<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
REGISTRATION NO. 333-65127
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FIRST CONSULTING GROUP, INC.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8742 95-3539020
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
111 W. OCEAN BOULEVARD, 4TH FLOOR
LONG BEACH, CALIFORNIA 90802
(562) 624-5200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
LUTHER J. NUSSBAUM
CHIEF EXECUTIVE OFFICER
FIRST CONSULTING GROUP, INC.
111 W. OCEAN BOULEVARD, 4TH FLOOR
LONG BEACH, CALIFORNIA 90802
(562) 624-5200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
PATRICK A. POHLEN, ESQ. DAVID S. ANTZIS, ESQ.
Cooley Godward LLP Saul, Ewing, Remick & Saul, LLP
Five Palo Alto Square 1055 Westlakes Drive, Suite 150
3000 El Camino Real Berwyn, PA 19312
Palo Alto, CA 94306 (610) 251-5050
(650) 843-5000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement and the effective time of the proposed merger of Foxtrot Acquisition
Sub, Inc. with and into Integrated Systems Consulting Group, Inc. ("ISCG"), as
described in the Agreement and Plan of Merger and Reorganization, dated as of
September 9, 1998, as amended by the First Amendment, dated as of November 11,
1998, attached as Appendix A to the Joint Proxy Statement/Prospectus forming a
part of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
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>
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
[FCG LOGO] [ISCG LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of First Consulting Group, Inc. and Integrated
Systems Consulting Group, Inc. have agreed to merge these two companies. If the
merger is completed, ISCG will become a wholly-owned subsidiary of FCG. We
estimate that the shares of FCG common stock to be issued to ISCG shareholders
will represent approximately 27.3% of the outstanding FCG common stock after the
merger.
In the merger, ISCG shareholders will have the right to receive 0.77 of a
share of FCG common stock for each share of ISCG common stock they own. In lieu
of receiving FCG common stock, ISCG shareholders have dissenter's rights. ISCG
shareholders who properly demand these rights will receive cash for the fair
value of the ISCG common stock that they held prior to the merger. The fair
value would be determined by a court or by agreement between ISCG and its
shareholders who exercise their dissenter's rights.
We have scheduled special meetings for the FCG stockholders and ISCG
shareholders to vote on the matters described in this document. At the FCG
special meeting, FCG stockholders will be asked to approve the issuance of
shares of FCG common stock in the merger. At the ISCG special meeting, ISCG
shareholders will be asked to adopt and approve the merger agreement and approve
the merger of a subsidiary of FCG with and into ISCG.
The merger cannot be completed unless the holders of FCG and ISCG common
stock approve the matters described in this document. The board of directors of
each of these two companies has unanimously approved the merger and recommends
that its respective stockholders approve the matters described in this document.
Your vote is very important.
Whether or not you plan to attend your special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will count as a vote in favor of the merger.
You may vote at your special meeting if you own shares as of the close of
business on November 10, 1998. The dates, times and places of the special
meetings are as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR FCG STOCKHOLDERS: FOR ISCG SHAREHOLDERS:
December 18, 1998 December 18, 1998
8:00 a.m. local time 9:00 a.m. local time
111 W. Ocean Boulevard, 4th Floor 575 East Swedesford Road
Long Beach, California 90802 Wayne, Pennsylvania 19087
</TABLE>
This joint proxy statement/prospectus provides you with detailed information
about the proposed merger. FCG provided the information concerning FCG. ISCG
provided the information concerning ISCG. Please see "Where You Can Find More
Information" on page 1 for additional information about FCG and ISCG.
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING AT PAGE 22.
<TABLE>
<S> <C>
[/S/ LUTHER J. NUSSBAUM] [/S/ DAVID LIPSON]
Luther J. Nussbaum David S. Lipson
Chief Executive Officer Chairman, Chief Executive Officer and
First Consulting Group President
Integrated Systems Consulting Group
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We are first mailing this joint proxy statement/prospectus dated November
17, 1998 and the forms of proxy on or about November 20, 1998.
<PAGE>
PRELIMINARY JOINT PROXY STATEMENT
[FCG LOGO]
111 W. OCEAN BOULEVARD, 4TH FLOOR
LONG BEACH, CALIFORNIA 90802
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 18, 1998
------------------------
TO THE STOCKHOLDERS OF FIRST CONSULTING GROUP, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of First
Consulting Group, Inc., a Delaware corporation, will be held on December 18,
1998 at 8:00 a.m. local time at 111 W. Ocean Boulevard, 4th Floor, Long Beach,
California 90802 to consider and vote upon the following proposal:
1. To approve the issuance of shares of common stock of FCG, pursuant to
the Agreement and Plan of Merger and Reorganization by and among FCG,
Integrated Systems Consulting Group, a Pennsylvania corporation, and
Foxtrot Acquisition Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of FCG as amended by the First Amendment dated as of November
11, 1998. Upon consummation of the merger, ISCG will become a
wholly-owned subsidiary of FCG. A copy of the reorganization agreement,
as amended, is attached as Appendix A to the joint proxy
statement/prospectus accompanying this notice.
2. To transact such other business as may properly come before the FCG
special meeting or any adjournment or postponement thereof.
The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus.
Stockholders of record at the close of business on November 10, 1998 are
entitled to notice of, and to vote at, the FCG special meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the FCG special meeting in
person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Board of Directors
/s/ Patricia A. Lowery
Patricia A. Lowery
SECRETARY
Long Beach, California
November 20, 1998
<PAGE>
PRELIMINARY JOINT PROXY STATEMENT
[ISCG LOGO]
575 EAST SWEDESFORD ROAD
WAYNE, PENNSYLVANIA 19087
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 18, 1998
------------------------
TO THE STOCKHOLDERS OF INTEGRATED SYSTEMS CONSULTING GROUP, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Integrated
Systems Consulting Group, Inc., a Pennsylvania corporation, will be held on
December 18, 1998 at 9:00 a.m. local time, at 575 East Swedesford Road, Wayne,
Pennsylvania 19087 to consider and vote upon the following proposal:
1. To approve and adopt the Agreement and Plan of Reorganization among
ISCG, First Consulting Group, Inc., a Delaware corporation, and Foxtrot
Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary
of FCG, and to approve the merger of Foxtrot with and into ISCG as
amended by the First Amendment, dated as of November 11, 1998. Upon
consummation of the merger, ISCG will become a wholly-owned subsidiary of
FCG. A copy of the reorganization agreement, as amended, is attached as
Appendix A to the joint proxy statement/prospectus accompanying this
notice.
2. To transact such other business as may properly come before the ISCG
special meeting or any adjournment or postponement thereof.
The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus.
Shareholders of record at the close of business on November 10, 1998 are
entitled to notice of, and to vote at, the ISCG special meeting and any
adjournments or postponements thereof.
All shareholders are cordially invited to attend the ISCG special meeting in
person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Board of Directors
/s/ DAVID D. GATHMAN
David D. Gathman
SECRETARY
Wayne, Pennsylvania
November 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 1
QUESTIONS AND ANSWERS ABOUT THE FCG/ISCG MERGER............................................................ 2
SUMMARY.................................................................................................... 3
The Companies............................................................................................ 3
First Consulting Group, Inc............................................................................ 3
Integrated Systems Consulting Group, Inc............................................................... 3
Our Reasons for the Merger............................................................................... 3
Opinions of Financial Advisors........................................................................... 4
Vote Required............................................................................................ 4
Share Ownership of Management and Certain Holders........................................................ 4
Interests of Certain Persons in the Merger............................................................... 4
Registration Rights Agreement............................................................................ 5
Conditions to the Merger................................................................................. 5
Termination of the Merger Agreement...................................................................... 6
Expenses and Termination Fees............................................................................ 6
Ownership of FCG Following the Merger.................................................................... 7
Anticipated Accounting Treatment......................................................................... 7
Affiliate Agreements..................................................................................... 7
Regulatory Approvals..................................................................................... 7
Forward-Looking Statements May Prove Inaccurate.......................................................... 7
Markets and Market Prices................................................................................ 8
FIRST CONSULTING GROUP, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION........................ 9
FIRST CONSULTING GROUP, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION........................ 9
INTEGRATED SYSTEMS CONSULTING GROUP, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION........... 10
UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION...................................... 11
COMPARATIVE PER SHARE DATA (UNAUDITED)..................................................................... 12
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS................................................ 13
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS....................................... 20
RISK FACTORS............................................................................................... 22
Risks Relating to the Merger............................................................................. 22
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Risks Relating to the Business of FCG.................................................................... 23
Risks Relating to the Business of ISCG................................................................... 28
THE FCG SPECIAL MEETING.................................................................................... 33
Purpose of the FCG Special Meeting....................................................................... 33
Proxies.................................................................................................. 33
Date, Time and Place of Meeting.......................................................................... 33
Voting Rights and Outstanding Shares..................................................................... 33
Solicitation............................................................................................. 33
Vote Required............................................................................................ 34
Revocability Of Proxies.................................................................................. 34
THE ISCG SPECIAL MEETING................................................................................... 34
Purpose of the ISCG Special Meeting...................................................................... 34
Proxies.................................................................................................. 34
Date, Time and Place of Meeting.......................................................................... 34
Voting Rights and Outstanding Shares..................................................................... 35
Solicitation............................................................................................. 35
Vote Required............................................................................................ 35
Revocability of Proxies.................................................................................. 36
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY................................................ 36
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................................................ 37
Background of the Merger................................................................................. 37
Joint Reasons For the Merger............................................................................. 40
ISCG's Reasons For the Merger............................................................................ 40
FCG's Reasons For the Merger............................................................................. 42
Opinion of Financial Advisor to ISCG..................................................................... 43
Opinion of Financial Advisor to FCG...................................................................... 48
Interests of Certain Persons in the Merger............................................................... 52
Voting Agreements........................................................................................ 53
Affiliate Agreements..................................................................................... 53
Registration Rights Agreement............................................................................ 54
Material Federal Income Tax Consequences................................................................. 55
Anticipated Accounting Treatment......................................................................... 57
Regulatory Matters....................................................................................... 57
Rights of Dissenting Shareholders of ISCG................................................................ 58
No FCG Appraisal Rights.................................................................................. 60
Resale of FCG Common Stock............................................................................... 60
THE MERGER AGREEMENT....................................................................................... 61
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
General.................................................................................................. 61
Merger Consideration..................................................................................... 61
Stock Options and Warrants............................................................................... 61
Stock Ownership Following the Merger..................................................................... 62
Conversion of Shares; Procedures for Exchange of Certificates............................................ 62
Effect on Certificates................................................................................... 63
Corporate Matters........................................................................................ 63
Conditions to the Merger................................................................................. 63
Representations and Warranties........................................................................... 66
Covenants................................................................................................ 67
Termination.............................................................................................. 73
Expenses and Termination Fees............................................................................ 74
INFORMATION RELATING TO FCG................................................................................ 75
FCG BUSINESS............................................................................................. 75
Overview............................................................................................... 75
Services............................................................................................... 75
Service Delivery....................................................................................... 78
Research And Practice Support.......................................................................... 78
Clients................................................................................................ 79
Sales and Marketing.................................................................................... 79
International Operations............................................................................... 80
Employees.............................................................................................. 80
Facilities............................................................................................. 81
Legal Proceedings...................................................................................... 81
FCG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 81
Overview............................................................................................... 81
Comparison of Nine Months Ended September 30, 1998 and 1997............................................ 82
Comparison of the Years Ended December 31, 1997 and 1996............................................... 83
Comparison of Years Ended December 31, 1996 and 1995................................................... 84
Comparison of Years Ended December 31, 1995 and 1994................................................... 84
Liquidity and Capital Resources........................................................................ 85
Year 200 Compliance.................................................................................... 85
FCG MANAGEMENT AFTER THE MERGER.......................................................................... 86
Executive Officers And Directors....................................................................... 86
Recent Changes in Management........................................................................... 89
Board Composition...................................................................................... 89
Board Committees....................................................................................... 90
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Director Compensation.................................................................................. 90
Executive Compensation................................................................................. 91
Option Grants In Last Fiscal Year...................................................................... 91
Aggregate Option Exercises In Last Fiscal Year......................................................... 92
Limitation Of Liability And Indemnification Matters.................................................... 92
CERTAIN TRANSACTIONS OF FCG.............................................................................. 93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FCG...................................... 94
INFORMATION RELATING TO ISCG............................................................................... 96
ISCG BUSINESS............................................................................................ 96
Overview............................................................................................... 96
Consulting Services.................................................................................... 96
Sales and Marketing.................................................................................... 98
Vendor Relationships................................................................................... 98
Concentration and Mix of Revenues...................................................................... 99
Employees.............................................................................................. 99
Competition............................................................................................ 100
Intellectual Property.................................................................................. 100
Properties............................................................................................. 101
Legal Proceedings...................................................................................... 101
ISCG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 101
Overview............................................................................................... 101
Comparison of Nine Months Ended September 30, 1998 and 1997............................................ 102
Comparison of the Years Ended December 31, 1997 and 1996............................................... 103
Comparison of the Years Ended December 31, 1996 and 1995............................................... 104
Liquidity and Capital Resources........................................................................ 105
Impact of Year 2000.................................................................................... 105
Recently Issued Accounting Standards................................................................... 207
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ISCG..................................... 107
COMPARISON OF CAPITAL STOCK................................................................................ 109
Description of FCG Capital Stock......................................................................... 109
Description of ISCG Capital Stock........................................................................ 110
COMPARISON OF SHAREHOLDERS' RIGHTS......................................................................... 111
Size of the Board of Directors........................................................................... 111
</TABLE>
iv
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<S> <C>
Classified Board of Directors............................................................................ 111
Cumulative Voting........................................................................................ 111
Removal of Directors..................................................................................... 112
Filling Vacancies on the Board of Directors.............................................................. 112
Interested Director Transactions......................................................................... 112
Indemnification of Directors and Officers................................................................ 113
Amendments to the Certificate of Incorporation and Articles of Incorporation............................. 113
Amendment of Bylaws...................................................................................... 114
Power To Call Special Shareholders' Meeting; Action By Consent........................................... 114
Inspection of Shareholders' List......................................................................... 115
Dividends and Repurchases of Shares...................................................................... 115
Approval of Certain Corporate Transactions............................................................... 115
Business Combination Following a Change of Control....................................................... 116
Shareholder Derivative Suits............................................................................. 116
Dissenters' Rights....................................................................................... 117
Dissolution.............................................................................................. 117
EXPERTS.................................................................................................... 118
LEGAL MATTERS.............................................................................................. 118
FCG STOCKHOLDER PROPOSALS.................................................................................. 118
ISCG SHAREHOLDER PROPOSALS................................................................................. 118
INDEX TO FCG AND ISCG FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
APPENDICES:
Appendix A Agreement and Plan of Merger and Reorganization.................... A-1
Appendix A-1 First Amendment to the Agreement and Plan of Merger A-1-1
and Reorganization...............................................
Appendix B-1 Opinion of Robert W. Baird & Co. Incorporated...................... B-1-1
Appendix B-2 Opinion of Hambrecht & Quist LLC................................... B-2-1
Appendix C-1 Form of ISCG Voting Agreement...................................... C-1-1
Appendix C-2 Form of FCG Voting Agreement....................................... C-2-1
Appendix D-1 Form of ISCG Affiliate Agreement................................... D-1-1
Appendix D-2 Form of FCG Affiliate Agreement.................................... D-2-1
Appendix E Form of Registration Rights Agreement.............................. E-1
Appendix F PBCL Dissenters' Rights............................................ F-1
</TABLE>
v
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
First Consulting Group, Inc. is a Delaware corporation. FCG's principal
executive offices are located at 111 W. Ocean Boulevard, 4th Floor, Long Beach,
California 90802, and its telephone number is (562) 624-5200.
Integrated Systems Consulting Group, Inc. is a Pennsylvania corporation.
ISCG's principal executive offices are located at 575 East Swedesford Road,
Wayne, Pennsylvania 19087, and its telephone number is (610) 989-7000.
FCG and ISCG file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may inspect and copy such material at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. You may also obtain copies
of such material from the SEC at prescribed rates by writing to the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find our SEC filings at the SEC's website at
www.sec.gov.
FCG and ISCG are not incorporating any documents by reference.
The ISCG common stock and the FCG common stock are each quoted on the Nasdaq
National Market. The trading symbol for FCG is "FCGI." The trading symbol for
ISCG is "ISCG." You may inspect reports and other information concerning FCG and
ISCG at the offices of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. WE HAVE AUTHORIZED NO ONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THE DOCUMENT.
1
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE FCG/ISCG MERGER
<TABLE>
<C> <S>
Q: AS AN ISCG SHAREHOLDER, WHAT WILL I RECEIVE IN
THE MERGER?
A: Unless you properly exercise your dissenters'
rights, you will receive 0.77 of a share of
FCG common stock in exchange for each share of
ISCG common stock that you own. For example,
if you own 100 shares of ISCG common stock,
you will receive 77 shares of FCG common stock
in exchange for your shares. No fractional
shares will be issued. You will receive cash
for any fractional share you would otherwise
receive. The dollar amount you receive for a
fraction of a share will equal that fraction
multiplied by the closing price of a share of
FCG common stock on the date the merger is
consummated.
Q: WHAT ARE DISSENTERS' RIGHTS AND HOW CAN I
PROPERLY EXERCISE THEM?
A: Dissenters' rights allow ISCG shareholders to
receive the fair value of their shares of ISCG
common stock in cash in lieu of FCG common
stock. To exercise dissenters' rights, you
must (1) notify ISCG of your intent to
exercise dissenters' rights, (2) effect no
change in your ownership in ISCG and (3)
refrain from voting in favor of the merger.
For a more detailed description of the
procedures ISCG shareholders must follow to
properly exercise their dissenters' rights,
see "Approval of the Merger and Related
Transactions--Rights of Dissenting
Shareholders of ISCG" beginning on page 58 of
this document. You should also read carefully
and in its entirety the full text of the
requirements of Pennsylvania law to exercise
dissenters' rights which is attached as
Appendix F to this document. FCG stockholders
are not entitled to dissenters' rights in the
merger.
Q: WHAT HAPPENS TO OPTIONS AND WARRANTS TO
PURCHASE ISCG COMMON STOCK AS A RESULT OF THE
MERGER?
A: Each option and warrant to purchase ISCG
common stock will convert into an option or
warrant to purchase 77% as many shares of FCG
common stock at an adjusted exercise price.
For example, if you have an option or warrant
to purchase 100 shares of ISCG common stock at
an exercise price of $7.70, after the merger
you will have an option or warrant to purchase
77 shares of FCG common stock, at an exercise
price of $10.00.
Q: AS A FCG STOCKHOLDER, WILL I RECEIVE
ADDITIONAL SHARES OF FCG COMMON STOCK IN THE
MERGER?
A: You will continue to hold the same number of
shares of FCG common stock after the merger.
Additional shares of FCG common stock will be
issued in the merger.
Q: WHAT ARE THE TAX CONSEQUENCES TO STOCKHOLDERS
OF THE MERGER?
A: We intend that the merger be treated as a
tax-free reorganization for federal income tax
purposes. ISCG shareholders should not
recognize gain or loss on the exchange of
their stock, except that ISCG shareholders may
be taxed on cash received for a fractional
share. FCG stockholders should not recognize
any gain or loss in connection with the
merger. Tax matters, however, are very
complicated and the tax consequences of the
merger to you will depend on the facts of your
particular situation. We encourage you to
contact your tax advisors to determine the tax
consequences of the merger to you. To review
the tax consequences to FCG and ISCG
stockholders in greater detail, see pages 55
to 57 of this joint proxy
statement/prospectus.
Q: IF I AM NOT GOING TO ATTEND THE STOCKHOLDER
MEETING, SHOULD I RETURN MY PROXY CARD
INSTEAD?
A: Yes. Please fill out and sign your proxy card
and mail it to us in the enclosed return
envelope as soon as possible. Returning your
proxy card ensures that your shares will be
represented at the special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to
your company's corporate secretary before the
special meeting or attend the special meeting
in person and vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will
send ISCG shareholders written instructions
for exchanging their stock certificates. FCG
stockholders will keep their current
certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: Assuming that our companies satisfy or waive
all of the conditions to closing contained in
the merger agreement, we anticipate that the
merger will occur on or before December 23,
1998.
</TABLE>
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS DOCUMENT. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. WE URGE YOU TO READ THE ENTIRE DOCUMENT (INCLUDING THE
APPENDICES) BEFORE YOU DECIDE HOW TO VOTE. THE MERGER AGREEMENT IS ATTACHED AS
APPENDIX A TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT WHICH
IS THE LEGAL DOCUMENT GOVERNING THE MERGER.
THE COMPANIES
FIRST CONSULTING GROUP, INC.
111 W. Ocean Boulevard, 4th Floor
Long Beach, California 90802
(562) 624-5200
FCG is a leader in operation effectiveness and information management
services. FCG provides the following services to healthcare organizations in
North America and Europe:
- Consulting
- Software implementation
- Network and application integration
- Co-management
FCG designs its services to help its clients:
- Improve their operation effectiveness
- Reduce cost
- Improve customer service
- Enhance patient care
FCG was incorporated in California in October 1980 and reincorporated in
Delaware in February 1998. For more information, see "Information Relating to
FCG" beginning on page 75.
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
575 East Swedesford Road
Wayne, Pennsylvania 19087
(610) 989-7000
ISCG is an information services consulting firm that provides the following
services to the pharmaceutical industry:
- Software application development
- Document management systems integration
- Network integration
ISCG specializes in:
- Client-server architecture
- Document management-based applications
- Web-based applications
- Designing databases for efficient retrieval of information
- Computer network design, implementation and management
ISCG was incorporated in Pennsylvania in September 1988. For more
information on ISCG, see "Where You Can Find More Information" on Page 1.
OUR REASONS FOR THE MERGER
We believe that the merger will create a combined company capable of:
- Responding quickly and effectively to emerging opportunities in
the healthcare industry
- Offering a broader range and scope of services to the
pharmaceutical and biotechnology industries
- Competing more effectively in providing services
The combined company may also offer a greater range of career opportunities
for employees, may improve employee retention, and may operate with reduced
general and administrative expenses.
The FCG Board of Directors believes that the merger may result in a number
of benefits to FCG and its stockholders, including, among other benefits: (1)
increased array of services (2) expanded client base in the healthcare and
pharmaceutical industries and (3) stronger application development capability in
a wide range of technologies.
3
<PAGE>
The ISCG Board of Directors believes that the merger may result in a number
of benefits to ISCG and its shareholders, including, among other benefits: (1)
an increased ability to secure larger and more complex projects from its
customers as a result of the greater size of the combined company and (2) an the
ability to market its consulting services to its customers' more senior level
decision-makers.
To review the background and reasons for the merger in greater detail, as
well as the risks of the merger, see "Approval of the Merger and Related
Transactions--Background of the Merger," "--Joint Reasons for the Merger,"
"--ISCG's Reasons for the Merger" and "--FCG's Reasons for the Merger,"
beginning on page 37 and "Risk Factors--Risks Relating to the Merger" beginning
on page 22.
Opinions of Financial Advisors
In deciding to approve the merger, each Board of Directors considered the
opinion of its financial advisor. FCG received an opinion from its financial
advisor, Hambrecht & Quist LLC that the exchange ratio was fair to FCG from a
financial point of view. ISCG received an opinion from its financial advisor,
Robert W. Baird & Co. Incorporated, that the exchange ratio was fair, from a
financial point of view, to the holders of ISCG common stock other than FCG and
its affiliates. More information on these opinions is provided in the following
sections of this document: "Approval of the Merger and Related
Transactions--Opinion of Financial Advisor to FCG" beginning on page 48 and
"--Opinion of Financial Advisor to ISCG" beginning on page 43. These opinions
are attached as Appendices B-1 and B-2 to this document. We encourage you to
read these opinions carefully and in their entirety.
Vote Required
At the close of business on the record date, 16,600,418 shares of FCG common
stock were outstanding and entitled to vote at the FCG special meeting. A
majority of shares of FCG common stock present in person or represented by proxy
and entitled to vote at the FCG special meeting must vote to approve the
proposal to issue shares of FCG common stock in the merger.
At the close of business on the record date, 8,068,723 shares of ISCG common
stock were outstanding and entitled to vote at the ISCG special meeting. A
majority of the shares of ISCG common stock present in person or represented by
proxy and entitled to vote at the ISCG special meeting must vote to approve and
adopt the merger agreement and approve the merger. If 10% or more of the
outstanding shares of ISCG common stock properly exercise their dissenters'
rights, however, FCG is not obligated to consummate the merger.
Share Ownership of Management and
Certain Holders
As of the record date, the directors and executive officers of FCG, as a
group, beneficially owned approximately 5,948,965 shares of FCG Common Stock.
James A. Reep, the Chairman of the Board of Directors, Thomas A. Reep, the Chief
Financial Officer, and Brent A. Hanson, Vice President, North American
Consulting Practice of FCG, who together hold approximately 26.1% of the FCG
common stock outstanding as of the record date, have entered into voting
agreements with ISCG. These stockholders have agreed to vote in favor of the
proposal and have granted ISCG an irrevocable proxy to vote their shares of FCG
common stock in favor of the proposal. For more information on these agreements,
see "Approval of the Merger and Related Transactions--Voting Agreements"
beginning on page 53.
As of the record date, the directors and executive officers of ISCG, as a
group, beneficially owned approximately 3,707,675 shares of ISCG common stock.
Certain shareholders of ISCG, who together hold approximately 57% of the ISCG
common stock outstanding as of the record date, have entered into voting
agreements with FCG. These shareholders have agreed to vote in favor of the
proposal and have granted FCG an irrevocable proxy to vote their shares of ISCG
common stock in favor of the proposal. The affirmative vote of the shares of the
ISCG common stock held by these shareholders will be sufficient to approve and
adopt the merger agreement and to approve the merger. However, if 10% or more of
the outstanding shares of ISCG common stock properly exercise their dissenters'
rights, FCG is not obligated to consummate the merger. For more information on
these agreements, see "Approval of the Merger and Related Transactions--Voting
Agreements" beginning on page 53.
4
<PAGE>
Interests of Certain Persons in the Merger
ISCG's shareholders should note that certain members of ISCG's management
and the ISCG Board of Directors have interests in the merger as employees and/or
directors that are different from, or in addition to, your interest as a
shareholder. If the merger is completed, certain indemnification arrangements
for persons serving as directors and officers of ISCG at the time of the merger
will be continued for at least six years after the merger is consummated. Also,
the combined company will maintain a policy of directors' and officers'
liability insurance for the benefit of those persons for three years after the
merger. In addition, FCG has agreed to use reasonable efforts to nominate and
appoint (1) a person designated by ISCG to Class I of the FCG Board to serve
until the annual meeting of stockholders to be held in 1999 (2) Donald R.
Caldwell, or another person designated by ISCG, to Class II of the FCG Board to
serve until the annual meeting of stockholders to be held in 2000 and (3) David
S. Lipson, or another person designated by ISCG, to Class III of the FCG Board
of Directors to serve until the annual meeting of stockholders to be held in
2001. For more information, see "Approval of the Merger and Related
Transactions--Interests of Certain Persons in the Merger" beginning on page 52.
Registration Rights Agreement
FCG has agreed to enter into a registration rights agreement, when the
merger is consummated, with David S. Lipson, Technology Leaders II, Safeguard
Scientifics, Inc. and the Warrant and Stock Trust. Under this agreement, these
persons or entities will have certain rights relating to the registration of the
shares of FCG common stock they receive in the merger. These rights include (1)
the right to notification if FCG proposes to register any of its securities in
an underwritten public offering, and, subject to certain conditions and
limitations, the right to include their shares of stock in such registration,
and (2) subject to certain conditions and limitations, the right to require FCG
to file a registration statement with respect to their shares of FCG common
stock. The form of the registration rights agreement is included as Appendix E
to this document. For more information on this agreement and these rights, see
"Approval of the Merger and Related Transactions--Registration Rights Agreement"
beginning on page 54.
Conditions to the Merger
FCG will complete the merger only if a number of conditions are either
satisfied or waived by FCG, some of which include:
- The representations and warranties of ISCG made in the merger
agreement, subject to certain materiality limitations, are
accurate
- ISCG performs certain covenants and obligations contained in the
merger agreement in all material respects
- The ISCG shareholders approve the merger agreement and merger
- The FCG stockholders approve the issuance of FCG common stock in
the merger
- Holders of fewer than 10% of the outstanding shares of ISCG common
stock properly exercise their dissenters' rights
- The independent auditors of FCG and ISCG deliver letters stating
that the merger will qualify for pooling of interests accounting
treatment
- FCG's legal counsel delivers a legal opinion that the merger will
be treated as a tax-free reorganization for federal income tax
purposes
- FCG receives certain other consents, certificates, letters and
legal opinions
- FCG receives written resignations of all officers and directors of
ISCG as of the consummation of the merger
- There is no material adverse change to the business, condition,
assets, liabilities, operations or financial performance of ISCG
or its subsidiaries
- The FCG common stock to be issued in the merger is authorized for
listing on Nasdaq
- There are no restraining orders, injunctions and other orders
preventing the consummation of
5
<PAGE>
the merger or other certain litigation or administrative actions
or proceedings
ISCG will complete the merger only if a number of conditions are satisfied
or waived by ISCG, some of which include:
- The representations and warranties of FCG made in the merger
agreement, subject to certain materiality limitations, are
accurate
- FCG performs certain covenants and obligations contained in the
merger agreement in all material respects
- The ISCG shareholders approve the merger agreement and merger
- The FCG stockholders approve the issuance of FCG common stock in
the merger
- ISCG receives the executed registration rights agreement
- The independent auditors of FCG and ISCG deliver letters stating
that the merger will qualify for pooling of interests accounting
treatment
- ISCG's legal counsel delivers a legal opinion that the merger will
be treated as a tax-free reorganization for federal income tax
purposes
- ISCG receives certain other consents, certificates, letters and
legal opinions
- There is no material adverse change to the business, condition,
assets, liabilities, operations or financial performance of FCG
- The FCG common stock to be issued in the merger is authorized for
listing on Nasdaq
- There are no restraining orders, injunctions and other orders
preventing the consummation of the merger or other certain
litigation or administrative actions or proceedings
For more information on the conditions to the merger, see "The Merger
Agreement--Conditions to the Merger" beginning on page 63.
Termination of the Merger Agreement
The Board of Directors of both companies can jointly agree to terminate the
merger agreement at any time without completing the merger. Either company can
terminate the merger agreement if:
1. we do not complete the merger by January 31, 1999;
2. a governmental authority or other legal action permanently prohibits the
merger;
3. the ISCG shareholders do not approve the merger or the FCG stockholders
do not approve the issuance of FCG common stock to ISCG shareholders in
the merger; or
4. the other party's representations and warranties shall be or have become
materially inaccurate or the other party breaches or materially fails to
comply with its obligations under the merger agreement, resulting in the
inability to satisfy a condition to the completion of the merger.
In addition, FCG can terminate the merger agreement if certain triggering
events, as defined in the merger agreement, occur at any time prior to the
adoption and approval of the merger agreement and approval of the merger by the
ISCG shareholders. For more information on the circumstances under which the
merger can be terminated, see "The Merger Agreement--Termination" beginning on
page 73.
Expenses and Termination Fees
We have agreed that we will each pay our own fees and expenses in connection
with the merger, whether or not the merger is consummated, except that we will
share equally all fees and expenses, other than attorneys' fees, in connection
with the printing and filing of this document and the registration statement of
which this document is a part. ISCG has agreed that if the merger agreement is
terminated under certain circumstances, it will pay to FCG a non-refundable fee
equal to $5,000,000. For more information, see "The Merger Agreement-- Expenses
and Termination Fees" beginning on page 74.
6
<PAGE>
Ownership of FCG Following the Merger
Based upon the number of shares of ISCG common stock issued and outstanding
on the record date, which excludes outstanding options, warrants or other rights
to purchase ISCG common stock, an aggregate of approximately 6,212,917 shares of
FCG common stock will be issued in connection with the merger. Based upon the
number of shares of FCG common stock issued and outstanding on the record date,
which excludes outstanding options or other rights to purchase FCG common stock,
and the number of additional shares of FCG common stock that will be issued in
connection with the merger, the former holders of ISCG common stock will hold
approximately 27.3% of the total number of shares of FCG common stock issued and
outstanding after consummation of the merger.
Based on the number of outstanding options to purchase ISCG common stock as
of the record date, the total number of outstanding options to purchase ISCG
common stock will become rights to purchase an aggregate of 702,141 shares of
FCG common stock in connection with the merger. Based on the number of
outstanding warrants to purchase ISCG common stock on the record date, the total
number of outstanding warrants to purchase ISCG common stock will become rights
to purchase an aggregate of 523,387 shares of FCG common stock in connection
with the merger.
Anticipated Accounting Treatment
We expect the merger will be accounted for as a pooling of interests, which
means that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes. For more information, see "Approval
of the Merger and Related Transactions--Anticipated Accounting Treatment"
beginning on page 57.
Affiliate Agreements
ISCG has delivered to FCG executed affiliate agreements with certain
individuals who might be considered affiliates of ISCG under the securities
laws. These agreements restrict such individuals' ability to: (1) dispose of FCG
common stock received in the merger and (2) dispose of ISCG common stock held
prior to the consummation of the merger. The purpose of these agreements is to:
(1) comply with the requirements of certain federal securities laws and (2) help
ensure that the merger will be treated as a pooling of interests for accounting
and financial reporting purposes. A form of these affiliate agreements is
included as Appendix D-1 to this document. For more information on these
agreements, see "Approval of the Merger and Related Transactions--Affiliate
Agreements" and "--Resale of FCG Common Stock" beginning on page 53.
FCG has delivered to ISCG executed affiliate agreements with certain
individuals who might be considered affiliates of FCG under the securities laws.
These agreements restrict such individuals' ability to dispose of FCG common
stock received in the merger to help ensure that the merger will be treated as a
pooling of interests for accounting and financial reporting purposes. A form of
these affiliate agreements is included as Appendix D-2 to this document. For
more information on these agreements, see "Approval of the Merger and Related
Transactions--Affiliate Agreements" and "--Resale of FCG Common Stock" beginning
on page 53.
Regulatory Approvals
We are not required to notify the Federal Trade Commission or the Antitrust
Division of the United States Department of Justice before we can complete the
merger. However, the FTC or the Antitrust Division has the authority to
challenge the merger on antitrust grounds before or after the merger is
completed. For more information, see "Approval of the Merger and Related
Transactions--Regulatory Matters" beginning on page 57.
Forward-Looking Statements May Prove Inaccurate
We have each made forward-looking statement in this document that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of FCG,
ISCG or the combined company. Also, when we use such words as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should note that the merger and an investment in securities of
FCG involve certain risks and uncertainties that could affect the future
financial results of FCG. Some of these risks include: risks related to the
integration of FCG and ISCG, risks associated with a fixed exchange ratio, risks
relating to the respective businesses of FCG and ISCG and other risks and
uncertainties discussed under
7
<PAGE>
"Risk Factors" and elsewhere in this document and in the documents ISCG
incorporated by reference. For more information on these risks, see "Risk
Factors" beginning on page 22.
Markets and Market Prices
FCG common stock is quoted on Nasdaq under the symbol "FCGI." ISCG common
stock is quoted on Nasdaq under the symbol "ISCG." Following the consummation of
the merger, ISCG common stock will cease to be quoted on Nasdaq.
The following table sets forth the closing sale price per share of FCG
common stock as reported on Nasdaq and the equivalent per share price, as
explained below, of ISCG common stock on September 9, 1998 the last trading day
before the announcement of the merger, and on November 10, 1998.
<TABLE>
<CAPTION>
FCG EQUIVALENT
COMMON ISCG
STOCK PER
PURCHASE SHARE
PRICE PRICE(1)
----------- -----------
<S> <C> <C>
September 9, 1998.......................................................................... $ 17.44 $ 13.43
November 10, 1998.......................................................................... $ 18.50 $ 14.25
</TABLE>
- ------------------------
(1) The equivalent ISCG per share price represents 0.77 of the price of one
share of FCG common stock.
The actual prices of FCG or ISCG common stock prior to or at the time the
merger is consummated cannot be guaranteed or predicted. For more information on
this risk, see "Risk Factors--Risks Relating to the Merger--Risks Associated
with Fixed Exchange Ratio" on page 22.
8
<PAGE>
FIRST CONSULTING GROUP, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of FCG
as of December 31, 1996 and 1997 and for each of the years ended December 31,
1995, 1996 and 1997, has been derived from and should be read in conjunction
with the audited consolidated financial statements of FCG and related notes
thereto included elsewhere in this joint proxy statement/prospectus. The
selected historical consolidated financial information of FCG as of December 31,
1993, 1994 and 1995 and for the years ended December 31, 1993 and December 31,
1994, have been derived from the audited consolidated financial statements of
FCG which are not included in this joint proxy statement/prospectus. The
selected financial information of FCG as of September 30, 1998 and for each of
the nine-month periods ended September 30, 1997 and 1998 have been derived from
and should be read in conjunction with the unaudited consolidated financial
statements included elsewhere in this joint proxy statement/prospectus, which
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of FCG's financial position and results of operations for and as of
the end of such periods.
FCG'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenue............................... $ 19,050 $ 30,046 $ 47,744 $ 65,822 $ 91,570 $ 66,305 $ 94,601
Cost of services.......................... 10,721 16,869 26,518 40,718 53,526 38,823 51,813
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 8,329 13,177 21,226 25,104 38,044 27,482 42,788
General and administrative expenses....... 6,995 9,871 17,517 23,670 31,669 22,804 32,815
Compensation expenses related to stock
issuances................................ -- -- 385 588 6,060 1,861 --
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 1,334 3,306 3,324 846 315 2,817 9,973
Interest income (expense), net............ 46 (77) (36) 3 (68) (59) 1,325
Other income, net......................... 77 32 18 44 119 110 48
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes.............. 1,457 3,261 3,306 893 366 2,868 11,346
Provision for income taxes................ 591 1,577 1,423 500 1,900 1,590 5,449
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ 866 $ 1,684 $ 1,883 $ 393 $ (1,534) $ 1,278 $ 5,897
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic net income (loss) per share......... $ 0.07 $ 0.19 $ 0.25 $ 0.05 $ (0.15) $ 0.13 $ 0.39
Diluted net income (loss) per share....... $ 0.07 $ 0.19 $ 0.25 $ 0.04 $ (0.15) $ 0.12 $ 0.38
Shares used in computing basic net income
per share................................ 11,735 8,831 7,515 8,671 9,987 9,687 15,001
Shares used in computing diluted net
income per share......................... 11,735 8,876 7,544 9,127 9,987 10,279 15,722
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 1,675 $ 1,335 $ 2,075 $ 214 $ 2,950 $ 13,485
Total assets..................................... 7,950 11,203 20,648 22,812 34,425 100,831
Long-term debt................................... 643 1,550 3,362 2,692 262 209
Total stockholders' equity....................... 1,558 1,710 1,612 3,040 5,462 66,548
</TABLE>
9
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of ISCG
as of December 31, 1996 and 1997 and for each of the years ended December 31,
1995, 1996 and 1997 has been derived from and should be read in conjunction with
the audited consolidated financial statements of ISCG and related notes thereto
included elsewhere in this joint proxy statement/prospectus. The selected
historical consolidated financial information of ISCG as of December 31, 1993,
1994 and 1995 and for the years ended December 31, 1993 and December 31, 1994
have been derived from and should be read in conjunction with the audited
consolidated financial statements of ISCG which are not included in this joint
proxy statement/prospectus. The selected financial information of ISCG as of
September 30, 1998 and for each of the nine-month periods ended September 30,
1997 and 1998 have been derived from and should be read in conjunction with the
unaudited consolidated financial statements included elsewhere in this joint
proxy statement/prospectus, which have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of ISCG's financial position and results of
operations for such periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 9,461 $ 13,543 $ 21,024 $ 30,607 $ 43,178 $ 30,576 $ 45,897
Direct costs.............................. 5,632 8,111 12,559 17,497 25,402 17,893 27,732
--------- --------- --------- --------- --------- --------- ---------
Gross Profit............................ 3,829 5,432 8,465 13,110 17,776 12,683 18,165
Selling, general & administrative
Expenses................................ 2,495 3,259 5,187 8,194 12,233 8,955 12,304
Costs and expenses associated with
terminated business combination......... -- -- -- -- -- -- 486
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................... 1,334 2,173 3,278 4,916 5,543 3,728 5,375
Interest income (expense), net............ 5 (85) (33) 354 418 317 221
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of acounting change.............. 1,339 2,088 3,245 5,270 5,961 4,045 5,596
Provision for income taxes................ 495 880 1,395 2,266 2,448 1,699 2,319
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of
accounting change....................... 844 1,208 1,850 3,004 3,513 2,346 3,277
Cumulative effect of accounting change.... 141 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 703 $ 1,208 $ 1,850 $ 3,004 $ 3,513 $ 2,346 $ 3,277
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
NET INCOME PER COMMON SHARE:
Income before cumulative effect of
accounting change..................... $ 0.09 $ 0.20 $ 0.36 $ 0.43 $ 0.44 $ 0.30 $ 0.41
Cumulative effect of accounting change.. $ (0.01) -- -- -- -- -- --
Net income per common share
Basic............................... $ 0.08 $ 0.20 $ 0.36 $ 0.43 $ 0.44 $ 0.30 $ 0.41
Diluted............................. $ 0.07 $ 0.17 $ 0.30 $ 0.37 $ 0.40 $ 0.26 $ 0.37
Shares used in computing net income per
common share:
Basic............................... 9,067 6,112 5,085 6,913 7,921 7,914 8,030
Diluted............................. 9,841 6,933 6,181 8,091 8,881 8,885 8,976
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 626 $ 757 $ 2,479 $ 11,267 $ 9,443 $ 4,025
Working capital............................... 991 1,393 3,327 14,728 16,330 16,571
Total assets.................................. 2,814 4,205 7,586 20,844 23,898 29,554
Long-term debt................................ 5 2,088 -- -- -- --
Total stockholders' equity.................... 1,401 291 4,846 17,760 21,357 24,884
</TABLE>
10
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The unaudited selected pro forma combined condensed financial information
set forth below gives effect to the merger as a pooling of interests, assuming
that 0.77 of a share of FCG common stock is issued in exchange for each share of
ISCG common stock. The unaudited pro forma combined condensed statements of
operations for each of the years ended December 31, 1995, 1996 and 1997 and for
the nine-month periods ended September 30, 1998 and 1997, combine the historical
consolidated statements of operations of FCG and ISCG as if the merger had
occurred at the beginning of the earliest period presented. The unaudited pro
forma combined condensed balance sheet as of September 30, 1998 gives effect to
the merger as if it had occurred on September 30, 1998, and combines the
historical unaudited consolidated balance sheet of FCG and the historical
unaudited consolidated balance sheet of ISCG as of such date. This data should
be read in conjunction with the selected historical consolidated financial
information, the unaudited pro forma combined condensed financial statements and
the separate historical consolidated financial statements of FCG and ISCG and
the notes thereto included elsewhere in this joint proxy statement/prospectus.
The unaudited pro forma combined condensed financial statements, presented for
illustrative purposes only, are not necessarily indicative of the operating
results or financial position that would have been achieved had the merger been
consummated at the beginning of the earliest period presented and should not be
construed as representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS DATA
(1):
Net revenue................................................. $ 68,768 $ 96,429 $ 134,748 $ 96,881 $ 140,498
Cost of services............................................ 39,077 58,215 78,928 56,716 79,545
--------- --------- --------- --------- ---------
Gross profit.............................................. 29,691 38,214 55,820 40,165 60,953
Selling, general and administrative expenses................ 22,704 31,864 43,902 31,759 45,119
Compensation expenses related to stock issuances............ 385 588 6,060 1,861 --
Costs and expenses associated with terminated business
combination............................................... -- -- -- -- 486
--------- --------- --------- --------- ---------
Income from operations.................................... 6,602 5,762 5,858 6,545 15,348
Interest income (expense), net.............................. (69) 357 350 258 1,546
Other income, net........................................... 18 44 119 110 48
--------- --------- --------- --------- ---------
Income before income taxes................................ 6,551 6,163 6,327 6,913 16,942
Provision for income taxes.................................. 2,818 2,766 4,348 3,289 7,768
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ 3,733 $ 3,397 $ 1,979 $ 3,624 $ 9,174
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per common share
Basic..................................................... $ 0.33 $ 0.24 $ 0.12 $ 0.23 $ 0.43
Diluted................................................... $ 0.30 $ 0.22 $ 0.11 $ 0.21 $ 0.41
Shares used in computing net income per common share:
Basic..................................................... 11,430 13,994 16,086 15,781 21,184
Diluted................................................... 12,303 15,357 17,324 17,120 22,634
</TABLE>
<TABLE>
<CAPTION>
AS OF
-------------
SEPTEMBER 30,
1998
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 17,510
Total assets............................................ 130,385
Long-term debt.......................................... 209
Total stockholders' equity (2).......................... 87,932
</TABLE>
- ------------------------------
(1) The unaudited selected pro forma combined condensed financial information
gives effect to the completion of the merger as if it had occurred on
January 1, 1995.
(2) Includes the effect of approximately $3.5 million in direct transaction
costs associated with the merger. Such transaction costs consist of
transaction fees for investment bankers, attorneys, accountants, printing
and other related charges.
11
<PAGE>
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth certain historical per share data of FCG and
ISCG and combined per share data on an unaudited pro forma basis after giving
effect to the merger as a pooling of interests at the exchange ratio. This data
should be read in conjunction with the selected historical consolidated
financial information and the unaudited selected pro forma combined condensed
financial information of FCG and ISCG and notes thereto, included elsewhere in
this joint proxy statement/prospectus. The unaudited pro forma combined per
share data are not necessarily indicative of the operating results or financial
position that would have occurred if the merger had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Historical FCG:
Net income (loss) per basic share........................ $ 0.25 $ 0.05 $ (0.15) $ 0.13 $ 0.39
Net income (loss) per diluted share...................... $ 0.25 $ 0.04 $ (0.15) $ 0.12 $ 0.38
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Historical ISCG:
Net income per basic share............................... $ 0.36 $ 0.43 $ 0.44 $ 0.30 $ 0.41
Net income per diluted share............................. $ 0.30 $ 0.37 $ 0.40 $ 0.26 $ 0.37
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Pro Forma Combined Net Income (1):
Per FCG share--Basic..................................... $ 0.33 $ 0.24 $ 0.12 $ 0.23 $ 0.43
Per FCG share--Diluted................................... $ 0.30 $ 0.22 $ 0.11 $ 0.21 $ 0.41
Equivalent per ISCG share--Basic (3)..................... $ 0.25 $ 0.18 $ 0.09 $ 0.18 $ 0.33
Equivalent per ISCG share--Diluted (3)................... $ 0.23 $ 0.17 $ 0.08 $ 0.16 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
30, 1998
---------------
<S> <C>
Book value per share (2)
Historical FCG................................................................................... $ 4.16
Historical ISCG.................................................................................. $ 3.08
Pro forma combined per FCG share (1)............................................................. $ 3.96
Equivalent pro forma combined per ISCG share (1)................................................. $ 3.05
</TABLE>
- --------------------------
(1) FCG and ISCG estimate they will incur direct transaction costs of
approximately $3.5 million associated with the merger, which will be charged
to operations upon consummation of the merger. The pro forma combined book
value per share data gives effect to the estimated direct transaction costs
as if such costs had been incurred as of the respective balance sheet date.
The pro forma combined book value per share data does not include additional
costs, which costs are not currently estimable, expected to be incurred
relating to integrating the companies. The direct transaction costs are not
included in the pro forma combined net income per share data. See "Unaudited
Pro Forma Combined Condensed Financial Statements" and accompanying notes
thereto.
(2) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. The pro forma combined book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
common stock outstanding as of September 30, 1998.
(3) The ISCG equivalent pro forma combined net income per share amounts are
calculated by multiplying the FCG combined pro forma net income per share
amounts by the exchange ratio of 0.77 per share.
12
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the merger, using the pooling of interests
method of accounting. These financial statements reflect certain assumptions
deemed probable by management regarding the merger (e.g., that share information
used in the unaudited pro forma information approximates actual share
information at the effective date). No adjustments to the unaudited pro forma
combined condensed financial statements have been made to account for different
possible results in connection with the foregoing, as management believes that
the impact on such information of varying outcomes, individually or in the
aggregate, would not be material.
The unaudited pro forma combined condensed balance sheet as of September 30,
1998 gives effect to the merger as if it had occurred on September 30, 1998, and
combines the historical unaudited consolidated balance sheet of FCG and the
historical unaudited consolidated balance sheet of ISCG as of such date.
The unaudited pro forma combined condensed statements of operations for each
of the years ended December 31, 1995, 1996 and 1997 and for the nine-month
period ended September 30, 1998, combine the historical consolidated statements
of operations of FCG and ISCG as if the merger had occurred at the beginning of
the earliest period presented.
FCG and ISCG estimate that they will incur direct transaction costs of
approximately $3.5 million associated with the merger, which will be charged to
operations upon consummation of the merger. In addition, it is expected that
following the merger, the combined company will incur additional costs, which
can not currently be estimated, associated with integrating the operations of
the two companies. Integration-related costs are not included in the
accompanying unaudited pro forma combined condensed financial statements.
Unaudited pro forma combined condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the earliest period
presented, nor is it necessarily indicative of future financial position or
results of operations. These unaudited pro forma combined condensed financial
statements are based upon the respective historical consolidated financial
statements of FCG and ISCG and notes thereto, included elsewhere in this joint
proxy statement/ prospectus. These unaudited pro forma combined condensed
financial statements do not incorporate, nor do they assume, any benefits from
cost savings or synergies of operations of the combined company.
13
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FCG ISCG ADJUSTMENTS COMBINED
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 13,485 $ 4,025 $ -- $ 17,510
Investments available for sale................................ 11,130 -- -- 11,130
Accounts receivable, net...................................... 23,842 15,512 -- 39,354
Work in process............................................... 11,352 212 -- 11,564
Prepaid expenses.............................................. 1,821 560 -- 2,381
Income taxes receivables...................................... 132 -- -- 132
Other current assets.......................................... -- 932 -- 932
--------- --------- ------ -----------
Total current assets........................................ 61,762 21,241 -- 83,003
--------- --------- ------ -----------
Notes receivable--stockholders.................................. 1,772 -- -- 1,772
Property and equipment, net..................................... 6,324 3,651 -- 9,975
Long term investments........................................... 25,758 -- -- 25,758
Goodwill, net................................................... 1,193 4,558 -- 5,751
Other assets.................................................... 4,022 104 -- 4,126
--------- --------- ------ -----------
Total assets................................................ $ 100,831 $ 29,554 $ -- $ 130,385
--------- --------- ------ -----------
--------- --------- ------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt............................. $ 228 $ -- $ -- $ 228
Accounts payable and accrued expenses......................... 16,059 3,983 -- 20,042
Accrued transaction costs..................................... -- -- 3,500 3,500
Current income tax liability.................................. 4,663 346 -- 5,009
Deferred revenue.............................................. 377 -- -- 377
Customer advances............................................. 2,296 -- -- 2,296
Deferred income taxes......................................... 6,503 341 -- 6,844
--------- --------- ------ -----------
Total current liabilities................................... 30,126 4,670 3,500 38,296
--------- --------- ------ -----------
Non-current liabilities
Long-term debt, net of current portion........................ 209 -- -- 209
Supplemental executive retirement plan........................ 3,501 -- -- 3,501
Deferred income taxes......................................... 447 -- -- 447
--------- --------- ------ -----------
Total liabilities........................................... 34,283 4,670 3,500 42,453
--------- --------- ------ -----------
Put obligation related to Associate 401(k) and Stock Ownership
Plan (ASOP) and capital stock................................. -- -- -- --
Stockholders' equity............................................ -- -- -- --
Common Stock.................................................. 16 46 (40) 22
Additional paid-in capital.................................... 68,256 12,843 (531) 80,568
Retained earnings............................................. 10,111 12,566 (3,500) 19,177
Deferred compensation--stock incentive agreements............. (4,077) -- -- (4,077)
Unearned ASOP shares.......................................... (853) -- -- (853)
Notes receivable--stockholders................................ (6,905) -- -- (6,905)
Treasury stock................................................ -- (571) 571 --
--------- --------- ------ -----------
Total stockholders' equity.................................. 66,548 24,884 (3,500) 87,932
--------- --------- ------ -----------
Total liabilities and stockholders' equity.................. $ 100,831 $ 29,554 $ -- $ 130,385
--------- --------- ------ -----------
--------- --------- ------ -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
14
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FCG ISCG COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Net revenue..................................................................... $ 47,744 $ 21,024 $ 68,768
Cost of services................................................................ 26,518 12,559 39,077
--------- --------- -----------
Gross profit.................................................................. 21,226 8,465 29,691
Selling, general and administrative expenses.................................... 17,517 5,187 22,704
Compensation expenses related to stock issuances................................ 385 -- 385
--------- --------- -----------
Income from operations........................................................ 3,324 3,278 6,602
Other income
Interest income (expense), net................................................ (36) (33) (69)
Other income, net............................................................. 18 -- 18
--------- --------- -----------
Income before income taxes.................................................. 3,306 3,245 6,551
Provision for income taxes...................................................... 1,423 1,395 2,818
--------- --------- -----------
Net income.................................................................... $ 1,883 $ 1,850 $ 3,733
--------- --------- -----------
--------- --------- -----------
Basic net income per share...................................................... $ 0.25 $ 0.36 $ 0.33
Diluted net income per share.................................................... $ 0.25 $ 0.30 $ 0.30
Shares used in computing basic net income per share............................. 7,515 5,085 11,430
Shares used in diluted net income per share..................................... 7,544 6,181 12,303
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
15
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FCG ISCG COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Net revenue..................................................................... $ 65,822 $ 30,607 $ 96,429
Cost of services................................................................ 40,718 17,497 58,215
--------- --------- -----------
Gross profit.................................................................. 25,104 13,110 38,214
Selling, general and administrative expenses.................................... 23,670 8,194 31,864
Compensation expenses related to stock issuances................................ 588 -- 588
--------- --------- -----------
Income from operations........................................................ 846 4,916 5,762
Other income
Interest income, net.......................................................... 3 354 357
Other income, net............................................................. 44 -- 44
--------- --------- -----------
Income before income taxes.................................................. 893 5,270 6,163
Provision for income taxes...................................................... 500 2,266 2,766
--------- --------- -----------
Net income.................................................................... $ 393 $ 3,004 $ 3,397
--------- --------- -----------
--------- --------- -----------
Basic net income per share...................................................... $ 0.05 $ 0.43 $ 0.24
Diluted net income per share.................................................... $ 0.04 $ 0.37 $ 0.22
Shares used in computing basic net income per share............................. 8,671 6,913 13,994
Shares used in diluted net income per share..................................... 9,127 8,091 15,357
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
16
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FCG ISCG COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Net revenue..................................................................... $ 91,570 $ 43,178 $ 134,748
Cost of services................................................................ 53,526 25,402 78,928
--------- --------- -----------
Gross profit.................................................................. 38,044 17,776 55,820
Selling, general and administrative expenses.................................... 31,669 12,233 43,902
Compensation expenses related to stock issuances................................ 6,060 -- 6,060
--------- --------- -----------
Income from operations........................................................ 315 5,543 5,858
Other income
Interest income (expense), net................................................ (68) 418 350
Other income, net............................................................. 119 -- 119
--------- --------- -----------
Income before income taxes.................................................. 366 5,961 6,327
Provision for income taxes...................................................... 1,900 2,448 4,348
--------- --------- -----------
Net income (loss)............................................................. $ (1,534) $ 3,513 $ 1,979
--------- --------- -----------
--------- --------- -----------
Basic net income (loss) per share............................................... $ (0.15) $ 0.44 $ 0.12
Diluted net income (loss) per share............................................. $ (0.15) $ 0.40 $ 0.11
Shares used in computing basic net income per share............................. 9,987 7,921 16,086
Shares used in diluted net income per share..................................... 9,987 8,881 17,324
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
17
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FCG ISCG COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Net revenue..................................................................... $ 66,305 $ 30,576 $ 96,881
Cost of services................................................................ 38,823 17,893 56,716
--------- --------- -----------
Gross profit.................................................................. 27,482 12,683 40,165
--------- --------- -----------
Selling, general and administrative expenses.................................... 22,804 8,955 31,759
Compensation expenses related to stock issuances................................ 1,861 -- 1,861
--------- --------- -----------
Income from operations........................................................ 2,817 3,728 6,545
--------- --------- -----------
Other income
Interest income (expense), net................................................ (59) 317 258
Other income, net............................................................. 110 -- 110
--------- --------- -----------
Income before income taxes.................................................. 2,868 4,045 6,913
--------- --------- -----------
Provision for income taxes...................................................... 1,590 1,699 3,289
--------- --------- -----------
Net income.................................................................... $ 1,278 $ 2,346 $ 3,624
--------- --------- -----------
--------- --------- -----------
Basic net income per share...................................................... $ 0.13 $ 0.30 $ 0.23
Diluted net income per share.................................................... $ 0.12 $ 0.26 $ 0.21
Shares used in computing basic net income per share............................. 9,687 7,914 15,781
Shares used in diluted net income per share..................................... 10,279 8,885 17,120
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
18
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FCG ISCG COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Net revenue..................................................................... $ 94,601 $ 45,897 $ 140,498
Cost of services................................................................ 51,813 27,732 79,545
--------- --------- -----------
Gross profit.................................................................. 42,788 18,165 60,953
Selling, general and administrative expenses.................................... 32,815 12,304 45,119
Cost and expenses associated with terminated business combination............... -- 486 486
--------- --------- -----------
Income from operations........................................................ 9,973 5,375 15,348
Other income
Interest income, net.......................................................... 1,325 221 1,546
Other income, net............................................................. 48 -- 48
--------- --------- -----------
Income before income taxes.................................................. 11,346 5,596 16,942
Provision for income taxes...................................................... 5,449 2,319 7,768
--------- --------- -----------
Net income.................................................................... $ 5,897 $ 3,277 $ 9,174
--------- --------- -----------
--------- --------- -----------
Basic net income per share...................................................... $ 0.39 $ 0.41 $ 0.43
Diluted net income per share.................................................... $ 0.38 $ 0.37 $ 0.41
Shares used in computing basic net income per share............................. 15,001 8,030 21,184
Shares used in diluted net income per share..................................... 15,722 8,976 22,634
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
19
<PAGE>
FIRST CONSULTING GROUP, INC. AND INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1--PERIODS COMBINED
The FCG consolidated balance sheet as of September 30, 1998 has been
combined with the ISCG consolidated balance sheet as of September 30, 1998. The
FCG consolidated statements of operations for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995 have
been combined with the ISCG consolidated statements of operations for the nine
months ended September 30, 1998 and 1997, and for the years ended December 31,
1997, 1996, and 1995 respectively.
NOTE 2--MERGER COSTS
FCG and ISCG estimate they will incur direct transaction costs of
approximately $3.5 million associated with the merger, consisting primarily of
fees for investment banking, filings with regulatory agencies, legal,
accounting, financial printing and other related costs. These nonrecurring costs
will be charged to operations in the fiscal quarter in which the merger is
consummated. The unaudited pro forma combined balance sheet gives effect to such
charges as if they had been incurred as of September 30, 1998, but the effects
of these costs have not been reflected in the unaudited pro forma combined
statements of operations as they are nonrecurring in nature. It is expected that
substantially all of the costs will be paid out of existing cash reserves within
six to twelve months after the consummation of the merger.
NOTE 3--PRO FORMA NET INCOME PER SHARE
The unaudited pro forma combined net income per common and equivalent share
is based upon the weighted average number of common and equivalent shares of FCG
and ISCG outstanding for each period at the exchange ratio.
NOTE 4--PRO FORMA NET INCOME (LOSS) PER SHARE
The following table reconciles the number of shares used in the pro forma
earnings per share computations to the numbers set forth in FCG's and ISCG's
historical statements of operations (in thousands, except the exchange ratio):
20
<PAGE>
NOTE 4--PRO FORMA NET INCOME (LOSS) PER SHARE (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Shares used in basic per share computation:
Historical ISCG....................................... 5,085 6,913 7,921 7,914 8,030
Exchange Ratio........................................ 0.77 0.77 0.77 0.77 0.77
--------- --------- --------- ------ ------
3,915 5,323 6,099 6,094 6,183
Historical FCG........................................ 7,515 8,671 9,987 9,687 15,001
--------- --------- --------- ------ ------
Pro forma combined.................................... 11,430 13,994 16,086 15,781 21,184
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
Shares used in diluted per share computation:
Historical ISCG....................................... 6,181 8,091 8,881 8,885 8,976
Exchange Ratio........................................ 0.77 0.77 0.77 0.77 0.77
--------- --------- --------- ------ ------
4,759 6,230 6,838 6,841 6,912
Historical FCG........................................ 7,544 9,127 9,987 10,279 15,722
--------- --------- --------- ------ ------
Add back of dilutive shares previously not included as
anti-dilutive due to loss........................... -- -- 499 -- --
--------- --------- --------- ------ ------
Pro forma combined.................................... 12,303 15,357 17,324 17,120 22,634
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
</TABLE>
21
<PAGE>
RISK FACTORS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF
THE COMBINED COMPANY MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
BELOW, ELSEWHERE IN THIS DOCUMENT, AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE IN MAKING AN INVESTMENT DECISION. KEEP IN MIND THAT THE RISKS
DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING FCG, ISCG OR THE COMBINED COMPANY.
RISKS RELATING TO THE MERGER
INTEGRATING FCG AND ISCG INVOLVES RISKS THAT MAY NEGATIVELY IMPACT THE
COMBINED COMPANY. Integrating FCG and ISCG will be a complex, time-consuming
and expensive process. Before the merger, FCG and ISCG operated independently,
each with its own business, business culture, clients, employees and systems.
After the merger, FCG and ISCG must operate as a combined organization utilizing
common (1) information and communication systems, (2) operating procedures, (3)
financial controls and (4) human resource practices, including benefit, training
and professional development programs. There may be substantial difficulties,
costs and delays involved in integrating FCG and ISCG. These may include:
- Distracting management from the business of the combined company
- Potential incompatibility of business cultures
- Perceived adverse change in client service standards, business focus,
billing practices, or service offerings available to clients
- Perceived uncertainty in career opportunities, benefits and the long-term
value of stock options available to employees
- Costs and delays in implementing common systems and procedures
- Potential inefficiencies in delivering services to the clients of the
combined company
- Potential inability to obtain consents of third parties required because
of the merger
Any one or all of these factors may cause increased operating costs, lower
than anticipated financial performance or the loss of clients and employees.
Many of these factors are also outside the control of either company. The
failure to integrate FCG and ISCG would have a material adverse effect on the
business, financial condition and results of operations of the combined company.
THE NUMBER OF SHARES OF FCG COMMON STOCK RECEIVED IN THE MERGER WILL NOT
INCREASE OR DECREASE DUE TO CHANGES IN THE PRICE OF EITHER COMPANY'S STOCK. At
the effective time of the merger, each outstanding share of ISCG common stock
will be converted into a fixed number of shares of FCG common stock. The number
of shares of FCG common stock received in the merger will not increase or
decrease due to fluctuations in the market price of either company's stock.
Recent market prices of FCG common stock and ISCG common stock are set forth
under the captions "Summary--Markets and Market Prices" beginning on page 12 and
"Comparative Per Share Market Price Data and Dividend Policy" beginning on page
36. We encourage ISCG shareholders to obtain current market quotations for FCG
common stock and ISCG common stock. FCG common stock and ISCG common stock have
been subject to price volatility. The market prices of FCG common stock and ISCG
common stock cannot be guaranteed or predicted. For more information, see
"Comparative Per Share Market Price Data and Dividend Policy" beginning on page
36.
RIGHTS OF ISCG SHAREHOLDERS WILL CHANGE AFTER THE MERGER. Following the
merger, ISCG shareholders will become FCG stockholders. There are important
differences between the rights of ISCG shareholders and the rights of FCG
stockholders. For a description of these differences, see "Comparison of
Shareholders' Rights."
22
<PAGE>
RISKS RELATING TO THE BUSINESS OF FCG
FCG MAY BE UNABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES. FCG's business is labor-intensive and requires highly skilled
employees. Most of FCG's consultants possess extensive expertise in healthcare,
information technology and consulting fields. To serve a growing client base,
FCG must continue to recruit and retain qualified personnel with expertise in
each of these three fields. Competition for such personnel is intense. FCG
competes for such personnel with management consulting firms, healthcare
organizations, software firms and other businesses. Many of these entities have
substantially greater financial and other resources than FCG. FCG may not be
able to recruit and retain a sufficient number of qualified personnel to serve
existing and new clients. If FCG fails to to recruit and retain a sufficient
number of qualified personnel, FCG's ability to expand its client base or
services could be impaired and FCG's business, financial condition and results
of operations could be adversely effected.
CONTINUED OR INCREASED EMPLOYEE TURNOVER COULD NEGATIVELY AFFECT FCG'S
BUSINESS. FCG has experienced employee turnover rates at or above industry
averages as a result of (1) dependence on lateral hiring of consultants, (2)
travel demands imposed on its consultants, and (3) loss of employees to
competitors and clients. Continued or increased employee turnover could
materially adversely affect FCG's business, financial condition and results of
operations. In addition, many of FCG's consultants develop strong business
relationships with FCG's clients. FCG depends on these relationships to generate
additional assignments and engagements. The loss of a substantial number of
consultants could erode FCG's client base and decrease FCG's revenue.
THERE ARE VARIOUS FACTORS WHICH MAY CAUSE FCG'S NET REVENUES AND OPERATING
RESULTS TO FLUCTUATE. FCG's net revenue and operating results may fluctuate
significantly because of a number of factors, many of which are outside FCG's
control. These factors may include:
- Losing key personnel and other employees
- Losing one or more significant clients
- Consummating an acquisition
- Costs of integrating acquired operations
- Timing and collection of payments and new client engagements
- Delays in securing and completing client engagements
- Fluctuations in market demand for FCG's services, consultant hiring and
utilization
- Variability in the number of billable days
- Availability of foreign net operating losses and other credits against
FCG's earnings
- Increased competition and pricing pressures
- Changes in business strategy, pricing and billing policies of FCG and its
competitors
- International currency fluctuations
A substantial portion of FCG's expenses, particularly personnel and related
costs, depreciation, office rent and occupancy costs, are relatively fixed. One
or more of the foregoing factors may cause FCG's operating expenses to be
disproportionately high during any given period. In addition, FCG bills certain
of its services on a fixed-price basis, and any assignment delays or
expenditures of time beyond that projected for the assignment could result in
write-offs of client billings. Significant write-offs could materially adversely
effect FCG's business, financial condition and results of operations. Based on
the preceding factors, FCG may experience a shortfall in revenue or earnings or
otherwise fail to meet public market expectations, which could materially
adversely effect FCG's business, financial condition and the market price of the
FCG common stock.
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<PAGE>
THE VARIABLE NUMBER OF BILLABLE DAYS IN A QUARTER MAY AFFECT FCG'S NET
REVENUE AND NET OPERATING EXPENSES. FCG's net revenue and operating expenses
vary depending on the number of billable days in any given quarter. FCG
typically has a lower number of billable days in the second and fourth quarters
of every year. In the second quarter of each year, FCG requires employee
attendance at an annual meeting of all of its employees. In the fourth quarter
of each year, FCG also encourages its employees to take vacation during the
December holidays. The number of billable days may also vary as a result of
vacation days, sick time, paid and unpaid leave and other holidays.
THE LENGTH OF TIME REQUIRED TO ENGAGE A CLIENT AND TO COMPLETE AN ASSIGNMENT
MAY BE UNPREDICTABLE AND COULD NEGATIVELY IMPACT FCG'S NET REVENUES AND
OPERATING RESULTS. The timing of client engagements and service fulfillment is
not predictable with any degree of accuracy. You should not rely on prior
engagement cycles as any indication of the timing of future client engagements
or revenues.
Prior to client engagements, FCG typically spends a substantial amount of
time and resources (1) identifying strategic or business issues facing the
client, (2) defining engagement objectives, (3) gathering information, (4)
preparing proposals and (5) negotiating contracts. FCG may be required to hire
new consultants before securing a client engagement. Clients may defer commiting
to new assignments for any length of time and for any reason. Such deferrals
could require FCG to maintain a significant number of under-utilized consultants
during any given period. In addition, failing to procure an engagement after
spending such time and resources could materially adversely effect FCG's
business, financial condition and results of operations.
The length of time required to complete an assignment often depends on
factors outside FCG's control, including:
- Existing information systems at the client site
- Changes or the anticipation of changes in the regulatory environment
affecting healthcare organizations
- Budgetary cycles and constraints
- Availability of personnel and other resources
- Consolidation in the healthcare industry
FCG may be unable to satisfy objectives and complete projects and services.
Any such failure may result in write-offs of client billings, reduction in
engagements or loss of clients. FCG's failure to deliver the services required
by the client on a timely basis or within anticipated budgets could materially
adversely affect FCG's business, financial condition and results of operations.
IF FCG IS UNABLE TO GENERATE ADDITIONAL REVENUE FROM ITS EXISTING CLIENTS,
FCG'S BUSINESS MAY BE NEGATIVELY AFFECTED. FCG's success depends on obtaining
additional engagements from its existing clients. A substantial portion of FCG's
revenues are derived from services provided to its existing clients. The loss of
a small number of clients may result in a material decline in revenues and cause
FCG to fail to meet public market expectations of its financial performance and
operating results. Any material failure on the part of FCG to generate
additional revenues from its existing clients may materially adversely effect
FCG's business, financial condition and results of operations.
IF FCG IS UNABLE TO MANAGE ITS GROWTH, ITS BUSINESS MAY BE NEGATIVELY
IMPACTED. FCG's business has grown rapidly in recent years. This growth has
placed new and increased demands on FCG's vice presidents and other management
personnel. This growth has also placed significant and increasing demands on
FCG's financial, technical and operational resources and on its information
systems. To manage any future growth, FCG must (1) extend its financial
reporting and information management systems to a growing number of offices and
employees, and (2) develop and implement new procedures and controls to
accommodate new operations, services and clients. Increasing operational and
administrative demands
24
<PAGE>
may make it difficult for FCG's vice presidents to engage in business
development activities. Adding a significant number of new employees and offices
may also impair FCG's ability to maintain its service delivery standards and
corporate culture. In addition, FCG has in the past changed, and may in the
future change, its organizational structure and business strategy. Such changes
may result in operational inefficiencies and delays in delivering FCG's
services. Such changes could also cause a disruption in FCG's business and could
have a material adverse effect on FCG's business, financial condition and
results of operations. If FCG fails to effectively manage its growth, FCG's
business, financial condition and results of operations could be adversely
affected.
FCG'S FAILURE TO ACQUIRE AND SUCCESSFULLY INTEGRATE THE BUSINESSES FCG
ACQUIRES COULD NEGATIVELY IMPACT FCG. FCG intends to grow, in part, by acquiring
complementary professional practices within the healthcare industry. In 1998,
FCG completed two acquisitions and is in the process of completing a third
acquisition. Integrating acquired operations is a complex, time-consuming and
expensive process. All acquisitions involve risks that could materially and
adversely effect FCG's business and operating results. These risks include (1)
distracting management from the business of FCG, (2) losing key personnel and
other employees, (3) losing clients, (4) costs, delays and inefficiencies
associated with integrating acquired operations and personnel, and (5)
amortizing the cost of acquired assets and goodwill. Acquired businesses may not
enhance FCG's services, provide FCG with increased client opportunities or
result in growth. Combining acquired operations with FCG may result in lower
overall operating margins, greater stock price volatility and quarterly earnings
fluctuations. Cultural incompatibilities, career uncertainties and other factors
associated with such acquisitions may result in the loss of employees and
clients. Failing to acquire and successfully integrate complementary practices
could materially adversely effect FCG's business, financial condition and
results of operations.
FCG'S INTERNATIONAL OPERATIONS CREATE SPECIALIZED RISKS THAT CAN NEGATIVELY
AFFECT FCG. FCG provides its services to international clients. Expanding into
international markets will require FCG to (1) spend a significant amount of
management, human and financial resources, (2) hire additional personnel, and
(3) establish international offices. FCG may be unable to recruit and retain a
sufficient number of qualified consultants in each country in which it intends
to conduct its business. If FCG fails to recruit and retain qualified employees,
FCG's ability to expand internationally may be impaired and FCG's business,
financial condition and results of operations could be adversely effected. FCG's
international operations are subject to a variety of risks, including:
- Difficulties and costs of localizing services in international markets
- Unfavorable pricing and price competition
- Currency fluctuations
- Longer payment cycles in some countries
- Difficulties in collecting international accounts receivable
- Difficulties in enforcing contractual obligations and intellectual
property rights
- Adverse tax consequences
- Increased costs associated with maintaining international marketing
efforts and offices
- Adverse changes in regulatory requirements
- Economic instability
Any one or all of these factors may cause increased operating costs, lower
than anticipated financial performance and may materially adversely effect FCG's
business, financial condition and results of operations.
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<PAGE>
THE DISRUPTION OR FAILURE OF COMPUTER PROGRAMS AND SYSTEMS DUE TO THEIR
INABILITY TO PROCESS DATE/TIME INFORMATION BETWEEN THE TWENTIETH AND
TWENTY-FIRST CENTURIES MAY CAUSE AN INTERRUPTION IN AND NEGATIVELY IMPACT FCG'S
BUSINESS. Many existing computer programs and systems, including those used by
FCG's clients, use only two digits to identify the year in the date field. These
programs may be unable to process date/time information between the twentieth
and twenty-first centuries. This inability could cause the disruption or failure
of such computer systems (the "Y2K Problem"). Solving the Y2K Problem will
require a large amount of time and resources. FCG's clients may have to
reallocate a significant portion of their budgets away from FCG's services to
address this problem. Such reallocation would have a material adverse effect on
FCG's business, financial condition and results of operations. FCG's current
time and billing systems are not Y2K compliant. FCG has purchased an upgrade to
these systems that will render them Y2K compliant. FCG expects to complete
deployment of this upgrade in the fourth quarter of 1998. There can be no
assurance that such deployment will begin as planned or, if begun, will be
completed in a timely and cost-effective manner.
THE LOSS OF FCG'S VICE PRESIDENTS AND EXECUTIVE OFFICERS COULD NEGATIVELY
AFFECT FCG. FCG's performance depends on the continued service of its vice
presidents and executive officers. In particular, FCG depends on such persons to
secure new clients and engagements and to manage the business and affairs of
FCG. The loss of such persons could result in disruption of FCG's business,
stock price volatility and could have a material adverse effect on FCG's
business, financial condition and results of operations. FCG has not entered
into long-term employment contracts with any of its employees and does not
maintain key employee life insurance.
IF FCG FAILS TO MEET CLIENT EXPECTATIONS IN THE PERFORMANCE OF ITS SERVICES,
FCG'S BUSINESS COULD SUFFER. FCG's services often involve complex information
systems and software which are critical to the clients' operations. FCG's
failure to meet client expectations in the performance of its services may
damage FCG's reputation in the healthcare industry and adversely affect its
ability to attract and retain clients. If a client is not satisfied with FCG's
services, FCG will generally spend additional human and other resources at its
own expense to ensure client satisfaction. Such expenditures will typically
result in a lower margin on such engagements and could materially adversely
effect FCG's business, financial condition and results of operations.
In the course of providing its services, FCG will often recommend the use of
other software and hardware products. These products may not perform as expected
or contain defects. If this occurs, FCG's reputation could be damaged and it
could be subject to liability. FCG attempts to limit its exposure to potential
liability claims. Such limitations may not be effective. A successful liability
claim brought against FCG may adversely affect FCG's reputation in the
healthcare industry and could have a material adverse effect on FCG's business,
financial condition and results of operations. Although FCG maintains liability
insurance, such insurance may not provide adequate coverage for successful
claims against FCG.
IF FCG DOES NOT COMPETE EFFECTIVELY IN THE HEALTHCARE INFORMATION SERVICES
INDUSTRY, THEN ITS BUSINESS MAY BE NEGATIVELY IMPACTED. The market for
healthcare information technology consulting is very competitive. FCG has
competitors that provide some or all of the services provided by FCG. In
strategic consulting services, FCG competes with (1) international consulting
firms, (2) regional and specialty consulting firms and (3) the consulting groups
of international accounting firms such as KPMG Peat Marwick LLP, Ernst & Young
LLP, Deloitte & Touche LLP, PricewaterhouseCoopers, LLP and Andersen Consulting.
In implementation and integration services, FCG competes with (1) information
system vendors such as HBO & Company, Inc., Shared Medical Systems Corporation
and Integrated Systems Solution Corporation, a division of International
Business Machines Corporation, (2) service groups of computer equipment
companies, (3) systems integration companies such as Electronic Data Systems
Corporation, Perot Systems Corporation, CAP Gemini America, Inc. and Computer
Sciences Corporation, (4) clients' internal information management departments,
and (5) other healthcare consulting firms such as DAOU Systems Inc. and Superior
Consultant Holdings Corporation.
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<PAGE>
Many of FCG's competitors have significantly greater financial, human and
marketing resources than FCG. Such competitors may be able to respond more
quickly to new or emerging technologies and changes in customer demands, or to
devote greater resources to the development, promotion, sale and support of
their products and services than FCG. FCG may be unable to compete effectively
with current and future competitors. Competitive pressures may cause FCG's
revenue or operating margins to decline or otherwise materially adversely effect
its business, financial condition and results of operations.
IF FCG FAILS TO KEEP PACE WITH REGULATORY AND TECHNOLOGICAL CHANGES, THEN
FCG'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED. The healthcare industry
is subject to regulatory and technological changes that may affect the
procurement practices and operations of healthcare organizations. During the
past several years, the healthcare industry has been subject to an increase in
governmental regulation and reform proposals. These reforms could increase
governmental involvement in the healthcare industry, lower reimbursement rates
or otherwise change the operating environment of FCG's clients. Healthcare
organizations may react to these proposals by curtailing or deferring
investments, including those for FCG's services. FCG cannot predict with any
certainty what impact, if any, such legislative reforms could have on its
business.
Technological change in the network and application markets has created high
demand for consulting, implementation and integration services. If the pace of
technological change were to diminish, FCG could experience a decrease in demand
for its services. Any material decrease in demand would materially adversely
effect FCG's business, financial condition and results of operations.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD NEGATIVELY IMPACT FCG'S
BUSINESS. FCG derives substantially all of its revenue from clients in the
healthcare industry. As a result, FCG's business, financial condition and
results of operations are influenced by conditions affecting this industry,
particularly current trends towards consolidation among healthcare
organizations. Such consolidation may reduce the number of existing and
potential clients for FCG's services. In addition, the resulting organizations
could have greater bargaining power, which could erode the current pricing
structure for FCG's services. The reduction in the size of FCG's target market
or the failure of FCG to maintain its pricing strategies could have a material
adverse effect on FCG's business, financial condition and results of operations.
FCG MAY BE UNABLE TO EFFECTIVELY PROTECT ITS PROPRIETARY INFORMATION AND
PROCEDURES. FCG must protect its proprietary information, including its
proprietary methodologies, research, tools, software code and other information.
To do this, FCG relies on a combination of copyright and trade secret laws and
confidentiality procedures to protect its intellectual property. These steps may
not protect FCG's proprietary information. In addition, the laws of certain
countries do not protect or enforce proprietary rights to the same extent as do
the laws of the United States. FCG is currently providing its services to
clients in international markets. FCG's proprietary information may not be
protected to the same extent as provided under the laws of the United States, if
at all. The unauthorized use of FCG's intellectual property could have a
material adverse effect on FCG's business, financial condition or results of
operations. In addition, third parties may assert infringement claims against
FCG in the future. Such claims may result in protracted and costly litigation,
regardless of the merits of such claims.
FCG'S EXISTING STOCKHOLDERS MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS
REQUIRING STOCKHOLDER APPROVAL. Upon consummation of the merger, FCG's existing
stockholders will beneficially own approximately 16,600,418 shares, or 72.8%, of
the outstanding shares of FCG common stock. As a result, FCG's existing
stockholders, if acting together, will be able to exercise control over or
significantly influence matters requiring stockholder approval, including the
election of directors, mergers, consolidations and sales of all or substantially
all of the assets of FCG.
DELAWARE LAW AND FCG'S CHARTER COULD MAKE THE ACQUISITION OF FCG BY ANOTHER
COMPANY MORE DIFFICULT. Certain provisions of Delaware law applicable to FCG
could delay or make more difficult a merger, tender offer or proxy contest
involving FCG, including Section 203 of the DGCL, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of
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three years from the date the person became an interested stockholder unless
certain conditions are met. In addition, the FCG Board of Directors may issue
shares of preferred stock without stockholder approval on such terms as the FCG
Board Directors may determine. The rights of the holders of FCG common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. In addition, the FCG
certificate of incorporation and FCG bylaws provide for a classified board of
directors, eliminate the right of stockholders to act by written consent without
a meeting, require advanced stockholder notice to nominate directors and raise
matters at the annual stockholders meeting, eliminate cumulative voting in the
election of directors and allow for the removal of directors only for cause and
with a two-thirds vote of FCG's outstanding shares. All of the foregoing could
have the effect of delaying, deferring or preventing a change in control of FCG
and could limit the price that certain investors might be willing to pay in the
future for shares of FCG common stock.
RISKS RELATING TO THE BUSINESS OF ISCG
ISCG MAY NOT BE ABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF TECHNICAL
EMPLOYEES TO MEET ITS WORK REQUIREMENTS.
ISCG's business of rendering professional services is labor-intensive. ISCG
believes its future success will depend in large part upon attracting, retaining
and motivating sufficient numbers of highly-skilled technical employees. There
are not enough information services professionals available to meet the current
demands of the computer consulting industry and ISCG believes that demand will
remain high for the foreseeable future. Therefore, in the future, ISCG might not
be able to attract and retain sufficient numbers of such highly-skilled
technical employees to meet its work requirements. The inability to attract new
technical employees or the departure of an unusually high number of ISCG's
technical employees would have a material adverse impact on ISCG's business.
IF CERTAIN KEY EMPLOYEES OF ISCG LEAVE ISCG OR ARE NO LONGER ABLE TO PERFORM
SERVICES FOR ISCG, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON ISCG'S
BUSINESS.
ISCG believes that the efforts and abilities of its senior management are
very important to its continued success. In particular, if David S. Lipson,
ISCG's Chairman, Chief Executive Officer and President, or certain of ISCG's
other executive officers or senior managers left ISCG or were unable to perform
services for ISCG, it could have a material negative impact on ISCG's business.
ISCG has employment agreements with each of its executive officers.
ISCG'S REVENUES MAY DECREASE AS A RESULT OF CERTAIN CHANGES IN THE
PHARMACEUTICAL INDUSTRY.
Historically, a significant portion of ISCG's revenues has come from
companies in the pharmaceutical business. This trend may continue in the future.
The following chart shows the approximate percentage of total revenues ISCG
derived from the pharmaceutical industry during 1995, 1996, 1997 and 1998
(through September 30, 1998).
<TABLE>
<CAPTION>
1995 1996 1997 1998 (THROUGH SEPTEMBER 30, 1998)
----- ----- ----- -------------------------------------
<S> <C> <C> <C>
64% 59% 62% 68%
</TABLE>
ISCG's revenues are linked to the pharmaceutical industry's research and
development expenditures. Should any of the following events occur in the
pharmaceutical industry, ISCG's business could be negatively affected in a
material way:
- The industry's general economic environment changes adversely
- Companies continue to consolidate
- Research and development expenditures or pharmaceutical companies'
expenditures on technology in general decrease
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A trend in the pharmaceutical industry is for companies to "outsource"
either large information technology-dependent projects or their information
systems staffing requirements. Outsourcing means that, rather than utilize its
own employees, a company contracts with a third party to undertake an entire
project or to provide technical personnel to augment their own staff. ISCG
benefits when pharmaceutical companies outsource to it. If this outsourcing
trend slows down or stops, ISCG's financial condition and results of operations
could be impacted in a materially adverse way.
A FEW CLIENTS MAY ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF ISCG'S REVENUES IN
ANY GIVEN YEAR AND ISCG'S BUSINESS COULD BE NEGATIVELY IMPACTED IF IT WERE
UNABLE TO SECURE ENGAGEMENTS FOR LARGE PROJECTS WITH SIGNIFICANT CLIENTS
IN A PARTICULAR YEAR.
A small number of clients each usually account for 10% or more of ISCG's
revenues in any given year. The following chart shows ISCG clients that
accounted for 10% or more of ISCG's revenues in 1995, 1996, 1997 and 1998
(though September 30, 1998).
<TABLE>
<S> <C> <C> <C> <C>
Percentage
of Revenues
Percentage Percentage Percentage in 1998
of Revenues of Revenues of Revenues (through
Client in 1995 in 1996 in 1997 9/30/98)
Air Products and Chemicals, Inc. 13% 10% -- --
Merck & Company, Inc. 11% 10% -- --
SmithKline Beecham Corp. -- -- 11% 10%
Pharmaceutical -- -- -- 13%
Research Institute
</TABLE>
ISCG's clients generally implement large software applications on an
irregular basis because such implementation is a complex, time-intensive and
costly process. Therefore, the amount of revenues derived by ISCG from a
specific client may vary significantly from year-to-year. Accordingly, ISCG
expects that the identity of clients accounting for large portions of its
revenues will change from year-to-year.
IF ISCG FAILS TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH VENDORS OF
SOFTWARE PRODUCTS, IT COULD HAVE A
NEGATIVE EFFECT ON ISCG'S ABILITY TO SECURE ENGAGEMENTS.
ISCG has established a non-exclusive partnership arrangement with
Documentum, Inc. Documentum markets document management software applications
largely to the pharmaceutical industry. ISCG believes that its relationship with
this vendor is important to its sales, marketing and support activities. ISCG
integrates Documentum's software products into clients' systems. If a client or
prospective client selects one of Documentum's products, ISCG may be hired to
integrate the product into the client's system. ISCG's strong relationship with
Documentum has often resulted in sales leads and client engagements for ISCG. If
ISCG fails to maintain its relationship with Documentum or fails to establish
relationships with other vendors, its business could be materially adversely
effected.
ISCG'S FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED IF ITS TECHNICAL
EMPLOYEES ARE UNDER-UTILIZED OR IF ITS BILLING MARGINS DECREASE.
ISCG's revenues are derived largely from the hourly fees its clients pay for
the professional services rendered by ISCG's technical employees. The
"utilization rate" of ISCG's technical employees is defined as the number of
hours actually billed during any given period divided by the number of hours
available during that period. Utilization rates can vary based on a number of
factors, including (1) non-billable time between assignments that is incurred by
technical employees, (2) vacation hours taken by technical employees, (3)
weather events that prevent technical employees from reaching work sites, and
(4) training
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of technical employees. Since virtually all of ISCG's technical employees are
full time employees and their costs are relatively fixed, variances in
utilization rates affect both ISCG's revenues and operating results.
In addition, the shortage of highly trained technical employees in the
industry has caused upward pressure on such employees' wages. ISCG's "billing
margin" is the difference between its cost of delivering consulting services
(which cost consists predominately of wages and related benefits) and the rates
ISCG charges its customers. A decrease in ISCG's billing margin would adversely
affect ISCG's financial performance. ISCG cannot guarantee that its billing
margin will not decrease in the future.
ISCG'S QUARTERLY RESULTS MAY VARY AS A RESULT OF UNDER-UTILIZATION OF
TECHNICAL EMPLOYEES AND/OR THE TIMING OF CERTAIN GENERAL AND
ADMINISTRATIVE SPENDING.
ISCG's business is generally not seasonal. However, since its
employee-related costs are relatively fixed and revenues fluctuate,
profitability may vary from one quarter to another. The following factors
contribute to such variations:
- Changes in employee utilization rates
- The timing of certain general and administrative expenses
- The timing of new hires
- The timing of training for new and existing technical employees
- The number of business days in a particular quarter
These factors could impact ISCG's future quarterly results. Therefore, the
future amount or pattern of ISCG's quarterly results will not necessary be the
same as its historical amount or pattern of quarterly results.
ISCG HAS GROWN RAPIDLY AND CONTINUES TO GROW RAPIDLY. IF ISCG FAILS TO
EFFECTIVELY MANAGE THIS GROWTH, ITS FINANCIAL RESULTS COULD SUFFER.
From January 1, 1992 through September 30, 1998, the size of ISCG's
professional staff increased from 61 to 538 personnel. This growth has placed
increasing demands on ISCG's management, financial and other resources. ISCG has
built these resources and systems to account for such growth, but continued
growth may require ISCG to increase its investment in such systems, or to
reorganize its management team. Such changes, should they occur, could cause an
interruption or diversion of focus from ISCG's core business activities and have
an adverse effect on financial results.
IF ISCG FAILS TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS IN THE
INFORMATION TECHNOLOGY INDUSTRY, IT COULD HAVE A MATERIAL ADVERSE EFFECT
ON ISCG'S BUSINESS.
The information technology industry has experienced and continues to
experience rapid technological advances and developments. To continue to succeed
in the future, ISCG must develop solutions that keep pace with continuing
changes in information processing technology, evolving industry standards and
changing client preferences. ISCG may not succeed in addressing these
developments on a timely basis. If ISCG delays or fails to address these
developments, ISCG's business could be materially negatively impacted. In
addition, technologies or methodologies developed by others could make ISCG's
services noncompetitive or obsolete.
IF ISCG DOES NOT EFFECTIVELY COMPETE, ITS BUSINESS WILL BE NEGATIVELY
IMPACTED.
ISCG competes in the commercial professional services segment of the
information technology industry. In this segment, many companies compete for
client assignments and for technical personnel. Many of the companies that ISCG
competes with or may compete with have significantly greater financial,
technical and marketing resources and have greater name recognition. ISCG
primarily seeks consulting,
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<PAGE>
applications development and systems and networking engagements with companies
within the pharmaceutical industry. A number of other professional services
firms also seek these kinds of engagements. ISCG believes that the following are
the principal factors on which ISCG and companies operating in the same industry
segment compete:
- Responsiveness to client needs
- Availability of technical personnel
- Speed of applications development
- Quality of service
- Price
- Project management capability
- Technical expertise
- The ability to market to and serve clients internationally
ISCG believes that its ability to compete also depends in part on the
following factors that are outside of its control:
- The ability of its competitors to hire, retain and motivate qualified
technical personnel
- The ownership by competitors of software used by potential clients
- The development of software that would reduce or eliminate the need for
ISCG's services
- The price at which others offer comparable services
- The extent of its competitors' responsiveness to customer needs
COMPUTER SYSTEMS USED BY OR DESIGNED BY ISCG OR USED BY THIRD PARTIES WITH
WHOM ISCG REGULARLY DEALS MAY NOT BE ABLE TO PROCESS DATE/TIME INFORMATION
BETWEEN THE TWENTIETH AND TWENTY-FIRST CENTURIES. THIS INABILITY COULD
CAUSE THE DISRUPTION OR FAILURE OF SUCH COMPUTER SYSTEMS. ISCG'S BUSINESS COULD
BE INTERRUPTED AND SUFFER A MATERIAL ADVERSE EFFECT AS A RESULT OF SUCH
DISRUPTION OR FAILURE.
Many existing computer programs and systems, including certain of those used
by ISCG for its own internal purposes and certain of those used by its clients,
suppliers, vendors and others, use only two digits to identify the year in the
date field. Some custom applications designed, built or modified by ISCG for its
clients may also only use two digits to identify the year in the date field.
These programs were designed and developed without considering the impact of
their inability to process date/time information between the twentieth and
twenty-first centuries. This inability to process information could cause the
disruption or failure of such computer systems, and is referred to as the "Y2K
problem." ISCG has identified four main areas of its Y2K risk:
- ISCG's internal computer systems could be disrupted or fail, causing an
interruption or decrease in ISCG's ability to continue its operations
- The computer systems of third parties with whom ISCG regularly deals,
including among others its clients, suppliers, vendors, utilities and
financial institutions, could be disrupted or fail, causing an
interruption or decrease in ISCG's ability to continue its operations
- ISCG could be exposed to liabilities if certain of the custom applications
designed, built or modified by ISCG for its clients are disrupted or fail
- ISCG's revenue could decline if clients' resources are diverted from
ISCG's traditional work to fixing their Y2K problems
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<PAGE>
ISCG is currently evaluating the nature and extent of the Y2K issues related
to its internal systems. ISCG believes that, before December 31, 1999, its
material internal systems will be substantially able to process date/time
information between the twentieth and twenty-first centuries. If ISCG does not
achieve Y2K compliance for its internal systems on a timely basis, ISCG's
business could suffer a material adverse impact.
If the business of any third party with whom ISCG regularly deals, including
among others its clients, suppliers, vendors, utilities and financial
institutions, is significantly disrupted because such party is not Y2K
compliant, it could have a material adverse effect on ISCG's business. These
disruptions could include, among other things:
- A client's inability to process payments to ISCG
- A financial institution's inability to process checks drawn on ISCG's bank
accounts, accept deposits or process wire transfers
- A client's, supplier's, vendor's or financial institution's business
failure
- An interruption in deliveries of computer equipment and other supplies
from vendors
- A loss of voice and data connections ISCG uses to share information
- A loss of electric power to ISCG's facilities
- Other interruptions to the normal conduct of business by ISCG, the nature
and extent of which ISCG cannot foresee
ISCG does not know whether any of the disruptions described above will
actually occur, or if they do occur, the effect they will have on ISCG.
ISCG believes it is likely that certain custom software applications it
designed, built or modified in the past are non-Y2K compliant. ISCG has not made
a determination of which custom applications may not be Y2K compliant. Further,
ISCG has not determined the extent to which it may be legally responsible for
either (i) fixing any non-Y2K compliant applications or (ii) the consequences of
such non-compliance. ISCG has not quantified the impact that the foregoing risk
may have on its business. Even in the absence of legal liability, ISCG could
determine that it is in ISCG's best interests to offer to fix non-compliant
applications under a variety of arrangements, including at no charge or at rates
below ISCG's normal rates. The failure of custom software applications delivered
by ISCG in the past to be Y2K compliant could have a material adverse effect on
ISCG's business, financial condition and results of operations.
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THE FCG SPECIAL MEETING
PURPOSE OF THE FCG SPECIAL MEETING
The purpose of the FCG special meeting is to consider and vote upon a
proposal to approve the issuance of the FCG common stock in connection with the
proposed merger of Foxtrot Acquisition Sub, Inc. with and into Integrated
Systems Consulting Group, Inc., as described in the merger agreement. FCG common
stockholders may also consider and vote upon such other matters as may be
properly brought before the FCG special meeting or any postponements or
adjournments thereof. The merger will occur only if the proposal is approved.
THE FCG BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF SHARES OF FCG
COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT.
PROXIES
The FCG proxy card accompanying this joint proxy statement/prospectus is
being solicited on behalf of the FCG Board of Directors for use at the FCG
special meeting.
DATE, TIME AND PLACE OF MEETING
The FCG special meeting will be held at FCG's principal offices, located at
111 W. Ocean Boulevard, 4th Floor, Long Beach, California, on December 18, 1998
at 8:00 a.m. local time.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of FCG common stock at the close of business on
November 10, 1998 will be entitled to notice of and to vote at the FCG special
meeting. At the close of business on the record date there were 16,600,418
shares of FCG common stock outstanding and entitled to vote. Except for the
stockholders identified herein under "Information Relating to FCG--Security
Ownership of Certain Beneficial Owners and Management of FCG," as of the record
date, to the knowledge of FCG, no other person beneficially owned more than 5%
of the outstanding FCG common stock.
Each holder of record of FCG common stock on the record date will be
entitled to one vote for each share held on all matters to be voted upon at the
FCG special meeting.
SOLICITATION
This joint proxy statement/prospectus was mailed to all FCG stockholders of
record as of the record date and constitutes notice of the FCG special meeting
in conformity with the requirements of the Delaware General Corporation Law
("DGCL").
Regardless of whether the merger is consummated, each of FCG and ISCG will
pay its own costs and expenses incurred in connection with the reorganization
agreement and the transactions contemplated by the merger agreement, except that
fees and expenses (other than attorneys' fees) incurred in connection with the
printing and filing of the registration statement and this joint proxy
statement/prospectus will be shared equally by FCG and ISCG. See "The Merger
Agreement--Expenses and Termination Fees."
Subject to the foregoing, the cost of the solicitation of proxies from
holders of FCG common stock and all related costs will be borne by FCG. In
addition, FCG may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of FCG. No additional
compensation will be paid to directors, officers or other regular employees for
such services.
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VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of FCG common stock entitled to vote at the
FCG special meeting is necessary to constitute a quorum.
Approval of the proposal requires the affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote at the FCG special meeting. All votes will be tabulated by the inspector of
election appointed for the meeting, who will separately tabulate affirmative and
negative votes, abstentions and broker non-votes. Abstentions will be counted
towards the tabulation of votes cast on proposals presented to the stockholders
and will have the same effect as negative votes on each proposal. Broker
non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether a matter has been approved.
Pursuant to certain voting agreements dated September 9, 1998 (each an "FCG
voting agreement" and, collectively, the "FCG voting agreements"), James A.
Reep, Thomas A. Reep and Brent A. Hanson (each an "FCG voting agreement
stockholder" and, collectively, the "FCG voting agreement stockholders") have
agreed that, prior to the earlier of the (i) effective time (as defined below)
or (ii) the termination of the merger agreement (the "expiration date"), they
will vote their shares of FCG common stock in favor of the issuance of FCG
common stock pursuant to the merger and, in certain instances, to require any
party to whom shares of FCG common stock (or securities convertible into shares
of FCG common stock) held as of the date of the merger agreement or acquired
prior to the expiration date are sold, pledged, granted an option to purchase,
or otherwise transferred to execute a counterpart of the FCG voting agreements.
The "effective time" is the latest of (a) the filing of articles of merger with
the Secretary of State of the Commonwealth of Pennsylvania, (b) the filing of a
certificate of merger with the Secretary of State of the State of Delaware and
(c) such later time as may be specified in the articles of merger or certificate
of merger. See "Approval of the Merger and Related Transactions--Voting
Agreements."
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
corporate secretary of FCG at FCG's principal offices, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
THE ISCG SPECIAL MEETING
PURPOSE OF THE ISCG SPECIAL MEETING
The purpose of the ISCG special meeting is to consider and vote upon the
approval and adoption of the merger agreement and approval of the merger.
Holders of ISCG common stock may also consider and vote upon such other matters
as may be properly brought before the ISCG special meeting or any postponements
or adjournments thereof. The merger will occur only if the proposal is approved.
THE ISCG BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER, AND RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER
AGREEMENT AND FOR APPROVAL OF THE MERGER.
PROXIES
The ISCG proxy accompanying this joint proxy statement/prospectus is being
solicited on behalf of the ISCG Board of Directors for use at the ISCG special
meeting.
DATE, TIME AND PLACE OF MEETING
The ISCG special meeting will be held at ISCG's principal offices, located
at 575 East Swedesford Road, Wayne, Pennsylvania on December 18, 1998 at 9:00
a.m. local time.
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<PAGE>
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of ISCG common stock at the close of business on the
record date will be entitled to notice of and to vote at the ISCG special
meeting. At the close of business on the record date there were 8,068,723 shares
of ISCG common stock outstanding and entitled to vote. Except for the
shareholders identified herein under "Security Ownership of Certain Beneficial
Owners and Management of ISCG," as of the record date, to the knowledge of ISCG,
no other person beneficially owned more than 5% of the outstanding ISCG common
stock.
Each holder of record of ISCG common stock on the record date will be
entitled to one vote for each share held on all matters to be voted upon at the
ISCG special meeting.
SOLICITATION
This joint proxy statement/prospectus was mailed to all ISCG shareholders of
record as of the record date and constitutes notice of the ISCG special meeting
in conformity with the requirements of the Pennsylvania Business Corporation Law
("the PBCL").
Regardless of whether the merger is consummated, each of FCG and ISCG will
pay its own costs and expenses incurred in connection with the merger agreement
and the transactions contemplated by the merger agreement, except that fees and
expenses (other than attorneys' fees) incurred in connection with the printing
and filing of the registration statement and this joint proxy
statement/prospectus and will be shared equally by FCG and ISCG. See "The Merger
Agreement--Expenses and Termination Fees."
Subject to the foregoing, the cost of the solicitation of proxies from
holders of ISCG common stock and all related costs will be borne by ISCG. In
addition, ISCG may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of ISCG. No additional
compensation will be paid to directors, officers or other regular employees for
such services.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of ISCG common stock entitled to vote at the
ISCG special meeting is necessary to constitute a quorum.
Approval of the proposal requires approval of a majority of the outstanding
shares of ISCG common stock as of the record date. All votes will be tabulated
by the inspector of election appointed for the meeting, who will separately
tabulate affirmative and negative votes, abstentions and broker non-votes.
Abstentions will be counted towards the tabulation of votes cast on the proposal
presented to the shareholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether the proposal has been approved.
Pursuant to certain voting agreements dated September 9, 1998 (each an "ISCG
voting agreement and collectively, the "ISCG voting agreements"), David S.
Lipson, David S. Lipson, Technology Leaders II, Safeguard Scientifics, Inc. and
Warrant and Stock Trust (each an "ISCG voting agreement shareholder" and
collectively, the "ISCG voting agreement shareholders") have agreed that, prior
to the expiration date, they will vote their shares of ISCG common stock in
favor of the adoption and approval of the reorganization agreement and the
approval of the merger. The ISCG voting agreement shareholders have also
delivered to FCG irrevocable proxies with respect to the matters covered by the
FCG voting agreements. In addition, subject to certain exceptions, the ISCG
voting agreement shareholders have agreed not to sell, contract to sell, pledge,
grant any option to purchase or otherwise dispose of or transfer any of their
shares of ISCG common stock (or securities convertible into ISCG common stock)
held as of the date of the reorganization agreement or acquired prior to the
expiration date unless and until the other party to the transfer shall have (i)
executed a counterpart of the ISCG voting agreement and the corresponding
irrevocable proxy and (ii) agreed to hold such ISCG securities subject to all of
the terms and
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<PAGE>
provisions of the ISCG voting agreement. See "Approval of the Merger and Related
Transactions--Voting Agreements."
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
corporate secretary of ISCG at ISCG's principal offices, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY
Since February 13, 1998, FCG common stock has been quoted on Nasdaq under
the symbol "FCGI." Since April 18, 1996, the ISCG common stock has been quoted
on Nasdaq under the symbol "ISCG." The table below sets forth, for the quarters
indicated, the reported high and low sale prices of FCG common stock and ISCG
common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
FCG ISCG
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996 CALENDAR YEAR
Second Quarter (for ISCG from April 18, 1996).............................. -- -- $ 30.00 $ 16.25
Third Quarter.............................................................. -- -- 21.50 13.25
Fourth Quarter............................................................. -- -- 20.75 11.50
1997 CALENDAR YEAR
First Quarter.............................................................. -- -- 14.50 7.63
Second Quarter............................................................. -- -- 12.75 8.25
Third Quarter.............................................................. -- -- 13.63 8.75
Fourth Quarter............................................................. -- -- 12.25 9.25
1998 CALENDAR YEAR
First Quarter (for FCG from February 13, 1998)............................. $ 20.88 $ 17.50 14.13 9.00
Second Quarter............................................................. 29.13 18.50 16.25 11.25
Third Quarter.............................................................. 29.00 13.88 14.63 9.13
Fourth Quarter (through November 10, 1998)................................. 19.81 8.75 15.00 5.00
</TABLE>
As of the record date, there were approximately 76 record holders of FCG
common stock. As of the record date, there were approximately 422 record holders
of ISCG common stock. Neither FCG nor ISCG has ever paid cash dividends on their
respective common stock. The policies of FCG and ISCG are to retain earnings for
use in their respective businesses.
The following table sets forth the closing sale price per share of FCG
common stock as reported on Nasdaq and the historical and equivalent per share
price (as explained below) of ISCG common stock on September 9, 1998, the last
trading day preceding the announcement of the merger, and on November 10, 1998:
<TABLE>
<CAPTION>
FCG EQUIVALENT
COMMON STOCK HISTORICAL ISCG ISCG
PURCHASE PRICE PER SHARE PRICE PER SHARE PRICE(1)
------------------- ------------------- ---------------------
<S> <C> <C> <C>
September 9, 1998................................ $ 17.44 $ 10.38 $ 13.43
November 10, 1998................................ $ 18.50 $ 13.75 $ 14.25
</TABLE>
- ------------------------
(1) The equivalent ISCG per share price represents 0.77 of the price of one
share of FCG common stock.
THESE PRICES DO NOT INCLUDE RETAIL MARKUP, MARKDOWN OR COMMISSIONS. FCG
STOCKHOLDERS AND ISCG SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR FCG COMMON STOCK AND ISCG COMMON STOCK.
36
<PAGE>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
Beginning in 1997, FCG's Board of Directors evaluated FCG's long-term
strategy and decided to explore an expansion of its services and client types in
all sectors of the broad healthcare industry. The FCG Board believed that the
broad healthcare industry would continue to consolidate and that various market
sectors, such as the healthcare delivery, payor, government, pharmaceutical and
biotechnology sectors, would become closely related over time. The FCG Board
also believed that by hiring additional professionals and acquiring
complementary consulting firms it could expand its existing core competencies in
operations improvement and information management services. During 1997, FCG
assigned a team of senior level management personnel to conduct a preliminary
investigation of the viability of expanding FCG's services in the pharmaceutical
industry.
After completing its initial public offering in the first quarter of 1998,
FCG confirmed its strategic commitment to acquiring complementary consulting
firms to expand its services and client types in a series of meetings of the FCG
Board and FCG's Operating Committee and Vice President's Council. In particular,
FCG determined that it would be strategically important to expand its
application development and integration services and to establish a long-term
presence in the pharmaceutical industry. As a result of this commitment, FCG
contacted Hambrecht & Quist LLC to identify potential acquisitions of consulting
firms in certain industry segments, including the pharmaceutical industry.
In May 1998, James A. Reep, Chairman and then CEO of FCG, was made aware of
ISCG. ISCG was brought to the attention of FCG by several parties, including
Hambrecht & Quist.
In the spring of 1997, management of ISCG began to evaluate alternatives to
ISCG remaining as an independent company. Additionally, certain key shareholders
of ISCG suggested that ISCG evaluate strategic alternatives. In the summer of
1997, ISCG initiated a process to identify potential strategic partners.
Throughout the remainder of 1997 and early 1998, ISCG made contact with a number
of such potential partners both directly and through its financial advisors.
On April 7, 1998, at a meeting of the Executive Committee of the Board of
Directors of ISCG Robert W. Baird & Co. Incorporated reviewed with the ISCG
Executive Committee four written indications of interest from potential
partners, which did not include FCG. After due analysis of each indication of
interest, ISCG entered into a letter of intent and "no shop" agreement with one
such party on April 13, 1998 (the "prior offer"). Shortly thereafter, ISCG and
such third party initiated the process of due diligence and negotiation of a
definitive merger agreement. During May of 1998, ISCG questioned whether the
perceived cultural and economic benefits from pursuing a potential transaction
with this party would be realized. In a series of communications with senior
level management personnel between the parties, Mr. Lipson expressed concern
about these issues and certain unresolved issues in the definitive merger
agreement. The no-shop agreement with such third party expired in late May.
At the end of May 1998, Mr. Reep placed telephone calls to certain members
of ISCG's management. Mr. Lipson, Chairman and CEO of ISCG, subsequently called
Mr. Reep and the two met in person in early June of 1998 to discuss the
convergence of the provider, health plan and pharmaceutical sectors and the
potential strategic, cultural and operational synergies between the two
companies. Messrs. Reep and Lipson and several other members of the senior level
management personnel at ISCG subsequently met in early June of 1998. The agenda
of this meeting included additional discussions of strategic issues facing each
firm. At the conclusion of such meeting, Messrs. Reep and Lipson concluded that
additional discussions and due diligence were warranted and that a combination
of FCG and ISCG might potentially be in the best interests of the stockholders
and employees of both companies. A mutual non-disclosure agreement was executed
on June 8, 1998.
On June 11 and June 12, 1998, Luther J. Nussbaum, then Executive Vice
President of FCG, and Mr. Lipson met at the principal executive offices of ISCG.
Representatives of Hambrecht & Quist and Baird, the financial advisors to each
of FCG and ISCG, respectively, were also present at this meeting.
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<PAGE>
Messrs. Nussbaum and Lipson discussed the historical and prospective financial
and operational performance of each company and outlined the key terms of a
potential transaction. Messrs. Nussbaum and Lipson agreed that any transaction
would be subject to the successful completion of comprehensive due diligence and
execution of a definitive merger agreement.
On June 15, 1998, the FCG Board met for a regularly scheduled meeting.
During this meeting, certain management personnel, including Messrs. Reep and
Nussbaum, led a discussion regarding a potential acquisition of ISCG. During
this meeting the FCG Board approved the execution of a letter of intent for a
proposed merger of ISCG and FCG, and authorized and directed senior level
management personnel to continue discussions and negotiations with ISCG. The FCG
Board also directed such senior level management personnel to begin the due
diligence process as soon as practicable.
On June 15, 1998, the ISCG Executive Committee met to discuss a potential
transaction with FCG. On June 18, 1998, the ISCG Executive Committee approved
the execution of a letter of intent, including a 30-day "no shop" agreement, for
a proposed merger of ISCG and FCG. This letter of intent was executed on June
18, 1998.
On June 22, 1998, the ISCG Board held a special telephonic meeting at which
ISCG management updated the ISCG Board on the status of the potential
transaction with FCG.
Beginning on June 22 and continuing through June 26, 1998, representatives
of FCG, ISCG, Hambrecht & Quist, Baird, Grant Thornton LLP, KPMG Peat Marwick
LLP, Cooley Godward LLP, counsel to FCG, and Saul Ewing Remick & Saul, LLP,
counsel to ISCG, met at the ISCG principal offices to conduct due diligence with
respect to financial, operational and legal matters of ISCG. During these
meetings, numerous interviews and discussions took place among senior level
management personnel of both firms.
On June 23, 1998, a draft of the definitive merger agreement was delivered
by Cooley Godward to Saul Ewing. Drafts of exhibits to the merger agreement,
including drafts of FCG and ISCG affiliate agreements, FCG and ISCG voting
agreements and the registration rights agreement, were delivered to Saul Ewing
on June 23 and June 24, 1998. A series of telephonic conversations were held
beginning on June 26, 1998 between representatives of Saul Ewing and Cooley
Godward to negotiate a definitive merger agreement and related exhibits.
Beginning on June 29 and continuing through July 1, 1998, representatives of
FCG, ISCG, Hambrecht & Quist, Baird, Grant Thornton, KPMG, Cooley Godward, and
Saul Ewing met at the offices of Cooley Godward in Palo Alto, California to
conduct due diligence with respect to financial, operational and legal matters
of FCG. During this period, representatives of FCG, ISCG, Saul Ewing and Cooley
Godward met to continue negotiation of a definitive merger agreement and related
exhibits. At the conclusion of these meetings, certain issues relating to the
representation and warranty and termination provisions in the merger agreement,
including issues relating to the prior offer, and the registration rights
agreement remained unresolved.
On July 2, 1998, at a special meeting of the FCG Board, certain senior level
management personnel and representatives of Hambrecht & Quist and Cooley Godward
reviewed the terms of the proposed Merger and reported on the results of the due
diligence review of ISCG. In particular, Hambrecht & Quist made a presentation
regarding the financial terms of the proposed merger. In addition, the terms of
the merger agreement and related exhibits were discussed in detail with the FCG
Board. After these discussions, Hambrecht & Quist rendered its oral opinion
that, as of such date, the exchange ratio was fair from a financial point of
view to FCG. The meeting was concluded with the expectation that the FCG Board
would meet again on July 6, 1998 to consider and vote on the proposed merger
with ISCG. At the conclusion of these meetings, certain issues relating to the
representation and warranty and termination provisions in the merger agreement,
including issues relating to the prior offer, remained unresolved.
On July 2, 1998, at a meeting of the ISCG Board, certain senior level
management personnel and representatives of Baird and Saul Ewing reviewed the
terms of the proposed merger and reported on the
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<PAGE>
results of the due diligence review of FCG. The ISCG Board evaluated the merits
of the transaction, including the proposed exchange ratio and the cultural
compatibility between FCG and ISCG.
On July 6, 1998, at a special meeting of the FCG Board, the FCG Board voted
unanimously: (1) subject to, among other things, the satisfactory completion of
the pre-acquisition review of ISCG by FCG's legal and financial advisors, the
delivery of Hambrecht & Quist's fairness opinion, and the resolution of the
aforementioned outstanding issues, to approve the proposed merger with ISCG, the
merger agreement and related exhibits as presented to them, and to authorize and
direct the officers of FCG to finalize the terms of the reorganization
agreement, and (2) to recommend that the FCG stockholders vote to approve the
issuance of FCG common stock in the merger. In particular, the FCG Board noted
that satisfactory resolution of the representation and warranty and termination
provisions in the merger agreement was critical to the completion of the merger.
On July 6, 1998, the ISCG Board met to consider the approval of the proposed
transaction with FCG. The ISCG Board considered, among other things, the
potential benefits of the proposed merger, the risks of the merger and the
results of the due diligence process. In addition, Baird made a presentation
regarding the financial terms of the proposed merger and provided the ISCG Board
with a financial analysis with respect to such terms. In addition, the terms of
the merger agreement and related exhibits were discussed in detail with the ISCG
Board. The ISCG Board approved the transaction subject to a resolution,
satisfactory to the ISCG Executive Committee, of the representation and warranty
and termination provisions in the merger agreement and the delivery of Baird's
fairness opinion.
From July 6 to July 8, 1998, the representatives of FCG and ISCG attempted
to resolve issues in the representation and warranty and termination provisions
in the merger agreement, including issues relating to the prior offer. Failing
to resolve these issues, on July 8, 1998, Mr. Reep, in a telephone call with Mr.
Lipson and in a subsequent written confirmation, terminated negotiations between
FCG and ISCG. On August 26, 1998, ISCG executed a release agreement that it
believes resolved open issues relating to the prior offer. The release agreement
included a complete release of claims between ISCG and such third party. ISCG
has recognized expenses in the amount of approximately $292,000 after tax in the
third quarter of 1998 for due diligence, accounting, legal and other costs
arising in connection with the prior offer, including a payment made in
connection with the release agreement.
After the execution of the release agreement, in a series of telephone
conferences between senior level management personnel, FCG and ISCG decided to
resume negotiations. Beginning on September 1 and continuing through September
3, 1998, representatives of FCG, ISCG, Hambrecht & Quist, Baird, Grant Thornton
and KPMG met at the offices of Saul Ewing in Berwyn, Pennsylvania to update the
financial and operational due diligence from the previous review in June of
1998. Simultaneously, legal due diligence materials were exchanged among the
legal advisors to FCG and ISCG. Negotiations were held telephonically among the
legal advisors of FCG and ISCG from September 1 until September 9, 1998 to reach
final agreement on the terms of the definitive merger agreement.
The ISCG Board met on the morning of September 9, 1998, to consider the
definitive merger agreement. After due consideration, including a detailed
review of the merger agreement and merger evaluation of the oral opinion of
Baird, subsequently confirmed in writing, that the exchange ratio was fair, from
a financial point of view, to the holders of ISCG common stock (other than FCG
and its affiliates), the ISCG Board unanimously approved the merger agreement
and the related exhibits. The ISCG Board also voted unanimously in favor of
recommending the approval of the merger agreement and merger to the ISCG
shareholders.
On September 9, 1998, in a special meeting of the FCG Board, certain senior
level management personnel and representatives of Hambrecht & Quist and Cooley
Godward reviewed the finalized terms of the proposed merger and reported on the
results of the due diligence review of ISCG. In particular, Hambrecht & Quist
made a presentation regarding the analysis described under "Approval of the
Merger and Related Transactions--Opinion of Financial Advisor to FCG." In
addition, the terms of the merger agreement and related exhibits were discussed
in detail with the FCG Board. After these discussions,
39
<PAGE>
Hambrecht & Quist rendered its oral opinion, subsequently confirmed in writing,
that, as of such date, the exchange ratio was fair from a financial point of
view to FCG. After such presentations and discussions, the FCG Board voted
unanimously: (1) to approve the proposed merger with ISCG, the merger agreement
and related exhibits as presented to them; and (2) to recommend that the FCG
stockholders vote to approve the issuance of FCG common stock in the merger.
Following the approval of the FCG Board and the ISCG Board, the merger
agreement in its definitive form was executed and jointly announced in the
evening of September 9, 1998.
In connection with certain changes in the senior management structure of FCG
after the execution of the merger agreement, representatives of ISCG and FCG
began discussions regarding the role of senior level management of ISCG in the
combined company. The representatives proposed appointing an additional board
member to be designated by ISCG to FCG's Board to serve until FCG's annual
meeting of stockholders to be held in 1999. Thereafter, an amendment to the
merger agreement to that effect was approved by the FCG Board and the ISCG Board
and executed on November 11, 1998.
JOINT REASONS FOR THE MERGER
The Boards of Directors of FCG and ISCG believe that the proposed merger
will afford to each company the complementary strengths of the two individual
companies, will provide the combined company with several potential benefits and
may enable the combined company to address emerging strategic opportunities in
the healthcare industry quickly and effectively.
The potential benefits to the combined company include the following:
- The combination of FCG's broad industry expertise, information technology
strategic planning skills and program management methods and ISCG's deep
information technology skills allows the combined company to offer a
broader range and scope of services to the pharmaceutical and
biotechnology industries
- The combination of FCG's and ISCG's application development and
integration practices allows the combined company to compete more
effectively in the provision of these services to clients in the
healthcare industry
- The combination of FCG's and ISCG's experience, financial resources,
consultants and service offerings allows the combined company to share
knowledge and client opportunities and, as a result, enable the combined
company to respond quickly and effectively to emerging opportunities in
the healthcare industry
- The combined company may offer a greater range of career opportunities for
employees and may improve retention over time
- The combined company would potentially be able to operate with a reduced
level of general and administrative expenses
FCG and ISCG have each identified additional reasons for the merger, as
discussed below. It should be noted, however, that the potential benefits of the
merger may not be realized. See "Risk Factors."
ISCG'S REASONS FOR THE MERGER
During the spring of 1997, senior level management personnel of ISCG, at the
direction of the ISCG Board, decided that ISCG would seek a strategic partner.
Reasons for this decision included the need for ISCG to become a larger entity
in a consolidating marketplace, obtain additional technological and geographic
presence to compete with national and international competitors, and continue to
provide additional challenging positions necessary to recruit and retain skilled
employees in a highly competitive marketplace.
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<PAGE>
In addition to the anticipated joint benefits described above, the ISCG
Board believes that the following are additional reasons that the merger will be
beneficial to ISCG:
- ISCG believes that the greater size of the combined company will enable it
to secure larger and more complex projects from its clients
- The strategic consulting experience of FCG may offer ISCG the ability to
market its consulting services to more senior level decision-makers at its
customers
- The merger may provide enhanced career opportunities for ISCG's employees
In addition to the factors set forth above, in the course of its meetings
during June, July, August and September of 1998, the ISCG Board reviewed and
considered a wide variety of information relevant to the merger including:
- Information concerning FCG's and ISCG's respective businesses, historical
financial performance and conditions, operations, services, clients,
competitive positions, prospects and management
- ISCG's management's view as to the financial conditions results of
operations and business and financial potential of FCG and ISCG before and
after giving effect to the merger, based on management's due diligence
- Current financial market conditions and historical trading market prices,
volatility and trading information with respect to FCG common stock and
ISCG common stock
- The consideration to be paid to the ISCG shareholders in the merger and
the relationship between the market value of comparable merger
transactions
- The belief that the terms of the merger agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable
- Reports from management, legal and financial advisors as to the results of
their due diligence investigation of FCG
- The potential impact of the merger on clients and employees of FCG and
ISCG
- The likely reaction to the merger from the financial markets
- The financial analysis and pro forma and other information with respect to
the companies presented by management and Baird in presentations to the
ISCG Board, as well as Baird's opinion to the effect that the exchange
ratio was fair, from a financial point of view, to the holders of ISCG
common stock (other than FCG and its affiliates). A copy of Baird's
opinion is attached hereto as Appendix B-1 and ISCG shareholders are urged
to review it carefully and in its entirety
The ISCG Board also considered a number of potentially negative factors in
its deliberations concerning the merger, including:
- The potential disruption to the business of both companies following
announcement of the merger, including the effects of employee uncertainty,
the possibility that key employees may leave FCG or ISCG, and the
possibility that key clients may not approve of the merger or may
determine to terminate their relationship with the combined company
- The dilutive effects of the issuance of shares in the merger and the
higher level of expenses that will be borne by the combined company
- Additional potential problems and costs associated with the integration of
both companies into a single enterprise
- The possibility that the merger would not be consummated
- The other risks described under "Risk Factors" herein. After due
consideration, the ISCG Board concluded that the benefits of the
transaction to ISCG and its shareholders outweighed the risks associated
with the foregoing factors
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The foregoing discussion of the factors considered by the ISCG Board is not
intended to be exhaustive but is intended to include substantially all of the
material facts considered by the ISCG Board. In view of the complexity and
variety of factors considered by the ISCG Board, the ISCG Board did not consider
it practical to quantify or otherwise attempt to assign and relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors.
FCG'S REASONS FOR THE MERGER
At meetings convened on June 15, July 2, July 6 and September 9, 1998, the
FCG Board determined that the merger agreement and the transactions contemplated
thereby were in the best interests of FCG and its stockholders, approved and
adopted the merger agreement and the transactions contemplated thereby, and
unanimously recommended that the FCG stockholders approve the issuance of FCG
common stock in connection with the merger. In reaching the foregoing
conclusions and recommendations, the FCG Board considered a number of factors,
including the following:
- The convergence of several sectors within the healthcare industry
- The combination would (1) provide FCG with an increased array of services
and (2) expand FCG's client base in the increasingly interrelated
healthcare and pharmaceutical industries. FCG believes that the healthcare
industry may see increasing interaction among genetic engineering, drug
development, disease management, care management in general and care
delivery
- The combination of FCG and ISCG would strengthen FCG's application
development capability in client-server architecture, web-based
applications, object-oriented and relational databases, and cross-platform
systems integration
In addition to the factors set forth above, in the course of its meetings
during June, July and September of 1998 the FCG Board reviewed and considered a
wide variety of information relevant to the merger including:
- Information concerning FCG's and ISCG's respective businesses, historical
financial performance and conditions, operations, services, clients,
competitive positions, prospects and management
- FCG's management's view as to the financial condition, results of
operations and business and financial potential of FCG and ISCG before and
after giving effect to the merger, based on management's due diligence
- Current financial market conditions and historical trading market prices,
volatility and trading information with respect to FCG common stock and
ISCG common stock
- The consideration to be paid to the ISCG shareholders in the merger and
the relationship between the market value of comparable merger
transactions
- The belief that the terms of the merger agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable
- Reports from management, legal and financial advisors as to the results of
their due diligence investigation of ISCG
- The potential impact of the merger on clients and employees of FCG and
ISCG
- The likely reaction to the merger from the financial markets
- The financial analysis and pro forma and other information with respect to
the companies presented by management and Hambrecht & Quist in
presentations to the FCG Board, as well as Hambrecht & Quist's opinion
that, as of September 9, 1998, the exchange ratio was fair from a
financial point of view to FCG (a copy of which opinion is attached hereto
as Appendix B-2 and which opinion stockholders are urged to review
carefully and in its entirety)
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The FCG Board also considered a number of potentially negative factors in
its deliberations concerning the merger, including
- The potential disruption to the business of both companies following
announcement of the merger, including the effects of employee uncertainty,
the possibility that key employees may leave FCG of ISCG, and the
possibility that key clients may not approve of the merger or may
determine to terminate their relationship with the combined company
- The dilutive effects of the issuance of shares in the merger and the
higher level of expenses that will be borne by the combined company
- Additional potential problems and costs associated with the integration of
both companies into a single enterprise
- The possibility that the merger would not be consummated
- The other risks described under "Risk Factors" herein. After due
consideration, the FCG Board concluded that the benefits of the
transaction to FCG and its stockholders outweighed the risks associated
with the foregoing factors
The foregoing discussion of the factors considered by the FCG Board is not
intended to be exhaustive but is intended to include all of the material factors
considered by the FCG Board. In view of the complexity and variety of factors
considered by the FCG Board, the FCG Board did not consider it practical to
quantify or otherwise attempt to assign any relative or specific weights to the
specific factors considered, and individual directors may have given differing
weights to different factors.
OPINION OF FINANCIAL ADVISOR TO ISCG
ISCG retained Baird to act as its financial advisor in connection with the
possible sale of ISCG. As part of such services, ISCG requested that Baird
render its opinion as to the fairness, from a financial point of view, of the
exchange ratio to the holders of ISCG common stock (other than FCG and its
affiliates). On September 9, 1998, Baird rendered its opinion to the ISCG Board
to the effect that, as of such date, the exchange ratio was fair, from a
financial point of view, to the holders of ISCG common stock (other than FCG and
its affiliates).
THE FULL TEXT OF THE OPINION DELIVERED BY BAIRD TO THE ISCG BOARD DATED
SEPTEMBER 9, 1998 (THE "BAIRD OPINION"), WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION, IS ATTACHED AS APPENDIX B-1
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. THE BAIRD OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE EXCHANGE RATIO TO THE HOLDERS OF ISCG COMMON STOCK (OTHER
THAN FCG AND ITS AFFILIATES) AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
ISCG SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
MERGER AGREEMENT. THE SUMMARY OF BAIRD'S OPINION SET FORTH BELOW IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED HERETO AS
APPENDIX B-1. ISCG SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN
ITS ENTIRETY.
In conducting its investigation and analysis and in arriving at its opinion,
Baird reviewed such information and took into account such financial and
economic factors as it deemed relevant under the circumstances. In that
connection, Baird, among other things:
- Reviewed certain internal information, primarily financial in nature,
including projections, concerning the business and operations of ISCG and
FCG furnished to Baird for purposes of its analysis, as well as publicly
available information including but not limited to ISCG's and FCG's recent
filings with the SEC and equity analyst research reports prepared by
various investment banking firms, including Baird
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- Reviewed the merger agreement in the form presented to ISCG's Board
- Compared the historical market prices and trading activity of ISCG common
stock and FCG common stock with those of certain other publicly traded
companies Baird deemed relevant
- Compared the financial position and operating results of ISCG and FCG with
those of other publicly traded companies Baird deemed relevant
- Compared the proposed financial terms of the merger with the financial
terms of certain other business combinations Baird deemed relevant
Baird held discussions with members of ISCG's and FCG's respective senior
managements concerning ISCG's and FCG's historical and current financial
condition and operating results, as well as the future prospects of ISCG and
FCG, respectively. As a part of its engagement, Baird was requested to, and did,
solicit third party indications of interest in acquiring ISCG. Baird also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which Baird deemed
relevant for the preparation of its opinion. ISCG and FCG determined the
exchange ratio in arms-length negotiations. ISCG did not place any limitation
upon Baird with respect to the procedures followed or factors considered by
Baird in rendering its opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to Baird by or on behalf of ISCG and FCG, and was not
engaged to independently verify any such information. Baird assumed, with ISCG's
consent, that:
- All material assets and liabilities (contingent or otherwise, known or
unknown) of ISCG and FCG are as set forth in their respective financial
statements
- The merger will be accounted for under the pooling-of-interests method
- The merger will be consummated in accordance with the terms set forth in
the merger agreement, without any amendment thereto and without waiver by
ISCG or FCG of any of the conditions to their respective obligations
thereunder
At ISCG's direction, Baird assumed that no cost savings or operating
synergies will result from the merger, and excluded transaction costs from its
financial analysis. Baird also assumed that the financial forecasts examined by
it were reasonably prepared on bases reflecting the best available estimates and
good faith judgments of ISCG's and FCG's respective senior managements as to
future performance of ISCG and FCG, respectively. In conducting its review,
Baird did not undertake nor obtain an independent evaluation or appraisal of any
of the assets or liabilities (contingent or otherwise) of ISCG or FCG nor did it
make a physical inspection of the properties or facilities of ISCG or FCG.
Baird's opinion necessarily was based upon economic, monetary and market
conditions as they existed and could be evaluated on the date of its opinion,
and did not predict or take into account any changes which may occur, or
information which may become available, after the date of such opinion.
Furthermore, Baird expressed no opinion as to the price or trading range at
which any of ISCG's or FCG's securities (including ISCG common stock and FCG
common stock) will trade following the date of such opinion.
The following is a summary of the material financial analyses performed by
Baird in connection with rendering its opinion.
ANALYSIS OF ISCG'S VALUATION PREMIUMS. Baird calculated the implied equity
value per share reflected by the terms of the merger to be $13.19 for each share
of ISCG common stock, obtained by multiplying the exchange ratio of 0.77 by the
closing price per share of FCG common stock of $17.13 on September 4, 1998.
Baird compared the premium to holders of ISCG common stock represented by the
implied equity value per share of $13.19 to the closing prices for ISCG common
stock on such date and on the dates seven days, 30 days, 60 days, 90 days, 180
days and 52 weeks prior to the September 9, 1998 ISCG Board of
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Directors meeting. Baird calculated that the implied equity value per share
represented the following premiums or discounts to holders of ISCG common stock:
- A premium of 35.2% over the closing price of $9.75 for ISCG common stock
on September 4, 1998
- A premium of 25.6% over the closing price of $10.50 for ISCG common stock
seven days prior to the date of its opinion
- A premium of 7.6% over the closing price of $12.25 for ISCG common stock
30 days prior to the date of its opinion
- A discount of 2.3% over the closing price of $13.50 for ISCG common stock
60 days prior to the date of its opinion
- A discount of 0.5% over the closing price of $13.25 for ISCG common stock
90 days prior to the date of its opinion
- A premium of 7.6% over the closing price of $12.25 for ISCG common stock
180 days prior to the date of its opinion
- A premium of 0.5% over the closing price of $13.13 for ISCG common stock
52 weeks prior to the date of its opinion
Baird noted that the premiums and discounts of the implied equity value
relative to ISCG common stock price over certain historical time periods were
influenced by the significant volatility and price declines experienced recently
in the equity capital markets in general and for information technology service
companies in particular. Baird also performed an analysis of the implied
historical transaction premium, based upon the exchange ratio of 0.77 and the
closing market price per share of ISCG common stock and FCG common stock, for
each trading day from July 2, 1998 to September 4, 1998. This analysis yielded
an average premium of 51.4%, and a high and low premium of 90.4% and 21.4%,
respectively, relative to the premium of 35.2% based on the closing market price
per share of ISCG common stock and FCG common stock on September 4, 1998.
ANALYSIS OF ISCG VALUATION MULTIPLES. Baird calculated the implied total
equity value and implied enterprise value of ISCG as a result of the merger to
be $119.15 million and $115.13 million, respectively. The implied total equity
value was obtained by multiplying the implied equity value per share by the
total number of outstanding shares of ISCG common stock, including shares
issuable upon exercise of stock options and warrants outstanding as of August
31, 1998, less net proceeds from the exercise of such stock options and
warrants. The implied enterprise value was obtained by adding ISCG's outstanding
total debt and subtracting ISCG's cash and cash equivalents balances (as of July
31, 1998 as provided to Baird by ISCG management) to the implied total equity
value. In performing its analysis, Baird used, among other items, operating
statistics for ISCG's latest twelve months ended June 30, 1998 ("LTM"), as
provided by ISCG management. Baird calculated multiples of the implied total
equity value to ISCG's LTM net income and its projected net income for calendar
years 1998 and 1999 (based on ISCG management's estimates) and multiples of
ISCG's implied enterprise value to its LTM sales, operating income before
depreciation and amortization, interest and taxes ("EBITDA") and its operating
income ("EBIT"). The calculations resulted in multiples of the implied total
equity value to net income ("P/E Ratios") of 27.6x based on LTM results, 23.8x
based on projected 1998 results and 17.2x based on projected 1999 results. The
ratio of implied enterprise value to LTM sales was 2.1x, the ratio of implied
enterprise value to LTM EBITDA was 13.5x and the ratio of implied enterprise
value to LTM EBIT was 16.6x.
IMPLIED EXCHANGE RATIO ANALYSIS. Baird performed an analysis of the
historical trading ratio between ISCG common stock and FCG common stock based on
the closing market price per share of ISCG common stock relative to the closing
market price per share of FCG common stock for each trading day from July 2,
1998 to September 4, 1998. This analysis yielded an average historical trading
ratio of 0.52, and
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a high and low single day exchange ratio of 0.63 and 0.40, respectively,
significantly below the exchange ratio of 0.77.
ANALYSIS OF SELECTED PUBLICLY TRADED ISCG COMPARABLE COMPANIES. Baird
reviewed certain publicly available financial information as of the most
recently reported period and stock market information as of September 3, 1998,
for 15 publicly traded companies that Baird deemed relevant. Such comparable
companies consisted of information technology professional services companies.
For each comparable company, Baird calculated multiples, as of September 3,
1998, of enterprise value to LTM sales, LTM EBITDA and LTM EBIT. Baird then
compared these multiples to the relevant ISCG multiples based on the implied
equity price per share. An analysis of the multiples of enterprise value to LTM
sales, LTM EBITDA and LTM EBIT yielded 2.1x, 13.5x and 16.6x, respectively, for
ISCG compared to medians of 1.7x, 12.5x and 15.1x, respectively, for ISCG's
comparable companies. For ISCG and each comparable company, Baird also
calculated P/E Ratios based upon the implied equity value per share for ISCG and
the closing stock prices as of September 3, 1998 for the comparable companies
and net income statistics for LTM and projected 1998 and 1999. An analysis of
the P/E Ratios based on ISCG's net income for LTM and projected 1998 and 1999
yielded 27.6x, 23.8x and 17.2x, respectively, compared to LTM, projected 1998
and 1999 medians of 23.6x, 21.3x and 17.7x, respectively, for ISCG's comparable
companies.
ANALYSIS OF SELECTED PUBLICLY TRADED FCG COMPARABLE COMPANIES. In order to
assess the relative public market valuation of FCG common stock to be used by
FCG in exchange for ISCG common stock, Baird reviewed certain publicly available
financial information as of the most recently reported period and stock market
information as of September 3, 1998, for ten publicly traded companies which
Baird deemed relevant. Such comparable companies consisted of health care
information technology services and related companies. For each comparable
company, Baird calculated multiples as of September 3, 1998, of enterprise value
to LTM sales, LTM EBITDA and LTM EBIT. Baird then compared these multiples to
the relevant FCG multiples based on FCG's closing share price of $17.125 on
September 4, 1998, and FCG's LTM operating performance statistics, as provided
to Baird by FCG's management. An analysis of the multiples of Enterprise Value
to sales, EBITDA and EBIT yielded 2.1x, 17.6x and 21.6x, respectively, for FCG
compared to median ratios of 2.7x, 15.1x and 24.4x, respectively, for FCG's
comparable companies. For FCG and each comparable company, Baird also calculated
P/E Ratios based on the closing stock prices as of September 4, 1998, for FCG
and September 3, 1998, for the comparable companies and LTM earnings per share
and estimated earnings per share for 1998 and 1999. An analysis of the P/E
Ratios based on earnings per share for FCG's LTM and projected 1998 and 1999
(based on First Call consensus estimates) yielded 35.7x, 34.3x and 27.2x,
respectively, compared to LTM and projected 1998 and 1999 medians of 26.1x,
28.4x and 21.2x, respectively, for FCG's comparable companies.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Baird reviewed
selected acquisition transactions which Baird deemed relevant. Such transactions
were chosen based on a review of acquired companies that possessed general
business, operating and financial characteristics representative of companies in
the industry in which ISCG operates. Baird noted that none of the selected
transactions reviewed was identical to the merger and that, accordingly, the
analysis of comparable transactions necessarily involves complex consideration
and judgments concerning differences in financial and operating characteristics
of ISCG and other factors that would affect the acquisition value of comparable
transactions including, among others, the general market conditions prevailing
in the equity capital markets at the time of such transaction. For each
comparable transaction, Baird calculated multiples of enterprise value to LTM
sales, LTM EBITDA and LTM EBIT, calculated P/E Ratios based on LTM net income
and estimated net income one and two years forward (from the time of the
announcement of each specific acquisition transaction), and calculated the
premiums paid for the equity in these transactions over the public market value
of the equity at various times prior to the announcement of such transaction.
Baird then compared those multiples and premiums to the relevant ISCG multiples
and premiums. These calculations yielded multiples of enterprise value to LTM
sales, LTM EBITDA and LTM EBIT of 2.1x,
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13.5x and 16.6x, respectively, for ISCG, compared to the LTM medians of 1.7x,
20.9x and 24.7x, respectively, for the comparable acquisition transactions.
An analysis of the P/E Ratios based on LTM earnings per share and estimated
earnings one and two years forward (from the time of the announcement of each
specific acquisition transaction) yielded 27.6x, 23.8x and 17.2x for ISCG,
respectively, compared to a LTM and one and two year estimated earnings medians
of 40.8x, 32.6x and 24.9x for the comparable transactions, respectively. An
analysis of the implied equity value per share to the closing price of ISCG
common stock one day, 30 days and 90 days prior to the announcement date,
compared to the prices paid for the equity in such comparable acquisition
transactions relative to the market value of equity one day, 30 days and 90 days
prior to the announcement date of such transactions, yielded a one day premium
of 35.2%, a 30 day premium of 7.6% and a 90 day discount of 0.5% for ISCG,
compared to median premiums of 32.2%, 52.0% and 33.3%, respectively, for the
comparable acquisition transactions. As mentioned earlier, the average one day
premium based on the exchange ratio of 0.77 and the daily closing prices per
share of ISCG common stock and FCG common stock for the two month period prior
to the announcement date was 51.2% with a high and low one day premium of 90.4%
and 21.4%, respectively. Baird noted that ISCG's implied enterprise value and
P/E multiples and ISCG common stock price over certain historic time periods
were influenced by the significant volatility and price declines experienced
recently in the equity capital markets in general and for information technology
service companies in particular.
CONTRIBUTION ANALYSIS. Baird analyzed ISCG's and FCG's relative
contribution to the combined company with respect to certain measurements,
including net sales, gross profit, EBIT and net income. As a result of the
merger, ISCG's shareholders will own approximately 28.9% of the outstanding FCG
common stock assuming an exchange ratio of 0.77. This compares to ISCG's
contribution, based on projected 1998 and 1999 statistics for the combined
company, of approximately 33.1% to 33.5% of net sales, 30.6% to 31.8% of gross
profit, 38.1% to 40.0% of EBIT and 36.6% to 38.8% of net income.
DISCOUNTED CASH FLOW ANALYSIS. Baird performed a discounted cash flow
analysis of ISCG on a stand alone basis using management's projections for 1998
through 2002 without taking into account any potential cost savings and
synergies which may be realized following the merger. In such analysis, Baird
assumed terminal value multiples of 12.0x to 16.0x EBIT in the year 2002 and
discount rates of 21.0% to 25.0%. Such analysis produced implied values of ISCG
common stock ranging from $12.68 to $19.13 per share.
In order to assess the relative public market valuation of FCG common stock
to be used by FCG in exchange for ISCG common stock, Baird performed a
discounted cash flow analysis of FCG, on a stand alone basis, using FCG
management's projections for 1998 through 2002 without taking into account any
potential cost savings and synergies which may be realized following the merger.
In such analysis, Baird assumed terminal value multiples of 22.0x to 26.0x EBIT
in the year 2002 and discount rates of 21.0% to 25.0%. Such analysis produced
implied values of FCG common stock ranging from $20.45 to $27.19 per share.
PRO FORMA MERGER ANALYSIS. Baird prepared pro forma analyses of the
financial impact of the merger. In conducting its analysis, Baird relied upon
certain assumptions described above and projected earnings estimates for ISCG
(prepared by ISCG management) and FCG (prepared by FCG management). Baird
compared the earnings per share of FCG common stock, on a stand-alone basis, to
the earnings per share of the common stock of the combined company on a pro
forma basis. The analysis (assuming no transaction-related expenses, cost
savings or synergies) indicated that the proposed transaction would be accretive
to FCG's stockholders on an earnings per share basis in 1998 and 1999. The
results of the pro forma merger analysis are not necessarily indicative of
future operating results or financial position.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird. The preparation of a fairness opinion is a complex
process and is not susceptible to partial analysis or summary description. Baird
believes that its analyses must be considered as a whole, and that selecting
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portions of such analyses without considering all analyses and factors, would
create an incomplete view of the processes underlying its opinion. Baird did not
attempt to assign specific weights to particular analyses. Any estimates
contained in Baird's analyses are not necessarily indicative of actual values,
which may be significantly more or less favorable than as set forth therein.
Estimates of values of companies do not purport to be appraisals or necessarily
to reflect the prices at which companies may actually be sold. Because such
estimates are inherently subject to uncertainty, Baird does not assume
responsibility for their accuracy.
Baird, as part of its investment banking business, is engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. ISCG retained Baird because
of its experience and expertise in the valuation of businesses and their
securities in connection with mergers and acquisitions. In the ordinary course
of business, Baird may from time to time trade equity securities of ISCG and FCG
for its own account and for accounts of its customers and, accordingly, may at
any time hold a long or short position in such securities.
COMPENSATION. Pursuant to an engagement letter dated February 10, 1998 (as
amended) between ISCG and Baird, ISCG agreed to pay Baird, upon the transaction
date, a transaction fee equal to specified percentages of the total
consideration paid. Upon the transaction closing, Baird shall be paid a
transaction fee equal to 1.0% on the amount of total consideration up to $125.0
million, plus 2.0% on the total consideration amount between $125.0 million and
$175.0 million and 3.0% on the total consideration amount over $175.0 million.
For delivering its fairness opinion on September 9, 1998, Baird is entitled to
receive a fee of $400,000, payable upon delivery of its opinion, regardless of
the conclusions reached by Baird in such opinion, with such amount fully
credited against the transaction fee discussed above. ISCG has also agreed to
reimburse Baird for certain of its reasonable out-of-pocket expenses. ISCG has
also agreed to indemnify Baird, its affiliates and their respective directors,
officers, employees and agents and controlling persons against certain
liabilities relating to or arising out of its engagement, including liabilities
under the federal securities laws. In the past, Baird has performed investment
banking services for ISCG, including acting as co-manager in ISCG's 1996 public
offering of ISCG's common stock. Additionally, in the past, Baird has performed
investment banking services for Safeguard Scientifics, Inc., an affiliate of
ISCG, as well as for certain other affiliates of Safeguard Scientifics, Inc.,
for which Baird has received customary compensation.
OPINION OF FINANCIAL ADVISOR TO FCG
FCG engaged Hambrecht & Quist to act as its exclusive financial advisor in
connection with the merger and to render an opinion as to the fairness from a
financial point of view to FCG of the exchange ratio. Hambrecht & Quist was
selected by the FCG Board based on Hambrecht & Quist's qualifications, expertise
and reputation, as well as Hambrecht & Quist's historic investment banking
relationship and familiarity with FCG. Hambrecht & Quist rendered its oral
opinion (subsequently confirmed in writing) on September 9, 1998 to the FCG
Board that, as of such date, the exchange ratio is fair to FCG from a financial
point of view.
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THE FULL TEXT OF THE OPINION DELIVERED BY HAMBRECHT & QUIST TO THE FCG
BOARD, DATED SEPTEMBER 9, 1998 (THE "HAMBRECHT & QUIST OPINION"), WHICH SETS
FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY HAMBRECHT & QUIST IN RENDERING
ITS OPINION, IS ATTACHED AS APPENDIX B-2 TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE HAMBRECHT &
QUIST OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
OF THE EXCHANGE RATIO TO FCG AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY FCG
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER
AGREEMENT. THE SUMMARY OF THE HAMBRECHT & QUIST OPINION SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED
HERETO AS APPENDIX B-2. FCG STOCKHOLDERS ARE URGED TO READ THE OPINION CAREFULLY
AND IN ITS ENTIRETY.
In its review of the merger, and in arriving at its opinion, Hambrecht &
Quist, among other things:
- Reviewed the publicly available consolidated financial statements FCG for
recent years and interim periods to date and certain other relevant
financial and operating data of FCG made available to it from published
sources and from the internal records of FCG
- Reviewed certain internal financial and operating information, including
certain projections, relating to FCG prepared by the management of FCG
- Discussed the business, financial condition and prospects of FCG with
certain of its officers
- Reviewed the publicly available consolidated financial statements of ISCG
for recent years and interim periods to date and certain other relevant
financial and operating data of ISCG made available to it from published
sources and from the internal records of ISCG
- Reviewed certain internal financial and operating information, including
certain projections, relating to ISCG prepared by the management of ISCG
- Discussed the business, financial condition and prospects of ISCG with
certain of its officers
- Reviewed the recent reported prices and trading activity for the common
stocks of FCG and ISCG and compared such information and certain financial
information for FCG and ISCG with similar information for certain other
companies engaged in businesses it considers comparable
- Reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions
- Reviewed the merger agreement
- Performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and financial,
economic and market data as Hambrecht & Quist deemed relevant
Hambrecht & Quist did not independently verify any of the information
concerning FCG or ISCG considered in connection with its review of the merger
and, for purposes of its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all such information. In connection with its
opinion, Hambrecht & Quist did not prepare or obtain any independent valuation
or appraisal of any of the assets or liabilities of FCG or ISCG, nor did it
conduct a physical inspection of the properties and facilities of FCG or ISCG.
With respect to the financial forecasts and projections used in its analysis,
Hambrecht & Quist assumed that they reflected the best currently available
estimates and judgments of the expected future financial performance of ISCG and
FCG. For the purposes of its opinion, Hambrecht & Quist also assumed that
neither FCG nor ISCG was a party to any pending transactions, including external
financings (other than those contemplated that have been disclosed to Hambrecht
& Quist), recapitalizations or merger discussions, other than the merger and
those in the ordinary course of conducting their respective businesses. For
purposes of its opinion, Hambrecht & Quist assumed that the merger will qualify
as a tax-free reorganization under the Internal Revenue Code of 1986, as amended
(the
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"Code") for the shareholders of ISCG and that the merger will be accounted for
as a pooling of interests. Hambrecht & Quist's opinion is necessarily based upon
market, economic, financial and other conditions as they existed and can be
evaluated as of the date of the opinion and any subsequent change in such
conditions would require a reevaluation of such opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analysis set forth below does not purport to be a
complete description of the presentation by Hambrecht & Quist to the FCG Board.
In arriving at its opinion, Hambrecht & Quist did not attribute any particular
weight to any analyses or factors considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Hambrecht & Quist believes that its analyses and the summary set
forth below must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the following summary, without
considering all factors and analyses, could create an incomplete view of the
processes underlying the analyses set forth in the Hambrecht & Quist
presentation to the FCG Board and its opinion. In performing its analyses,
Hambrecht & Quist made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of FCG and ISCG. The analyses performed by
Hambrecht & Quist (and summarized below) are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be acquired.
In performing its analysis, Hambrecht & Quist used published Hambrecht &
Quist research estimates for projections of FCG's calendar year 1998 and 1999
financial performance. Hambrecht & Quist used published Baird research estimates
for projections of ISCG's calendar year 1998 and 1999 financial performance.
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to the FCG
Board on September 9, 1998:
CONTRIBUTION ANALYSIS. Hambrecht & Quist analyzed the contribution of each
of FCG and ISCG to certain calendar 1998 and 1999 financial statement categories
of the pro forma combined company using published research estimates for both
companies with no revenue or expense adjustments. The financial statement
categories included revenue, operating income, and pretax income. This
contribution analysis was then compared to the pro forma ownership percentage of
FCG stockholders and ISCG shareholders in the pro forma post-merger combined
company. Hambrecht & Quist observed that, calculated on a treasury share basis,
FCG stockholders are expected to own approximately 70% of the combined company
equity at the close of the merger and ISCG shareholders are expected to own
approximately 30% of the combined company equity at the close of the merger. It
was estimated that FCG and ISCG would contribute approximately 67% and 33%,
respectively, of the combined revenues, approximately 61% and 39%, respectively,
of the combined operating income and approximately 64% and 36%, respectively, of
the combined pretax income in calendar 1998. It was estimated that FCG and ISCG
would contribute approximately 64% and 36%, respectively, of the combined
revenue, approximately 57% and 43%, respectively, of the combined operating
income and approximately 60% and 40%, respectively, of the combined pretax
income in calendar year 1999.
PRO FORMA MERGER ANALYSIS. Hambrecht & Quist analyzed the pro forma impact
of the merger on the combined company's calendar 1998 and 1999 earnings per
share ("EPS") using published research for both companies. Hambrecht & Quist
observed that this resulted in greater EPS for the combined company than for FCG
on a stand-alone basis. The foregoing analysis did not assume any adjustments in
revenues or costs resulting from the operating synergies potentially realized
from the merger. The actual results and savings achieved by the combined company
resulting from the merger may vary from the projected results and variations may
be material.
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ANALYSIS OF PUBLICLY TRADED COMPARABLE COMPANIES. Hambrecht & Quist
compared selected historical and projected financial information of ISCG to
publicly traded information technology ("IT") staff augmentation and to publicly
traded IT consulting companies Hambrecht & Quist deemed to be comparable to
ISCG. Such information included the ratio of market value to projected net
income and historical book value. Hambrecht & Quist also examined the ratio of
the enterprise value (market value plus debt less cash) to historical revenue,
EBITDA, and EBIT. The foregoing multiples were applied to historical financial
results of ISCG for the LTM period ended June 30, 1998 and projected net income
for calendar 1998 and 1999 based on published Baird research estimates.
IT staff augmentation companies deemed comparable were Alternative Resources
Corp., Analysts International Corp., Complete Business Solutions, Inc., Computer
Horizons Corp., Computer Management Sciences, Inc., Cotelligent Group, Inc.,
Data Processing Resources Corp., Hall Kinion & Associates, Inc., Mastech Corp.,
PRT Group, Inc., Renaissance Worldwide, Inc., Syntel, Inc., Tier Technologies,
Inc. and Ubics, Inc. IT consulting companies deemed comparable were American
Management Systems, Inc., Analysis & Technology, Inc., Cambridge Technology
Partners, Inc., Ciber, Inc., Diamond Technology Partners, Inc., ECsoft Group,
plc, Exponent, Inc., First Consulting Group, Inc., Metzler Group, Inc., Sapient
Corp., Superior Consultant Holdings Corp. and Technology Solutions Company.
Hambrecht & Quist determined mean values for the IT staff augmentation
companies of 1.8 times LTM revenue, 13.2 times LTM EBITDA, 14.8 times LTM EBIT,
21.1 times projected calendar 1998 net income, 16.1 times projected calendar
1999 net income, and 4.1 times book value. Based on the analysis of comparable
IT staff augmentation companies, ISCG's implied equity value per share ranged
from $9.95 to $12.30. Hambrecht & Quist determined mean values for the IT
consulting companies of 3.4 times LTM revenue, 23.5 times LTM EBITDA, 28.9 times
LTM EBIT, 30.6 times projected calendar 1998 net income, 24.4 times projected
calendar 1999 net income, and 5.6 times book value. Based on the analysis of
comparable IT consulting companies, ISCG's implied equity value per share ranged
from $14.58 to $21.04. Each implied equity value range compared with an offer in
the proposed merger of approximately $13.67 per share based on the exchange
ratio of 0.77 and closing price of FCG common stock on September 3, 1998 of
$17.75.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Hambrecht & Quist
compared the proposed merger with selected merger and acquisition transactions.
This analysis included 32 transactions involving companies in the consulting and
information services industry ("comparable M&A transactions"). In examining
these transactions, Hambrecht & Quist analyzed certain income statement and
balance sheet parameters of the acquired company relative to the consideration
offered. The foregoing multiples were applied to historical financial results of
ISCG for the twelve-month period ended June 30, 1998. Multiples analyzed
included consideration offered to LTM revenue, LTM EBITDA, LTM EBIT, LTM net
income, and book value. The mean multiples offered in the selected comparable
M&A transactions was 2.3 times LTM revenues, 28.6 times LTM EBITDA, 28.7 times
LTM EBIT, 47.6 times LTM net income, and 11.6 times book value. Based on the
analysis of selected comparable M&A transactions, ISCG's implied equity value
applying multiples to historical results ranged from values between $12.97 and
$30.32 per share. This compared with an offer in the proposed merger of
approximately $13.67 per share based on the exchange ratio of 0.77 and closing
price of FCG common stock on September 3, 1998 of $17.75.
No company or transaction used in the above analyses is identical to ISCG or
the merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values of the companies or
company to which they are compared.
PREMIUM ANALYSIS. Hambrecht & Quist compared the implied premium of the
offer as of September 3, 1998 to similar premiums for the seven relevant
comparable M&A transactions. Hambrecht & Quist observed that the mean one-day
premium paid in the selected public company transactions was 36%. This compared
with the proposed acquisition in which, as of September 3, 1998, represented a
premium over
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the closing price for ISCG common stock of 38%. Hambrecht & Quist also analyzed
the implied premiums to mean historical closing prices for the one week, one
month and three months ending September 3, 1998 using the implied offer price
based on the 0.77 exchange ratio and found that the implied premiums were 28%,
53% and 48%, respectively.
DISCOUNTED CASH FLOW ANALYSIS. Hambrecht & Quist performed discounted cash
flow analyses for ISCG using published research estimates for calendar 1998 and
1999 and ISCG management projections as adjusted by FCG management for calendar
2000 through 2002. The analysis aggregated:
- The present value of the projected free cash flow (defined as after-tax
EBIT, less increases in working capital, plus depreciation and
amortization, and less capital expenditures) through 2002
- The present value of a range of terminal values for the year 2002
- The combined value of debt and cash on the balance sheet of ISCG as of
August 1998
The terminal values for ISCG were determined by applying multiples ranging
from 1.5 to 2.5 times ISCG's estimated revenue for 2002. ISCG's free cash flow
streams and terminal values were discounted to present values using discount
rates ranging from 16% to 20%. Such analyses indicated a range of equity values
for ISCG of between $15.24 and $28.13 per share. This compared with an offer in
the proposed merger of approximately $13.67 per share based on the exchange
ratio of 0.77 and closing price of FCG common stock on September 3, 1998 of
$17.75.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion which is attached as
Appendix B-2 to this joint proxy statement/prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In the past, Hambrecht & Quist has provided investment banking and other
financial advisory services to FCG and has received fees for rendering these
services. In particular, Hambrecht & Quist acted as lead underwriter of FCG's
initial public offering on February 13, 1998, and received a fee for these
services. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of FCG and receives customary
compensation in connection therewith, and also provides research coverage for
FCG. In the ordinary course of business, Hambrecht & Quist actively trades in
the equity and derivative securities of FCG for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Hambrecht & Quist may in the future provide
additional investment banking or other financial advisory services to FCG.
COMPENSATION. Pursuant to an engagement letter dated June 29, 1998, FCG has
agreed to pay Hambrecht & Quist a fee of $250,000 in connection with the
delivery of the fairness opinion rendered on September 9, 1998. Upon
consummation of the merger, FCG has agreed to pay Hambrecht & Quist a fee of
0.9% of the aggregate consideration paid in the transaction, less any fees
previously paid. FCG also has agreed to reimburse Hambrecht & Quist for its
reasonable out-of-pocket expenses and to indemnify Hambrecht & Quist against
certain liabilities, including liabilities under the federal securities laws or
relating to or arising out of Hambrecht & Quist's engagement as financial
advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of ISCG's management and the ISCG Board may be deemed to
have certain interests in the merger that are in addition to their interests as
shareholders of ISCG generally. The ISCG Board was aware of these interests and
considered them, among other matters, in approving the merger agreement and the
transactions contemplated thereby.
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INDEMNIFICATION AND INSURANCE. The merger agreement provides that all
rights to indemnification existing in favor of the persons serving as directors
and officers of ISCG as of the date of the merger agreement for acts or
omissions occurring prior to the effective time, as provided in the ISCG bylaws
and in any indemnification agreements between ISCG and such directors and
officers, will survive the merger, and that FCG will cause ISCG (the "surviving
corporation") to perform its obligations arising thereunder for at least six
years from the effective time. Subject to certain limitations, FCG has also
agreed to cause the surviving corporation to maintain in effect for three years
after the effective time a policy of directors' and officers' liability
insurance for the benefit of persons serving as directors and officers of ISCG
as of such date. See "The Merger Agreement Covenants--Indemnification and
Insurance."
NOMINATION AND APPOINTMENT OF DIRECTORS. As soon as practicable after the
Effective Time, FCG shall use reasonable efforts to nominate and appoint (1) a
nominee designated by ISCG to Class I of the FCG Board to serve until the annual
meeting of stockholders to be held in 1999, (2) Donald R. Caldwell, or such
other nominee designated by ISCG, to Class II of the FCG Board to serve until
the annual meeting of stockholders to be held in 2000, and (3) David S. Lipson,
or such other nominee designated by ISCG, to Class III of the FCG Board to serve
until the annual meeting of stockholders to be held in 2001.
VOTING AGREEMENTS
ISCG VOTING AGREEMENTS. Pursuant to the ISCG voting agreements, the ISCG
voting agreement shareholders, who beneficially own an aggregate of 5,253,996
outstanding shares of ISCG common stock (representing approximately 60.0% of the
shares of ISCG common stock as of September 9, 1998) have agreed that, prior to
the expiration date, they will vote their shares of ISCG common stock in favor
of: (i) approval and adoption of the merger agreement; (ii) approval of the
merger; and (iii) each of the other actions contemplated by the merger
agreement. The ISCG voting agreement shareholders have also delivered to FCG
irrevocable proxies with respect to the matters covered by the ISCG voting
agreements. In addition, the ISCG voting agreement shareholders have agreed not
to transfer any securities of ISCG owned by them unless and until the proposed
transferee of such ISCG securities shall have (i) executed a counterpart of the
ISCG voting agreement and an irrevocable proxy and (ii) agreed to hold such ISCG
securities subject to all of the terms and provisions of the ISCG voting
agreement. The affirmative vote of the shares of ISCG common stock subject to
the ISCG voting agreements will be sufficient to approve and adopt the merger
agreement and to approve the merger. The form of ISCG voting agreement is
attached to this joint proxy statement/prospectus as Appendix C-1.
FCG VOTING AGREEMENTS. Pursuant to the FCG voting agreements, the FCG
voting agreement stockholders, who beneficially own an aggregate of 4,339,072
outstanding shares of FCG common stock (representing approximately 27.3% of the
shares of FCG common stock as of September 9,1998) have agreed that, prior to
the expiration date, they will vote their shares of FCG common stock in favor of
(i) the issuance of the shares of FCG common stock to be issued in the merger
and (ii) each of the other actions contemplated by the merger agreement. The FCG
voting agreement stockholders have also delivered to ISCG irrevocable proxies
with respect to the matters covered by the FCG voting agreements. In addition,
the FCG voting agreement stockholders have also agreed, in certain instances, to
require any party to whom their shares of FCG common stock may be sold, pledged,
granted an option to purchase, or otherwise transferred to execute a counterpart
of the FCG voting agreement and agree to hold such FCG securities subject to all
the terms and provisions of the FCG voting agreements. The form of FCG voting
agreement is attached to this joint proxy statement/prospectus as Appendix C-2.
x
AFFILIATE AGREEMENTS
ISCG AFFILIATE AGREEMENTS. Pursuant to certain agreements (each an "ISCG
affiliate agreement"), certain individuals and entities that may be deemed
affiliate of ISCG (each, an "ISCG affiliate") have agreed not to effect any
sale, transfer or other disposition of the FCG common stock received by such
ISCG affiliate in the merger unless: (1) such sale, transfer or other
disposition is made in conformity with
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the volume and other requirements of Rule 145 under the Securities Act of 1933,
as amended (the "Securities Act"), as evidenced by a broker's letter and a
representation letter executed by the ISCG affiliate (reasonably satisfactory in
form and content to FCG), each stating that such requirements have been met; (2)
legal counsel reasonably satisfactory to FCG shall have advised FCG in a written
opinion letter (reasonably satisfactory in form and content to FCG), upon which
FCG may rely, that such sale, transfer or other disposition will be exempt from
registration under the Securities Act; (3) such sale, transfer or other
disposition is effected pursuant to an effective registration statement under
the Securities Act; or (4) an authorized representative of the SEC shall have
rendered written advice to such ISCG affiliate to the effect that the SEC would
take no action, or that the staff of the SEC would not recommend that the SEC
take action, with respect to such proposed sale, transfer or other disposition,
and a copy of such written advice and all other related communications with the
SEC shall have been delivered to FCG.
In addition, so as to help ensure that the merger will be treated as a
pooling of interests for accounting and financial reporting purposes, the ISCG
affiliate agreements provide that during the period contemplated by the SEC's
Staff Accounting Bulletin Number 65 until the earlier of (i) FCG's public
announcement of financial results covering at least 30 days of combined
operations of FCG and ISCG or (ii) the reorganization agreement is terminated in
accordance with its terms, no ISCG affiliate shall sell, exchange, transfer,
pledge, distribute or otherwise dispose of or grant any option, establish any
"short" or put-equivalent position with respect to or enter into any similar
transaction (through derivatives or otherwise) intended or having the effect,
directly or indirectly, to reduce such ISCG affiliate's risk relative to: (i)
any ISCG common stock (except pursuant to and upon consummation of the merger);
or (ii) any FCG common stock received by such ISCG affiliate in the merger or
upon exercise of options assumed by FCG in the merger. Provided certain
conditions are met, the ISCG affiliate agreements provide for certain exceptions
to the foregoing restrictions on transfer relating to: (i) certain DE MINIMIS
transfers; (ii) transfers in payment of the exercise price of options to
purchase ISCG common stock or FCG common stock; (iii) charitable donations; and
(iv) transfers to trusts established for the benefit of members of such ISCG
affiliate's family or gifts to members of such ISCG affiliate's family. The form
of ISCG affiliate agreement is attached to this joint proxy statement/prospectus
as Appendix D-1.
FCG AFFILIATE AGREEMENTS. Pursuant to certain agreements (each an "FCG
affiliate agreement" and, collectively, the "FCG affiliate agreements"), certain
individuals and entities that may be deemed affiliates of FCG (each, an "FCG
affiliate") have agreed that, during the period contemplated by the Commission's
Staff Accounting Bulletin Number 65 until the earlier of (i) FCG's public
announcement of financial results covering at least 30 days of combined
operations of FCG and ISCG or (ii) the reorganization agreement is terminated in
accordance with its terms, such FCG affiliate shall not, subject to certain
exceptions, sell, exchange, transfer, pledge, distribute or otherwise dispose of
or grant any option, establish any "short" or put-equivalent position with
respect to or enter into any similar transaction (through derivative's or
otherwise) intended or having the effect, directly or indirectly, to reduce such
FCG affiliate's risk relative to any FCG common stock. Provided certain
conditions are met, the FCG affiliate agreements provide for certain exceptions
to the foregoing restrictions on transfer relating to: (i) certain DE MINIMIS
transfers; (ii) transfers in payment of the exercise price of options to
purchase FCG common stock; (iii) charitable donations; or (iv) transfers to
trusts established for the benefit of members of such FCG affiliate's family or
gifts to members of such FCG affiliate's family. The form of the FCG affiliate
agreement is attached to this joint proxy statement/prospectus as Appendix D-2.
REGISTRATION RIGHTS AGREEMENT
Upon the consummation of the transactions contemplated by the merger
agreement, which will occur on a date to be agreed by FCG and ISCG (the "closing
date"), certain holders of ISCG stock, consisting of David S. Lipson, Technology
Leaders II, Safeguard Scientifics, Inc. and the Warrant and Stock Trust
(collectively the "holders"), will be entitled to certain rights with respect to
the registration of their shares of FCG common stock issued in connection with
the merger under the Securities Act. Under the terms of the registration rights
agreement, which ISCG has agreed to deliver on the closing date, if FCG proposes
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to register any of its securities under the Securities Act for purposes of
distributing securities of FCG by means of an underwritten public offering, the
holders are entitled to notice of such registration and are entitled to include
their shares of stock, provided, among other conditions, that the underwriters
of any offering have the right to limit the number of shares included in such
registration or exclude such shares entirely. In addition, subject to certain
conditions, the holders may also require FCG, beginning on the date of FCG's
public announcement of financial results covering at least 30 days of combined
operations of FCG and ISCG, and expiring 18 months from the date of the
registration rights agreement, on not more than one occasion, to file a
registration statement under the Securities Act at FCG's expense (other than
underwriting discounts and commissions) with respect to the shares owned by the
holders, which amount may be reduced by shares owned by other holders of
registration rights; provided, further, that the number of shares allocated to
the holders shall not be less than 2,000,000 shares unless the aggregate number
of shares to be registered is less than 2,000,000, in which case all shares to
be registered shall be allocated to the holders. The form of the registration
rights agreement is attached to this joint proxy statement/ prospectus as
Appendix E.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the merger that are generally applicable to holders of ISCG
common stock. This discussion assumes that holders of ISCG common stock hold
such shares as capital assets. This discussion is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter the
tax consequences to FCG, ISCG or the ISCG shareholders as described herein.
ISCG shareholders should be aware that this discussion does not deal with
all U.S. federal income tax considerations that may be relevant to particular
ISCG shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, banks, insurance companies or
tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Code, who are non-United States persons, who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions or who hold their shares as a hedge or as part of a
hedging, straddle, conversion or other risk reduction transaction. In addition,
the following discussion does not address the tax consequences of the merger
under foreign, state or local tax laws or the tax consequences of transactions
effectuated prior to or after the merger (whether or not such transactions are
in connection with the merger).
It is the opinion of Saul Ewing and Cooley Godward that the merger will
constitute a reorganization pursuant to Section 368(a) of the Code
(collectively, the "tax opinions"). In addition, ISCG's obligation to consummate
the merger is conditioned on the receipt by ISCG of an opinion from Saul Ewing,
and FCG's and Foxtrot's obligations to consummate the merger are conditioned on
their receipt of an opinion from Cooley Godward, confirming that the merger will
constitute a reorganization (collectively, the "closing opinions"). Such
conditions will not be waived without a resolicitation of consent by the
shareholders of ISCG and stockholders of FCG. Saul Ewing and Cooley Godward have
advised ISCG, and FCG and Foxtrot, respectively, that they currently expect to
be able to deliver such closing opinions. See "The Merger Agreement--Conditions
to the Merger--FCG and Foxtrot" and "--ISCG." The tax opinions and closing
opinions:
- Will not be binding on the IRS nor preclude the IRS from adopting a
contrary position
- Will be based on the assumptions discussed below, as well as
representations received from ISCG, FCG and Foxtrot
- Will be based on the assumption that the merger will be consummated in
accordance with the terms of the merger agreement and
- Will be subject to the limitations discussed below
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Neither ISCG nor FCG has requested, or will request, a ruling from the IRS
with regard to any of the federal income tax consequences of the merger. The tax
opinions and closing opinions assume and are conditioned upon:
- The truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the representations
received from ISCG, FCG and Foxtrot to support the tax opinions and
closing opinions (the "tax representations") and in all other instruments
and documents related to the formation, organization and operation of
ISCG, FCG and Foxtrot examined by and relied upon by Saul Ewing and Cooley
Godward in connection with the merger
- That original documents submitted to such counsel (including signatures
thereto) are authentic, documents submitted to such counsel as copies
conform to the original documents, and that all such documents have been
(or will be by the effective time) duly and validly executed and delivered
where due execution and delivery are a prerequisite to the effectiveness
thereof
- That all covenants contained in the merger agreement (including exhibits
thereto) and in the tax representations are performed without waiver or
breach of any material provision thereof
- That the merger will be reported by FCG and ISCG on their respective
federal income tax returns in a manner consistent with the tax opinions
and the closing opinions
- That any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification
Subject to the limitations and qualifications referred to herein and in the
tax opinions and closing opinions, it is the opinion of Saul Ewing and Cooley
Godward that as a result of the merger's qualifying as a reorganization, the
following U.S. federal income tax consequences will result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of ISCG common stock upon the receipt of FCG common stock solely
in exchange for such ISCG common stock in the merger (except to the
extent, if any, of cash received in lieu of fractional shares)
- The aggregate tax basis of the FCG common stock so received by each ISCG
shareholder in the merger (including any fractional share of FCG common
stock not actually received) will be the same as the aggregate tax basis
of ISCG common stock surrendered by such ISCG shareholder in exchange
therefor
- The holding period of FCG common stock so received by each ISCG
shareholder in the merger will include the period for which ISCG common
stock surrendered in exchange therefor was considered to be held, provided
that ISCG common stock so surrendered is held as a capital asset at the
effective time
- Cash payments received by holders of ISCG common stock in lieu of a
fractional share will be treated as if such fractional share of FCG common
stock had been issued in the merger and then redeemed by FCG. An ISCG
shareholder receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount of cash
received and the basis in such fractional share. The gain or loss should
be capital gain or loss provided that each such fractional share of ISCG
common stock was held as a capital asset at the effective time
- A shareholder of ISCG who properly exercises dissenters' rights under any
applicable law with respect to a share of ISCG common stock and receives
payments for such stock in cash should recognize capital gain or loss (if
such stock was held as a capital asset at the effective time of the
merger) measured by the difference between the amount of cash received and
the shareholder's basis in such share, provided such payment is neither
essentially equivalent to a dividend within the meaning of Section 302 of
the Code nor has the effect of a distribution of a dividend within the
meaning of Section 356(a)(2) of the Code (collectively, a "dividend
equivalent transaction"). A sale of ISCG shares incident to an exercise of
dissenters' rights will generally not be a dividend
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equivalent transaction if, as a result of such exercise, the dissenting
shareholder owns no shares of FCG common stock (either actually or
constructively within the meaning of Section 318 of the Code) immediately
after the merger
- Neither FCG nor ISCG will recognize gain solely as a result of the merger
A successful IRS challenge to the reorganization status of the merger would
result in significant adverse tax consequences to the ISCG shareholders. An ISCG
shareholder would recognize gain or loss with respect to each share of ISCG
common stock surrendered equal to the difference between the shareholder's basis
in such share and the fair market value, as of the effective time, of the FCG
common stock received in exchange therefor. In such event, a shareholder's
aggregate basis in the FCG common stock so received would equal its fair market
value, and the shareholder's holding period for such stock would begin the day
after the closing date.
Even if the merger qualifies as a reorganization, a recipient of FCG common
stock would recognize income to the extent that, for example, any such shares
were determined to have been received in exchange for services, to satisfy
obligations or in consideration for anything other than the ISCG common stock
surrendered. In addition, to the extent that an ISCG shareholder were treated as
receiving (directly or indirectly) consideration other than FCG common stock in
exchange for such shareholder's ISCG common stock, gain, if any, would have to
be recognized.
Certain noncorporate ISCG shareholders may be subject to backup withholding
at a rate of 31% on cash payments received in lieu of a fractional share
interest in FCG common stock. Backup withholding will not apply, however, to a
shareholder who furnishes a correct taxpayer identification number ("TIN") and
certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the letter of transmittal, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A shareholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
ISCG COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE EFFECTS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
Each ISCG shareholder will be required to retain records and file with such
shareholder's U.S. federal income tax return a statement setting forth certain
facts relating to the merger.
ANTICIPATED ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with GAAP. This accounting method would permit
the recorded assets and liabilities of ISCG to be carried forward to the
consolidated financial statements of FCG at their recorded historical amounts.
Consummation of the merger is conditioned upon (i) the receipt by FCG of a
letter from its independent accountants dated as of the closing date to the
effect that such accountants concur with FCG management's conclusion that
pooling of interests accounting for the merger is appropriate, and (ii) receipt
by ISCG of a letter from its independent accountants dated as of a date no
earlier than the date three days prior to the effective time to the effect that
such accountants concur with ISCG management's conclusion that no conditions
exist relating to ISCG that would preclude FCG from accounting for the merger as
a pooling of interests.
REGULATORY MATTERS
ANTITRUST. The merger is not subject to the premerger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). However, the FTC or the
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Antitrust Division of the United States Department of Justice (the "Antitrust
Division") could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin consummation of
the merger or seeking to cause divestiture of significant assets of FCG or ISCG
or their subsidiaries. There can be no assurance that a challenge to the merger
on antitrust grounds will not be made, or, if such challenge is made, of what
the result would be. Consummation of the merger is conditioned upon, among other
things, the absence of any temporary restraining order, preliminary or permanent
injunction, or other order issued by any federal or state court in the United
States which prevents the consummation of the merger.
FILINGS WITH THE SECRETARY OF STATE OF THE COMMONWEALTH OF PENNSYLVANIA AND
THE SECRETARY OF STATE OF THE STATE OF DELAWARE. Articles of Merger must be
filed with the Secretary of State of the Commonwealth of Pennsylvania and a
Certificate of Merger must be filed with the Secretary of State of Delaware to
consummate the merger.
RIGHTS OF DISSENTING SHAREHOLDERS OF ISCG
Pursuant to the PBCL, shareholders of ISCG have the right to dissent from
the merger, and to obtain payment of the "fair value" (as defined in the PBCL)
of their shares, if the merger is consummated. The term "fair value" means the
fair value of the shares immediately before completion of the merger, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the merger.
The following summary of the steps to be taken if the right to dissent is to
be exercised is qualified in its entirety by the full text of Section 1930 and
Subchapter D of Chapter 15 of the PBCL, which are attached to this joint proxy
statement/prospectus as Appendix F. Each step must be taken in the indicated
order and in strict compliance with the applicable provisions of the statute in
order to perfect dissenters' rights. The failure of any shareholder to comply
with these steps will result in the shareholder receiving the consideration
contemplated by the merger agreement and waiving his right to dissent. Any
shareholder of ISCG who contemplates exercising the right to dissent is urged to
read carefully the provisions of Section 1930 and Subchapter D of Chapter 15 of
the PBCL.
Any written notice or demand which is required in connection with the
exercise of dissenters' rights, whether before or after the effective time, may
be sent to ISCG at the ISCG principal offices.
A shareholder who wishes to dissent must file with ISCG prior to the vote of
shareholders on the merger at the ISCG special meeting, a written notice of
intention to demand that he be paid the fair value for his shares, if the merger
is effected, must effect no change in the beneficial ownership of his shares
from the date of such filing continuously through the closing date, and must
refrain from voting his shares to approve the merger. Neither a proxy nor a vote
against approval of the merger will constitute the necessary written notice of
intention to dissent. A beneficial owner of shares which are held of record in
"street name" by a brokerage firm or other nominee must obtain the written
consent of such record holder to such beneficial owner's exercise of dissenters'
rights and must submit such consent to ISCG, no later than the time of the
filing of his notice of intention to dissent.
If the merger is approved by the required vote of ISCG's shareholders at the
ISCG special meeting, ISCG will mail a notice to all dissenters who gave due
notice of intention to demand payment of their shares and who refrained from
voting in favor of the merger. The notice will state where and when a demand for
payment must be sent and certificates for the shares must be deposited in order
to obtain payment, and will include a form for demanding payment and a copy of
Subchapter D of Chapter 15 of the PBCL. The time set for receipt of the demand
for payment and deposit of stock certificates will not be less than 30 days from
the date of mailing of the notice.
A shareholder who fails to timely demand payment or fails to timely deposit
stock certificates, as required by ISCG's notice, will not have any right to
receive payment of the fair value of his shares.
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Promptly after completion of the merger, or upon timely receipt of demand
for payment if the merger already has been completed, ISCG will either remit to
dissenters who have made demand and have deposited their stock certificates the
amount that ISCG estimates to be the fair value of such dissenters' shares or
give written notice that no such remittance is being made. The remittance or
notice will be accompanied by (1) a closing balance sheet and an income
statement of ISCG for a fiscal year ending not more than 16 months before the
date of remittance or notice, together with the latest available interim
financial statements, (2) a statement of ISCG's estimate of the fair value of
the shares, and (iii) notice of the right of the dissenter to demand payment or
supplemental payment under the PBCL, as the case may be, accompanied by a copy
of Subchapter D of Chapter 15 of the PBCL. If ISCG does not remit the amount of
its estimated fair value for shares with respect to which demand for payment has
been made and stock certificates have been deposited, then ISCG will return any
certificates that have been deposited. Returned certificates, and any
certificates subsequently issued in exchange therefor, will be marked to record
the fact that demand for payment has been made. Transferees of shares so marked
shall not acquire any rights in ISCG other than those rights held by the
original dissenter after such dissenter demanded payment of fair value.
If a dissenter believes that the amount stated in the notice as ISCG's
estimate of the fair value of the dissenters' shares or remitted by ISCG is less
than the fair value of the dissenters' shares, he may send ISCG his own estimate
of the fair value of such shares, which shall be deemed to be a demand for
payment of the amount of the deficiency. If ISCG remits payment of its estimated
value of a dissenter's shares or delivers notice of its estimate of the fair
value of the dissenters' shares, and the dissenter does not file his own
estimate within 30 days after the mailing by ISCG of its remittance or notice,
the dissenter will be entitled to no more than the amount stated in the notice
or remitted to him by ISCG.
Within 60 days after the latest to occur of completion of the merger, timely
receipt by ISCG of any demands for payment, or timely receipt by ISCG, as the
case may be, of any estimates by dissenters of fair value, if any demands for
payment remain unsettled, ISCG may file in the Court of Common Pleas of Chester
County (the "Court"), an application requesting that the fair value of the
dissenters' shares be determined by the Court. In such case, all dissenters,
wherever residing, whose demands have not been settled shall be made parties to
the proceeding as in an action against their shares, and a copy of the
application shall be served on each such dissenter. The Court may appoint an
appraiser to receive evidence and recommend a decision on the issue of fair
value. The appraiser shall have such power and authority as may be specified in
the order of appointment or in any amendment thereof. Each dissenter who is made
a party shall be entitled to recover the amount by which the fair value of his
shares is found to exceed the amount, if any, previously remitted, plus
interest. If ISCG were to fail to file such an application, then any dissenter
who has made a demand and who has not settled his claim against ISCG may file an
application in the name of ISCG at any time within 30-days after the expiration
of the 60-day period and request that the fair value be determined by the Court.
If no dissenter files such an application, then each dissenter entitled to do so
shall be paid ISCG's estimate of the fair value of the dissenters' shares and no
more, and may bring an action to recover any amount not previously remitted.
If ISCG were to fail to file such an application, then any dissenter who has
made a demand and who has not settled his claim against ISCG may file an
application in the name of ISCG at any time within 30 days after the expiration
of the 60-day period and request that the fair value be determined by the Court.
If no dissenter files such an application, then each dissenter entitled to do so
shall be paid ISCG's estimate of the fair value of the dissenters' shares and no
more, and may bring an action to recover any amount not previously remitted.
Holders of ISCG common stock considering exercising dissenters' rights
should recognize that the fair value of their shares determined by the Court
could be more than, the same as or less than the consideration they are entitled
to receive pursuant to the merger agreement if they do not exercise dissenters'
rights. The costs and expenses of valuation proceedings before the Court,
including the reasonable compensation and expenses of the appraiser appointed by
the Court, shall be determined by
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the Court and assessed against the business corporation except that any part of
the costs and expenses may be apportioned and assessed as the Court deems
appropriate against all or some of the dissenters who are parties and whose
action in demanding supplemental payment the Court finds to be dilatory,
obdurate, arbitrary, vexatious or in bad faith. Fees and expenses of counsel and
of experts for the respective parties may be assessed as the Court deems
appropriate against the corporation and in favor of any or all dissenters if the
corporation failed to comply substantially with the requirements of this
subchapter and may be assessed against either the corporation or a dissenter, in
favor of any other party, if the Court finds that the party against whom the
fees and expenses are assessed acted in bad faith or in a dilatory, obdurate,
arbitrary or vexatious manner in respect to the rights provided by the PBCL. If
the Court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and should not be
assessed against the corporation, it may award to those counsel reasonable fees
to be paid out of the amounts awarded to the dissenters who were benefited.
ISCG intends to negotiate in good faith with any dissenting shareholder. If
after negotiation, a claim cannot be settled, then ISCG intends to file an
application requesting that the fair value of the dissenters' shares be
determined by the Court.
NO FCG APPRAISAL RIGHTS
Holders of FCG common stock are not entitled to appraisal rights under the
DGCL because FCG is not a constituent corporation to the merger under the DGCL.
RESALE OF FCG COMMON STOCK
FCG common stock issued in connection with the merger will be freely
transferable, except that shares issued to an ISCG affiliate or who becomes an
affiliate of FCG are subject to certain restrictions on resale. An affiliate is
defined generally as including, without limitation, directors, certain executive
officers and certain other persons who control a company. Pursuant to the terms
of the merger agreement, ISCG has delivered to FCG, ISCG affiliate agreements
executed by the ISCG affiliates that prohibit the sale, exchange, transfer,
pledging, distribution or other disposition of or granting of any option,
establishment of any "short" or put-equivalent position with respect to or any
similar transaction (through derivatives or otherwise) intended or having the
effect, directly or indirectly, to reduce such ISCG affiliate's risk relative
to: (1) any ISCG common stock (except pursuant to and upon consummation of the
merger); or (2) any FCG common stock received by such ISCG affiliate in the
merger or upon exercise of options assumed by FCG in the merger, except under
certain circumstances, in order to comply with the requirements of certain
federal securities laws and to help ensure the merger is treated as a pooling of
interest for accounting and financial reporting purposes. See "Approval of the
Merger and Related Transactions-- Affiliate Agreements."
Pursuant to the terms of the merger agreement, FCG has delivered to ISCG,
FCG affiliate agreements executed by the FCG affiliates that prohibit the sale,
exchange, transfer, pledging, distribution or other disposition of or granting
of any option, establishment of any "short" or put-equivalent position with
respect to or any similar transaction (through derivatives or otherwise)
intended or having the effect, directly or indirectly, to reduce such FCG
affiliate's risk relative to any FCG common stock except under certain
circumstances, so as to help ensure that the merger will be accounted for as a
pooling of interests. See "Approval of the Merger and Related
Transactions--Affiliate Agreements."
Pursuant to the terms of the merger agreement, FCG has agreed to enter into
a registration rights agreement with David S. Lipson, Technology Leaders II,
Safeguard Scientifics, Inc. and the Warrant and Stock Trust (the "registration
rights agreement") at the closing, which grants the holders certain rights with
respect to the registration under the Securities Act of shares of FCG common
stock issued to the holders in connection with the merger. See "Approval of the
Merger and Related Transactions--Registration Rights Agreement."
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THE MERGER AGREEMENT
GENERAL
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this joint proxy
statement/prospectus and is incorporated herein by reference, as amended in the
First Amendment dated November 11, 1998, a copy of which is attached in Appendix
A-1 to this joint proxy statement/prospectus. However, the following is not a
complete statement of all provisions of the merger agreement and related
agreements. Statements made in this joint proxy statement/prospectus with
respect to the terms of the merger agreement and such related agreements are
qualified in their respective entireties by reference to the more detailed
information set forth in the merger agreement and such related agreements.
Capitalized terms used in this summary but not defined in this joint proxy
statement/prospectus shall have the meanings ascribed to them in the merger
agreement.
The merger agreement provides for the merger of Foxtrot with and into ISCG.
As a result of the merger, Foxtrot will cease to exist, ISCG will become a
wholly-owned subsidiary of FCG, and the former shareholders of ISCG will become
stockholders of FCG. ISCG, as the surviving corporation, will retain all of its
separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises unaffected by the merger. Foxtrot has been
formed solely for the purpose of effecting the merger, and there will be no
other activity in Foxtrot. The merger will become effective at the effective
time, which shall be upon the filing of articles of merger with the Secretary of
State of the Commonwealth of Pennsylvania and the certificate of merger with the
Secretary of State of the State of Delaware or such later time as may be
specified in the articles of merger. The effective time shall occur no later
than the second day after the satisfaction or waiver of all the conditions to
closing set forth in the merger agreement. It is currently anticipated that the
effective time will occur on or before December 23, 1998. There can be no
assurance, however, that the conditions to the merger will be satisfied by such
date, or at all, or that the merger agreement will not be terminated. See
"--Conditions to the Merger."
MERGER CONSIDERATION
ISCG COMMON STOCK. At the effective time, each share of ISCG common stock
then outstanding will be converted into the right to receive FCG common stock
based on the exchange ratio. The exchange ratio is currently 0.77, which will be
adjusted for any subsequent stock split, stock dividend, reverse stock splits
reclassification, recapitalization or similar transaction.
NO FRACTIONAL SHARES. No fractional shares of FCG common stock will be
issued in connection with the merger, and no certificates for any such
fractional shares will be issued. In lieu of such fractional shares, any holder
of ISCG common stock (after aggregating all fractional shares of FCG common
stock issuable to such shareholder) will, upon surrender of such shareholder's
stock certificate(s) representing ISCG common stock to the American Stock
Transfer & Trust Company, transfer agent and registrar for FCG common stock and
exchange agent for purposes of the merger (the "exchange agent"), be paid in
cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price of a share of FCG
common stock on Nasdaq on the "closing date" (as defined herein).
STOCK OPTIONS AND WARRANTS
STOCK OPTIONS. At the effective time, all outstanding options with respect
to ISCG common stock under ISCG's Amended and Restated Option Plan
(collectively, "ISCG options") shall be converted into and become rights with
respect to FCG common stock, and FCG shall assume each such option in accordance
with the terms (as in effect as of the date of the merger agreement) of the
stock option plan under which it was issued and the stock option agreement by
which it is evidenced. From and after the effective time,
- Each ISCG option assumed by FCG may be exercised solely for shares of FCG
common stock
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- The number of shares of FCG common stock subject to each such ISCG option
shall be equal to the number of shares of ISCG common stock subject to
such ISCG option immediately prior to the effective time multiplied by the
exchange ratio, rounding down to the nearest whole share (with cash, less
the applicable exercise price, being payable for any fraction of a share)
- The per share exercise price under each such ISCG option shall be adjusted
by dividing the per share exercise price under such ISCG option by the
exchange ratio and rounding up to the nearest cent
- Any restriction on the exercise of any such ISCG option shall continue in
full force and effect and the term, exercisability, vesting schedule and
other provisions of such ISCG option shall otherwise remain unchanged
WARRANTS. All rights with respect to ISCG common stock under warrants that
are then outstanding shall be converted into and become rights with respect to
FCG common stock, and FCG shall, subject to certain limitations, assume all such
warrants in accordance with the terms of such warrants. Each warrant assumed by
FCG (1) may be exercised solely for shares of FCG common stock, (2) the number
of shares of FCG common stock subject to each warrant assumed shall be equal to
the number of shares of ISCG common stock subject to such warrant immediately
prior to the effective time multiplied by the exchange ratio, rounding down to
the nearest whole share (with cash, less the applicable exercise price, being
payable for any fraction of a share), (3) the per share exercise price under
each warrant assumed shall be adjusted by dividing the per share exercise price
under the warrant by the exchange ratio and rounding up to the nearest cent (to
the extent permitted by the terms of the warrants and otherwise rounded or
without rounding as required by the terms of the particular warrant).
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of ISCG common stock issued and outstanding
as of the ISCG record date, an aggregate of approximately 6,212,917 shares of
FCG common stock will be issued to security holders of ISCG. Based upon the
number of shares of FCG common stock issued and outstanding as of the FCG record
date (assuming no exercise of outstanding options, warrants or other rights to
purchase FCG common stock), the former holders of ISCG common stock would hold
and have voting power with respect to approximately 27.3% of FCG's total issued
and outstanding shares after consummation of the merger.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
As soon as practicable after the effective time, the exchange agent will
mail to the registered holders of ISCG common stock (i) a letter of transmittal
and (ii) instructions for the use in effecting the surrender of valid
certificates representing shares of ISCG common stock (the "ISCG stock
certificates") in exchange for certificates representing FCG common stock. Upon
surrender of an ISCG stock certificate to the exchange agent for exchange,
together with a duly executed letter of transmittal and such other documents as
may reasonably be required by the exchange agent or FCG, the holder of such ISCG
stock certificate shall be entitled to receive in exchange therefor a
certificate representing the whole number of shares of FCG common stock that
such shareholder has the right to receive. No fractional shares of FCG common
stock will be issued in connection with the merger, and no certificates for any
such fractional shares will be issued. See "--Merger Consideration--No
Fractional Shares."
If any ISCG stock certificate has been lost, stolen or destroyed, FCG may
require the owner of such lost, stolen or destroyed ISCG stock certificate to
provide an appropriate affidavit and to deliver a bond as indemnity against any
claim that may be made against the exchange agent, FCG or ISCG with respect to
such ISCG stock certificate.
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ISCG SHAREHOLDERS SHOULD NOT SURRENDER THEIR ISCG STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
EFFECT ON CERTIFICATES
At the effective time, (1) all shares of ISCG common stock outstanding
immediately prior to the effective time will automatically be canceled and
retired and will cease to exist, and all holders of certificates representing
shares of ISCG common stock that were outstanding immediately prior to the
effective time will cease to have any rights as shareholders of ISCG, and (2)
the stock transfer books of ISCG will be closed with respect to all shares of
ISCG common stock outstanding immediately prior to the effective time. No
further transfer of any such shares of ISCG common stock will be made on such
stock transfer books after the effective time. If, after the effective time, an
ISCG stock certificate is presented to the exchange agent (or to ISCG or FCG),
such ISCG stock certificate will be canceled and will be exchanged as provided
above under the caption "--Conversion of Shares; Procedure for Exchange of
Certificates" and "--Merger Consideration."
CORPORATE MATTERS
As of the effective time, the articles of incorporation of the surviving
corporation will be amended and restated to conform to the certificate of
incorporation of Foxtrot as in effect immediately prior to the effective time
with the exception that the name of the surviving corporation shall be
Integrated Systems Consulting Group, Inc., and the bylaws of the surviving
corporation will be amended and restated to conform to the bylaws of Foxtrot as
in effect immediately prior to the effective time. Immediately after the
effective time, the directors and officers of the surviving corporation shall be
the directors and officers of Foxtrot immediately prior to the effective time.
CONDITIONS TO THE MERGER
FCG AND FOXTROT. The obligations of FCG and Foxtrot to effect the merger
and otherwise consummate the transactions contemplated by the reorganization
agreement are subject to the satisfaction, at or prior to the closing, of
conditions, among others, to the following general effect:
- The representations and warranties of ISCG contained in the merger
agreement shall be accurate in all material respects as of the date of the
merger agreement and as of the closing date as if made on and as of the
closing date except that any representations and warranties qualified by
"material adverse effect" (as defined herein) or other materiality
qualifications are accurate in all respects as of the date of the merger
agreement and as of the closing date as if made on and as of the closing
date
- Each covenant or obligation that ISCG is required to comply with or to
perform at or prior to the closing shall have been complied with and
performed in all material respects
- The registration statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been
issued by the Commission with respect to the registration statement
- The merger agreement and the merger shall have been duly approved by the
necessary vote of the ISCG shareholders, and the issuance of FCG common
stock in the merger shall have been duly approved by the necessary vote of
the FCG stockholders. Fewer than 10% of the outstanding shares of ISCG
common stock shall be dissenting shares
- All material consents required to be obtained in connection with the
merger and the other transactions contemplated by the merger agreement
shall have been obtained and shall be in full force and effect
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- FCG and Foxtrot shall have received the following agreements and
documents, each of which shall be in full force and effect: (A) a
statement from ISCG conforming to the requirements of Section
1.897-2(h)(2) of the Treasury Regulations; (B) a letter from KPMG, dated
as of the closing date and addressed to FCG and ISCG reasonably
satisfactory in form and substance to FCG and Grant Thornton, to the
effect that, after reasonable investigation, KPMG is not aware of any fact
concerning ISCG or any of its shareholders or affiliates that could
preclude FCG from accounting for the merger as a pooling of interests; (C)
a letter from Grant Thornton, dated as of the closing date and addressed
to FCG, reasonably satisfactory in form and substance to FCG, to the
effect that, after reasonable investigation, Grant Thornton is not aware
of any fact concerning FCG or and of its stockholders or affiliates that
could preclude FCG from accounting for the merger as a pooling of
interests; (D) a legal opinion of Cooley Godward, dated as of the closing
date and addressed to FCG, to the effect that the merger will constitute a
reorganization within the meaning of Section 368 of the Code; (E) a
certificate executed on behalf of ISCG by its chief executive officer
confirming that the conditions set forth above have been duly satisfied;
and (F) the written resignations of all officers and directors of ISCG as
of the effective time
- There shall have been no material adverse change in the business,
condition, assets, liabilities, operations or financial performance of
ISCG and its subsidiaries (the "acquired corporations") since the date of
the merger agreement
- ISCG shall have filed with the IRS a notification required under Sections
1.897-2(h)(1)(i) and 1.897-2(h)(2) of the United States Treasury
Regulations ("Treasury Regulations")
- The shares of FCG common stock to be issued in the merger shall have been
authorized for listing on Nasdaq, subject to notice of issuance
- No temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the merger shall have been
issued by any court of competent jurisdiction and remain in effect, and
there shall not be any legislation or regulation enacted or deemed
applicable to the merger that makes consummation of the merger illegal
- There shall not be pending or threatened any action, suit or litigation
brought by the United States Government or the European Community, or any
agency, commission, instrumentality, unit or body of the United States
Government or the European Community: (A) challenging or seeking to
restrain or prohibit the consummation of the merger or any of the other
transactions contemplated by the merger agreement; (B) relating to the
merger and seeking to obtain from FCG or any of its subsidiaries any
damages that may be material to FCG; (C) seeking to prohibit or limit in
any material respect FCG's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of the
surviving corporation; or (D) which would materially and adversely affect
the right of FCG, the surviving corporation or any subsidiary of FCG to
own the assets or operate the business of ISCG
- There shall not be pending any action, suit or litigation in which there
is a reasonable possibility of an outcome that would have a material
adverse effect on ISCG or any of its subsidiaries or on FCG: (A)
challenging or seeking to restrain or prohibit the consummation of the
merger or any of the other transactions contemplated by the merger
agreement; (B) relating to the merger and seeking to obtain from FCG or
any of its subsidiaries any damages that may be material to FCG; (C)
seeking to prohibit or limit in any material respect FCG's ability to
vote, receive dividends with respect to or otherwise exercise ownership
rights with respect to the stock of the surviving corporation; or (D)
which would affect adversely the right of FCG, the surviving corporation
or any subsidiary of FCG to own the assets or operate the business of ISCG
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ISCG. The obligations of ISCG to effect the merger and otherwise consummate
the transactions contemplated by the merger agreement are subject to the
satisfaction, at or prior to the closing, of conditions, among others, to the
following general effect:
- The representations and warranties of FCG and Foxtrot contained in the
merger agreement shall be accurate in all material respects as of the date
of the merger agreement and as of the closing date as if made on and as of
the closing date, except that any representations and warranties qualified
by material adverse effect or other materiality qualifications are
accurate in all respects as of the date of the merger agreement and as of
the closing date as if made on and as of the closing date
- All of the covenants and obligations that FCG and Foxtrot are required to
comply with or to perform at or prior to the closing shall have been
complied with and performed in all material respects
- The registration statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been
issued by the Commission with respect to the registration statement
- The merger agreement and the merger shall have been duly approved by the
necessary vote of the ISCG shareholders, and the issuance of FCG common
stock in the merger shall have been duly approved by the necessary vote of
the FCG stockholders
- ISCG shall have received the following agreements and documents: (A) the
registration rights agreement executed by FCG and each of the persons
identified therein; (B) a legal opinion of Saul Ewing, dated as of the
closing date and addressed to ISCG, to the effect that the merger will
constitute a reorganization within the meaning of Section 368 of the Code;
(C) a letter from KPMG, dated as of a date no earlier than three days
prior to the closing date and addressed to ISCG, reasonably satisfactory
in form and substance to FCG and Grant Thornton, to the effect that, after
reasonable investigation, KPMG is not aware of any fact concerning ISCG or
any of its shareholders or affiliates that could preclude FCG from
accounting for the merger as a pooling of interests; (D) a letter from
Grant Thornton, dated as of a date no earlier than three days prior to the
closing date and addressed to FCG, reasonably satisfactory in form and
substance to FCG, to the effect that, after reasonable investigation,
Grant Thornton is not aware of any fact concerning FCG or and of its
stockholders or affiliates that could preclude FCG from accounting for the
merger as a pooling of interests; and (E) a certificate executed on behalf
of FCG by an executive officer of FCG, confirming that conditions set
forth above have been satisfied
- There shall have been no material adverse change in the business,
condition, assets, liabilities, operations or financial performance of FCG
since the date of the reorganization agreement
- The shares of FCG common stock to be issued in the merger shall have been
authorized for listing on Nasdaq, subject to notice of issuance
- No temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the merger by ISCG shall have
been issued by any court of competent jurisdiction and remain in effect,
and there shall not be any legislation or regulation enacted or deemed
applicable to the merger that makes consummation of the merger illegal
For purposes of the merger agreement, an event, violation, inaccuracy,
circumstance or other matter will be deemed to have a "material adverse effect"
on the acquired corporations if such event, violation, inaccuracy, circumstance
or other matter would have a material adverse effect on (1) the business,
condition, capitalization, assets, liabilities, operations or financial
performance of the acquired corporations taken as a whole, (2) the ability of
ISCG to consummate the merger or any of the other transactions contemplated in
the merger agreement or to perform any of its obligations under the merger
agreement, or (3) the ability of FCG to vote, receive dividends with respect to
or otherwise exercise ownership rights
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with respect to the stock of the surviving corporation. An event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "material
adverse effect" on FCG if such event, violation, inaccuracy, circumstance or
other matter would have a material adverse effect on the business, condition,
assets, liabilities, operations or financial performance of FCG and its
subsidiaries taken as a whole.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains certain representations and warranties,
including, without limitation, representations and warranties by ISCG as to:
- Due organization and subsidiaries
- The articles of incorporation of ISCG, as amended (the "ISCG articles of
incorporation"), and the bylaws of ISCG (the "ISCG bylaws")
- Capitalization
- Filings with the SEC and financial statements
- Absence of certain changes
- Real property, equipment and leaseholds
- Title to assets
- Receivables and significant customers
- Proprietary assets
- Material contracts
- Year 2000 liabilities
- Compliance with legal requirements
- Certain business practices
- Governmental authorizations
- Tax matters
- Employee and labor matters and benefit plans
- Environmental matters
- Insurance
- Transactions with affiliates
- Legal proceedings and orders
- The authority and binding nature of the merger agreement and the
inapplicability of certain anti-takeover statutes
- The absence of existing discussions or negotiations concerning other
acquisition proposals
- Accounting matters
- The vote required to approve the merger agreement
- Non-contravention and consents
- The receipt of a fairness opinion from Baird
- Brokers, finders and investment bankers and their fees or commissions
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- Disclosure
The merger agreement contains further representations and warranties by FCG
and Foxtrot as to:
- Due organization, standing and power to conduct business
- Capitalization
- Filings with the SEC and financial statements
- Disclosure
- Absence of certain changes
- Authority and binding nature of the merger agreement
- Non-contravention and consents
- Vote required to approve the issuance of FCG common stock pursuant to the
merger
- Valid issuance of the FCG common stock to be issued pursuant to the merger
- Accounting matters
- Receipt of a fairness opinion from Hambrecht & Quist
- Tax matters
- Environmental matters
- Significant customers
- Year 2000 liabilities
COVENANTS
ACCESS AND INVESTIGATION. The merger agreement requires that during the
period from September 9, 1998 through the effective time (the "pre-closing
period"), ISCG shall, and shall cause the respective representatives of the
acquired corporations to:
- Provide FCG and FCG's representatives with reasonable access to the
acquired corporations' representatives, personnel and assets and to all
existing books, records, tax returns, work papers and other documents and
information relating to the acquired corporations
- Provide FCG and FCG's representatives with such copies of the existing
books, records, tax returns, work papers and other documents and
information relating to the acquired corporations, and with such
additional financial, operating and other data and information regarding
the acquired corporations, as FCG may reasonably request
ISCG shall also promptly provide FCG with copies of:
- Any written materials or communications sent by or on behalf of ISCG to
its shareholders
- Any material notice, document or other communication sent by or on behalf
of any of the acquired corporations to any party to any material contract
or sent to any of the acquired corporations by any party to any material
contract (other than any communication that relates solely to commercial
transactions between ISCG and the other party to any such material
contract and that is of the type sent in the ordinary course of business
and consistent with past practices)
- Any notice, report or other document filed with or sent to any
governmental body in connection with the merger or any of the other
transactions contemplated by the merger agreement
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- Any material notice, report or other document received by any of the
acquired corporations from any governmental body
CONDUCT OF ISCG'S BUSINESS. The merger agreement requires that during the
pre-closing period, ISCG shall
- Conduct its business and operations (A) in the ordinary course and in
accordance with past practices and (B) in compliance with all applicable
legislation and regulations and the requirements of all of its material
contracts
- Use all reasonable efforts to ensure that each of the acquired
corporations preserves intact its current business organization, keeps
available the services of its current officers and employees and maintains
its relations and goodwill with all suppliers, customers, landlords,
creditors, licensors, licensees, employees and other persons having
business relationships with the respective acquired corporations
- Keep in full force all of its insurance policies
- Provide all notices, assurances and support required by any acquired
corporation contract relating to any proprietary asset in order to ensure
that no condition under such acquired corporation contract occurs which
could result in, or could increase the likelihood of, (A) any transfer or
disclosure by any acquired corporation of any source code materials or
other proprietary asset, or (B) a release from any escrow of any source
code materials or other proprietary asset which have been deposited or are
required to be deposited in escrow under the terms of such acquired
corporation contract
- Cause its officers to report regularly to FCG concerning the status of
ISCG's business (to the extent requested by FCG)
During the pre-closing period, ISCG shall not (without the prior written
consent of FCG), and shall not permit any of the other acquired corporations to:
- (A) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of its capital stock, or (B)
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities
- Sell, issue, grant or authorize the issuance or grant of (A) any capital
stock or other security, (B) any option, call, warrant or right to acquire
any capital stock or other security, or (C) any instrument convertible
into or exchangeable for any capital stock or other security (except that
ISCG may (1) issue ISCG common stock upon the valid exercise of ISCG
options or ISCG warrants outstanding as of the date of the merger
agreement and (2) in the ordinary course of business and consistent with
past practices, grant options exercisable into not more than 250 shares of
ISCG common stock per newly-hired employee)
- Amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of ISCG's stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify any of the terms of any
outstanding option, warrant or other security or any related contract
- Amend or permit the adoption of any amendment to the ISCG articles of
incorporation or the ISCG bylaws or other charter or organizational
documents, or, subject to the other terms of the merger agreement, effect
or become a party to any merger, consolidation, share exchange, business
combination, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction
- Form any subsidiary or acquire any equity interest or other interest in
any other entity
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- Make any capital expenditure (except that the acquired corporations may
make capital expenditures that, when added to all other capital
expenditures made on behalf of the acquired corporations during the
pre-closing period, do not exceed $50,000 with respect to any single
capital expenditure or $100,000 in the aggregate)
- Enter into or become bound by, or permit any of the assets owned or used
by ISCG to become bound by, certain material contracts, or amend or
prematurely terminate, or waive or exercise any material right or remedy
(including any right to repurchase shares of ISCG common stock) under,
certain material contracts
- Acquire, lease or license any right or other asset from any other person
or sell or otherwise dispose of, or lease or license, any right or other
asset to any other person (except in each case for immaterial assets
acquired, leased, licensed or disposed of by ISCG in the ordinary course
of business and consistent with past practices), or waive or relinquish
any material right
- Incur any indebtedness for borrowed money (other than: (A) in connection
with the financing of ordinary trade payables; (B) pursuant to existing
credit facilities; (C) in connection with leasing activities in the
ordinary course of business; or (D) for tax planning purposes in the
ordinary course of business) or guarantee any indebtedness of any person
for borrowed money, or issue or sell any debt securities or warrants or
right to acquire debt securities of any of the acquired corporations or
guarantee any debt securities of others
- Except in the ordinary course of business and consistent with past
practices, establish, adopt or amend any employee benefit plan, pay any
bonus except in accordance with the terms of such existing plans or
pursuant to commitments made prior to the date of the merger agreement, or
make any profit-sharing or similar payment to, or increase the amount of
the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees
- Grant any severance or termination pay to any officer or employee except
payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date of the merger agreement and as previously disclosed in writing or
made available to FCG, or adopt any new severance plan
- Hire any new employee having an annual base salary in excess of $100,000
or as an officer of ISCG or engage any consultant or independent
contractor for period exceeding sixty days
- Change the status, title or responsibilities, including, without
limitation, termination or promotion, of any officer of ISCG or promote
any employee to an officer position in ISCG
- Transfer or license to any person or otherwise extend the term of any
agreement with respect to, amend or modify in any material adverse respect
any rights (including, without limitation, distribution rights) to the
proprietary assets of the acquired corporations, or enter into assignments
of future patent rights, other than non-exclusive licenses and
distribution rights in the ordinary course of business and consistent with
past practice
- Sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the
business of ISCG, except in the ordinary course of business consistent
with past practice or lend funds to any third party (other than
intracompany loans and travel advances in the ordinary course of business)
- Change any of its methods of accounting or accounting practices in any
respect
- Make any material election with respect to taxes
- Commence or settle any legal proceeding
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- Enter into any material transaction or take any other material action
outside the ordinary course of business or inconsistent with past
practices
- Enter into any agreement requiring the consent or approval of any third
party with respect to the merger
- Agree or commit to take any of the actions described above
During the pre-closing period, ISCG shall promptly notify FCG in writing of:
- The discovery by ISCG of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of the merger agreement and
that caused or constitutes a material inaccuracy in any representation or
warranty made by ISCG in the merger agreement
- Any event, condition, fact or circumstance that occurs, arises or exists
after the date of the merger agreement and that would cause or constitute
a material inaccuracy in any representation or warranty made by ISCG in
the merger agreement if (A) such representation or warranty had been made
as of the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of
the merger agreement
- Any event, condition, fact or circumstance hereafter arising which, if
existing or occurring at the date of the merger agreement, would have been
required to be set forth or described in the disclosure schedule that has
been prepared by ISCG in accordance with the requirements of Section 9.6
of the merger agreement and that has been delivered by ISCG to FCG on the
date of the merger agreement (the "ISCG disclosure schedule")
- Any material breach of any covenant or obligation of ISCG
- Any event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions to closing impossible or unlikely or
that has had or could reasonably be expected to have a material adverse
effect on the acquired corporations
If any event, condition, fact or circumstance that is required to be
disclosed by ISCG to FCG requires any change in the ISCG disclosure schedule, or
if any such event, condition, fact or circumstance would require such a change
assuming the ISCG disclosure schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then ISCG shall promptly deliver to FCG an update to the ISCG
disclosure schedule specifying such change. No such update shall be deemed to
supplement or amend ISCG disclosure schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by ISCG in the
merger agreement, or (ii) determining whether any of the conditions to FCG and
Foxtrot's obligation to close has been satisfied.
NON-SOLICITATION. Pursuant to the merger agreement, ISCG has agreed that it
will not, directly or indirectly, and will not authorize or permit any of the
other acquired corporations or any representative of the acquired corporations
to:
- Solicit, initiate, encourage or induce the making, submission or
announcement of any acquisition proposal or take any action that could be
reasonably expected to lead to an acquisition proposal
- Furnish any information regarding any of the acquired corporations to any
person in connection with or in response to an acquisition proposal
- Engage in discussions with any person with respect to any acquisition
proposal
- Approve, endorse or recommend any acquisition proposal
- Enter into any letter of intent or similar document or any contract
contemplating or otherwise relating to any acquisition transaction
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ISCG is not prevented, however, from furnishing nonpublic information
regarding the acquired corporations to, or entering into discussions with, any
person in response to a superior offer or engaging in discussions with respect
thereto if all of the following conditions are met:
- Neither ISCG nor any representative of the acquired corporations shall has
violated any of its obligations against non-solicitation
- The ISCG Board determines in good faith, based upon the advice of its
outside counsel, that such action is required in order for the ISCG Board
to comply with its fiduciary duties under applicable law
- Prior to furnishing any nonpublic information to, or entering discussions
with any person, ISCG gives FCG written notice of the identity of such
person and of ISCG's intention to furnish nonpublic information to, or
enter into discussions with, such person, and ISCG receives from such
person an executed confidentiality agreement containing customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such person by ISCG
- Prior to furnishing any such nonpublic information to, or entering into
discussions with, such person, ISCG furnishes such nonpublic information
to FCG (to the extent such nonpublic information has not been previously
furnished by ISCG to FCG). In addition to the foregoing, ISCG shall (A)
provide FCG with at least 24 hours prior notice of any meeting of ISCG's
Board at which ISCG's Board is reasonably expected to consider a superior
offer and (B) not recommend a superior offer to its shareholders for a
period of not less than the greater of two business days or 48 hours after
FCG's receipt of a copy of such superior offer
An "acquisition proposal" is any offer or proposal contemplating or
otherwise relating to any "acquisition transaction." An "acquisition
transaction" is any transaction or series of related transactions involving: (1)
any merger, consolidation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or other
similar transaction (A) in which any of the acquired corporations is a
constituent corporation, (B) in which any person or "group" (as defined in the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and the
rules thereunder) of persons directly or indirectly acquires ISCG or more than
50% of the company's business or directly or indirectly acquires beneficial or
record ownership of securities representing more than 20% of the outstanding
securities of any class of voting securities of any of the acquired corporation,
or (C) in which any of the acquired corporations issues securities representing
more than 20% of the outstanding securities of any class of voting securities of
ISCG; (2) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of ISCG; or (3) any liquidation or
dissolution of ISCG.
A "superior offer" is an unsolicited, bona fide written offer made by a
third party to purchase more than 50% of the outstanding shares of ISCG common
stock on terms that the ISCG Board determines, in its reasonable judgment, based
upon the written advice of its financial advisor, to be more favorable to ISCG's
shareholders than the terms of the merger, except that no such offer shall be
deemed to be a "superior offer" if any financing required to consummate the
transaction contemplated by such offer is not committed and is not likely to be
obtained by such third party on a timely basis.
MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS. Pursuant to the merger
agreement, ISCG will take all action necessary in accordance with applicable law
to convene and hold the ISCG special meeting to vote upon the approval of the
merger agreement and the merger. ISCG's obligation to call, give notice of,
convene and hold the ISCG special meeting will not be limited or otherwise
affected by the commencement, disclosure announcement or submission to ISCG of
an acquisition proposal or by the withdrawal, amendment or modification of the
recommendation of the ISCG Board with respect to the merger. Pursuant to the
merger agreement, FCG will take all action necessary to call, give notice of,
convene and hold the FCG special meeting to vote upon the issuance of FCG common
stock in the merger.
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Neither the Board of Directors of ISCG or FCG nor any committee thereof is
permitted to withdraw, amend or modify, or propose or resolve to withdraw, amend
or modify, in a manner adverse to the other party, its recommendations in favor
of the merger agreement and the merger in the case of ISCG, and the issuance of
FCG common stock in the case of FCG. However, notwithstanding the foregoing, the
ISCG Board will not be prevented from withdrawing, amending or modifying its
unanimous recommendation in favor of the merger if (1) a superior offer is made
to ISCG and is not withdrawn, (2) neither ISCG nor any of its representatives
has violated the covenants given by them concerning non-solicitation and (3) the
ISCG Board concludes in good faith, based upon the advice of its outside
counsel, that, in light of such superior offer, the withdrawal, amendment or
modification of such recommendation is required in order for the ISCG Board to
comply with its fiduciary obligations.
CONDITIONS RELATING TO STOCK OPTIONS AND WARRANTS. For a description of the
treatment of stock options and warrants to purchase ISCG common stock, see the
caption above entitled "--Stock Options and Warrants."
FORM S-8. Pursuant to the merger agreement, FCG has agreed to file a
registration statement on Form S-8 for the shares of FCG common stock issuable
with respect to assumed ISCG options as soon as reasonably practical, and in any
event within 60 days, after the effective time.
NOMINATION AND APPOINTMENT OF DIRECTORS. As soon as practicable after the
effective time, FCG shall use reasonable efforts to nominate and appoint (1) a
nominee designated by ISCG, to Class I of the FCG Board to serve until the
annual meeting of stockholders to be held in 1999, (2) Donald R. Caldwell, or
such other nominee designated by ISCG, to Class II of the FCG Board to serve
until the annual meeting of stockholders to be held in 2000, and (3) David S.
Lipson, or such other nominee designated by ISCG, to Class III of the FCG Board
to serve until the annual meeting of stockholders to be held in 2001.
ACCOUNTING TREATMENT; TAX FREE REORGANIZATION. Each of ISCG and FCG has
agreed (1) not to take any action during the pre-closing period that would
adversely affect the ability of FCG to account for the merger as a pooling of
interests, (2) to use all reasonable efforts to attempt to ensure that none of
its affiliates (as that term is used in Rule 145 promulgated under the
Securities Act) takes any action that could adversely affect the ability of FCG
to account for the merger as a pooling of interests and (3) not to take any
action either prior to or after the effective time that would reasonably be
expected to cause the merger to fail to qualify as a reorganization.
INDEMNIFICATION AND INSURANCE. Pursuant to the merger agreement, all rights
to indemnification existing in favor of the persons serving as directors or
officers of ISCG as of the date of the merger agreement for acts and omissions
occurring prior to the effective time, as provided in the ISCG bylaws and as
provided in any indemnification agreements between ISCG and said officers and
directors shall survive the merger and shall be observed by FCG and the
surviving corporation for a period of not less than six years from the effective
time. The merger agreement also provides that from the effective time until the
third anniversary of the date on which the merger becomes effective, the
surviving corporation shall maintain in effect, for the benefit of the persons
serving as directors and officers of ISCG as of the date of the merger agreement
with respect to acts or omissions occurring prior to the effective time, the
lesser of (1) the existing policy of directors' and officers' liability
insurance maintained by ISCG as of the date of the merger agreement (the
"existing policy") and (2) the amount of coverage purchased by 150% of the
amount of the last annual premium paid by ISCG prior to the date of the merger
agreement for the existing policy; provided, however, that the surviving
corporation may substitute for the existing policy a policy or policies of
comparable coverage.
CERTAIN OTHER COVENANTS. The merger agreement contains certain other
covenants including covenants relating to: (i) preparation and filing of the
registration statement; (ii) obtaining regulatory approvals; (iii) public
announcements; (iv) tax qualification and opinion back-up certificates; (v)
resignation of
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officers and directors of ISCG; (vi) listing of the FCG common stock to be
issued pursuant to the merger on Nasdaq; and (vii) FIRPTA.
TERMINATION
The merger agreement may be terminated prior to the effective time (whether
before or after approval of the merger agreement and the merger by the ISCG
shareholders):
- By mutual written consent duly authorized by the Boards of Directors of
the FCG and ISCG
- By either FCG or ISCG if the merger shall not have been consummated by
January 31, 1999 (unless the failure to consummate the merger is
substantially attributable to a failure to act on the part of the party
seeking to terminate the merger agreement to perform any material
obligation required to be performed by such party at or prior to the
effective time)
- By either FCG or ISCG if a court of competent jurisdiction or other
governmental body shall have issued a final and non-appealable order,
decree or ruling, or shall have taken any other action, having the effect
of permanently restraining, enjoining or otherwise prohibiting the merger
- By either FCG or ISCG if (A) the ISCG special meeting shall have been held
(either on the date for which such meeting was originally scheduled or
pursuant to any permissible adjournment or postponement) and (B) the
merger agreement and the merger shall not have been adopted and approved
at such meeting by the necessary vote of the ISCG shareholders (provided
that the right to terminate the merger agreement on this basis shall not
be available to ISCG where the failure to obtain shareholder approval
shall have been caused by the action or failure to act of ISCG and such
action or failure to act constitutes a material breach by ISCG of the
merger agreement)
- By FCG (at any time prior to the adoption and approval of the merger
agreement and the merger by the necessary vote of the ISCG shareholders)
if a triggering event shall have occurred
- By either FCG or ISCG if (A) the FCG special meeting shall have been held
(either on the date for which such meeting was originally scheduled or
pursuant to any permissible adjournment or postponement) and (B) issuance
of the FCG common stock in the merger shall not have been approved at such
meeting by the necessary vote of the FCG stockholders
- By FCG if any of ISCG's representations and warranties contained in the
merger agreement shall be or shall have become materially inaccurate, or
if any of ISCG's covenants contained in the merger agreement shall have
been breached in any material respect; provided, however, that if an
inaccuracy in ISCG's representations and warranties or a breach of a
covenant by ISCG is curable by ISCG and ISCG is continuing to exercise all
reasonable efforts to cure such inaccuracy or breach, then FCG may not
terminate the merger agreement on this basis on account of such inaccuracy
or breach
- By ISCG if any of FCG's representations and warranties contained in the
merger agreement shall be or shall have become materially inaccurate, or
if any of FCG's covenants contained in the merger agreement shall have
been breached in any material respect; provided, however, that if an
inaccuracy in FCG's representations and warranties or a breach of a
covenant by FCG is curable by FCG and FCG is continuing to exercise all
reasonable efforts to cure such inaccuracy or breach, then ISCG may not
terminate the merger agreement on this basis on account of such inaccuracy
or breach
A "triggering event" shall be deemed to have occurred if:
- The ISCG Board shall have failed to recommend, or shall for any reason
have withdrawn or shall have amended or modified in a manner adverse to
FCG its unanimous recommendation in favor of, the adoption and approval of
the merger agreement or the approval of the merger
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- ISCG shall have failed to include in this joint proxy statement/prospectus
the unanimous recommendation of the ISCG Board in favor of the adoption
and approval of the merger agreement and the approval of the merger
- The ISCG Board fails to reaffirm its unanimous recommendation in favor of
the adoption and approval of the merger agreement and the approval of the
merger within five business days after FCG requests in writing that such
recommendation be reaffirmed
- The ISCG Board shall have approved, endorsed or recommended any
acquisition proposal
- ISCG shall have entered into any letter of intent of similar document or
any contract relating to any acquisition proposal
- ISCG shall have failed to hold the ISCG special meeting as promptly as
practicable and in any event within 45 days after the registration
statement of which this joint proxy statement/prospectus forms a part is
declared effective under the Securities Act
- A tender or exchange offer relating to securities of ISCG shall have been
commenced and ISCG shall not have sent to its securityholders, within ten
business days after the commencement of such tender or exchange offer, a
statement disclosing that ISCG recommends rejection of such tender or
exchange offer
- An acquisition proposal is publicly announced, and ISCG (A) fails to issue
a press release announcing its opposition to such acquisition proposal
within five business days after such acquisition proposal is announced or
(B) otherwise fails to actively oppose such acquisition proposal
- ISCG breaches or is deemed to have breached any of its non-solicitation
obligations under the merger agreement
EXPENSES AND TERMINATION FEES
Pursuant to the merger agreement, all fees and expenses incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement shall be paid by the party incurring such expenses, whether or
not the merger is consummated; provided, however, that FCG and ISCG shall share
equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of this joint proxy statement/prospectus
and any amendments or supplements thereto.
If the merger agreement is terminated by FCG or ISCG pursuant to item (v)
under the caption "--Termination" above, then ISCG shall pay to FCG, in cash, a
nonrefundable fee equal to $5,000,000 (the "termination fee").
If the merger agreement is terminated by ISCG or FCG pursuant to item (iv)
under the caption "--Termination" above and an acquisition transaction is
consummated or a proposed acquisition transaction is publicly announced at
anytime prior to the first anniversary of the date of the merger agreement, ISCG
shall pay to FCG the termination fee contemporaneously with the earlier of the
consummation of such acquisition transaction or such announcement regarding a
proposed acquisition agreement.
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INFORMATION RELATING TO FCG
FCG BUSINESS
OVERVIEW
FCG provides operations improvement and information management services to
payors, providers, government agencies and other healthcare organizations in
North America and Europe. FCG's services are designed to increase its clients'
operations effectiveness in order to reduce cost, improve customer service and
enhance the quality of patient care. Operations effectiveness offers a means to
improve the financial, administrative and clinical processes within a client
organization. FCG's services address the increasing need for healthcare-specific
information technology expertise to objectively evaluate, select, implement and
manage an optimal set of information systems, networks and applications. FCG has
over 560 consultants who possess extensive expertise in key healthcare
financial, administrative and clinical processes, information technologies and
applications. FCG provides this expertise to clients by assembling
multi-disciplinary teams which provide comprehensive services across its four
principal services: consulting; software implementation; network and application
integration; and co-management services. FCG's services and consultants are
supported by internal research and a centralized information system which
provides real-time access to current industry and technology information and
project methodologies, experiences, models and tools. FCG believes that its
success is attributable to its strong relationships with industry leading
clients, the healthcare, technology and consulting expertise of FCG's
consultants, and the depth and breadth of its consulting services.
SERVICES
FCG's four principal services consist of consulting, software
implementation, network and application integration and co-management services.
FCG typically is engaged on an assignment-by-assignment basis and assembles
client teams from one or more services to match the expertise and service
offerings with the overall objectives required by each client and engagement.
Many client engagements involve multiple assignments. FCG may assemble several
client teams to serve the needs of a single client. FCG provides its services at
the client site to senior-level management and other personnel within the client
organization.
CONSULTING SERVICES
FCG's consulting services primarily consist of strategic planning,
operations effectiveness, procurement and contracting, and general consulting.
FCG's strategic planning services involve the development of strategic plans
for healthcare organizations encompassing one or more of the following areas:
the decision to purchase and implement large-scale clinical, patient information
or financial applications; the installation and integration of comprehensive
communications, network and other information technology systems; systems and
information architectures; and organizational and governance structures for
information technology departments. FCG believes that its strategic planning
services will continue to be the core of FCG's business as it provides a
foundation for the introduction of FCG's other services to clients and allows
FCG to develop multi-level relationships with its clients. FCG typically
provides its strategic planning services on a fixed-fee basis.
The goal of each strategic plan is to enable the client to maximize the
value of its information technology investments and improve operations
effectiveness. To ensure that each plan addresses the strategic goals,
priorities and needs of the client, FCG's strategic planning process involves
the participation of several senior-level management personnel, clinicians,
physicians and other user groups within the client organization. FCG collects
information regarding the client's business strategies, information technology
applications and systems, the capabilities of the client's in-house technical
staff and the operational needs of user groups. FCG then identifies several
information and infrastructure needs which must be addressed in order to
implement the client's business strategies. FCG also develops a series of
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prioritized recommendations or assignments to be completed by the client during
the next three to five years. These recommendations may include such items as
the installation of packaged software applications or communication networks, or
the use of clinical repositories or outcomes systems. The strategic plan
delivered to the client describes the recommendations in detail and typically
includes specific information technology alternatives, internal staffing
recommendations and implementation schedules and budgets. FCG also assists the
client in building consensus with respect to a particular strategic objective or
assignment.
FCG's operations effectiveness services enhance its clients' performance
through financial, administrative and clinical process improvement. FCG believes
that information technology is the most important element in implementing a
successful business process redesign. Through its historic information
technology expertise and its emerging enterprise-level operations effectiveness
services, FCG provides the full set of skills required to address the increased
pressures facing its clients to reduce cost, improve customer service and
improve and measure quality of patient care. These services are closely
integrated with FCG's implementation and integration services to ensure that
clients receive maximum benefit from new systems installations.
FCG provides information technology procurement and contracting services
that assist its clients with rapidly identifying, selecting and contracting for
the optimal information technology applications, networks and systems. FCG's
procurement and contracting consultants operate independently of hardware and
software vendors and accordingly provide objective assessments and
recommendations with respect to information technology alternatives and pricing.
Using these services, a client can efficiently identify and select an
appropriate vendor-based alternative, balance competing interests within the
client organization and, in many instances, negotiate price discounts and other
terms which may be difficult to achieve without FCG's involvement. FCG does not
purchase and resell hardware or software to its clients. FCG's procurement and
contracting services support FCG's strategic planning, implementation and
integration services by assisting clients in selecting and contracting with
vendors who will provide the applications, networks or systems to be installed
at the client site. FCG's procurement and contracting services are often
provided as part of a client's larger information technology, networking or
operational initiatives which may involve the provision of FCG's other services.
FCG typically provides its procurement and contracting services on a per-hour
basis.
FCG's consultants typically assess the technical capabilities,
specifications and design philosophy of existing products and assist clients in
all stages of procurement such as system requirement assessment and definition,
procurement planning and management, requests for proposals, vendor evaluation
and selection and contract negotiation. FCG's procurement and contracting
services include such areas as clinical, patient, financial and managed care
systems, claims processing, outcomes systems, local area networks, wide area
networks, voice and video systems, electronic messaging, call centers, Internet
and web technologies and telemedicine.
FCG also provides general information management consulting services to its
existing clients on an as-needed basis in connection with industry trends and
developments, product introductions or changing regulatory requirements. FCG's
general consulting services typically are provided directly to senior-level
client personnel and involve small-scale, short duration assignments that are
important in maintaining strong client relationships.
SOFTWARE IMPLEMENTATION SERVICES
FCG provides implementation services for packaged software products utilized
by healthcare organizations. These services include project management,
installation, interface programming, testing and training services. In providing
these services, FCG draws on proven methodologies and its extensive expertise in
healthcare processes and information technology to ensure that each
implementation is completed efficiently with minimal disruption to clients'
operations. FCG's implementation specialists
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emphasize administrative and clinical process improvement and user training,
including technical support staff training, in each engagement. FCG typically
provides its implementation services on a fixed-fee per month or per-hour basis.
Through its implementation services, FCG believes that it enables its
clients to maximize the value of each application investment. FCG typically
assembles a dedicated, on-site, multi-disciplinary team of consultants to
perform each implementation engagement. This team determines implementation
schedules and budgets with the client. FCG's implementation specialists may also
provide project management, quality assurance or an interface mapping and
programming function through which FCG efficiently installs the application and
ensures that, once installed, the application will communicate with other
applications and networks used by the client. This interface mapping and
programming function often requires that FCG develop a considerable amount of
additional software code. Training of client personnel involves all aspects of
the complete system. FCG has extensive expertise in implementing applications
from vendors such as Cerner Corporation, Erisco Systems, HBO & Company, IDX
Systems Corp., Medic Computer Systems, Inc., MedicaLogic, Inc., Meditech, Inc.,
PHAMIS Inc., PeopleSoft, Inc. and Shared Medical Systems Corporation. FCG
believes that its expertise with and independence from application vendors
provides clients with an objective, reliable resource to implement these
applications.
NETWORK AND APPLICATION INTEGRATION SERVICES
FCG designs and develops comprehensive system architectures,
infrastructures, interfaces, databases, applications and networks to address the
need for information integration and dissemination throughout a healthcare
organization. FCG's network and application integration services emphasize
scalable architectures and systems that can accommodate an increasing array of
functions and features to address a client's emerging information needs. FCG
often identifies specific technology and service alternatives for each clinical
and operational site within the client organization in the course of each
integration plan and engagement. FCG's integration services typically involve
FCG's procurement and contracting and implementation services in order to assist
the client in acquiring the needed hardware and software and, in some cases, to
install the acquired software as part of the integration plan. FCG typically
provides its network and application integration services on a fixed fee,
per-hour, or fixed-fee per month basis as negotiated in individual client
contracts.
FCG's network and application integration services are typically provided to
consolidated healthcare organizations, including integrated delivery networks
("IDNs") and health plans. Application integration assignments include the
development and implementation of master patient indices, computer-based patient
record systems, managed care and medical management systems, physician practice
management systems, clinical decision support and data repositories, and data
warehouses. Network integration assignments include the development of
information, technology and communication architectures and Internet, intranet
and desktop messaging systems. Network and application integration engagements
involve planning, designing and managing the installation and implementation of
hardware and software technologies. These engagements also involve comprehensive
site visits and user interviews, application programming and training across
multiple levels of a client organization. Often FCG prepares a detailed mapping
of physical, technical and operational elements of the integrated applications
or networks.
CO-MANAGEMENT SERVICES
FCG provides interim staffing for healthcare organizations primarily for
senior-level information technology positions such as Chief Information
Officers, Directors of Information Systems and information technology department
managers. FCG also provides information technology department outsourcing on a
temporary or permanent basis as determined by the client. FCG's co-management
services emphasize the importance of existing management and other information
technology personnel. Accordingly, FCG's personnel work with existing
information technology staff to address strategic business, information and
technology needs. FCG typically provides its co-management services on a
fixed-fee per month basis.
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SERVICE DELIVERY
FCG's services are provided by over 560 consultants who collectively have
expertise in key healthcare financial, administrative and clinical processes,
information technologies and applications. FCG believes that its healthcare
industry focus, information technology expertise, experienced consultants, and
research and practice support enable its clients to reduce cost, improve
customer service and enhance the quality of patient care.
To ensure client satisfaction, FCG typically assigns a Client Service
Executive to each client team. The Client Service Executive's primary
responsibility is to establish and maintain long-term relationships with
clients. The Client Service Executive regularly communicates with the client to
ensure client satisfaction and is also responsible for billing decisions on each
assignment. For client engagements with multiple independent assignments, FCG
assigns a Delivery Service Executive to each assignment. A Delivery Service
Executive has specific technology, process or service line expertise and is
responsible for supervising the daily functions of the client team and for
ensuring that the team's progress is consistent with the client's objectives and
schedule. FCG measures every client's satisfaction through a client satisfaction
survey completed at six month intervals during the engagement and again at the
conclusion of each assignment.
FCG employs consultants whose individual expertise combines healthcare,
information technology and consulting skills. FCG's consultants have developed
healthcare-specific expertise in key areas such as financial, administrative and
clinical processes, care management, clinical decision support, health plan
operations, medical and utilization management, outcomes and performance
management, physician practice management, ambulatory care and privacy and
confidentiality protection. FCG's consultants also have expertise in
implementing, integrating and developing a wide range of information technology
and management systems. These systems include packaged software applications,
client/server and object-oriented computing technologies, data repositories and
data warehousing, electronic commerce and electronic data imaging, networking,
web technologies, telemedicine, document management, security and disaster
recovery. FCG has expanded its recruiting efforts to ensure that it continues to
attract and retain the breadth and depth of skills and expertise necessary to
compete successfully in the healthcare consulting industry. FCG recruits and
retains its consultants by offering a combination of a growing healthcare
consulting practice, industry leading clients, intellectually challenging client
engagements and professional interaction and growth.
RESEARCH AND PRACTICE SUPPORT
FCG's services and consultants are supported by internal research, training
and a centralized information system which provides real-time access to current
industry and technology information and project methodologies, experiences,
models and tools. FCG's principal research and practice support initiatives
include the Emerging Practices Group, Professional Development Programs,
Scottsdale Institute, KITE and Practice Guilds.
EMERGING PRACTICES GROUP. The Emerging Practices Group performs industry
research and collects, packages and distributes knowledge regarding emerging
trends in the healthcare industry. Examples of topics that the Emerging
Practices Group has researched are information management practices in emerging
IDNs, process design and redesign for cross continuum care management, impact of
government legislation, physician integration, Internet and intranet in
healthcare, and use of hand-held computing devices. FCG documents research
findings, conducts internal and client workshops on these topics, and makes the
research available for use in its client engagements.
PROFESSIONAL DEVELOPMENT AND INCENTIVE PROGRAMS. FCG has instituted several
professional development and incentive programs to encourage employee retention
and to provide support for the professional growth of all employees. FCG
provides training to its employees through an annual four-day educational
retreat, as well as ongoing classroom education, computer-based training,
distance learning and external
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seminars. FCG has programs to educate all new employees about the history,
culture and practices of FCG. All employees are required to establish an annual
professional development plan for knowledge acquisition, skill development,
leadership assessment and training, project management and relationship
management. In addition to such programs, FCG encourages equity participation by
all employees. All vice presidents must purchase a multiple of their annual
salary in FCG common stock through the 1994 Restricted Stock Plan, as amended
(the "1994 Restricted Stock Plan"). See "Management--1994 Restricted Stock Plan
and Agreements." All other employees are eligible to participate in the
Associate 401(k) and Stock Ownership Plan (the "ASOP"), which matches 50% of
employee contributions with a contribution of FCG common stock by FCG. See
"Management- Associate 401(k) and Stock Ownership Plan."
SCOTTSDALE INSTITUTE. FCG's Scottsdale Institute is a membership
organization composed of more than 25 healthcare organizations across the United
States, typically represented by their Chief Executive Officers, Chief Operating
Officers or Chief Information Officers. Membership is by invitation only. The
Scottsdale Institute provides its members with a cost-sharing vehicle for
information exchange, problem-solving and learning related to improving
operations effectiveness through information management. The Emerging Practices
Group performs guided research projects in collaboration with groups of three to
five Scottsdale Institute member organizations that share common characteristics
and information management needs. The Emerging Practices Group delivers research
reports and tools to member organizations in areas such as management
techniques, organizational models, benchmarking and best practices,
methodologies, plans, and vendor information. This research enables FCG to
develop practical, applied solutions to problems of leading healthcare
organizations and to anticipate service needs of the broader market.
KNOWLEDGE AND INFORMATION TECHNOLOGY EXCHANGE. FCG's personnel have access
to FCG's internal research and to current industry and technology information
and project methodologies, experiences, models and tools through KITE. KITE
currently houses over 6,000 documents that include industry information, service
methodologies and tools, benchmarks and best practice information and other
documentation to support FCG's services and consultants. KITE is updated on a
continuous basis with information resulting from each engagement, by the
Emerging Practices Group, and by the Practice Guilds. FCG believes that this
resource allows its consultants to utilize engagement-specific information which
improves the quality and content of services delivered to clients while reducing
cost of delivery.
CLIENTS
In 1997, FCG provided services to over 360 clients consisting of providers,
payors and other healthcare organizations in North America and Europe. During
the first six months of 1998, FCG provided services to over 320 clients. FCG's
clients include leading IDNs, health plans, acute care centers, academic medical
centers, physician organization, governmental agencies and other organizations.
SALES AND MARKETING
FCG generates a substantial portion of its revenue from existing clients and
client referrals and markets its services primarily through its vice presidents.
FCG's vice presidents develop strong relationships with senior-level information
management and other decision-making personnel at leading healthcare
organizations, and are therefore positioned to market additional strategic and
information technology consulting services to FCG's existing clients. FCG
maintains these relationships by successfully completing assignments and meeting
clients' expectations. In particular, FCG believes that by successfully
completing strategic plans for new and existing clients, its vice presidents
will have significant opportunities to offer implementation and integration
services to these clients. FCG has demonstrated that this strategy leads to
expanded opportunities with its clients and referrals to new clients. In
providing its services, FCG attains an in-depth understanding of its client's
processes and internal information technology and business strategies. Through
this understanding, FCG plans to provide operations effectiveness services to a
greater portion of its client base. Operations effectiveness services involve
assessing, designing and improving
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financial, administrative and clinical process. FCG's vice presidents and
practice directors allocate a significant portion of their time to business
development and related activities. FCG also employs six specialists who are
responsible for new business development with targeted clients.
FCG is frequently engaged to provide multiple services throughout several
phases of a client's information technology system lifecycle, including
planning, procurement and contracting, implementation, integration and
management. As a result of this involvement, FCG's personnel often develop an
in-depth understanding of the client's systems and capabilities and develop
strong relationships with personnel within the client organization. These
relationships provide FCG with significant opportunities to undertake additional
assignments for each client.
In addition to generating assignments from existing clients, FCG attracts
new clients through its targeted marketing activities. FCG's marketing
activities include public speaking, publishing press releases and trade show
participation. FCG also maintains research reports and "white papers" on its web
site, along with other company and industry information. FCG's marketing staff
produces a number of sales support tools including presentations, brochures,
article reprints, descriptions of FCG's services and case studies.
INTERNATIONAL OPERATIONS
FCG has provided its consulting, implementation and integration services to
clients in Canada, Germany, France, Spain, Ireland, Mexico and the United
Kingdom, and maintains offices in Dublin, Ireland and London, Macclesfield and
Belfast, United Kingdom. On January 13, 1998, FCG completed the acquisition of a
small healthcare consulting firm in the United Kingdom, Greenhalgh and Company
Limited. On June 1, 1998, FCG completed the acquisition of all the assets and
hired all the employees of an application development firm, the Windrose Group,
based in Honduras. FCG believes that select international acquisitions will
enhance its ability to effectively serve clients in targeted international
markets.
FCG intends to expand its international consulting services, which will
require a significant amount of management's attention and FCG's human and
financial resources. FCG may establish additional international operations and
hire additional personnel. There can be no assurance that FCG will be able to
successfully recruit and retain the necessary number of highly skilled
consultants in each country in which it intends to conduct its operations. Any
inability to recruit and retain such employees could impair FCG's ability to
expand internationally and may have a material adverse effect on FCG's business,
financial condition and results of operations. In addition, there can be no
assurance that FCG will be able to establish international market demand for its
services. FCG's international business may be subject to a variety of risks,
including the difficulty of tailoring its services to individual countries'
healthcare market needs, currency fluctuations, potentially longer payment
cycles, potential difficulties in collecting international accounts receivable,
the enforcement of contractual obligations and intellectual property rights,
potentially adverse tax consequences, increased costs associated with
maintaining international marketing efforts, costs of localizing services in
international markets, adverse changes in regulatory requirements and possible
economic downturns outside of the United States. There can be no assurance that
such factors will not have a material adverse effect on FCG's future
international operations and, consequently, on its business, financial condition
and results of operations.
EMPLOYEES
As of September 30, 1998, FCG had 774 employees, 56 of whom were vice
presidents. FCG's vice presidents are stockholders of FCG and are responsible
for new business development, client relationships, company leadership, service
delivery and the long-term strategy of FCG. FCG believes that its relationship
with its employees is good.
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FACILITIES
FCG's headquarters is located in approximately 18,000 square feet of leased
office space in Long Beach, California. FCG also leases an aggregate of
approximately 87,000 square feet of office space in the following cities:
Oakland, California; Morristown, New Jersey; Bethesda, Beltsville and Baltimore,
Maryland; New York City, New York; Tampa, Florida; Detroit and Okemos, Michigan;
Houston and Dallas, Texas; Boston, Massachusetts; Pittsburgh, Pennsylvania;
Chicago, Illinois; Atlanta, Georgia; Seattle, Washington; Denver, Colorado;
Dublin, Ireland and London, Macclesfield and Belfast, United Kingdom; and
Tegucigalpa, Honduras. FCG is considering expansion of its headquarters leased
space in the Long Beach headquarters to accommodate future growth.
LEGAL PROCEEDINGS
From time to time, FCG may be involved in claims or litigation that arise in
the normal course of business. As of the date of this prospectus, FCG is not a
party to any legal proceedings which, if decided adversely to FCG, would have a
material adverse effect on FCG's business, financial condition or results of
operations.
FCG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the consolidated financial statements
and notes thereto contained elsewhere in this joint proxy statement/prospectus.
Except for the historical information contained herein, the discussion in this
joint proxy statement/prospectus contains certain forward-looking statements
that involve risks and uncertainties, such as statements of FCG's plans,
objectives, expectations and intentions. The cautionary statements made in this
joint proxy statement/prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this prospectus.
FCG's actual results could differ materially from those discussed here. Factors
that could cause or contribute to such differences include those discussed in
this section and the sections entitled "Risk Factors" and "FCG Business" as well
as those discussed elsewhere in this joint proxy statement/prospectus.
OVERVIEW
FCG provides services to payors, providers and other healthcare
organizations in North America and Europe. FCG generates substantially all of
its revenue from fees for professional services. FCG typically bills for its
services on an hourly, fixed-fee or monthly fixed-fee basis as specified by the
agreement with a particular client. FCG establishes standard hourly rates for
each level of consultant based on several factors including industry and
assignment-related experience, technical expertise, skills and knowledge. For
services billed on an hourly basis, fees are determined by multiplying the
amount of time expended on each assignment by the hourly rate for the
consultant(s) assigned to the engagement. Fixed fees are established on a
per-assignment or monthly basis and are based on several factors such as the
size, scope, complexity and duration of an assignment and the number of
consultants required to complete the assignment. Actual hourly or fixed fees for
an assignment may vary from the standard or historical rates charged by FCG. For
services billed on an hourly basis, FCG recognizes revenue as services are
performed. For services billed on a fixed fee basis, FCG recognizes revenue
using the percentage of completion method based on the amount of time completed
on each assignment versus the projected number of hours required to complete
such assignment. Revenue is recorded as incurred at assignment rates net of
unplanned adjustments for specific engagements. Unplanned adjustments to revenue
are booked at the time they are known. FCG may obtain payment in advance of
providing services. These advances are recorded as deferred revenue and
reflected as a liability on FCG's balance sheet.
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Cost of services primarily consists of the salaries, bonuses and related
benefits of consultants, subcontractor expenses, and the costs of FCG's
supplemental executive retirement plan. General and administrative expenses
primarily consist of the costs attributable to: office space occupancy;
investments in FCG's information systems, research and practice support and
quality initiatives; salaries and expenses for executive management, financial
accounting and administrative personnel; recruiting fees and professional
development; and marketing, legal and other professional services.
In connection with the ASOP and certain non-qualified stock options granted
to FCG's vice presidents, FCG recognizes a compensation expense on its
consolidated statement of operations. The recurring portion of FCG's
compensation expense relating to stock issuances and the amortization of
deferred compensation is reflected in FCG's consolidated statements of
operations as general and administrative expenses or cost of services based on
the function of the employee to whom the charge relates. Since 1988, FCG has
granted all stock options at fair market value. In connection with the ASOP, FCG
matches employee 401(k) contributions with shares of FCG common stock based on
the fair market value of the shares.
FCG's most significant expenses are its human resource and related salary
and benefit expenses. As of September 30, 1998, approximately 80% of FCG's 774
employees are consultants, and the salaries and benefits of such consultants are
recognized in FCG's cost of services. Non-billable employee salaries and
benefits are recognized as a component of general and administrative expenses.
FCG's cost of services as a percentage of revenue is directly related to its
consultant utilization, which is the ratio of total billable hours to available
hours in a given month. FCG manages consultant utilization by monitoring
assignment requirements and timetables, available and required skills, and
available consultant hours per week and per month. The number of consultants
staffed on an assignment will vary according to the size, complexity, duration
and demands of the assignment. Assignment terminations, completions and
scheduling delays may result in periods in which consultants are not optimally
utilized. An unanticipated termination of a significant assignment or an overall
lengthening of the sales cycle could result in a higher than expected number of
unassigned consultants and could cause FCG to experience lower margins. In
addition, the opening of new offices, expansion into new markets, and the hiring
of consultants in advance of client assignments have resulted and may continue
to result in periods of lower consultant utilization.
FCG's effective tax rate has varied from period to period due to
non-deductible losses from FCG's foreign operations and differences between book
and tax deductions associated with certain non-deductible operating expenses,
including certain compensation expenses related to the ASOP.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUE. FCG's net revenue increased to $94.6 million, or 42.7%, for
the nine months ended September 30, 1998 from $66.3 million for the nine months
ended September 30, 1997. This increase was primarily attributable to an
increase in revenue from FCG's implementation, operations effectiveness, and
integration services.
COST OF SERVICES. Cost of services increased to $51.8 million, or 33.5%,
for the nine months ended September 30, 1998 from $38.8 million for the nine
months ended September 30, 1997. The increase was primarily attributable to an
increase in the number of consultants. Cost of services as a percentage of
revenue decreased to 54.8% for the nine months ended September 30, 1998 from
58.6% for the nine months ended September 30, 1997. This decrease was primarily
attributable to increased realization of standard fees and a higher proportion
of billable associates to total associates during the nine months ended
September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $32.8 million, or 43.9%, for the nine months ended September 30,
1998 from $22.8 million for the nine months ended September 30, 1997. General
and administrative expenses as a percentage of revenue increased to 34.7% for
the nine months ended September 30, 1998 from 34.4% for the nine months ended
September 30,
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1997. This increase was primarily attributable to an increase in FCG's hiring,
including increased hiring from its expansion into Europe.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses
related to stock issuances decreased to zero for the nine months ended September
30, 1998 from $1.9 million for the nine months ended September 30, 1997. This
decrease was attributable to the discontinuance of certain compensatory stock
and option issuances.
INTEREST INCOME, NET. Interest income, net of interest expense, increased
to $1.3 for the nine months ended September 30, 1998 from $59,000 net expense
for the nine months ended September 30, 1997. Interest income net of interest
expense as a percentage of revenue increased to 1.4% for the nine months ended
September 30, 1998 from 0.1% for the nine months ended September 30, 1997. This
increase was primarily attributable to the investment of net proceeds from FCG's
initial public offering in February 1998.
INCOME TAXES. Income taxes as a percentage of income before income taxes
decreased to 48.0% for the nine months ended September 30, 1998 from 55.4% for
the nine months ended September 30, 1997 due to a reduction in certain
non-deductible compensation related expenses partly offset by the existence of
non-deductible foreign losses in the current period.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUE. FCG's net revenue increased to $91.6 million, or 39.1%, for
the year ended December 31, 1997 from $65.8 million for the year ended December
31, 1996. This increase was primarily attributable to an increase in revenue
from FCG's implementation and integration services and an increase in consultant
utilization.
COST OF SERVICES. Cost of services increased to $53.5 million, or 31.5%,
for the year ended December 31, 1997 from $40.7 million for the year ended
December 31, 1996. The increase was primarily attributable to an increase in the
number of consultants. Cost of services as a percentage of revenue decreased to
58.5% for the year ended December 31, 1997 from 61.9% for the year ended
December 31, 1996. This decrease was primarily attributable to increased
utilization rates for FCG's consultants during the year ended December 31, 1997.
FCG believes that the increase in utilization rates was primarily attributable
to the discontinuation of certain incentive programs and the resulting
reallocation of billable resources to projects across geographic regions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $31.7 million, or 33.8%, for the year ended December 31, 1997 from
$23.7 million for the year ended December 31, 1996. This increase was primarily
attributable to FCG's relocation to a larger corporate facility, expanded
marketing initiatives, expansion into the United Kingdom, and continued efforts
to enhance and improve FCG's internal infrastructure including upgrades to its
management information systems. General and administrative expenses as a
percentage of revenue decreased to 34.6% for the year ended December 31, 1997
from 36.0% for the year ended December 31, 1996.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses
related to stock issuances increased to $6.1 million for the year ended December
31, 1997 from $588,000 for the year ended December 31, 1996. This increase was
primarily attributable to a $4.2 million non-cash charge associated with an
allocation of 568,000 shares of FCG common stock to employees pursuant to a
one-time modification of the ASOP and a non-recurring compensation expense of
$1.2 million resulting from the difference between estimated average fair market
value and cost of the allocated ASOP shares.
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COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUE. FCG's net revenue increased to $65.8 million, or 37.9%, for
the year ended December 31, 1996 from $47.7 million for the year ended December
31, 1995. This increase was primarily attributable to an increase in revenue
from implementation and integration services and the expansion of such services
to IDNs and health plans.
COST OF SERVICES. Cost of services increased to $40.7 million, or 53.5%,
for the year ended December 31, 1996 from $26.5 million for the year ended
December 31, 1995. This increase was primarily attributable to an increase in
the number of consultants. Cost of services as a percentage of revenue increased
to 61.9% for the year ended December 31, 1996 from 55.5% for the year ended
December 31, 1995. This increase was primarily attributable to a significant
decrease in utilization rates for consultants located in the central United
States. FCG believes that this decrease in utilization was attributable to
certain incentive programs which have since been discontinued.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $23.7 million, or 35.1%, for the year ended December 31, 1996 from
$17.5 million for the year ended December 31, 1995. This increase was primarily
attributable to an increase in the number of non-billable employees and expenses
relating to the improvement of FCG's infrastructure. General and administrative
expenses as a percentage of revenue decreased to 36.0% for the year ended
December 31, 1996 from 36.7% for the year ended December 31, 1995.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expense
related to stock issuances increased to $588,000, or 52.7%, for the year ended
December 31, 1996 from $385,000 for the year ended December 31, 1995. This
increase was primarily attributable to stock options granted below fair market
value in 1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
NET REVENUE. FCG's net revenue increased to $47.7 million, or 58.9%, for
the year ended December 31, 1995 from $30.0 million for the year ended December
31, 1994. This increase was primarily attributable to an increase in the number
of new assignments and consultants and an increase in FCG's focus on working
with IDNs and health plans.
COST OF SERVICES. Cost of services increased to $26.5 million, or 57.2%,
for the year ended December 31, 1995 from $16.9 million for the year ended
December 31, 1994. The increase was primarily attributable to an increase in the
number of consultants. Cost of services as a percentage of revenue remained
relatively constant at 55.5% for the year ended December 31, 1995 from 56.1% for
the year ended December 31, 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $17.5 million, or 77.5%, for the year ended December 31, 1995 from
$9.9 million for the year ended December 31, 1994. This increase was primarily
attributable to an increase in the number of non-billable employees, increased
recruiting and training expenses, continued geographical expansion and
investments in internal information technology systems. General and
administrative expenses as a percentage of revenue increased to 36.7% for the
year ended December 31, 1995 from 32.8% for the year ended December 31, 1994.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses
related to stock issuances was $385,000 for the year ended December 31, 1995.
There was no corresponding expense in the prior period. This expense was
primarily attributable to stock options granted below fair market value in 1995.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, the Company generated cash
flow from operations of $7.5 million. During the nine months ended September 30,
1998, the Company used cash flow of approximately $3.4 million to purchase
property and equipment, including computer and related equipment and office
furniture. Depreciation and amortization expense for the nine months ended
September 30, 1998 was approximately $2.3 million. During the nine months ended
September 30, 1998, the Company generated cash flow of $45.0 million from
financing activities. At September 30, 1998, the Company had working capital of
$31.6 million and long term investments of $25.8 million. At December 31, 1997,
the Company had working capital of $9.3 million. The primary reason for the
increase was the completion of the Company's initial public offering in February
1998.
The Company has a revolving line of credit which allows the Company to
borrow up to $6.0 million at an interest rate of the prevailing prime rate. The
revolving line of credit expires on December 31, 1998. There was no outstanding
balance under the line of credit at September 30, 1998. The Company has two term
loan facilities ("Term Loan A" and "Term Loan B"). Term Loan A is a $305,000
facility under which approximately $241,000 was outstanding as of September 30,
1998. Term Loan A expires on July 1, 2003. Term Loan B is a $4.0 million
facility under which approximately $174,000 was outstanding as of September 30,
1998. Term Loan B expires on December 4, 2001. Term Loan A and Term Loan B bear
interest at a rate per annum equal to the prevailing prime rate plus 0.5%. All
borrowings under the Company's credit facilities are secured by the Company's
accounts receivable and other rights to payment, general intangibles and
equipment. The line of credit agreement provides that the Company must satisfy
certain covenants and restrictions.
YEAR 2000 COMPLIANCE
Many existing computer programs and systems, including those used by FCG's
clients, use only two digits to identify the year in the date field. These
programs may be unable to process date/time information between the twentieth
and twenty-first centuries. This inability could cause the disruption or failure
of such computer systems (the "Y2K Problem"). Solving the Y2K Problem will
require a large amount of time and resources. FCG's clients may have to
reallocate a significant portion of their budgets away from FCG's services to
address this problem. Such reallocations would have a material adverse effect on
FCG's business, financial condition and results of operations. Additionally,
FCG's current time and billing systems for its internal use are not Y2K
compliant. FCG has purchased an upgrade to these systems that will render them
Y2K compliant and expects to complete deployment of this upgrade in the first
quarter of 1999. There can be no assurance that such deployment will begin as
planned or, if begun, will be completed in a timely and cost-effective manner.
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<PAGE>
FCG MANAGEMENT AFTER THE MERGER
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of FCG (including directors to be
appointed after consummation of the merger who have already been designated by
ISCG) and their ages as of October 5, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
James A. Reep.................... 46 Chairman of the Board
Luther J. Nussbaum............... 51 Chief Executive Officer, Executive Vice President, Worldwide
Practice Support and Director
Steven Heck...................... 50 President, Executive Vice President, Practice and Director
Thomas A. Reep................... 42 Vice President, Finance and Chief Financial Officer
Richard N. Kramer................ 44 Vice President and Managing Director, Healthcare Delivery
Roy A. Ziegler................... 35 Vice President and Managing Director, Health Plans
Don M. Tompkins.................. 54 Vice President and Managing Director, Implementation Services
Michael R. Gorsage............... 46 Vice President and Managing Director, Network Integration
Services
Frank I. Mueller................. 49 Vice President and Managing Director, Europe
Erica L. Drazen.................. 51 Vice President and Managing Director, Emerging Practices
Roy W. Walters................... 51 Vice President and Managing Director, Quality Improvement
Paula K. Cowan................... 55 Vice President, Human Resources
Stanley R. Nelson(1)(2).......... 71 Director
Steven Lazarus(1)................ 66 Director
Stephen E. Olson(1)(2)........... 56 Director
Scott S. Parker.................. 62 Director
Jack O. Vance(2)................. 73 Director
David S. Lipson(3)............... 54 Director
Donald R. Caldwell(4)............ 52 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Under the terms of the merger agreement, as soon as practicable after the
effective time, FCG shall use reasonable efforts to nominate and appoint Mr.
Lipson, or such other nominee designated by ISCG, to Class III of the FCG
Board to serve until the annual meeting of stockholders to be held in 2001.
(4) Under the terms of the merger agreement, as soon as practicable after the
closing date, FCG shall use reasonable efforts to nominate and appoint Mr.
Caldwell, or such other nominee designated by ISCG, to Class II of the FCG
Board to serve until the annual meeting of stockholders to be held in 2000.
In addition to the directors listed above, as soon as practicable after the
closing date, FCG is obligated under the terms of the merger agreement to use
reasonable efforts to appoint a nominee designated by ISCG to Class I of the FCG
Board to serve until the annual meeting of stockholders to be held in 1999.
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<PAGE>
JAMES A. REEP co-founded FCG in 1980 and has served as Chairman of the FCG
Board since December 1987. Mr. Reep served as Chief Executive Officer and
President from March 1991 to October 1998. Mr. Reep is a member of the Board of
Directors of New Era of Networks, Inc., which develops packaged solutions for
application integration. Mr. Reep also serves as a director of First Consulting
Group (UK) Ltd., First Consulting Group (Ireland) Ltd., and the Scottsdale
Institute, subsidiaries of FCG, and several non-profit organizations. From 1977
to 1980, Mr. Reep was a consultant at Arthur Andersen. Mr. Reep is the brother
of Thomas A. Reep, Chief Financial Officer of FCG. Mr. Reep received a B.A. from
California State University, Long Beach and an M.B.A. from the University of
Chicago.
DAVID S. LIPSON co-founded ISCG and has been Chairman of the ISCG Board of
Directors and ISCG's Chief Executive Officer, President and Treasurer since its
inception. Mr. Lipson has more than 30 years of industry experience in executive
management and sales and marketing. His previous employers include IBM, Control
Data Corporation, Dun & Bradstreet Computer Services, SunGard Data Systems Inc.
and Digital Equipment Corporation. Mr. Lipson currently serves as a director of
Prescient Systems.
LUTHER J. NUSSBAUM has served FCG as Chief Executive Officer since October
1998 and as Executive Vice President, Worldwide Practice Support since April
1995 and has been a director since November 1997. Prior to joining FCG Mr.
Nussbaum was the President of Nussbaum & Associates, a strategic and information
consulting firm, from 1993 to 1995. From 1989 to 1993, Mr. Nussbaum served as
President and Chief Executive Officer of Evernet Systems, Inc., a national
network systems integration company. From 1986 to 1989, Mr. Nussbaum was the
President and Chief Operating Officer of Ashton-Tate Corp., a microcomputer
software development company. Mr. Nussbaum serves as a director of First
Consulting Group (UK) Ltd. and First Consulting Group (Ireland) Ltd.,
subsidiaries of FCG, and four private entrepreneurial companies. Mr. Nussbaum
received a B.A. from Rhodes College and an M.B.A. from Stanford University.
STEVEN HECK has served FCG as President since October 1998 and as Executive
Vice President, Practice since April 1995 and as a director since April 1997.
Mr. Heck served as Vice President, Practice from April 1991 to March 1995. From
1990 to 1991, Mr. Heck served as Chief Information Officer of Evangelical Health
Systems. Mr. Heck served FCG as Vice President, Midwest Region from May 1987 to
December 1989. Prior to joining FCG, Mr. Heck was the Managing Partner of the
Great Lakes Health Care Practice at Price Waterhouse LLP from 1985 to 1987.
THOMAS A. REEP has served FCG as Vice President, Finance and Chief Financial
Officer since May 1980. Prior to joining FCG, Mr. Reep was an accountant with
Ernst & Young from 1977 to 1980. Mr. Reep is a certified public accountant in
the State of California. Mr. Reep serves as a director of a non-profit
organization. Mr. Reep is the brother of James A. Reep, Chairman, Chief
Executive Officer and President of FCG. Mr. Reep received a B.S. and an M.B.A.
from California State University, Long Beach.
RICHARD N. KRAMER has served FCG as Vice President and Managing Director,
Healthcare Delivery since January 1998. Mr. Kramer served as Vice President and
Managing Director, East Region from July 1995 to December 1997 and as Vice
President, East Region from January 1995 to June 1995. Prior to joining FCG, Mr.
Kramer was the National Partner for the Healthcare Information Technology
Practice at KPMG from 1994 to 1995 and served in other capacities from 1983 to
1993. Mr. Kramer received a B.A. from The Johns Hopkins University and an M.B.A.
from Columbia University Graduate School of Business.
ROY A. ZIEGLER has served FCG as Vice President and Managing Director,
Health Plans since January 1998. Mr. Ziegler served as Vice President and
Managing Director, West Region from January 1996 to December 1997 and as Vice
President of Managed Care from November 1993 to December 1995. Prior to joining
FCG, Mr. Ziegler was the Practice Director of the Health Management Initiative
in the Pacific Region at Andersen Consulting from 1992 to 1993 and served in
other capacities from 1984 to 1991. Mr. Ziegler received a B.S. from Pepperdine
University.
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<PAGE>
DON M. TOMPKINS has served FCG as Vice President and Managing Director,
Implementation Services since January 1994. Mr. Tompkins served as Vice
President from April 1993 to December 1996. Prior to joining FCG, Mr. Tompkins
was a General Manager of Network Computing Tools for Texas Instruments
Incorporated from 1990 to 1996. Mr. Tompkins received a B.S. from Chaminade
University of Honolulu.
MICHAEL R. GORSAGE has served FCG as a Vice President and Managing Director,
Network Integration Services since May 1991. Prior to joining FCG, Mr. Gorsage
was the National Director of Communications Technologies Consulting Services at
Price Waterhouse LLP from 1989 to 1991 and served in other capacities from 1984
to 1987. Mr. Gorsage received a B.S. from Northeast Louisiana University and an
M.B.A. from the University of Tampa.
FRANK I. MUELLER has served FCG as Vice President and Managing Director,
Europe since January 1997. Mr. Mueller served as Vice President from January
1988 to December 1996 and joined FCG as a Practice Director in November 1986.
Prior to joining FCG, Mr. Mueller was the President of Health Serv, a clinical
decision support systems company, from 1981 to 1985. Mr. Mueller received a B.A.
from the University of Southern California and an M.A. from California State
University, Long Beach.
ERICA L. DRAZEN has served FCG as Vice President and Managing Director,
Emerging Practices since September 1995, and served as a director from April
1997 to December 1997. Prior to joining FCG, Ms. Drazen was the Vice President
and Director of the Healthcare Information Systems Practice at Arthur D. Little,
Inc. from 1990 to 1995 and served in other capacities from 1969 to 1989. Ms.
Drazen received a B.S. from Tufts University, an M.S. from Massachusetts
Institute of Technology and an Sc.D. from the Harvard School of Public Health.
ROY W. WALTERS has served FCG as Vice President and Managing Director,
Quality Improvement since June 1996 and served as a director from April 1997 to
December 1997. Mr. Walters served as Vice President from March 1992 to May 1996.
Prior to joining FCG, Mr. Walters was a consultant in the Healthcare Group at
Andersen Consulting from 1975 to February 1992. Mr. Walters received a B.A. from
Cornell University and an M.H.A. from Duke University.
PAULA K. COWAN has served FCG as Vice President, Human Resources since March
1996. Prior to joining FCG, Ms. Cowan was a consultant for Meek and Associates,
a strategic compensation and performance management consulting firm, from 1992
to 1996 and served as Vice President of Human Resources for Ashton-Tate Corp.
from 1986 to 1992. Ms. Cowan received a B.A. and an M.A. from California State
University, Long Beach.
STANLEY R. NELSON has served FCG as a director since April 1997. From 1993
to August 1997, Mr. Nelson was the President of the Center for Clinical
Integration, Inc., the predecessor of the Scottsdale Institute, a subsidiary of
FCG. Since 1988, Mr. Nelson has been an independent healthcare consultant to
various organizations. Prior to 1988, Mr. Nelson served as the President and
Chief Executive Officer of the Henry Ford Healthcare Corp. in Detroit, Michigan
and, prior to that, the Abbott-Northwestern Hospital in Minneapolis, Minnesota.
Mr. Nelson currently serves as a director of the Scottsdale Institute, a
subsidiary of FCG. Mr. Nelson received a B.S. and an M.H.A. from the University
of Minnesota.
STEVEN LAZARUS has served FCG as a director since April 1997. Since 1986,
Mr. Lazarus has served as a senior principal of various venture capital funds
associated with ARCH Venture, including President and Chief Executive Officer of
ARCH Development Corporation and Managing Director of ARCH Venture Partners.
From 1986 to 1994, Mr. Lazarus served as the Associate Dean of the Graduate
School of Business of the University of Chicago. He currently serves as a
director of Amgen Inc., a biotechnology company, Primark Corporation, an
information services company, Illinois Superconductor Corporation, which
develops radio frequency equipment for the wireless communication industry, and
New Era of Networks, Inc., which develops packaged solutions for application
integration. Mr. Lazarus received a B.A. from Dartmouth College and an M.B.A.
from the Harvard University Graduate School of Business.
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<PAGE>
STEPHEN E. OLSON has served FCG as a director since April 1997. Since 1988,
Mr. Olson has served as Chairman of the Board of The Olson Company, a developer
of landmark residential communities within urban environments. Since 1992, Mr.
Olson has also served as Chairman of the Board of Flowline, Inc., a
high-technology company specializing in intelligent sensors and controls. Mr.
Olson serves as a director of several private companies. Mr. Olson received a
B.A. from the University of Redlands and an M.B.A. from Pepperdine University.
SCOTT S. PARKER has served FCG as a director since November 1997. He has
served as the President and Chief Executive Officer of Intermountain Health Care
since 1975. Mr. Parker serves as a director of First Security Corporation MMI
Companies, Inc., a community and commercial bank, and Questar Corporation, a
natural gas and energy services holding company. Mr. Parker received a B.A. from
the University of Utah and an M.H.A. from the University of Minnesota.
JACK O. VANCE has served FCG as a director since April 1997. Mr. Vance is
the Managing Director of Management Research, Inc., a management consulting
firm. From 1973 to 1989, Mr. Vance was the Managing Partner of the Los Angeles
office of McKinsey & Company and served on the Executive Committee of that
firm's Board of Directors from 1962 to 1989. Mr. Vance serves as a director of
International Rectifier Corporation, a supplier of power semiconductor
components, Semtech Corporation, a manufacturer of analog semiconductor
products, and several private companies. Mr. Vance received a B.S. from the
University of Louisville and an M.B.A. from the Wharton School of the University
of Pennsylvania.
DONALD R. CALDWELL has been President and Chief Operating Officer of
Safeguard Scientifics, Inc. since February 1996. Mr. Caldwell was an Executive
Vice President of Safeguard Scientifics, Inc. from December 1993 to February
1996. Prior to that time, Mr. Caldwell was President of Valley Forge Capital
Group, Ltd., a business mergers and acquisition advisory firm that he founded,
from April 1991 to December 1993 and an executive officer of a predecessor
company of Cambridge Technology Partners (Massachusetts), Inc., a provider of
information technology consulting and software development, from December 1989
to March 1991. Mr. Caldwell's prior positions included serving as a partner in
the national office of Arthur Young & Co. (a predecessor to Ernst & Young, LLP).
Mr. Caldwell is a director of Compucom, Diamond Technology Partners Consulting,
Inc., Quaker Chemical Corporation, Drexel University and Safeguard Scientifics,
Inc., as well as two privately held companies.
RECENT CHANGES IN MANAGEMENT
On October 5, 1998, FCG announced that Luther J. Nussbaum was appointed
Chief Executive Officer of FCG, and Steven Heck was appointed President and
Chief of the Professional Practice. In addition, FCG announced that its
three-member Office of the President was expanded to include five senior
executives. Such appointments were made upon news that James A. Reep is in
serious condition after being diagnosed on September 30, 1998, with cancer. Mr.
Reep will continue to serve as Chairman of the Board and an employee of FCG.
BOARD COMPOSITION
FCG currently has authorized eight directors. In accordance with the terms
of the amended and restated certificate of incorporation, of FCG (the "FCG
certificate of incorporation"), the terms of office of the FCG Board will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1999; Class II, whose term will expire at
the annual meeting of stockholders to be held in 2000; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2001. The Class
I directors are Stephen Olson and Steven Heck, the Class II directors are
Stanley R. Nelson, Luther J. Nussbaum and Jack O. Vance and the Class III
directors are Scott S. Parker, Steven Lazarus and James A. Reep. At each annual
meeting of stockholders after the initial classification, the successors to
directors whose term will then expire will be elected to serve from the time of
election and
89
<PAGE>
qualification until the third annual meeting following election. In addition,
the FCG certificate of incorporation provides that the authorized number of
directors may be changed only by resolution of the FCG Board. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the FCG Board
may have the effect of delaying or preventing changes in control or management
of FCG. Although directors of FCG may be removed for cause by the affirmative
vote of the holders of a majority of the FCG common stock, the FCG certificate
of incorporation provides that holders of two-thirds of the FCG common stock
must vote to approve the removal of a director without cause.
Under the terms of the merger agreement, as soon as practicable after the
effective time, FCG has agreed to use reasonable efforts to nominate and appoint
(i) a nominee designated by ISCG to Class I of the FCG Board to serve until the
annual meeting of stockholders to be held in 1999, (ii) Donald R. Caldwell, or
such other nominee designated by ISCG, to Class II of the FCG Board to serve
until the annual meeting of stockholders to be held in 2000, and (iii) David S.
Lipson, or such other nominee designated by ISCG, to Class III of the FCG Board
to serve until the annual meeting of stockholders to be held in 2001.
BOARD COMMITTEES
The Audit Committee of the FCG Board reviews the internal accounting
procedures of FCG and consults with, and reviews the services provided by, FCG's
independent auditors. The Compensation Committee of the FCG Board reviews and
recommends to the FCG Board the compensation and benefits of all officers of FCG
and reviews general policy relating to compensation and benefits of employees of
FCG. The Compensation Committee also administers the issuance of stock options
and other awards under FCG's stock plans.
DIRECTOR COMPENSATION
FCG currently provides annual cash compensation in the amount of $10,000 to
directors for services in such capacity. Directors are also reimbursed for
certain expenses in connection with attendance at Board of Directors and
committee meetings. Directors receive automatic grants of nonstatutory stock
options under the 1997 Non-Employee Directors' Stock Option Plan and are
eligible for grants of nonstatutory stock options under the 1997 Equity
Incentive Plan. Currently, each non-employee director is required to purchase
and hold shares with an aggregate fair market value equal to the annual fees
paid to the directors under the Non-Employee Director Restricted Stock Plan.
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EXECUTIVE COMPENSATION
The following table sets forth certain information for the year ended
December 31, 1997, regarding the compensation of FCG's Chief Executive Officer
and each of the four most highly compensated executive officers of FCG whose
salary and bonus for such year were in excess of $100,000 on an annualized basis
(the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------------- ---- ---------- ---------
<S> <C> <C> <C>
James A. Reep
Chairman of the Board.......... $370,000 $ 120,435 $47,634(2)(3)
Luther J. Nussbaum
Chief Executive Officer and
Executive Vice President,
Worldwide Practice Support..... 315,000 127,533 49,009(3)
Steven Heck
President and Executive Vice
President, Practice............ 335,000 109,043 171,425(3)(4)
Don M. Tompkins
Vice President and Managing
Director, Implementation
Services....................... 315,000 110,250 57,328(3)
Richard W. Kramer
Vice President and Managing
Director, East Region.......... 315,000 99,225 44,560(3)
Roy A. Ziegler
Vice President and Managing
Director, West Region.......... 315,000 99,725 51,111(3)
</TABLE>
- ------------------------
(1) In accordance with the Commission rules, other annual compensation in the
form of perquisites and other personal benefits has been omitted where the
aggregate amount of such perquisites and other personal benefits constitutes
less than the lesser of $50,000 or 10% of the total annual salary and bonus
for the Named Executive Officer for the fiscal year.
(2) Reflects a premium of $28,674 paid by FCG for a life insurance policy of
which Mr. Reep is the beneficiary.
(3) Includes imputed interest on interest-free loans by FCG to each of the named
executive officers (except Mr. Reep) for the purchase of shares of FCG
common stock under the 1994 Restricted Stock Plan, supplemental executive
retirement plan contributions made on behalf of each of the named executive
officers (except Mr. Reep), and an allocation of 1,000 shares to each of the
named executive officers' accounts under the ASOP at an aggregate valuation
of $7,443 per named executive officer. Also includes FCG's 50% matching
contribution of FCG common stock under the ASOP for the account of Messrs.
Reep, Heck, Nussbaum, Tompkins, Kramer and Ziegler with an estimated
valuation of $11,517, $11,347, $11,517, $10,620, $11,202 and $11,517,
respectively. See "Information Relating To FCG--Certain Transactions of
FCG," and "Information Relating to FCG--FCG Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) Includes $90,700 in relocation expenses paid by FCG.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to named executive officers for the year
ended December 31, 1997.
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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth for each of the named executive officers the
shares acquired and the value realized on each exercise of stock options during
the fiscal year ended December 31, 1997. No named executive officer held options
at December 31, 1997.
<TABLE>
<CAPTION>
SHARES VALUE
ACQUIRED ON REALIZED
NAME EXERCISE (#) ($)(1)
- --------------------------------- ------------- ----------
<S> <C> <C>
James A. Reep.................... -- --
Luther J. Nussbaum............... -- --
Steven Heck...................... 47,272 587,591
Don M. Tompkins.................. -- --
Richard N. Kramer................ 123,920 1,540,326
Roy A. Ziegler................... -- --
</TABLE>
- ------------------------
(1) Value realized is based on an initial public offering price of $13.00 per
share of FCG common stock, although at the time of grant the fair market
value of the FCG common stock was determined by the FCG Board to be $4.76
per share. Amounts reflected are based on the assumed value minus the
exercise price multiplied by the number of shares acquired on exercise and
do not indicate that the optionee sold such stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The bylaws of FCG (the "FCG bylaws") provide that FCG will indemnify its
directors and executive officers and may indemnify its other officers, employees
and other agents to the fullest extent permitted by Delaware law. FCG is also
empowered under the FCG bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, FCG expects to
enter into indemnification agreements with each of its directors and executive
officers.
FCG has obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act. In addition, the FCG certificate of incorporation provides that,
to the fullest extent permitted by Delaware law, FCG's directors will not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to FCG and its stockholders. This provision in the FCG certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Under current
Delaware law, a director's liability to FCG or its stockholders may not be
limited with respect to any breach of the director's duty of loyalty to FCG or
its stockholders, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and FCG and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws such as the federal
securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director or officer
of FCG as to which indemnification is being sought, nor is FCG aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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CERTAIN TRANSACTIONS OF FCG
FCG and its vice presidents have entered into certain agreements relating to
the issuance of FCG's securities. Under the provisions of the 1994 Restricted
Stock Plan, FCG's vice presidents have entered into restricted stock agreements
("RSAs") that require each vice president to purchase a minimum number of shares
of FCG common stock. Shares of FCG common stock are purchased under the RSAs at
a price per share equal to the price as quoted on Nasdaq. On and prior to July
30, 1997, FCG also provided certain of its vice presidents with non-qualified
stock options to purchase shares of FCG common stock based on the number of
shares purchased under the RSAs. These options were granted with exercise prices
below the then-prevailing market value for shares of FCG common stock as
determined by an independent valuation firm. In connection with the RSAs and
stock option agreements entered into between FCG and its vice presidents FCG
has, from time to time, made certain loans to its vice presidents equal to the
following: (1) the aggregate purchase price for shares of FCG common stock
purchased by a vice president under the 1994 Restricted Stock Plan; (2) the
aggregate exercise price for stock options exercised by a vice president in
connection with the 1994 Restricted Stock Plan; and (3) the aggregate amount of
medicare and income taxes payable by a vice president as a result of the
exercise of stock options granted in connection with the 1994 Restricted Stock
Plan.
The promissory notes evidencing such loans are generally non-recourse,
non-interest bearing, and have a stated term of ten years. FCG records a
compensation expense and FCG's vice presidents recognize income on the imputed
interest attributable to these notes. Shares of FCG common stock purchased under
the RSAs or pursuant to the exercise of stock options, for which purchase or
exercise a loan was granted, are pledged as security for the outstanding
principal amounts of the loans. Each vice president is required to pledge that
number of shares having a market value equal to 120% of the amount remaining due
under the loans. The RSAs require FCG's vice presidents to repay the outstanding
principal amounts of such loans at the greater of (1) one-tenth (1/10) of the
face amount of such loans, and (2) one-half (1/2) of the vice presidents' net
after tax annual bonus. FCG's vice presidents may repay the outstanding
principal amounts in advance without penalty. As of December 31, 1997, all of
the outstanding options under these arrangements have been exercised and the
outstanding aggregate principal amount under these loans equaled approximately
$9.3 million. In the future, FCG plans to grant all stock options at market
value and to match employee 401(k) contributions with shares of FCG common stock
based on the market value of the shares at the time of grant.
FCG has an ongoing, non-contractual business relationship with First Ticket
Travel, whose sole proprietor is Fatima Reep, the wife of James A. Reep,
Chairman of the Board, and former Chief Executive Officer and President of FCG.
For the year ended December 31, 1997, FCG has purchased travel services from
First Ticket Travel in the amount of approximately $124,000.
FCG entered into a consulting agreement with Stanley R. Nelson on September
1, 1997. The agreement provides that Mr. Nelson will be paid up to a maximum of
$11,115 per month, for consulting services related to the administration of and
strategic planning for the Scottsdale Institute.
FCG has entered into indemnification agreements with its directors and
officers for the indemnification of and advancement of expenses to such persons
to the full extent permitted by law. FCG also intends to execute such agreements
with its future directors and officers.
FCG believes that the foregoing transactions were in its best interest. As a
matter of policy the transactions were, and all future transactions between FCG
and any of its officers, directors or principal stockholders will be, approved
by a majority of the independent and disinterested members of the FCG Board,
will be on terms no less favorable to FCG than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes of FCG.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FCG
The following table sets forth certain information regarding the beneficial
ownership of FCG Common Stock as of August 31, 1998, and as adjusted to reflect
the issuance of FCG common stock in connection with the merger: (i) each
stockholder who is known by FCG to own beneficially more than 5% of FCG common
stock; (ii) each named executive officer of FCG; (iii) each director of FCG; and
(iv) all directors and executive officers of FCG as a group. Unless otherwise
indicated, to the knowledge of FCG, all persons listed below have sole voting
and investment power with respect to their shares of FCG common stock, except to
the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ----------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
James A. Reep (2)........................................................................ 2,880,000 18.08%
Associate 401(k) and Stock Ownership Plan (3)............................................ 1,589,544 9.98
Brent A. Hanson (4)...................................................................... 826,200 5.19
Thomas A. Reep (5)....................................................................... 632,872 3.97
Frank I. Mueller......................................................................... 301,896 1.90
Roy A. Ziegler (6)....................................................................... 207,616 1.30
Steven Heck (7).......................................................................... 173,142 1.09
Richard N. Kramer (8).................................................................... 167,292 1.05
Luther J. Nussbaum (9)................................................................... 135,120 *
Stanley R. Nelson........................................................................ 2,100 *
Steven Lazarus........................................................................... 2,100 *
Stephen E. Olson......................................................................... 2,100 *
Jack O. Vance............................................................................ 2,100 *
Scott S. Parker.......................................................................... 1,344 *
All executive officers and directors as a group (17 persons) (3)(10)..................... 5,104,726 32.05
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of FCG common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote, and subject to community
property laws where applicable, FCG believes, based on information
furnished by such persons, that the persons named in the table above have
sole voting and investment power with respect to all shares of FCG common
stock shown as beneficially owned by them. Percentage of beneficial
ownership is based on 15,925,602 shares of FCG common stock outstanding as
of August 31, 1998. Certain shares are subject to repurchase at the
original issuance price plus a growth factor. The growth factor is equal to
the average interest rate compounded quarterly which FCG pays to a
commercial lending institution in a calendar quarter (the "growth factor").
In the event FCG has no borrowings for a particular quarter, then the
growth factor shall be the prime rate on the first day of the quarter, as
announced in the Wall Street Journal or if the Wall Street Journal
discontinues such announcements, then it shall be the prime rate as
announced by Bank of America.
(2) The business address of the named stockholder is c/o First Consulting
Group, Inc., 111 West Ocean Blvd., 4th Floor, Long Beach, California 90802.
Of the shares held, 2,880,000 are held by the Reep Family LLC of which Mr.
Reep is the Managing Member.
(3) The business address of the named stockholder is c/o First Consulting
Group, Inc., 111 West Ocean Blvd., 4th Floor, Long Beach, California 90802.
The shares are held by Union Bank as trustee of the ASOP. FCG allocates
shares of FCG common stock as matching contributions to certain of its
executive officers. These executive officers have the right to acquire the
fair market value of the stock allocated to their respective accounts upon
termination of employment. Such stockholder also
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has the right to vote such shares of FCG common stock allocated under the
ASOP with respect to the approval or disapproval of any FCG merger or
consolidation, recapitalization, reclassification, liquidation,
dissolution, sale of substantially all assets of a trade or business, or
such similar transaction. Of the shares held by the ASOP, 9,180 shares have
been allocated to the accounts of the following named executive officers:
Steven Heck (1,520 shares); Richard N. Kramer (1,500 shares); Frank I.
Mueller (1,540 shares); James A. Reep (1,540 shares); Thomas A. Reep (1,540
shares) and Roy A. Ziegler (1,540 shares). All other executive officers as
a group have been allocated a total of 9,280 shares.
(4) The business address of the named stockholder is c/o First Consulting
Group, Inc., 6903 Rockledge Drive, Suite 920, Bethesda, Maryland 20817. The
shares are held by The Brent A. Hanson Inter Vivos Trust dated March 24,
1995, of which Mr. Hanson is trustee.
(5) The business address of the named stockholder is c/o First Consulting
Group, Inc., 111 West Ocean Blvd., 4th Floor, Long Beach, California 90802.
The shares are held by The Reep Family Inter Vivos Trust, dated May 27,
1992, of which Mr. Reep and his wife, Patricia A. Reep, are trustees. Of
the shares held, 73,864 are unvested shares as of October 30, 1998. Of such
unvested shares, 36,932 are subject to repurchase by FCG at a price equal
to $2.38 per share plus the growth factor and 36,932 shares are subject to
repurchase by FCG at a price equal to $4.76 per share plus the growth
factor.
(6) Of the shares held, 124,569 are unvested shares as of October 30, 1998. Of
such unvested shares, 30,594 are subject to repurchase by FCG at a price
equal to $0.44 per share plus the growth factor, 24,866 are subject to
repurchase by FCG at a price equal to $0.53 per share plus the growth
factor, 46,073 are subject to repurchase by FCG at a price equal to $0.57
per share plus the growth factor, and 23,036 are subject to repurchase by
FCG at a price equal to $2.80 per share plus the growth factor.
(7) Of the shares held, 19,238 are unvested shares as of October 30, 1998. Of
such unvested shares, 7,200 are subject to repurchase by FCG at a price
equal to $0.22 per share plus the growth factor, 5,656 are subject to
repurchase by FCG at a price equal to $0.53 per share plus the growth
factor, 4,254 are subject to repurchase by FCG at a price equal to $0.57
per share plus the growth factor and 2,128 are subject to repurchase by FCG
at a price equal to $2.80 per share plus the growth factor.
(8) Of the shares held, 117,104 are unvested as of October 30, 1998. Of such
unvested shares, 78,069 are subject to repurchase by FCG at a price equal
to $0.57 per share plus the growth factor and 39,035 are subject to
repurchase by FCG at a price equal to $2.80 per share plus the growth
factor.
(9) The shares are held by The Nussbaum Family Trust, a Revocable Living Trust
dated March 2, 1992, of which Mr. Nussbaum is a trustee. Of the shares
held, 94,583 are unvested shares as of October 30, 1998. Of such unvested
shares, 63,055 are subject to repurchase by FCG at a price equal to $0.57
per share plus the growth factor and 31,528 are subject to repurchase by
FCG at a price equal to $2.80 per share plus the growth factor.
(10) Of the shares held, 763,998 are unvested shares as of October 30, 1998. In
general, such unvested shares are subject to repurchase by FCG at a price
equal to the original purchase price plus the growth factor.
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INFORMATION RELATING TO ISCG
ISCG BUSINESS
OVERVIEW
ISCG provides consulting services addressing its clients' information
processing needs through technologically advanced solutions. ISCG focuses its
marketing efforts primarily on the pharmaceutical industry in order to exploit
its extensive experience in the development, implementation, integration, and
management of information systems used by the pharmaceutical industry. By virtue
of this experience, ISCG's technical personnel have developed a strong
understanding of the drug development process and broad expertise in the
information systems and software applications required to support this
complicated and data intensive process. ISCG's technical personnel have
developed a broad range of technical skills and capabilities with respect to
commercially available packaged software products that address drug development
information processing requirements. Pharmaceutical company engagements
accounted for an aggregate of approximately $26.8 million, or 62% of total
revenues in 1997, compared to $18.0 million and $13.5 million, or 59%, and 64%,
of ISCG's revenues in 1996 and 1995, respectively.
Both within and outside the pharmaceutical industry, ISCG provides services
based on its expertise in the latest technologies, including client-server
architecture, Internet or web-based applications, document management solutions,
relational and object oriented databases, and cross-platform applications
integration. ISCG delivers consulting services in two broad areas: applications
development and systems and network management. In the applications development
area, ISCG provides expertise to its clients both across the full software
development life cycle and in one or more discrete phases of the software
development process. ISCG's applications development activities accounted for
approximately 78% of its revenues in 1998 (through September 30) and 78% of its
revenues in 1997. This compares with 79% and 78% in 1996 and 1995, respectively.
In the systems and network management area, ISCG provides expertise to its
clients in the design, implementation, management, and support of multi-vendor
local and wide area networks, desktop computer systems, and servers. ISCG's
network management activities accounted for approximately 21% of its revenues in
1998 (through September 30) and 22% of its revenues in 1997. This compares with
21% in 1996 and 22% in 1995.
ISCG was incorporated in the Commonwealth of Pennsylvania in 1988. ISCG
completed its initial public offering of common stock in May 1996 pursuant to a
rights offering to the stockholders of Safeguard Scientifics, Inc. ISCG's
principal executive offices are located at 575 East Swedesford Road, Wayne,
Pennsylvania 19087, and its telephone number is (610) 989-7000. ISCG's World
Wide Web homepage address is www.iscg.com and its e-mail address is
[email protected].
CONSULTING SERVICES
ISCG delivers applications development consulting services to its customers
on a project basis by providing full software development life cycle services.
These services are provided both from ISCG's Software Development Centers as
well as at its clients' facilities, on either a time and materials or fixed-fee
basis. ISCG has developed proprietary methodologies to support the full
development life cycle for building and validating software in a regulated
environment. ISCG also delivers applications development and systems and network
management consulting services to its clients through providing staff
augmentation on a time and materials basis.
ISCG delivers its applications development services through five main
practice areas:
PHARMACEUTICAL RESEARCH SYSTEMS PRACTICE. ISCG's technical personnel in
this practice specialize in the analysis, development, and integration of
software solutions that support the drug development life cycle in
pharmaceutical research. The clients' research groups serviced by this practice
include the drug discovery, pre-clinical, and clinical organizations of
pharmaceutical and biotechnology companies. In addition to supporting these
research areas, the personnel in this practice are also proficient with the
analysis,
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development, and integration of clinical software systems that support drug
safety and adverse experience reporting. These technical personnel are
knowledgeable with respect to the research groups' focus on the collection,
analysis, and management of clinical and pre-clinical data required for global
regulatory submissions. ISCG's technical personnel in this practice have
extensive experience in the development, validation and deployment of customized
systems for these applications. In addition to custom software development,
ISCG's technical personnel have integrated and customized applications software
from vendors of commercially available packaged solutions.
DOCUMENT MANAGEMENT SYSTEMS PRACTICE. ISCG's technical personnel in this
practice design, build, and integrate software solutions for document management
systems. These technical personnel are particularly knowledgeable in the
documentation requirements of the pharmaceutical regulatory approval process, as
well as the enabling technologies applicable to that process. These technologies
include user interface design, document repository management, imaging, and
publishing. ISCG customizes packaged software products to support the
preparation and submission of New Drug Applications ("NDA"), Computer Assisted
NDAs ("CANDAs"), and a variety of multi-national regulatory submission
documents. These systems typically track and manage clinical documents and
support the automated assembly of regulatory submissions using both
client/server architectures, as well as Web-based technologies. In addition to
its document management engagements for pharmaceutical companies, ISCG has
expanded into other industries, including process manufacturing, food and
beverage, petro-chemical, publishing, and consumer products. ISCG maintains a
partnership with Documentum, Inc., as a Signature Partner, as well as with other
vendors of imaging and publishing technologies including Electronic Submission
Publishing Systems, Inc., (ESPS), Cornerstone Imaging, Inc. and Kofax Image
Products, Inc. Client projects supported by this practice often include the use
of ISCG-developed application solution frameworks and background technology.
CLIENT-SERVER SYSTEMS INTEGRATION PRACTICE. ISCG's technical personnel in
this practice specialize in the architecture, development and integration of
client-server systems using integrated development environments that include
computer-aided design tools, graphical user interface ("GUI") and
state-of-the-art database technologies. GUI development platforms include
Sybase, Inc.'s PowerBuilder; Microsoft Corporation's Visual Basic, Access and
Visual C++; and Oracle Corporation's Designer/2000 and Developer/2000. Database
technologies used by this group include products from Oracle, Sybase, and
Microsoft, and operating systems such as Hewlett-Packard Company's HP/UX,
Digital Equipment Corporation's OpenVMS, Sun Microsystem, Inc.'s Sun/OS and
Solaris, Microsoft's Windows NT, and SCO UNIX. In addition to application
development and integration services, this group also provides database
administration, capacity planning, and migration services. Personnel in this
practice support both the Document Management and Pharmaceutical Research
Systems practices in addition to undertaking non-pharmaceutical industry
engagements.
INTERNET TECHNOLOGIES PRACTICE. ISCG's technical personnel in this
developing practice specialize in the design, development, and implementation of
Internet, intranet, and extranet applications. Consulting services offered by
technical personnel in this group typically involve Web-based applications with
database integration. In addition to the development of new Web-based
applications, technical personnel in this group also build Web-based
applications to access legacy databases using languages such as HTML and Java,
and a variety of products from Microsoft, Netscape, Sun Microsystems, and Oracle
Corporation. As with the Client/Server Systems Integration Practice, personnel
in this practice support both the Document Management and Pharmaceutical
Research Systems practices in addition to conducting non-pharmaceutical industry
engagements.
SYSTEMS AND NETWORK MANAGEMENT SERVICES. ISCG's systems and network
management services unit provides clients with consulting expertise in the
evaluation, design, implementation, and support of local and wide area networks,
personal computers and server systems. Examples of the varied functions
performed by ISCG's technical personnel include multi-network integration,
desktop system installation
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and management, server management, capacity planning, performance analysis and
data network evaluation and design. ISCG's technical personnel specialize in
Windows 95, Windows NT, UNIX, and Open/ VMS technologies. Their technical skill
set spans a wide range of implementation technologies, including
Hewlett-Packard's HP/UX; Sun Microsytems' Solaris; Digital Equipment's Alpha;
Novell Inc.'s Netware; and TCP/IP. Consequently, ISCG is able to provide systems
and network management services in diverse client environments.
SALES AND MARKETING
ISCG has a direct sales force, consisting of a Vice President of Sales, two
sales directors, and 16 account executives, responsible for all phases of the
selling process. Three account executives are located in the New Jersey office;
one account executive is based in the Chicago office, and one account executive
is based in the Virginia office, which was acquired in May of 1997. The
remainder of the direct sales force is based in ISCG's Wayne, Pennsylvania
headquarters. Much of ISCG's project-based work is sold from the Wayne office.
The efforts by ISCG's sales force are supplemented by its technical personnel,
who, in the past, have been able to expand existing engagements and generate new
business while on assignment at clients' sites.
ISCG's marketing department, under direction of the Vice President of
Marketing, is mainly focused on expanding ISCG's presence and technical
reputation in the pharmaceutical industry, its largest marketplace. The
marketing group's responsibilities lie in two areas: ISCG's general marketing
functions; and the business development and sales support functions of the
practices. The marketing department, which includes the practice directors and
managers, manages vendor relationships and marketing functions and supports
sales, business development and proposal writing. In developing and marketing
new service offerings, the marketing department works closely with both ISCG's
sales force and delivery organization to develop offerings that meet client
needs and leverage the expertise and experience of ISCG's technical personnel.
ISCG regularly exhibits and presents at pharmaceutical trade association,
technical, and vendor user group conferences. These conferences focus on
document management, drug discovery, adverse events reporting, clinical data
management, and various technologies. ISCG also periodically writes and
distributes "white papers" or case studies about its experiences in utilizing a
variety of leading edge technologies. These white papers are often delivered at
trade association conferences and routinely distributed to current and
prospective clients. The purpose of these publications is to create and enhance
ISCG's image as a technology leader.
ISCG views existing clients as a valuable source of additional work in the
form of both extensions to, and expansion of, ongoing engagements, and the
initiation of new engagements. ISCG seeks to establish long-term relationships
with clients in which clients rely on ISCG for ongoing information technology
solutions. These types of relationships have helped create stable revenues for
ISCG. In 1997 and 1996, respectively, approximately 81% and 86% of ISCG's
revenues were derived from clients to which it had provided services in the
previous year.
VENDOR RELATIONSHIPS
ISCG has established non-exclusive partnership arrangements with software
vendors that market technology or application solutions to ISCG's current and
prospective clients. In 1997, ISCG increased the number of formalized
relationships with vendors. The vendor partnership and alliance programs of
which ISCG is a part have provided ISCG with sales leads, reselling commissions,
marketing assistance revenues, increased publicity, discounted software,
specialized training programs, participation in beta software programs and
privileged information about vendors' technical and marketing strategies. ISCG
currently maintains marketing partnerships with Borland International, Inc.,
Cornerstone, Documentum, Inc., ESPS, Hewlett-Packard, Kofax, Microframe
Technologies, Inc., Microsoft, Oracle Corporation, Silverstream Software Inc.,
and Sybase.
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ISCG has established partnerships with vendors of application software such
as Chemical Abstract Service (a division of the American Chemical Society),
Domain Solutions, Inc., Oxford Molecular Group, plc and The Automation
Partnership. ISCG's history of integrating its partners' software products into
clients' systems has led to strong relationships with these vendors, which
enhances ISCG's marketing efforts. These partnership arrangements position ISCG
as a potential systems integrator should clients or prospective clients select
one of these vendors' products.
In partnership with software vendors such as Borland International, Inc.,
Documentum, and ESPS, ISCG provides training courses in the vendors' respective
technologies to clients. These partnerships generally strengthen the
relationship between ISCG and these vendors, enhance ISCG's market position with
the vendors' products, create consulting opportunities, train ISCG's technical
personnel in strategic technologies at lower costs, introduce ISCG to potential
clients, and allow current clients a closer view of ISCG.
CONCENTRATION AND MIX OF REVENUES
Historically, a small number of clients have each accounted for 10% or more
of ISCG's revenues. In 1998 (through September 30), Pharmaceutical Research
Institute accounted for approximately 13% of revenues. In 1997, SmithKline
Beecham accounted for approximately 11% of revenues. In 1996, Air Products and
Chemicals, Inc. and Merck & Company, Inc. each accounted for approximately 10%
of revenues. In 1995, Air Products and Merck accounted for approximately 13% and
11% of revenues, respectively. Engagements by pharmaceutical companies accounted
for approximately 68%, 62%, 59%, and 64% of ISCG's revenues in 1998 (through
September 30), 1997, 1996 and 1995, respectively.
EMPLOYEES
GENERAL. As of September 30, 1998, ISCG had 626 employees. This total
included 538 technical personnel. ISCG believes its future success will depend
in large part upon its ability to attract, retain and motivate highly skilled
personnel, particularly technical personnel. None of ISCG's employees is subject
to a collective bargaining agreement. ISCG believes its relations with its
employees are excellent.
RECRUITING. ISCG has implemented a variety of techniques to identify and
recruit ISCG-qualified candidates to support the growth of ISCG. ISCG employs
seven full time recruiters dedicated to the hiring of technical personnel. One
of ISCG's most successful source of new hires is the Coworker Referral Program,
which encourages employees to recommend or refer qualified candidates for
employment with ISCG, and rewards referring employees with referral bonuses.
ISCG places advertisements in various newspapers and utilizes professional
search firms to identify candidates for hire. ISCG participates in job fairs in
all the regions in which it operates. Additionally, ISCG sponsors independent
recruiting events, such as open houses or free technical seminars, several times
a year.
ISCG aggressively recruits technical personnel with strong experience in
client/server, Internet, document management, and systems and networking
technology. An active college recruiting program hired recent graduates into
four "Associate Programs" that provided entry-level technical training during
1997. ISCG has developed an innovative "Boot Camp," which hires lateral
candidates with general technical work experience and re-trains them in high-
demand skills.
TRAINING. ISCG has established an extensive educational facility at its
headquarters comprised of three training rooms that accommodate a total of 50
students. During 1997, ISCG established an additional educational facility in
its Somerset, New Jersey location that can accommodate 12 students. Vendor
training and Company designed and conducted day and evening school classes are
provided to ISCG's technical personnel.
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COMPETITION
The commercial professional services segment of the information technology
industry includes a large number of participants and is highly competitive. The
industry includes participants from a variety of market segments including
systems consulting and integration firms, contract programming companies,
application software firms, the professional service groups of computer
equipment manufacturers such as IBM and Digital Equipment, "Big Six" consulting
firms, and general management consulting firms. ISCG's competitors include
companies such as Andersen Consulting, Technology Solutions Corporation, Cap
Gemini America, Computer Sciences Corporation's consulting division, and
Cambridge Technology Partners, Inc.
Many participants in the commercial professional services segment of the
information technology industry have significantly greater financial, technical,
and marketing resources and have greater name recognition than ISCG. In
addition, the industry is highly fragmented and served by numerous firms, many
of which serve only their respective local markets. ISCG also faces competition
from organizations providing staff augmentation services to, and individuals who
contract directly with, information systems departments of existing and
potential clients. ISCG believes the principal competitive factors in the
commercial professional services segment of the information technology industry
include responsiveness to client needs, availability of technical personnel,
speed of application software development, quality of service, price, project
management capability and technical expertise.
While ISCG's clients have historically been concentrated in the eastern
United States, it has a client base in the Midwestern United States, which it
serves primarily from the Wayne office. In addition, certain of ISCG's clients
are located in Europe. ISCG believes that geographic location with respect to
the performance of technical services is becoming a greater competitive factor.
ISCG has a sales office in Chicago and a branch office in Virginia. ISCG uses
relationships with global partners to provide services to its multi-national
clients.
ISCG also believes that its ability to compete depends in part on a number
of competitive factors outside its control, including the ability of its
competitors to hire, retain, and motivate qualified technical personnel; the
ownership by competitors of software used by potential clients; the development
of software that would reduce or eliminate the need for ISCG's services; the
price at which others offer comparable services; and the extent of its
competitors' responsiveness to customer needs.
INTELLECTUAL PROPERTY
ISCG's business is not dependent on the ownership or exclusive use of any
specific information technology. ISCG holds no patents or registered copyrights.
ISCG's business does, however, include the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to the client.
ISCG develops Background Technology for use in its software development
efforts. This Background Technology consists of pre-existing development tools,
objects, routines, sub-routines, and other programs along with associated data
and documentation, and is designed to increase competitiveness by improving
consultant productivity and leverage ISCG's technical and market experience.
Background Technology is either developed internally and owned by ISCG, or is
developed as part of customer projects, with the customer's agreement to grant
ownership to ISCG.
ISCG relies upon a combination of trade secret, nondisclosure, and other
contractual arrangements to protect its and its clients' proprietary rights.
ISCG generally enters into confidentiality agreements with its clients and
potential clients and limits access to, and distribution of, its clients' or
software vendor partners' proprietary information. There can be no assurance
that the steps taken by ISCG in this regard will be adequate to deter
misappropriation of ISCG's, its clients' or vendor partners' proprietary
information or that ISCG will be able to detect unauthorized use or take
appropriate steps to enforce its clients' and vendor partners' intellectual
property rights. In addition, all of ISCG's employees execute restrictive
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covenants upon joining ISCG that require the employee to keep confidential all
proprietary information pertaining to the assets or business of ISCG and its
clients and provide that during the term of employment, and for a certain time
period thereafter, the employee may not be employed by, solicit, or provide
consulting services for any past, current or potential clients of ISCG.
PROPERTIES
ISCG's headquarters and principal administrative, sales and marketing, and
application development operations are located in approximately 39,000 square
feet of leased space in Wayne, Pennsylvania, in suburban Philadelphia. This
lease expires in 2000. ISCG leases an additional 12,500 square feet of space in
an office complex near its headquarters, under a lease expiring in 2000.
During 1997, ISCG moved its New Jersey operations to an 11,000-square-foot
sales, training, and application development center in Somerset, New Jersey,
under a lease expiring in 2002. ISCG also leases shared facilities in Chicago,
Illinois and Alexandria, Virginia, pursuant to short-term agreements. In
February 1998, ISCG acquired all the outstanding capital stock of WaveFront
Consulting, Inc., a privately owned, custom application development firm located
in Vienna, Virginia. WaveFront Consulting, Inc. leases approximately 3,000
square feet of office space pursuant to a lease expiring in January 2000. ISCG
plans to combine the personnel and operations of its Virginia facilities.
ISCG anticipates that additional space will be required as business expands
and believes that it will be able to obtain suitable space as needed.
LEGAL PROCEEDINGS
In the opinion of ISCG's management, there are no material legal proceedings
pending against ISCG.
ISCG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this joint proxy statement/ prospectus. The following discussion
includes forward-looking statements that involve risk and uncertainties and are
subject to change at any time. ISCG derives its forward-looking statements from
its operating budgets, estimates and forecasts, which are based upon detailed
assumptions about many important factors. While ISCG believes its assumptions
are reasonable, it cautions that there are inherent difficulties in predicting
the impact of certain factors, including client demand, dependence on the
pharmaceutical industry, the attraction and retention of technical personnel,
concentration and mix of revenues, third-party Year 2000 modification plans and
other factors, which could cause actual results to differ materially from
predicted results. These factors, as and when applicable, are disclosed
previously and from time to time in ISCG's filings with the SEC.
OVERVIEW
Since ISCG began operations in late 1988, it has experienced substantial
growth in revenues, income from operations and net income. During 1997, 1996 and
1995, ISCG's revenues increased by 41%, 46% and 55%, respectively, to $43.2
million in 1997, $30.6 million in 1996 and $21.0 million in 1995. ISCG's income
from operations increased by 13%, 50% and 51%, respectively, to $5.5 million in
1997, $4.9 million in 1996 and $3.3 million in 1995. ISCG's net income increased
by 17%, 62% and 53%, respectively, to $3.5 million in 1997, $3.0 million in 1996
and $1.9 million in 1995.
Substantially all of ISCG's revenues are professional fees which generally
are billed at hourly rates. ISCG's costs consist primarily of employee-related
costs and non-reimbursed travel expenses of its technical and technical
management employees. As employee related costs are relatively fixed, variations
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in ISCG's revenues and operating results can occur as a result of variations in
billing margins and utilization rates (i.e. the ratio of hours billed to total
available hours) of its technical personnel.
Since most of ISCG's consulting engagements are on a time and materials
basis, ISCG historically has been able to maintain its billing margins by
increasing its hourly rates to offset increases in costs related to its
professional staff. ISCG manages its billing margins by establishing a target
billing rate for each of its technical personnel which is used as a goal for
ISCG's account executives in negotiating and establishing billing rates for
specific projects or assignments; however, actual billing rates may be higher or
lower than the target billing rates. Hourly rate increases are generally
implemented by ISCG when a technical person completes one assignment and moves
to the next assignment, although hourly rates are also often adjusted during an
assignment based on relevant contractual provisions. ISCG further manages its
billing margins by basing a portion of all account executives' incentive
compensation on the annual aggregate billing margin for their accounts.
Differences in personnel utilization rates can result from variations in the
amount of non-billed time, which has historically consisted of training time,
vacation and holiday time, time lost to illness and inclement weather and
unassigned time. Non-billed time also includes time devoted to other necessary
and productive activities such as sales support and interviewing prospective
employees. Unassigned time results from differences in the timing of the
completion of an existing assignment and the beginning of a new assignment. In
order to reduce and limit unassigned time, ISCG actively manages personnel
utilization by monitoring and projecting estimated engagement start and
completion dates and matching employee availability with current and projected
client requirements. In addition, the number of new technical personnel training
programs and the amount of training incurred for existing technical personnel
varies and can affect ISCG's personnel utilization rates from period to period.
During 1996 and 1995, ISCG enjoyed a lower employee turnover rate than that
experienced by the industry in general. Although industry statistics are not yet
available for 1997, ISCG believes this trend will continue for 1997 as well.
ISCG believes the continuity associated with its lower employee turnover rate
has helped it to respond more effectively to its clients' needs as its business
has grown. In addition, although ISCG's growth has resulted in increases in
general and administrative expenses, such increases would likely have been
greater if ISCG's employee turnover rate were significantly higher.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE. ISCG's revenues for the quarter and nine month periods ended
September 30, 1998 increased by $4.7 million, or 41%, and $15.3 million, or 50%,
compared to the corresponding periods in 1997. Approximately $4.5 million and
$14.3 million, or 96% and 93%, of these increases resulted from growth in
professional services revenue and approximately $187,000 and $1.1 million, or 4%
and 7%, from increases primarily in software revenue during the quarter and nine
months. Approximately 66% and 69% of the increase in professional services
revenue is attributed to an increase in hours billed and approximately 34% and
31% is attributed to an increases in aggregate average rates during the quarter
and nine months, respectively. For the quarter and nine month periods ended
September 30, 1998, the percentage of professional services revenue from clients
in the pharmaceutical industry was 70% and 68% compared to 62% and 63% for the
corresponding periods in 1997.
DIRECT COSTS. Direct costs for the quarter and nine month periods ended
September 30, 1998 increased by $3.0 million, or 44%, and $9.8 million, or 55%,
compared to the corresponding periods in 1997. These increases are principally
due to the growth in the professional staff to 538 technical personnel at
September 30, 1998 from 430 at September 30, 1997. As a percentage of revenues,
direct costs were 60% for the quarter and nine month periods ended September 30,
1998 compared to 59% for each of the corresponding periods in 1997. The increase
for the quarter and nine month period resulted principally from a decline in
ISCG's utilization rates (i.e. the ratio of hours billed to total available
hours) compared with the corresponding periods in 1997.
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SELLING EXPENSES. Selling expenses for the quarter and nine month periods
ended September 30, 1998 increased by $343,000, or 44%, and $1.1 million, or
56%, compared to the corresponding periods in 1997. As a percentage of revenues,
selling expenses were 7% for the quarter and nine month periods ended September
30, 1998 compared to 7% for each of the corresponding periods in 1997. The
dollar increase is principally due to the increase in the number of sales and
marketing personnel to 27 at September 30, 1998 from 21 at September 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter and nine month periods ended September 30, 1998 increased by
$688,000, or 29%, and $2.2 million, or 32%, compared to the corresponding
periods in 1997. These increases are principally due to increases in
administrative expenses to support ISCG's growth, facilities and facilities
related costs and the amortization of goodwill. The increases in facilities
costs (office rent, utilities, depreciation of computer equipment, amortization
of software and leasehold improvements, expansion of computer networks,
additional software costs and the costs of related support personnel) is related
to the growth in the number of professional and supervisory personnel performing
client engagements in ISCG's offices, rather than at client locations. As a
percentage of revenues, general and administrative expenses were 19% and 20% for
the quarter and nine month periods ended September 30, 1998 compared to 21% and
23% for the quarter and nine month periods of 1997. These decreases were
principally a result of increased revenues, which did not require a
corresponding increase in general and administrative expenses. ISCG believes its
general and administrative expenses as a percentage of revenue will be less for
the full year 1998 than for the full year in 1997.
COST AND EXPENSES ASSOCIATED WITH TERMINATED BUSINESS COMBINATION. As a
result of the termination of a potential business combination prior to the
definitive merger agreement with FCG, ISCG incurred a charge of $486,000 in the
third quarter of 1998. This charge included a payment for a release of claims
between ISCG and the other party and due diligence, accounting and legal
expenses.
INTEREST INCOME. Interest income for the quarter and nine month periods
ended September 30, 1998 decreased to $60,000 from $88,000 and $221,000 from
$317,000 in the corresponding periods in 1997. These decreases are principally
due to lower average cash equivalents and short-term investment balances.
EFFECTIVE INCOME TAX RATE. ISCG's effective income tax rate in 1998
decreased to 41% from 42% in 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. ISCG's revenues for 1997 increased by $12.6 million, or 41% from
1996. Approximately 67% of this increase resulted from an increase in the volume
of hours billed and approximately 33% from increases in the aggregate average
rates for hours billed during 1997. For 1997, revenue from clients in the
pharmaceutical industry increased to $26.8 million, or 62% of revenues, from
$18.0 million, or 59% of revenues, in 1996.
DIRECT COSTS. Direct costs consist primarily of employee-related costs and
non-reimbursed travel expenses for ISCG's technical personnel. Direct costs for
1997 increased by $7.9 million, or 45%, from 1996. This increase is principally
due to an increase in the number of technical personnel to 440 at December 31,
1997 from 330 at December 31, 1996. As a percentage of revenues, direct costs
increased to 59% in 1997 from 57% in 1996. This increase resulted principally
from a lower utilization rate during 1997 compared to 1996. During 1997 ISCG
performed more project engagements than staff augmentation assignments compared
to 1996. As a result, ISCG has experienced greater non-billable time prior to
the start of project engagements and between project engagements. Also, during
1997, ISCG experienced longer periods of non-billable time for its less
experienced new hires, after the completion of their training, before their
first assignments.
SELLING EXPENSES. Selling expenses principally consist of employee-related
costs as well as travel expenses of ISCG's sales and marketing personnel.
Selling expenses for 1997 increased by $1.3 million to
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$3.1 million from $1.8 million in 1996. This increase is principally due to the
increase in the number of sales and marketing personnel to 25 at December 31,
1997 from 13 at December 31, 1996. As a percentage of revenues, selling expenses
increased to 7% for 1997 compared to 6% for 1996. This increase resulted
principally from ISCG adding more experienced Account Executives in 1997, with
the skills to sell project engagements, and increased marketing initiatives in
order to provide existing and potential clients with essential information about
ISCG and its service offerings.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of executive management costs, recruiting costs, accounting, human
resources, general expenses, office facilities costs, training and education
expenses and depreciation and amortization. General and administrative expenses
for 1997 increased by $2.8 million to $9.2 million from $6.4 million in 1996 and
were 21% of revenues for 1997 and 1996. The increase is principally due to
increases in facilities costs (office rent and utilities) and facility related
costs (such as depreciation of computer equipment, amortization of software and
leasehold improvements, expansion of computer networks, additional software
costs and the costs of related support personnel) and recruiting expenses and
administrative personnel relating to an increase in the number of professional
and supervisory personnel, and performing client engagements in ISCG's offices
rather than at client locations.
INTEREST INCOME. Net interest income was $418,000 in 1997 as compared with
net interest income of $354,000 in 1996. The increase in net interest income
resulted from higher invested cash and investment balances during 1997.
EFFECTIVE INCOME TAX RATE. ISCG's effective income tax rate in 1997
decreased to 41% from 43% in 1996. This decrease is principally the result of
tax planning strategies and incentive tax credits received by ISCG.
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. ISCG's revenues for 1996 increased by $9.6 million, or 46% from
1995. Approximately 64% of this increase resulted from an increase in the volume
of hours billed and approximately 36% from increases in the aggregate average
rates for hours billed during 1996. For 1996, revenue from clients in the
pharmaceutical industry increased to $18.0 million, or 59% of revenues, from
$13.5 million, or 64% of revenues, in 1995 and revenues from clients engaged in
software development increased to $3.5 million, or 11% of revenues, in 1996 from
$1.4 million, or 7% of revenues, in 1995.
DIRECT COSTS. Direct costs for 1996 increased by $4.9 million, or 39%, from
1995. This increase is principally due to an increase in the number of technical
personnel to 330 at December 31, 1996 from 254 at December 31, 1995. As a
percentage of revenues, direct costs declined to 57% in 1996 from 60% in 1995.
This decline resulted primarily from increases in aggregate average billing
rates during 1996 that exceeded increases in payroll and related expenses for
ISCG's technical personnel. In response to such billing rate increases and to
competition for information services professionals in general, during the second
quarter of 1996 ISCG increased the compensation levels for a number of its
technical professionals.
SELLING EXPENSES. Selling expenses for 1996 increased by $778,000 to $1.8
million from $1.0 million in 1995. This increase is principally due to the
increase in the number of sales and marketing personnel to 13 at December 31,
1996 from 8 at December 31, 1995. As a percentage of revenues, selling expenses
increased to 6% for 1996 compared to 5% for 1995. This increase resulted from
the addition of three account executives (one in ISCG's new Chicago sales
office) and the addition of two technical sales support personnel to assist in
the increased focus on project-oriented consulting.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1996 increased by $2.3 million to $6.4 million from $4.1 million in 1995 and
to 21% of revenues for 1996 compared to 20% for 1995. These increases are
principally due to increases in facilities costs (office rent and utilities) and
facility-related costs (such as depreciation of computer equipment, amortization
of software and leasehold
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improvements, expansion of computer networks, additional software costs and the
costs of related support personnel) to support an increase during 1996 in the
number of professional and supervisory personnel performing client engagements
in ISCG's offices rather than at client locations. During 1996, ISCG also
incurred certain new expenses and increased insurance, legal and accounting
expenses associated with public company filing and compliance requirements and
with investor and shareholder relations.
INTEREST INCOME. Net interest income was $354,000 in 1996 as compared with
net interest expense of $33,000 in 1995. This increase in net interest income
resulted from higher invested cash balance during 1996 principally as a result
of the $9.9 million in net proceeds received from ISCG's initial public offering
of common stock in May 1996 (the "Initial Public Offering"). See "--Liquidity
and Capital Resources."
EFFECTIVE INCOME TAX RATE. ISCG's effective income tax rate in 1996 and
1995 was 43%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments decreased $5.4 million
to $4.0 million at September 30, 1998 from $9.4 million at December 31, 1997.
The decrease resulted principally from the acquisition of WaveFront, working
capital requirements, and capital expenditures. At September 30, 1998 cash
equivalents were invested in institutional money-market funds. By policy, ISCG
places its investments in high credit-quality instruments.
Cash and cash equivalents and short-term investments decreased $1.9 million
to $9.4 million at December 31, 1997 from $11.3 million at December 31, 1996.
This decrease resulted principally from the acquisition of Cutting Edge Computer
Solutions, Inc. At December 31, 1997 cash equivalents were invested in
short-term U.S. governmental agency issues, commercial paper, institutional
money-market funds and a repurchase agreement. By policy, ISCG places its
investments in high credit-quality instruments.
In February 1998, ISCG acquired all of the outstanding shares of capital
stock of WaveFront Consulting, Inc. for cash of $3.7 million, subject to certain
conditional payments based upon future operating income.
In May 1996, ISCG completed its Initial Public Offering. ISCG issued
2,175,000 shares of ISCG's common stock and received net proceeds of
approximately $9.9 million.
In 1995, ISCG sold 953,355 shares of Common Stock and received net proceeds
of approximately $2.7 million from such sale. The net proceeds primarily were
used by ISCG to repay the outstanding bank indebtedness and the note to the
selling stockholder and the balance for general corporate purposes.
ISCG currently anticipates that cash generated from operations and existing
cash balances will be sufficient to satisfy its operating requirements and
ordinary capital spending for the foreseeable future. Should ISCG's business
expand more rapidly than expected, ISCG's $1.0 million bank line of credit would
be available to fund such operating and capital requirements. In addition, ISCG
could consider seeking additional public or private debt or equity financing to
fund growth opportunities, including acquisitions.
IMPACT OF YEAR 2000
The Year 2000 or Y2K issue arises because many existing computer programs
and systems, including some of those used by ISCG for its own internal purposes
and those used by its clients, suppliers, vendors and others, and possibly some
custom applications designed, built or modified by ISCG for its clients, use
only two digits to identify the year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, computer applications that utilize this two-digit
year format could fail or create erroneous results by or at the year 2000.
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ISCG has identified four main areas of its Y2K risk:
(1) ISCG'S INTERNAL COMPUTER SYSTEMS COULD BE DISRUPTED OR FAIL, CAUSING AN
INTERRUPTION OR DECREASE IN ISCG'S ABILITY TO OPERATE. ISCG is conducting an
ongoing assessment of the Y2K-readiness of its major information technology (IT)
systems and non-IT systems such as building security, voice mail, telephone and
other systems containing embedded microprocessors.
Except as described in the next paragraph, ISCG has completed an analysis of
its internal business systems including its accounting and human resource
applications and its PC's, servers, networks, and application software. Plans to
modify, update, or replace key business systems are being implemented. ISCG
expects that its internal systems will be substantially Y2K compliant before
December 31, 1999.
ISCG is currently analyzing the software and hardware used to develop custom
applications for its customers, including development tools, utilities,
operating systems, and servers. ISCG is attempting to obtain written
confirmation from vendors that these products are Y2K compliant, and is testing
and modifying its internally developed tools. Where necessary ISCG is upgrading,
modifying, or replacing this software and hardware. While ISCG believes that it
will continue to be able to deliver custom applications to its customers after
the year 2000, a substantial failure of its internal systems could delay that
delivery, and could have an adverse impact on ISCG's business.
The costs incurred to date on these efforts have not been material. Based on
currently available information, ISCG believes that the cost to compete these
efforts will also not be material. However, if additional compliance efforts of
which ISCG is not currently aware are required, or if updating, modifying or
replacing ISCG's systems costs more than currently estimated, the Y2K issue
could have a material adverse effect on ISCG. If ISCG's efforts to make its
internal systems Y2K compliant are unsuccessful, the resulting failure could
result in a substantial interruption of ISCG's operations and materially affect
ISCG's business.
(2) THE COMPUTER SYSTEMS OF THIRD PARTIES WITH WHOM ISCG REGULARLY DEALS
COULD BE DISRUPTED OR FAIL, CAUSING AN INTERRUPTION OR DECREASE IN ISCG'S
ABILITY TO CONTINUE ITS OPERATIONS. ISCG relies on third party relationships in
the conduct of its business, including suppliers, vendors, utilities, financial
institutions and others. ISCG has created a list of the third parties it
believes are material to its operations and is attempting to obtain written
assurances from them that there will be no interruption of service as a result
of the Y2K issue. Where such assurances are not given, ISCG intends, where
practical, to devise contingency plans to allow ISCG to operate in the event of
Y2K-related service interruption. It is possible that ISCG will experience
interruptions in third party services despite vendors' assurances otherwise, and
that ISCG will not be able to develop contingency plans to meet individual or
multiple third party failures, resulting in an operations interruption that
could materially adversely affect ISCG's business.
(3) ISCG COULD BE EXPOSED TO LIABILITIES IF ANY OF THE CUSTOM APPLICATIONS
DESIGNED, BUILT OR MODIFIED BY ISCG FOR ITS CLIENTS ARE DISRUPTED OR FAIL. ISCG
believes it is likely that certain custom software applications it designed,
built or modified in the past are non-Y2K compliant. ISCG has not made a
determination of which custom applications may not be Y2K compliant. Further,
ISCG has not determined the extent to which it may be legally responsible for
either (1) fixing any non-Y2K compliant applications or (2) the consequences of
such non-compliance. ISCG has not quantified the impact that the foregoing risk
could have on its business. To better estimate the scope of this potential
problem, ISCG is planning to review representative samples of the custom
applications it has worked on in its larger engagements in the past one to three
years. To the extent this review indicates that any of such applications are not
Y2K compliant, ISCG will evaluate whether such non-compliance may result in
liability for ISCG. Even in the absence of legal liability, ISCG may determine
that it is in ISCG's best interests to offer to fix non-compliant applications
under a variety of arrangements including at no charge or at rates below ISCG's
normal rates. The failure of custom software applications delivered by ISCG in
the past to be Y2K compliant, and the liability or the need to devote additional
resources that could result from such failure, could have a material adverse
effect on ISCG's business.
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(4) ISCG'S SOURCES OF REVENUE COULD DECLINE IF CLIENTS' RESOURCES ARE
DIVERTED TO THE Y2K PROBLEM OR IF CLIENTS' OPERATIONS ARE DISRUPTED. If clients
of ISCG divert significant resources from new application development to
addressing their Y2K problems, ISCG's work for those clients would be reduced
and ISCG could experience a material decrease in its business overall.
Currently, ISCG is not able to predict the extent to which its clients will
divert their resources to the Y2K problem or to estimate the impact, if any,
this may have on ISCG's revenues. ISCG is evaluating whether it should take
steps (such as making inquiries with the relevant persons within its clients'
organizations) to attempt to quantify this risk.
In addition, business interruptions experienced by ISCG's clients due to the
Y2K issue could result in reduced demand for ISCG's services (applications
development or systems and networking) or delay in payment of ISCG's invoices.
Such interruptions could have a material adverse effect on ISCG's business.
ISCG has not yet devised, and may not be able to devise, a contingency plan
that will adequately address all Y2K issues. Because of the uncertainty
surrounding the Y2K issue, unforeseen and unpredictable costs and liabilities
associated with the Y2K issue could materially adversely impact the business,
prospects, financial condition and results of operations of ISCG.
RECENTLY ISSUED ACCOUNTING STANDARDS
The following new statements are effective for financial statements for
periods beginning after December 15, 1997. SFAS 130--Reporting Comprehensive
Income, SFAS 131--Disclosure about Segments of an Enterprise and Related
Information, SFAS 132--Employers' Disclosure about Pensions and Other Post
Retirement Benefits, SOP 97-2--Software Revenue Recognition. These standards are
not expected to have a material effect on ISCG's financial conditions and
results of operations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ISCG
The following table sets forth certain information regarding the beneficial
ownership of ISCG common stock as of August 31, 1998 by: (1) each shareholder
who is known by ISCG to own beneficially more than 5% of ISCG common stock; (2)
the Chief Executive Officer of ISCG and each of the four most highly compensated
executive officers of ISCG; (3) each director of ISCG; and (4) all directors and
executive officers of ISCG as a group. Unless otherwise indicated, to the
knowledge of ISCG, all persons
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listed below have sole voting and investment power with respect to all shares of
ISCG common stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1)
- --------------------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
David S. Lipson (2).................................................................... 2,917,879 36.1%
Technology Leaders II (3).............................................................. 1,209,955 14.7
<*>Safeguard</*> Scientifics, Inc. (4)................................................. 756,025 9.2
Warrant and Stock Trust (5)............................................................ 370,137 4.4
Melissa A. Clancey (6)................................................................. 18,300 *
David F. Elderkin (7).................................................................. 94,050 1.2
David D. Gathman (8)................................................................... 103,184 1.3
Edward P. Kaiserian (9)................................................................ 25,200 *
Jay M. Rose (10)....................................................................... 39,150 *
Victor E. Stambaugh (11)............................................................... 26,100 *
Frank Baldino, Jr., Ph.D. (12)......................................................... 8,000 *
Melvyn E. Bergstein (13)............................................................... 13,434 *
Donald R. Caldwell (14)................................................................ 15,390 *
Mark J. DeNino (15).................................................................... 2,032 *
David S. Fehr (16)..................................................................... 4,000 *
James L. Mann (17)..................................................................... 11,000 *
Donna J. Pedrick (18).................................................................. 3,000 *
Michael D. Stern (19).................................................................. 385,656 4.6
Edward S.J. Tomezsko, Ph.D. (20)....................................................... 16,100 *
All executive officers and directors as a group (16 persons) (21)...................... 3,682,475 43.1
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of ISCG common stock.
(1) Solely for the purpose of the percentage ownership calculation for each
beneficial owner depicted herein, the number of shares of ISCG common stock
deemed outstanding (i) assumes there are 8,076,404 shares of ISCG common
stock outstanding as of August 31, 1998, and (ii) includes additional
shares issuable pursuant to options or warrants held by such owner that may
be exercised within 60 days after August 31, 1998, as set forth below.
Solely for the purpose of the percentage beneficial ownership calculation
for all executive officers and directors as a group, the aggregate number
of shares underlying all presently exercisable options held by such persons
is added to the total number of shares of ISCG common stock outstanding.
(2) The business address of the named shareholder is 575 East Swedesford Road,
Wayne, Pennsylvania 19087. Excludes 30,276 shares of ISCG common stock
outstanding and 339,861 shares of ISCG common stock issuable pursuant to a
warrant, which outstanding shares and warrant were transferred by Mr.
Lipson to the Warrant and Stock Trust. See footnotes (5) and (19). Mr.
Lipson disclaims beneficial ownership of such securities.
(3) The business address of the named shareholder is 800 The <*>Safeguard</*>
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087. Includes 169,931
shares of ISCG common stock issuable pursuant to warrants. Technology
Leaders II L.P. and Technology Leaders II Offshore C.V. are venture capital
funds that are required by their governing documents to make all
investment, voting and disposition actions in tandem. Technology Leaders II
L.P. and Technology Leaders II Offshore C.V. are referred to herein as
"Technology Leaders II." Of the 1,040,024 shares outstanding and 169,931
shares (the "derivative shares") obtainable upon the exercise of the
warrants owned by Technology Leaders II, 579,605 shares and 94,703
derivative shares are owned by Technology Leaders II L.P. and 460,419
shares and 75,228 derivative shares are owned by Technology Leaders II
Offshore C.V. Technology Leaders II Management L.P. ("TLM"), the sole
general partner of Technology Leaders II L.P. and
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the co-general partner of Technology Leaders II Offshore C.V., exercises
through its executive committee sole investment and voting power with
respect to the shares owned by these entities.
(4) The business address of the named shareholder is 800 The <*>Safeguard</*>
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087. Includes 169,931
shares of ISCG common stock issuable pursuant to a warrant. Shares are held
of record by <*>Safeguard</*> Scientifics (Delaware), Inc., a wholly-owned
subsidiary of <*>Safeguard</*> Scientifics, Inc. ("<*>Safeguard</*>"). Does
not include shares beneficially owned by Technology Leaders II, in which
<*>Safeguard</*> has a beneficial interest.
(5) The business address of the named shareholder is 510 Williamson Road,
Gladwyne, Pennsylvania 19035. Consists of 30,276 shares of ISCG common
stock outstanding and 339,861 shares of ISCG common stock issuable pursuant
to a warrant. See footnotes (2) and (19).
(6) Includes 8,500 shares of ISCG common stock issuable pursuant to exercisable
options.
(7) Includes 8,950 shares of ISCG common stock issuable pursuant to exercisable
options.
(8) Includes 75,084 shares of ISCG common stock issuable pursuant to
exercisable options.
(9) Includes 9,400 shares of ISCG common stock issuable pursuant to exercisable
options.
(10) Includes 28,150 shares of ISCG common stock issuable pursuant to
exercisable options.
(11) Includes 16,400 shares of ISCG common stock issuable pursuant to
exercisable options.
(12) Includes 3,000 shares of ISCG common stock issuable pursuant to
exercisable options.
(13) Includes 3,000 shares of ISCG common stock issuable pursuant to
exercisable options.
(14) Excludes 756,025 shares beneficially owned by <*>Safeguard</*>. Mr.
Caldwell serves as President and Chief Operating Officer of
<*>Safeguard</*>. Mr. Caldwell disclaims beneficial ownership of such
shares.
(15) Excludes 1,209,955 shares beneficially owned by Technology Leaders II. Mr.
DeNino is a General Partner and Managing Director of TLM and is a member
of TLM's eleven-person executive committee. Mr. DeNino disclaims
beneficial ownership of such shares.
(16) Includes 4,000 shares of ISCG common stock issuable pursuant to
exercisable options.
(17) Includes 3,000 shares of ISCG common stock issuable pursuant to
exercisable options.
(18) Includes 1,500 shares of ISCG common stock issuable pursuant to
exercisable options.
(19) Includes 30,276 shares of ISCG common stock outstanding and 339,861 shares
of ISCG common stock issuable pursuant to a warrant held by the Warrant
and Stock Trust, of which Mr. Stern is the sole trustee. Also includes 900
shares of ISCG common stock issuable pursuant to exercisable options.
(20) Includes 8,100 shares of ISCG common stock issuable pursuant to
exercisable options.
(21) Includes (1) an aggregate of 167,984 shares of ISCG common stock issuable
pursuant to exercisable options and (2) 30,276 shares of ISCG common stock
outstanding and 339,861 shares of ISCG common stock issuable pursuant to a
warrant held by the Warrant and Stock Trust.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF FCG CAPITAL STOCK
The authorized capital stock of FCG consists of 50,000,000 shares of common
stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001 par
value (the "FCG preferred stock"). As of the record date, there were 16,600,418
shares of FCG common stock outstanding held of record by 76 stockholders.
FCG COMMON STOCK. The holders of FCG common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. The holders of FCG common stock are entitled to receive ratably
such dividends as may be declared by the FCG Board out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
FCG, holders of FCG common stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of FCG common stock have no
preemptive rights and no right to convert their FCG common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
FCG common stock. All outstanding shares of FCG common stock are, and all shares
of FCG common stock to be outstanding after the completion of the merger will
be, fully-paid and nonassessable.
FCG PREFERRED STOCK. The FCG Board has the authority, without further
action by the stockholders, to issue up to 10,000,000 shares of FCG preferred
stock, in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by stockholders. The issuance of FCG
preferred stock could adversely affect the voting power of holders of FCG common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of FCG. FCG has no present plan to issue any
shares of FCG preferred stock.
DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS. FCG is
subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and employees, owns (or within three years
prior, did own) 15% or more of the corporation's voting stock.
The FCG certificate of incorporation and FCG bylaws also require that, any
action required or permitted to be taken by stockholders of FCG must be effected
at a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of the
stockholders of FCG may be called only by the FCG Board, the Chairman of the
Board, the President of FCG, or by any person or persons holding shares
representing at least 10% of the outstanding capital stock of FCG. The FCG
certificate of incorporation also provides for a classified board and specifies
that the authorized number of directors may be changed only by resolution of the
FCG Board. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of FCG. See "Management--Board
Composition."
REGISTRATION RIGHTS. Pursuant to the merger agreement, FCG has agreed to
enter into the registration rights agreement at closing, which grants the
holders certain rights with respect to the registration under the Securities Act
of shares of FCG common stock issued to the holders in connection with the
merger.
TRANSFER AGENT AND REGISTRAR. American Stock Transfer & Trust Company has
been appointed as the transfer agent and registrar for the FCG common stock.
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DESCRIPTION OF ISCG CAPITAL STOCK
The authorized capital stock of ISCG consists of 25,000,000 shares of ISCG
common stock, par value $0.005 per share, and 500,000 shares of ISCG preferred
stock, par value $1.00 per share ("ISCG preferred stock"). As of the record
date, there were 8,068,723 shares of ISCG common stock outstanding held of
record by 422 shareholders and no shares of ISCG preferred stock outstanding.
ISCG COMMON STOCK. The holders of ISCG common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders and do not have cumulative voting rights. Except as otherwise
required by law, all other matters are determined by a majority of the votes
cast. Holders of ISCG common stock are entitled to receive ratably such
dividends, if any, as may be declared by the ISCG Board out of funds legally
available therefor, subject to any preferential dividend rights of outstanding
ISCG preferred stock. Subject to the rights of holders of ISCG preferred stock,
upon the liquidation, dissolution or winding up of ISCG, the holders of ISCG
common stock are entitled to receive ratably the net assets of ISCG available
after the payment of all debts and other liabilities. Holders of the ISCG common
stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of ISCG common stock are fully paid and nonasessable.
ISCG PREFERRED STOCK. ISCG, by resolution of the ISCG Board and without any
further vote or action by the shareholders, has the authority, subject to
certain limitations prescribed by law, to issue from time to time up to an
aggregate of 500,000 shares of ISCG preferred stock in one or more classes or
series and to determine the designation and the number of shares of any class or
series as well as the voting rights, preferences, limitations and special
rights, if any, of the shares of any such class or series, including the
dividend rights, dividend rates, conversion rights and terms, voting rights,
redemption rights and terms, and liquidation preferences. The issuance of ISCG
preferred stock may have the effect of delaying, deferring or preventing a
change of control of ISCG. As of the ISCG record date, there were no shares of
ISCG preferred stock outstanding, and ISCG has no plans to issue any shares of
ISCG preferred stock.
PENNSYLVANIA BUSINESS CORPORATION LAW. The PBCL expressly permits directors
of a corporation to consider the interests of constituencies other than
shareholders, such as employees, suppliers, customers and the community, in
discharging their duties. Further, the PBCL expressly provides that directors do
not violate their fiduciary duty solely by relying on shareholders' rights plans
or other antitakeover provisions of the PBCL.
The effect of these provisions may be to deter hostile takeovers at a price
higher than the prevailing market price for the ISCG common stock. In some
circumstances, certain shareholders may consider these antitakeover provisions
to have a disadvantageous effect. Tender offers or other non-open market
acquisitions of shares are frequently made at prices above the prevailing market
price of a company's shares. In addition, acquisitions of shares by persons
attempting to acquire control through market purchases may cause the market
price of the ISCG common stock to reach levels that are higher than would
otherwise be the case. These antitakeover provisions may discourage any or all
of such acquisitions, particularly those of less than all of the ISCG common
stock, and may thereby prevent certain holders of ISCG common stock from having
an opportunity to sell their shares at a temporarily higher market price.
PBCL contains four additional provisions that would have applied to ISCG had
the shareholders not opted out of these provisions. The shareholders of ISCG
amended the articles of incorporation on January 29, 1996 to opt out of the
"control transactions" provision, which provides for mandatory shareholder
notice of the acquisition of 20% of the voting power of a Pennsylvania
corporation and provides shareholders with the opportunity to demand "fair
value" for their shares upon acquisition of voting power; the "business
combination" provision, which limits a corporation from engaging in any merger
or business combination with an interested shareholder unless certain conditions
have been met; the "control share" provision, which limits the voting power of
the shareholders owning 20% or more of a corporation's voting stock, and the
"disgorgement" provision, which permits a corporation to recover
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profits resulting from the sale of shares in certain situations, including those
where an individual or group attempts to acquire at least 20% of the
corporation's voting shares.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the ISCG
common stock is ChaseMellon Shareholder Services, L.L.C.
COMPARISON OF SHAREHOLDERS' RIGHTS
In connection with the merger, the ISCG shareholders will be converting
their shares of ISCG common stock into shares of FCG common stock. FCG is a
Delaware corporation and ISCG is a Pennsylvania corporation, and the FCG
certificate of incorporation and the FCG bylaws differ from the ISCG articles of
incorporation and the ISCG bylaws in several significant respects. Because of
the differences between the DGCL and the PBCL, and the differences in the
charter documents of FCG and ISCG, the rights of a holder of FCG common stock
differ from the rights of a holder of ISCG common stock.
Below is a summary of some of the important differences between the DGCL and
the PBCL and the charter documents of FCG and ISCG. It is not practical to
summarize all of such differences in this joint proxy statement/prospectus, but
some of the principal differences which could materially affect the rights of
ISCG shareholders include the following:
SIZE OF THE BOARD OF DIRECTORS
In accordance with the DCGL, the FCG certificate of incorporation states
that the number of directors will be set exclusively by the FCG Board and
authorizes the FCG Board to change the number by resolution. The number of
directors of FCG is currently fixed at eight. The FCG Board acting without
stockholder approval may change such number.
Under the PBCL, the number of directors is fixed by, or in the manner
provided in the bylaws or, if not so fixed, the number of directors is the same
as that stated in the articles of incorporation or three if no number is so
stated. The ISCG bylaws fix the number of directors at eleven directors. The
PBCL vests the authority to amend the bylaws to change the number of directors
in the board of directors, subject to the power of the shareholders to change
such action.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one in which a certain number, but not all, of the
directors are elected on a rotating basis each year. The DGCL permits, but does
not require, a classified board of directors, pursuant to which the directors
can be divided into as many as three classes with staggered terms of office,
with only one class of directors standing for election each year. The FCG
certificate of incorporation provides for a classified board of directors with
three classes of directors.
Under the PBCL, a corporation is permitted to adopt a classified board;
provided, however, that if the directors are classified, each class must be as
nearly equal in number as possible, the term of office of at least one class
must expire in each year and the members of a class must not be elected for a
period longer than four years. In contrast to the FCG certificate of
incorporation, the ISCG articles of incorporation do not provide for a
classified board.
CUMULATIVE VOTING
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may then cast all such votes for a single
candidate or may allocate them among as many candidates as the shareholder may
choose. Under the DGCL, cumulative voting in the election of directors is not
available unless specifically provided in the certificate of incorporation. The
FCG certificate of incorporation does not provide for cumulative voting.
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The PBCL provides that any shareholder is entitled to cumulate his votes in
the election of directors unless the articles of incorporation provide
otherwise. The ISCG articles of incorporation provide that the shareholders of
the corporation do not have any cumulative voting rights.
REMOVAL OF DIRECTORS
Under the DGCL, if a corporation has a classified board, the stockholders
may remove a director only for cause, unless the certificate of incorporation
provides otherwise. The FCG certificate of incorporation and the FCG bylaws
provide that any and all directors may be removed with cause by a vote of the
holders of a majority of shares entitled to vote at an election of directors,
and without cause by the vote of at least 66 2/3% of the shares entitled to vote
at an election of directors.
Under the PBCL, any director or the entire board of directors of a
corporation may be removed, with or without cause, if the removal is approved by
the affirmative vote of a majority of the outstanding shares entitled to vote.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the DCGL, vacancies and newly created directorships may be filled by a
majority of the directors then in office (even though less than a quorum) unless
otherwise provided in the certificate of incorporation or bylaws (and unless the
certificate of incorporation directs that a particular class of stock is to
elect such director, in which case any other directors elected by such class, or
a sole remaining director so elected, may fill such vacancy). Under the FCG
certificate of incorporation and FCG bylaws, only a majority of directors then
in office (even though less than a quorum) may fill any vacancies or newly
created directorship on the FCG Board (unless the FCG Board determines by
resolution that the newly created directorship shall be filled by the
stockholders).
Pursuant to the PBCL and the ISCG bylaws, any vacancy on ISCG's Board,
including vacancies resulting from an increase in the number of directors, may
be filled by a majority vote of the remaining members of the ISCG Board, though
less than a quorum, or by a sole remaining director, and each person so selected
will be a director to serve until a successor has been selected and qualified or
until his or her earlier death, resignation or removal. When one or more
directors resign from the board effective at a future date, the directors then
in office, including those who have so resigned, will have power by the
applicable vote to fill the vacancies, the vote thereon to take effect when the
resignations become effective.
INTERESTED DIRECTOR TRANSACTIONS
Under the DGCL, certain contracts or transactions in which one or more of a
corporation's directors has an interest are not void or voidable because of such
interest, provided that certain conditions, such as obtaining the required
approval and fulfilling the requirements of good faith and full disclosure are
met. Under the DGCL the conditions are that either (1) the shareholders or the
disinterested directors must approve any such contract or transaction after the
full disclosure of material facts, or (2) the contract or transaction must have
been fair as to the corporation at the time it was approved. Under the DGCL, if
board approval is sought, the contract or transactions must be approved by a
majority of the disinterested directors (even though less than a quorum).
Similarly, under the PBCL, a transaction between a corporation and an
interested director will not be void or voidable solely for that reason if (1)
the board of directors knows about the director's interest and authorized the
transaction by the affirmative vote of a majority of the disinterested directors
even though the disinterested directors are less than a quorum, (2) the
shareholders entitled to vote thereon know about the director's interest and the
contract is specifically approved in good faith by vote of those shareholders or
(3) the transaction is fair to the corporation as of the time it is authorized,
approved or ratified by the board of directors or the shareholders.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
FCG provides indemnification of its directors, officers and employees. The
FCG bylaws provide that FCG shall indemnify each of its directors and executive
officers against expenses, judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. The
FCG certificate of incorporation provides that FCG may agree to indemnify and
protect any director, officer, employee or agent to the fullest extent permitted
by the DGCL. Under the DGCL other than an action brought by or in the right of
the corporation, such indemnification is available if it is determined that the
proposed indemnitee acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful. In actions brought by or in the right
of the corporation, such indemnification is limited to expenses actually and
reasonably incurred and permitted only if the indemnitee acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the company, except that no indemnification may be made in respect
of any claim, issue or matter as to which such person is adjudged to be liable
to the corporation, unless and only to the extent that the court in which the
action was brought determines that, despite the adjudication of liability but in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses which the court deems proper. To the
extent that the proposed indemnitee has been successful in defense of any
action, suit or proceeding, he must be indemnified against expenses actually and
reasonably incurred by him in connection with the action.
The PBCL permits a corporation to indemnify its representatives. Pursuant to
the ISCG bylaws, no director of ISCG will be personally liable as such for
monetary damages for any action taken, or any failure to take action, unless the
director has breached or failed to perform the duties of his office under the
PBCL and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness; provided, however, that a director may be
responsible or liable pursuant to a criminal statute or for payment of taxes
pursuant to local, state or federal law. The ISCG bylaws provide that ISCG will
indemnify any officer or any director (or employee or agent designated by
majority vote of the ISCG Board to the extent provided in such vote) who was or
is a party to or threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including action by or in the right of ISCG) by reason of the
fact that he is or was a director or officer (or employee or agent) of ISCG or
is or was serving at the request of ISCG as a director or officer (or employee
or agent) of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding; provided, however,
that indemnification will not be made in any case where the act or failure to
act giving rise to the claim for indemnification is determined by a court to
have constituted willful misconduct or recklessness. Expenses incurred by an
officer, director, employee or agent purportedly indemnified pursuant to the
ISCG bylaws in defending a civil or criminal action, suit or proceeding may be
paid by the corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it will ultimately be determined that he is not entitled to
be indemnified by the corporation. The indemnification and advancement of
expenses provided for in the ISCG bylaws continues as to a person who has ceased
to be a director, officer, employee or agent of the corporation and will inure
to the benefit of the heirs, executors and administrators of such person.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION AND ARTICLES OF INCORPORATION
Under the DGCL, a corporation's certificate of incorporation can be amended
by the affirmative vote of the board of directors and approved by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, unless the certificate of incorporation requires the vote of a
larger portion of the shares. The FCG certificate of incorporation requires
approval by 66 2/3% of the
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outstanding shares entitled to vote thereon in order to amend certain provisions
of the FCG certificate of
incorporation relating to the composition of the FCG Board, election, removal
and actions of directors, amendment of the FCG bylaws and FCG certificate of
incorporation, actions by stockholders, the calling of special meetings of
stockholders and indemnification of directors.
The PBCL provides that a vote of the shareholders entitled to vote on a
proposed amendment to the articles of incorporation will be taken at the next
annual or special meeting of which notice for that purpose has been duly given.
Unless the articles of incorporation or a specific provision of the PBCL
requires a greater vote, a proposed amendment of the articles of incorporation
will be adopted upon receiving the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon and, if any class or series of
shares is entitled to vote thereon as a class, the affirmative vote of a
majority of the votes cast in each such class vote. In general, pursuant to the
PBCL, a proposed amendment of the articles of incorporation will not be deemed
to have been adopted by a corporation unless it has also been approved by the
board of directors, regardless of the fact that the board has directed or
suffered the submission of the amendment to the shareholder for action. The ISCG
articles of incorporation do not require a higher percentage of affirmative
votes than a majority of the shares entitled to vote thereon.
AMENDMENT OF BYLAWS
Under the FCG certificate of incorporation and FCG bylaws, the stockholders
of FCG may alter or amend the FCG bylaws by a vote of at least 66 2/3% of the
outstanding shares entitled to vote thereon. Under the FCG certificate of
incorporation and FCG bylaws, the FCG Board may adopt, amend or repeal the FCG
bylaws.
Pursuant to the PBCL, bylaws of a corporation may be amended or repealed
either by the shareholders of the corporation at any duly organized meeting
thereof or, with respect to those matters that are not expressly committed by
the PBCL to the shareholders and, regardless of whether the shareholders have
previously adopted or approved the bylaws being amended or repeal, by the board
of directors of the corporation.
POWER TO CALL SPECIAL SHAREHOLDERS' MEETING; ACTION BY CONSENT
Under the DGCL, a special meeting of stockholders may be called by the board
of directors or by any other person authorized to do so in the certificate of
incorporation or the bylaws. The FCG certificate of incorporation and the FCG
bylaws provide that special meetings of stockholders may be called only by the
FCG Board, the Chairman of the FCG Board, the President of FCG, or by any person
or persons holding shares representing at least 10% of the outstanding capital
stock of FCG. The FCG certificate of incorporation provides that any action
taken by stockholders must be effected at an annual or special meeting and may
not be effected by written consent.
Under the PBCL, a special meeting of the shareholders may be called at any
time by (1) the board of directors, (2) unless otherwise provided in the
articles of incorporation, by shareholders entitled to cast at least 20% of the
votes that all shareholders are entitled to cast at that particular meeting or
(3) by such officers or other persons as may be provided in the bylaws. The ISCG
bylaws provide that a special meeting of the shareholders may be called at any
time upon written notice to the secretary of the corporation by (1) a majority
of the ISCG Board or (2) by the President. Additionally, under the PBCL and the
bylaws of ISCG, the ISCG Board must hold at least one meeting of the
shareholders in each calendar year. If the annual meeting of the shareholders is
not called and held within six months after the time designated by the ISCG
Board, then any shareholder may call the meeting at any time thereafter. The
PBCL requires that at any time, upon written request of any person who has
called a special meeting, the secretary must fix the time of the meeting which,
if the meeting is called pursuant to a statutory right, will be held not more
than 60 days after the receipt of the request. If the secretary neglects or
refuses to fix the time of the meeting, the person or persons calling the
meeting may do so.
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Under the PBCL, unless otherwise restricted in the bylaws, any action
required or permitted to be taken at a meeting of the shareholders or class of
shareholders of a corporation may be taken without a meeting of the shareholders
if, prior or subsequent to the action, a consent or consents thereto by all the
shareholders who would be entitled to vote at a meeting for such purpose are
filed with the secretary of the corporation. ISCG's bylaws do not contain any
restrictions on shareholders' ability to act by unanimous written consent. The
PBCL also provides that, if the ISCG bylaws so provide, any action required or
permitted to be taken at a meeting of the shareholders or of a class of
shareholders may be taken without a meeting upon the written consent of
shareholders who would have been entitled to cast the minimum number of votes
that would be necessary to authorize the action at a meeting at which all
shareholders entitled to vote thereon were present and voting. ISCG's bylaws do
not provide for shareholder action by partial written consent.
INSPECTION OF SHAREHOLDERS' LIST
The DGCL allows any shareholder to inspect the shareholders' list for a
purpose reasonably related to such person's interest as a shareholder. The PBCL
provides that the officer or agent having charge of the transfer books for the
shares of the corporation must make a complete list of the shareholders entitled
to vote at a shareholder meeting, arranged in alphabetical order, with the
address of and the number of shares held by each shareholder The list must be
produced and kept open at the time and place of the shareholder meeting and will
be subject to the inspection of any shareholder during the whole time of the
meeting for the purposes thereof.
DIVIDENDS AND REPURCHASES OF SHARES
The DGCL permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared or for the preceding fiscal year as long as the amount of
capital of the corporation is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. The FCG certificate of incorporation
does not contain any such restrictions on FCG's ability to declare and pay
dividends. In addition, the DGCL generally provides that a corporation may
redeem or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation. The ability of a Delaware corporation to
pay dividends on, or to make repurchases or redemptions of, its shares is
dependent on the financial status of the corporation standing alone and not on a
consolidated basis. In determining the amount of surplus of a Delaware
corporation, the assets of the corporation, including stock of subsidiaries
owned by the corporation, must be valued at their fair market value as
determined by the board of directors, regardless of their historical book value.
The PBCL provides that, unless otherwise restricted in the bylaws, a
distribution may be made unless if, after giving effect thereto, (1) the
corporation would be unable to pay its debts as they become due in the usual
course of its business or (2) the total assets of the corporation would be less
than the sum of its total liabilities plus the amount that would be needed, if
the corporation were to be dissolved at the time as of which the distribution is
measured, to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the distribution. The
PBCL also permits corporations to acquire their own shares. The ISCG articles of
incorporation do not impose additional restrictions on distributions.
Furthermore, the ISCG articles of incorporation permit dividends to be paid upon
the ISCG common stock as and where declared by the ISCG Board, subject to the
rights of the preferred shareholders. The ISCG bylaws provide that any dividends
paid may be paid in cash, in property, or in shares of the corporation.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under the DGCL, with certain exceptions, any merger, consolidation or sale,
lease or exchange of all or substantially all of the assets must be approved by
the board of directors and by the affirmative vote of a
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majority of the outstanding shares entitled to vote thereon. Pursuant to the
PBCL, a plan of merger or consolidation generally shall be adopted upon
receiving the affirmative vote of a majority of the votes cast by all
shareholders entitled to vote thereon of each of the domestic corporations that
is a party to the merger or consolidation and, if any class or series of shares
is entitled to vote thereon as a class, the affirmative vote of a majority of
the votes cast in each class to vote. Additionally, the PBCL generally provides
that the sale, lease, exchange or other disposition of all, or substantially all
the property and assets, with or without the goodwill, of a corporation, must be
made only pursuant to a plan of asset transfer which is approved in the same
manner that mergers are approved.
BUSINESS COMBINATION FOLLOWING A CHANGE OF CONTROL
The DGCL prohibits certain business combinations between a Delaware
corporation, the shares of which are listed on a national securities exchange,
and an "interested shareholder" for a period of three years following the time
that such person became an "interested shareholder," without board approval,
unless certain conditions are met and unless the certificate of incorporation of
the corporation contains a provision expressly electing not to be governed by
such provisions. The FCG certificate of incorporation does not contain such an
election.
Similarly, the PBCL prohibits certain business combinations between a
Pennsylvania corporation that is a "registered corporation" (which includes
corporations registered under the Exchange Act) and an "interested shareholder"
unless certain conditions are met and unless the articles of incorporation
expressly provide that such corporation is electing not to be subject to such
provisions. The ISCG articles of incorporation contain such an election,
therefore, provisions of the PBCL that impose special standards with respect to
business combinations between registered corporations and interested
shareholders do not apply to ISCG.
SHAREHOLDER DERIVATIVE SUITS
Under the DCGL, a stockholder may only bring a derivative action on behalf
of the corporation if the stockholder was a stockholder of the corporation at
the time of the transaction in question or his or her stock thereafter devolved
upon him or her by operation of law. The PBCL provides that in any action or
proceeding brought to enforce a secondary right on the part of one or more
shareholders of a corporation against any present or former officer or director
of the corporation because the corporation refuses to enforce rights that may
properly be asserted by it, each plaintiff must aver and it must be made to
appear that each plaintiff was a shareholder of the corporation or owner of a
beneficial interest in the shares at the time of the transaction of which he
complains, or that his shares or beneficial interest in the shares devolved upon
him by operation of law from a person who was a shareholder or owner of a
beneficial interest in the shares at that time; provided however that any
shareholder who otherwise would be entitled to maintain the action or proceeding
and who does not meet such requirements may, nevertheless in the discretion of
the court, be allowed to maintain the action or proceeding on preliminary
showing to the court, by application and upon such verified statements and
depositions as may be required by the court, that there is a strong prima facie
case in favor of the claim asserted on behalf of the corporation and that
without the action serious injustice will result. In any action or proceeding
instituted or maintained by holders or owners of less than 5% of the outstanding
shares of any class of the corporation, unless the shares held or owned by the
holders or owners have an aggregate fair market value in excess of $200,000, the
corporation in whose right the action or proceeding is brought will be entitled
to require the plaintiffs to give security for the reasonable expenses,
including attorneys' fees, that may be incurred by it in connection therewith or
for which it may become liable in connection with mandatory indemnification, to
which security the corporation will have recourse in such amount as the court
determines upon the termination of the action or proceeding.
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DISSENTERS' RIGHTS
Under the DGCL, a shareholder of a corporation participating in certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such shareholder may receive cash in the
amount of the fair market value of the shares held by such shareholder (as
determined by a court or by agreement of the corporation and the shareholder) in
lieu of the consideration such shareholder may otherwise receive in the
transaction. Under the DGCL, appraisal rights are not available to: (1)
stockholders with respect to a merger or consolidation by a corporation, the
shares of which are either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or are held of
record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or are held of record by more than 2,000 holders; or
(2) stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because, among other things, the number of shares to be issued in the merger
does not exceed 20% of the shares of the surviving corporation outstanding
immediately prior to the merger, and if certain other conditions are met.
Under the PBCL, a shareholder of a corporation generally has the right,
under varying circumstances, to dissent from certain corporate transactions
(including mergers, share exchanges, the sale of all or substantially all of the
corporate assets and corporate divisions) and to obtain payment in cash of the
fair value of his shares in lieu of the consideration he would otherwise receive
in the transaction. Pursuant to the PBCL, if the proposed corporate action is
submitted to a vote at a meeting of shareholders of a corporation, any person
who wishes to dissent and obtain payment of the fair value of his shares must
file with the corporation, prior to the vote, a written notice of intention to
demand that he be paid the fair value for his shares if the proposed action is
effectuated, must effect no change in the beneficial ownership of his shares
form the date of such filing continuously through the effective date of the
proposed action and must refrain from voting his shares in approval of such
action. A dissenter who fails in any respect will not acquire any right to
payment of the fair value of his shares. Neither a proxy nor a vote against the
proposed corporate action will constitute the written notice required. Under the
PBCL, a person who wishes to exercise dissenters' rights must also comply with
the other requirements set forth in the PBCL. See "Summary of Dissenters'
Rights."
The DGCL also does not provide stockholders of a corporation with appraisal
rights when the corporation acquires another business through the issuance of
its capital stock: (1) in exchange for all or substantially all of the assets of
the business to be acquired; (2) in exchange for more than fifty percent of the
outstanding shares of the corporation to be acquired; or (3) in a merger of the
corporation to be acquired with a subsidiary of the acquiring corporation.
DISSENTERS' RIGHTS MAY BE AVAILABLE TO SHAREHOLDERS OF ISCG WITH RESPECT TO
THE MERGER. SEE "THE MERGER--RIGHTS OF DISSENTING SHARES OF ISCG."
DISSOLUTION
Under the DGCL, unless approved by stockholders holding 100% of the total
voting power of the corporation, a dissolution must be initiated by the FCG
Board and approved by the affirmative vote of the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon.
Under the PBCL, a resolution to dissolve a corporation shall be adopted upon
receiving the affirmative vote of a majority of the votes cast by all
shareholders of the corporation entitled to vote thereon and, if any class of
shares is entitled to vote thereon as a class, the affirmative vote of a
majority of the votes cast in each class vote. A proposal for the voluntary
dissolution of a corporation will not be deemed to have been adopted by the
corporation unless it has also been recommended by resolution of the
118
<PAGE>
board of directors, regardless of the fact that the board has directed or
suffered the submission of such a proposal to the shareholders for action.
EXPERTS
The consolidated financial statements of First Consulting Group, Inc. as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, included in this joint proxy statement/prospectus have been
so included in reliance upon the report of Grant Thornton LLP, independent
certified public accountants, given upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements and schedule of Integrated Systems
Consulting Group, Inc. as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997, included in this joint
proxy statement/prospectus, have been so included in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, given upon the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered hereby and other legal
matters will be passed upon for FCG by Cooley Godward LLP, Palo Alto,
California. Cooley Godward LLP and certain members and associates in such firm
own an aggregate of approximately 2,500 shares of FCG common stock.
Certain legal matters in connection with the merger will be passed upon for
ISCG by Saul, Ewing, Remick & Saul, LLP, Berwyn, Pennsylvania.
FCG STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in the proxy statement of FCG to be
issued in connection with the 1999 annual meeting of FCG stockholders must be
delivered to or mailed and received at the principal executive offices of FCG
not later than on the close of business on the sixtieth day nor earlier than the
close of business on the ninetieth day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event public
announcement of the date of such annual meeting is first made by FCG fewer than
seventy days prior to the date of such annual meeting, the close of business on
the tenth day following the day on which public announcement is first made by
FCG.
ISCG SHAREHOLDER PROPOSALS
ISCG expects to hold an annual meeting of shareholders sometime during May
of 1999 unless the merger is completed prior to such period. In the event that a
shareholder desires to have a proposal included in the proxy statement and form
of proxy for the annual meeting of shareholders to be held in 1999, the proposal
must be received by ISCG in writing on or before January 1, 1999, by certified
mail, return receipt requested, and must comply in all respects with applicable
rules and regulations of the Commission relating to such inclusions. Shareholder
proposals must be mailed to the Secretary of ISCG at the ISCG principal offices.
119
<PAGE>
INDEX TO FCG AND ISCG FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................................................... F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.............................................................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS.................................................................... F-4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY................................................ F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... F-7
INTERIM FINANCIAL STATEMENTS
INTERIM CONSOLIDATED BALANCE SHEETS...................................................................... F-19
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS............................................................ F-20
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................ F-21
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS....................................................... F-22
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................................................... F-24
FINANCIAL STATEMENTS....................................................................................... F-25
CONSOLIDATED BALANCE SHEETS.............................................................................. F-25
CONSOLIDATED STATEMENTS OF OPERATIONS.................................................................... F-26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.......................................................... F-27
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................... F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... F-29
INTERIM FINANCIAL STATEMENTS
INTERIM CONSOLIDATED BALANCE SHEETS...................................................................... F-38
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS............................................................ F-39
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................ F-40
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS....................................................... F-41
</TABLE>
F-1
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Consulting Group, Inc.
We have audited the accompanying consolidated balance sheets of First
Consulting Group, Inc. (formerly FCG Enterprises, Inc.) and its subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Consulting Group, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Los Angeles, California
January 17, 1998, except for Note K
as to which the date is
February 10, 1998.
F-2
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997
------------------------
ACTUAL 1996
PRO FORMA --------- ---------
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................. $ 2,950 $ 2,950 $ 214
Accounts receivable, less allowance of $500 and $83 in 1997 and 1996, respectively.... 11,846 11,846 7,803
Work in process....................................................................... 8,030 8,030 7,117
Prepaid expenses...................................................................... 821 821 1,067
Income tax receivables................................................................ 1,114 1,114 --
Current portion of notes receivable--stockholders..................................... 328 328 184
------------- --------- ---------
Total current assets................................................................ 25,089 25,089 16,385
Notes receivable--stockholders (Note D)................................................. 1,368 1,368 454
Property and equipment
Furniture, equipment, and leasehold improvements...................................... 1,874 1,874 1,040
Information systems equipment......................................................... 9,040 9,040 6,565
------------- --------- ---------
10,914 10,914 7,605
Less accumulated depreciation and amortization.......................................... 5,641 5,641 3,286
------------- --------- ---------
5,273 5,273 4,319
Other assets
Executive Benefit Trust (Note G)...................................................... 2,506 2,506 1,264
Other................................................................................. 189 189 390
------------- --------- ---------
2,695 2,695 1,654
------------- --------- ---------
Total assets........................................................................ $ 34,425 $ 34,425 $ 22,812
------------- --------- ---------
------------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit........................................................................ $ 2,000 $ 2,000 $ --
Current portion of long-term debt (Note B)............................................ 871 871 670
Accounts payable...................................................................... 735 735 1,646
Accrued liabilities................................................................... 2,219 2,219 931
Accrued vacation...................................................................... 1,923 1,923 1,368
Deferred revenue...................................................................... 391 391 --
Customer advances..................................................................... 1,965 1,965 --
Deferred income taxes (Note C)........................................................ 5,679 5,679 4,218
------------- --------- ---------
Total current liabilities........................................................... 15,783 15,783 8,833
Non-current liabilities
Long-term debt, net of current portion (Note B)....................................... 262 262 2,692
Supplemental executive retirement plan (Note G)....................................... 2,506 2,506 1,264
Deferred income taxes (Note C)........................................................ 447 447 140
Other................................................................................. -- -- 185
------------- --------- ---------
3,215 3,215 4,281
Commitments and contingencies (Notes E and G)........................................... -- -- --
Put obligation related to ASOP and capital stock (Notes H and I)........................ -- 9,965 6,658
Stockholders' equity
Preferred Stock, $.001 par value; 10,000,000 shares authorized, no shares issued and
outstanding......................................................................... -- -- --
Common Stock, $.001 par value; 50,000,000 shares authorized, 12,042,664 and 10,696,120
shares issued and outstanding at December 31, 1997 and 1996, respectively........... 12 12 11
Additional paid-in capital............................................................ 20,822 20,822 11,539
Retained earnings..................................................................... 4,215 4,215 5,749
Deferred compensation--stock incentive agreements (Notes A and H)..................... (3,635) (3,635) (2,333)
Unearned ASOP shares (Note I)......................................................... (853) (853) (3,225)
Notes receivable--stockholders (Note D)............................................... (5,134) (5,134) (2,043)
Put obligation related to ASOP and capital stock (Notes H and I)...................... -- (9,965) (6,658)
------------- --------- ---------
Total stockholders' equity.......................................................... 15,427 5,462 3,040
------------- --------- ---------
Total liabilities and stockholders' equity.......................................... $ 34,425 $ 34,425 $ 22,812
------------- --------- ---------
------------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net revenue...................................................................... $ 91,570 $ 65,822 $ 47,744
Cost of services................................................................. 53,526 40,718 26,518
--------- --------- ---------
Gross profit................................................................. 38,044 25,104 21,226
General and administrative expenses.............................................. 31,669 23,670 17,517
Compensation expenses related to stock issuances (Note H)........................ 6,060 588 385
--------- --------- ---------
Income from operations....................................................... 315 846 3,324
--------- --------- ---------
Other income
Interest income................................................................ 245 245 172
Interest expense............................................................... (313) (242) (208)
Other income, net.............................................................. 119 44 18
--------- --------- ---------
Income before income taxes................................................... 366 893 3,306
Provision for income taxes....................................................... 1,900 500 1,423
--------- --------- ---------
Net income (loss)............................................................ $ (1,534) $ 393 $ 1,883
--------- --------- ---------
--------- --------- ---------
Income (loss) per share (restated, see note A9)
Basic net income (loss) per share.............................................. $ (.15) $ .05 $ .25
--------- --------- ---------
--------- --------- ---------
Diluted net income (loss) per share............................................ $ (.15) $ .04 $ .25
--------- --------- ---------
--------- --------- ---------
Basic weighted average shares.................................................. 9,987 8,671 7,515
Diluted weighted average shares................................................ 9,987 9,127 7,544
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
---------------------- RETAINED DEFERRED ASOP
SHARES AMOUNT EARNINGS COMPENSATION SHARES
----------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995................................. 7,428 $ 967 $ 3,473 $ -- $ --
Redemption of Common Stock............................... (216) (80) -- -- --
Issuance of Common Stock................................. 52 30 -- -- --
Stock issued under stock option agreement--
compensation........................................... -- 76 -- -- --
Issuance of Common Stock under the Associate 401(k) and
Stock Ownership Plan................................... 1,432 4,000 -- -- (4,000)
Issuance of Common Stock under the Restricted Stock
Agreements............................................. 1,372 3,625 -- (1,978) --
Increase of put obligation............................... -- -- -- -- --
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- -- 385 --
Net income............................................... -- -- 1,883 -- --
----------- --------- ----------- -------------- -----------
Balance, December 31, 1995............................... 10,068 8,618 5,356 (1,593) (4,000)
Redemption of Common Stock............................... (28) (40) -- -- --
Issuance of Common Stock under the Restricted Stock
Agreements............................................. 560 1,953 -- (1,048) --
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- -- 308 --
Capital stock released under the Associate 401(k) and
Stock Ownership Plan................................... -- 272 -- -- 775
Interest income on stockholders' notes receivable........ -- -- -- -- --
Issuance of new Common Stock to Associate 401(k) and
Stock Ownership Plan................................... 96 362 -- -- --
Increase of put obligation............................... -- -- -- -- --
Excess income tax benefits attributable to exercised
stock options.......................................... -- 385 -- -- --
Net income............................................... -- -- 393 -- --
----------- --------- ----------- -------------- -----------
Balance, December 31, 1996............................... 10,696 11,550 5,749 (2,333) (3,225)
Redemption of Common Stock............................... (64) (305) -- -- --
Issuance of Common Stock under the Restricted Stock
Agreements............................................. 1,347 4,899 -- (1,847) --
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- -- 545 --
Common Stock released under the Associate 401(k) and
Stock Ownership Plan................................... -- 3,725 -- -- 2,677
Issuance of Common Stock to Associate 401(k) and Stock
Ownership Plan......................................... 64 305 -- -- (305)
Interest income on stockholders' notes receivable........ -- -- -- -- --
Issuance of new Common Stock to associates in the
Associate 401(k) and Stock Ownership Plan.............. -- 265 -- -- --
Increase of put obligation............................... -- -- -- -- --
Excess income tax benefits attributable to exercised
stock options.......................................... -- 395 -- -- --
Net income............................................... -- -- (1,534) -- --
----------- --------- ----------- -------------- -----------
Balance, December 31, 1997............................... 12,043 $ 20,834 $ 4,215 $ (3,635) $ (853)
----------- --------- ----------- -------------- -----------
----------- --------- ----------- -------------- -----------
<CAPTION>
NOTES
RECEIVABLE-- PUT
STOCKHOLDERS OBLIGATION TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Balance, January 1, 1995................................. $ -- $ (2,730) $ 1,710
Redemption of Common Stock............................... -- -- (80)
Issuance of Common Stock................................. -- -- 30
Stock issued under stock option agreement--
compensation........................................... -- -- 76
Issuance of Common Stock under the Associate 401(k) and
Stock Ownership Plan................................... -- -- --
Issuance of Common Stock under the Restricted Stock
Agreements............................................. (1,469) -- 178
Increase of put obligation............................... -- (2,570) (2,570)
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- 385
Net income............................................... -- -- 1,883
------------- ----------- ---------
Balance, December 31, 1995............................... (1,469) (5,300) 1,612
Redemption of Common Stock............................... -- -- (40)
Issuance of Common Stock under the Restricted Stock
Agreements............................................. (481) -- 424
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- 308
Capital stock released under the Associate 401(k) and
Stock Ownership Plan................................... -- -- 1,047
Interest income on stockholders' notes receivable........ (93) -- (93)
Issuance of new Common Stock to Associate 401(k) and
Stock Ownership Plan................................... -- -- 362
Increase of put obligation............................... -- (1,358) (1,358)
Excess income tax benefits attributable to exercised
stock options.......................................... -- -- 385
Net income............................................... -- -- 393
------------- ----------- ---------
Balance, December 31, 1996............................... (2,043) (6,658) 3,040
Redemption of Common Stock............................... -- -- (305)
Issuance of Common Stock under the Restricted Stock
Agreements............................................. (2,825) -- 227
Compensation recognized under the Restricted Stock
Agreements............................................. -- -- 545
Common Stock released under the Associate 401(k) and
Stock Ownership Plan................................... -- -- 6,402
Issuance of Common Stock to Associate 401(k) and Stock
Ownership Plan......................................... -- -- --
Interest income on stockholders' notes receivable........ (266) -- (266)
Issuance of new Common Stock to associates in the
Associate 401(k) and Stock Ownership Plan.............. -- -- 265
Increase of put obligation............................... -- (3,307) (3,307)
Excess income tax benefits attributable to exercised
stock options.......................................... -- -- 395
Net income............................................... -- -- (1,534)
------------- ----------- ---------
Balance, December 31, 1997............................... $ (5,134) $ (9,965) $ 5,462
------------- ----------- ---------
------------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ (1,534) $ 393 $ 1,883
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 2,453 1,739 767
Provision for bad debts.................................................. 417 83 84
Deferred income taxes.................................................... 1,769 498 1,727
Loss (gain) on sale of assets............................................ 16 5 (13)
Compensation from stock issuances........................................ 8,093 1,830 385
Interest income on notes receivable--stockholders........................ (266) (93) --
Change in assets and liabilities:
Accounts receivable...................................................... (4,460) 5,154 (6,084)
Work in process.......................................................... (913) (6,448) --
Prepaid expenses......................................................... 246 -- (721)
Income taxes receivables................................................. (1,114) (185) --
Other assets............................................................. 201 (271) (39)
Accounts payable......................................................... (911) (752) 1,756
Accrued liabilities...................................................... 1,288 (877) 385
Accrued vacation......................................................... 555 1,369 334
Customer advances........................................................ 1,965 -- --
Deferred revenue......................................................... 391 -- --
Other.................................................................... (186) (235) 315
----------- --------- ---------
Net cash provided by operating activities.............................. 8,010 2,210 779
----------- --------- ---------
Cash flows from investing activities:
Issuance of notes receivable............................................... (2,554) (709) (153)
Payments on notes receivable............................................... 1,232 648 177
Purchase of property and equipment......................................... (3,423) (3,571) (1,928)
----------- --------- ---------
Net cash used in investing activities.................................. (4,745) (3,632) (1,904)
Cash flows from financing activities:
Net borrowings on line of credit........................................... 2,000 -- --
Proceeds from issuance of long-term debt................................... 147 -- 4,000
Principal payments on long-term debt....................................... (2,681) (670) (2,160)
Proceeds from issuance of Common Stock..................................... 5 271 106
Common Stock repurchase.................................................... -- (40) (80)
----------- --------- ---------
Net cash provided by (used in) financing activities.................... (529) (439) 1,866
----------- --------- ---------
Net change in cash and cash equivalents................................ 2,736 (1,861) 741
Cash and cash equivalents at beginning of period............................. 214 2,075 1,334
----------- --------- ---------
Cash and cash equivalents at end of period................................... $ 2,950 $ 214 $ 2,075
----------- --------- ---------
----------- --------- ---------
Cash paid during the period for:
Interest................................................................... $ 313 $ 328 $ 202
Income taxes............................................................... $ 87 $ 33 $ 539
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
First Consulting Group, Inc. (formerly FCG Enterprises, Inc.) and its
subsidiaries (the "company") is a leading provider of information technology and
other consulting services for healthcare providers, payors, and other healthcare
organizations. The company's services are designed to assist its clients in
increasing operations effectiveness by reducing cost, improving customer service
and enhancing the quality of patient care. The company provides this expertise
to clients by assembling multi-disciplinary teams which provide comprehensive
services across its four principal services: consulting, software
implementation, network and application integration and co-management services.
The company's services and consultants are supported by internal research and a
centralized information system which provides real-time access to current
industry and technology information, project methodologies, experiences and
tools.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Consulting Group, Inc. and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
The company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line basis in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter.
4. WORK IN PROCESS
Work in process represents the recognized net revenue for services performed
that had not been billed to clients at the balance sheet date. Such amounts are
billed as project requisites are met.
5. INCOME TAXES
The company accounts for income taxes on the liability method under which
deferred tax liabilities (assets) are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense (benefit) is equal to the change in the deferred
tax liability (asset) from the beginning to the end of the year. A current tax
asset or liability is recognized for the estimated taxes refundable or payable
for the current year.
6. PUT OBLIGATIONS
Currently the existing stockholders of the company, including the Associate
401(k) and Stock Ownership Plan ("ASOP"), have the ability to require the
company to repurchase their shares upon the occurrence of certain conditions,
which are outside the control of the company (see Notes H and I). As such, the
company reflects estimated obligations related to these repurchase commitments
outside of equity in the accompanying financial statements.
F-7
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. REVENUE RECOGNITION
The company generates substantially all of its revenue from fees for
professional services. The company typically bills for its services on an
hourly, fixed-fee or fixed-fee per month basis. For services billed on an hourly
basis, the company recognizes revenue as services are performed. For services
billed on a fixed-fee or fixed-fee per month basis, the company recognizes
revenue using the percentage of completion method. Revenue is recorded as
incurred at assignment rates net of any adjustments due to specific engagement
situations.
8. STOCK-BASED COMPENSATION
The company accounts for stock-based employee compensation as prescribed by
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and has adopted
the disclosure provisions of Statement of Financial Accounting Standards 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). SFAS 123 requires pro
forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied. Under the
fair value based method, compensation cost is recorded based on the value of the
award at the grant date and is recognized over the service period. The adoption
of SFAS 123 disclosure provisions has no effect on either the company's
financial condition or its results of operations.
9. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"), which
superseded APB Opinion No. 15. Net income (loss) per share for all periods
presented has been restated to reflect the adoption of SFAS 128. Basic net
income (loss) per share is based upon the weighted average number of common
shares outstanding. Diluted net income (loss) per share is based on the
assumption that all convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. ASOP shares that have not been committed to be released are not
treated as outstanding when determining the weighted average number of shares
for either basic or diluted net income (loss) per share.
The company previously issued financial statements that presented net income
(loss) per share in accordance with Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83, which was subsequently superceded by SAB No.
98. The financial statements have been restated to conform to the guidance in
SAB No. 98.
10. CREDIT RISKS
Financial instruments that subject the company to concentrations of credit
risks consist primarily of billed and unbilled accounts receivable. The
company's clients are primarily involved in the healthcare industry.
Concentrations of credit risk with respect to billed and unbilled accounts
receivable are limited due to the company's credit evaluation process and the
nature of its clients. Historically, the company has not incurred significant
credit-related losses.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the fair value of financial instruments approximates
their carrying amounts. The carrying value of cash and cash equivalents
approximates their estimated fair values. Management believes
F-8
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the fair values of notes payable and stockholders' notes receivable approximate
their carrying values based on current rates for instruments with similar
characteristics.
12. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The company is in the process of modifying its stock agreements such that,
upon the effectiveness of the proposed initial public offering, the company will
no longer have the obligation to repurchase shares of common stock from the
current stockholders. A pro forma unaudited consolidated balance sheet as of
December 31, 1997 has been presented to reflect this change.
13. DEFERRED COMPENSATION--STOCK INCENTIVE AGREEMENTS
In accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, the company records a charge to deferred compensation when it grants
options or sells stock to officers or employees at an exercise price which is
less than the fair market value of such shares. Amounts recorded as deferred
compensation are amortized over the appropriate service period based upon the
vesting schedule for such grants (generally ten years).
14. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
15. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE
INCOME, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Company has determined that the
adoption of SFAS 130 will not have a material effect on the Company's financial
statements.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
("SFAS 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which applies only to publicly held business entities. A reportable
segment, referred to as an operating segment, is component of an entity about
which separate financial information is produced internally, that is evaluated
by the chief operation decision-maker to assess performance and allocate
resources. SFAS 131 is effective for financial statements issued for periods
beginning after December 15, 1997.
16. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
F-9
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--NOTES PAYABLE
The company has a $6,000,000 revolving line of credit available through
December 1, 1998, at the bank's prevailing prime rate. The balance outstanding
on this line of credit was $2,000,000 and zero at December 31, 1997 and 1996,
respectively. Borrowings on the line are collaterized by all of the company's
deposit accounts, accounts receivable and equipment. Under the line of credit
agreement, the company is required to pay a fee equal to 0.25% per annum on the
average daily unused balance and maintain selected financial ratios.
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Note payable to bank....................................................... $ 958 $ 3,333
Other note payable......................................................... 175 29
--------- ---------
1,133 3,362
Less current portion....................................................... 871 670
--------- ---------
Non-current portion........................................................ $ 262 $ 2,692
--------- ---------
--------- ---------
</TABLE>
The note payable to bank is collateralized by all deposit accounts, accounts
receivable, and equipment of the company and by unreleased ASOP shares (see Note
I). The note bears interest at the bank's prime rate (8.5% and 8.25% at December
31, 1997 and 1996, respectively) plus 0.5%. The note is payable in monthly
installments of $56,000 ($672,000 annually) plus interest with the last
installment due December 2001.
NOTE C--INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.............................................................................. $ 131 $ 2 $ (288)
State................................................................................ -- -- (16)
--------- --------- ---------
Total current...................................................................... 131 2 (304)
Deferred............................................................................... 1,769 498 1,727
--------- --------- ---------
Provision for income taxes............................................................. $ 1,900 $ 500 $ 1,423
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-10
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES (CONTINUED)
Temporary differences consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets
Current
Net operating loss............................................................... $ 72 $ 96 $ 23
Contributions.................................................................... 74 72 22
Bad debts........................................................................ 205 18 --
Other............................................................................ (14) -- --
--------- --------- ---------
Total current deferred tax assets.............................................. 337 186 45
Non-current........................................................................
Supplemental executive retirement plan contributions............................. 720 506 273
Stock based compensation......................................................... -- 104 181
Other............................................................................ 205 61 97
--------- --------- ---------
Total non-current deferred tax assets.......................................... 925 671 551
--------- --------- ---------
Total deferred tax assets.................................................... 1,262 857 596
--------- --------- ---------
Deferred tax liabilities
Current--Accrual to cash basis adjustment.......................................... 6,016 4,404 4,456
Non-current--Stock based compensation 1,372 811 --
--------- --------- ---------
Total deferred tax liabilities 7,388 5,215 4,456
--------- --------- ---------
Total net deferred tax liabilities......................................... $ 6,126 $ 4,358 $ 3,860
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of the following items, the total provision for income taxes was
different from the amount computed by applying the statutory U.S. federal income
tax rate to earnings before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax at statutory rate........................................ 35.0% 35.0% 35.0%
Changes due to:
State franchise tax, net of federal income tax benefit.................... 6.0 6.1 6.1
Meals and entertainment................................................... 44.2 7.1 3.0
ASOP...................................................................... 435.5 12.5 --
Other..................................................................... (1.7) (4.7) (1.1)
----- ----- -----
519.0% 56.0% 43.0%
----- ----- -----
----- ----- -----
</TABLE>
For tax reporting purposes, the company had historically elected to be taxed
under the cash basis of reporting as opposed to the accrual method used for
financial reporting purposes. As a result of such election, a deferred tax
liability of $6,016,000 and $4,404,000 exists at December 31, 1997 and 1996,
respectively. As a result of the proposed initial public offering of common
stock, the company is required to change its tax reporting to the accrual basis
to be consistent with financial reporting purposes. As a
F-11
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES (CONTINUED)
result of this change, the deferred tax liability resulting from the use of cash
basis reporting for income taxes will become payable over a period not exceeding
four years.
NOTE D--NOTES RECEIVABLE--STOCKHOLDERS
Notes receivable from stockholders consist primarily of loans provided to
participants of the restricted stock bonus and non-qualified stock option
agreements (see Note H). The company allows participants to exchange notes for
the purchase of shares of common stock and the exercise of stock options. Notes
received in exchange for common stock have been classified as a reduction of
stockholders' equity. In addition, the company also provides participants with
notes to cover associated taxes related to the exercise of stock options. Notes
are generally non-recourse and non-interest bearing and have been discounted
using imputed annual interest rates from 5.77% to 6.36%. Such notes are payable
over a ten-year term.
Participants are required to pay, each year, the greater of 10% of the
outstanding amounts or 50% of the after tax amount of any annual bonus received
by them to repay outstanding amounts of the notes. Stockholders' notes
receivable received in exchange for common stock were $5,134,000 and $2,043,000,
as of December 31, 1997 and 1996, respectively. Amortization of deferred
compensation resulting from discounting the face value of non-interest bearing
notes issued to the company by its vice presidents for the purchase of shares of
common stock was $266,269 and $93,432 for the years ended December 31, 1997 and
1996, respectively. Stockholders' notes receivable related to advances to
associates for payment of taxes associated with stock option exercises were
$1,679,000 and $454,000 as of December 31, 1997 and 1996, respectively.
Compensation expense resulting from discounting the face value of non-interest
bearing notes issued to the company by its vice presidents in connection with
the company's payment of certain tax liabilities relating to the exercise of
stock options was $518,855 and $187,425 for the years ended December 31, 1997
and 1996, respectively.
NOTE E--COMMITMENTS AND CONTINGENCIES
The company leases its office facilities, certain office space and living
accommodations for consultants on short-term projects under operating leases
which expire at various dates through 2002. At December 31, 1997, the company
was obligated under non-cancelable operating leases with future minimum rentals
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 1,620
1999.............................................................................. 1,297
2000.............................................................................. 969
2001.............................................................................. 716
2002.............................................................................. 543
---------
$ 5,145
---------
---------
</TABLE>
Rent expense aggregated $2,624,000, $1,703,000 and $1,241,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-12
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that the outcome of these
matters will not have a material adverse effect on the company's financial
position or results of operation.
NOTE F--STOCK OPTIONS
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS
PER SHARE OUTSTANDING
----------------- -----------
<S> <C> <C>
Balance at January 1, 1995........................................................ -- --
Options granted................................................................. $ 0.57 1,279,440
Options exercised............................................................... 0.57 (733,088)
-----------
Balance at December 31, 1995...................................................... 0.57 546,432
Options granted................................................................. 1.13 366,168
Options exercised............................................................... 0.94 (193,928)
Options canceled................................................................ 0.57 (22,224)
-----------
Balance at December 31, 1996...................................................... 0.76 696,448
Options granted................................................................. 5.05 1,244,576
Options exercised............................................................... 1.15 (822,424)
Options canceled................................................................ 1.13 (89,200)
-----------
Balance at December 31, 1997...................................................... $ 5.49 1,029,400
-----------
-----------
</TABLE>
None of the options outstanding at December 31, 1997 are exercisable. As of
December 31, 1997, option prices ranged from $4.76 to $7.44 and had a remaining
weighted average life of 9.73 years.
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the "minimal value" method for
option pricing with the following weighted average assumptions: risk-free
interest rate of 6%; dividend yield of 0%; and a remaining weighted average life
of the option of two to five years. For purposes of adjusted pro forma
disclosures, the estimated fair value of the options is not materially different
from the intrinsic value of the options. As such, the pro forma impact on
reported results for the years ended December 31, 1997, 1996 and 1995 was not
significant and has not been presented herein. The weighted average fair value
of options granted during the year ended December 31, 1997, 1996 and 1995 was
$1.60, $2.79 and $1.13, respectively.
For the year ended December 31, 1997, 1996 and 1995, compensation expense
recognized in income for stock-based employee compensation related to the grant
of options was $278,415, $215,000 and $385,000, respectively.
F-13
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--PROFIT-SHARING PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PROFIT-SHARING PLAN
The company had a discretionary profit-sharing plan covering substantially
all employees. Contributions were determined by the Board of Directors and were
limited to the maximum amount deductible for federal income tax purposes.
Discretionary contributions to the profit-sharing plan were $150,000 for the
year ended December 31, 1995. Effective January 1, 1996, this plan was merged
into the ASOP (see Note I).
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
On January 1, 1994 the company adopted the Supplemental Executive Retirement
Plan (the "SERP"). The SERP was amended on January 1, 1996. The SERP is
administered by the Board of Directors or a committee appointed by the Board of
Directors.
Participants in the SERP are those executive officers at the vice president
or higher level of seniority who are eligible to participate in the 1994 Plan
and who are selected by the Board of Directors or a committee appointed by the
Board of Directors to participate. The Board of Directors or a committee
appointed by the Board of Directors may also designate other officers for
participation in the compensation reduction portion of the SERP. Participation
is conditioned on the submission of a completed enrollment form. SERP
participation terminates when a participant ceases to be a stockholder of the
company, provided that a former stockholder who continues as an officer may
continue to participate in the compensation reduction portion of the SERP.
Participants may make fully vested compensation reduction contributions to
the SERP, subject to a maximum deferral of 10% of annual base salary. The
company may make a voluntary "FCG contribution" for any year in an amount
determined by the Board to the account of SERP participants. FCG contributions
vest 10% for each year of service (with up to 5 years service credit for
participants who were vice presidents on January 1, 1994), provided that FCG
contributions fully vest upon a change in control of the company or upon a
participant's death, disability or attainment of age 65. Company contributions
to the SERP were $493,000, $372,000 and $301,000 for the years ended December
31, 1997, 1996, and 1995, respectively.
The contributions to the SERP are invested by the company in Variable Life
Insurance Contracts. Management believes that the participants' account balance,
cash surrender value of life insurance and death benefits will be sufficient to
satisfy the company's obligations under the SERP.
NOTE H--STOCK INCENTIVE AGREEMENTS
1994 RESTRICTED STOCK PLAN AND AGREEMENTS
On December 15, 1997, the Board of Directors adopted an amendment to the
1994 Restricted Stock Plan (as amended the "1994 Plan") and form of restricted
stock agreement ("RSA"). The stockholders approved the 1994 Plan and RSAs on
January 15, 1998. The 1994 Plan provides a mechanism for the purchase and sale
of common stock by its vice presidents. The 1994 Plan is administered by the
company's Board of Directors or a committee appointed by the Board.
Under the 1994 Plan, the company has entered into RSAs with each of its vice
presidents. The 1994 Plan and RSAs provide that each person, upon becoming a
vice president of the company, must purchase and hold a specific minimum number
of shares of common stock. Vice presidents at Levels I and II are
F-14
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK INCENTIVE AGREEMENTS (CONTINUED)
required to purchase and hold that number of shares equal to one times the vice
president's base salary divided by the then-current fair value of the common
stock. Vice presidents at Levels III and IV are required to purchase and hold
that number of shares equal to two times the vice president's base salary
divided by the then-current fair value of the common stock. Prior to the
completion of this offering, the fair value of the common stock is determined by
reference to a report prepared for the company by an independent valuation firm.
Shares purchased under the RSAs are subject to a 10-year vesting period
beginning the date upon which an individual becomes a vice president and vest
annually upon the completion of each year of service. Automatic acceleration of
vesting occurs upon death or permanent disability of a vice president and upon
certain changes in ownership of the company. Partial acceleration of vesting may
also occur once the vice president attains the age of 59. Shares purchased after
consummation of this offering are fully vested upon purchase.
Under the terms of the RSAs, the company retains a repurchase right with
respect to unvested shares, unless such termination is due to debt, disability
or changes in control of the company. Pursuant to this right, the company may
repurchase unvested shares at the original issuance price plus a growth factor.
The growth factor is equal to the average interest rate compounded quarterly
which the company pays to a commercial lending institution in a calendar quarter
(the "growth factor"). In the event the company has no borrowings for a
particular quarter, then the growth factor shall be the prime rate on the first
day of the quarter, as announced in the Wall Street Journal or if the Wall
Street Journal discontinues such announcements, then it shall be the prime rate
as announced by Bank of America. Shares acquired under RSAs are nontransferable,
with the exception of transfers for certain estate planning and charitable gift
purposes. In addition, the RSAs provide that, under certain circumstances and
upon attaining a certain age, a vice president may sell a portion, but not all,
of his or her shares to other vice presidents or to the company. The company may
also repurchase vested shares from a departing vice president if he or she
competes with the company and/or profits from the sale of common stock within
six months of such competition. Upon completion of this offering, a vice
president may also sell unencumbered shares of common stock on the public
market, subject to continuing to satisfy the minimum shareholding requirements.
Vice presidents pay the purchase price of the shares by means of non-recourse
and recourse non-interest bearing promissory notes.
The RSAs also contain non-competition and non-solicitation provisions which
apply generally to the vice president's employment with the company and which
continue to bind the vice president even after repurchase of all shares by the
company; provided, however, that such provisions may be superseded by an
employment agreement entered into between the company and the vice president.
The company maintains life insurance coverage for the purpose of redeeming
stock of its vice president stockholders through the SERP in the event of a vice
president's death (see Note G). For most vice presidents, the insured benefit is
equal to the current market value of the vice president's shareholdings. The
company is also the beneficiary of a split-dollar life insurance policy on its
principal stockholder that is intended to partially fund the repurchase of the
principal stockholder's stock upon death. The company also maintains long-term
disability insurance policies on the principal stockholder to help fund the
purchase of stock upon permanent disability of the stockholder.
F-15
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK INCENTIVE AGREEMENTS (CONTINUED)
NON-QUALIFIED STOCK OPTION AGREEMENT
Effective January 1, 1996, and restated January 1, 1997, the company
executed and adopted a non-qualified stock option agreement for certain
officers. The principal terms of the agreement provide that for each share of
stock purchased at fair market value, the stockholder is granted one exercisable
stock option which allows the stockholder to purchase additional shares at a
price below the fair market value of the common stock. During 1997 and 1996,
215,176 and 366,168 shares, respectively, were granted under the provisions of
the agreement and stockholders exercised options on 822,424 and 193,928 shares
of common stock, respectively. Deferred compensation of $512,000 and $737,000
was recorded for the years ended December 31, 1997 and 1996, respectively,
related to the granting of options under this agreement. Compensation expense
related to the amortization of the deferred compensation on these options
approximated $145,000 and $79,000 for the years ended December 31, 1997 and
1996, respectively.
Effective December 19, 1995, the company executed and adopted a
non-qualified stock option agreement for certain vice presidents. The principal
terms of the agreement provided that for each share of stock purchased at fair
market value of the common stock, the stockholder was granted two exercisable
stock options which allow the stockholder to purchase additional shares at
approximately 20% of the fair market value of the common stock. During 1995,
1,279,440 stock options were granted under the provisions of the agreement and
vice presidents exercised options for 733,008 shares of common stock.
Compensation expense related to these options approximated $134,000, $136,000
and $385,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The agreements also provide that the company will make non-recourse loans
available for the purchase of stock, the exercise of stock options and
associated taxes (see Note D).
OTHER EQUITY PLANS
On August 22, 1997, the Board adopted an equity incentive plan and
non-employee directors' stock option plan, which was approved by the
shareholders on January 15, 1998. The principal terms of the equity incentive
plan allow the company to grant either stock options, stock bonuses or stock
appreciation rights to acquire up to 1,600,000 shares of common stock. The stock
awards vest over a ten-year term from the date of grant. Under the plan, the
company granted employees 945,400 options to purchase common stock at an
exercise price equal to the market price of common stock on the date of grant.
As of December 31, 1997, none of these options were exercisable. The company had
no stock appreciation rights issued or outstanding for the year ended December
31, 1997.
The non-employee directors' stock option plan allows the company to grant
options under such plan for up to 200,000 shares of common stock. Under the
plan, the company granted 84,000 options on August 22, 1997, to purchase common
stock at an exercise price equal to the market price of the common stock on date
of grant. These options vest over a ten-year term from date of grant.
NOTE I--ASSOCIATE 401(k) AND STOCK OWNERSHIP PLAN
The ASOP, as amended, was adopted effective December 1, 1995. The ASOP
covers all employees of the company and affiliates of the company designated by
the company's Board of Directors, excluding any union employees unless their
coverage is bargained for, and excluding non-resident aliens without U.S. source
earned income. ASOP participation commences automatically for newly eligible
employees on semiannual entry dates.
F-16
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--ASSOCIATE 401(k) AND STOCK OWNERSHIP PLAN (CONTINUED)
Under the ASOP, participants may elect to reduce their current compensation
by up to the lesser of 15% of such compensation or the statutorily prescribed
annual limit ($9,500 in 1997) and have the amount of such reduction contributed
to the ASOP. In addition, the company may make contributions to the ASOP on
behalf of participants. company contributions may be matching contributions
allocated based on each participant's compensation reduction contributions,
discretionary profit sharing contributions allocated based on each participant's
compensation, or "first share contributions" allocated to some or all
participants on a per capita basis.
The ASOP is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended, so that contributions by employees or by the company
to the ASOP, and income earned thereon are not taxable until withdrawn and so
that contributions by the company, if any, will be deductible by the company
when made. Participants become vested in company contributions under two graded
vesting schedules, so that matching and first share contributions are fully
vested after five years of service and profit sharing contributions are fully
vested after seven years of service. The ASOP is a leveraged employee stock
ownership plan. The ASOP borrowed $4.0 million from a third-party financial
institution (the "ASOP loan") to purchase 1,429,848 shares of common stock in
1995. The shares of common stock so purchased were placed in a suspense account
under the ASOP from which they are released and allocated to participants
accounts' as the ASOP loan is repaid. Any or all company contributions may be
used to repay the ASOP loan.
The company accounts for its ASOP in accordance with Statement of Position
93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the
company reports in its Statement of Financial Position the debt of the ASOP and
unearned ASOP shares, which is the original cost basis of the ASOP shares
pledged as collateral for the debt. As shares are committed to be released, the
company credits unearned ASOP shares based on the cost of the shares to the
ASOP. The company records compensation expense based on the fair market value of
the shares committed to be released. The difference between the fair value of
shares committed to be released and the cost of those shares to the ASOP is
either charged or credited to stockholders' equity accounts, as applicable.
Compensation expense for the 401(k) match and the ASOP was approximately $2.4
million and $1.8 million for the years ended December 31, 1997 and 1996,
respectively. No compensation expense related to the ASOP was recognized in 1995
as the plan was adopted on December 1, 1995 and none of the shares had been
committed to be released. Prior to the adoption of the ASOP, the company
sponsored a profit-sharing plan which included a 401(k) provision with
essentially the same provisions as the current ASOP. The company's matching
contributions to the 401(k) provision under the previous profit sharing plan was
$560,000 during 1995.
In 1996, the company made matching contributions and first share
contributions to the ASOP sufficient to provide a 50% matching contribution and
a first share contribution of 200 shares of company stock for each participant
who was employed by the company on January 1, 1996 or became employed by the
company thereafter. In consideration for employees allowing the company to make
a plan modification to the current ASOP plan, the company committed to release
1,000 shares of common stock to each participant in the ASOP as of November 26,
1997 (568,000 shares in the aggregate). This commitment resulted in a charge to
compensation expense of approximately $4.2 million in the fourth quarter of
1997. Such amount is included in compensation expenses related to stock
issuances in the accompanying financial statements. The committed shares will be
released to participant accounts to the extent that shares distributed to an
individual do not exceed certain Internal Revenue Service section limitations.
F-17
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--ASSOCIATE 401(k) AND STOCK OWNERSHIP PLAN (CONTINUED)
The ASOP shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Allocated shares.................................... 1,301,712 372,780 --
Unreleased shares................................... 287,832 1,152,764 1,429,848
------------ ------------ ------------
Total ASOP shares............................... 1,589,544 1,525,544 1,429,848
Fair market value of unreleased shares.............. $ 2,520,000 $ 7,258,000 $ 4,039,000
</TABLE>
Upon the cessation of employment of an employee, the company pays the
employee the fair market value of the shares of common stock previously
allocated to such employee under the ASOP. The fair market value of common stock
is determined by an independent valuation firm. The ultimate funding of this
obligation rests with the company. Accordingly, the company has recorded the
potential future obligation to repurchase such securities outside of permanent
equity (see also Note H). Subsequent to the company's closing of its anticipated
initial public offering, shares of common stock held by the ASOP are expected to
be tradable on an established exchange and recording of such amounts outside of
permanent equity will no longer be required (see Note A-11).
NOTE J--CONCENTRATION OF CREDIT RISK
The company maintains its cash balances in a financial institution located
in Long Beach, California. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1997, the company had
balances in excess of the insured amount of approximately $3,940,000. The
company has not experienced any losses in such account and believes it is not
exposed to any significant credit risk on its cash and cash equivalents. The
company has concentrations of credit risk related to accounts receivable and
revenues. At December 31, 1997, accounts receivable associated with five clients
represented approximately 30% of the accounts receivable balance. Also, for the
year ended December 31, 1997, approximately 15% of total net revenue was
attributable to five clients.
NOTE K--SUBSEQUENT EVENT
The Board of Directors authorized management of the company to file a
registration statement with the Securities and Exchange Commission permitting
the company to sell up to 6,000,000 shares of common stock to the public (the
"Offering"). In connection with the Offering, the Board of Directors approved a
four-for-one stock split in the form of a stock dividend covering all of the
company's capital stock and options. All share and per share amounts included in
the accompanying financial statements have been adjusted to reflect the stock
split. In conjunction with the offering, the Board of Directors authorized,
subject to shareholder approval, the reincorporation of the company into
Delaware, resulting in a change in the company's name from FCG Enterprises, Inc.
to First Consulting Group, Inc.
F-18
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER 30, -------------
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................................................................... $ 13,485 $ 2,950
Investments available for sale.................................................................. 11,130 --
Accounts receivable, less allowance of $500..................................................... 23,842 11,846
Work in process................................................................................. 11,352 8,030
Prepaid expenses................................................................................ 1,821 821
Income tax receivables.......................................................................... 132 1,114
Current portion of notes receivable-stockholders................................................ -- 328
------------- -------------
Total current assets...................................................................... 61,762 25,089
Notes receivable-stockholders....................................................................... 1,772 1,368
Property and equipment
Furniture, equipment, and leasehold improvements................................................ 2,443 1,874
Information systems equipment................................................................... 11,822 9,040
------------- -------------
14,265 10,914
Less accumulated depreciation and amortization...................................................... 7,941 5,641
------------- -------------
6,324 5,273
Other assets
Executive benefit trust......................................................................... 3,511 2,506
Long term investments........................................................................... 25,758 --
Goodwill........................................................................................ 1,193 --
Other........................................................................................... 511 189
------------- -------------
30,973 2,695
------------- -------------
Total assets.............................................................................. $ 100,831 $ 34,425
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit.................................................................................. $ -- $ 2,000
Current portion of long-term debt............................................................... 228 871
Accounts payable................................................................................ 2,496 735
Accrued liabilities............................................................................. 10,879 2,219
Accrued vacation................................................................................ 2,684 1,923
Deferred revenue................................................................................ 377 391
Customer advances............................................................................... 2,296 1,965
Current income tax liability.................................................................... 4,663 --
Deferred income taxes........................................................................... 6,503 5,679
------------- -------------
Total current liabilities................................................................. 30,126 15,783
Non-current liabilities
Long-term debt, net of current portion.......................................................... 209 262
Supplemental executive retirement plan.......................................................... 3,501 2,506
Deferred income taxes........................................................................... 447 447
------------- -------------
4,157 3,215
Commitments and contingencies....................................................................... -- --
Put obligation related to Associate 401(k) and Stock Ownership Plan (ASOP) and capital stock........ -- 9,965
Stockholders' equity
Preferred Stock, 10,000,000 shares authorized, no shares issued and outstanding................. -- --
Common Stock, 50,000,000 shares authorized, 15,924,402 shares issued and outstanding at
September 30, 1998 and 12,042,664 shares issued and outstanding at December 31, 1997........... 16 12
Additional paid-in capital...................................................................... 68,256 20,822
Retained earnings............................................................................... 10,111 4,215
Deferred compensation-stock incentive agreements................................................ (4,077) (3,635)
Unearned ASOP shares............................................................................ (853) (853)
Notes receivable-stockholders................................................................... (6,905) (5,134)
Put obligation related to ASOP and capital stock................................................ -- (9,965)
------------- -------------
Total stockholders' equity................................................................ 66,548 5,462
------------- -------------
Total liabilities and stockholders' equity................................................ $ 100,831 $ 34,425
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue.......................................... $ 34,215 $ 24,477 $ 94,601 $ 66,305
Cost of services..................................... 18,427 14,098 51,813 38,823
------------- ------------- ------------- -------------
Gross profit..................................... 15,788 10,379 42,788 27,482
General and administrative expenses.................. 12,078 8,648 32,815 22,804
Compensation expenses related to stock issuances..... -- 815 -- 1,861
------------- ------------- ------------- -------------
Income from operations........................... 3,710 916 9,973 2,817
Other income
Interest income (expense), net................... 528 (11) 1,325 (59)
Other income, net................................ 13 9 48 110
------------- ------------- ------------- -------------
Income before income taxes................. 4,251 914 11,346 2,868
Provision for income taxes........................... 2,058 507 5,449 1,590
------------- ------------- ------------- -------------
Net income....................................... $ 2,193 $ 407 $ 5,897 $ 1,278
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic net income per share........................... $ 0.140 $ 0.041 $ 0.393 $ 0.132
Diluted net income per share......................... $ 0.134 $ 0.039 $ 0.375 $ 0.124
Shares used in computing basic net income per
share.............................................. 15,662 9,975 15,001 9,687
Shares used in computing diluted net income per
share.............................................. 16,421 10,513 15,722 10,279
</TABLE>
See accompanying notes.
F-20
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 5,897 $ 1,278
Net noncash charges to income................................................... 2,300 6,195
Change in operating assets and liabilities...................................... (650) 2,473
------------- -------------
Net cash provided by operating activities....................................... 7,547 9,946
------------- -------------
Cash flows from investing activities:
Purchase of investments......................................................... (36,796) --
Furniture, equipment, and leasehold improvements................................ (569) (678)
Information systems equipment................................................... (2,782) (1,726)
Notes receivable stockholders................................................... (1,808) (2,922)
------------- -------------
Net cash used in investing activities........................................... (41,955) (5,326)
------------- -------------
Cash flows from financing activities:
Long term debt.................................................................. (53) (246)
Line of credit.................................................................. (2,000) --
Proceeds from issuance of stock................................................. 47,438 155
Deferred compensation stock incentive........................................... (442) (305)
------------- -------------
Net cash generated in financing activities.................................. 44,943 (396)
------------- -------------
Net increase (decrease) in cash and equivalents..................................... 10,535 4,224
Cash and equivalents at beginning of period......................................... 2,950 214
------------- -------------
Cash and equivalents at end of period............................................... $ 13,485 $ 4,438
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheets of First Consulting Group, Inc. (the
"Company") at September 30, 1998 and consolidated statements of operations and
condensed consolidated statements of cash flows for the periods ended September
30, 1998 and 1997 are unaudited. These financial statements reflect all
adjustments, consisting of only normal recurring adjustments, which, in the
opinion of management, are necessary to fairly present the financial position of
the Company at September 30, 1998 and the results of operations for the
three-month periods ended September 30, 1998 and September 30, 1997, and the
nine-month periods ended September 30, 1998 and September 30, 1997. The results
of operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the year ending December 31, 1998.
For more complete financial information, these financial statements should be
read in conjunction with the audited financial statements for the year ended
December 31, 1997 included in the Company's Registration Statement on Form S-1,
File No. 333-41121, declared effective on February 12, 1998.
2. STOCKHOLDERS' EQUITY
On November 25, 1997, a certificate of incorporation was filed with the
state of Delaware forming First Consulting Group, Inc. and authorizing
50,000,000 shares of common stock and authorizing 10,000,000 shares of preferred
stock. On January 22, 1998, the Board of Directors of FCG Enterprises, Inc., a
California company, approved a 4-for-1 split of common stock in the form of a
stock dividend. On February 10, 1998, FCG Enterprises, Inc., a California
company, merged into First Consulting Group, Inc., a Delaware company. On
February 13, 1998, First Consulting Group, Inc., completed an initial public
offering of its common stock in which 3,801,858 shares of common stock were sold
by the Company, resulting in net proceeds of approximately $45.1 million; an
additional 812,384 shares of common stock were sold by existing stockholders.
3. INVESTMENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and interest-earning deposits or securities with original maturities of three
months or less. The Company has approximately $11.1 million in short term
investments and $25.8 million in non-current investments classified as available
for sale. Such investments are currently held primarily in tax-exempt government
securities. Net unrealized gains and losses on investments were not material at
September 30, 1998.
4. RECENT DEVELOPMENTS
On September 9, 1998, the Company signed a definitive merger agreement and
plan of reorganization for the acquisition of Integrated Systems Consulting
Group, Inc. (ISCG), a leading provider of application development, document
management and network integration services predominately for the pharmaceutical
industry. The Company expects this transaction to close during the fourth
quarter of 1998. After such time, the financial condition and results of
operations of the two companies will be reported on a combined basis.
Under the terms of the agreement, each outstanding share of ISCG common
stock will be exchanged at a fixed exchange rate of 0.77 for a newly issued
share of Company common stock. The transaction is intended to be accounted for
as a pooling-of-interests and is intended to qualify as a tax-free
reorganization. Shareholders representing approximately 56.6% and 27% of the
common stock outstanding of ISCG and the Company respectively have signed
irrevocable proxies to vote in favor of the merger.
F-22
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. NET INCOME PER SHARE
The following represents a reconciliation of basic and diluted net income
per share for the three month and nine month periods ended September 30, 1998
and 1997, respectively (amounts rounded to thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders...................... $2,193 15,662 $0.140 $407 9,975 $0.041
Effect of dilutive securities:
Options:..................................................... 759 -- 538
------ -------- ------ --------
Diluted EPS:
Income available to common stockholders and assumed
conversions................................................ $2,193 16,421 $0.134 $407 10,513 $0.039
------ -------- --------- ------ -------- ---------
------ -------- --------- ------ -------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders..................... $5,897 15,001 $0.393 $1,278 9,687 $0.132
---------
---------
Effect of dilutive securities:
Options:.................................................... -- 721 592
------ -------- ------ --------
Diluted EPS:
Income available to common stockholders and assumed
conversions................................................. $5,897 15,722 $0.375 $1,278 10,279 $0.124
------ -------- --------- ------ -------- ---------
------ -------- --------- ------ -------- ---------
</TABLE>
F-23
<PAGE>
INTEGRATED SYSTEM CONSULTING GROUP, INC.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INTEGRATED SYSTEMS CONSULTING
GROUP, INC.:
We have audited the accompanying consolidated balance sheets of Integrated
Systems Consulting Group, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Systems Consulting Group, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 23, 1998, except as to note 14, which is as of February 27, 1998
F-24
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 8,842 $ 8,730
Short-term investments, at cost, which approximates market.................................. 601 2,537
Accounts receivable:
Trade, net of reserves of $312 and $196..................................................... 8,789 5,643
Unbilled.................................................................................... 148 144
Prepaid expenses............................................................................ 340 562
Other current assets........................................................................ 151 196
--------- ---------
Total current assets........................................................................ 18,871 17,812
Property and equipment, net................................................................. 3,507 2,935
Goodwill, net............................................................................... 1,413 --
Other assets................................................................................ 107 97
--------- ---------
$ 23,898 $ 20,844
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................................... $ 1,107 $ 1,590
Accrued compensation payable................................................................ 909 1,104
Income taxes payable........................................................................ 439 27
Deferred income taxes....................................................................... 86 363
--------- ---------
Total current liabilities................................................................... 2,541 3,084
--------- ---------
Commitments (note 12)
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized; none issued.................... -- --
Common stock, $.005 par value, 25,000,000 shares authorized 9,227,513 shares issued in 1997
and 1996.................................................................................. 46 46
Additional paid-in capital.................................................................. 12,654 12,612
Retained earnings........................................................................... 9,289 5,776
--------- ---------
21,989 18,434
Treasury stock, at cost, 1,273,681 and 1,370,840 common shares in 1997 and 1996,
respectively.............................................................................. (632) (674)
--------- ---------
21,357 17,760
--------- ---------
$ 23,898 $ 20,844
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-25
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues......................................................................... $ 43,178 $ 30,607 $ 21,024
Operating expenses:
Direct costs..................................................................... 25,402 17,497 12,559
Selling expenses................................................................. 3,054 1,822 1,044
General and administrative expenses.............................................. 9,179 6,372 4,143
--------- --------- ---------
Total operating expenses......................................................... 37,635 25,691 17,746
--------- --------- ---------
Income from operations........................................................... 5,543 4,916 3,278
--------- --------- ---------
Interest income.................................................................. 419 359 80
Interest expense................................................................. (1) (5) (113)
--------- --------- ---------
Income before income taxes....................................................... 5,961 5,270 3,245
Provision for income taxes....................................................... 2,448 2,266 1,395
--------- --------- ---------
Net income....................................................................... $ 3,513 $ 3,004 $ 1,850
--------- --------- ---------
--------- --------- ---------
Net income per common share:
Basic............................................................................ $ .44 $ .43 $ .36
--------- --------- ---------
--------- --------- ---------
Diluted.......................................................................... $ .40 $ .37 $ .30
--------- --------- ---------
--------- --------- ---------
Shares used in computing net income per common share:
Basic............................................................................ 7,921 6,913 5,085
--------- --------- ---------
--------- --------- ---------
Diluted.......................................................................... 8,881 8,091 6,181
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-26
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------- PAID-IN RETAINED -----------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
--------- ----------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995................. 6,015,751 $ 30 $ 3 $ 922 (1,406,880) $ (664) $ 291
Purchase of treasury stock, at cost....... -- -- -- -- (4,980) (8) (8)
Exercise of stock options................. 48,435 -- 15 -- -- -- 15
Issuance of common stock and warrants..... 953,355 5 2,693 -- -- -- 2,698
Net income................................ -- -- -- 1,850 -- -- 1,850
--------- --- ----------- ----------- ---------- ----- ---------
Balances, December 31, 1995............... 7,017,541 35 2,711 2,772 (1,411,860) (672) 4,846
Purchase of treasury stock, at cost....... -- -- -- -- (7,800) (26) (26)
Exercise of stock options................. 34,972 -- 43 -- 48,820 24 67
Issuance of common stock.................. 2,175,000 11 9,858 -- -- -- 9,869
Net income................................ -- -- -- 3,004 -- -- 3,004
--------- --- ----------- ----------- ---------- ----- ---------
Balances, December 31, 1996............... 9,227,513 46 12,612 5,776 (1,370,840) (674) 17,760
Exercise of stock options................. -- -- 42 -- 97,159 42 84
Net income................................ -- -- -- 3,513 -- -- 3,513
--------- --- ----------- ----------- ---------- ----- ---------
Balances, December 31, 1997............... 9,227,513 $ 46 $ 12,654 $ 9,289 (1,273,681) $ (632) $ 21,357
--------- --- ----------- ----------- ---------- ----- ---------
--------- --- ----------- ----------- ---------- ----- ---------
</TABLE>
See accompanying notes.
F-27
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 3,513 $ 3,004 $ 1,850
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of acquisition:
Depreciation and amortization................................................. 1,343 725 312
Deferred income tax benefit................................................... (277) (237) (297)
Changes in assets and liabilities:
Accounts receivable......................................................... (3,150) (2,609) (708)
Prepaid expenses............................................................ 231 (358) (23)
Other assets................................................................ 455 20 3
Accounts payable and accrued expenses....................................... (563) 596 496
Accrued compensation payable................................................ (195) 358 500
Income taxes payable........................................................ 412 (373) 179
---------- ---------- ---------
Net cash provided by operating activities....................................... 1,769 1,126 2,312
---------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................. (1,783) (2,248) (1,243)
Purchase of short-term investments.............................................. (10,414) (15,942) --
Maturity and sale of short-term investments..................................... 12,350 13,405 --
Acquisition of business, net of cash acquired................................... (1,894) -- --
---------- ---------- ---------
Net cash used in investing activities........................................... (1,741) (4,785) (1,243)
---------- ---------- ---------
Cash flows from financing activities:
Repayment of note payable to stockholder........................................ -- -- (1,350)
Repayments on bank debt......................................................... -- -- (703)
Purchase of treasury stock, net................................................. -- (2) (8)
Proceeds from issuance of common stock.......................................... 84 9,912 2,714
---------- ---------- ---------
Net cash provided by financing activities....................................... 84 9,910 653
---------- ---------- ---------
Net increase in cash and cash equivalents....................................... 112 6,251 1,722
Cash and cash equivalents, beginning of year.................................... 8,730 2,479 757
---------- ---------- ---------
Cash and cash equivalents, end of year.......................................... $ 8,842 $ 8,730 $ 2,479
---------- ---------- ---------
---------- ---------- ---------
Supplemental disclosure of cash flow information:
Income taxes paid............................................................... $ 2,440 $ 2,879 $ 1,514
Interest paid................................................................... $ -- $ 5 $ 118
Noncash investing and financing transactions:
Conversion of accounts receivable to note receivable............................ $ -- $ 94 $ 100
</TABLE>
See accompanying notes.
F-28
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Integrated Systems Consulting Group, Inc. (ISCG or the Company) through its
wholly-owned operating subsidiary provides consulting services that address its
clients' information processing needs, including client-server architecture,
graphical user interface applications, object-oriented and relational databases,
and cross platform applications integration. The Company operates in one
business segment delivering its services in two broad areas, software
applications development and systems and network management. The Company's
applications development activities accounted for approximately 78% and 79% of
its revenues in 1997 and 1996, respectively.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include U.S. Government securities, commercial
paper, and money market accounts with an original maturity of three months or
less.
INVESTMENTS
The Company has classified its marketable debt securities as
held-to-maturity. Securities classified as held-to-maturity are reported at
amortized cost. Realized gains and losses and declines in value of securities
judged to be other-than-temporary are included in income. Interest and dividends
on all securities are included in interest income.
Since held-to-maturity securities are short-term in nature, changes in
market interest rates would not have a significant impact on fair value of these
securities. These securities are carried at amortized cost which approximate
fair value.
Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consist of commercial paper and
United States Government debt securities.
The carrying amounts reflected in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the short maturities of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of depreciation. Expenditures
for improvements which significantly extend the useful life of an asset are
capitalized. Expenditures for repairs and maintenance are expensed as incurred.
Property and equipment acquired under capital leases are stated at the lower of
fair market value or the present value of the minimum lease payments at the
inception of the lease.
F-29
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computers and software (commercially available packages) 3 to 5 years
3 to 10
Furniture, fixtures and equipment years
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease term.
</TABLE>
GOODWILL
Goodwill is being amortized over ten years on a straight-line basis. The
realizability of goodwill is subject to periodic review by the Company. Such
review is based on various analyses, including cash flow and profitability
projections that incorporate, as applicable, the impact on existing Company
businesses. The analyses necessarily involve significant management judgment in
evaluating the capacity of an acquired business to perform in accordance with
projections. Accumulated amortization at December 31, 1997 and 1996 was $101,000
and $--, respectively.
REVENUE RECOGNITION
Revenues under time and material contracts are recognized in the period in
which services are provided.
Revenues under fixed price contracts are recognized under the
percentage-of-completion method. Under this method, revenues are recognized
based upon costs incurred as a percentage of estimated total costs of individual
contracts. Anticipated losses are recognized when they become known. Revisions
in estimated profits are made in the month in which the circumstances requiring
the revision become known.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings per Share,
(SFAS 128) was adopted by the Company in December 1997. SFAS 128 changed the
method for computing and presenting earnings per share (EPS) and requires dual
presentation of basic and diluted earnings per share. As required by Staff
Accounting Bulletin 98 (SAB 98) issued by the Securities and Exchange
Commission, certain common equivalent shares issued by the Company prior to the
effective date of the initial public offering ("IPO"), which is discussed in
note 10, have been included as if they were outstanding for all periods prior to
the IPO. Prior period EPS data has been restated to conform with the provisions
of SFAS 128 and SAB 98.
F-30
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Estimates
made in the preparation of the accompanying financial statements include the
percentage of completion of fixed price contracts and the amount of reserves
established for uncollectible amounts included in accounts receivable.
(3) CONCENTRATION OF CREDIT RISK AND MAJOR CLIENTS
The Company derives a significant portion of its revenues from companies in
the pharmaceutical industry. In particular, the Company's revenues are highly
dependent on research and development expenditures by the pharmaceutical
industry. Further, the Company's business could be impacted by changes in
government regulations applicable to the drug development process. Revenues
derived from clients in the pharmaceutical industry were approximately 62%, 59%
and 64% of total revenues in the years ending December 31, 1997, 1996, and 1995,
respectively. At December 31, 1997, $3,659,000 or 41% of trade and unbilled
receivables are due from companies in the pharmaceutical industry.
The following table summarizes the percentage of revenues from the Company's
significant clients (listing those clients that exceed 10% in the applicable
year):
<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
-------------------------------
1997
---------
CLIENT 1996 1995
- ----------------------------------------------------------------------- --------- ---------
A.................................................................... 11% 10% 13%
B.................................................................... * * 11%
* Less than 10%
</TABLE>
The Company generally extends 30-day credit terms to, and requires no
collateral from, its clients. The Company performs an initial credit evaluation
and, on an ongoing basis, monitors the payment patterns and balances of its
clients' accounts. The Company maintains an allowance for uncollectible amounts
based on past experience.
There were no significant revenues derived from foreign operations during
the periods covered by the accompanying financial statements.
(4) ACQUISITION
In April 1997, the Company completed the acquisition of the assets and
certain liabilities of Cutting Edge Computer Solutions, Inc. (Cutting Edge) for
cash. Cutting Edge was an information services consulting firm with primary
offices in Malvern, PA and Alexandria, VA, that specializes in the design and
development of business software using client-server, relational database, and
Internet and Intranet technologies. This acquisition was accounted for using the
purchase method of accounting, resulting in goodwill of $1,514,000 as the excess
of cash paid over the fair value of assets acquired of $461,000 and liabilities
assumed of $80,000. Pro forma information as if the acquisition had occurred on
January 1, 1996
F-31
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITION (CONTINUED)
has not been provided since such pro forma results do not differ materially from
those reported in the accompanying financial statements.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Software................................................................. $ 704 $ 450
Computers and office equipment........................................... 3,424 2,542
Leasehold improvements................................................... 478 378
Furniture and fixtures................................................... 1,555 995
--------- ---------
6,161 4,365
Less: Accumulated depreciation
and amortization....................................................... (2,654) (1,430)
--------- ---------
$ 3,507 $ 2,935
--------- ---------
--------- ---------
</TABLE>
(6) LINE OF CREDIT
The Company maintains a bank line of credit which provides for maximum
borrowings of $1,000,000, with interest on outstanding borrowings at the bank's
national commercial rate, which was 8.50% at December 31, 1997. The agreement
requires the Company to maintain a compensating balance of $50,000, meet certain
financial covenants, prohibits the payment of dividends, and expires in
September 1998 if not extended. The highest borrowings outstanding under this
line were $--, $200,000, and $375,000 during 1997, 1996, and 1995, respectively.
There were no amounts outstanding at December 31, 1997 or 1996.
(7) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Modified cash vs. accrual method of accounting................................ $ 244 $ 491
Allowance for doubtful accounts............................................... (125) (79)
Other......................................................................... (33) (49)
--------- ---------
Net deferred tax liabilities.................................................. $ 86 $ 363
--------- ---------
--------- ---------
</TABLE>
F-32
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................................ $ 2,473 $ 1,954 $ 1,298
State.......................................................... 252 549 394
2,725 2,503 1,692
--------- --------- ---------
Deferred:
Federal........................................................ (213) (169) (192)
State.......................................................... (64) (68) (105)
--------- --------- ---------
(277) (237) (297)
--------- --------- ---------
$ 2,448 $ 2,266 $ 1,395
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of the federal income tax computed at the
statutory rates to the actual income tax. The Federal statutory rate was 34% for
the years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate........................... $ 2,027 $ 1,792 $ 1,103
State income taxes, net of federal tax benefit................... 124 317 260
Other............................................................ 297 157 32
--------- --------- ---------
$ 2,448 $ 2,266 $ 1,395
--------- --------- ---------
--------- --------- ---------
</TABLE>
(8) EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all employees. The Company's
contribution was $345,000, $203,000 and $86,000 for 1997, 1996, and 1995,
respectively.
F-33
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMPUTATION OF EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of the
basic and diluted EPS computations:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE)
<S> <C> <C> <C>
Net income................................................. $ 3,513 $ 3,004 $ 1,850
Basic shares............................................... 7,921 6,913 5,085
Effect of dilutive options and warrants.................... 960 1,178 1,096
--------- --------- ---------
Diluted shares............................................. 8,881 8,091 6,181
--------- --------- ---------
Net income per common share:
Basic.................................................... $ .44 $ .43 $ .36
--------- --------- ---------
--------- --------- ---------
Diluted.................................................. $ .40 $ .37 $ .30
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1997 and 1996, options to purchase an average of 146,875 and 7,250
shares of common stock at prices ranging from $10.75 to $15.25 and $13.50 to
$15.25 per share were outstanding, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common stock.
(10) STOCKHOLDERS' EQUITY
CAPITAL STRUCTURE
Prior to June 1995, the Company had two classes of common stock (A and B)
which were similar in all respects except that class A common shares had voting
rights and class B common shares did not. Effective June 30, 1995, the Company's
articles of incorporation were amended to combine the class A and class B shares
into a single class of voting common stock. This combination of the separate
classes of common stock has been given retroactive effect in the accompanying
financial statements and related note disclosures for all periods presented.
STOCK TRANSACTIONS
On May 31, 1996, the Company completed its IPO. The Company issued 2,175,000
shares of the Company's common stock and received proceeds of approximately
$9,900,000, net of issuance costs of approximately $975,000.
In June and August 1995, Safeguard Scientifics, Inc. (Safeguard) and two
venture capital funds (collectively, the Investors) acquired 2,080,048 shares of
the Company's common stock from the Company and its principal shareholder and
also acquired warrants to purchase 339,862 shares of common stock at an exercise
price of $3.68 per share. The Company sold 953,355 common shares and the
warrants directly to the investors for cash of $2,750,000. The balance of the
Investors shares were acquired from the Company's principal stockholder. In
connection with these transactions, the Company also issued warrants to acquire
339,861 shares of its common stock at an exercise price of $3.68 per share to
the principal stockholder, who is also the Company's chief executive officer. No
value was assigned to these warrants since their exercise price exceeded the
estimated fair value of the Company's common stock as of the issuance date.
F-34
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCKHOLDERS' EQUITY (CONTINUED)
The warrants discussed in the preceding paragraph became exercisable on the
effective date of the registration statement on Form S-1 with respect to the
IPO. The warrants issued to the Investors expire three years after they become
exercisable and the warrants issued to the principal stockholder expire June 30,
1999. The warrants contain customary provisions requiring proportionate
adjustment of the exercise price in the event of a stock split, stock dividend,
or dilutive financing. The Investors also obtained certain other rights which
include piggyback and demand registration rights in certain circumstances
following an IPO of the Company's common stock.
(11) STOCK OPTION PLAN
Under the Company's amended 1989 Stock Option Plan (the "Plan"), the Company
may grant incentive stock options to employees and nonqualified stock options to
employees and directors. The Compensation Committee of the Board of Directors
administers the Plan, subject to approval by the Board of Directors. All options
are granted at not less than fair market value at the date of grant and
generally expire ten years from the date of grant. Options granted prior to July
25, 1996 generally vest at a rate of 20% per annum beginning on the second
anniversary of the grant date. Options granted on or after July 25, 1996
generally vest ratably over a five-year period.
Stock option activity, both incentive and nonqualified, under the Plan is
presented as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at January 1, 1995................................. 326,080 $ .59
Granted........................................................ 556,551 2.49
Exercised...................................................... (48,435) .32
Canceled....................................................... (23,140) 1.97
----------- ----------------
Outstanding at December 31, 1995............................... 811,056 1.89
Granted........................................................ 13,760 14.35
Exercised...................................................... (83,792) .81
Canceled....................................................... (30,778) 2.51
----------- ----------------
Outstanding at December 31, 1996............................... 710,246 2.33
Granted........................................................ 498,675 11.39
Exercised...................................................... (97,159) .98
Canceled....................................................... (189,692) 11.68
----------- ----------------
Outstanding at December 31, 1997............................... 922,070 $ 5.32
----------- ----------------
----------- ----------------
</TABLE>
At December 31, 1997, 1996 and 1995, 208,257, 152,914 and 140,492 options
were exercisable, respectively, under the Plan. In 1997, the Company's Board of
Directors amended the Plan, with subsequent stockholder approval, to increase
the number of shares of common stock authorized for issuance under the Plan from
1,250,000 to 1,650,000 shares. In 1995, the Company's Board of Directors amended
the Plan, with subsequent stockholder approval, to increase the number of shares
of common stock authorized for issuance under the Plan from 930,000 to 1,250,000
shares. In March 1997 the Company modified the terms of certain nonvested stock
options granted in January 1997 by decreasing the exercise price from $13.25 to
$10.75.
F-35
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .05 to $ 1.21 128,446 4.5 Years $ .71 65,632 $ .52
1.52 to 2.88 236,455 7.2 Years 1.75 76,501 1.63
3.33 219,094 7.9 Years 3.33 62,524 3.33
8.88 to 15.25 338,075 9.2 Years 10.86 3,600 14.28
- ----------------- ----------- ----------- ----------- ----------- -----------
$ .05 to $15.25 922,070 7.7 Years $ 5.32 208,257 $ 2.01
- ----------------- ----------- ----------- ----------- ----------- -----------
- ----------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for the
Plan. Accordingly, no compensation expense has been recognized for options
granted. Had compensation expense for the Company been consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, (SFAS 123), the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE)
<S> <C> <C> <C> <C>
Net income....................................... As reported $ 3,513 $ 3,004 $ 1,850
Pro forma 2,846 2,917 1,811
Basic earnings per share......................... As reported .44 .43 .36
Pro forma .36 .42 .36
Diluted earnings per share....................... As reported .40 .37 .30
Pro forma .32 .36 .29
</TABLE>
The fair value of the options granted under the Plan in 1997 and 1996
calculated using the Black-Scholes pricing model were $4.51 and $3.22 per share,
respectively. The following assumptions were used in the Black-Scholes pricing
model: expected dividend yield 0%, risk-free interest rate ranging from 5.55% to
7.18%, expected volatility factor of .6 for 1997 and an expected life ranging
from six to seven years. Pro forma net income reflects only options granted on
or after to January 1, 1995 and excludes the effect of a volatility assumption
prior to the Company becoming publicly traded in 1996. Therefore, the full
impact of calculating compensation expense for stock options under SFAS 123 is
not reflected in the pro forma net income amounts presented above because
compensation expense is reflected over the options' vesting period and
compensation expense for options granted prior to January 1, 1995 is not
considered.
(12) COMMITMENTS
LEASES
The Company is obligated to pay rent for office space under operating leases
which expire at various dates through September 2002.
Rent expense for 1997, 1996, and 1995 was $990,000, $614,000, and $293,000
respectively.
F-36
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 1,081
1999................................................................ 1,101
2000................................................................ 949
2001................................................................ 233
2002................................................................ 165
---------
Total minimum lease payments........................................ $ 3,529
---------
---------
</TABLE>
SALARY CONTINUATION AGREEMENTS
The Company has employment agreements with certain members of management.
These agreements contain provisions for salary continuation payments
(aggregating approximately $1,312,000 at December 31, 1997) if all such
employees are terminated without cause.
(13) RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors is the chief executive officer
of a client. Revenues from this client were $2,101,000, $78,000, and $0 in 1997,
1996 and 1995, respectively. Outstanding trade accounts receivable from this
client were $108,000 and $161,000 at December 31, 1997 and 1996, respectively.
A former member of the Company's Board of Directors was the chief executive
officer of a client. Revenues from this client were $418,000, $2,858,000, and
$587,000 in 1997, 1996 and 1995, respectively. Outstanding trade accounts
receivable from this client were $170,000 and $572,000 at December 31, 1997 and
1996, respectively. The same former member of the Company's Board of Directors
was a member of a client's Board of Directors. Revenues from this client were
$0, $114,000, and $395,000 in 1997, 1996 and 1995. Outstanding accounts
receivable from this client were $0 at December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996, and 1995, the Company made
insurance premium payments of $116,000, $143,000 and $116,000, respectively,
under certain insurance policies on the life of the Chief Executive Officer of
the Company for which the Company is not the beneficiary.
(14) SUBSEQUENT EVENT
In February 1998, the Company acquired all of the outstanding shares of
capital stock of WaveFront Consulting, Inc. (WaveFront) for cash of $3,650,000,
subject to certain conditional payments based upon future operating income.
WaveFront is an information technology consulting firm located in Vienna,
Virginia, specializing in providing distributed computing solutions, including
client/server and internet development, principally in the telecommunications
industry. WaveFront has 30 employees and reported revenues of $2,800,000 for the
year ended December 31, 1997. This acquisition will be accounted for using the
purchase method of accounting.
F-37
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
1997
SEPTEMBER 30 ------------
1998
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 4,025 $ 8,842
Short-term investments, at cost, which approximates market......................... -- 601
Accounts receivable:
Trade, net of reserves of $764 and $312.......................................... 15,512 8,789
Unbilled......................................................................... 212 148
Prepaid expenses................................................................... 560 340
Other current assets............................................................... 932 151
------------ ------------
Total current assets................................................................. 21,241 18,871
Property and equipment, net.......................................................... 3,651 3,507
Goodwill, net........................................................................ 4,558 1,413
Other assets......................................................................... 104 107
------------ ------------
$ 29,554 $ 23,898
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................................. $ 3,007 $ 1,107
Accrued compensation payable....................................................... 976 909
Income taxes payable............................................................... 346 439
Deferred income taxes.............................................................. 341 86
------------ ------------
Total current liabilities............................................................ 4,670 2,541
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized; none issued........... -- --
Common stock, $.005 par value, 25,000,000 shares authorized, 9,227,513 and
9,227,513 shares issued.......................................................... 46 46
Additional paid-in capital......................................................... 12,843 12,654
Retained earnings.................................................................. 12,566 9,289
------------ ------------
25,455 21,989
Treasury stock, at cost, 1,149,909 and 1,273,681 common shares..................... (571) (632)
------------ ------------
24,884 21,357
------------ ------------
$ 29,554 $ 23,898
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-38
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 16,224 $ 11,478 $ 45,897 $ 30,576
Operating expenses:
Direct costs........................................................ 9,765 6,777 27,732 17,893
Selling expenses.................................................... 1,128 785 3,143 2,018
General and administrative expenses................................. 3,062 2,374 9,161 6,937
Cost and expenses associated with terminated business combination... 486 -- 486 --
--------- --------- --------- ---------
Total operating expenses.............................................. 14,441 9,936 40,522 26,848
--------- --------- --------- ---------
Income from operations................................................ 1,783 1,542 5,375 3,728
Interest income, net.................................................. 60 88 221 317
--------- --------- --------- ---------
Income before income taxes............................................ 1,843 1,630 5,596 4,045
Provision for income taxes............................................ 771 685 2,319 1,699
--------- --------- --------- ---------
Net income............................................................ $ 1,072 $ 945 $ 3,277 $ 2,346
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share:
Basic............................................................... $ .13 $ .12 $ .41 $ .30
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. $ .12 $ .11 $ .37 $ .26
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net income per common share:
Basic............................................................... 8,076 7,924 8,030 7,914
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. 8,973 8,911 8,976 8,885
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-39
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 3,277 $ 2,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 1,374 1,000
Deferred income tax benefit.............................................................. 97 (218)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable.................................................................... (5,973) (3,893)
Prepaid expenses....................................................................... (220) 135
Other assets........................................................................... (766) 338
Accounts payable and accrued expenses.................................................. 1,721 (406)
Accrued compensation payable........................................................... (67) (363)
Income taxes payable................................................................... (97) 120
--------- ---------
Net cash used in operating activities........................................................ (654) (941)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................................................ (1,161) (1,451)
Purchases of short-term investments........................................................ -- (9,756)
Maturity and sale of short-term investments................................................ 601 10,550
Acquisition of business, net of cash acquired.............................................. (3,853) (1,894)
--------- ---------
Net cash used in investing activities........................................................ (4,413) (2,551)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock..................................................... 250 48
--------- ---------
Net cash provided by financing activities.................................................... 250 48
--------- ---------
Net change in cash and cash equivalents...................................................... (4,817) (3,444)
Cash and cash equivalents, beginning......................................................... 8,842 8,730
--------- ---------
Cash and cash equivalents, ending............................................................ $ 4,025 $ 5,286
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Income taxes paid.......................................................................... $ 2,022 $ 1,795
Acquisition of business
Assets acquired.......................................................................... $ 935 $ 480
Liabilities assumed...................................................................... $ 475 $ 80
</TABLE>
See accompanying notes.
F-40
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
2. On September 9, 1998 the Company announced a definitive merger agreement
with First Consulting Group, Inc. (FCGI). Under the terms of the agreement,
which is subject to approval of both FCGI's and the Company's shareholders
and customary closing conditions, each outstanding share of the Company's
common stock will be exchanged at a fixed exchange rate of 0.77 for a newly
issued share of FCGI common stock. Completion of the merger is expected in
the fourth quarter of 1998. The transaction is intended to be accounted for
as a pooling-of-interests and is intended to qualify as a tax-free
reorganization.
3. In February 1998, the Company acquired all of the outstanding shares of
capital stock of WaveFront Consulting, Inc. (WaveFront) for an initial cash
payment of $3,650,000, plus conditional payments based upon future operating
income. WaveFront is an information technology consulting firm located in
Vienna, Virginia, specializing in providing distributed computing solutions,
including client/server and internet development, principally in the
telecommunications industry. WaveFront had 30 employees and reported
revenues of $2.8 million for the year ended December 31, 1997. This
acquisition was accounted for using the purchase method of accounting. The
fair value of the identifiable net assets acquired was $460,000. The
remainder of the purchase price was allocated to goodwill. Pro forma
information as if the acquisition had occurred on January 1, 1997 has not
been provided since such pro forma results do not differ materially from
those reported in the accompanying financial statements.
4. In April 1997, the Company completed the acquisition of the assets and
certain liabilities of Cutting Edge Computer Solutions, Inc. (Cutting Edge)
for cash. Cutting Edge is an information services consulting firm with
primary offices in Malvern, PA, and Alexandria, VA, that specializes in the
design and development of business software using client-server, relational
database, and internet and intranet technologies. Cutting Edge had 26
employees and reported revenues of $2.2 million in calendar year 1996. This
acquisition was accounted for using the purchase method of accounting. The
fair value of the identifiable net assets acquired was $400,000. The
remainder of the purchase price was allocated to goodwill.
5. Statement of Financial Accounting Standards No. 128, Earnings per Share,
(SFAS 128) was adopted by the Company in December 1997. SFAS 128 changed the
method for computing and presenting earnings per share (EPS) and requires
dual presentation of basic and diluted earnings per share. Prior period EPS
data has been restated to conform with the provisions of SFAS 128.
6. The following statements were adopted by the Company on January 1, 1998.
SFAS 130--Reporting Comprehensive Income, SFAS 131--Disclosure about
Segments of an Enterprise and Related Information, SFAS 132--Employers'
Disclosure about Pensions and Other Post Retirement Benefits, and SOP
97-2--Software Revenue Recognition. These standards did not have a material
effect on the Company's financial condition and results of operations and
the Company has no components of other comprehensive income to report.
F-41
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AND
REORGANIZATION
AMONG
FIRST CONSULTING GROUP, INC.,
A DELAWARE CORPORATION;
FOXTROT ACQUISITION SUB, INC.,
A DELAWARE CORPORATION;
AND
INTEGRATED SYSTEMS CONSULTING GROUP, INC.,
A PENNSYLVANIA CORPORATION
---------------------
DATED AS OF SEPTEMBER 9, 1998
------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION.................................... A-1
1.1 Merger of Merger Sub into the Company............................. A-1
1.2 Effect of the Merger.............................................. A-2
1.3 Closing; Effective Time........................................... A-2
1.4 Certificate of Incorporation and Bylaws; Directors and Officers... A-2
1.5 Conversion of Shares.............................................. A-2
1.6 Stock Options and Warrants........................................ A-3
1.7 Closing of the Company's Transfer Books........................... A-3
1.8 Exchange of Certificates.......................................... A-3
1.9 Dissenting Shares................................................. A-4
1.10 Tax Consequences.................................................. A-5
1.11 Accounting Consequences........................................... A-5
1.12 Further Action.................................................... A-5
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. A-5
2.1 Due Organization; Subsidiaries; Etc............................... A-5
2.2 Articles of Incorporation and Bylaws.............................. A-5
2.3 Capitalization, Etc............................................... A-6
2.4 SEC Filings; Financial Statements................................. A-7
2.5 Absence of Changes................................................ A-8
2.6 Leasehold; Equipment.............................................. A-9
2.7 Title to Assets................................................... A-10
2.8 Receivables; Significant Customers................................ A-10
2.9 Proprietary Assets................................................ A-10
2.10 Contracts......................................................... A-12
2.11 Year 2000 Liabilities............................................. A-14
2.12 Compliance with Legal Requirements................................ A-14
2.13 Certain Business Practices........................................ A-14
2.14 Governmental Authorizations....................................... A-14
2.15 Tax Matters....................................................... A-15
2.16 Employee and Labor Matters; Benefit Plans......................... A-16
2.17 Environmental Matters............................................. A-17
2.18 Insurance......................................................... A-18
2.19 Transactions with Affiliates...................................... A-18
2.20 Legal Proceedings; Orders......................................... A-18
2.21 Authority; Inapplicability of Anti-takeover Statutes; Binding
Nature of Agreement............................................. A-19
2.22 No Existing Discussions........................................... A-19
</TABLE>
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2.23 Accounting Matters................................................ A-19
2.24 Vote Required..................................................... A-19
2.25 Non-Contravention; Consents....................................... A-19
2.26 Fairness Opinion.................................................. A-20
2.27 Financial Advisor................................................. A-20
2.28 Full Disclosure................................................... A-21
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB..................................................... A-21
3.1 Organization, Standing and Power.................................. A-21
3.2 Capitalization, Etc............................................... A-21
3.3 SEC Filings; Financial Statements................................. A-22
3.4 Disclosure........................................................ A-22
3.5 Absence of Certain Changes or Events.............................. A-23
3.6 Authority; Binding Nature of Agreement............................ A-23
3.7 Non-Contravention; Consents....................................... A-23
3.8 Vote Required..................................................... A-23
3.9 Valid Issuance.................................................... A-23
3.10 Accounting Matters................................................ A-23
3.11 Fairness Opinion.................................................. A-23
3.12 Tax Matters....................................................... A-24
3.13 Environmental Matters............................................. A-24
3.14 Significant Customers............................................. A-25
3.15 Year 2000 Liabilities............................................. A-25
SECTION 4. CERTAIN COVENANTS OF THE COMPANY.............................. A-25
4.1 Access and Investigation.......................................... A-25
4.2 Operation of the Company's Business............................... A-26
4.3 No Solicitation................................................... A-28
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES........................... A-29
5.1 Registration Statement; Joint Proxy Statement/Prospectus.......... A-29
5.2 Company Shareholders' Meeting..................................... A-30
5.3 Parent Stockholders' Meeting...................................... A-31
5.4 Regulatory Approvals.............................................. A-31
5.5 Stock Options..................................................... A-32
5.6 Form S-8.......................................................... A-32
5.7 Warrants.......................................................... A-32
5.8 Indemnification of Officers and Directors......................... A-33
5.9 Pooling of Interests; Tax Free Reorganization..................... A-33
5.10 Additional Agreements............................................. A-33
</TABLE>
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5.11 Confidentiality................................................... A-34
5.12 Disclosure........................................................ A-34
5.13 Tax Matters....................................................... A-34
5.14 Resignation of Officers and Directors............................. A-34
5.15 Nasdaq Listing.................................................... A-35
5.16 FIRPTA Matters.................................................... A-35
5.17 Parent Board of Directors......................................... A-35
5.18 Access to Information............................................. A-35
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER
SUB........................................................... A-35
6.1 Accuracy of Representations....................................... A-35
6.2 Performance of Covenants.......................................... A-35
6.3 Effectiveness of Registration Statement........................... A-35
6.4 Stockholder Approval.............................................. A-35
6.5 Consents.......................................................... A-36
6.6 Agreements and Documents.......................................... A-36
6.7 No Material Adverse Change........................................ A-36
6.8 FIRPTA Compliance................................................. A-36
6.9 Listing........................................................... A-36
6.10 No Restraints..................................................... A-36
6.11 No Governmental Litigation........................................ A-36
6.12 No Other Litigation............................................... A-37
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY............. A-37
7.1 Accuracy of Representations....................................... A-37
7.2 Performance of Covenants.......................................... A-37
7.3 Effectiveness of Registration Statement........................... A-37
7.4 Stockholder Approval.............................................. A-37
7.5 Documents......................................................... A-37
7.6 No Material Adverse Change........................................ A-38
7.7 Listing........................................................... A-38
7.8 No Restraints..................................................... A-38
SECTION 8. TERMINATION................................................... A-38
8.1 Termination....................................................... A-38
8.2 Notice of Termination; Effect of Termination...................... A-39
8.3 Expenses; Termination Fees........................................ A-39
SECTION 9. MISCELLANEOUS PROVISIONS...................................... A-39
9.1 Amendment......................................................... A-39
9.2 Waiver............................................................ A-40
</TABLE>
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9.3 No Survival of Representations and Warranties..................... A-40
9.4 Entire Agreement; Counterparts.................................... A-40
9.5 Applicable Law; Jurisdiction...................................... A-40
9.6 Disclosure Schedule............................................... A-40
9.7 Attorneys' Fees................................................... A-40
9.8 Assignability..................................................... A-41
9.9 Notices........................................................... A-41
9.10 Cooperation....................................................... A-41
9.11 Construction...................................................... A-41
</TABLE>
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<PAGE>
AGREEMENT AND PLAN
OF
MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("AGREEMENT") is made
and entered into as of September 9, 1998, by and among: FIRST CONSULTING GROUP,
INC., a Delaware corporation ("PARENT"); FOXTROT ACQUISITION SUB, INC., a
Delaware corporation and a wholly owned subsidiary of Parent ("MERGER SUB"); and
Integrated Systems Consulting Group, Inc., a Pennsylvania corporation (the
"COMPANY"). Certain capitalized terms used in this Agreement are defined in
Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger (the
"MERGER") of Merger Sub with and into the Company in accordance with this
Agreement and the Pennsylvania Business Corporation Law of 1988, as amended (the
"PBCL"), and the Delaware General Corporation Law, as amended (the "DGCL"). Upon
consummation of the Merger, Merger Sub will cease to exist, and the Company will
become a wholly-owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "CODE"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. The Board of Directors of the Company has (i) determined that the Merger
is consistent with and in furtherance of the long-term strategy of the Company
and fair to, and in the best interests of, the Company and its shareholders,
(ii) approved this Agreement, the Merger and the other transactions contemplated
by this Agreement and (iii) determined to recommend that the shareholders of the
Company adopt and approve this Agreement and approve the Merger.
D. The respective Boards of Directors of Parent and Merger Sub have
approved this Agreement and the Merger.
E. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, each of the
affiliate shareholders of the Company listed on Exhibit B-1 hereto is entering
into a Voting Agreement substantially in the form attached hereto as Exhibit
C-1; and as a condition and inducement to the Company's willingness to enter
into this Agreement, each of the affiliate stockholders of Parent listed on
Exhibit B-2 hereto is entering into a Voting Agreement substantially in the form
attached hereto as Exhibit C-2.
F. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, each of the
Persons identified on Exhibit D-1 hereto is entering into an Affiliate Agreement
substantially in the form attached hereto as Exhibit E-1. Concurrently with the
execution of this Agreement, and as a condition and inducement to the Company's
willingness to enter into this Agreement, each of the Persons identified on
Exhibit D-2 hereto is entering into an Affiliate Agreement substantially in the
form attached hereto as Exhibit E-2.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION.
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "SURVIVING CORPORATION").
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1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the PBCL and the DGCL.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on a date to be designated by Parent (the "CLOSING
DATE"), which shall be no later than the second business day after satisfaction
or waiver of the conditions set forth in Sections 6 and 7. Contemporaneously
with or as promptly as practicable after the Closing, properly executed articles
of merger conforming to the requirements of the PBCL (the "ARTICLES OF MERGER")
shall be filed with the Department of State of the Commonwealth of Pennsylvania
and a properly executed certificate of merger conforming to the requirements of
the DGCL shall be filed with the Secretary of State of the State of Delaware.
The Merger shall take effect at the later of (a) the time the Articles of Merger
is accepted for filing by the Department of State of the Commonwealth of
Pennsylvania, (b) the time the certificate of merger is accepted for filing by
the Secretary of State of the State of Delaware and (c) at such later time as
may be specified in the Articles of Merger (the "EFFECTIVE TIME").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND
OFFICERS. Unless otherwise determined by Parent prior to the Effective Time:
(a) the Articles of Incorporation and Bylaws of the Surviving
Corporation shall be amended and restated as of the Effective Time to
conform to the Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws substantially in the form attached hereto as Exhibits
F-1 and F-2, respectively; PROVIDED, HOWEVER, that at the Effective Time the
Articles of Incorporation of the Surviving Corporation shall be amended so
that the name of the Surviving Corporation shall be Integrated Systems
Consulting Group, Inc.; and
(b) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the directors and officers of Merger Sub
immediately prior to the Effective Time, until their respective successors
are elected and qualified or duly appointed, as the case may be.
1.5 CONVERSION OF SHARES.
(a) Subject to Section 1.5(d), at the Effective Time, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub, the
Company or any shareholder of the Company:
(i) any shares of Company Common Stock then held by the Company or
any subsidiary of the Company (or held in the Company's treasury) shall
be canceled;
(ii) any shares of Company Common Stock then held by Parent, Merger
Sub or any other subsidiary of Parent shall be canceled;
(iii) except as provided in clauses "(i)" and "(ii)" above and
subject to Sections 1.5(b) and (d) and Section 1.9, each share of Company
Common Stock then outstanding shall be converted into the right to
receive 0.77 of a share of Parent Common Stock; and
(iv) each share of the common stock, no par value per share, of
Merger Sub then outstanding shall be converted into one share of common
stock of the Surviving Corporation.
(b) The fraction of a share of Parent Common Stock into which each
outstanding share of Company Common Stock is to be converted pursuant to
Section 1.5(a)(iii) (as such fraction may be adjusted in accordance with
this Section 1.5(b)) is referred to as the "EXCHANGE RATIO." If, between the
date of this Agreement and the Effective Time, the outstanding shares of
Company Common Stock or Parent Common Stock are changed into a different
number or class of shares by reason of any stock split, stock dividend,
reverse stock split, reclassification, recapitalization or other similar
transaction, then the Exchange Ratio shall be appropriately adjusted.
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(c) If any shares of Company Common Stock outstanding immediately prior
to the Effective Time are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company, then the shares of
Parent Common Stock issued in exchange for such shares of Company Common
Stock will also be unvested and subject to the same repurchase option, risk
of forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends. The Company shall take all action that may be necessary to ensure
that, from and after the Effective Time, Parent is entitled to exercise any
such repurchase option or other right set forth in any such restricted stock
purchase agreement or other agreement.
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
Company Common Stock who would otherwise be entitled to receive a fraction
of a share of Parent Common Stock (after aggregating all fractional shares
of Parent Common Stock issuable to such holder) shall, upon surrender of
such holder's Company Stock Certificate(s) (as defined in Section 1.7), be
paid in cash the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the closing price of a
share of Parent Common Stock on Nasdaq on the Effective Date.
1.6 STOCK OPTIONS AND WARRANTS. At the Effective Time, all Company Options
(as defined in Section 2.3(b)) shall be assumed by Parent in accordance with
Section 5.5, and all Company Warrants (as defined in Section 2.3(c)) shall be
assumed by Parent in accordance with Section 5.7.
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time shall automatically be canceled and retired and shall cease to
exist, and all holders of certificates representing shares of Company Common
Stock that were outstanding immediately prior to the Effective Time shall cease
to have any rights as shareholders of the Company; and (b) the stock transfer
books of the Company shall be closed with respect to all shares of Company
Common Stock outstanding immediately prior to the Effective Time. No further
transfer of any such shares of Company Common Stock shall be made on such stock
transfer books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of Company Common Stock
(a "COMPANY STOCK CERTIFICATE") is presented to the Exchange Agent (as defined
in Section 1.8) or to the Surviving Corporation or Parent, such Company Stock
Certificate shall be canceled and shall be exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) Prior to the Closing Date, Parent shall select a reputable bank or
trust company to act as exchange agent in the Merger (the "EXCHANGE AGENT").
Promptly after the Effective Time, Parent shall deposit with the Exchange
Agent (i) certificates representing the shares of Parent Common Stock
issuable pursuant to this Section 1 and (ii) cash sufficient to make
payments in lieu of fractional shares in accordance with Section 1.5(d). The
shares of Parent Common Stock and cash amounts so deposited with the
Exchange Agent, together with any dividends or distributions received by the
Exchange Agent with respect to such shares, are referred to collectively as
the "EXCHANGE FUND."
(b) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the registered holders of Company Stock Certificates (i) a
letter of transmittal in customary form and containing such provisions as
Parent may reasonably specify (including a provision confirming that
delivery of Company Stock Certificates shall be effected, and risk of loss
and title to Company Stock Certificates shall pass, only upon delivery of
such Company Stock Certificates to the Exchange Agent), and (ii)
instructions for use in effecting the surrender of Company Stock
Certificates in exchange for certificates representing Parent Common Stock.
Subject to Section 1.5(d), upon surrender of a Company Stock Certificate to
the Exchange Agent for exchange, together with a duly executed letter of
transmittal and such other documents as may be reasonably required by the
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<PAGE>
Exchange Agent or Parent, (A) the holder of such Company Stock Certificate
shall be entitled to receive in exchange therefor a certificate representing
the number of shares of Parent Common Stock that such holder has the right
to receive pursuant to the provisions of Section 1.5(a)(iii) together with
any cash in lieu of fractional share(s) pursuant to the provisions of
Section 1.5(d), and (B) the Company Stock Certificate so surrendered shall
be canceled. Until surrendered as contemplated by this Section 1.8(b), each
Company Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive shares of Parent Common Stock
(and cash in lieu of any fractional share of Parent Common Stock) as
contemplated by Section 1.5. If any Company Stock Certificate shall have
been lost, stolen or destroyed, Parent may, in its discretion and as a
condition precedent to the issuance of any certificate representing Parent
Common Stock, require the owner of such lost, stolen or destroyed Company
Stock Certificate to provide an appropriate affidavit and to deliver a bond
(in such sum as Parent may reasonably direct) as indemnity against any claim
that may be made against the Exchange Agent, Parent or the Surviving
Corporation with respect to such Company Stock Certificate.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock represented thereby, until such
holder surrenders such Company Stock Certificate in accordance with this
Section 1.8 (at which time such holder shall be entitled to receive all such
dividends and distributions, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to
holders of Company Stock Certificates as of the date 180 days after the date
on which the Merger becomes effective shall be delivered to Parent upon
demand, and any holders of Company Stock Certificates who have not
theretofore surrendered their Company Stock Certificates in accordance with
this Section 1.8 shall thereafter look only to Parent for satisfaction of
their claims for Parent Common Stock, cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to
Parent Common Stock.
(e) Each of the Exchange Agent, Parent and the Surviving Corporation
shall be entitled to deduct and withhold from any consideration payable or
otherwise deliverable pursuant to this Agreement to any holder or former
holder of Company Common Stock such amounts as may be required to be
deducted or withheld therefrom under the Code or under any provision of
state, local or foreign tax law or under any other applicable Legal
Requirement. To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement as having
been paid to the Person to whom such amounts would otherwise have been paid.
(f) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock with respect to any shares
of Parent Common Stock (or dividends or distributions with respect thereto),
or for any cash amounts, delivered to any public official pursuant to any
applicable abandoned property, escheat or similar Legal Requirement.
1.9 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, shares, if any, of Company Common Stock that are issued and
outstanding immediately prior to the Effective Time that are held by any
shareholder who has not voted such shares in favor of the Merger and who shall
have delivered a written notice of intention to demand payment of fair value of
such shares in the manner provided in Section 1574 of the PBCL ("DISSENTING
SHARES") shall not be converted into or be exchangeable for the right to receive
the consideration provided in Section 1.5(a)(iii) (or cash in lieu of fractional
shares in accordance with Section 1.5(d)) unless and until such holder shall
have failed to perfect or shall have effectively withdrawn or lost his right to
be paid fair value under the PBCL. If such holder shall have failed to perfect
or have effectively withdrawn or lost such right, his shares of Company Common
Stock shall thereupon be deemed to have been converted into and to have become
exchangeable for, at the Effective
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<PAGE>
Time, the right to receive the consideration provided in Section 1.5(a)(iii) (or
cash in lieu of fractional shares in accordance with Section 1.5(d)) without any
interest thereon.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.11 ACCOUNTING CONSEQUENCES. For accounting purposes, the Merger is
intended to be treated as a "pooling of interests."
1.12 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to Parent and Merger Sub that, except as
set forth in the disclosure schedule that has been prepared by the Company in
accordance with the requirements of Section 9.6 and that has been delivered by
the Company to Parent on the date of this Agreement and signed by the President
of the Company (the "COMPANY DISCLOSURE SCHEDULE"):
2.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) The Company has no Subsidiaries, except for the corporations
identified in Part 2.1(a)(i) of the Company Disclosure Schedule; and neither
the Company nor any of the other corporations identified in Part 2.1(a)(i)
of the Company Disclosure Schedule owns any capital stock of, or any equity
interest of any nature in, any other Entity. (The Company and each of its
Subsidiaries are referred to collectively in this Agreement as the "ACQUIRED
CORPORATIONS".) None of the Acquired Corporations has agreed or is obligated
to make, or is bound by any Contract under which it may become obligated to
make, any future investment in or capital contribution to any other Entity.
None of the Acquired Corporations has, at any time, been a general partner
of any general partnership, limited partnership or other Entity.
(b) Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all corporate power and authority: (i) to conduct
its business in the manner in which its business is currently being
conducted; (ii) to own and use its assets in the manner in which its assets
are currently owned and used; and (iii) to perform its obligations under all
Contracts by which it is bound.
(c) None of the Acquired Corporations is or has been required to be
qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction other than the jurisdictions identified in
Part 2.1(c) of the Company Disclosure Schedule, except where the failure to
be so qualified, authorized, registered or licensed has not had and will not
have a Material Adverse Effect on the Acquired Corporations. Each of the
Acquired Corporations is in good standing as a foreign corporation in each
of the respective jurisdictions identified in Part 2.1(c) of the Company
Disclosure Schedule.
2.2 ARTICLES OF INCORPORATION AND BYLAWS. The Company has delivered to
Parent accurate and complete copies of the articles of incorporation, bylaws and
other charter and organizational documents of the respective Acquired
Corporations, including all amendments thereto. None of the Acquired
Corporations is in violation of any of the provisions of its articles of
incorporation or bylaws or equivalent governing instruments.
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<PAGE>
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Company consists of: (i)
twenty-five million (25,000,000) shares of Company Common Stock, $.005 par
value per share, of which, as of August 31, 1998, 8,076,404 shares (which
amount does not materially differ from the amount issued and outstanding as
of the date of this Agreement) have been issued and are outstanding; and
(ii) five hundred thousand (500,000) shares of preferred stock, $1.00 par
value per share, of which no shares are outstanding as of the date of this
Agreement. All of the outstanding shares of Company Common Stock have been
duly authorized and validly issued, and are fully paid and nonassessable. As
of the date of this Agreement, there are 1,151,109 shares of Company Common
Stock held in treasury by the Company and no shares of stock held in
treasury by any of the other Acquired Corporations. (i) None of the
outstanding shares of Company Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any
similar right; (ii) none of the outstanding shares of Company Common Stock
is subject to any right of first refusal in favor of the Company; and (iii)
there is no Acquired Corporation Contract relating to the voting or
registration of, or restricting any Person from purchasing, selling,
pledging or otherwise disposing of (or granting any option or similar right
with respect to), any shares of Company Common Stock. Upon consummation of
the Merger, (A) the shares of Parent Common Stock issued in exchange for any
shares of Company Common Stock that are subject to a Contract pursuant to
which the Company has the right to repurchase, redeem or otherwise reacquire
any shares of Company Common Stock will, without any further act of Parent,
the Company or any other Person, become subject to the restrictions,
conditions and other provisions contained in such Contract, and (B) Parent
will automatically succeed to and become entitled to exercise the Company's
rights and remedies under any such Contract. None of the Acquired
Corporations is under any obligation to repurchase, redeem or otherwise
acquire any outstanding shares of Company Common Stock.
(b) As of August 31, 1998, 957,725 shares (which amount does not
materially differ from the amount subject to options outstanding as of the
date of this Agreement) of Company Common Stock are subject to issuance
pursuant to outstanding options to purchase Company Common Stock. (Stock
options granted by the Company pursuant to the Company's stock option plans
are referred to in this Agreement as "COMPANY OPTIONS.") Part 2.3(b)(i) of
the Company Disclosure Schedule sets forth the following information with
respect to each Company Option outstanding as of August 31, 1998: (i) the
particular plan pursuant to which such Company Option was granted; (ii) the
name of the optionee; (iii) the number of shares of Company Common Stock
subject to such Company Option; (iv) the exercise price of such Company
Option; (v) the date on which such Company Option was granted; (vi) the
applicable vesting schedule and the extent to which such Company Option is
vested and exercisable as of the date of this Agreement; and (vii) the date
on which such Company Option expires. The Company has delivered to Parent
accurate and complete copies of all stock option plans pursuant to which the
Company has ever granted stock options and the form of all stock option
agreements evidencing such options. There are no commitments or agreements
of any character to which the Company is bound obligating the Company to
accelerate the vesting of any Company Option.
(c) As of the date of this Agreement, six hundred seventy-nine thousand,
seven hundred twenty-three (679,723) shares of Company Common Stock are
subject to issuance pursuant to outstanding warrants to purchase Company
Common Stock ("COMPANY WARRANTS"). Part 2.3(c) of the Company Disclosure
Schedule sets forth the following information with respect to each Company
Warrant outstanding as of the date of this Agreement: (i) the name of the
warrant holder; (ii) the number of shares of Company Common Stock subject to
such Company Warrant; (iii) the exercise price of such Company Warrant; (iv)
the date on which such Company Warrant was granted; (v) the applicable
vesting schedule and the extent to which such Company Warrant is vested and
exercisable as of the date of this Agreement; and (vii) the date on which
such Company Warrant expires. The Company has
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<PAGE>
delivered to Parent accurate and complete copies of all agreements,
certificates and other documents evidencing all warrants which the Company
has ever granted.
(d) Except as set forth in Parts 2.3(b), 2.3(c) or 2.3(d) of the Company
Disclosure Schedule there is no: (i) outstanding subscription, option, call,
warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Company; (ii)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or
other securities of the Company; (iii) shareholder rights plan (or similar
plan commonly referred to as a "poison pill") or Contract under which the
Company is or may become obligated to sell or otherwise issue any shares of
its capital stock or any other securities; or (iv) condition or circumstance
that may give rise to or provide a basis for the assertion of a claim by any
Person to the effect that such Person is entitled to acquire or receive any
shares of capital stock or other securities of the Company.
(e) All outstanding shares of Company Common Stock, all outstanding
Company Options, all outstanding Company Warrants and all outstanding shares
of capital stock of each Subsidiary of the Company have been issued and
granted in compliance with (i) all applicable securities laws and other
applicable Legal Requirements, and (ii) all requirements set forth in
applicable Contracts.
(f) All of the outstanding shares of capital stock of each of the
Entities identified in Part 2.1(a)(i) of the Company Disclosure Schedule are
validly issued, fully paid and nonassessable and are owned beneficially and
of record by the Company, free and clear of any Encumbrances.
2.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent accurate and complete copies of
all registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed by the Company with the SEC and
will deliver to Parent accurate and complete copies of all such registration
statements, proxy statements and other statements, reports, schedules, forms
and other documents filed after the date of this Agreement and prior to the
Effective Time (collectively, the "COMPANY SEC DOCUMENTS"). All statements,
reports, schedules, forms and other documents required to have been filed by
the Company with the SEC have been so filed. As of the time it was filed
with the SEC (or, if amended or superseded by a later filing, then on the
date of such filing): (i) each of the Company SEC Documents filed with the
SEC complied in all material respects with the applicable requirements of
the Securities Act or the Exchange Act (as the case may be) as of the date
of such filing and any Company SEC Documents filed after the date hereof
will so comply; and (ii) none of the Company SEC Documents contained any
untrue statement of material fact or omitted to state a material fact
required to be state therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements (including any related notes)
contained in the Company SEC Documents filed with the SEC (the "COMPANY
FINANCIAL STATEMENTS"): (i) complied as to form in all material respects
with the published rules and regulations of the SEC applicable thereto; (ii)
were prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods covered
(except as may be indicated in the notes to such financial statements or, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC, and
except that the unaudited financial statements may not contain footnotes and
other information required for complete financial statements), and (iii)
fairly present the consolidated financial position of the Company and its
subsidiaries as of the respective dates thereof and the consolidated results
of operations of the Company and its subsidiaries for the periods covered
thereby. All adjustments (consisting of recurring accruals) considered
necessary for a fair presentation of the financial statements have been
included. The audited consolidated balance sheet of the Company and its
subsidiaries included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 is sometimes referred to herein as the "COMPANY
BALANCE SHEET" and the unaudited
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consolidated balance sheet of the Company and its subsidiaries as of June
30, 1998 included in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 is sometimes referred to herein as the "COMPANY
UNAUDITED INTERIM BALANCE SHEET." All financial statements (including any
related notes) contained in Company SEC Documents filed after the date
hereof shall meet the conditions set forth in (i), (ii) and (iii) of this
Section 2.4(b).
2.5 ABSENCE OF CHANGES. Since the date of the Company Unaudited Interim
Balance Sheet:
(a) there has not been any material adverse change in the business,
condition, assets, liabilities, operations, financial performance or
prospects of the Acquired Corporations taken as a whole, and no event has
occurred that could reasonably be expected to have a Material Adverse Effect
on the Acquired Corporations;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of any of the
Acquired Corporations (whether or not covered by insurance);
(c) none of the Acquired Corporations has (i) declared, accrued, set
aside or paid any dividend or made any other distribution in respect of any
shares of capital stock, or (ii) repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities;
(d) none of the Acquired Corporations has sold, issued, granted or
authorized the issuance or grant of (i) any capital stock or other security
(except for Company Common Stock issued upon the exercise of outstanding
Company Options or Company Warrants), (ii) any option, call, warrant or
right to acquire any capital stock or any other security (except for Company
Options described in Part 2.3(b)(i) of the Company Disclosure Schedule), or
(iii) any instrument convertible into or exchangeable for any capital stock
or other security;
(e) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of any of the
Company's stock option plans, (ii) any provision of any agreement evidencing
any outstanding Company Option or Company Warrant, or (iii) any restricted
stock purchase agreement;
(f) except as provided in Part 2.5(f) of the Company Disclosure
Schedule, there has been no amendment to the articles of incorporation,
bylaws or other charter or organizational documents of any of the Acquired
Corporations, and none of the Acquired Corporations has effected or been a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(g) except as provided in Part 2.5(g) of the Company Disclosure
Schedule, none of the Acquired Corporations has (i) received any Acquisition
Proposal, or (ii) solicited, initiated, encouraged or induced, or provided
any nonpublic information to or entered into any discussions with any Person
for the purpose of soliciting, initiating, encouraging or inducing, the
making or submission of any Acquisition Proposal;
(h) none of the Acquired Corporations has formed any subsidiary or
acquired any equity interest or other interest in any other Entity;
(i) none of the Acquired Corporations has made any capital expenditures
which exceed $800,000 in the aggregate;
(j) except in the ordinary course of business and consistent with past
practices, none of the Acquired Corporations has (i) entered into or
permitted any of the assets owned or used by it to become bound by any
Material Contract (as defined in Section 2.10), or (ii) amended or
prematurely terminated, or waived any material right or remedy under, any
Material Contract;
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(k) none of the Acquired Corporations has (i) acquired, leased or
licensed any material right or other material asset from any other Person,
(ii) sold or otherwise disposed of, or leased or licensed, any material
right or other material asset to any other Person, or (iii) waived or
relinquished any right, except for rights or other assets acquired, leased,
licensed or disposed of in the ordinary course of business and consistent
with past practices;
(l) none of the Acquired Corporations has written off as uncollectible,
or established any extraordinary reserve with respect to, any account
receivable or other indebtedness in excess of $25,000 with respect to any
single matter, or in excess of $50,000 in the aggregate;
(m) except as set forth on Part 2.5(m) of the Company Disclosure
Schedule, none of the Acquired Corporations has made any pledge of any of
its assets or otherwise permitted any of its assets to become subject to any
Encumbrance, except for pledges of immaterial assets made in the ordinary
course of business and consistent with past practices;
(n) except as set forth in Part 2.5(n) of the Company Disclosure
Schedule and except for intercompany indebtedness among the Acquired
Corporations and relocation and travel advances referred to in Section
2.8(b), none of the Acquired Corporations has (i) lent money to any Person,
or (ii) incurred or guaranteed any indebtedness for borrowed money;
(o) except as provided in Part 2.5(o) of the Company Disclosure
Schedule, none of the Acquired Corporations has (i) established or adopted
any Plan (as defined in Section 2.16(a)), (ii) caused or permitted any Plan
to be amended in any material respect, or (iii) paid any bonus or made any
profit-sharing or similar payment to, or materially increased the amount of
the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees;
(p) none of the Acquired Corporations has changed any of its methods of
accounting or accounting practices in any respect;
(q) none of the Acquired Corporations has made any material election
with respect to Taxes;
(r) except as set forth in Part 2.5(r) of the Company Disclosure
Schedule, none of the Acquired Corporations has commenced or settled any
Legal Proceeding;
(s) none of the Acquired Corporations has entered into any material
transaction or taken any other material action that has had, or could
reasonably be expected to have, a Material Adverse Effect on the Acquired
Corporations; and
(t) except as set forth in Part 2.5(t) of the Company Disclosure
Schedule, none of the Acquired Corporations has agreed or committed to take
any of the actions referred to in clauses "(c)" through "(s)" above.
2.6 LEASEHOLD; EQUIPMENT. None of the Acquired Corporations own any real
property or any interest in real property, except for the leaseholds created
under the real property leases identified in Part 2.6 of the Company Disclosure
Schedule. All such real property is being leased pursuant to lease agreements
that are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default) that would result in a Material Adverse Effect
on the Acquired Corporations. Part 2.6 of the Company Disclosure Schedule
accurately identifies all material items of equipment leased by the Acquired
Corporations. All material items of equipment and other tangible assets owned by
or leased to the Acquired Corporations are adequate for the uses to which they
are being put, are in good condition and repair (ordinary wear and tear
excepted) and are adequate for the conduct of the business of the Acquired
Corporations in the manner in which such business is currently being conducted.
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2.7 TITLE TO ASSETS. The Acquired Corporations own, and have good, valid
and marketable title to, or in the case of leased properties and assets, valid
leasehold interests in, all of their respective tangible properties and assets,
real, personal and mixed, used or held for use in their business, including: (i)
all assets reflected on the Company Unaudited Interim Balance Sheet; and (ii)
all other assets reflected in the books and records of the Acquired Corporations
as being owned or leased by the Acquired Corporations. Except as set forth in
Part 2.7 of the Company Disclosure Schedule, all of said assets are owned or
leased by the Acquired Corporations free and clear of any Encumbrances, except
for (x) any lien for current taxes not yet due and payable, and (y) minor liens
that have arisen in the ordinary course of business and that do not (in any case
or in the aggregate) materially detract from the value of the assets subject
thereto or materially impair the operations of any of the Acquired Corporations.
2.8 RECEIVABLES; SIGNIFICANT CUSTOMERS.
(a) Part 2.8 of the Company Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable of the Acquired
Corporations as of the date of the Company Unaudited Interim Balance Sheet.
All existing accounts receivable of the Acquired Corporations (including
those accounts receivable reflected on the Company Unaudited Interim Balance
Sheet that have not yet been collected and those accounts receivable that
have arisen since the date of the Company Unaudited Interim Balance Sheet
and have not yet been collected) (i) represent valid obligations of
customers of the Acquired Corporations arising from bona fide transactions
entered into in the ordinary course of business, (ii) are current and will
be collected in full when due, without any counterclaim or set off and are
not subject to any dispute or threat of nonpayment (net of the allowance for
doubtful accounts set forth on the Company Unaudited Interim Balance Sheet
and an additional amount not to exceed $250,000 in the aggregate) and (iii)
represent revenues that have been recognized in accordance with GAAP.
(b) Part 2.8(b) of the Company Disclosure Schedule contains an accurate
and complete list as of August 31, 1998 of all loans and advances made by
any of the Acquired Corporations to any employee, director, consultant or
independent contract of such Acquired Corporation, other than routine travel
or relocation advances made to employees in the ordinary course of business,
which loan and advances do not materially differ from the loans and advances
as of the date of this Agreement.
(c) Part 2.8(c) of the Company Disclosure Schedule sets forth a complete
and accurate list of all Significant Customers. For purposes of this
Agreement, "SIGNIFICANT CUSTOMERS" are the twenty (20) customers of the
Company that have effected the most purchases, in dollar terms, and
accounted for the most revenues, in dollar terms, during the four (4) fiscal
quarter period ended June 30, 1998. None of the Company's Significant
Customers has canceled, returned or substantially reduced or, to the
knowledge of the Company, is currently attempting or threatening to cancel,
return or substantially reduce, any purchases from, orders to or services
provided by the Company. The Company has not received any material customer
complaints concerning its products and/or services.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9(a)(i) of the Company Disclosure Schedule sets forth, with
respect to each Company Proprietary Asset registered with any Governmental
Body or for which an application has been filed with any Governmental Body,
(i) a brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. The
Company owns no Proprietary Assets other than the Company Proprietary Assets
set forth in Part 2.9(a)(i) of the Company Disclosure Schedule. Part
2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public at a cost of
less than $10,000), and identifies the license agreement under which such
Proprietary Asset is being licensed to the Company. To the best of the
knowledge of the Company, the Company has good, valid and marketable title
to all of the Company Proprietary Assets
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identified in Parts 2.9(a)(i) and 2.9(a)(ii) of the Disclosure Schedule,
free and clear of all liens and other Encumbrances, and has a valid right to
use all Proprietary Assets identified in Part 2.9(a)(iii) of the Disclosure
Schedule. Except as set forth in Part 2.9(a)(v) of the Disclosure Schedule,
to the best of the knowledge of the Company, the Company is not obligated to
make any payment to any Person for the use of any Company Proprietary Asset.
The Company has not developed jointly with any other Person any Company
Proprietary Asset with respect to which such other Person has any rights.
(b) The Company has taken all commercially reasonable measures and
precautions necessary to protect and maintain the confidentiality and
secrecy of all Company Proprietary Assets (except Company Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to
maintain and protect the value of all Company Proprietary Assets.
(c) To the best of the knowledge of the Company, none of the Company
Proprietary Assets infringes or conflicts with any Proprietary Asset owned
or used by any other Person. Except as set forth in Part 2.9(c) of the
Company Disclosure Schedule, to the best of the knowledge of the Company,
the Company is not infringing, misappropriating or making any unlawful use
of, and the Company has not at any time infringed, misappropriated or made
any unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset
owned or used by any other Person. To the best of the knowledge of the
Company, no other Person is infringing, misappropriating or making any
unlawful use of, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Company Proprietary Asset.
(d) (i) Each Company Proprietary Asset conforms in all material respects
with any specification, documentation, performance standard, representation
or statement made or provided with respect thereto by or on behalf of the
Company; and (ii) there has not been any claim by any customer or other
Person alleging that any Company Proprietary Asset (including each version
thereof that has ever been licensed or otherwise made available by the
Company to any Person) does not conform in all material respects with any
specification, documentation, performance standard, representation or
statement made or provided by or on behalf of the Company, and, to the best
of the knowledge of the Company, there is no basis for any such claim. To
the best of the knowledge of the Company, the Company has established
adequate reserves on the Company Unaudited Interim Balance Sheet to cover
all costs associated with any obligations that the Company may have with
respect to the correction or repair of programming errors or other defects
in the Company Proprietary Assets.
(e) The Company Proprietary Assets constitute all the Proprietary Assets
necessary to enable the Company to conduct its business in the manner in
which such business has been and is being conducted. Except as set forth in
Part 2.9(e) of the Company Disclosure Schedule, (i) the Company has not
licensed any of the Company Proprietary Assets to any Person on an exclusive
basis, and (ii) the Company has not entered into any covenant not to compete
or Contract limiting its ability to exploit fully any of its Proprietary
Assets or to transact business in any market or geographical area or with
any Person.
(f) All employees set forth in Part 2.9(f) of the Company Disclosure
Schedule have executed and delivered an agreement to the Company (containing
no exceptions to or exclusions from the scope of its coverage) that is
substantially identical to the form of Employment Agreement or Employee
Agreement previously delivered to Parent by the Company. Substantially all
other current and substantially all former employees of the Company have
executed and delivered to the Company an agreement (containing no exceptions
to or exclusions from the scope of its coverage) that is substantially
identical to the form of confidential information and invention assignment
agreement previously delivered to Parent. Substantially all current and
former consultants and independent contractors to the Company have executed
and delivered to the Company an agreement (containing no exceptions to or
exclusions from the scope of its coverage) that is substantially identical
to the form
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of consultant confidential information and invention assignment agreement
previously delivered to Parent.
(g) Except as set forth in Part 2.9(g) of the Company Disclosure
Schedule, to the best of the knowledge of the Company, each of the Acquired
Corporations has taken adequate steps to ensure that all software (and
related Proprietary Assets) used in its operations are Year 2000 Compliant
(as defined below). For purposes of this Agreement, "YEAR 2000 COMPLIANT"
shall mean that software that can individually, and in combination and in
conjunction with all other systems, products or processes with which they
are required or designed to interface, continue to be used normally and to
operate successfully (both in functionality and performance in all material
respects) over the transition into the twenty first century when used in
accordance with the documentation relating to all software (and related
Acquired Corporation Proprietary Assets) that is sold, licensed or
transferred by any Acquired Corporation to any Person, including being able
to, before, on and after January 1, 2000 substantially conform to the
following: (i) use logic pertaining to dates which allow users to identify
and/or use the century portion of any date fields without special
processing; and (ii) respond to all date elements and date input so as to
resolve any ambiguity as to century in a disclosed, defined and
pre-determined manner and provide date information in ways which are
unambiguous as to century, either by permitting or requiring the century to
be specified or where the data element is represented without a century, the
correct century is unambiguous for all manipulations involving that element.
2.10 CONTRACTS.
(a) Part 2.10 of the Company Disclosure Schedule identifies each
Acquired Corporation Contract that constitutes a "Material Contract." For
purposes of this Agreement, each of the following shall be deemed to
constitute a "MATERIAL CONTRACT":
(i) (A) any Contract or outstanding offer relating to the employment
of, or the performance of services by, any employee, (B) any Contract
pursuant to which any of the Acquired Corporations is required to make
any severance, termination or similar payment, bonus or relocation
payment or any other payment (other than payments in respect of salary)
to any current or former employee or director of any of the Acquired
Corporations and (C) any Contract or Plan (including, without limitation,
any stock option plan, stock appreciation plan or stock purchase plan),
any of the benefits of which may be increased, or the vesting of benefits
of which may be accelerated;
(ii) any Contract (A) relating to the acquisition, transfer,
development, sharing, license (to or by any of the Acquired
Corporations), use or other exploitation of any Proprietary Asset (except
for any Contract pursuant to which any Proprietary Asset is licensed to
the Acquired Corporations under any third party software license
generally available to the public); or (B) with respect to the
distribution or marketing of any products of the Acquired Corporations;
(iii) any Contract which provides for indemnification of any officer,
director, employee or agent of any of the Acquired Corporations;
(iv) any Contract imposing any restriction on the right or ability
of any Acquired Corporation (A) to compete in any market or geographic
area with any other Person, (B) to acquire any product or other asset or
any services from any other Person, to sell any product or other asset to
or perform any services for any other Person or to transact business or
deal in any other manner with any other Person, or (C) to develop or
distribute any technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities (other than the issuance
of Company Common Stock upon the valid exercise of Company Options or
Company Warrants outstanding as of the date of this Agreement), (B)
providing any Person with any preemptive right, right of participation,
right of
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maintenance or any similar right with respect to any securities, or (C)
providing the Company with any right of first refusal with respect to, or
right to repurchase or redeem, any securities;
(vi) any Contract requiring that the Company give any notice or
provide any information to any Person prior to accepting any Acquisition
Proposal;
(vii) any Contract that (A) contemplates or involves payment or
delivery of cash or other consideration in an amount or having a value in
excess of $7,500 per month and (B) has a term of more than 90 days and
that may not be terminated by such Acquired Corporation within 90 days
after the delivery of a termination notice by such Acquired Corporation;
(viii) any Contract that contemplates or involves payment or delivery
of cash or other consideration by any of the Acquired Corporations in an
amount or having a value in excess of $100,000 in the aggregate;
(ix) except as set forth in Part 2.10(a)(ix) of the Company
Disclosure Schedule, any Contract or Plan (including, without limitation,
any stock option plan, stock appreciation plan or stock purchase plan),
any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the execution of this Agreement
or the consummation of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(x) any joint marketing or development Contract currently in force
under which an Acquired Corporation has continuing material obligations
to jointly market any product, technology or service and which may not be
canceled without penalty upon notice of 30 days or less, or any material
Contract pursuant to which an Acquired Corporation has continuing
material obligations to jointly develop any Proprietary Asset that will
not be owned, in whole or in part, by an Acquired Corporation and which
may not be canceled without penalty upon notice of 90 days or less;
(xi) any Contract currently in force to disclose or deliver to any
Person, or permit the disclosure or delivery to any escrow agent or other
Person, of the source code, or any portion or aspect of the source code,
or any proprietary information or algorithm contained in or relating to
any source code, of any Acquired Corporation Proprietary Asset that is
material to the Acquired Corporations taken as a whole;
(xii) any Contract (not otherwise identified in clauses "(i)" through
"(xi)" of this sentence) that is or would be material to any of the
Acquired Corporations, to the business, condition, capitalization or
operations of any of the Acquired Corporations or to any of the
transactions contemplated by this Agreement; and
(xiii) any other Contract, if a breach of such Contract could
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations.
(b) Each Material Contract is valid and in full force and effect, and is
enforceable by an Acquired Corporation in accordance with its terms, subject
to (i) laws of general application relating to bankruptcy, insolvency and
the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies. To the best of the knowledge
of the Company, no Person has violated or breached, or committed any default
under, any Material Contract.
(c) (i) None of the Acquired Corporations has violated or breached, or
committed any default under, any Acquired Corporation Contract, and, to the
best of the knowledge of the Company, no other Person has violated or
breached, or committed any default under, any Acquired Corporation Contract
that will have a Material Adverse Effect on the Acquired Corporations; (ii)
to the best of the knowledge of the Company, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of
time) will, or could reasonably be expected to, (A) result in a violation or
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breach of any of the provisions of any Acquired Corporation Contract, (B)
give any Person the right to declare a default or exercise any remedy under
any Acquired Corporation Contract, (C) give any Person the right to a
rebate, chargeback, penalty or change in delivery schedule under any
Acquired Corporation Contract, (D) give any Person the right to accelerate
the maturity or performance of any Acquired Corporation Contract, or (E)
give any Person the right to cancel, terminate or modify any Acquired
Corporation Contract that will have a Material Adverse Effect on the
Acquired Corporations; (iii) none of the Acquired Corporations or any of
their Representatives has received any notice or other communication
regarding any actual or possible violation or breach of, or default under,
any Acquired Corporation Contract that will have a Material Adverse Effect
on the Acquired Corporation; and (iv) each of the Acquired Corporations has
obtained all necessary export licenses related to the export of its
products.
(d) Except as set forth in Part 2.10(d) of the Company Disclosure
Schedule, there is no Acquired Corporation Contract to which any
Governmental Body is a party or under which any Governmental Body has any
rights or obligations, or directly or indirectly benefiting any Governmental
Body (including any subcontract or other Contract between any Acquired
Corporation and any contractor or subcontractor to any Governmental Body).
(e) No Person is renegotiating, or has a right pursuant to the terms of
any Material Contract to renegotiate, any amount paid or payable to any
Acquired Corporation under any Material Contract or any other material term
or provision of any Material Contract, except for Acquired Corporation
Contracts, which are being renegotiated or provide for renegotiation
pursuant to their terms in the ordinary course of the Company's business.
2.11 YEAR 2000 LIABILITIES. None of the Acquired Corporations has any
accrued, contingent or other liabilities of any nature, either matured or
unmatured, including, without limitation, any liabilities relating to costs
associated with insuring that all software (and related Acquired Corporation
Proprietary Assets) that is sold, licensed or transferred by any Acquired
Corporation to any Person, computer systems, any software utilized by the
Acquired Corporations or other components of the Acquired Corporations'
information technology infrastructure are Year 2000 Compliant (whether or not
required to be reflected in financial statements in accordance with GAAP, and
whether due or to become due), except for: (a) liabilities identified as such in
the "liabilities" column of the Company Unaudited Interim Balance Sheet; and (b)
normal and recurring liabilities that have been incurred by the Acquired
Corporations since the date of the Company Unaudited Interim Balance Sheet in
the ordinary course of business and consistent with past practices.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Acquired Corporations
is, and has at all times since June 3, 1996 been, in compliance with all
applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and will not have a Material Adverse Effect on
the Acquired Corporations. Since June 3, 1996, none of the Acquired Corporations
has received any notice or other communication from any Governmental Body
regarding any actual or possible violation of, or failure to comply with, any
Legal Requirement.
2.13 CERTAIN BUSINESS PRACTICES. None of the Acquired Corporations nor any
director, officer, agent or employee of any of the Acquired Corporations has, on
behalf of any of the Acquired Corporations, (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
2.14 GOVERNMENTAL AUTHORIZATIONS. The Acquired Corporations hold all
Governmental Authorizations necessary to enable the Acquired Corporations to
conduct their respective businesses in the manner in which such businesses are
currently being conducted. All such Governmental Authorizations are valid and in
full force and effect. Each Acquired Corporation is, and at all times since June
3, 1996 has been, in
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substantial compliance with the terms and requirements of such Governmental
Authorizations. Since June 3, 1996, none of the Acquired Corporations has
received any notice or other communication from any Governmental Body regarding
(a) any actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification of
any Governmental Authorization.
2.15 TAX MATTERS.
(a) Except as set forth in Part 2.15(a) of the Company Disclosure
Schedule, all Tax Returns required to be filed by or on behalf of the
respective Acquired Corporations with any Governmental Body with respect to
any taxable period ending on or before the Closing Date (the "ACQUIRED
CORPORATION RETURNS") (i) have been or will be filed on or before the
applicable due date (including any extensions of such due date if properly
obtained), and (ii) have been, or will be when filed, prepared in all
material respects in compliance with all applicable Legal Requirements. All
amounts shown on the Acquired Corporation Returns to be due on or before the
Closing Date have been or will be paid on or before the Closing Date.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with GAAP. Each Acquired Corporation will
establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period
from the date of this Agreement through the Closing Date.
(c) Except as set forth in Part 2.15(c) of the Company Disclosure
Schedule, since the Acquired Corporation Return for the taxable period ended
December 31, 1994, no Acquired Corporation Return has ever been examined or
audited by any Governmental Body. No extension or waiver of the limitation
period applicable to any of the Acquired Corporation Returns has been
granted (by the Company or any other Person), and no such extension or
waiver has been requested from any Acquired Corporation.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of the Company, has been threatened against or with respect to any
Acquired Corporation in respect of any material Tax. There are no
unsatisfied liabilities for material Taxes (including liabilities for
interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by any
Acquired Corporation with respect to any material Tax (other than
liabilities for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by the Acquired
Corporations and with respect to which adequate reserves for payment have
been established). There are no liens for material Taxes upon any of the
assets of any of the Acquired Corporations except liens for current Taxes
not yet due and payable. None of the Acquired Corporations has entered into
or become bound by any agreement or consent pursuant to Section 341(f) of
the Code. None of the Acquired Corporations has been, and none of the
Acquired Corporations will be, required to include any adjustment in taxable
income for any tax period (or portion thereof) pursuant to Section 481 of
the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing.
(e) Except as set forth in Part 2.15(e) of the Company Disclosure
Schedule, there is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of the Acquired Corporations that, considered
individually or considered collectively with any other such Contracts, will,
or could reasonably be expected to, give rise directly or indirectly to the
payment of any amount that would not be deductible pursuant to Section 280G
or Section 162 of the Code. None of the Acquired Corporations is, or has
ever been, a party to or bound by any tax indemnity agreement, tax sharing
agreement, tax allocation agreement or similar Contract.
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2.16 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.16(a) of the Company Disclosure Schedule identifies each
salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program or agreement
(collectively, the "PLANS") sponsored, maintained, contributed to or
required to be contributed to by any of the Acquired Corporations for the
benefit of any current or former employee of any of the Acquired
Corporations.
(b) Except as set forth in Part 2.16(a) of the Company Disclosure
Schedule, none of the Acquired Corporations maintains, sponsors or
contributes to, and none of the Acquired Corporations has at any time in the
past maintained, sponsored or contributed to, any employee pension benefit
plan (as defined in Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), whether or not excluded from coverage
under specific Titles or Merger Subtitles of ERISA) for the benefit of
employees or former employees of any of the Acquired Corporations (a
"PENSION PLAN"). None of the Plans identified in Part 2.16(a) of the Company
Disclosure Schedule is subject to Title IV of ERISA or Section 412 of the
Code.
(c) Except as set forth in Part 2.16(a) or Part 2.16(c) of the Company
Disclosure Schedule, none of the Acquired Corporations maintains, sponsors
or contributes to any: (i) employee welfare benefit plan (as defined in
Section 3(1) of ERISA, whether or not excluded from coverage under specific
Titles or Merger Subtitles of ERISA) for the benefit of any employees or
former employees of any of the Acquired Corporations (a "WELFARE PLAN"), or
(ii) self-funded medical, dental or other similar Plan. None of the Plans
identified in Part 2.16(a) of the Company Disclosure Schedule is a
multi-employer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, the Company has delivered to Parent: (i)
an accurate and complete copy of such Plan (including all amendments
thereto); (ii) an accurate and complete copy of the annual report, if
required under ERISA, with respect to such Plan for the last two years;
(iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, (iv) if such Plan is funded
through a trust or any third party funding vehicle, an accurate and complete
copy of the trust or other funding agreement (including all amendments
thereto) and accurate and complete copies the most recent financial
statements thereof; (v) accurate and complete copies of all Contracts
relating to such Plan, including service provider agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
recordkeeping agreements; and (vi) an accurate and complete copy of the most
recent determination letter received from the Internal Revenue Service with
respect to such Plan (if such Plan is intended to be qualified under Section
401(a) of the Code).
(e) None of the Acquired Corporations is or has ever been required to be
treated as a single employer with any other Person under Section 4001(b)(1)
of ERISA or Section 414(b), (c), (m) or (o) of the Code. None of the
Acquired Corporations has ever been a member of an "affiliated service
group" within the meaning of Section 414(m) of the Code. None of the
Acquired Corporations has ever made a complete or partial withdrawal from a
multi-employer plan, as such term is defined in Section 3(37) of ERISA,
resulting in "withdrawal liability," as such term is defined in Section 4201
of ERISA (without regard to subsequent reduction or waiver of such liability
under either Section 4207 or 4208 of ERISA).
(f) None of the Acquired Corporations has any plan or commitment to
create any Welfare Plan or any additional Pension Plan, or to modify or
change any existing Pension Plan (other than to comply with applicable law)
in a manner that would affect any employee of any of the Acquired
Corporations.
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(g) Except as set forth in Part 2.16(g) of the Company Disclosure
Schedule, no Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former employee of any of the
Acquired Corporations after any such employee's termination of service
(other than (i) benefit coverage mandated by applicable law, including
coverage provided pursuant to Section 4980B of the Code, (ii) deferred
compensation benefits accrued as liabilities on the Company Balance Sheet,
and (iii) benefits the full cost of which are borne by current or former
employees of any of the Acquired Corporations (or the employees'
beneficiaries)).
(h) With respect to any Plan constituting a group health plan within the
meaning of Section 4980B(g)(2) of the Code, the provisions of Section 4980B
of the Code ("COBRA") have been complied with in all material respects. Part
2.16(h) of the Company Disclosure Schedule describes all obligations of the
Acquired Corporations as of the date of this Agreement under any of the
provisions of COBRA.
(i) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Legal Requirements, including but not
limited to ERISA and the Code.
(j) Each of the Plans intended to be qualified under Section 401(a) of
the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such
determination letter should be revoked.
(k) Except as set forth in Part 2.16(k) of the Company Disclosure
Schedule, neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any payment (including any
bonus, golden parachute or severance payment) to any current or former
employee or director of any of the Acquired Corporations (whether or not
under any Plan), or materially increase the benefits payable under any Plan,
or result in any acceleration of the time of payment or vesting of any such
benefits.
(l) Part 2.16(l) of the Company Disclosure Schedule contains a list of
all salaried employees of each of the Acquired Corporations as of the date
of this Agreement, and correctly reflects, in all material respects, their
base salaries, their targeted annual bonus amounts, their dates of
employment and their positions. None of the Acquired Corporations is a party
to any collective bargaining contract or other Contract with a labor union
involving any of its employees. All of the employees of the Acquired
Corporations are "at will" employees.
(m) Part 2.16(m) of the Company Disclosure Schedule identifies each
Employee who is not fully available to perform work because of disability or
other leave and sets forth the basis of such leave and the anticipated date
of return to full service.
(n) Each Plan complies in all material respects with all applicable
Legal Requirements. Each of the Acquired Corporations is in compliance in
all material respects with all Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters.
(o) Except as set forth in Part 2.16(o) of the Company Disclosure
Schedule, each of the Acquired Corporations has good labor relations, and
none of the Acquired Corporations has any knowledge of any facts indicating
that (i) the consummation of the Merger or any of the other transactions
contemplated by this Agreement will have a material adverse effect on the
labor relations of any of the Acquired Corporations, or (ii) any of the
employees of the Acquired Corporations intends to terminate his or her
employment with the Acquired Corporation with which such employee is
employed.
2.17 ENVIRONMENTAL MATTERS. Each of the Acquired Corporations is in
compliance in all material respects with all applicable Environmental Laws,
which compliance includes the possession by each of the
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Acquired Corporations of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. None of the Acquired Corporations has received any notice or
other communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that any of the Acquired
Corporations is not in compliance with any Environmental Law, and, to the best
of the knowledge of the Company, there are no circumstances that may prevent or
interfere with the compliance by any of the Acquired Corporations with any
Environmental Law in the future. To the best of the knowledge of the Company, no
current or prior owner of any property leased or controlled by any of the
Acquired Corporations has received any notice or other communication (in writing
or otherwise), whether from a Government Body, citizens group, employee or
otherwise, that alleges that such current or prior owner or any of the Acquired
Corporations is not in compliance with any Environmental Law. To the best of the
knowledge of the Company, all property that is leased to, controlled by or used
by the Company, and all surface water, groundwater and soil associated with or
adjacent to such property is in clean and healthful condition and is free of any
material environmental contamination of any nature. (For purposes of this
Section 2.17 and Section 3.13: (i) "ENVIRONMENTAL LAW" means any federal, state,
local or foreign Legal Requirement relating to pollution or protection of human
health or the environment (including ambient air, surface water, ground water,
land surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern; and (ii) "MATERIALS OF ENVIRONMENTAL
CONCERN" include chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products and any other substance that is now or
hereafter regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.)
2.18 INSURANCE. The Company has delivered to Parent a copy of each
insurance policy and each self insurance program relating to the business,
assets or operations of any of the Acquired Corporations. Each such insurance
policy is in full force and effect. Since June 3, 1996, none of the Acquired
Corporations has received any notice or other communication regarding any actual
or possible (a) cancellation or invalidation of any insurance policy, (b)
refusal of any coverage or rejection of any material claim under any insurance
policy, or (c) material adjustment in the amount of the premiums payable with
respect to any insurance policy. Except as set forth in Part 2.18 of the Company
Disclosure Schedule, there is no pending claim (including any workers'
compensation claim) under or based upon any insurance policy of any of the
Acquired Corporations; and, to the best of the knowledge of the Company, no
event has occurred, and no condition or circumstance exists, that might (with or
without notice or lapse of time) directly or indirectly give rise to or serve as
a basis for any such claim.
2.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Company SEC
Documents, since the date of the Company's last proxy statement filed with the
SEC, no event has occurred that would be required to be reported by the Company
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 2.19 of the
Company Disclosure Schedule identifies each person who is an "affiliate" (as
that term is used in Rule 145 promulgated under the Securities Act) of the
Company as of the date of this Agreement.
2.20 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.20(a) of the Company Disclosure
Schedule, there is no pending Legal Proceeding (including, to the best
knowledge of the Company, any investigation), and no Person has overtly
threatened to commence any Legal Proceeding: (i) that involves any of the
Acquired Corporations or any of the assets owned or used by any of the
Acquired Corporations, including, without limitation, any Acquired Company
Proprietary Asset; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the
Merger or any of the other transactions contemplated by this Agreement. To
the best of the knowledge of the Company, no event has occurred, and no
claim, dispute or other condition or circumstance exists, that will, or
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that could reasonably be expected to, give rise to or serve as a basis for
the commencement of any such Legal Proceeding. To the best of the knowledge
of the Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, cause or provide a basis for a director, officer or other
Representative of any of the Acquired Corporations to seek indemnification
from, or commence a Legal Proceeding against or involving, any of the
Acquired Corporations.
(b) There is no order, writ, injunction, judgment or decree to which any
of the Acquired Corporations, or any of the assets owned or used by any of
the Acquired Corporations, is subject. To the best of the knowledge of the
Company, no officer or other employee of any of the Acquired Corporations is
subject to any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing any conduct,
activity or practice relating to the business of any of the Acquired
Corporations.
2.21 AUTHORITY; INAPPLICABILITY OF ANTI-TAKEOVER STATUTES; BINDING NATURE
OF AGREEMENT. The Company has the absolute and unrestricted right, corporate
power and authority to enter into and to perform its obligations under this
Agreement. The Board of Directors of the Company (at a meeting duly called and
held) has (a) unanimously determined that the Merger is advisable and fair and
in the best interests of the Company and its shareholders, (b) unanimously
approved the execution, delivery and performance of this Agreement by the
Company and has unanimously approved the Merger, (c) unanimously recommended the
adoption and approval of this Agreement and the Merger by the holders of Company
Common Stock and directed that this Agreement and the Merger be submitted for
consideration by the Company's shareholders at the Company Shareholders' Meeting
(as defined in Section 5.2), and (d) approved, and the stockholders of the
Company have adopted, an amendment to the Company's Articles of Incorporation
having the effect of causing the Company not to be subject to any state takeover
law or similar Legal Requirement that might otherwise apply to the Merger or any
of the other transactions contemplated by this Agreement except as set forth in
Part 2.21 of the Company Disclosure Schedule. This Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
2.22 NO EXISTING DISCUSSIONS. None of the Acquired Corporations, and no
Representative of any of the Acquired Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.23 ACCOUNTING MATTERS. To the best of the knowledge of the Company,
neither the Company nor any of its affiliates has taken or agreed to, or plans
to, take any action that would prevent Parent from accounting for the Merger as
a "pooling of interests."
2.24 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Company Common Stock outstanding on the record date for the
Company Shareholder Meeting (the "REQUIRED COMPANY SHAREHOLDER VOTE") is the
only vote of the holders of any class or series of the Company's capital stock
necessary to adopt and approve this Agreement, the Merger and the other
transactions contemplated by this Agreement.
2.25 NON-CONTRAVENTION; CONSENTS. Neither (i) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (ii) the consummation of the
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Merger or any of the other transactions contemplated by this Agreement, will
directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the articles of incorporation, bylaws or other charter or
organizational documents of any of the Acquired Corporations, or (ii) any
resolution adopted by the shareholders, the board of directors or any
committee of the board of directors of any of the Acquired Corporations;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which any of the Acquired Corporations, or
any of the assets owned or used by any of the Acquired Corporations, is
subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by any of the Acquired Corporations or that
otherwise relates to the business of any of the Acquired Corporations or to
any of the assets owned or used by any of the Acquired Corporations;
(d) except as set forth in Part 2.25(d) of the Company Disclosure
Schedule, contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Acquired Corporation
Contract that is or would constitute a Material Contract, or give any Person
the right to (i) declare a default or exercise any remedy under any such
Acquired Corporation Contract, (ii) a rebate, chargeback, penalty or change
in delivery schedule under any such Acquired Corporation Contract, (iii)
accelerate the maturity or performance of any such Acquired Corporation
Contract, or (iv) cancel, terminate or modify any term of such Acquired
Corporation Contract; or
(e) result in the imposition or creation of any Encumbrance upon or with
respect to any asset owned or used by any of the Acquired Corporations
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of any of the Acquired Corporations).
Except as may be required by the Exchange Act, the PBCL, the DGCL and the rules
of the National Association of Securities Dealers, Inc. ("NASD") (as they relate
to the S-4 Registration Statement and the Joint Proxy Statement/Prospectus, as
defined in Section 2.28(b)), none of the Acquired Corporations was, is or will
be required to make any filing with or give any notice to, or to obtain any
Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
2.26 FAIRNESS OPINION. The Company's Board of Directors has received the
written opinion of Robert W. Baird & Co. Incorporated, financial advisor to the
Company, dated the date of this Agreement, to the effect that the Exchange Ratio
is fair to the shareholders of the Company from a financial point of view. The
Company has furnished an accurate and complete copy of said written opinion to
Parent.
2.27 FINANCIAL ADVISOR. Except for Robert W. Baird & Co. Incorporated, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or any of the other
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of any of the Acquired Corporations. The Company has communicated to
Parent the fee formula pursuant to which fees, commissions and other amounts
will be paid by the Company to Robert W. Baird & Co. Incorporated if the Merger
is consummated. The Company has furnished to Parent accurate and complete copies
of all agreements under which any such fees, commissions or other amounts have
been paid or may become payable and all indemnification and other agreements
relating to the engagement of Robert W. Baird & Co. Incorporated.
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2.28 FULL DISCLOSURE.
(a) This Agreement (including the Company Disclosure Schedule) does not,
and the certificate referred to in Section 6.6(e) will not, (i) contain any
representation, warranty or information that is false or misleading with
respect to any material fact, or (ii) omit to state any material fact
necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information
were or will be made or provided) not false or misleading.
(b) None of the information supplied or to be supplied by or on behalf
of the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of Parent Common Stock in the Merger (the "S-4
REGISTRATION STATEMENT") will, at the time the S-4 Registration Statement is
filed with the SEC or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
are made, not misleading. None of the information supplied or to be supplied
by or on behalf of the Company for inclusion or incorporation by reference
in the Joint Proxy Statement/Prospectus to be filed with the SEC as part of
the S-4 Registration Statement (the "JOINT PROXY STATEMENT/PROSPECTUS"),
will, at the time the Joint Proxy Statement/Prospectus is mailed to the
shareholders of the Company, at the time of the Company Shareholders'
Meeting or as of the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading. The Joint
Proxy Statement/Prospectus will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated by the SEC thereunder.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.
Parent and Merger Sub, jointly and severally, represent and warrant to the
Company that, except as set forth in the disclosure schedule delivered to the
Company on the date of this Agreement and signed by an executive officer of
Parent (the "PARENT DISCLOSURE SCHEDULE"):
3.1 ORGANIZATION, STANDING AND POWER. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has all corporate power
and authority to own its properties and to carry on its business as now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect on Parent and Merger Sub.
3.2 CAPITALIZATION, ETC. The authorized capital stock of Parent consists
of: (i) fifty million (50,000,000) shares of Parent Common Stock, $.001 par
value per share, of which, as of August 31, 1998, 15,925,602 shares (which
amount does not materially differ from the amount issued and outstanding as of
the date of this Agreement) were issued and outstanding; and (ii) ten million
(10,000,000) shares of preferred stock, $.001 par value per share, of which no
shares are outstanding as of the date of this Agreement. As of the date of this
Agreement, there are no outstanding subscriptions, options, calls, warrants or
rights to acquire shares of Parent Common Stock other than pursuant to stock
issuance or stock option plans or other arrangements disclosed in the Parent SEC
Documents. The authorized capital stock of Merger Sub consists of one hundred
(100) shares of Common Stock ("MERGER SUB COMMON STOCK"), $.001 par value per
share, all of which have been issued and are outstanding as of the date of this
Agreement and are held by Parent. As of the date of this Agreement, there are no
shares of Parent Common Stock held in treasury by Parent. None of the
outstanding shares of Parent Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right.
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3.3 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a
form other than Form S-8) and definitive proxy statement filed by Parent
with the SEC between November 26, 1997 and the date of this Agreement and
will deliver to the Company accurate and complete copies of all such
registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed after the date of this Agreement
and prior to the Effective Date (the "PARENT SEC DOCUMENTS"), which are all
of the forms, reports and documents required to be filed by Parent with the
SEC since November 26, 1997. As of the time it was filed with the SEC (or,
if amended or superseded by a later filing, then on the date of such
filing): (i) each of the Parent SEC Documents filed with the SEC was timely
filed and complied in all material respects with the applicable requirements
of the Securities Act or the Exchange Act (as the case may be) as of the
date of such filing and any Parent SEC Documents filed after the date hereof
and prior to the Effective Time will so comply; and (ii) none of the Parent
SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered (except as may be indicated in the notes to such
financial statements and, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may
not contain footnotes and other information required to complete financial
statements); and (iii) fairly present the consolidated financial position of
Parent and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Parent and its subsidiaries for the
periods covered thereby. All adjustments (consisting of recurring accruals)
considered necessary for a fair presentation of the financial statements
have been included. The audited consolidated balance sheet of Parent and its
subsidiaries for the year ended December 31, 1997 included in the Company's
final Prospectus dated February 13, 1998 is sometimes referred to herein as
the "PARENT BALANCE SHEET" and the unaudited consolidated balance sheet of
Parent and its subsidiaries as of June 30, 1998 included in Parent's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 is
sometimes referred to herein as the "PARENT UNAUDITED INTERIM BALANCE
SHEET." All financial statements (including any related notes) contained in
Company SEC Documents filed after the date hereof shall meet the conditions
set forth in (i), (ii) and (iii) of this Section 3.3(b).
3.4 DISCLOSURE.
(a) This Agreement (including the Parent Disclosure Schedule) does not,
and the certificate referred to in Section 7.5(e) will not, (i) contain any
representation, warranty or information that is false or misleading with
respect to any material fact, or (ii) omit to state any material fact
necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information
were or will be made or provided) not false or misleading.
(b) None of the information to be supplied by or on behalf of Parent for
inclusion in the S-4 Registration Statement will, at the time the S-4
Registration Statement becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. None of the information to be supplied by or on behalf of Parent
for inclusion in the Joint Proxy Statement/Prospectus will, at the time the
Joint Proxy Statement/Prospectus is mailed to the shareholders of Parent, at
the time of the Parent Shareholders' Meeting or as of the Effective Time,
contain any untrue statement of a material fact or
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omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they are made, not misleading. The S-4 Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations promulgated by the SEC
thereunder, except that no representation or warranty is made by Parent with
respect to statements made or incorporated by reference therein based on
information supplied by the Company for inclusion or incorporation by
reference in the Joint Proxy Statement/Prospectus. The Joint Proxy
Statement/Prospectus will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations promulgated
by the SEC thereunder.
3.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Part 3.5
of the Parent Disclosure Schedule between the date of the Parent Unaudited
Interim Balance Sheet and the date of this Agreement: (i) there has not been any
event that has had a Material Adverse Effect on Parent; (ii) Parent has not
declared, accrued, set aside or paid any dividend; and (iii) Parent has not
incurred any liabilities other than in the ordinary course of business and
consistent with past practices.
3.6 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Merger Sub have the
absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; and the execution, delivery and performance by
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of Parent and Merger Sub and their respective
boards of directors. This Agreement constitutes the legal, valid and binding
obligation of Parent and Merger Sub, enforceable against them in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
3.7 NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery of
this Agreement by Parent and Merger Sub nor the consummation by Parent and
Merger Sub of the Merger will (a) conflict with or result in any breach of any
provision of the certificate of incorporation or bylaws of Parent or the
articles of incorporation or bylaws of Merger Sub, or (b) result in a default by
Parent or Merger Sub under any Contract to which Parent or Merger Sub is a
party, except for any default which has not had and will not have a Material
Adverse Effect on Parent, or (c) result in a violation by Parent or Merger Sub
of any law, statute, rule, regulation, order, writ, injunction, judgment or
decree to which Parent or Merger Sub is subject, except for any violation which
has not had and will not have a Material Adverse Effect on Parent. Except as may
be required by the Securities Act, the Exchange Act, state securities or "blue
sky" laws, the PBCL, the DGCL and the rules of the NASD (as they relate to the
S-4 Registration Statement and the Joint Proxy Statement/Prospectus), Parent is
not and will not be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with the execution and
delivery of this Agreement, or the consummation of the Merger.
3.8 VOTE REQUIRED. The only vote of Parent's stockholders required to
approve the issuance of Parent Common Stock in the Merger is the vote of a
majority of votes cast in person or by proxy as prescribed by rules of the NASD
(the "REQUIRED PARENT STOCKHOLDER VOTE").
3.9 VALID ISSUANCE. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be duly
authorized, validly issued, fully paid and nonassessable.
3.10 ACCOUNTING MATTERS. To the best of the knowledge of Parent, Parent
has not taken and has not agreed, and does not plan, to take any action that
would prevent Parent from accounting for the Merger as a "pooling of interests."
3.11 FAIRNESS OPINION. Parent's Board of Directors has received the
written opinion of Hambrecht & Quist LLC, financial advisor to Parent, dated as
of the date of this Agreement, to the effect that
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the Exchange Ratio is fair to Parent from a financial point of view. Parent has
furnished an accurate and complete copy of said written opinion to the Company.
3.12 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the Parent
and its Subsidiaries with any Governmental Body with respect to any taxable
period ending on or before the Closing Date (the "PARENT RETURNS") (i) have
been or will be filed on or before the applicable due date (including any
extensions of such due date if properly obtained), and (ii) have been, or
will be when filed, prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on the Parent Returns to be
due on or before the Closing Date have been or will be paid on or before the
Closing Date.
(b) The Parent financial statements in the Parent SEC Documents fully
accrue all actual and contingent liabilities for Taxes with respect to all
periods through the dates thereof in accordance with GAAP. Parent will
establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period
from the date of this Agreement through the Closing Date.
(c) Since the Parent Return for the taxable period ended December 31,
1992, no Parent Return has ever been examined or audited by any Governmental
Body. No extension or waiver of the limitation period applicable to any of
the Parent Returns has been granted (by Parent or any other Person), and no
such extension or waiver has been requested from Parent or any of its
Subsidiaries.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of the Parent, has been threatened against or with respect to
Parent or any of its Subsidiaries in respect of any material Tax. There are
no unsatisfied liabilities for material Taxes (including liabilities for
interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by Parent
or any of its Subsidiaries with respect to any material Tax (other than
liabilities for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by Parent or any of
its Subsidiaries and with respect to which adequate reserves for payment
have been established). There are no liens for material Taxes upon any of
the assets of any of Parent or any of its Subsidiaries except liens for
current Taxes not yet due and payable. Neither Parent nor any of its
Subsidiaries has entered into or become bound by any agreement or consent
pursuant to Section 341(f) of the Code. Neither Parent nor any of its
Subsidiaries has been, and neither Parent nor any of its Subsidiaries will
be, required to include any adjustment in taxable income for any tax period
(or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions or events occurring, or accounting methods employed, prior to
the Closing.
(e) There is no agreement, plan, arrangement or other Contract covering
any employee or independent contractor or former employee or independent
contractor of Parent or any of its Subsidiaries that, considered
individually or considered collectively with any other such Contracts, will,
or could reasonably be expected to, give rise directly or indirectly to the
payment of any amount that would not be deductible pursuant to Section 280G
or Section 162 of the Code. Neither Parent nor any of its Subsidiaries is,
or has ever been, a party to or bound by any tax indemnity agreement, tax
sharing agreement, tax allocation agreement or similar Contract.
3.13 ENVIRONMENTAL MATTERS. Except as set forth in Part 3.13 of the Parent
Disclosure Schedule, each of Parent and its Subsidiaries is in compliance in all
material respects with all applicable Environmental Laws, which compliance
includes the possession by each of Parent and its Subsidiaries of all permits
and other Governmental Authorizations required under applicable Environmental
Laws, and compliance with the terms and conditions thereof. Neither Parent nor
any of its Subsidiaries has received any notice or other communication (in
writing or otherwise), whether from a Governmental Body, citizens group,
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employee or otherwise, that alleges that any of Parent or its Subsidiaries is
not in compliance with any Environmental Law, and, to the knowledge of Parent,
there are no circumstances that may prevent or interfere with the compliance by
Parent or any of its Subsidiaries with any Environmental Law in the future. To
the knowledge of the Parent, no current or prior owner of any property leased or
controlled by Parent or any of its Subsidiaries has received any notice or other
communication (in writing or otherwise), whether from a Government Body,
citizens group, employee or otherwise, that alleges that such current or prior
owner or Parent or any of its Subsidiaries is not in compliance with any
Environmental Law. To the knowledge of Parent, all property that is leased to,
controlled by or used by Parent, and all surface water, groundwater and soil
associated with or adjacent to such property is in clean and healthful condition
and is free of any material environmental contamination of any nature.
3.14 SIGNIFICANT CUSTOMERS. Part 3.14 of the Parent Disclosure Schedule
sets forth a complete and accurate list of all Parent's Significant Customers.
For purposes of this Agreement, "PARENT'S SIGNIFICANT
CUSTOMERS" are the twenty (20) customers of the Parent that have effected the
most purchases, in dollar terms, and accounted for the most revenues, in dollar
terms, during the fiscal year ended December 31, 1997. None of the Parent's
Significant Customers has canceled, returned or substantially reduced or, to the
knowledge of the Parent, is currently attempting or threatening to cancel,
return or substantially reduce, any purchases from, orders to or services
provided by the Parent. Parent has not received any material customer complaints
concerning its products and/or services.
3.15 YEAR 2000 LIABILITIES. Neither Parent nor any of its Subsidiaries has
any accrued, contingent or other liabilities of any nature, either matured or
unmatured, including, without limitation, any liabilities relating to costs
associated with insuring that all software (and related Parent Proprietary
Assets) that is sold, licensed or transferred by Parent or any of its
Subsidiaries to any Person, computer systems, any software utilized by the
Parent or other components of the Parent's information technology infrastructure
are Year 2000 Compliant (whether or not required to be reflected in financial
statements in accordance with GAAP, and whether due or to become due), except
for: (a) liabilities identified as such in the "liabilities" column of the
Parent Unaudited Interim Balance Sheet as of June 30, 1998 included in the
Parent's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998; and
(b) normal and recurring liabilities that have been incurred by Parent since the
date of the Parent Unaudited Interim Balance Sheet in the ordinary course of
business and consistent with past practices.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY.
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Time (the "PRE-CLOSING PERIOD"), the Company
shall, and shall cause the respective Representatives of the Acquired
Corporations to: (a) provide Parent and Parent's Representatives with reasonable
access to the Acquired Corporations' Representatives, personnel and assets and
to all existing books, records, Tax Returns, work papers and other documents and
information relating to the Acquired Corporations; and (b) provide Parent and
Parent's Representatives with such copies of the existing books, records, Tax
Returns, work papers and other documents and information relating to the
Acquired Corporations, and with such additional financial, operating and other
data and information regarding the Acquired Corporations, as Parent may
reasonably request. Without limiting the generality of the foregoing, during the
Pre-Closing Period, the Company shall promptly provide Parent with copies of:
(a) any written materials or communications sent by or on behalf of the
Company to its shareholders;
(b) any material notice, document or other communication sent by or on
behalf of any of the Acquired Corporations to any party to any Material
Contract or sent to any of the Acquired Corporations by any party to any
Material Contract (other than any communication that relates solely to
commercial transactions between the Company and the other party to any such
Material Contract and that is of the type sent in the ordinary course of
business and consistent with past practices);
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(c) any notice, report or other document filed with or sent to any
Governmental Body in connection with the Merger or any of the other
transactions contemplated by this Agreement; and
(d) any material notice, report or other document received by any of the
Acquired Corporations from any Governmental Body.
4.2 OPERATION OF THE COMPANY'S BUSINESS.
(a) During the Pre-Closing Period: (i) the Company shall ensure that
each of the Acquired Corporations conducts its business and operations (A)
in the ordinary course and in accordance with past practices and (B) in
compliance with all applicable Legal Requirements and the requirements of
all Acquired Company Contracts that constitute Material Contracts; (ii) the
Company shall use all reasonable efforts to ensure that each of the Acquired
Corporations preserves intact its current business organization, keeps
available the services of its current officers and employees and maintains
its relations and goodwill with all suppliers, customers, landlords,
creditors, licensors, licensees, employees and other Persons having business
relationships with the respective Acquired Corporations; (iii) the Company
shall keep in full force all insurance policies referred to in Section 2.18;
(iv) the Company shall provide all notices, assurances and support required
by any Acquired Corporation Contract relating to any Proprietary Asset in
order to ensure that no condition under such Acquired Corporation Contract
occurs which could result in, or could increase the likelihood of, (A) any
transfer or disclosure by any Acquired Corporation of any source code
materials or other Proprietary Asset, or (B) a release from any escrow of
any source code materials or other Proprietary Asset which have been
deposited or are required to be deposited in escrow under the terms of such
Acquired Corporation Contract; and (v) the Company shall (to the extent
requested by Parent) cause its officers to report regularly to Parent
concerning the status of the Company's business.
(b) During the Pre-Closing Period, the Company shall not (without the
prior written consent of Parent), and shall not permit any of the other
Acquired Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(ii) sell, issue, grant or authorize the issuance or grant of (i)
any capital stock or other security, (ii) any option, call, warrant or
right to acquire any capital stock or other security, or (iii) any
instrument convertible into or exchangeable for any capital stock or
other security (except that the Company may (A) issue Company Common
Stock upon the valid exercise of Company Options or Company Warrants
outstanding as of the date of this Agreement and (B) in the ordinary
course of business and consistent with past practices, grant options
exercisable into not more than two hundred fifty (250) shares of Company
Common Stock per newly-hired employee);
(iii) amend or waive any of its rights under, or accelerate the
vesting under, any provision of any of the Company's stock option plans,
any provision of any agreement evidencing any outstanding stock option or
any restricted stock purchase agreement, or otherwise modify any of the
terms of any outstanding option, warrant or other security or any related
Contract;
(iv) amend or permit the adoption of any amendment to its articles
of incorporation or bylaws or other charter or organizational documents,
or effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(v) form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) make any capital expenditure (except that the Acquired
Corporations may make capital expenditures that, when added to all other
capital expenditures made on behalf of the Acquired
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Corporations during the Pre-Closing Period, do not exceed $50,000 with
respect to any single capital expenditure or $100,000 in the aggregate);
(vii) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Contract (other than
Contracts identified pursuant to Section 2.10(a)(viii) hereunder), or
amend or prematurely terminate, or waive or exercise any material right
or remedy (including any right to repurchase shares of Company Common
Stock) under, any Material Contract (other than Contracts identified
pursuant to Section 2.10(a)(viii) hereunder);
(viii) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except in each case for
immaterial assets acquired, leased, licensed or disposed of by the
Company in the ordinary course of business and consistent with past
practices), or waive or relinquish any material right;
(ix) incur any indebtedness for borrowed money (other than (i) in
connection with the financing of ordinary trade payables; (ii) pursuant
to existing credit facilities; (iii) in connection with leasing
activities in the ordinary course of business; or (iv) for tax planning
purposes in the ordinary course of business) or guarantee any
indebtedness of any person for borrowed money, or issue or sell any debt
securities or warrants or right to acquire debt securities of any of the
Acquired Corporations or guarantee any debt securities of others.
(x) except in the ordinary course of business and consistent with
past practices, establish, adopt or amend any employee benefit plan, pay
any bonus except in accordance with the terms of existing Plans or
pursuant to commitments made prior to the date of this Agreement, or make
any profit-sharing or similar payment to, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees;
(xi) grant any severance or termination pay to any officer or
employee except payments in amounts consistent with policies and past
practices or pursuant to written agreements outstanding, or policies
existing, on the date hereof and as previously disclosed in writing or
made available to Parent, or adopt any new severance plan;
(xii) hire any new employee having an annual salary in excess of
$100,000 or as an officer of the Company or engage any consultant or
independent contractor for a period exceeding sixty (60) days;
(xiii) change the status, title or responsibilities, including without
limitation, termination or promotion, of any officer of the Company or
promote any employee to an officer position in the Company;
(xiv) transfer or license to any Person or otherwise extend the term
of any agreement with respect to, amend or modify in any material respect
any rights (including without limitation distribution rights) to the
Proprietary Assets of the Acquired Corporations, or enter into
assignments of future patent rights, other than non-exclusive licenses
and distribution rights in the ordinary course of business and consistent
with past practice;
(xv) sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the
aggregate, to the business of the Company, except in the ordinary course
of business consistent with past practice or lend funds to any third
party (other than intracompany loans and travel advances in the ordinary
course of business);
(xvi) change any of its methods of accounting or accounting practices
in any respect;
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(xvii) make any election with respect to Taxes;
(xviii) commence or settle any Legal Proceeding;
(xix) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices;
(xx) enter into any agreement requiring the consent or approval of
any third party with respect to the Merger; or
(xxi) agree or commit to take any of the actions described in clauses
"(i)" through "(xx)" of this Section 4.2(b).
(c) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of: (i) the discovery by the Company of any event,
condition, fact or circumstance that occurred or existed on or prior to the
date of this Agreement and that caused or constitutes a material inaccuracy
in any representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute a
material inaccuracy in any representation or warranty made by the Company in
this Agreement if (A) such representation or warranty had been made as of
the time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement; (iii)
any event, condition, fact or circumstance hereafter arising which, if
existing or occurring at the date of this Agreement, would have been
required to be set forth or described in the Company Disclosure Schedule;
(iv) any material breach of any covenant or obligation of the Company; and
(v) any event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or that has had or could reasonably be expected to
have a Material Adverse Effect on the Acquired Corporations. No notification
given to Parent pursuant to this Section 4.2(c) shall limit or otherwise
affect any representations, warranties, covenants or obligations of the
Company contained in this Agreement.
(d) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.2(c) requires any change in the Company
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming Company Disclosure Schedule were dated
as of the date of the occurrence, existence or discovery of such event,
condition, fact or circumstance, then the Company shall promptly deliver to
Parent an update to the Company Disclosure Schedule specifying such change.
No such update shall be deemed to supplement or amend the Company Disclosure
Schedule for the purpose of (i) determining the accuracy of any of the
representations and warranties made by the Company in this Agreement, or
(ii) determining whether any of the conditions set forth in Section 6 has
been satisfied.
4.3 NO SOLICITATION.
(a) From the date of this Agreement until the earlier of the Effective
Time or termination of this Agreement pursuant to Section 8, the Company
shall not directly or indirectly, and shall not authorize or permit any
subsidiary of the Company or any Representative of any of the Acquired
Corporations directly or indirectly to, (i) solicit, initiate, encourage or
induce the making, submission or announcement of any Acquisition Proposal or
take any action that could reasonably be expected to lead to an Acquisition
Proposal, (ii) furnish any information regarding any of the Acquired
Corporations to any Person in connection with or in response to an
Acquisition Proposal, (iii) engage in discussions with any Person with
respect to any Acquisition Proposal, (iv) approve, endorse or recommend any
Acquisition Proposal or (v) enter into any letter of intent or similar
document or any Contract contemplating or otherwise relating to any
Acquisition Transaction; PROVIDED, HOWEVER, that prior to the approval of
this Agreement by the Required Company Shareholder Vote, this Section 4.3(a)
shall
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not prohibit the Company from furnishing nonpublic information regarding the
Acquired Corporations to, or entering into discussions with, any Person in
response to a Superior Offer submitted by such Person (and not withdrawn) if
(1) neither the Company nor any Representative of any of the Acquired
Corporations shall have violated any of the restrictions set forth in this
Section 4.3, (2) the Board of Directors of the Company concludes in good
faith, based upon the advice of its outside legal counsel, that such action
is required in order for the Board of Directors of the Company to comply
with its fiduciary obligations to the Company's shareholders under
applicable law, (3) prior to furnishing any such nonpublic information to,
or entering into discussions with, such Person, the Company gives Parent
written notice of the identity of such Person and of the Company's intention
to furnish nonpublic information to, or enter into discussions with, such
Person, and the Company receives from such Person an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
Person by or on behalf of the Company, and (4) prior to furnishing any such
nonpublic information to such Person, the Company furnishes such nonpublic
information to Parent (to the extent such nonpublic information has not been
previously furnished by the Company to Parent). Without limiting the
generality of the foregoing, the Company acknowledges and agrees that any
violation of any of the restrictions set forth in the preceding sentence by
any Representative of any of the Acquired Corporations, whether or not such
Representative is purporting to act on behalf of any of the Acquired
Corporations, shall be deemed to constitute a breach of this Section 4.3 by
the Company. In addition to the foregoing, the Company shall (i) provide
Parent with at least twenty-four (24) hours prior notice of any meeting of
the Company's Board of Directors at which the Company's Board of Directors
is reasonably expected to consider a Superior Offer and (ii) not recommend a
Superior Offer to its shareholders for a period of not less than the greater
of two (2) business days or forty-eight (48) hours after Parent's receipt of
a copy of such Superior Offer (pursuant to Section 4.3(b) below).
(b) The Company shall promptly advise Parent orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period. The Company shall
keep Parent fully informed with respect to the status of any such
Acquisition Proposal and any modification or proposed modification thereto.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition
Proposal.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES.
5.1 REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS.
(a) As promptly as practicable after the date of this Agreement, the
Company and Parent shall prepare and cause to be filed with the SEC the S-4
Registration Statement, together with the Joint Proxy Statement/Prospectus
and any other documents required by the Securities Act, the Exchange Act or
any other Federal, foreign or Blue Sky or related laws in connection with
the Merger and the transactions contemplated by this Agreement ("OTHER
FILINGS"). Each of Parent and the Company will notify the other promptly
upon the receipt of any comments from the SEC or its staff or any other
government officials and of any request by the SEC or its staff or any other
government officials for amendments or supplements to the S-4 Registration
Statement, the Joint Proxy Statement/Prospectus or any Other Filings or for
additional information and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the S-4 Registration Statement, the Joint Proxy
Statement/Prospectus, any Other Filings or the Merger. Each of Parent and
the Company shall use all reasonable efforts to cause the S-4 Registration
Statement (including the Joint Proxy Statement/Prospectus) and any Other
Filings to comply with the rules and regulations promulgated by the SEC, to
respond promptly to any comments of the SEC or its staff and to have the
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S-4 Registration Statement declared effective under the Securities Act as
promptly as practicable after it is filed with the SEC. Parent will use all
reasonable efforts to cause the Joint Proxy Statement/ Prospectus to be
mailed to Parent's stockholders and the Company will use all reasonable
efforts to cause the Joint Proxy Statement/Prospectus to be mailed to the
Company's shareholders, as promptly as practicable after the Form S-4
Registration Statement is declared effective under the Securities Act. The
Company shall promptly furnish to Parent all information concerning the
Acquired Corporations and the Company's shareholders that may be required or
reasonably requested in connection with any action contemplated by this
Section 5.1. If any event relating to any of the Acquired Corporations
occurs, or if the Company becomes aware of any information, that should be
set forth in an amendment or supplement to the S-4 Registration Statement or
the Joint Proxy Statement/Prospectus, then the Company shall promptly inform
Parent thereof and shall cooperate with Parent in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the shareholders of the Company and the stockholders of
Parent.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common
Stock to be issued in the Merger will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
registered holder of Company Common Stock has an address of record on the
record date for determining the shareholders entitled to notice of and to
vote at the Company Shareholders' Meeting; PROVIDED, HOWEVER, that Parent
shall not be required (i) to qualify to do business as a foreign corporation
in any jurisdiction in which it is not now qualified or (ii) to file a
general consent to service of process in any jurisdiction.
5.2 COMPANY SHAREHOLDERS' MEETING.
(a) The Company shall take all action necessary under all applicable
Legal Requirements to call, give notice of, convene and hold a meeting of
the holders of Company Common Stock (the "COMPANY SHAREHOLDERS' MEETING") to
consider, act upon and vote upon the adoption of this Agreement and approval
of the Merger. The Company Shareholders' Meeting will be held as promptly as
practicable and in any event within forty-five (45) days after the S-4
Registration Statement is declared effective under the Securities Act;
PROVIDED, HOWEVER, that notwithstanding anything to the contrary contained
in this Agreement, the Company may adjourn or postpone the Company
Shareholders' Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the Joint Proxy Statement/ Prospectus is provided
to the Company's shareholders in advance of a vote on the Merger and this
Agreement or, if as of the time for which Company Shareholders' Meeting is
originally scheduled (as set forth in the Joint Proxy Statement/Prospectus)
there are insufficient shares of Company Common Stock represented (either in
person or by proxy) to constitute a quorum necessary to conduct the business
of the Company's Shareholders' Meeting. The Company shall ensure that the
Company Shareholders' Meeting is called, noticed, convened, held and
conducted, and that all proxies solicited in connection with the Company
Shareholders' Meeting are solicited, in compliance with all applicable Legal
Requirements. The Company's obligation to call, give notice of, convene and
hold the Company Shareholders' Meeting in accordance with this Section
5.2(a) shall not be limited or otherwise affected by the commencement,
disclosure, announcement or submission to the Company of any Acquisition
Proposal, or by any withdrawal, amendment or modification of the
recommendation of the Board of Directors of the Company with respect to the
Merger.
(b) Subject to Section 5.2(c): (i) the Board of Directors of the Company
shall unanimously recommend that the Company's shareholders vote in favor of
and adopt and approve this Agreement and the Merger at the Company
Shareholders' Meeting; (ii) the Joint Proxy Statement/Prospectus shall
include a statement to the effect that the Board of Directors of the Company
has unanimously recommended that the Company's shareholders vote in favor of
and adopt and approve this Agreement and the Merger at the Company
Shareholders' Meeting; and (iii) neither the Board of Directors of the
Company nor any committee thereof shall withdraw, amend or modify, or
propose or resolve to
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withdraw, amend or modify, in a manner adverse to Parent, the unanimous
recommendation of the Board of Directors of the Company that the Company's
shareholders vote in favor of and adopt and approve this Agreement and the
Merger. For purposes of this Agreement, said recommendation of the Board of
Directors shall be deemed to have been modified in a manner adverse to Parent if
said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.2(b) shall prevent the Board of Directors of
the Company from withdrawing, amending or modifying its unanimous
recommendation in favor of the Merger if (i) a Superior Offer is made to the
Company and is not withdrawn, (ii) neither the Company nor any of its
Representatives shall have violated any of the restrictions set forth in
Section 4.3, and (iii) the Board of Directors of the Company concludes in
good faith, based upon the advice of its outside counsel, that, in light of
such Superior Offer, the withdrawal, amendment or modification of such
recommendation is required in order for the Board of Directors of the
Company to comply with its fiduciary obligations to the Company's
shareholders under applicable law. Nothing contained in this Section 5.2
shall limit the Company's obligation to hold and convene the Company
Shareholders' Meeting (regardless of whether the unanimous recommendation of
the Board of Directors of the Company shall have been withdrawn, amended or
modified).
5.3 PARENT STOCKHOLDERS' MEETING.
(a) Parent shall take all action necessary to call, give notice of,
convene and hold a meeting of the holders of Parent Common Stock to consider
and vote upon the issuance of Parent Common Stock in the Merger (the "PARENT
STOCKHOLDERS' MEETING"). The Parent Stockholders' Meeting will be held as
promptly as practicable and in any event within forty-five (45) days after
the S-4 Registration Statement is declared effective under the Securities
Act; PROVIDED, HOWEVER, that notwithstanding anything to the contrary
contained in this Agreement, Parent may adjourn or postpone the Parent
Stockholders' Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the Joint Proxy Statement/Prospectus is provided
to Parent's stockholders in advance of a vote on the issuance of Parent
Common Stock in the Merger or, if as of the time for which the Parent
Stockholders' Meeting is originally scheduled (as set forth in the Joint
Proxy Statement/Prospectus) there are insufficient shares of Parent Common
Stock represented (either in person or by proxy) to constitute a quorum
necessary to conduct the business of the Parent's Stockholders' Meeting.
(b) (i) The board of directors of Parent shall unanimously recommend
that Parent's stockholders vote in favor of the issuance of Parent Common
Stock in the Merger; (ii) the Joint Proxy Statement/ Prospectus shall
include a statement to the effect that the board of directors of Parent has
unanimously recommended that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger; and (iii) neither the board
of directors of Parent nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify, in a manner
adverse to the Company, the unanimous recommendation of the board of
directors of Parent that Parent's stockholders vote in favor of the issuance
of Parent Common Stock in the Merger. For purposes of this Agreement, said
recommendation of Parent's board of directors shall be deemed to have been
modified in a manner adverse to the Company if said recommendation shall no
longer be unanimous.
5.4 REGULATORY APPROVALS. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. The Company and Parent shall respond as promptly as
practicable to any inquiries or requests received from any state attorney
general or other Governmental Body in connection with antitrust or related
matters. Each of the Company and Parent shall (1) give the other party prompt
notice of the commencement of any Legal Proceeding by or before any Governmental
Body with respect to the Merger or any of the other transactions contemplated by
this Agreement, (2) keep the other party informed as to
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the status of any such Legal Proceeding, and (3) promptly inform the other party
of any communication to or from the Federal Trade Commission, the Department of
Justice or any other Governmental Body regarding the Merger. The Company and
Parent will consult and cooperate with one another, and will consider in good
faith the views of one another, in connection with any analysis, appearance,
presentation, memorandum, brief, argument, opinion or proposal made or submitted
in connection with any Legal Proceeding under or any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited by any
Governmental Body or by any Legal Requirement, in connection with any Legal
Proceeding under or any other federal or state antitrust or fair trade law or
any other similar Legal Proceeding, each of the Company and Parent agrees to
permit authorized Representatives of the other party to be present at each
meeting or conference relating to any such Legal Proceeding and to have access
to and be consulted in connection with any document, opinion or proposal made or
submitted to any Governmental Body in connection with any such Legal Proceeding.
5.5 STOCK OPTIONS.
(a) Subject to Section 5.5(b), at the Effective Time, all rights with
respect to Company Common Stock under each Company Option then outstanding
shall be converted into and become rights with respect to Parent Common
Stock, and Parent shall assume each such Company Option in accordance with
the requirements of Section 424(a) of the Code (as in effect as of the date
of this Agreement) and the terms of the stock option plan under which it was
issued and the stock option agreement by which it is evidenced. From and
after the Effective Time, (i) each Company Option assumed by Parent may be
exercised solely for shares of Parent Common Stock, (ii) the number of
shares of Parent Common Stock subject to each such Company Option shall be
equal to the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounding down to the nearest whole share (with cash, less
the applicable exercise price, being payable for any fraction of a share),
(iii) the per share exercise price under each such Company Option shall be
adjusted by dividing the per share exercise price under such Company Option
by the Exchange Ratio and rounding up to the nearest cent and (iv) any
restriction on the exercise of any such Company Option shall continue in
full force and effect and the term, exercisability, vesting schedule and
other provisions of such Company Option shall otherwise remain unchanged;
PROVIDED, HOWEVER, that each Company Option assumed by Parent in accordance
with this Section 5.5(a) shall, in accordance with its terms, be subject to
further adjustment as appropriate to reflect any stock split, stock
dividend, reverse stock split, reclassification, recapitalization or other
similar transaction subsequent to the Effective Time.
(b) Notwithstanding anything to the contrary contained in this Section
5.5, in lieu of assuming outstanding Company Options in accordance with
Section 5.5(a), Parent may, at its election, cause such outstanding Company
Options to be replaced by issuing equivalent replacement stock options in
substitution therefor that are substantially the same.
(c) The Company shall take all action that may be necessary (under the
plans pursuant to which Company Options are outstanding and otherwise) to
effectuate the provisions of this Section 5.5 and to ensure that, from and
after the Effective Time, holders of Company Options have no rights with
respect thereto other than those specifically provided in this Section 5.5.
5.6 FORM S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as reasonably practical (and in any event within sixty (60)
days) after the Effective Time.
5.7 WARRANTS. At the Effective Time, all rights with respect to Company
Common Stock under Company Warrants that are then outstanding shall be converted
into and become rights with respect to Parent Common Stock, and Parent shall
assume each Company Warrant in accordance with the terms (as in effect as of the
date hereof) of such Company Warrants. From and after the Effective Time, (a)
each Company Warrant assumed by Parent may be exercised solely for shares of
Parent Common Stock, (b) the
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number of shares of Parent Common Stock subject to each Company Warrant shall be
equal to the number of shares of Company Common Stock subject to such Company
Warrant immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounding down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share), (c) the per share
exercise price under each such Company Warrant shall be adjusted by dividing the
per share exercise price under such Company Warrant by the Exchange Ratio and
rounding up to the nearest cent and (d) any restriction on the exercise of any
Company Warrant shall continue in full force and effect and the term,
exercisability, schedule and other provisions of such Company Warrant shall
otherwise remain unchanged; PROVIDED, HOWEVER, that such Company Warrant shall,
in accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction subsequent to the Effective Time. The Company shall take all action
that may be necessary (under the Company Warrants and otherwise) to effectuate
the provisions of this Section 5.7 and to ensure that, from and after the
Effective Time, holders of Company Warrants have no rights with respect thereto
other than those specifically provided herein.
5.8 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) All rights to indemnification existing in favor of the current
directors and officers of the Company for acts and omissions occurring prior
to the Effective Time, as provided in the Company's Bylaws (as in effect as
of the date of this Agreement) and as provided in any indemnification
agreements between the Company and said officers and directors (as in effect
as of the date of this Agreement), shall survive the Merger and shall be
observed by Parent and the Surviving Corporation for a period of not less
than six (6) years from the Effective Time.
(b) From the Effective Time until the third anniversary of the date on
which the Merger becomes effective, the Surviving Corporation shall maintain
in effect, for the benefit of the current directors and officers of the
Company with respect to acts or omissions occurring prior to the Effective
Time, the lesser of (i) the existing amount of coverage of the existing
policy of directors' and officers' liability insurance maintained by the
Company as of the date of this Agreement (the "EXISTING POLICY") and (ii)
the amount of coverage purchased by 150% of the amount of the last annual
premium paid by the Company prior to the date of this Agreement for the
Existing Policy; PROVIDED, HOWEVER, that the Surviving Corporation may
substitute for the Existing Policy a policy or policies of comparable
coverage.
5.9 POOLING OF INTERESTS; TAX FREE REORGANIZATION. Each of the Company and
Parent agrees (a) not to take any action during the Pre-Closing Period that
would adversely affect the ability of Parent to account for the Merger as a
"pooling of interests," (b) to use all reasonable efforts to attempt to ensure
that none of its "affiliates" (as that term is used in Rule 145 promulgated
under the Securities Act) takes any action that could adversely affect the
ability of Parent to account for the Merger as a "pooling of interests" and (c)
not to take any action either prior to or after the Effective Time that could
reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code. The Company agrees to provide
KPMG Peat Marwick LLP and Grant Thornton LLP such letters as may be reasonably
requested by either of them with respect to the letters referred to in Sections
6.6(b) and 6.6(c).
5.10 ADDITIONAL AGREEMENTS.
(a) Subject to Section 5.10(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated
by this Agreement. Without limiting the generality of the foregoing, but
subject to Section 5.10(b), each party to this Agreement (i) shall make all
filings (if any) and give all notices (if any) required to be made and given
by such party in connection with the Merger and the other transactions
contemplated by this Agreement, (ii) shall use all reasonable efforts to
obtain each Consent (if any) required to be obtained (pursuant to any
applicable Legal Requirement or Contract,
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or otherwise) by such party in connection with the Merger or any of the
other transactions contemplated by this Agreement, and (iii) shall use all
reasonable efforts to lift any restraint, injunction or other legal bar to
the Merger. The Company shall promptly deliver to Parent a copy of each such
filing made, each such notice given and each such Consent obtained by the
Company during the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in this
Agreement, Parent shall not have any obligation under this Agreement: (i) to
dispose or cause any of its subsidiaries to dispose of any assets, or to
commit to cause any of the Acquired Corporations to dispose of any assets;
(ii) to discontinue or cause any of its subsidiaries to discontinue offering
any product, or to commit to cause any of the Acquired Corporations to
discontinue offering any product; (iii) to license or otherwise make
available, or cause any of its subsidiaries to license or otherwise make
available, to any Person, any technology, software or other Proprietary
Asset, or to commit to cause any of the Acquired Corporations to license or
otherwise make available to any Person any technology, software or other
Proprietary Asset; (iv) to hold separate or cause any of its subsidiaries to
hold separate any assets or operations (either before or after the Closing
Date), or to commit to cause any of the Acquired Corporations to hold
separate any assets or operations; or (v) to make or cause any of its
Subsidiaries to make any commitment (to any Governmental Body or otherwise)
regarding its future operations or the future operations of any of the
Acquired Corporations.
5.11 CONFIDENTIALITY. The parties acknowledge that the Company and Parent
have previously executed a Mutual Non-Disclosure Agreement, dated as of June 16,
1998 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will
continue in full force and effect in accordance with its terms.
5.12 DISCLOSURE. Parent and the Company have agreed to the text of a joint
press release announcing the signing of this Agreement and shall consult with
each other before issuing any other press release or otherwise making any public
statement with respect to the Merger or any of the other transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, the Company shall not, and shall not permit any of its
Representatives to, make any disclosure regarding the Merger or any of the other
transactions contemplated by this Agreement unless (a) Parent shall have
approved such disclosure or (b) the Company shall have been advised in writing
by its outside legal counsel that such disclosure is required by applicable law.
5.13 TAX MATTERS.
(a) At or prior to the filing of the S-4 Registration Statement, Parent
and Merger Sub and the Company shall execute and deliver to Cooley Godward
LLP and to Saul, Ewing, Remick & Saul LLP tax representation letters in the
forms attached as Exhibit G-1 and G-2, as applicable;
(b) Parent, Merger Sub and the Company shall each confirm to Cooley
Godward LLP and to Saul, Ewing, Remick & Saul LLP the accuracy and
completeness as of the Effective Time of the tax representation letters
delivered pursuant to Section 5.13(a);
(c) Parent, Merger Sub and the Company shall use all reasonable efforts
to cause the Merger to qualify as a tax free reorganization under Section
368(a)(1) of the Code; and
(d) Following delivery of the tax representation letters pursuant to
Section 5.13(a), each of Parent and the Company shall use its reasonable
efforts to cause Cooley Godward LLP and Saul, Ewing, Remick & Saul LLP,
respectively, to deliver promptly to it a legal opinion satisfying the
requirements of Item 601 of Regulation S-K promulgated under the Securities
Act. In rendering such opinions, each of such counsel shall be entitled to
rely on the tax representation letters delivered pursuant to Section
5.13(a).
5.14 RESIGNATION OF OFFICERS AND DIRECTORS. The Company shall use all
reasonable efforts to obtain and deliver to Parent prior to the Closing the
resignation of each officer and director of the Company.
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5.15 NASDAQ LISTING. Parent shall use all reasonable efforts to have the
shares of Parent Common Stock issuable to the shareholders of the Company
pursuant to the Agreement and such other shares required to be reserved for
issuance in connection with the Merger authorized for listing on Nasdaq upon
official notice of issuance.
5.16 FIRPTA MATTERS. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section 1.897 - 2(h)(2)
of the United States Treasury Regulations.
5.17 PARENT BOARD OF DIRECTORS. As soon as practicable after the Effective
Time, Parent shall use reasonable efforts to nominate and appoint (i) Warren V.
Musser, or such other nominee designated by the Company, to Class I of its Board
of Directors to serve until the annual meeting of stockholders to be held in
1999 and (ii) David S. Lipson, or such other nominee designated by the Company,
to Class II of its Board of Directors to serve until the annual meeting of
stockholders to be held in 2000.
5.18 ACCESS TO INFORMATION. During the Pre-Closing Period, Parent shall,
and shall cause its Representatives, to: (a) provide the Company and its
Representatives with reasonable access to Parent's Representatives, personnel
and assets and to all existing books, records, Tax Returns, work papers and
other documents and information relating to Parent and its Subsidiaries; and (b)
provide the Company and its Representatives with such copies of the existing
books, records, Tax Returns, work papers and other documents and information
relating to Parent and its Subsidiaries, and with such additional financial,
operating and other data and information regarding Parent and its Subsidiaries,
as the Company may reasonably request. Without limiting the generality of the
foregoing, during the Pre-Closing Period, Parent shall promptly provide the
Company with copies of any notice, report or other document filed with or sent
to any Governmental Body in connection with the Merger or any of the other
transactions contemplated by this Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
and upon consummation of the Closing, all conditions herein shall be deemed
satisfied and any liability for failure to satisfy any condition herein shall be
precluded:
6.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of the
Company contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement and shall be accurate in all material
respects as of the Closing Date as if made on and as of the Closing Date;
PROVIDED, HOWEVER, that any representations and warranties qualified by
"Material Adverse Effect" or other materiality qualifications are accurate in
all respects as of the date of this Agreement and shall be accurate in all
respects as of the Closing Date as if made on and as of the Closing Date.
6.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
6.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.4 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the Required Company Shareholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote. Fewer than 10% of the outstanding shares of Company
Common Stock shall be Dissenting Shares.
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6.5 CONSENTS. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.25 of the Company Disclosure
Schedule) shall have been obtained and shall be in full force and effect.
6.6 AGREEMENTS AND DOCUMENTS. Parent and Merger Sub shall have received
the following agreements and documents, each of which shall be in full force and
effect:
(a) the statement referred to in Section 5.16(b), executed by the
Company;
(b) a letter from KPMG Peat Marwick LLP, dated as of the Closing Date
and addressed to Parent and the Company, reasonably satisfactory in form and
substance to Parent and Grant Thornton LLP, to the effect that, after
reasonable investigation, KPMG Peat Marwick LLP is not aware of any fact
concerning the Company or any of the Company's shareholders or affiliates
that could preclude Parent from accounting for the Merger as a "pooling of
interests" in accordance with GAAP, Accounting Principles Board Opinion No.
16 and all published rules, regulations and policies of the SEC;
(c) a letter from Grant Thornton LLP, dated as of the Closing Date and
addressed to Parent, reasonably satisfactory in form and substance to
Parent, to the effect that, after reasonable investigation, Grant Thornton
LLP is not aware of any fact concerning Parent or any of Parent's
stockholders or affiliates that could preclude Parent from accounting for
the Merger as a "pooling of interests" in accordance with GAAP, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC;
(d) a legal opinion of Cooley Godward LLP, dated as of the Closing Date
and addressed to Parent, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code (it being
understood that, in rendering such opinion, Cooley Godward LLP may rely upon
the tax representation letters referred to in Section 5.13);
(e) a certificate executed on behalf of the Company by its Chief
Executive Officer confirming that the conditions set forth in Sections 6.1,
6.2, 6.4, 6.5, 6.7 and 6.8 have been duly satisfied; and
(f) the written resignations of all officers and directors of the
Company, effective as of the Effective Time.
6.7 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business, condition, assets, liabilities, operations or financial
performance of the Acquired Corporations since the date of this Agreement.
6.8 FIRPTA COMPLIANCE. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 5.16.
6.9 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
6.10 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would materially and adversely affect
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the right of Parent, the Surviving Corporation or any subsidiary of Parent to
own the assets or operate the business of the Company.
6.12 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Acquired Corporations or on Parent: (a)
challenging or seeking to restrain or prohibit the consummation of the Merger or
any of the other transactions contemplated by this Agreement; (b) relating to
the Merger and seeking to obtain from Parent or any of its subsidiaries any
damages that may be material to Parent, (c) seeking to prohibit or limit in any
material respect Parent's ability to vote, receive dividends with respect to or
otherwise exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect adversely the right of Parent, the
Surviving Corporation or any subsidiary of Parent to own the assets or operate
the business of the Company.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY.
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions, and upon consummation
of the Closing, all conditions herein shall be deemed satisfied and any
liability for failure to satisfy any condition herein shall be precluded:
7.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall have been accurate in
all material respects as of the date of this Agreement and shall be accurate in
all material respects as of the Closing Date as if made on and as of the Closing
Date; PROVIDED, HOWEVER, that any representations and warranties qualified by
"Material Adverse Effect" or other materiality qualifications are accurate in
all respects as of the date of this Agreement and shall be accurate in all
respects as of the Closing Date as if made on and as of the Closing Date.
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all material
respects.
7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
7.4 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the Required Company Shareholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
7.5 DOCUMENTS. The Company shall have received the following documents:
(a) a Registration Rights Agreement in the form of Exhibit H, executed
by Parent and each person identified on Exhibit I.
(b) a legal opinion of Saul, Ewing, Remick & Saul LLP, dated as of the
Closing Date and addressed to the Company, to the effect that the Merger
will constitute a reorganization within the meaning of Section 368 of the
Code (it being understood that, in rendering such opinion, Saul, Ewing,
Remick & Saul LLP may rely upon tax representation letters including those
referred to in Section 5.13);
(c) a letter from KPMG Peat Marwick LLP, dated as of a date no earlier
than three (3) days prior to the Closing Date and addressed to the Company,
reasonably satisfactory in form and substance to Parent and Grant Thornton
LLP, to the effect that, after reasonable investigation, KPMG Peat Marwick
LLP is not aware of any fact concerning the Company or any of the Company's
shareholders or affiliates that could preclude Parent from accounting for
the Merger as a "pooling of
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interests" in accordance with GAAP, Accounting Principles Board Opinion No.
16 and all published rules, regulations and policies of the SEC;
(d) a letter from Grant Thornton LLP, dated as of a date no earlier than
three (3) days prior to the Closing Date and addressed to Parent, reasonably
satisfactory in form and substance to Parent, to the effect that, after
reasonable investigation, Grant Thornton LLP is not aware of any fact
concerning Parent or any of Parent's stockholders or affiliates that would
preclude Parent from accounting for the Merger as a "pooling of interests"
in accordance with GAAP, Accounting Principles Board Opinion No. 16 and all
published rules, regulations and policies of the SEC; and
(e) a certificate executed on behalf of Parent by an executive officer
of Parent, confirming that conditions set forth in Sections 7.1, 7.2, 7.3
and 7.6 have been duly satisfied.
7.6 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in Parent's business, condition, assets, liabilities, operations or
financial performance since the date of this Agreement.
7.7 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
7.8 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger by
the Company shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger by the Company
illegal.
SECTION 8. TERMINATION.
8.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the shareholders of the
Company:
(a) by mutual written consent of the Boards of Directors of the Parent
and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by January 31, 1999 (unless the failure to consummate the Merger
is attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Time);
(c) by either Parent or the Company if a court of competent jurisdiction
or other Governmental Body shall have issued a final and non-appealable
order, decree or ruling, or shall have taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger;
(d) by either Parent or the Company if (i) the Company Shareholders'
Meeting shall have been held (either on the date for which such Meeting was
originally scheduled or pursuant to any permissible adjournment or
postponement) and (ii) this Agreement and the Merger shall not have been
adopted and approved at such meeting by the Company Required Shareholder
Vote (PROVIDED that the right to terminate this Agreement under this Section
8.1(d) shall not be available to the Company where the failure to obtain
Company shareholder approval shall have been caused by the action or failure
to act of the Company and such action or failure to act constitutes a
material breach by the Company of this Agreement);
(e) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the Company Required Shareholder Vote) if a
Triggering Event shall have occurred;
(f) by either Parent or Company if (i) the Parent Stockholders' Meeting
shall have been held (either on the date for which such Meeting was
originally scheduled or pursuant to any permissible
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adjournment or postponement) and (ii) issuance of the Parent Common Stock in
the Merger shall not have been approved at such meeting by the Parent
Required Stockholder Vote;
(g) by Parent if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of the Company's covenants contained in this Agreement
shall have been breached in any material respect; PROVIDED, HOWEVER, that if
an inaccuracy in the Company's representations and warranties or a breach of
a covenant by the Company is curable by the Company and the Company is
continuing to exercise all reasonable efforts to cure such inaccuracy or
breach, then Parent may not terminate this Agreement under this Section
8.1(g) on account of such inaccuracy or breach; or
(h) by the Company if any of Parent's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of Parent's covenants contained in this Agreement
shall have been breached in any material respect; PROVIDED, HOWEVER, that if
an inaccuracy in Parent's representations and warranties or a breach of a
covenant by Parent is curable by Parent and Parent is continuing to exercise
all reasonable efforts to cure such inaccuracy or breach, then the Company
may not terminate this Agreement under this Section 8.1(h) on account of
such inaccuracy or breach.
8.2 NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination under
Section 8.1 above will be effective immediately upon the delivery of written
notice of the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 8.1, this Agreement shall
be of no further force or effect; PROVIDED, HOWEVER, that (i) this Section 8.2,
Section 8.3 and Section 9 shall survive the termination of this Agreement and
shall remain in full force and effect, (ii) the termination of this Agreement
shall not relieve any party from any liability for any breach of this Agreement
and (iii) no termination of this Agreement shall affect the obligations of the
parties contained in the Confidentiality Agreement, all of which obligations
shall survive termination of this Agreement in accordance with their terms.
8.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses,
whether or not the Merger is consummated; PROVIDED, HOWEVER, that Parent and
the Company shall share equally all fees and expenses, other than attorneys'
fees, incurred in connection with the printing and filing of the S-4
Registration Statement and the Joint Proxy Statement/ Prospectus and any
amendments or supplements thereto.
(b) If this Agreement is terminated by Parent pursuant to Section
8.1(e), then the Company shall pay to Parent (at the time specified in
Section 8.3(c)), a nonrefundable fee equal to five million dollars
($5,000,000) (the "TERMINATION FEE") in cash within three (3) days of such
termination.
(c) If this Agreement is terminated by Company or Parent pursuant to
Section 8.1(d) and an Acquisition Transaction is consummated or a proposed
Acquisition Transaction is publicly announced at anytime prior to the first
anniversary of the date of this Agreement, Company shall pay to Parent the
Termination Fee contemporaneously with the earlier of the consummation of
such Acquisition Transaction or such announcement regarding a proposed
Acquisition Agreement.
SECTION 9. MISCELLANEOUS PROVISIONS.
9.1 AMENDMENT. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after approval of this Agreement and the Merger by the shareholders of
the Company; and whether before or after approval of the issuance of Parent
Common Stock in the Merger by Parent's stockholders); PROVIDED, HOWEVER, that
(i) after any such approval of this Agreement and the Merger by the Company's
shareholders, no amendment shall be made
A-39
<PAGE>
which by law or NASD regulation requires further approval of the shareholders of
the Company without the further approval of such shareholders, and (ii) after
any such approval of the issuance of Parent Company Stock in the Merger by
Parent's stockholders, no amendment shall be made which by law or NASD
regulation requires further approval of Parent's stockholders without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
9.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No party shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
9.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.4 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement and the other
agreements referred to herein constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among or between any
of the parties with respect to the subject matter hereof and thereof. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original and all of which shall constitute one and the same instrument.
9.5 APPLICABLE LAW; JURISDICTION. THIS AGREEMENT IS MADE UNDER, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. In any action between
or among any of the parties, whether arising out of this Agreement or otherwise,
(a) each of the parties irrevocably and unconditionally consent in the State of
California; (b) if any such action is commenced in a state court, then, subject
to applicable law, no party shall object to the removal of such action to any
federal court located in the law, no party shall object to the removal of such
action to any federal court located in the State of California; (c) each of the
parties irrevocably waivers the right to trial by jury; and (d) each of the
parties irrevocably consents to service of process by first class certified
mail, return receipt requested, postage prepaid, to the address at which such
party is to receive notice in accordance with Section 9.9.
9.6 DISCLOSURE SCHEDULE. Each of the Company Disclosure Schedule and the
Parent Disclosure Schedule shall be arranged in separate parts corresponding to
the numbered and lettered sections contained in Sections 2 and 3, respectively,
and the information disclosed in any numbered or lettered part shall be deemed
to relate to and to qualify only the particular representation or warranty set
forth in the corresponding numbered or lettered section in Section 2 or 3,
respectively, and shall not be deemed to relate to or to qualify any other
representation or warranty unless such relationship or qualification is
reasonably apparent.
9.7 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a
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<PAGE>
reasonable sum for its attorneys' fees and all other reasonable costs and
expenses incurred in such action or suit.
9.8 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that neither this
Agreement nor any of the Company's rights hereunder may be assigned by the
Company without the prior written consent of Parent, and any attempted
assignment of this Agreement or any of such rights by the Company without such
consent shall be void and of no effect. Except as set forth in Section 5.8 with
respect to the current directors and officers of the Company, nothing in this
Agreement, express or implied, is intended to or shall confer upon any Person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
9.9 NOTICES. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
<TABLE>
<CAPTION>
if to Parent: FIRST CONSULTING GROUP, INC.
111 W. Ocean Boulevard, 4th Floor
Long Beach, CA 90802
Facsimile: (562) 432-1932
<S> <C>
if to Merger Sub: FOXTROT ACQUISITION SUB, INC.
111 W. Ocean Boulevard, 4th Floor
Long Beach, CA 90802
Facsimile: (562) 432-1932
if to the INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Company: 575 East Swedesford Road
Wayne, PA 19087
Facsimile: (610) 989-7100
</TABLE>
9.10 COOPERATION. The Company agrees to cooperate fully with Parent and to
execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
Parent to evidence or reflect the transactions contemplated by this Agreement
and to carry out the intent and purposes of this Agreement.
9.11 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
A-41
<PAGE>
IN WITNESS WHEREOF, the parties have caused this AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION to be executed as of the date first above written.
<TABLE>
<CAPTION>
FIRST CONSULTING GROUP, INC.
<S> <C>
By: /s/ LUTHER J. NUSSBAUM
-------------------------------------------
Printed Name: Luther J. Nussbaum
-------------------------------------------
Title: Executive Vice President
--------------------------------------------
FOXTROT ACQUISITION SUB, INC.
By: /s/ LUTHER J. NUSSBAUM
-------------------------------------------
Printed Name: Luther J. Nussbaum
-------------------------------------------
Title: President
--------------------------------------------
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
By: /s/ DAVID S. LIPSON
-------------------------------------------
Printed Name: David S. Lipson
-------------------------------------------
Title: President
--------------------------------------------
</TABLE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
SIGNATURE PAGE
A-42
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit A......................... Certain Definitions
<S> <C>
Exhibit B-1....................... Company Shareholders who have executed Voting Agreements
Exhibit B-2....................... Parent Stockholders who have executed a Voting Agreement
Exhibit C-1....................... Form of Voting Agreement for Company Shareholders
Exhibit C-2....................... Form of Voting Agreement for Parent Stockholders
Exhibit D-1....................... Individuals executing Company Affiliate Agreement in
Form of Exhibit E-1
Exhibit D-2....................... Individuals executing Parent Affiliate Agreement in Form
of Exhibit E-2
Exhibit E-1....................... Form of Affiliate Agreement for Company Affiliates
Exhibit E-2....................... Form of Affiliate Agreement for Parent Affiliates
Exhibit F-1....................... Form of Surviving Corporation Articles of Incorporation
Exhibit F-2....................... Form of Surviving Corporation Bylaws
Exhibit G-1....................... Form of Tax Representation Letter to be delivered by
Parent and Merger Sub
Exhibit G-2....................... Form of Tax Representation Letter to be delivered by
Company
Exhibit H......................... Form of Registration Rights Agreement
Exhibit I......................... Individuals to execute Registration Rights Agreement in
Form of Exhibit H
</TABLE>
A-43
<PAGE>
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUIRED CORPORATION CONTRACT. "ACQUIRED CORPORATION CONTRACT" shall mean
any Contract: (a) to which any of the Acquired Corporations is a party; (b) by
which any of the Acquired Corporations or any asset of any of the Acquired
Corporations is or may become bound or under which any of the Acquired
Corporations has, or may become subject to, any obligation; or (c) under which
any of the Acquired Corporations has or may acquire any right or interest.
ACQUIRED CORPORATION PROPRIETARY ASSET. "ACQUIRED CORPORATION PROPRIETARY
ASSET" shall mean any Proprietary Asset owned by or licensed to any of the
Acquired Corporations or otherwise used by any of the Acquired Corporations.
ACQUISITION PROPOSAL. "ACQUISITION PROPOSAL" shall mean any offer or
proposal (other than an offer or proposal by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
ACQUISITION TRANSACTION. "ACQUISITION TRANSACTION" shall mean any
transaction or series of related transactions involving:
any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which any of the Acquired
Corporations is a constituent corporation, (ii) in which a Person or "group"
(as defined in the Exchange Act and the rules promulgated thereunder) of
Persons directly or indirectly acquires the Company or more than fifty
percent (50%) of the Company's business or directly or indirectly acquires
beneficial or record ownership of securities representing more than twenty
percent (20%) of the outstanding securities of any class of voting
securities of any of the Acquired Corporations, or (iii) in which any of the
Acquired Corporations issues securities representing more than twenty
percent (20%) of the outstanding securities of any class of voting
securities of the Company;
(a) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 50% of the assets of the Company; or
(b) any liquidation or dissolution of the Company.
AGREEMENT. "AGREEMENT" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
COMPANY COMMON STOCK. "COMPANY COMMON STOCK" shall mean the Common Stock,
$.005 par value per share, of the Company.
CONSENT. "CONSENT" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "CONTRACT" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
ENCUMBRANCE. "ENCUMBRANCE" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
A-A-1
<PAGE>
ENTITY. "ENTITY" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
EXCHANGE ACT. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
GOVERNMENTAL AUTHORIZATION. "GOVERNMENTAL AUTHORIZATION" shall mean any: (a)
permit, license, certificate, franchise, permission, clearance, registration,
qualification or authorization issued, granted, given or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement; or (b) right under any Contract with any Governmental Body.
GOVERNMENTAL BODY. "GOVERNMENTAL BODY" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
LEGAL PROCEEDING. "LEGAL PROCEEDING" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "LEGAL REQUIREMENT" shall mean any federal, state, local,
municipal, foreign or other law, statute, constitution, principle of common law,
resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. An event, violation, inaccuracy, circumstances or
other matter will be deemed to have a "Material Adverse Effect" on the Acquired
Corporations if such event, violation, inaccuracy, circumstance or other matter
would have a material adverse effect on (i) the business, condition,
capitalization, assets, liabilities, operations or financial performance of the
Acquired Corporations taken as a whole, (ii) the ability of the Company to
consummate the Merger or any of the other transactions contemplated by the
Agreement or to perform any of its obligations under the Agreement, or (iii)
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "Material Adverse Effect" on Parent if such event,
violation, inaccuracy, circumstance or other matter would have a material
adverse effect on the business, condition, assets, liabilities, operations or
financial performance of Parent and its subsidiaries taken as a whole.
NASDAQ. "NASDAQ" shall mean the Nasdaq National Market.
PARENT COMMON STOCK. "PARENT COMMON STOCK" shall mean the Common Stock,
$.001 par value per share, of Parent.
PERSON. "PERSON" shall mean any individual, Entity or Governmental Body.
PROPRIETARY ASSET. "PROPRIETARY ASSET" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program (in source and executable form), algorithm,
invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset in any jurisdiction in the world; or (b) right to use or exploit any of
the foregoing in any jurisdiction in the world.
A-A-2
<PAGE>
REPRESENTATIVES. "REPRESENTATIVES" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
SECURITIES ACT. "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
SUBSIDIARY. An entity shall be deemed to be a "Subsidiary" of another Person
if such Person directly or in directly owns, beneficially or of record, an
amount of voting securities of other interests in such Entity that is sufficient
to enable such Person to elect at leased a majority of the members of such
Entity's board of directors or other governing body.
SUPERIOR OFFER. "SUPERIOR OFFER" shall mean an unsolicited, bona fide
written offer made by a third party to purchase more than 50% of the outstanding
shares of Company Common Stock on terms that the board of directors of the
Company determines, in its reasonable judgment, based upon the written advice of
its financial advisor, to be more favorable to the Company's shareholders than
the terms of the Merger; PROVIDED, HOWEVER, that any such offer shall not be
deemed to be a "Superior Offer" if any financing required to consummate the
transaction contemplated by such offer is not committed and is not likely to be
obtained by such third party on a timely basis.
TAX. "TAX" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, AD
VALOREM tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "TAX RETURN" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
TRIGGERING EVENT. A "TRIGGERING EVENT" shall be deemed to have occurred if:
(i) the Board of Directors of the Company shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Parent its unanimous recommendation in favor of, the adoption
and approval of the Agreement or the approval of the Merger; (ii) the Company
shall have failed to include in the Joint Proxy Statement/Prospectus the
unanimous recommendation of the board of directors of the Company in favor of
the adoption and approval of the Agreement and the approval of the Merger; (iii)
the board of directors of the Company fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the Agreement and the
approval of the Merger within five (5) business days after the Parent request in
writing that such recommendation be reaffirmed; (iv) the board of directors of
the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (v) the Company shall have entered into any letter of intent of
similar document or any Contract relating to any Acquisition Proposal; (vi) the
Company shall have failed to hold the Company Shareholders Meeting as promptly
as practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act; (vii) a tender or
exchange offer relating to securities of the Company shall have been commenced
and the Company shall not have sent to its securityholders, within ten (10)
business days after the commencement of such tender or exchange offer, a
statement disclosing that the Company recommends rejection of such tender or
exchange offer; (viii) an Acquisition Proposal is publicly announced, and the
Company (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five business days after such Acquisition Proposal
is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal; or (ix) the Company breaches or is deemed to have breached any of its
obligations under Section 4.3 of the Agreement.
A-A-3
<PAGE>
APPENDIX A-1
FIRST AMENDMENT
TO
AGREEMENT AND PLAN
OF
MERGER AND REORGANIZATION
THIS FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
(this "FIRST AMENDMENT") made and entered into as of November 11, 1998, by and
among: FIRST CONSULTING GROUP, INC., a Delaware corporation ("PARENT"); FOXTROT
ACQUISITION SUB, INC., a Delaware corporation and a wholly owned subsidiary of
Parent ("MERGER SUB"); and INTEGRATED SYSTEMS CONSULTING GROUP, INC., a
Pennsylvania corporation (the "COMPANY"), amends that certain Agreement and Plan
of Merger and Reorganization, dated as of September 9, 1998, by and among
Parent, Merger Sub and the Company (the "ORIGINAL AGREEMENT"). Capitalized terms
used but not defined herein shall have the meanings assigned to them in the
Original Agreement.
W I T N E S S E T H
WHEREAS, the parties have entered into the Original Agreement on September
9, 1998; and
WHEREAS, subject to the terms and conditions provided herein, the parties
desire to amend the Original Agreement in accordance with Section 9.1 thereof.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, and other good and valuable consideration, the receipt of which is
acknowledged by the parties, the parties hereby agree as follows:
1. Section 5.17 of the Agreement is hereby amended and restated in its
entirety to read as follows:
"5.17 PARENT BOARD OF DIRECTORS. As soon as practicable after the
Effective Time, Parent shall use reasonable efforts to nominate and appoint:
(i) a nominee designated by the Company to Class I of its Board of Directors
to serve until the annual meeting of stockholders to be held in 1999; (ii)
Donald R. Caldwell, or such other nominee designated by the Company, to
Class II of its Board of Directors to serve until the annual meeting of
stockholders to be held in 2000; and (iii) David S. Lipson, or such other
nominee designated by the Company, to Class III of its Board of Directors to
serve until the annual meeting of stockholders to be held in 2001."
2. Any reference in the Original Agreement to the term "Agreement" is
deemed to refer to both the Original Agreement as well as the Original Agreement
as amended by this First Amendment.
3. Except as amended by this First Amendment, the Original Agreement
remains in full force and effect.
4. This First Amendment is made under, and shall be construed and enforced
in accordance with, the laws of the state of California applicable to agreements
made and to be performed solely therein, without giving effect to principles of
conflicts of law.
5. This First Amendment may be executed in several counterparts, each of
which shall be deemed an original and all of which shall constitute one and the
same instrument.
A-1-1
<PAGE>
IN WITNESS WHEREOF, the parties have each caused this FIRST AMENDMENT to be
executed as of the date first written above.
<TABLE>
<S> <C> <C>
FIRST CONSULTING GROUP, INC.
By: /s/ LUTHER J. NUSSBAUM
-----------------------------------------
Luther J. Nussbaum
CHIEF EXECUTIVE OFFICER
FOXTROT ACQUISITION SUB, INC.
By: /s/ LUTHER J. NUSSBAUM
-----------------------------------------
Luther J. Nussbaum
PRESIDENT
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
By: /s/ DAVID D. GATHMAN
-----------------------------------------
David D. Gathman
EXECUTIVE VICE PRESIDENT,
FINANCE AND ADMINISTRATION
</TABLE>
A-1-2
<PAGE>
APPENDIX B-1
[LOGO]
September 9, 1998
Board of Directors
Integrated Systems Consulting Group, Inc.
575 E. Swedesford Road
Wayne, PA 19087
Ladies and Gentlemen:
Integrated Systems Consulting Group, Inc. (the "Company") proposes to enter
into an Agreement and Plan of Merger and Reorganization (the "Agreement") with
First Consulting Group, Inc. ("Parent") and Foxtrot Acquisition Sub, Inc., a
wholly owned subsidiary of Parent ("Merger Sub"). Pursuant to the Agreement, at
the Effective Time (as defined in the Agreement), Merger Sub shall be merged
with and into the Company (the "Merger") and each issued and outstanding share
of common stock, par value $.005 per share ("Company Common Stock"), of the
Company (other than Dissenting Shares (as defined in the Agreement) and shares
held by the Company, Parent or any of their respective subsidiaries) will be
converted solely into the right to receive 0.77 of one share of common stock,
par value $.001 per share ("Parent Common Stock"), of Parent (the "Exchange
Ratio").
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange Ratio to the holders of Company Common Stock (other than
Parent and its affiliates).
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment
banking business, is engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In that
connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company and Parent furnished to us for
purposes of our analysis, as well as publicly available information including
but not limited to the Company's and the Parent's recent filings with the
Securities and Exchange Commission and equity analyst research reports prepared
by various investment banking firms including Baird; (ii) reviewed the Agreement
in the form presented to the Company's Board of Directors; (iii) compared the
historical market prices and trading activity of the Company Common Stock and
Parent Common Stock with those of certain other publicly traded companies we
deemed relevant; (iv) compared the financial position and operating results of
the Company and Parent with those of other publicly traded companies we deemed
relevant; (v) compared the proposed financial terms of the Merger with the
financial terms of certain other business combinations we deemed relevant; and
(vi) reviewed certain potential pro forma effects of the Merger. We have held
discussions with members of the Company's and Parent's respective senior
managements concerning the Company's and Parent's historical and current
financial condition and operating results, as well as the future prospects of
the Company and Parent, respectively. As a part of our engagement we were
requested to and did solicit third party indications of interest in acquiring
the Company. We have also considered such other information,
B-1-1
<PAGE>
Integrated Systems Consulting Group, Inc.
September 9, 1998
Page 2
financial studies, analysis and investigations and financial, economic and
market criteria which we deemed relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided us by or on behalf of the Company and the Parent, and have
not been engaged to independently verify any such information. We have assumed,
with your consent, (i) that all material assets and liabilities (contingent or
otherwise, known or unknown) of the Company and the Parent are as set forth in
their respective financial statements, (ii) the Merger will be accounted for
under the pooling-of-interests method and (iii) the Merger will be consummated
in accordance with the terms of the Agreement, without any amendment thereto and
without waiver by the Company or Parent of any of the conditions to their
respective obligations thereunder. At your direction, we have assumed that no
cost savings or operating synergies will result from the Merger, and have
excluded transaction costs from our financial analysis. We have also assumed
that the financial forecasts examined by us were reasonably prepared on bases
reflecting the best available estimates and good faith judgments of the
Company's and Parent's respective senior managements as to future performance of
the Company and Parent, respectively. In conducting our review, we have not
undertaken nor obtained an independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of the Company and Parent nor
have we made a physical inspection of the properties or facilities of the
Company or Parent. Our opinion necessarily is based upon economic, monetary and
market conditions as they exist and can be evaluated on the date hereof, and
does not predict or take into account any changes which may occur, or
information which may become available, after the date hereof. Furthermore, we
express no opinion as to the price or trading range at which any of the
Company's or Parent's securities (including the Company Common Stock and Parent
Common Stock) will trade following the date hereof.
Our opinion has been prepared at the request and for the information of the
Board of Directors of the Company, and shall not be used for any other purpose
or disclosed to any other party without the prior written consent of Baird;
provided, however, that this letter may be reproduced in full in the Proxy
Statement/Prospectus to be provided to the Company's stockholders in connection
with the Merger. This opinion does not address the relative merits of the Merger
and any other potential transactions or business strategies considered by the
Company's Board of Directors, and does not constitute a recommendation to any
shareholder of the Company as to how any such shareholder should vote with
respect to the Merger. Baird will receive a fee for rendering this opinion. In
the past, Baird has performed investment banking services for the Company,
including acting as co-manager in the Company's 1996 public offering of the
Company's Common Stock. Additionally, in the past Baird has performed investment
banking services for Safeguard Scientifics, Inc., an affiliate of the Company,
as well as for certain other affiliates of Safeguard Scientifics, Inc., for
which Baird has received customary compensation.
In the ordinary course of our business, we may from time to time trade the
securities of the Company or Parent for our own account or the accounts of our
customers and, accordingly, may at any time hold long or short positions in such
securities.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair, from a financial point of view, to
the holders of Company Common Stock (other than Parent and its affiliates).
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
B-1-2
<PAGE>
APPENDIX B-2
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA
94104
(415) 439-3000
September 9, 1998
CONFIDENTIAL
The Board of Directors
First Consulting Group, Inc.
111 W. Ocean Boulevard, 4th Floor
Long Beach, CA 90802
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to First Consulting Group, Inc. ("First Consulting" or the "Company") of
the Exchange Ratio (as defined below) in connection with the proposed merger of
a wholly owned subsidiary of First Consulting with and into Integrated Systems
Consulting Group, Inc. ("ISCG") (the "Proposed Transaction") under the terms of
the Agreement and Plan of Merger and Reorganization, dated as of September 9,
1998, among ISCG, First Consulting and Foxtrot Acquisition Sub, Inc. and the
related Exhibits and Schedules thereto (the "Agreement"). The Agreement
provides, among other things, that each issued and outstanding share of common
stock of ISCG will be converted, upon consummation of the Proposed Transaction,
into 0.77 shares of First Consulting common stock (the "Exchange Ratio). For
purposes of this opinion, we have assumed that the Proposed Transaction will
qualify as a tax-free reorganization under the United States Internal Revenue
Code and that the Proposed Transaction will be accounted for as a pooling-of-
interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of First Consulting in connection with the Proposed Transaction, and
we will receive a fee for our services, which include the rendering of this
opinion.
In the past, we have provided investment banking and other financial
advisory services to First Consulting and have received fees for rendering these
services. In particular, Hambrecht & Quist acted as lead underwriter of the
Company's initial public offering on February 13, 1998, and received a fee for
these
SAN FRANCISCO - NEW YORK - BOSTON - NEWPORT BEACH - SAN DIEGO - LONDON
MEMBERS NEW YORK STOCK EXCHANGE - AMERICAN STOCK EXCHANGE - PACIFIC STOCK
EXCHANGE
B-2-1
<PAGE>
The Board of Directors
First Consulting Group, Inc.
Page 2
services. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of First Consulting and
receives customary compensation in connection therewith, and also provides
research coverage for First Consulting. In the ordinary course of business,
Hambrecht & Quist actively trades in the equity and derivative securities of
First Consulting for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Hambrecht & Quist may in the future provide additional investment banking or
other financial advisory services to First Consulting.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
First Consulting for recent years and interim periods to date and certain
other relevant financial and operating data of First Consulting made
available to us from published sources and from the internal records of
First Consulting;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to First Consulting prepared by the
management of First Consulting;
(iii) discussed the business, financial condition and prospects of First
Consulting with certain of its officers;
(iv) reviewed the publicly available consolidated financial statements
of ISCG for recent years and interim periods to date and certain other
relevant financial and operating data of ISCG made available to us from
published sources and from the internal records of ISCG;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to ISCG prepared by the management
of ISCG;
(vi) discussed the business, financial condition and prospects of ISCG
with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of First Consulting and ISCG and compared such information and
certain financial information for First Consulting and ISCG with similar
information for certain other companies engaged in businesses we consider
comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning First Consulting or ISCG
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not undertaken any independent valuation or appraisal of
any of the assets or liabilities of First Consulting or ISCG; nor have we
conducted a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections made available
to us and used in our analysis, we have assumed that they reflect the best
currently available estimates and judgments of the expected future financial
performance of First Consulting and ISCG. For purposes of this
B-2-2
<PAGE>
The Board of Directors
First Consulting Group, Inc.
Page 3
Opinion, we have assumed that neither First Consulting nor ISCG is a party to
any pending transactions, including external financings, recapitalizations or
material merger discussions, other than the Proposed Transaction and those
activities undertaken in the ordinary course of conducting their respective
businesses. Our opinion is necessarily based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of this
letter and any change in such conditions would require a reevaluation of this
opinion. Hambrecht & Quist expresses no opinion as to the price at which First
Consulting common stock will trade after the effective date of the Proposed
Transaction.
It is understood that his letter is for the information of the Board of
Directors in connection with their evaluation of the Proposed Transaction and
may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the joint proxy
statement/ prospectus related to the Proposed Transaction. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the Exchange Ratio is fair to the Company from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ DAVID G. GOLDEN
------------------------------------
David G. Golden
MANAGING DIRECTOR
B-2-3
<PAGE>
APPENDIX C-1
COMPANY VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of September 9, 1998, by and
between FIRST CONSULTING GROUP, INC., a Delaware corporation ("PARENT"), and the
undersigned stockholder ("STOCKHOLDER").
RECITALS
WHEREAS, Stockholder is a stockholder of Integrated Systems Consulting
Group, Inc., a Pennsylvania corporation (the "COMPANY").
WHEREAS, Parent, Foxtrot Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and the Company, are entering
into an Agreement and Plan of Merger and Reorganization of even date herewith
(the "MERGER AGREEMENT") which provides (subject to the conditions set forth
therein) for the merger of Merger Sub with and into the Company (the "MERGER").
NOW, THEREFORE, in order to induce Parent and Merger Sub to enter into the
Merger Agreement and consummate the transactions contemplated thereby, and for
other valuable consideration (the receipt and sufficiency of which are hereby
acknowledged by Stockholder), Stockholder hereby covenants and agrees as
follows:
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants herein contemplated
and intending to be legally bound hereby, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS.
For purposes of this Agreement:
(a) "COMPANY COMMON STOCK" shall mean the common stock, par value $.005
per share, of the Company.
(b) "EXPIRATION DATE" shall mean the earlier of (i) the date upon which
the Merger Agreement is validly terminated pursuant to Section 8 thereof, or
(ii) the date upon which the Merger becomes effective in accordance with the
terms and provisions of the Merger Agreement.
(c) Stockholder shall be deemed to "OWN" or to have acquired "OWNERSHIP"
of a security if Stockholder: (i) is the record owner of such security; or
(ii) is the "beneficial owner" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of such security.
(d) "PERSON" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity or (iii) governmental
authority.
(e) "SUBJECT SECURITIES" shall mean: (i) all securities of the Company
(including all shares of Company Common Stock and all options, warrants and
other rights to acquire shares of Company Common Stock) Owned by Stockholder
as of the date of this Agreement; and (ii) all additional securities of the
Company (including all additional shares of Company Common Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock) of which Stockholder acquires Ownership during the period from
the date of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have a effected a "TRANSFER" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment
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<PAGE>
contemplating the possible sale of, pledge of, encumbrance of, grant of an
option with respect to, transfer of or disposition of such security or any
interest therein.
2. TRANSFER OF SUBJECT SECURITIES.
2.1 TRANSFEREE OF SUBJECT SECURITIES TO BE BOUND BY THIS
AGREEMENT. Stockholder agrees that, during the period from the date of this
Agreement through the Expiration Date, Stockholder shall not cause or permit any
Transfer of any of the Subject Securities to be effected unless each Person to
which any of such Subject Securities, or any interest in any of such Subject
Securities, is or may be transferred shall have: (a) executed a counterpart of
this Agreement and a proxy in the form attached hereto as Exhibit A (with such
modifications as Parent may reasonably request); and (b) agreed to hold such
Subject Securities (or interest in such Subject Securities) subject to all of
the terms and provisions of this Agreement.
2.2 TRANSFER OF VOTING RIGHTS. Stockholder agrees that, during the period
from the date of this Agreement through the Expiration Date, Stockholder shall
ensure that: (a) none of the Subject Securities is deposited into a voting
trust; and (b) no proxy is granted, and no voting agreement or similar agreement
is entered into, with respect to any of the Subject Securities.
3. VOTING OF SHARES.
3.1 VOTING AGREEMENT. Stockholder agrees that, during the period from the
date of this Agreement through the Expiration Date:
(a) at any meeting of stockholders of the Company, however called, and
at every adjournment thereof, Stockholder shall (unless otherwise directed
in writing by Parent) cause all outstanding shares of Company Common Stock
that are Owned by Stockholder as of the record date fixed for such meeting
to be voted in favor of the approval and adoption of the Merger Agreement
and the approval of the Merger, and in favor of each of the other actions
contemplated by the Merger Agreement; and
(b) in the event written consents are solicited or otherwise sought from
stockholders of the Company with respect to the approval or adoption of the
Merger Agreement, with respect to the approval of the Merger or with respect
to any of the other actions contemplated by the Merger Agreement,
Stockholder shall (unless otherwise directed in writing by Parent) cause to
be executed, with respect to all shares of Company Common Stock that are
Owned by Stockholder as of the record date fixed for the consent to the
proposed action, a written consent or written consents to such proposed
action.
3.2 PROXY; FURTHER ASSURANCES.
(a) Contemporaneously with the execution of this Agreement: (i)
Stockholder shall deliver to Parent a proxy in the form attached to this
Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the shares referred to therein (the
"PROXY"); and (ii) Stockholder shall cause to be delivered to Parent an
additional proxy (in the form attached hereto as Exhibit A) executed on
behalf of the record owner of any outstanding shares of Company Common Stock
that are owned beneficially (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934), but not of record, by Stockholder.
(b) From time to time and without additional consideration, Stockholder
shall execute and deliver, or cause to be executed and delivered, such
additional transfers, assignments, endorsements, proxies, consents and other
instruments, and shall take such further actions, as Parent may request for
the purpose of carrying out and furthering the intent of this Agreement.
4. WAIVER OF DISSENTERS' RIGHTS. Stockholder hereby irrevocably and
unconditionally waives, and agrees to cause to be waived and to prevent the
exercise of, any rights of appraisal, any dissenters' rights and any similar
rights relating to the Merger or any related transaction that Stockholder or any
other
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<PAGE>
Person may have by virtue of the ownership of any outstanding shares of Company
Common Stock Owned by Stockholder.
5. NO SOLICITATION. Stockholder agrees that, during the period from the
date of this Agreement through the Expiration Date, Stockholder shall not,
directly or indirectly, and Stockholder shall ensure that his Representatives
(as defined in the Merger Agreement) do not, directly or indirectly: (i)
solicit, initiate, encourage or induce the making, submission or announcement of
any Acquisition Proposal (as defined in the Merger Agreement) or take any action
that could reasonably be expected to lead to an Acquisition Proposal; (ii)
furnish any information regarding the Company or any direct or indirect
subsidiary of the Company to any Person in connection with or in response to an
Acquisition Proposal or potential Acquisition Proposal; or (iii) engage in
discussions with any Person with respect to any Acquisition Proposal.
Stockholder shall immediately cease and discontinue, and Stockholder shall
ensure that his Representatives immediately cease and discontinue, any existing
discussions with any Person that relate to any Acquisition Proposal.
6. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder hereby
represents and warrants to Parent as follows:
6.1 AUTHORIZATION, ETC. Stockholder has the absolute and unrestricted
right, power, authority and capacity to execute and deliver this Agreement and
the Proxy and to perform his obligations hereunder and thereunder. This
Agreement and the Proxy have been duly executed and delivered by Stockholder and
constitute legal, valid and binding obligations of Stockholder, enforceable
against Stockholder in accordance with their terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
6.2 NO CONFLICTS OR CONSENTS.
(a) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not: (i) conflict with or violate any law, rule,
regulation, order, decree or judgment applicable to Stockholder or by which
he or any of his properties is or may be bound or affected; or (ii) result
in or constitute (with or without notice or lapse of time) any breach of or
default under, or give to any other Person (with or without notice or lapse
of time) any right of termination, amendment, acceleration or cancellation
of, or result (with or without notice or lapse of time) in the creation of
any encumbrance or restriction on any of the Subject Securities pursuant to,
any contract to which Stockholder is a party or by which Stockholder or any
of his affiliates or properties is or may be bound or affected.
(b) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not, require any consent or approval of any Person.
6.3 TITLE TO SECURITIES. As of the date of this Agreement: (a) Stockholder
holds of record (free and clear of any encumbrances or restrictions) the number
of outstanding shares of Company Common Stock set forth under the heading
"Shares Held of Record" on the signature page hereof; (b) Stockholder holds
(free and clear of any encumbrances or restrictions) the options, warrants and
other rights to acquire shares of Company Common Stock set forth under the
heading "Options and Other Rights" on the signature page hereof; (c) Stockholder
Owns the additional securities of the Company set forth under the heading
"Additional Securities Beneficially Owned" on the signature page hereof; and (d)
Stockholder does not directly or indirectly Own any shares of capital stock or
other securities of the Company, or any option, warrant or other right to
acquire (by purchase, conversion or otherwise) any shares of capital stock or
other securities of the Company, other than the shares and options, warrants and
other rights set forth on the signature page hereof.
C-1-3
<PAGE>
6.4 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Agreement are accurate in all respects as of the date of this
Agreement, will be accurate in all respects at all times through the Expiration
Date and will be accurate in all respects as of the date of the consummation of
the Merger as if made on that date.
7. MISCELLANEOUS.
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties, covenants and agreements made by Stockholder in
this Agreement shall survive (i) the consummation of the Merger, (ii) any
termination of the Merger Agreement and (iii) the Expiration Date.
7.2 INDEMNIFICATION. Stockholder shall hold harmless and indemnify Parent
and Parent's affiliates from and against, and shall compensate and reimburse
Parent and Parent's affiliates for, any loss, damage, claim, liability, fee
(including attorneys' fees), demand, cost or expense (regardless of whether or
not such loss, damage, claim, liability, fee, demand, cost or expense relates to
a third-party claim) that is directly or indirectly suffered or incurred by
Parent or any of Parent's affiliates, or to which Parent or any of Parent's
affiliates otherwise becomes subject, and that arises directly or indirectly
from, or relates directly or indirectly to any inaccuracy in or breach of any
representation, warranty, covenant or obligation of Stockholder contained in
this Agreement or in the Proxy.
7.3 EXPENSES. All costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such costs and expenses.
7.4 NOTICES. Any notice or other communication required or permitted to be
delivered to Parent or Stockholder under this Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
if to Stockholder:
at the address or facsimile phone number set forth below
Stockholder's signature on the signature page hereof
WITH A COPY TO:
Saul, Ewing, Remick & Saul LLP
1055 Westlakes Drive, Suite 150
Berwyn, PA 19312
Attn: David S. Antzis
Fax:(610) 408-4401
if to Parent:
First Consulting Group, Inc.
111 W. Ocean Boulevard, 4th Floor
Long Beach, CA 90802
Attn: Luther J. Nussbaum
Facsimile: (562) 432-1932
WITH A COPY TO:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Patrick A. Pohlen
Fax: (650) 849-7400
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<PAGE>
7.5 SEVERABILITY. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
7.6 ENTIRE AGREEMENT. This Agreement, the Proxy, and any other documents
delivered by the parties in connection herewith constitute the entire agreement
between the parties with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings between the parties with
respect thereto.
7.7 ASSIGNMENT; BINDING EFFECT. Except as provided herein, neither this
Agreement nor any of the interests or obligations hereunder may be assigned or
delegated by Stockholder and any attempted or purported assignment or delegation
of any of such interests or obligations shall be void. Subject to the preceding
sentence, this Agreement shall be binding upon Stockholder and his heirs,
estate, executors, personal representatives, successors and assigns, and shall
inure to the benefit of Parent and its successors and assigns. Without limiting
any of the restrictions set forth in Section 2 or elsewhere in this Agreement,
this Agreement shall be binding upon any Person to whom any Subject Securities
are transferred. Nothing in this Agreement is intended to confer on any Person
(other than Parent and its successors and assigns) any rights or remedies of any
nature.
7.8 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the Proxy was
not performed in accordance with its specific terms or was otherwise breached.
Stockholder agrees that, in the event of any breach or threatened breach by
Stockholder of any covenant or obligation contained in this Agreement or in the
Proxy, Parent shall be entitled (in addition to any other remedy that may be
available to it, including monetary damages) to seek and obtain (a) a decree or
order of specific performance to enforce the observance and performance of such
covenant or obligation, and (b) an injunction restraining such breach or
threatened breach.
7.9 NON-EXCLUSIVITY. The rights and remedies of Parent under this
Agreement are not exclusive of or limited by any other rights or remedies which
it may have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative). Nothing in this Agreement shall limit
any of Stockholder's obligations, or the rights or remedies of Parent, under any
Affiliate Agreement between Parent and Stockholder; and nothing in any such
Affiliate Agreement shall limit any of Stockholder's obligations, or any of the
rights or remedies of Parent, under this Agreement.
7.10 GOVERNING LAW. This Agreement and the Proxy shall be construed in
accordance with, and governed in all respects by, the laws of the State of
Pennsylvania (without giving effect to principles of conflicts of laws).
7.11 COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
7.12 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
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<PAGE>
7.13 ATTORNEYS' FEES. If any legal action or other legal proceeding
relating to this Agreement or the enforcement of any provision of this Agreement
is brought against Stockholder, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
7.14 WAIVER. No failure on the part of Parent to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of
Parent in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy. Parent shall not be deemed to have waived any claim
available to Parent arising out of this Agreement, or any power, right,
privilege or remedy of Parent under this Agreement, unless the waiver of such
claim, power, right, privilege or remedy is expressly set forth in a written
instrument duly executed and delivered on behalf of Parent; and any such waiver
shall not be applicable or have any effect except in the specific instance in
which it is given.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this COMPANY VOTING
AGREEMENT to be executed as of the date first written above.
FIRST CONSULTING GROUP, INC.
Signed: ______________________________
Printed Name: ________________________
Title: _______________________________
STOCKHOLDER
Signed: ______________________________
Printed Name: ________________________
Address: _____________________________
______________________________________
______________________________________
Facsimile: ___________________________
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
</TABLE>
VOTING AGREEMENT SIGNATURE PAGE
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<PAGE>
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder of INTEGRATED SYSTEMS CONSULTING GROUP, INC., a
Pennsylvania corporation (the "COMPANY"), hereby irrevocably (to the fullest
extent permitted by law) appoints and constitutes James A. Reep, Luther J.
Nussbaum and Thomas A. Reep, and First Consulting Group, Inc., a Delaware
corporation ("Parent"), and each of them, the attorneys and proxies of the
undersigned with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to (i) the outstanding shares of
capital stock of the Company owned of record by the undersigned as of the date
of this proxy, which shares are specified on the final page of this proxy, and
(ii) any and all other shares of capital stock of the Company which the
undersigned may acquire on or after the date hereof. (The shares of the capital
stock of the Company referred to in clauses "(i)" and "(ii)" of the immediately
preceding sentence are collectively referred to as the "SHARES.") Upon the
execution hereof, all prior proxies given by the undersigned with respect to any
of the Shares are hereby revoked, and the undersigned agrees that no subsequent
proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between
Parent and the undersigned (the "VOTING AGREEMENT"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Foxtrot Acquisition
Sub, Inc. and the Company (the "MERGER AGREEMENT").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Merger Agreement or the effective time of the merger
contemplated thereby (the "MERGER") at any meeting of the stockholders of the
Company, however called, or in connection with any solicitation of written
consents from stockholders of the Company, in favor of the approval and adoption
of the Merger Agreement and the approval of the Merger, and in favor of each of
the other actions contemplated by the Merger Agreement.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
VOTING AGREEMENT
C-1-8
<PAGE>
This proxy shall terminate upon the earlier of the valid termination of the
Merger Agreement or the effective time of the Merger.
Dated: September 9, 1998
--------------------------------------
Signed
--------------------------------------
Printed Name
Number of shares of common stock of
INTEGRATED SYSTEMS CONSULTING GROUP,
INC. owned of record as of the date of
this proxy:
--------------------------------------
IRREVOCABLE PROXY
C-1-9
<PAGE>
APPENDIX C-2
PARENT VOTING AGREEMENT
This Voting Agreement is entered into as of September 9, 1998, by and
between INTEGRATED SYSTEMS CONSULTING GROUP, INC., a Pennsylvania corporation
("COMPANY"), FIRST CONSULTING GROUP, INC., a Delaware corporation ("PARENT"),
and the undersigned stockholder ("STOCKHOLDER").
RECITALS
WHEREAS, Stockholder is a stockholder of Parent.
WHEREAS, Parent, Foxtrot Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and Company, are entering into
an Agreement and Plan of Merger and Reorganization of even date herewith (the
"MERGER AGREEMENT") which provides (subject to the conditions set forth therein)
for the merger of Merger Sub with and into Company (the "MERGER").
NOW, THEREFORE, in order to induce Company to enter into the Merger
Agreement and consummate the transactions contemplated thereby, and for other
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged by Stockholder), Stockholder hereby covenants and agrees as
follows:
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
1. CERTAIN DEFINITIONS.
For purposes of this Agreement:
(a) "PARENT COMMON STOCK" shall mean the common stock, par value $.001
per share, of Parent.
(b) "EXPIRATION DATE" shall mean the earlier of (i) the date upon which
the Merger Agreement is validly terminated pursuant to Section 8 thereof, or
(ii) the date upon which the Merger becomes effective in accordance with the
terms and provisions of the Merger Agreement.
(c) Stockholder shall be deemed to "OWN" or to have acquired "OWNERSHIP"
of a security if Stockholder is the "beneficial owner" (within the meaning
of Rule 13d-3 under the Securities Exchange Act of 1934) of such security by
virtue of Stockholder, directly or indirectly, having or sharing voting
power over such security.
(d) "PERSON" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(e) "SUBJECT SECURITIES" shall mean: (i) all securities of Parent
(including all shares of Parent Common Stock and all options, warrants and
other rights to acquire shares of Parent Common Stock) Owned by Stockholder
as of the date of this Agreement; and (ii) all additional securities of
Parent (including all additional shares of Parent Common Stock and all
additional options, warrants and other rights to acquire shares of Parent
Common Stock) of which Stockholder acquires Ownership during the period from
the date of this Agreement through the Expiration Date.
(f) A Person shall be deemed to have a effected a "TRANSFER" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment providing for the sale of, pledge of, encumbrance of, grant of
an option with respect to, transfer of or disposition of such security or
any interest therein.
C-2-1
<PAGE>
2. TRANSFER OF SUBJECT SECURITIES.
2.1 TRANSFEREE OF SUBJECT SECURITIES TO BE BOUND BY THIS
AGREEMENT. Stockholder agrees that, during the period from the date of this
Agreement through the Expiration Date, Stockholder shall not cause or permit any
Transfer of any of the Subject Securities to be effected unless each Person to
which any of such Subject Securities, or any interest in any of such Subject
Securities, is or may be transferred shall have: (a) executed a counterpart of
this Agreement (with such modifications as Company may reasonably request); and
(b) agreed in writing to hold such Subject Securities (or interest in such
Subject Securities) subject to all of the terms and provisions of this
Agreement.
2.2 TRANSFER OF VOTING RIGHTS. Stockholder agrees that, during the period
from the date of this Agreement through the Expiration Date, Stockholder shall
not deposit (or permit the deposit of) any Subject Securities in a voting trust
or grant any proxy or enter into any voting agreement or similar agreement in
contravention of the obligations of Stockholder under this Agreement with
respect to any of the Subject Securities.
3. VOTING OF SHARES.
3.1 VOTING AGREEMENT. Stockholder agrees that, during the period from the
date of this Agreement through the Expiration Date:
(a) at any meeting of Stockholders of Parent, however called, and at
every adjournment thereof, Stockholder shall (unless otherwise directed in
writing by Company) cause all outstanding shares of Parent Common Stock that
are Owned by Stockholder as of the record date fixed for such meeting to be
voted in favor of the issuance of Parent Common Stock in connection with the
Merger, and in favor of each of the other actions contemplated by the Merger
Agreement; and
(b) in the event written consents are solicited or otherwise sought from
Stockholders of Parent with respect to the approval or adoption of the
Merger Agreement, with respect to the approval of the Merger or with respect
to any of the other actions contemplated by the Merger Agreement,
Stockholder shall (unless otherwise directed in writing by Company) cause to
be executed, with respect to all shares of Parent Common Stock that are
Owned by Stockholder as of the record date fixed for the consent to the
proposed action, a written consent or written consents to such proposed
action.
3.2 PROXY; FURTHER ASSURANCES.
(a) Contemporaneously with the execution of this Agreement: (i)
Stockholder shall deliver to Company a proxy in the form attached to this
Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law, with respect to the shares referred to therein (the
"PROXY"); and (ii) Stockholder shall cause to be delivered to Company an
additional proxy (in the form attached hereto as Exhibit A) executed on
behalf of the record owner of any outstanding shares of Parent Common Stock
that are owned beneficially (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934), but not of record, by Stockholder.
(b) From time to time and without additional consideration, Stockholder
shall execute and deliver, or cause to be executed and delivered, such
additional transfers, assignments, endorsements, proxies, consents and other
instruments, and shall take such further actions, as Company may request for
the purpose of carrying out and furthering the intent of this Agreement.
C-2-2
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
Stockholder hereby represents and warrants to Company as follows:
4.1 AUTHORIZATION, ETC. Stockholder has the absolute and unrestricted
right, power, authority and capacity to execute and deliver this Agreement and
the Proxy and to perform his obligations hereunder and thereunder. This
Agreement and the Proxy have been duly executed and delivered by Stockholder and
constitute legal, valid and binding obligations of Stockholder, enforceable
against Stockholder in accordance with their terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
4.2 NO CONFLICTS OR CONSENTS.
(a) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not: (i) conflict with or violate any order, decree or
judgment applicable to Stockholder or by which he or any of his properties
is or may be bound or affected; or (ii) result in or constitute (with or
without notice or lapse of time) any breach of or default under, or give to
any other Person (with or without notice or lapse of time) any right of
termination, amendment, acceleration or cancellation of, or result (with or
without notice or lapse of time) in the creation of any encumbrance or
restriction on any of the Subject Securities pursuant to, any contract to
which Stockholder is a party or by which Stockholder or any of his
affiliates or properties is or may be bound or affected.
(b) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not, require any consent or approval of any Person.
4.3 TITLE TO SECURITIES. As of the date of this Agreement: (a) Stockholder
holds of record (free and clear of any encumbrances or restrictions that will
restrict or interfere in any way with the actions contemplated hereby or
Stockholder's obligations hereunder) the number of outstanding shares of Parent
Common Stock set forth under the heading "Shares Held of Record" on the
signature page hereof; (b) Stockholder holds (free and clear of any encumbrances
or restrictions that will restrict or interfere in any way with the actions
contemplated hereby or Stockholder's obligations hereunder) the options,
warrants and other rights to acquire shares of Parent Common Stock set forth
under the heading "Options and Other Rights" on the signature page hereof; (c)
Stockholder Owns the additional securities of Parent set forth under the heading
"Additional Securities Beneficially Owned" on the signature page hereof; and (d)
Stockholder does not directly or indirectly Own any shares of capital stock or
other securities of Parent, or any option, warrant or other right to acquire (by
purchase, conversion or otherwise) any shares of capital stock or other
securities of Parent, other than the shares and options, warrants and other
rights set forth on the signature page hereof.
4.4 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Agreement are accurate in all respects as of the date of this
Agreement, will be accurate in all respects at all times through the Expiration
Date and will be accurate in all respects as of the date of the consummation of
the Merger as if made on that date except that Stockholder's beneficial or
record ownership of securities as represented in Section 6.3 hereof may differ
as of the Expiration Date in the event of acquisitions or Transfers of
securities not prohibited by the terms of this Agreement.
5. MISCELLANEOUS.
5.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties, covenants and agreements made by Stockholder in
this Agreement shall survive the Expiration Date.
C-2-3
<PAGE>
5.2 INDEMNIFICATION. Parent shall hold harmless and indemnify Company and
Company's affiliates from and against, and shall compensate and reimburse
Company and Company's affiliates for, any loss, damage, claim, liability, fee
(including reasonable attorneys' fees), demand, cost or expense (regardless of
whether or not such loss, damage, claim, liability, fee, demand, cost or expense
relates to a third-party claim) that is directly or indirectly suffered or
incurred by Company or any of Company's affiliates, or to which Company or any
of Company's affiliates otherwise becomes subject, and that arises directly or
indirectly from, or relates directly or indirectly to any inaccuracy in or
breach of any representation, warranty, covenant or obligation of Stockholder
contained in this Agreement or in the Proxy.
5.3 EXPENSES. All costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such costs and expenses.
5.4 NOTICES. Any notice or other communication required or permitted to be
delivered under this Agreement shall be in writing and shall be deemed properly
delivered, given and received when delivered (by hand, by registered mail, by
courier or express delivery service or by facsimile confirmation obtained) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
IF TO STOCKHOLDER:
at the address or facsimile phone number set forth below
Stockholder's signature on the signature page hereof
WITH A COPY TO:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: Patrick A. Pohlen
Fax: (650) 849-7400
IF TO COMPANY:
Integrated Systems Consulting Group, Inc.
575 East Swedesford Road
Wayne, PA 19087
Attn: Thomas Olenzak
Fax: (610) 989-7050
WITH A COPY TO:
Saul, Ewing, Remick & Saul LLP
1055 Westlakes Drive, Suite 150
Berwyn, PA 19312
Attn: David S. Antzis
Fax: (610) 408-4401
5.5 SEVERABILITY. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall
C-2-4
<PAGE>
not affect the validity or enforceability of the remainder of such provision or
the validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable from
every other part of such provision.
5.6 ENTIRE AGREEMENT. This Agreement, the Proxy, and any other documents
delivered by the parties in connection herewith constitute the entire agreement
between the parties with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings between the parties with
respect thereto.
5.7 ASSIGNMENT; BINDING EFFECT. Except as provided herein, neither this
Agreement nor any of the interests or obligations hereunder may be assigned or
delegated by Stockholder and any attempted or purported assignment or delegation
of any of such interests or obligations shall be void. Subject to the preceding
sentence, this Agreement shall be binding upon Stockholder and his heirs,
estate, executors, personal representatives, successors and assigns, and shall
inure to the benefit of Company and its successors and assigns. This Agreement
shall be binding upon any Person to whom any Subject Securities are transferred
to the extent provided in Section 2 hereof. Nothing in this Agreement is
intended to confer on any Person (other than Company and its successors and
assigns) any rights or remedies of any nature.
5.8 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the Proxy was
not performed in accordance with its specific terms or was otherwise breached.
Stockholder agrees that, in the event of any breach or threatened breach by
Stockholder of any covenant or obligation contained in this Agreement or in the
Proxy, Company shall be entitled (in addition to any other remedy that may be
available to it, including monetary damages) to seek and obtain (a) a decree or
order of specific performance to enforce the observance and performance of such
covenant or obligation, and (b) an injunction restraining such breach or
threatened breach.
5.9 NON-EXCLUSIVITY. The rights and remedies of Company under this
Agreement are not exclusive of or limited by any other rights or remedies which
it may have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative). Nothing in this Agreement shall limit
any of Stockholder's obligations, or the rights or remedies of Company, under
any Affiliate Agreement between Company and Stockholder; and nothing in any such
Affiliate Agreement shall limit any of Stockholder's obligations, or any of the
rights or remedies of Company, under this Agreement.
5.10 GOVERNING LAW. This Agreement and the Proxy shall be construed in
accordance with, and governed in all respects by, the laws of the State of
California (without giving effect to principles of conflicts of laws).
5.11 COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
5.12 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
5.13 ATTORNEYS' FEES. If any legal action or other legal proceeding
relating to this Agreement or the enforcement of any provision of this Agreement
is brought against Stockholder, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
5.14 WAIVER. No failure on the part of Company to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of
Company in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further
C-2-5
<PAGE>
exercise thereof or of any other power, right, privilege or remedy. Company
shall not be deemed to have waived any claim available to Company arising out of
this Agreement, or any power, right, privilege or remedy of Company under this
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of Company; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
[THIS SPACE INTENTIONALLY LEFT BLANK]
C-2-6
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this PARENT VOTING AGREEMENT
to be executed as of the date first written above.
INTEGRATED SYSTEMS CONSULTING GROUP,
INC.
Signed: ______________________________
Printed Name: ________________________
Title: _______________________________
FIRST CONSULTING GROUP, INC.
Signed: ______________________________
Printed Name: ________________________
Title: _______________________________
STOCKHOLDER
Signed: ______________________________
Printed Name: ________________________
Address: _____________________________
______________________________________
______________________________________
Facsimile: ___________________________
<TABLE>
<CAPTION>
ADDITIONAL SECURITIES
SHARES HELD OF RECORD OPTIONS AND OTHER RIGHTS BENEFICIALLY OWNED
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
</TABLE>
C-2-7
<PAGE>
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder of FIRST CONSULTING GROUP, INC. a Delaware
corporation ("PARENT"), hereby irrevocably (to the fullest extent permitted by
law) appoints and constitutes David S. Lipson, and Integrated Systems Consulting
Group, Inc., a Pennsylvania corporation (the "COMPANY"), and each of them, the
attorneys and proxies of the undersigned with full power of substitution and
resubstitution, to the full extent of the undersigned's rights with respect to
(i) the outstanding shares of capital stock of Parent owned of record by the
undersigned as of the date of this proxy, which shares are specified on the
final page of this proxy, and (ii) any and all other shares of capital stock of
Parent which the undersigned may acquire on or after the date hereof. (The
shares of the capital stock of Parent referred to in clauses "(i)" and "(ii)" of
the immediately preceding sentence are collectively referred to as the
"SHARES.") Upon the execution hereof, all prior proxies given by the undersigned
with respect to any of the Shares are hereby revoked, and the undersigned agrees
that no subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between the
Company and the undersigned (the "VOTING AGREEMENT"), and is granted in
consideration of the Company entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Foxtrot Acquisition
Sub, Inc. and the Company (the "MERGER AGREEMENT").
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Merger Agreement or the effective time of the merger
contemplated thereby (the "MERGER") at any meeting of the stockholders of
Parent, however called, or in connection with any solicitation of written
consents from stockholders of Parent, in favor of the approval and adoption of
the Merger Agreement and the approval of the Merger, and in favor of each of the
other actions contemplated by the Merger Agreement.
The undersigned may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the undersigned (including any
transferee of any of the Shares).
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
This proxy shall terminate upon the earlier of the valid termination of the
Merger Agreement or the effective time of the Merger.
Dated: September 9, 1998 _________________________________
Signed
______________________________________
Printed Name
Number of shares of common stock of
First Consulting Group, Inc. owned of
record as of the date of this proxy:
______________________________________
C-2-8
<PAGE>
APPENDIX D-1
COMPANY AFFILIATE AGREEMENT
THIS COMPANY AFFILIATE AGREEMENT (this "AGREEMENT") is dated as of September
9, 1998, by and between FIRST CONSULTING GROUP, INC., a Delaware corporation
("PARENT"), INTEGRATED SYSTEMS CONSULTING GROUP, INC., a Pennsylvania
corporation ("COMPANY"), and the undersigned affiliate ("AFFILIATE").
RECITALS
WHEREAS, Affiliate is a stockholder of Company.
WHEREAS, Parent, Foxtrot Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and Company have entered into
an Agreement and Plan of Merger and Reorganization dated as of September 9, 1998
(the "MERGER AGREEMENT"), providing for the merger of Merger Sub with and into
Company (the "MERGER"). The Merger Agreement contemplates that, upon
consummation of the Merger, (i) the holders of the common stock of Company
("COMPANY COMMON STOCK") will receive shares of common stock of Parent ("PARENT
COMMON STOCK") in exchange for their shares of Company Common Stock and (ii)
Company will become a wholly-owned subsidiary of Parent. It is accordingly
contemplated that Affiliate will receive shares of Parent Common Stock in the
Merger.
WHEREAS, Affiliate understands that the Parent Common Stock being issued in
the Merger will be issued pursuant to a registration statement on Form S-4 and
that Affiliate may be deemed to be an "affiliate" of Company, as the term
"affiliate" is used (i) for purposes of paragraphs (c) and (d) of Rule 145
("RULE 145") of the General Rules and Regulations of the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and (ii) in the SEC's Accounting Series Releases 130 and 135,
and, as such, Affiliate may only transfer, sell or dispose of such Parent Common
Stock in accordance with this Affiliate Agreement and Rule 145.
WHEREAS, it is a condition to the consummation of the Merger pursuant to the
Merger Agreement that the independent accounting firms that audit the annual
financial statements of Parent and Company will have delivered the written
concurrences with the conclusions of management of Parent and Company to the
effect that the Merger will be accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16.
AGREEMENT
NOW, THEREFORE, in order to induce Parent and Company to consummate the
transactions contemplated by the Merger Agreement, and for other valuable
consideration (the receipt and sufficiency of which are hereby acknowledged by
Affiliate), Affiliate hereby covenants and agrees as follows:
1. REPRESENTATIONS AND WARRANTIES. Affiliate represents and warrants to
Parent as follows:
(a) Affiliate is the holder and "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, as amended) of the number
of shares of Company Common Stock set forth under Affiliate's signature
below (the "COMPANY SHARES"), and Affiliate has good and valid title to
Company Shares, free and clear of any liens, pledges, security interests,
adverse claims, equities, options, proxies, charges, encumbrances or
restrictions of any nature.
(b) Affiliate has carefully read this Agreement, and has discussed with
Affiliate's own independent counsel to the extent Affiliate felt necessary
the limitations imposed on Affiliate's ability to sell, transfer or
otherwise dispose of the shares of Parent Common Stock that Affiliate is to
receive in the Merger (the "PARENT SHARES"). Affiliate fully understands the
limitations this Agreement places upon Affiliate's ability to sell, transfer
or otherwise dispose of the Parent Shares.
D-1-1
<PAGE>
(c) Affiliate understands that the representations, warranties and
covenants set forth herein will be relied upon by Parent, Company, and their
respective affiliates, counsel and accounting firms for purposes of
determining Parent's eligibility to account for the Merger as a "pooling of
interests," and that substantial losses and damages may be incurred by these
persons if Affiliate's representations, warranties or covenants are
breached.
2. PROHIBITION AGAINST TRANSFER. In addition to the restrictions set forth
elsewhere herein, Affiliate agrees that Affiliate shall not effect any sale,
transfer or other disposition of the Parent Shares unless:
(a) such sale, transfer or other disposition is made in conformity with
the volume and other requirements of Rule 145 under the Securities Act, as
evidenced by a broker's letter and a representation letter executed by
Affiliate (reasonably satisfactory in form and content to Parent), each
stating that such requirements have been met;
(b) counsel reasonably satisfactory to Parent shall have advised Parent
in a written opinion letter (reasonably satisfactory in form and content to
Parent), upon which Parent may rely, that such sale, transfer or other
disposition will be exempt from registration under the Securities Act;
(c) such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Securities Act; or
(d) an authorized representative of the SEC shall have rendered written
advice to Affiliate to the effect that the SEC would take no action, or that
the staff of the SEC would not recommend that the SEC take action, with
respect to such proposed sale, transfer or other disposition, and a copy of
such written advice and all other related communications with the SEC shall
have been delivered to Parent.
3. STOP TRANSFER INSTRUCTIONS; LEGEND. Affiliate acknowledges and agrees
that (a) stop transfer instructions will be given to Parent's transfer agent
with respect to the Parent Shares, and (b) each certificate representing any of
such shares of Parent Common Stock or any substitutions thereof shall bear a
legend (together with any other legend or legends required by applicable state
securities laws or otherwise), stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT
OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED
OR HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH
RULE AND IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED AS OF
SEPTEMBER 9, 1998, BETWEEN THE REGISTERED HOLDER FIRST CONSULTING
GROUP, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF FIRST CONSULTING GROUP, INC.
4. COVENANTS RELATED TO POOLING OF INTERESTS. In accordance with SEC Staff
Accounting Bulletin No. 65 ("SAB 65"), during the period contemplated by SAB 65,
until the earlier of (i) Parent's public announcement of financial results
covering at least 30 days of combined operations of Parent and Company or (ii)
the Merger Agreement is terminated in accordance with its terms, Affiliate will
not sell, exchange, transfer, pledge, distribute, or otherwise dispose of or
grant any option, establish any "short" or put-equivalent position with respect
to or enter into any similar transaction (through derivatives or otherwise)
intended or having the effect, directly or indirectly, to reduce its risk
relative to: (i) any shares of Company Common Stock, except pursuant to and upon
the consummation of the Merger; or (ii) any shares of Parent Common Stock
received by Affiliate in the Merger or any shares of Parent Common Stock
received by Affiliate upon exercise of options assumed by Parent in connection
with the Merger. Parent may, at its discretion, cause a restrictive legend
covering the restrictions referred to in this Section 4
D-1-2
<PAGE>
to be placed on Parent Common Stock certificates issued to Affiliate in the
Merger and place a stock transfer notice consistent with the restrictions
referred to in this Section 4 with its transfer agent with respect to such
certificates, provided such restrictive legend shall be removed and/or notice
shall be countermanded promptly upon expiration of the necessity therefor at the
request of Affiliate.
5. PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained
in this Agreement, Affiliate (i) may transfer Affiliate's PRO RATA portion (of
the total number of shares available under the "de minimis" exception referred
to in this clause (i) to all affiliates of Parent and Company) of the "de
minimis" number of shares of Company Common Stock and Parent Common Stock
available for sale in accordance with SEC Staff Accounting Bulletin No. 76 (the
"DE MINIMIS POOL") contingent upon confirmation and approval by legal counsel
for Company and independent auditors to Company and Parent that such transfer
qualifies as within Affiliate's pro rata portion of the De Minimis Pool and does
not otherwise adversely affect the Parent's ability to account for the Merger as
a "pooling of interests" (ii) may (with the written consent of Parent, not to be
unreasonably withheld): (A) transfer shares of Company Common Stock or Parent
Common Stock to Company in payment of the exercise price of options to purchase
Company Common Stock; (B) transfer shares of Parent Common Stock in payment of
the exercise price of options to purchase Parent Common Stock; (C) transfer
shares of Company Common Stock or Parent Common Stock to any organization
qualified under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended, so long as such organization has traditionally been supported by
contributions from the general public (as opposed to being supported largely by
a specific donor); and (D) transfer shares of Company Common Stock or shares of
Parent Common Stock to a trust established for the benefit of Affiliate and/or
for the benefit of one or more members of Affiliate's family, or make a bona
fide gift of shares of Common Stock of Company or shares of Parent Common Stock
to one or more members of Affiliate's family, provided that in the case of a
transfer or gift pursuant to this clause (C) or (D), a transferee of such shares
agrees to be bound by the limitations set forth in this Agreement.
6. SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement was not
performed in accordance with its specific terms or was otherwise breached.
Affiliate agrees that, in the event of any breach or threatened breach by
Affiliate of any covenant or obligation contained in this Agreement, each of
Parent and Company shall be entitled (in addition to any other remedy that may
be available to it, including monetary damages) to seek and obtain (a) a decree
or order of specific performance to enforce the observance and performance of
such covenant or obligation, and (b) an injunction restraining such breach or
threatened breach.
7. INDEPENDENCE OF OBLIGATIONS. The covenants and obligations of Affiliate
set forth in this Affiliate Agreement shall be construed as independent of any
other agreement or arrangement between Affiliate, on the one hand, and Company
or Parent, on the other. The existence of any claim or cause of action by
Affiliate against Company or Parent shall not constitute a defense to the
enforcement of any of such covenants or obligations against Affiliate.
8. NOTICES. Any notice or other communication required or permitted to be
delivered under this Agreement shall be in writing and shall be deemed properly
delivered, given and received when delivered (by hand, by registered mail, by
courier or express delivery service or by facsimile confirmation) to the address
or facsimile telephone number set forth beneath the name of such party below (or
to such other address or facsimile telephone number as such party shall have
specified in a written notice given to the other party):
IF TO PARENT:
First Consulting Group, Inc.
111 W. Ocean Boulevard- 4th Floor
Long Beach, CA 90802
Attn: Luther J. Nussbaum
Fax: (562) 432-1932
D-1-3
<PAGE>
WITH A COPY TO:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attn: Patrick A. Pohlen
Fax: (650) 849-7400
IF TO COMPANY:
Integrated Systems Consulting Group, Inc.
575 East Swedesford Road
Wayne, PA 19087
Attn: Thomas Olenzak
Fax: (610) 989-7050
WITH A COPY TO:
Saul, Ewing, Remick & Saul LLP
1055 Westlakes Drive, Suite 150
Berwyn, PA 19312
Attn: David S. Antzis
Fax: (610) 408-4401
IF TO AFFILIATE:
at the address or facsimile phone number set forth below
Affiliate's signature on the signature page hereof.
WITH A COPY TO:
Saul, Ewing, Remick & Saul LLP
1055 Westlakes Drive, Suite 150
Berwyn, PA 19312
Attn: David S. Antzis
Fax: (610) 408-4401
9. SEVERABILITY. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
10. GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of laws).
11. WAIVER. No failure on the part of Parent or Company to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the part
of Parent or Company in exercising any power, right, privilege or remedy under
this Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any
D-1-4
<PAGE>
other or further exercise thereof or of any other power, right, privilege or
remedy. Neither Parent or Company shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or remedy under
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of the party deemed to be charged; and any such waiver shall
not be applicable or have any effect except in the specific instance in which it
is given.
12. CAPTIONS. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
13. FURTHER ASSURANCES. Affiliate shall execute and/or cause to be
delivered to Parent or Company such instruments and other documents and shall
take such other actions as Parent or Company may reasonably request to
effectuate the intent and purposes of this Agreement.
14. ENTIRE AGREEMENT. This Agreement, the Merger Agreement and any Voting
Agreement or Noncompetition Agreement between Affiliate and Parent or
Irrevocable Proxy executed by Affiliate in favor of Parent constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings between the
parties with respect thereto.
15. NON-EXCLUSIVITY. The rights and remedies of Parent and Company
hereunder are not exclusive of or limited by any other rights or remedies which
Parent may have, whether at law, in equity, by contract or otherwise, all of
which shall be cumulative (and not alternative). Nothing in this Agreement shall
limit any of Affiliate's obligations, or the rights or remedies of Parent or
Company, under any Voting Agreement (including any Irrevocable Proxy contained
therein) or Noncompetition Agreement between Parent and Affiliate; and nothing
in any such Voting Agreement (including any Irrevocable Proxy) or Noncompetition
Agreement shall limit any of Affiliate's obligations, or any of the rights or
remedies of Parent, under this Agreement.
16. AMENDMENTS. This Agreement may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent, Company and Affiliate.
17. BINDING NATURE. This Agreement will be binding upon Affiliate and
Affiliate's representatives, executors, administrators, estate, heirs,
successors and assigns, and shall inure to the benefit of Company, Parent and
their respective successors and assigns.
18. ATTORNEYS' FEES AND EXPENSES. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against Affiliate, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
19. ASSIGNMENT. This Agreement and all obligations of Affiliate hereunder
are personal to Affiliate and may not be transferred or delegated by Affiliate
at any time. Company or Parent may freely assign any or all of its rights under
this Affiliate Agreement, in whole or in part, to any other person or entity
without obtaining the consent or approval of Affiliate.
20. SURVIVAL. Each of the representations, warranties, covenants and
obligations contained in this Agreement shall survive the consummation of the
Merger.
D-1-5
<PAGE>
The undersigned have executed this Agreement as of the date first set forth
above.
<TABLE>
<S> <C>
FIRST CONSULTING GROUP, INC.
By: ------------------------------------
Printed Name: --------------------------
Title: ---------------------------------
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
By: ------------------------------------
Printed Name: --------------------------
Title: ---------------------------------
AFFILIATE:
By: ------------------------------------
Printed Name: --------------------------
Address:
---------------------------------------
-----------------------------------------
-----------------------------------------
Facsimile:
--------------------------------------
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
STOCK BENEFICIALLY OWNED BY AFFILIATE:
----------------------------------------- shares
of Common Stock
----------------------------------------- shares
of Common Stock issuable upon exercise of
outstanding options
</TABLE>
AFFILIATE AGREEMENT SIGNATURE PAGE
D-1-6
<PAGE>
APPENDIX D-2
PARENT AFFILIATE AGREEMENT
THIS PARENT AFFILIATE AGREEMENT (this "AGREEMENT") is dated as of September
9, 1998, by and between FIRST CONSULTING GROUP, INC., a Delaware corporation
("PARENT"), INTEGRATED SYSTEMS CONSULTING GROUP, INC., a Pennsylvania
corporation (the "COMPANY"), and the undersigned affiliate of Parent
("AFFILIATE").
RECITALS
WHEREAS, Affiliate is a stockholder of Parent.
WHEREAS, Parent, Foxtrot Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and the Company have entered
into an Agreement and Plan of Merger and Reorganization dated as of September 9,
1998 (the "MERGER AGREEMENT"), providing for the merger of Merger Sub with and
into the Company (the "MERGER"). The Merger Agreement contemplates that, upon
consummation of the Merger, (i) the holders of the common stock of the Company
("COMPANY COMMON STOCK") will receive shares of common stock of Parent ("PARENT
COMMON STOCK") in exchange for their shares of Company Common Stock and (ii) the
Company will become a wholly-owned subsidiary of Parent.
WHEREAS, pursuant to the Merger Agreement it is a condition to consummation
of the Merger that Parent register shares of Parent Common Stock issued to
certain stockholders of the Company in connection with the Merger pursuant to
the terms of a Registration Rights Agreement in the form of Exhibit I to the
Merger Agreement.
WHEREAS, it is a condition to the consummation of the Merger pursuant to the
Merger Agreement that the independent accounting firms that audit the annual
financial statements of Parent and the Company will have delivered the written
concurrences with the conclusions of management of Parent and the Company to the
effect that the Merger will be accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16.
AGREEMENT
NOW, THEREFORE, in order to induce Parent and the Company to consummate the
transactions contemplated by the Merger Agreement, and for other valuable
consideration (the receipt and sufficiency of which are hereby acknowledged by
Affiliate), Affiliate hereby covenants and agrees as follows:
1. REPRESENTATIONS AND WARRANTIES. Affiliate represents and warrants to
Parent as follows:
(a) Affiliate is the holder and "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, as amended) of the number
of shares of the Parent Common Stock set forth under Affiliate's signature
below (the "PARENT SHARES"), and Affiliate has good and valid title to the
Parent Shares, free and clear of any liens, pledges, security interests,
adverse claims, equities, options, proxies, charges, encumbrances or
restrictions of any nature.
(b) Affiliate has carefully read this Agreement, and has discussed with
Affiliate's own independent counsel to the extent Affiliate felt necessary
the limitations imposed on Affiliate's ability to sell, transfer or
otherwise dispose of the shares of Parent Common Stock. Affiliate fully
understands the limitations this Agreement places upon Affiliate's ability
to sell, transfer or otherwise dispose of the Parent Shares.
(c) Affiliate understands that the representations, warranties and
covenants set forth herein will be relied upon by Parent, the Company, and
their respective affiliates, counsel and accounting firms for purposes of
determining Parent's eligibility to account for the Merger as a "pooling of
interests,"
D-2-1
<PAGE>
and that substantial losses and damages may be incurred by these persons if
Affiliate's representations, warranties or covenants are breached.
2. COVENANTS RELATED TO POOLING OF INTERESTS. In accordance with SEC Staff
Accounting Bulletin No. 65 ("SAB 65"), during the period contemplated by SAB 65,
until the earlier of (i) Parent's public announcement of financial results
covering at least thirty (30) days of combined operations of Parent and the
Company or (ii) the Merger Agreement is terminated in accordance with its terms,
Affiliate will not sell, exchange, transfer, pledge, distribute, or otherwise
dispose of or grant any option, establish any "short" or put-equivalent position
with respect to or enter into any similar transaction (through derivatives or
otherwise) intended or having the effect, directly or indirectly, to reduce its
risk relative to any Parent shares. Parent may, at its discretion, place a stock
transfer notice consistent with the restrictions referred to in this Section 2
with its transfer agent with respect to such certificates, provided such
restrictive legend shall be removed and/or notice shall be countermanded
promptly upon expiration of the necessity therefor at the request of Affiliate.
3. PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained
in this Agreement, Affiliate may (i) transfer a "de minimis" amount of Parent
Common Stock as contemplated by SEC Staff Accounting Bulletin No. 76 contingent
upon consultation with legal counsel for Parent as to whether such transfer
qualifies as "de minimis" and (ii) may (with the written consent of Parent, not
to be unreasonably withheld): (A) transfer shares of Parent Common Stock in
payment of the exercise price of options to purchase Parent Common Stock; (B)
transfer shares of Parent Common Stock to any organization qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, so long as
such organization has traditionally been supported by contributions from the
general public (as opposed to being supported largely by a specific donor); and
(C) transfer shares of Parent Common Stock to a trust established for the
benefit of Affiliate and/or for the benefit of one or more members of
Affiliate's family, or make a bona fide gift of Parent Common Stock to one or
more members of Affiliate's family, provided that in the case of a transfer or
gift pursuant to this clause (B) or (C), a transferee of such shares agrees to
be bound by the limitations set forth in this Agreement.
4. SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement was not
performed in accordance with its specific terms or was otherwise breached.
Affiliate agrees that, in the event of any breach or threatened breach by
Affiliate of any covenant or obligation contained in this Agreement, Parent
shall be entitled (in addition to any other remedy that may be available to it,
including monetary damages) to seek and obtain (a) a decree or order of specific
performance to enforce the observance and performance of such covenant or
obligation, and (b) an injunction restraining such breach or threatened breach.
5. INDEPENDENCE OF OBLIGATIONS. The covenants and obligations of Affiliate
set forth in this Affiliate Agreement shall be construed as independent of any
other agreement or arrangement between Affiliate, on the one hand, and Parent,
on the other. The existence of any claim or cause of action by Affiliate against
Parent shall not constitute a defense to the enforcement of any of such
covenants or obligations against Affiliate.
6. NOTICES. Any notice or other communication required or permitted to be
delivered under this Agreement shall be in writing and shall be deemed properly
delivered, given and received when delivered (by hand, by registered mail, by
courier or express delivery service or by facsimile confirmation) to the address
or facsimile telephone number set forth beneath the name of such party below (or
to such other
D-2-2
<PAGE>
address or facsimile telephone number as such party shall have specified in a
written notice given to the other party):
<TABLE>
<S> <C>
IF TO PARENT: FIRST CONSULTING GROUP, INC.
111 W. Ocean Boulevard--4(th) Floor
Long Beach, CA 90802
Attn: Luther J. Nussbaum
Fax: (562) 432-1932
WITH A COPY COOLEY GODWARD LLP
TO: Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attn: Patrick A. Pohlen
Fax: (650) 849-7400
IF TO at the address or facsimile phone number set forth
AFFILIATE: below Affiliate's signature on the signature page
hereof.
</TABLE>
7. SEVERABILITY. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
8. GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of laws).
9. WAIVER. No failure on the part of Parent to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of Parent in
exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy. Parent shall not be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of Parent;
and any such waiver shall not be applicable or have any effect except in the
specific instance in which it is given.
10. CAPTIONS. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
11. FURTHER ASSURANCES. Affiliate shall execute and/or cause to be
delivered to Parent such instruments and other documents and shall take such
other actions as Parent may reasonably request to effectuate the intent and
purposes of this Agreement.
12. ENTIRE AGREEMENT. This Agreement, constitutes the entire agreement
between the parties with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings between the parties with
respect thereto.
D-2-3
<PAGE>
13. NON-EXCLUSIVITY. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may have,
whether at law, in equity, by contract or otherwise, all of which shall be
cumulative (and not alternative).
14. AMENDMENTS. This Agreement may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent and Affiliate.
15. BINDING NATURE. This Agreement will be binding upon Affiliate and
Affiliate's representatives, executors, administrators, estate, heirs,
successors and assigns, and shall inure to the benefit of Parent and its
successors and assigns.
16. ATTORNEYS' FEES AND EXPENSES. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against Affiliate, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
17. ASSIGNMENT. This Agreement and all obligations of Affiliate hereunder
are personal to Affiliate and may not be transferred or delegated by Affiliate
at any time. Parent may freely assign any or all of its rights under this
Affiliate Agreement in whole or in part, to any other person or entity without
obtaining the consent or approval of Affiliate.
18. SURVIVAL. Each of the representations, warranties, covenants and
obligations contained in this Agreement shall survive the consummation of the
Merger.
[THIS SPACE INTENTIONALLY LEFT BLANK]
D-2-4
<PAGE>
The undersigned have executed this Agreement as of the date first set forth
above.
<TABLE>
<S> <C>
FIRST CONSULTING GROUP, INC.
By: ------------------------------------
Printed Name: --------------------------
Title: ---------------------------------
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
By: ------------------------------------
Printed Name: --------------------------
Title: ---------------------------------
AFFILIATE:
By: ------------------------------------
Printed Name: --------------------------
Address:
---------------------------------------
-----------------------------------------
-----------------------------------------
Facsimile:
--------------------------------------
FIRST CONSULTING GROUP, INC., Stock
Beneficially owned by Affiliate:
----------------------------------------- shares
of Common Stock
----------------------------------------- shares
of Common Stock issuable upon exercise of
outstanding options
</TABLE>
PARENT AFFILIATE AGREEMENT SIGNATURE PAGE
D-2-5
<PAGE>
APPENDIX E
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of , 1998, by and among FIRST CONSULTING GROUP, INC., a
Delaware corporation ("PARENT"), and those persons listed on Annex A hereto
(each individually a "HOLDER" and collectively, the "HOLDERS").
RECITALS
WHEREAS, each Holder is a shareholder of Integrated Systems Consulting
Group, Inc., a Pennsylvania corporation (the "Company").
WHEREAS, Parent, Foxtrot Acquisition Sub, Inc., a Delaware corporation and
wholly owned subsidiary of Parent ("MERGER SUB"), and the Company entered into
an Agreement and Plan of Merger and Reorganization dated as of September 9, 1998
(the "REORGANIZATION AGREEMENT") which provides (subject to the conditions set
forth therein) for the merger of Merger Sub with and into the Company (the
"MERGER").
WHEREAS, it is a condition precedent to the closing under the Reorganization
Agreement that the parties hereto enter into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. DEFINITIONS. Terms defined in the Reorganization Agreement and not
otherwise defined herein are used herein as so defined.
(a) "AFFILIATE" shall mean any person directly or indirectly controlling,
controlled by or under common control with such other person.
(b) "CLOSING DATE" shall mean the closing date specified in the
Reorganization Agreement.
(c) "COMMISSION" shall mean the Securities and Exchange Commission, or, if
at any time after the execution of this Agreement such Commission is not
existing and performing the duties now assigned to it under the Exchange Act or
the Securities Act, whichever is the relevant statute for the particular
purpose, then "COMMISSION" shall mean the body performing such duties at such
time.
(d) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, or any
successor thereto, and the rules and regulations promulgated thereunder, all as
the same shall be amended from time to time.
(e) "MERGER" shall mean the merger contemplated by the Reorganization
Agreement and as defined in the Reorganization Agreement.
(f) "PARENT COMMON STOCK" shall mean the Common Stock, par value $.001 per
share, of Parent.
(g) "PERMITTED TRANSFEREE" means (i) the spouse, child or lineal descendant
of a Holder, (ii) any executor, administrator, trustee or beneficiary of a
Holder under his or her will or other instrument taking effect at death or under
applicable laws of inheritance, succession, descent and distribution, (iii) any
trustee of a trust, the sole beneficiary or beneficiaries of which are such
Holder or any person described in (i) or (ii) above.
(h) "PERSON" shall mean an individual, corporation, association,
partnership, joint venture, trust, unincorporated organization, government or
political subdivision thereof or governmental agency.
E-1
<PAGE>
(i) "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act, and the automatic effectiveness or the
declaration or ordering of effectiveness of such registration statement or
document.
(j) "REGISTRABLE SECURITIES" means (i) the shares of Parent Common Stock
issued pursuant to the Reorganization Agreement and held continuously from the
Closing Date by the Holders, and (ii) the shares of Parent Common Stock held by
the Other Holders, except as otherwise provided herein.
(k) "SECURITIES ACT" shall mean the Securities Act of 1933, or any successor
thereto, and the rules, regulations, and forms promulgated thereunder, all as
the same shall be amended from time to time.
2. REGISTRATION RIGHTS.
2.1 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 2.1, if Parent shall receive a
written request from the Holders of at least fifty percent (50%) of the
Registrable Securities then outstanding and owned by the Holders (the
"INITIATING HOLDERS") that Parent file a registration statement under the
Securities Act covering the registration of any amount of Registrable Securities
then outstanding (a "QUALIFIED PUBLIC OFFERING"), then Parent shall, within
fifteen (15) days of the receipt thereof, give written notice of such request to
all Holders, and to certain other holders of Parent Common Stock determined by
Parent ("OTHER HOLDERS"), and subject to the limitations of this Section 2.1,
use commercially reasonable efforts to file a registration statement, as soon as
practicable but in no event later than ninety (90) days after the date of such
written request, registering under the Securities Act all Registrable Securities
that the Holders and Other Holders request to be registered.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise Parent as a part of their request made pursuant to this Section 2.1 and
Parent shall include such information in the written notice referred to in
Section 2.1(a). In such event, the right of any Holder or any Other Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's and Other Holder's participation in such underwriting and the
inclusion of such Holder's and such Other Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders and Other Holders
proposing to distribute their securities through such underwriting shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters mutually selected for such underwriting by Parent and a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 2.1, if the underwriter advises Parent that marketing factors require a
limitation of the number of securities to be underwritten (including Registrable
Securities) or restricts the underwriter's ability to conduct such offering then
Parent shall so advise all Holders and all Other Holders of Registrable
Securities which would otherwise be underwritten pursuant hereto, and the number
of shares that may be included in the underwriting shall be allocated to the
Holders and the Other Holders of Registrable Securities on a PRO RATA basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders) and the Other Holders; PROVIDED, HOWEVER,
that the number of Registrable Securities held by Other Holders to be included
in such underwriting and registration shall not exceed thirty-five percent (35%)
of the total number of shares of Registrable Securities proposed to be
distributed by means of the proposed underwriting; and, PROVIDED, FURTHER, that
the number of Registrable Securities to be allocated to the Holders shall not be
less than 2,000,000 shares of Parent Common Stock unless the number of
Registrable Securities to be included in the proposed underwriting is less than
2,000,000 shares of Parent Common Stock, in which case the entire amount of
Registrable Securities to be included in the proposed underwriting shall be
allocated to the Holders. Any Registrable Securities excluded or withdrawn from
such underwriting shall be withdrawn from the registration.
E-2
<PAGE>
(C) Parent shall not be required to file with the Commission a registration
statement or effect a registration pursuant to this Section 2.1:
(i) during the period contemplated by Commission Staff Accounting
Bulletin No. 65 until Parent's public announcement of financial results
covering at least thirty (30) days of combined operations of Parent and the
Company;
(ii) after the date which is eighteen (18) months after the date of this
Agreement;
(iii) after Parent has effected one (1) registration pursuant to this
Section 2.1, and such registration has been declared or ordered effective;
or
(iv) during any period starting with the date of filing of, and ending
on the date one hundred eighty (180) days following, the effective date of a
registration statement (other than registration statements relating to
employee benefit plans) filed by the Company with the Commission; PROVIDED,
HOWEVER, that Parent agrees that it will note file a registration statement
with the Commission until 90 days after the end of the period described in
clause (i) above.
2.2 PIGGYBACK REGISTRATIONS.
(a) Parent shall notify all Holders and Other Holders of Registrable
Securities in writing at least fifteen (15) days prior to the filing of any
registration statement under the Securities Act for purposes of distributing
securities of Parent by means of an underwritten public offering and will afford
each such Holder and Other Holder an opportunity to include in such registration
statement all or part of such Registrable Securities held by such Holder or
Other Holder. Each Holder and Other Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after the above-described notice from Parent, so
notify Parent in writing. The right of any such Holder or Other Holder to be
included in a registration pursuant to this Section 2.2 shall be conditioned
upon such Holder's or Other Holder's participation in such underwriting and the
inclusion of such Holder's or Other Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders and Other Holders
proposing to distribute their Registrable Securities through such underwriting
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by Parent.
Notwithstanding any other provision of this Agreement, if the underwriter
determines in good faith that marketing factors require a limitation of the
number of shares to be underwritten, the number of shares that may be included
in the underwriting shall be allocated: first, to Parent; and second, to the
Holders and Other Holders of Registrable Securities on a PRO RATA basis based on
the total number of Registrable Securities held by them. No such reduction shall
(i) reduce the securities being offered by Parent for its own account to be
included in the registration and underwriting, or (ii) reduce the amount of
securities of the selling Holders of Registrable Securities included in the
registration below thirty percent (30%) of the total amount of securities
included in such registration, unless such offering registration does not
include shares of any other selling shareholders, including Other Holders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. If any Holder or
Other Holder disapproves of the terms of any such underwriting, such Holder or
Other Holder may elect to withdraw therefrom by written notice to Parent and the
underwriter, delivered at least ten (10) business days prior to the effective
date of the registration statement. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn from the
registration. For any Holder or Other Holder which is a partnership or
corporation, the partners, retired partners and shareholders of such Holder or
Other Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing person shall be
deemed to be a single "Holder" or Other Holder, as the case may be, and any PRO
RATA reduction with respect to such "Holder" or "Other Holder" shall be based
upon the aggregate amount of shares owned by all entities and individuals
included in such "Holder" or "Other Holder," as defined in this sentence. The
Holder's rights and Parent's obligations under this Section 2.2 shall expire on
the third anniversary of this Agreement.
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(b) Parent shall have the right to terminate or withdraw any registration
initiated by it under this Section 2.2 prior to the effectiveness of such
registration whether or not any Holder or Other Holder has elected to include
securities in such registration. The registration expenses of such withdrawn
registration shall be borne by Parent in accordance with Section 3.5 hereof.
3. REGISTRATION PROCEDURES.
3.1 REGISTRATION PROCEDURES PURSUANT TO SECTION 2. In connection with
Parent's obligations to effect the Registration of any Registrable Securities
pursuant to Section 2 hereof, Parent shall:
(a) prepare and file with the Commission the registration statement with
respect to such Registrable Securities required under Section 2.1(a)
provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, Parent will furnish to Holders' and Other
Holders' counsel copies of all such documents proposed to be filed but only
those portions of such documents relating to the Holders and Other Holders
will be subject to the reasonable review of their respective counsel; and
Parent shall use commercially reasonable efforts to cause such registration
statement to become effective as soon as practicable;
(b) prepare and file with the Commission such amendments and supplements
to the registration statement and the prospectus used in connection
therewith as may be necessary to maintain the effectiveness of the
registration statement (for the applicable periods specified in Section 2.1
hereof), and comply with the provisions of the Securities Act with respect
to the disposition of all of the Registrable Securities during such
applicable period in accordance with the intended methods of disposition by
the Holders and Other Holders as set forth in the registration statement;
(c) promptly notify the Holders and Other Holders of the Registrable
Securities being registered and provide copies of all related documents (i)
when a registration statement, the prospectus or any prospectus supplement
or any amendment has been filed, and, with respect to a registration
statement or any post-effective amendment, when the same has become
effective, (ii) of any request by the Commission for amendments or
supplements to a registration statement or the prospectus or for additional
or supplemental information, (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of a registration statement or the
written threat or initiation of any proceedings for that purpose, (iv) of
the receipt by Parent of any notification with respect to the suspension of
the qualification of the Registrable Securities for sale in any jurisdiction
or the written threat or initiation of any proceeding for that purpose, or
(v) at any time when a prospectus is required to be delivered under the
Securities Act in connection with any registration statement, (A) of the
happening of any event as a result of which such registration statement,
prospectus, any prospectus supplement, or any document incorporated by
reference in any of the foregoing contains an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading or (B) that Parent is in
possession of material information that it deems advisable not to disclose
in a registration statement;
(d) make reasonable best efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement or any
post-effective amendment thereto or any state filing made in connection
therewith at the earliest practicable date;
(e) furnish to the Holders and Other Holders of the securities being
sold such number of copies of the registration statement, each such
amendment and supplement thereto (in each case including all exhibits
thereto), the prospectus included in the registration statement and such
other documents as the Holders or Other Holders may reasonably request in
order to facilitate the disposition of the Registrable Securities being
offered;
(f) cause all such Registrable Securities to be listed on each
securities exchange or market system on which the Parent Common Stock is
then listed;
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(g) otherwise use commercially reasonable efforts to comply with all
applicable rules and regulations of the Commission;
(h) use commercially reasonable efforts to (i) register or qualify the
Registrable Securities under such other securities laws or Blue Sky laws of
such jurisdictions as the Holders or Other Holders shall reasonably request,
(ii) keep such registrations or qualifications in effect for so long as each
of the registration statements remains in effect and (iii) take any and all
such actions as may be reasonably necessary or advisable to enable the
Holders and Other Holders of Registrable Securities being sold to consummate
the disposition in such jurisdictions of such Registrable Securities;
PROVIDED, HOWEVER, that Parent shall not be required for any such purpose to
(A) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not otherwise be required to qualify or (B)
consent to general service of process in any such jurisdiction; and
(i) cooperate with the Holders and Other Holders to effect the offering
and to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold under the registration
statement and not bearing any restrictive legends and such other actions as
may be reasonably necessary to complete the offering.
3.2 SUPPLEMENTS; AMENDMENTS. Upon the occurrence of any event contemplated
by Section 3.1(c)(v)(A), Parent shall, as soon as reasonably practicable,
prepare and furnish to each Holder and Other Holder a reasonable number of
copies of a prospectus supplemented or amended so that, as thereafter delivered
to the purchasers of Registrable Securities, such prospectus shall not contain
an untrue statement of a material fact or omit to state a material fact required
to bc stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The Holders and
Other Holders agree that upon receipt of any notice from Parent of the happening
of any event of the kind described in Section 3. l(c)(v)(A), the Holders and
Other Holders shall forthwith discontinue the disposition of the Registrable
Securities, until each Holder and Other Holder receives copies of such amended
or supplemented registration statement or prospectus, and if so directed by
Parent, the Holders and Other Holders shall deliver to Parent all copies, other
than permanent file copies, then in the Holders' or Other Holders' possession of
the prospectus covering such Registrable Securities at the time of receipt of
such notice. The Holders and Other Holders agree that upon receipt of any notice
from Parent of the happening of any circumstance described in Section
3.1(c)(v)(B), the Holders and Other Holders shall forthwith discontinue the
disposition of the Registrable Securities until Parent notifies the Holders and
Other Holders of the ceasing of such circumstances.
3.3 HOLDER INFORMATION. Parent may require each Holder and Other Holder to
furnish to Parent such information regarding the Holders and Other Holders and
the distribution of the Registrable Securities as Parent may from time to time
reasonably request in order to comply with the Securities Act. The Holders and
Other Holders agree to notify Parent as promptly as practicable of any
inaccuracy or change in information previously furnished by them to Parent or of
the happening of any event in either case as a result of which any prospectus
contains an untrue statement of a material fact regarding the Holders or Other
Holders or the distribution of such Registrable Securities or omits to state any
material fact regarding the Holders or the distribution of such Registrable
Securities required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading, and to furnish promptly to Parent any additional information
required to correct or update any previously furnished information or required
so that such prospectus shall not contain with respect to such person or the
distribution of such Registrable Securities an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the circumstances then
existing.
3.4 STOP TRANSFER INSTRUCTIONS; LEGEND. The Holders and Other Holders
agree and understand that, except as contemplated in this Agreement, the sale or
other disposition thereof by the Holders and Other Holders will not be,
registered under the Securities Act or the securities laws of any state and that
such
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shares may be sold or disposed of only in one (1) or more transactions
registered under the Securities Act and, where applicable, such state laws or as
to which an exemption from the registration requirements of the Securities Act
and, where applicable, such state laws is available. The Holders and Other
Holders acknowledge that, except as expressly set forth in this Agreement, the
Holders and Other Holders have no right to require Parent to cause the
registration of any Registrable Securities. The Holders and Other Holders
understand and agree that each certificate representing any Registrable
Securities (each, a "CERTIFICATE") shall be subject to stop transfer
instructions and shall bear a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT
OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED
OR HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH
RULE AND IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED AS OF
SEPTEMBER 9, 1998, BETWEEN THE REGISTERED HOLDER HEREOF FIRST
CONSULTING GROUP, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT
THE PRINCIPAL OFFICES OF FIRST CONSULTING GROUP, INC."
Parent hereby agrees that it will, upon the request of a Holder or Other
Holder, eliminate any stop transfer instructions and any restrictive legend on
any certificates representing the Registrable Securities if (i) in the opinion
of counsel, which counsel and opinion (in form, scope and substance) shall be
reasonably satisfactory to Parent, the Holders or Other Holders are entitled to
sell or dispose of the Registrable Securities represented by such Certificate
without registration or (ii) such shares are herein disposed of by the Holders
or Other Holders under a registration statement pursuant to Section 2 herein and
in compliance with the Securities Act and applicable state securities laws.
3.5 EXPENSES OF REGISTRATION. Parent shall bear and pay all expenses other
than underwriting discounts and commissions relating to Registrable Securities
incurred in connection with each registration, filing or qualification pursuant
to Section 2, including (without limitation) all registration, filing, and
qualification fees, printing, and accounting fees, fees and expenses of
compliance with securities or blue sky laws, fees and disbursements of counsel
for Parent, but Parent shall not pay the fees and disbursements of counsel and
accountants for the Holders and Other Holders. Parent shall not, however, be
required to pay for expenses of any registration proceeding begun pursuant to
Section 2.1, the request of which has been subsequently withdrawn by the
Initiating Holders unless the withdrawal is based upon material adverse
information concerning Parent of which the Initiating Holders were not aware at
the time of such request. If the Holders and Other Holders are required to pay
the registration expenses, such expenses shall be borne by the holders of
securities (including Registrable Securities) requesting such registration in
proportion to the number of shares for which registration was requested.
3.6 DELAY OF REGISTRATION. For a period not to exceed sixty (60) days,
Parent shall not be obligated to prepare and file, or be prevented from delaying
or abandoning, or by written notice to the Holders and Other Holders, may
suspend the use of (and the Holders and Other Holders hereby agree not to use a
registration statement during such period) a registration statement pursuant to
this Agreement at any time when Parent, in its good faith judgment, reasonably
believes:
(i) that the filing thereof at the time requested, or the offering of
Parent Common Stock pursuant thereto, would be seriously detrimental to the
Company and its stockholders or
(ii) (a) that the filing thereof at the time requested, or the offering
of Parent Common Stock pursuant thereto, would materially and adversely
affect (1) a pending or scheduled public offering or private placement of
Parent securities, (2) an acquisition, merger, consolidation or similar
transaction by or of Parent, (3) pre-existing and continuing negotiations,
discussions or pending proposals with respect to any of the foregoing
transactions or (4) the financial condition of Parent in view of the
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disclosure of any pending or threatened litigation, claim, assessment or
governmental investigation which might be required thereby, and (b) that the
failure to disclose any material information with respect to the foregoing
items (1), (2), (3) or (4) would cause a violation of the Securities Act or
the Exchange Act.
In the event Parent, in good faith, reasonably believes that such conditions
are continuing after such sixty (60)-day period, it may, with the consent of the
holders of a majority of the shares of Parent Common Stock subject (or to be
subject) to the registration statement, which consent shall not be unreasonably
withheld, extend such sixty (60)-day period for an additional thirty (30) days.
Any further delay shall require the consent of the holders of all such shares.
3.7 BLACKOUT PERIODS. Notwithstanding any other provision of this
Agreement, the Holders and Other Holders understand that there may be periods
during which the Company's Board of Directors may determine, in good faith, that
it is in the best interest of the Company and its stockholders to defer
disclosure of material non-public information and that during such periods sales
of Registrable Securities and the effectiveness of any registration statement
covering Registrable Securities may be suspended or delayed. Each Holder or
Other Holder of Registrable Securities agrees by acquisition of such Registrable
Securities that upon receipt of any notice from the Company of the development
of any material non-public information, such Holder or Other Holder will
forthwith discontinue such Holder's or Other Holders' disposition of Registrable
Securities pursuant to the registration statement relating to such Registrable
Securities until such Holder's or Other Holders' receipt of copies of an
appropriately supplemented or amended prospectus (the "BLACKOUT PERIOD") and, if
so directed by the Company, such Holder or Other Holder will use its best
efforts to deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such Holder's or Other Holder's possession,
of the prospectus relating to such Registrable Securities current at the time of
receipt of such notice. Notwithstanding the foregoing, (i) the aggregate
duration of all Blackout Periods in any ninety (90) day period shall not exceed
thirty (30) days, and (ii) no Blackout Period will be imposed during the five
(5) trading days following the effectiveness of a registration statement.
4. INDEMNIFICATION.
4.1 INDEMNIFICATION BY PARENT. In connection with any registration
statement which Parent may file pursuant to this Agreement, Parent shall, and it
hereby agrees to, indemnify and hold harmless each of the Holders, Other Holders
and each of their respective directors and officers, and each other person, if
any, which controls any such person within the meaning of the Securities Act,
from and against any and all losses, claims, damages or liabilities, and
expenses (including without limitation reasonable fees of counsel and any
amounts paid in any settlement effected with the consent of Parent) to which any
of the Holders, Other Holders and/or such director, officer or controlling
person thereof may become subject under the Securities Act, the common law or
otherwise, insofar as such losses, claims, damages or liabilities (or any
actions or proceedings, whether commenced or threatened and whether civil,
criminal or administrative, in respect thereof) or expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in any registration statement, or any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereto or
(ii) any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement therein, in light of the
circumstances in which they were made, not misleading; PROVIDED, HOWEVER, that
Parent shall not be liable to any such person in any such case to the extent
that any such loss, claim, damage, liability (or action or proceeding, whether
commenced or threatened, in respect thereof) or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, or prospectus, or amendment
or supplement thereto, in reliance upon and in conformity with written
information furnished to Parent by such person expressly for use therein; and
provided, further, that Parent shall not be liable to any such person under the
indemnity agreement in this Section 4.1 to the extent that any such loss, claim,
damage or liability (or action or proceeding, whether commenced or threatened,
in respect thereof) or expense results from the
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fact that Registrable Securities were sold to a person to whom there was not
sent or given a copy of the registration statement or prospectus or of the
prospectus as then amended or supplemented.
4.2 INDEMNIFICATION BY THE HOLDERS. In connection with any registration
statement in which the Registrable Securities held by a Holder or Other Holder
are registered, such Holder or Other Holder shall, and such Holder and Other
Holder hereby agrees to indemnify and hold harmless Parent, each director and
officer of Parent and such other person, if any, who controls Parent within the
meaning of the Securities Act, from and against any and all losses, claims,
damages or liabilities, and expenses (including without limitation reasonable
fees of counsel and any amounts paid in settlement effected with the consent of
such Holder and Other Holder not to be unreasonably withheld) to which Parent,
such director or officer or controlling person may become subject under the
Securities Act, the common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened and whether civil, criminal or administrative, in respect thereof) or
expenses arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact in or omission or alleged omission to state a
material fact required to be stated in any registration statement or any
prospectus contained therein, or any amendment or supplement thereto, or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, such statement or alleged statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to Parent by such Holder or such Other Holder expressly for use
therein; provided, that the obligation to indemnify will be several and not
joint as to each Holder and Other Holder and will be limited to the net amount
of proceeds received by such Holder from the sale of Registrable Securities
pursuant to such registration statement.
4.3 NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding with
respect to which a claim for indemnification may be made pursuant to this
Section 4 or a written threat to commence such action or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party, give written notice thereof (including a reasonable
explanation of the circumstances in connection therewith and copies of all
writings received relating thereto) to the latter; PROVIDED, HOWEVER, that the
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of any obligations under Section 4.1 or 4.2
hereof unless such failure to provide notice prejudices in any material way the
rights of the indemnifying party to conduct the defense of such action or
proceeding. In case any such action is brought against an indemnified party, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after such notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof unless the indemnifying party has failed to assume the defense
of such claim and to employ counsel reasonably satisfactory to such indemnified
person. No indemnifying party shall consent to entry of any judgment or enter
into any settlement with respect to a claim made against an indemnified party
without the consent of the indemnified party, which consent shall not be
unreasonably withheld, or unless such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in connection with the
circumstances out of which the action or proceeding arose for all persons that
may be entitled to or obligated to provide indemnification or contribution under
this Section 4. No indemnified party shall consent to entry of any judgment or
enter into any settlement of any action the defense of which has been assumed by
an indemnifying party without the consent of such indemnifying party, which
consent shall not be unreasonably withheld. An indemnifying party who is not
entitled to, or elects not to assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one (1) counsel for all
parties indemnified by such indemnifying party with respect to such claim.
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4.4 CONTRIBUTION. If for any reason the indemnification provided for in
Section 4.1 or Section 4.2 is unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses specifically covered by the indemnification provisions set forth in
Section 4.1 or Section 4.2, then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and the indemnified party,
as well as any other relevant equitable considerations; provided, that the
obligation to contribute will be individual to each Holder and Other Holder will
be limited to the net amount of proceeds received by such Holder or Other Holder
from the sale of Registrable Securities pursuant to such registration statement.
The relative fault of such indemnifying party and indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 4.4 were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11 (f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
5. MISCELLANEOUS.
5.1 NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to cause Parent,
or its successors or assigns to register Registrable Securities pursuant to this
Agreement are reserved solely for the use and benefit of the Holders and Other
Holders and may not be assigned or transferred by the Holders and Other Holders
to any other person other than to an Affiliate of such Holders or a Permitted
Transferee. A merger or consolidation of or transfer of all or substantially all
the assets of a Holder or Other Holder (a "FUNDAMENTAL TRANSACTION") shall not
be deemed an assignment for purposes of this Section 5.1 and the Registrable
Securities held by a Holder or Other Holder immediately prior to the
consummation of a Fundamental Transaction shall remain Registrable Securities
subsequent to such Fundamental Transaction.
5.2 NOTICES. All notices, requests, claims, demands, waivers and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered by hand, if delivered personally, by courier or by
telecopy, or three days after being deposited in the mail (registered or
certified mail, postage prepaid, return receipt requested) as follows:
To Parent at:
First Consulting Group, Inc.
111 W. Ocean Boulevard--4th Floor
Long Beach, CA 90802
Telephone: (562) 624-5200
Fax: (562) 432-1932
With a copy to:
Patrick A. Pohlen, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Telephone: (650) 843-5000
Fax: (650) 849-7400
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To Merger Sub:
Foxtrot Acquisition Sub, Inc.
111 W. Ocean Boulevard--4th Floor
Long Beach, CA 90802
Telephone: (562) 624-5200
Fax: (562) 432-1932
To any Holder:
at the address set forth under the name of such Holder on Annex A
hereof.
5.3 PARTIES IN INTEREST. All the terms and provisions of this Agreement
shall be binding upon, shall inure to the benefit of and shall be enforceable by
the parties hereto and their respective successors.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic substantive laws of the State of California without
giving effect to any choice or conflict of law provision or rule that would
cause the application of the domestic substantive laws of any other
jurisdiction,
5.5 HEADINGS. The descriptive headings of the several Sections and
paragraphs of this Agreement are for convenience of reference only, and do not
constitute a part of and shall not be deemed to limit or affect in any way any
of the provisions of this Agreement.
5.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and other writings
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire understanding of the parties with respect to its subject matter. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter, including the agreement relating to
registration rights set forth in Article V of that certain Common Stock and
Warrant Purchase Agreement between the Company and the Selling Parties (as
defined therein) dated June 30, 1995 and other related provisions thereof. This
Agreement may be amended and the observance of any term of this Agreement may be
waived only by a written instrument duly executed by Parent and each of the
Holders.
5.7 COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one (1) and the same instrument.
5.8 CONSTRUCTION OF TERMS. The singular may include the plural and vice
versa, unless the context clearly indicates to the contrary. The words "hereof,
"herein" and other similar compounds of the word "here" shall mean and refer to
the entire Agreement and not to any particular Section.
5.9 SEVERABILITY OF PROVISIONS. If any provision of this Agreement is
found to be unenforceable, the other provisions shall remain in effect.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed as of the date first written above.
FIRST CONSULTING GROUP, INC.
By: __________________________________
Title:
HOLDERS:
______________________________________
David S. Lipson
TECHNOLOGY LEADERS II
By: __________________________________
Title:
<*>SAFEGUARD</*> SCIENTIFICS, INC.
By: __________________________________
Title:
WARRANT AND STOCK TRUST
By: __________________________________
Title:
REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
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<PAGE>
ANNEX A
<TABLE>
<CAPTION>
HOLDER
-----------------------
<C> <S> <C>
David S. Lipson
Technology Leaders II
<*>Safeguard</*>
Scientifics, Inc.
Warrant and Stock Trust
</TABLE>
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APPENDIX F
PBCL DISSENTERS' RIGHTS
PENNSYLVANIA
BUSINESS CORPORATION LAW
1930 DISSENTERS RIGHTS.--(a) General rule.--If any shareholder of a
domestic business corporation that is to be a party to a merger or consolidation
pursuant to a plan of merger or consolidation objects to the plan of merger or
consolidation and complies with the provisions of Subchapter D of Chapter 15
(relating to dissenters rights), the shareholder shall be entitled to the rights
and remedies of dissenting shareholders therein provided, if any. See also
section 1906(c) (relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only.--Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(b)(1)(i) (relating
to adoption by board of directors).
(c) Cross references.--See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
SUBCHAPTER D. DISSENTERS RIGHTS
1571 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except as
otherwise provided in subsection (b), any shareholder of a business corporation
shall have the right to dissent from, and to obtain payment of the fair value of
his shares in the event of, any corporate action, or to otherwise obtain fair
value for his shares, where this part expressly provides that a shareholder
shall have the rights and remedies provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on transfer
of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--(1) Except as otherwise provided in paragraph (2) the
holders of the shares of any class or series of shares that, at the record date
fixed to determine the shareholders entitled to notice of and to vote at the
meeting at which a plan specified in any of Section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders; shall not have the
right to obtain payment of the fair value of any such shares under this
subchapter.
F-1
<PAGE>
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the case
of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or solely
into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of the class
to vote thereon and require for the adoption of the plan or the effectuation
of the transaction the affirmative vote of a majority of the votes cast by
all shareholders of the class.
(iii) Shares entitled to dissenters rights under Section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation and
with or without the intervention of another corporation or other person, shall
not be entitled to the rights and remedies of dissenting shareholders provided
in this subchapter regardless of the fact, if it be the case, that the
acquisition was accomplished by the issuance of voting shares of the corporation
to be outstanding immediately after the acquisition sufficient to elect a
majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
1572 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this Section unless the
context clearly indicates otherwise:
"CORPORATION." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation
for the purposes of this subchapter. The successor corporation in a division
shall have sole responsibility for payments to dissenters and other
liabilities under this subchapter except as otherwise provided in the plan
of division.
F-2
<PAGE>
"DISSENTER." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"FAIR VALUE." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking into account
all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"INTEREST." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors including the
average rate currently paid by the corporation on its principal bank loans.
1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.--(a) Record holders of
shares.--A record holder of shares of a business corporation may assert
dissenters rights as to fewer than all of the shares registered in his name only
if he dissents with respect to all the shares beneficially owned by any one
person and discloses the name and address of the person or persons on whose
behalf he dissents. In that event, his rights shall be determined as if the
shares as to which he has dissented and his other shares were registered in the
names of different shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
1574 NOTICE OF INTENTION TO DISSENT.--If the proposed corporate action is
submitted to a vote at a meeting of shareholders of a business corporation, any
person who wishes to dissent and obtain payment of the fair value of his shares
must file with the corporation, prior to the vote, a written notice of intention
to demand that he be paid the fair value of his shares if the proposed action is
effectuated, must effect no change in the beneficial ownership of his shares
from the date of such filing continuously through the effective date of the
proposed action and must refrain from voting his shares in approval of such
action. A dissenter who fails in any respect shall not acquire any right to
payment of the fair value of his shares under this subchapter. Neither a proxy
nor a vote against the proposed corporate action shall constitute the written
notice required by this section.
1575 NOTICE TO DEMAND PAYMENT.--(a) General rule.--If the proposed
corporate action is approved by the required vote at a meeting of shareholders
of a business corporation, the corporation shall mail a further notice to all
dissenters who gave due notice of intention to demand payment of the fair value
of their shares and who refrained from voting in favor of the proposed action.
If the proposed corporate action is to be taken without a vote of shareholders,
the corporation shall send to all shareholders who are entitled to dissent and
demand payment of the fair value of their shares a notice of the adoption of the
plan or other corporate action. In either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
beneficial shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
F-3
<PAGE>
(b) Time for receipt of demand for payment.--The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.--(a) Effect of
failure of shareholder to act.--A shareholder who fails to timely demand
payment, or fails (in the case of certificated shares) to timely deposit
certificates, as required by a notice pursuant to Section 1575 (relating to
notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of Section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.--(a) Failure to
effectuate corporate action.--Within 60 days after the date set for demanding
payment and depositing certificates, if the business corporation has not
effectuated the proposed corporate action, it shall return any certificates that
have been deposited and release uncertificated shares from any transfer
restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertified shares have been
released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of Section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this Section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subSection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those which the original dissenter had
after making demand for payment of their fair value.
F-4
<PAGE>
1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.--(a) General rule--If
the business corporation gives notice of its estimate of the fair value of the
shares, without remitting such amount, or remits payment of its estimate of the
fair value of a dissenter's shares as permitted by Section 1577(c) (relating to
payment of fair value of shares) and the dissenter believes that the amount
stated or remitted is less than the fair value of his shares, he may send to the
corporation his own estimate of the fair value of the shares, which shall be
deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subSection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
1579 VALUATION PROCEEDINGS GENERALLY.--(a) General rule--Within 60 days
after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under Section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to Section 1578 (relating
to estimate by dissenter of fair value of shares); if any demands for
payment remain unsettled, the business corporation may file in court an
application for relief requesting that the fair value of the shares be
determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the corporation
fails to file an application as provided in subSection (a), any dissenter who
made a demand and who has not already settled his claim against the corporation
may do so in the name of the corporation at any time within 30 days after the
expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid the corporation's estimate of the fair value of the shares and no more,
and may bring an action to recover any amount not previously remitted.
1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.--(a) General rule.--The
costs and expenses of any proceeding under Section 1579 (relating to valuation
proceedings generally) including the reasonable compensation and expenses of the
appraiser appointed by the court, shall be determined by the court and assessed
against the business corporation except that any part of the costs and expenses
may be apportioned and assessed as the court deems appropriate against all or
some of the dissenters who are parties and whose action in demanding
supplemental payment under Section 1578 (relating to estimate by dissenter of
fair value of shares) the court finds to be dilatory, obdurate, arbitrary,
vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against
F-5
<PAGE>
the corporation and in favor of any or all dissenters if the corporation failed
to comply substantially with the requirements of this subchapter and may be
assessed against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses arc
assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious
manner in respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
F-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
FCG's bylaws provide that FCG will indemnify its directors and executive
officers and may indemnify its other officers, employees and other agents to the
fullest extent permitted by Delaware law. FCG is also empowered under its bylaws
to enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person it is required or permitted to
indemnify. Pursuant to this provision, FCG expects to enter into indemnification
agreements with each of its directors and executive officers.
FCG has obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act. In addition, FCG's certificate of incorporation provides that,
to the fullest extent permitted by Delaware law, FCG's directors will not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to FCG and its stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Delaware law. Under current Delaware law, a director's
liability to FCG or its stockholders may not be limited with respect to any
breach of the director's duty of loyalty to FCG or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, for improper transactions between the director and
FCG and for improper distributions to stockholders and loans to directors and
officers. This provision also does not affect a director's responsibilities
under any other laws such as the federal securities laws or state or federal
environmental laws.
There is no pending litigation or proceeding involving a director or officer
of FCG as to which indemnification is being sought, nor is FCG aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
THE REGISTRANT HAS OBTAINED DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
THAT COVERS CERTAIN LIABILITIES, INCLUDING LIABILITIES TO THE REGISTRANT AND ITS
STOCKHOLDERS.
Pursuant to the merger agreement, all rights to indemnification existing in
favor of the persons serving as directors or officers of ISCG as of the date of
the merger agreement for acts and omissions occurring prior to the effective
time, as provided in the ISCG bylaws and as provided in any indemnification
agreements between ISCG and said officers and directors shall survive the merger
and shall be observed by FCG and the surviving corporation for a period of not
less than six years from the effective time. The merger agreement also provides
that from the effective time until the third anniversary of the date on which
the merger becomes effective, the surviving corporation shall maintain in
effect, for the benefit of the persons serving as directors and officers of ISCG
as of the date of the merger agreement with respect to acts or omissions
occurring prior to the effective time, the lesser of (i) the existing policy of
directors' and officers' liability insurance maintained by ISCG as of the date
of the merger agreement (the "existing policy") and (ii) the amount of coverage
purchased by 150% of the amount of the last annual premium paid by ISCG prior to
the date of the merger agreement for the existing policy; provided, however,
that the surviving corporation may substitute for the existing policy a policy
or policies of comparable coverage.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
2.1.1 Agreement and Plan of Merger and Reorganization dated as of September 9, 1998, by and among First
Consulting Group, Inc., a Delaware corporation ("FCG"), Foxtrot Acquisition Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of FCG, and Integrated Systems Consulting Group, Inc., a
Pennsylvania corporation ("ISCG") (incorporated by reference to Exhibit 99.1 of the Registrant's
Current Report on Form 8-K filed on September 22, 1998. (the "First Form 8-K")) (See Appendix A to
the joint proxy statement/ prospectus).
2.1.2 First Amendment to Agreement and Plan of Merger and Reorganization dated as of November 11, 1998
(incorporated by reference to Exhibit 99.1 of the Registrant's Current Report on Form 8-K filed on
November 12, 1998) (See Appendix A-1 to the joint proxy statement/prospectus).
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Form S-1 Registration Statement (No. 333-41121) originally filed on November 26, 1997
(the "Form S-1")).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Form S-1).
4.1 Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Form
S-1).
5.1* Legal Opinion of Cooley Godward LLP.
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Saul, Ewing, Remick & Saul LLP.
10.1 1997 Equity Incentive Plan Certificate (incorporated by reference to Exhibit 10.1 to the Registrant's
Form S-1).
10.1.1 Form of Incentive Stock Option between the Registrant and its employees, directors, and consultants
(incorporated by reference to Exhibit 10.1.1 to the Registrant's Form S-1).
10.1.2 Form of Non-Statutory Stock Option between the Registrant and its employees, directors, and
consultants (incorporated by reference to Exhibit 10.1.2 to the Registrant's Form S-1).
10.1.3 Form of Non-Statutory Stock Option (United Kingdom) between the Registrant and its United Kingdom
resident employees, directors, and consultants (incorporated by reference to Exhibit 10.1.3 to the
Registrant's Form S-1).
10.1.4 Form of 1997 Equity Incentive Plan Notice of Exercise between the Registrant and its employees,
directors, and consultants (incorporated by reference to Exhibit 10.1.4 to the Registrant's Form
S-1).
10.2 1997 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Registrant's Form S-1).
10.2.1 Form of Non-Statutory Stock Option (Initial Option-Continuing Non-Employee Directors) between the
Registrant its continuing non-employee directors (incorporated by reference to Exhibit 10.2.1 to the
Registrant's Form S-1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.2.2 Form of Non-Statutory Stock Option (Initial Option-New Non-Employee Directors) between the Registrant
and its non-employee directors (incorporated by reference to Exhibit 10.2.2 to the Registrant's Form
S-1).
10.2.3 Form of Non-Statutory Stock Option (Annual Option) between the Registrant and its non-employee
directors (incorporated by reference to Exhibit 10.2.3 to the Registrant's Form S-1).
10.2.4 Form of 1997 Non-Employee Directors' Stock Option Plan Notice of Exercise between the Registrant and
its non-employee directors (incorporated by reference to Exhibit 10.2.4 to the Registrant's Form
S-1).
10.3 1994 Restricted Stock Plan, as amended (incorporated by reference to Exhibit 10.3 to the Registrant's
Form S-1).
10.3.1 Form of Amended and Restated Restricted Stock Agreement between the Registrant and its executive
officers (incorporated by reference to Exhibit 10.3.1 to the Registrant's Form S-1).
10.3.2 Form of Loan and Pledge Agreement between the Registrant and its vice presidents (incorporated by
reference to Exhibit 10.3.2 to the Registrant's Form S-1).
10.3.3 Form of Secured Promissory Note (Non-Recourse) between the Registrant and its vice presidents
(incorporated by reference to Exhibit 10.3.3 to the Registrant's Form S-1).
10.4 Second Amended and Restated Associate 401(k) and Stock Ownership Plan (incorporated by reference to
Exhibit 10.4 to the Registrant's Form S-1).
10.5 First Amendment to the Second Amended and Restated Associate 401(k) and Stock Ownership Plan
(incorporated by reference to Exhibit 10.5 to the Registrant's Form S-1).
10.6 1997 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the
Registrant's Form S-1).
10.6.1 Form of Restricted Stock Agreement between the Registrant and its non-employee directors (incorporated
by reference to Exhibit 10.6.1 to the Registrant's Form S-1).
10.7 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.7 to the Registrant's
Form S-1).
10.8 Form of Indemnity Agreement between the Registrant and its directors and executive officers
(incorporated by reference to Exhibit 10.8 to the Registrant's Form S-1).
10.9 Lease, dated as of October 3, 1996, between the Registrant and Landmark Square Associates, L.P. for
the Registrant's principal executive offices in Long Beach, CA (incorporated by reference to Exhibit
10.9 to the Registrant's Form S-1).
10.10 Credit Agreement between the Registrant and Wells Fargo Bank, dated December 18, 1997 (incorporated by
reference to Exhibit 10.10 to the Registrant's Form S-1).
11.1 Statement of Computation of Earnings (Loss) per Share for ISCG (1).
11.2 Statement of Computation of Earnings (Loss) per Share for FCG (2).
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Form
S-1).
23.1* Consent of Grant Thornton LLP.
23.2* Consent of KPMG Peat Marwick LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
23.3* Consent of Cooley Godward LLP (See Exhibits 5.1 and 8.1).
23.4* Consent of Saul, Ewing, Remick & Saul LLP (See Exhibit 8.2).
24.1* Power of Attorney.
99.1 Form of ISCG Voting Agreement (incorporated by reference to Exhibit 99.2 of the Registrant's First
Form 8-K).
99.2 Form of FCG Voting Agreement (incorporated by reference to Exhibit 99.3 of the Registrant's First Form
8-K).
99.3 Form of ISCG Affiliate Agreement (incorporated by reference to Exhibit 99.4 of the Registrant's First
Form 8-K) (See Appendix D-1 of the joint proxy statement/prospectus).
99.4 Form of FCG Affiliate Agreement (incorporated by reference to Exhibit 99.5 of the Registrant's First
Form 8-K) (See Appendix D-2 of the joint proxy statement/prospectus).
99.5 Registration Rights Agreement (See Appendix E of the joint proxy statement/prospectus).
99.6* Form of FCG proxy card.
99.7* Form of ISCG proxy card.
99.8* Consent of Hambrecht & Quist LLC.
99.9* Consent of Robert W. Baird & Co. Incorporated.
</TABLE>
- ------------------------
* Previously filed.
(1) Incorporated by reference to Exhibit 11 of ISCG's Annual Report on Form 10-K
for the year ended December 31, 1997 and Exhibit 11.1 of ISCG's Quarterly
Report on Form 10-Q for the nine-month period ended September 30, 1998.
(2) Incorporated by reference to Exhibit 11.1 of the Registrant's Form S-1 and
Exhibit 11.1 of the Registrant's Quarterly Report on Form 10-Q for the
nine-period ended September 30, 1998.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules relating to FCG have been omitted because they are not
applicable or not required or the information required to be set forth therein
is included in the Financial Statements of FCG included elsewhere in the joint
proxy statement/prospectus.
II-4
<PAGE>
The following financial statements schedule of ISCG for the years ended
December 31, 1997, 1996 and 1995 is filed as part of this registration
statement:
SCHEDULE II
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COLUMN C
------------------------
COLUMN B ADDITIONS COLUMN E
---------- ------------------------ ----------
FOR THE YEAR COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE AT
ENDED DECEMBER --------------------- BEGINNING COST AND OTHER ----------- END OF
31 DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------- --------------------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 Billing adjustments
and uncollectible
amounts $ 196,000 $ 64,000 $ 84,000(1) $ (32,000) $ 312,000
1996 Billing adjustments
and uncollectible
amounts 200,000 -- 23,000(1) (27,000) 196,000
1995 Billing adjustments
and uncollectible
amounts 100,000 41,000 59,000(1) -- 200,000
</TABLE>
- ------------------------
(1) Charged against revenue.
Schedules relating to ISCG other than that listed above have been omitted
since they are either not required, not applicable, or because the information
required is included in the financial statements or the notes thereto.
(c) ITEM 4(B) REPORTS
See Appendices B-1 and B-2 to the joint proxy statement/prospectus.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the joint proxy statement/prospectus
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(2) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the amended and restated certificate of incorporation and
the bylaws of the Registrant and the Delaware General Corporation Law,
II-5
<PAGE>
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 Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the question has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of 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.
(5) (A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, First Consulting Group,
Inc. has duly caused this amendment No. 3 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Long Beach, County of Los Angeles, State of California on the 17th day of
November, 1998.
<TABLE>
<S> <C> <C>
By: /s/ LUTHER J. NUSSBAUM
------------------------------------------
Luther J. Nussbaum,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the require of the Securities Act of 1933, as amended, this
Amendment to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ LUTHER J. NUSSBAUM Chief Executive Officer
- ------------------------------ and Director (Principal November 17, 1998
Luther J. Nussbaum Executive Officer)
*
- ------------------------------ Chairman and Director November 17, 1998
James A. Reep
Chief Financial Officer
* and Vice President
- ------------------------------ (Principal Financial and November 17, 1998
Thomas A. Reep Accounting Officer)
*
- ------------------------------ Director November 17, 1998
Steven Heck
*
- ------------------------------ Director November 17, 1998
Steven Lazarus
*
- ------------------------------ Director November 17, 1998
Stanley R. Nelson
*
- ------------------------------ Director November 17, 1998
Stephen E. Olson
*
- ------------------------------ Director November 17, 1998
Scott S. Parker
*
- ------------------------------ Director November 17, 1998
Jack O. Vance
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ LUTHER J. NUSSBAUM
-------------------------------
Luther J. Nussbaum,
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
2.1.1 Agreement and Plan of Merger and Reorganization dated as of September 9, 1998, by and among
First Consulting Group, Inc., a Delaware corporation ("FCG"), Foxtrot Acquisition Sub,
Inc., a Delaware corporation and a wholly-owned subsidiary of FCG, and Integrated Systems
Consulting Group, Inc., a Pennsylvania corporation ("ISCG") (incorporated by reference to
Exhibit 99.1 of the Registrant's Current Report on Form 8-K filed on September 22, 1998.
(the "First Form 8-K")) (See Appendix A to the joint proxy statement/prospectus).
2.1.2 First Amendment to Agreement and Plan of Merger and Reorganization dated as of November 11,
1998 (incorporated by reference to Exhibit 99.1 of the Registrant's Current Report on Form
8-K filed on November 12, 1998) (See Appendix A-1 to the joint proxy statement/prospectus).
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to
the Registrant's Form S-1 Registration Statement (No. 333-41121) originally filed on
November 26, 1997 (the "Form S-1")).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Form
S-1).
4.1 Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-1).
5.1* Legal Opinion of Cooley Godward LLP.
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Saul, Ewing, Remick & Saul LLP.
10.1 1997 Equity Incentive Plan Certificate (incorporated by reference to Exhibit 10.1 to the
Registrant's Form S-1).
10.1.1 Form of Incentive Stock Option between the Registrant and its employees, directors, and
consultants (incorporated by reference to Exhibit 10.1.1 to the Registrant's Form S-1).
10.1.2 Form of Non-Statutory Stock Option between the Registrant and its employees, directors, and
consultants (incorporated by reference to Exhibit 10.1.2 to the Registrant's Form S-1).
10.1.3 Form of Non-Statutory Stock Option (United Kingdom) between the Registrant and its United
Kingdom resident employees, directors, and consultants (incorporated by reference to
Exhibit 10.1.3 to the Registrant's Form S-1).
10.1.4 Form of 1997 Equity Incentive Plan Notice of Exercise between the Registrant and its
employees, directors, and consultants (incorporated by reference to Exhibit 10.1.4 to the
Registrant's Form S-1).
10.2 1997 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Registrant's Form S-1).
10.2.1 Form of Non-Statutory Stock Option (Initial Option-Continuing Non-Employee Directors) between
the Registrant its continuing non-employee directors (incorporated by reference to Exhibit
10.2.1 to the Registrant's Form S-1).
10.2.2 Form of Non-Statutory Stock Option (Initial Option-New Non-Employee Directors) between the
Registrant and its non-employee directors (incorporated by reference to Exhibit 10.2.2 to
the Registrant's Form S-1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
10.2.3 Form of Non-Statutory Stock Option (Annual Option) between the Registrant and its
non-employee directors (incorporated by reference to Exhibit 10.2.3 to the Registrant's
Form S-1).
10.2.4 Form of 1997 Non-Employee Directors' Stock Option Plan Notice of Exercise between the
Registrant and its non-employee directors (incorporated by reference to Exhibit 10.2.4 to
the Registrant's Form S-1).
10.3 1994 Restricted Stock Plan, as amended (incorporated by reference to Exhibit 10.3 to the
Registrant's Form S-1).
10.3.1 Form of Amended and Restated Restricted Stock Agreement between the Registrant and its
executive officers (incorporated by reference to Exhibit 10.3.1 to the Registrant's Form
S-1).
10.3.2 Form of Loan and Pledge Agreement between the Registrant and its vice presidents
(incorporated by reference to Exhibit 10.3.2 to the Registrant's Form S-1).
10.3.3 Form of Secured Promissory Note (Non-Recourse) between the Registrant and its vice presidents
(incorporated by reference to Exhibit 10.3.3 to the Registrant's Form S-1).
10.4 Second Amended and Restated Associate 401(k) and Stock Ownership Plan (incorporated by
reference to Exhibit 10.4 to the Registrant's Form S-1).
10.5 First Amendment to the Second Amended and Restated Associate 401(k) and Stock Ownership Plan
(incorporated by reference to Exhibit 10.5 to the Registrant's Form S-1).
10.6 1997 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.6
to the Registrant's Form S-1).
10.6.1 Form of Restricted Stock Agreement between the Registrant and its non-employee directors
(incorporated by reference to Exhibit 10.6.1 to the Registrant's Form S-1).
10.7 Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.7 to the
Registrant's Form S-1).
10.8 Form of Indemnity Agreement between the Registrant and its directors and executive officers
(incorporated by reference to Exhibit 10.8 to the Registrant's Form S-1).
10.9 Lease, dated as of October 3, 1996, between the Registrant and Landmark Square Associates,
L.P. for the Registrant's principal executive offices in Long Beach, CA (incorporated by
reference to Exhibit 10.9 to the Registrant's Form S-1).
10.10 Credit Agreement between the Registrant and Wells Fargo Bank, dated December 18, 1997
(incorporated by reference to Exhibit 10.10 to the Registrant's Form S-1).
11.1 Statement of Computation of Earnings (Loss) per Share for ISCG (1).
11.2 Statement of Computation of Earnings (Loss) per Share for FCG (2).
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's
Form S-1).
23.1* Consent of Grant Thornton LLP.
23.2* Consent of KPMG Peat Marwick LLP.
23.3* Consent of Cooley Godward LLP (See Exhibits 5.1 and 8.1).
23.4* Consent of Saul, Ewing, Remick & Saul LLP (See Exhibit 8.2).
24.1* Power of Attorney.
99.1 Form of ISCG Voting Agreement (incorporated by reference to Exhibit 99.2 of the Registrant's
First Form 8-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
99.2 Form of FCG Voting Agreement (incorporated by reference to Exhibit 99.3 of the Registrant's
First Form 8-K).
99.3 Form of ISCG Affiliate Agreement (incorporated by reference to Exhibit 99.4 of the
Registrant's First Form 8-K.) (See Appendix D-1 of the joint proxy statement/ prospectus).
99.4 Form of FCG Affiliate Agreement (incorporated by reference to Exhibit 99.5 of the
Registrant's First Form 8-K.) (See Appendix D-2 of the joint proxy statement/ prospectus).
99.5 Registration Rights Agreement (See Appendix E of the joint proxy statement/ prospectus).
99.6* Form of FCG proxy card.
99.7* Form of ISCG proxy card.
99.8* Consent of Hambrecht & Quist LLC.
99.9* Consent of Robert W. Baird & Co. Incorporated.
</TABLE>
- ------------------------
* Previously filed.
(1) Incorporated by reference to Exhibit 11 of ISCG's Annual Report on Form 10-K
for the year ended December 31, 1997 and Exhibit 11.1 of ISCG's Quarterly
Report on Form 10-Q for the six- month period ended June 30, 1998.
(2) Incorporated by reference to Exhibit 11.1 of the Registrant's Form S-1 and
Exhibit 11.1 of the Registrant's Quarterly Report on Form 10-Q for the
six-month period ended June 30, 1998.
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF COOLEY GODWARD LLP]
November 16, 1998
First Consulting Group, Inc.
111 West Ocean Boulevard, Suite 1550
Long Beach, CA 90802
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of September 9, 1998
(the "Reorganization Agreement") by and among First Consulting Group, Inc., a
Delaware corporation ("Parent"), Foxtrot Acquisition Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Integrated
Systems Consulting Group, Inc., a Pennsylvania corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to Parent and Merger Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined, and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all exhibits and schedules attached thereto):
(A) the Reorganization Agreement;
(B) those certain tax representation letters dated September 9, 1998,
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(C) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and shareholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
4. The Merger will be consummated in accordance with the terms of the
Reorganization Agreement, will be effective under the laws of the Commonwealth
of Pennsylvania and the State of Delaware,
<PAGE>
First Consulting Group, Inc.
November 16, 1998
Page 2
and will be reported by Parent and the Company on their respective federal
income tax returns in a manner consistent with the opinion set forth below; and
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, for federal income tax purposes, the Merger will be a
reorganization within the meaning of Section 368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of
federal income tax law, you have asked us to review the discussions of federal
income tax issues contained in the Registration Statement. We have reviewed the
discussions entitled "Questions and Answers About The FCG/ISCG Merger--WHAT ARE
THE TAX CONSEQUENCES TO STOCKHOLDERS OF THE MERGER?" and "Approval of the Merger
and Related Transactions--Material Federal Income Tax Consequences" contained in
the Registration Statement and believe that, insofar as such discussions relate
to statements of law and legal conclusions, they are correct in all material
respects.
We consent to the references to our firm under the captions "Approval of the
Merger and Related Transactions--Material Federal Income Tax Consequences" and
"Legal Matters" in the Proxy Statement included in the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company capital stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal circumstances or to
certain types of investors subject to special treatment under the federal income
tax laws (for example, stockholders who are dealers in securities, banks,
insurance companies or tax-exempt organizations, who are subject to the
alternative minimum tax provisions of the Code, who are non-United States
persons, who acquired their shares of Company capital stock in connection with
stock option or stock purchase plans or in other compensatory transactions, or
who hold their Company capital stock as a hedge or as part of a hedging,
straddle, conversion or other risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if all of the transactions described in the
Reorganization Agreement are not consummated in accordance with the terms of the
Reorganization Agreement and without waiver of any material provision thereof.
To the extent that any of the representations, warranties, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
<PAGE>
First Consulting Group, Inc.
November 16, 1998
Page 3
This opinion is being delivered solely in connection with the Registration
Statement. It is intended for the benefit of Parent and Merger Sub and may not
be relied upon or utilized for any other purpose or by any other person and may
not be made available to any other person without our prior written consent.
Sincerely,
COOLEY GODWARD LLP
/s/ WEBB B. MORROW III
Webb B. Morrow III
WBM:dp
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF SAUL, EWING, REMICK & SAUL LLP]
November 16, 1998
Integrated Systems Consulting Group, Inc.
575 E. Swedesford Road
Wayne, PA 19087
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of September 9, 1998
(the "Reorganization Agreement") by and among First Consulting Group, Inc., a
Delaware corporation ("Parent"), Foxtrot Acquisition Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Integrated
Systems Consulting Group, Inc., a Pennsylvania corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As
such, and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated September 9, 1998,
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and shareholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters, are true and accurate at
all relevant times;
3. All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
<PAGE>
Integrated Systems Consulting Group, Inc.
November 16, 1998
Page 2
4. The Merger will be consummated in accordance with the terms of the
Reorganization Agreement, will be effective under the laws of the Commonwealth
of Pennsylvania and the State of Delaware, and will be reported by Parent and
the Company on their respective federal income tax returns in a manner
consistent with the Reorganization Agreement and the opinion set forth below;
and
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, for federal income tax purposes, the Merger will be a
reorganization within the meaning of section 368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of
federal income tax law, you have asked us to review the discussions of federal
income tax issues contained in the Registration Statement. We have reviewed the
discussions entitled "Questions and Answers About The FCG/ISCG Merger--WHAT ARE
THE TAX CONSEQUENCES TO STOCKHOLDERS OF THE MERGER?" and "Approval of the Merger
and Related Transactions--Material Federal Income Tax Consequences" contained in
the Registration Statement and believe that, insofar such discussions relate to
statements of law and legal conclusions, they are correct in all material
respects.
We consent to the references to our firm in the sections of the Registration
Statement captioned "Approval of the Merger and Related Transactions--Material
Federal Income Tax Consequences" and "Legal Matters" and to the filing of this
opinion as an exhibit to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company capital stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal circumstances or to
certain types of investors subject to special treatment under the federal income
tax laws (for example, stockholders who are dealers in securities, banks,
insurance companies or tax-exempt organizations, who are subject to the
alternative minimum tax provisions of the Code, who are non-United States
persons, who acquired their shares of Company capital stock in connection with
stock option or stock purchase plans or in other compensatory transactions, or
who hold their Company capital stock as a hedge or as part of a hedging,
straddle, conversion or other risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if all of the transactions described in the
Reorganization Agreement are not consummated in accordance with the terms of the
Reorganization Agreement and without waiver of any material provision thereof.
To the extent that any of the representations, warranties, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code as in effect on the date hereof, and on
existing judicial decisions, administrative regulations and published rulings.
No assurance can be given that future legislative, judicial or administrative
changes or interpretations would not adversely affect
<PAGE>
Integrated Systems Consulting Group, Inc.
November 16, 1998
Page 3
the accuracy of the conclusions stated herein. Nevertheless, by rendering this
opinion, we undertake no responsibility to advise you of any new developments in
the application or interpretation of the federal income tax laws.
This opinion is being delivered solely in connection with the Registration
Statement. It is intended for the benefit of the Company and may not be relied
upon or utilized for any other purpose or by any other person and may not be
made available to any other person without our prior written consent.
Very truly yours,
/s/ SAUL, EWING, REMICK & SAUL LLP