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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 00-24055
DA CONSULTING GROUP, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0418488
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5847 San Felipe Road, Suite 3700
Houston, Texas 77057
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 361-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AS OF
November 12, 1999 - - 6,418,604
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DA CONSULTING GROUP, INC.
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 1998
and September 30, 1999 (unaudited)................................ 3
Condensed Consolidated Statement of Income for the Three and
Nine Months ended September 30, 1998 and 1999 (unaudited).......... 4
Condensed Consolidated Statement of Cash Flows for the Three
and Nine Months ended September 30, 1998 and 1999 (unaudited)...... 5
Notes to Condensed Consolidated Financial Statements(unaudited)..... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 14
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 14
Signatures................................................................... 15
</TABLE>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------- -----------------
ASSETS (Unaudited)
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................... $ 9,971 $ 7,131
Short-term investments...................................................... 10,033 2,314
Accounts receivable:
Trade, net................................................................. 15,980 15,518
Other...................................................................... 35 -
Unbilled revenue............................................................ 1,589 2,588
Income taxes receivable..................................................... 1,310 1,040
Prepaid expenses and other current assets................................... 626 1,654
------- -------
Total current assets....................................................... 39,544 30,245
------- -------
Property and equipment, net................................................. 8,759 12,605
Other assets................................................................ 182 62
Intangible assets, net...................................................... 418 405
------- -------
Total assets..................................................... $48,903 $43,317
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable............................................................ $ 2,954 $ 2,337
Accrued expenses............................................................ 8,903 6,889
Deferred income............................................................. 1,345 706
Income taxes payable........................................................ 592 -
Deferred income taxes....................................................... 165 371
------- -------
Total current liabilities.................................................. 13,959 10,303
------- -------
Commitments and contingencies
Shareholder's equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized.............. - -
Common stock, $0.01 par value: 40,000,000 shares authorized; 6,571,777
shares issued; 6,550,074 and 6,418,604 shares outstanding at December
31, 1998 and September 30, 1999, respectively.............................. 65 65
Additional paid-in capital.................................................. 29,359 29,355
Retained earnings........................................................... 6,398 5,806
Accumulated other comprehensive income (loss)............................... (762) (690)
Treasury stock, at cost: 21,703 at December 31, 1998 and 153,173 shares at
September 30, 1999....................................................... (116) (1,522)
------- -------
Total shareholders' equity................................................. 34,944 33,014
------- -------
Total liabilities and shareholders' equity.......................... $48,903 $43,317
======= =======
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
<PAGE>
DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------- ------- --------- -------
<S> <C> <C> <C> <C>
Revenue................................................. $21,882 $15,804 $56,173 $61,980
Cost of revenue......................................... 11,230 8,426 29,249 31,316
------- ------- ------- -------
Gross profit.......................................... 10,652 7,378 26,924 30,664
Selling and marketing expense........................... 1,346 1,621 3,781 5,748
Development expense..................................... 779 350 1,523 1,815
General and administrative expense...................... 6,436 9,012 16,669 24,238
------- ------- ------- -------
Operating income (loss)............................... 2,091 (3,605) 4,951 (1,137)
Interest income, net.................................... 173 92 179 309
Other (expense), net.................................... (12) (2) (291) (90)
------- ------- ------- -------
Total other (expense) income, net 161 90 (112) 219
------- ------- ------- -------
Income (loss) before taxes............................ 2,252 (3,515) 4,839 (918)
Provision for income taxes.............................. 914 (1,318) 1,925 (326)
------- ------- ------- -------
Net income (loss).................................... $ 1,338 $(2,197) $ 2,914 $ (592)
======= ======= ======= =======
Basic earnings (loss) per share......................... $ 0.20 $ (0.34) $ 0.50 $ (0.09)
Weighted average shares outstanding..................... 6,555 6,419 5,775 6,452
Diluted earnings (loss) per share....................... $ 0.20 $ (0.34) $ 0.48 $ (0.09)
Weighted average shares outstanding..................... 6,822 6,419 6,042 6,452
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
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DA CONSULTING GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss).............................................................. $ 2,914 $ (592)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 783 1,758
Deferred income taxes....................................................... 157 206
(Gain) Loss on sale of fixed assets......................................... (8) 41
Changes in operating assets and liabilities:
Increase in accounts receivable and unbilled revenue..................... (6,927) (502)
Decrease in income tax receivable........................................ - 270
Increase in prepaid expenses and other current assets.................... (706) (1,028)
Decrease (increase) in other assets...................................... (257) 120
Increase (decrease) in accounts payable and accrued liabilities.......... 2,557 (2,632)
Increase (decrease) in deferred income................................... 1,937 (639)
Increase (decrease) in income taxes payable.............................. 154 (592)
-------- -------
Total adjustments.................................................. (2,310) (2,998)
-------- -------
Net cash provided by (used in) operating activities................ 604 (3,590)
-------- -------
Cash flows from investing activities:
Proceeds from sale of fixed assets............................................ 20 15
Sales of short-term investments............................................... 7,723
Purchases of short-term investments........................................... (9,984) (5)
Purchases of property and equipment........................................... (3,403) (5,649)
-------- -------
Net cash (used in) provided by investing activities................ (13,367) 2,084
-------- -------
Cash flows from financing activities:
Net repayment of revolving line of credit..................................... (3,208) -
Net repayments of note payable................................................ (55) -
Issuance of common stock...................................................... 25,268 -
Repayments of notes receivable from shareholders.............................. 503 -
Stock repurchases............................................................. (25) (1,943)
Deferred offering costs....................................................... (3,225) -
Proceeds from stock option exercise........................................... - 537
-------- -------
Net cash used in (provided by) financing activities................ 19,258 (1,406)
-------- -------
Effect of changes in foreign currency exchange rate on cash
and cash equivalents....................................................... (304) 72
-------- -------
Decrease in cash and cash equivalents.............................. 6,191 (2,840)
Cash and cash equivalents at beginning of year.................................. 3,664 9,971
-------- -------
Cash and cash equivalents at end of period...................................... $ 9,855 $ 7,131
======== =======
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements.
5
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DA CONSULTING GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
DA Consulting Group, Inc. and its subsidiaries (the "Company") is a
leading international provider of education for employees of companies
implementing business information technology.
(2) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, pursuant to such rules and regulations. The unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto as of and for
the year ended December 31, 1998, included in the Company's Annual Report on
Form 10-K.
The unaudited condensed consolidated financial information included herein
reflects all adjustments, consisting only of normal recurring adjustments, which
are necessary, in the opinion of management for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. Certain reclassifications have been made to prior
year amounts to conform to the current year presentation. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for the full year.
(3) PUBLIC STOCK OFFERING
In connection with the consummation of the Company's initial public
offering in April 1998, the Company sold 1.7 million shares of its common stock.
Additionally in May 1998, the Company sold an additional 42,586 shares of its
common stock pursuant to and in connection with the underwriters' over-allotment
option. The Company received aggregate net proceeds of approximately $21.1
million from the sale of such shares, (collectively, the "Public Stock
Offering") after deducting the underwriting discount and other Public Stock
Offering expenses.
(4) COMPREHENSIVE INCOME
Comprehensive income is comprised of two components: net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
recorded as an element of stockholder's equity and are excluded from net income.
Other comprehensive income is comprised of foreign currency translation
adjustments from international subsidiaries. The components of comprehensive
income are listed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------ ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss).............................. $1,338 $(2,197) $2,914 $(592)
Other comprehensive income (loss).............. 11 92 (304) 72
------ ------- ------ -----
Comprehensive income (loss).................... $1,349 $(2,105) $2,610 $(520)
====== ======= ====== =====
</TABLE>
6
<PAGE>
DA CONSULTING GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) EARNINGS PER SHARE
Basic earnings per share has been computed based on the weighted average
number of common shares outstanding during the applicable period. Diluted
earnings per share includes the number of shares issuable upon exercise of stock
options, less the number of shares that could have been repurchased with the
exercise proceeds, using the treasury stock method.
The following table summarizes the Company's computation of earnings per
share for the three and nine months ended September 30, 1998 and 1999 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1998 1999 1998 1999
------ ------- ------ ------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share............................ $ 0.20 $ (0.34) $ 0.50 $(0.09)
====== ======= ====== ======
Net income (loss).......................................... $1,338 $(2,197) $2,914 $ (592)
====== ======= ====== ======
Weighted average shares outstanding........................ 6,555 6,419 5,775 6,452
Computation of diluted earnings per share:
Common shares issuable under outstanding stock options... 828 - 828 -
Less shares assumed repurchased with proceeds from
exercise of stock options................................ (561) - (561) -
------ ------- ------ ------
Adjusted weighted average shares outstanding............. 6,822 6,419 6,042 6,452
====== ======= ====== ======
Diluted earnings(loss) per share........................... $ 0.20 $ (0.34) $ 0.48 $(0.09)
====== ======= ====== ======
</TABLE>
Approximately 1,015,920 antidilutive options were excluded from the
calculation of diluted earnings per share for the three months and nine months
ended September 30, 1999.
7
<PAGE>
DA CONSULTING GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Geographic Financial Data
Revenues from the Company's operations are presented below by operating
division.
<TABLE>
<CAPTION>
EUROPE,
MIDDLE EAST
(In thousands) AMERICAS & AFRICA ASIA PACIFIC TOTAL
-------- ----------- ------------ --------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues..................................... $14,470 $ 5,891 $1,521 $21,882
Operating income............................. 1,260 788 43 2,091
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues...................................... 8,827 4,076 2,901 15,804
Operating income (loss)....................... (2,811) (872) 78 (3,605)
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues...................................... 35,984 15,403 4,786 56,173
Operating income (loss)....................... 3,090 1,476 385 4,951
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues...................................... 38,267 16,984 6,729 61,980
Operating income (loss)....................... (482) 38 (693) (1,137)
</TABLE>
8
<PAGE>
DA CONSULTING GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading international provider of education for employees of
companies which are implementing business information technology. The Company
provides customized change communications, education and performance support
services designed to maximize its clients' returns on their substantial
investments in business information technology.
Recognizing the global nature of its existing and prospective client base, the
Company has built a substantial international presence. The Company is
currently organized into three divisions: the Americas Division, which includes
its North, South, and Central America operations; the EMEA Division, which
includes its Europe, Middle East, and Africa operations; and the Asia Pacific
Division, which includes its Australia and Asia operations.
RESULTS OF OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue. Revenue decreased by $6.1 million, or 27.8%, from $21.9 million in
the third quarter of 1998 to $15.8 million in the third quarter of 1999,
reflecting decreases in volume of services offset partially by an increase in
rates. Revenues from the Americas Division decreased by 39.0% from $14.5
million to $8.8 million; revenues from the EMEA Division decreased by 30.8% from
$5.9 million to $4.1 million; and revenues from the Asia Pacific Division
increased by 90.7% from $1.5 million to $2.9 million. The Company ended the
third quarter with 727 total employees, down from 819 employees at the end of
the same period of the prior year. Revenue for the third quarter of 1999 was
28.3% less than revenue in the second quarter of 1999 due to a slowdown in the
market for complex computer software and to the postponement of several
projects as clients focus on Y2k readiness. The Company expects further revenue
decline in the fourth quarter of 1999.
Gross profit. Gross profit decreased by $3.3 million, or 30.7%, from $10.7
million in the third quarter of 1998 to $7.4 million in the third quarter of
1999 and decreased as a percent of revenue from 48.7% in the third quarter of
1998 to 46.7% in the third quarter of 1999. The decrease in the gross profit
margin percentage is primarily attributable to decreased staff utilization.
Selling and marketing expense. Selling and marketing expense increased
$275,000 or 20.4%, from $1.3 million in the third quarter of 1998 to $1.6
million in the third quarter of 1999, and increased as a percentage of revenue
from 6.2% in the third quarter of 1998 to 10.3% in the third quarter of 1999.
This increase as a percentage of revenue is primarily attributable to increased
marketing efforts.
Development expense. Development expense decreased $429,000, or 55.1%, from
$779,000 in the third quarter of 1998 to $350,000 in the third quarter of 1999,
and decreased as a percent of revenue from 3.6% in the third quarter of 1998 to
2.2% in the third quarter of 1999. Primary expenditures for development in third
quarter of 1999 were in preparation of the release of FastEd, a tool targeted
for middle market companies. The decrease is due to one time expenditures
incurred during the third quarter of 1998 related to the development of the
Company's Fast Implementation Toolset.
9
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General and administrative expense. General and administrative expense
increased by $2.6 million, or 40.0%, from $6.4 million in the third quarter of
1998 to $9.0 million in the third quarter of 1999 and increased as a percentage
of revenue from 29.4% in the third quarter of 1998 to 57.0% in the third quarter
of 1999. The increase in expense is attributable to the cost of building
administrative infrastructure including staff, systems and facilities. In
addition, during the third quarter of 1999, the Company incurred approximately
$1 million in non-capitalized costs related to the implementation of SAP
software as its primary information system. The Company also reserved
approximately $300,000 for leasehold abandonment costs related to the
implementation of cost reduction programs. These costs were offset in part by
reduced incentive compensation as a result of slowed year over year revenue
growth beginning late in the second quarter of 1999.
Operating income. Operating income decreased from $2.1 million in the third
quarter of 1998 to an operating loss of $3.6 million in the third quarter of
1999 and decreased as a percentage of revenue from 9.6% in the third quarter of
1998 to a loss of 22.8% in the third quarter of 1999. This decrease resulted
from rapid decreases in revenues resulting in lower expense coverage as compared
to the revenues in the first and second quarters of 1999.
Other income (expense) net. Other income (expense), net changed from income
of $161,000 in the third quarter of 1998 to income of $90,000 in the third
quarter of 1999. Interest income, net changed from income of $173,000 in the
third quarter of 1998 to income of $92,000 in the third quarter of 1999. The
decrease in interest income is due to investment earnings in 1998 from the
Company's investments of proceeds from the Public Stock Offering, which was
completed in April 1998, compared to lower investment levels in the current
period.
Provision for income taxes. The Company's effective tax rate was 40.6% in the
third quarter of 1998 compared to 37.5% in the third quarter of 1999. The high
effective rate for the third quarter of 1998 is the result of nondeductible
operating losses in various countries. The lower tax benefit rate for the third
quarter of 1999 was a result of losses in higher income tax rate countries
offset in part by earnings in lower income tax rate countries and nondeductible
operating losses in various countries.
Net income. The Company's net income decreased by $3.5 million from $1.3
million in the third quarter of 1998 to a net loss of $2.2 million in the third
quarter of 1999 for reasons discussed above. Diluted earnings per share
decreased from $0.20 in the third quarter of 1998 to a loss per share of $0.34
in the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue. Revenue increased by $5.8 million, or 10.3%, from $56.2 million in
the first nine months of 1998 to $62.0 million in the first nine months of 1999,
reflecting increases both in volume of services and in rates. Revenues from
the Americas Division increased by 6.3% from $36.0 million to $38.3 million;
revenues from the EMEA Division increased by 10.3% from $15.4 million to $17.0
million; and revenues from the Asia Pacific Division increased by 40.6% from
$4.8 million to $6.7 million. Revenue for the third quarter of 1999 was 28.3%
less than revenue in the second quarter of 1999 due to a slowdown in the market
for complex computer software and to the postponement of several projects as
clients focus on Y2k readiness.
Gross profit. Gross profit increased by $3.7 million, or 13.9%, from $26.9
million in the first nine months of 1998 to $30.7 million in the first nine
months of 1999 and increased as a percent of revenue from 47.9% in the first
nine months of 1998 to 49.5% in the first nine months of 1999. The increase in
10
<PAGE>
the gross profit margin percentage is primarily attributable to increases in
productivity and billing rates offset by decreased staff utilization in the
second and third quarters of 1999.
Selling and marketing expense. Selling and marketing expense increased $2.0
million or 52.0%, from $3.8 million in the first nine months of 1998 to $5.8
million in the first nine months of 1999, and increased as a percentage of
revenue from 6.7% for the first nine months of 1998 to 9.3% for the first nine
months of 1999. This increase as a percentage of revenue is primarily
attributable to increased expenditures and declining revenues late in the second
quarter of 1999.
Development expense. Development expense increased $292,000 or 19.2%, from
$1.5 million in the first nine months of 1998 to $1.8 million in the first nine
months of 1999, and increased as a percent of revenue from 2.7% in the first
nine months of 1998 to 2.9% in the first nine months of 1999. The increase is
primarily attributable to the Company's expansion of its service offerings and
the development of proprietary and third party technologies to be used in the
education programs delivered to its clients.
General and administrative expense. General and administrative expense
increased by $7.5 million, or 45.4%, from $16.7 million in the first nine months
of 1998 to $24.2 million in the first nine months of 1999 and increased as a
percentage of revenue from 29.7% in the first nine months of 1998 to 39.1% in
the same period of 1999. The increase in expense is attributable to the cost of
building administrative infrastructure including staff, systems and facilities.
In addition, the period included approximately $1 million in non-capitalized
costs related to the implementation of SAP software as its primary information
system. The Company incurred costs totaling $575,000 during the first nine
months of 1999 for the termination of employees. The Company also recorded
approximately $300,000 for leasehold abandonment costs related to the
implementation of cost reduction programs. The costs were offset by reduced
incentive compensation in the third quarter of 1999 as a result of slowed year
over year revenue growth.
Operating income. Operating income decreased from $5.0 million in the first
nine months of 1998 to an operating loss of $1.1 million in the first nine
months of 1999 and decreased as a percentage of revenue from 8.8% in the first
nine months of 1998 to a loss of 1.8% in the first nine months of 1999. This
decrease resulted from rapid decreases in revenues resulting in reduced margins
and lower expense coverage.
Other income (expense) net. Other income (expense), net changed from expense
of $112,000 in the first nine months of 1998 to income of $219,000 in the first
nine months of 1999. Interest income, net changed from income of $179,000 in
the first nine months of 1998 to income of $309,000 in the first nine months of
1999. The increase in interest income is due to investment earnings from the
Company's investments of proceeds from the Initial Public Offering, which was
completed in April 1998. Prior to the Initial Public Offering the company
borrowed against a line of credit.
Provision for income taxes. The Company's effective tax rate was 39.8% in the
first nine months of 1998 compared to 35.5% in the first nine months of 1999.
The decrease in the effective rate is due to earnings in lower income tax rate
countries and nondeductible operating losses in various countries.
Net income. The Company's net income (loss) decreased $3.5 million from $2.9
million in the first nine months of 1998 compared to a loss of $592,000 in the
first nine months of 1999 for reasons discussed above. Diluted earnings (loss)
per share decreased from $0.48 in the first nine months of 1998 to a loss of
$0.09 in the first nine months of 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $7.1 million at September 30,
1999, compared to $10.0 million at December 31, 1998. The Company's working
capital was $19.9 million at September 30, 1999 and $25.6 million at December
31, 1998.
The Company's operating activities required cash of $3.6 million for the nine
months ended September 30, 1999, compared to $604,000 provided by operations for
the same period in 1998. The increase in cash used in operations resulted
primarily from operating losses incurred in the third quarter of 1999. The
increase also resulted from differences in the timing of payments of accounts
payable and accrued liabilities in the nine months ended September 30, 1999,
compared to the same period in 1998.
Investing activities provided cash of $2.1 million in the nine months ended
September 30, 1999, compared to cash used of $13.4 million for the same period
in 1998, primarily due to sales of short term investments during the first nine
months of 1999. This was offset in part by purchases of property and equipment
principally related to the implementation cost of the Company's primary
information system. During the first nine months of 1998, the Company purchased
approximately $9.9 million in short term investments and purchased a license for
its new software system.
Financing activities used cash of $1.4 million for the nine months ended
September 30, 1999, compared to cash provided of $19.3 million of the same
period of 1998. The Company repurchased 200,000 shares of common stock for $1.9
million and sold approximately 69,000 shares to employees under stock option
plans for $537,000 during 1999. Cash provided in 1998 primarily consisted of
$22.0 million in net proceeds from an Initial Public Offering offset by a $3.2
million repayment of its revolving line of credit during that period.
The Company has a $5.0 million unsecured revolving line of credit with a
commercial bank, which bears interest at the prime rate of interest plus 0.5%.
The Company may utilize this line of credit to finance a portion of its working
capital needs.
During 1999, the Company originally planned approximately $10.0 million in
capital expenditures, primarily for office furniture, computer and office
equipment and leasehold improvements to support the anticipated growth in its
professional and administrative staff. Capital expenditures in the first nine
months of 1999 were $5.6 million, of which $3 million was related to the
implementation costs of the Company's primary information system. Capital
expenditures for the remainder of 1999 have been scaled back significantly due
to a temporary decline in the market for the Company's services.
The Company believes its current cash balances, cash from future operations,
and its revolving line of credit will be sufficient to meet the Company's
working capital and cash needs for at least the next twelve months.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are not
historical facts which constitute forward-looking statements within the meaning
of the Private Securities Legislation Reform Act of 1995 which provides a safe
harbor for forward-looking statements. These forward-looking statements,
including those relating to Year 2000 compliance issues, are subject to
substantial risks and uncertainties that could cause the Company's actual
results, performance or achievements to differ materially from those expressed
or implied by these forward-looking statements. When used in this
12
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Report, the words "anticipate," "believe," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. Actual future results and trends may differ
materially from historical results as a result of certain factors, including but
not limited to: dependence on SAP AG and the ERP software market, risks
associated with management of a geographically dispersed organization,
fluctuating quarterly results, the need to attract and retain professional
employees, substantial competition, dependence on key personnel, risks
associated with management of growth, rapid technological change, limited
protection of proprietary expertise, methodologies and software, as well as
those set forth in the Liquidity and Capital Resources section of Management's
Discussion and Analysis section in the Company's Annual Report on Form 10-K and
other filings with the Securities and Exchange Commission.
YEAR 2000 COMPLIANCE ISSUES
Assessment: The Company has analyzed and identified the anticipated
consequences that the Year 2000 issue may have on its worldwide operations. The
major systems in use by the Company may be affected by the Year 2000 issue.
However, the Company has taken the significant steps described below toward
minimizing the risk associated with non-compliance.
Internal Project: During 1998, the Company began to implement plans to ensure
that its systems continue to meet its internal and external requirements.
During the first quarter of 1999, the Company completed the Year 2000
remediation of its corporate headquarters and Americas division based on
currently available information. The Company completed this remediation process
for its EMEA and Asia Pacific divisions in the second quarter of 1999.
Implementation of the SAP system was completed during the third quarter of 1999.
The company is currently processing daily transactions on its new SAP system.
Internal Systems: In addition to computer and software systems, the Company
recognizes that the use of internal systems such as telephone systems and other
business-related items may be affected by the Year 2000 issue. The Company is
currently addressing the potential effects and the cost to mitigate these
effects, and believes that the necessary steps can be taken to upgrade or
replace these items without a material impact on the Company's financial
position.
Third Parties: The Company has communicated and will continue to communicate
with third parties with which the Company does business in order to identify, to
the extent possible, the status of such parties' Year 2000 readiness. Although
these companies have confirmed that they will indeed be compliant by the Year
2000, the Company has limited or no control over the actions taken by these
third parties. Accordingly, there can be no assurance that all third parties
with which the Company does business will successfully resolve all of their Year
2000 compliance issues. The failure of these third parties to resolve their
Year 2000 compliance issues could have an adverse effect on the Company. The
Company's present analysis of its worst case scenario included Year 2000
failures in the telecommunications and electricity industries that may cause
disruptions in the Company's operations, thus causing an inability to provide
services to customers and temporary financial losses.
Contingency Plan: While the Company is in the process of addressing its Year
2000 issues prior to being affected by them, there can be no assurances as to
the ultimate success of the Company's compliance efforts. Uncertainties exist
as to the Company's ability to detect all Year 2000 problems. Management
believes that current monitoring and actions provide ample response time to
avoid material and adverse effects on the Company's business and financial
results, however, the Company is unable to quantify at
13
<PAGE>
this time the potential effect of any customer or Company non-compliance on the
Company's business or financial results. The Company has completed over 90% of
its system conversions at September 30, 1999.
The total expected cost of the Company's current systems conversion is
approximately $8.0 million, of which substantially all has been expended. This
conversion is not necessary in order for the Company to become Year 2000
compliant. The cost of converting the only non-compliant system would have been
nominal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds short-term investments, which consist of variable rate
municipal debt instruments. The Company uses a sensitivity analysis technique to
evaluate the hypothetical effect that changes in market interest rates may have
on the fair value of the Company's investments. At September 30, 1999, the
potential decrease in the fair value of investments assuming a ten percent
adverse change in the market rates is not significant.
DA CONSULTING GROUP, INC.
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 - Bylaws of the Company, as amended on August 6, 1999
Exhibit 10.1 - Change in Control Separation Agreement between DA
Consulting Group, Inc. and Dennis C. Fairchild dated
November 2, 1999.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period ended
September 30, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DA CONSULTING GROUP, INC.
(Registrant)
Dated: November 12, 1999 By: /s/ Nicholas H. Marriner
--------------------------------------------
Nicholas H. Marriner
Chairman and Chief Executive Officer
By: /s/ Dennis C. Fairchild
--------------------------------------------
Dennis C. Fairchild
Chief Financial Officer, Secretary and
Treasurer
By: /s/ Lynne P. Hohlfeld
--------------------------------------------
Lynne P. Hohlfeld
International Corporate Controller
(Principal Accounting Officer)
15
<PAGE>
EXHIBIT 3.1
DA CONSULTING GROUP, INC.
A TEXAS CORPORATION
BYLAWS
ARTICLE 1
OFFICES
Section 1.1. Registered Office. The registered office of the Company
within the State of Texas shall be located at either (i) the principal place of
business of the Company in the State of Texas or (ii) the office of the
corporation or individual acting as the Company's registered agent in Texas.
Section 1.2. The Company may, in addition to its registered office in
the State of Texas, have such other offices and places of business, both within
and without the State of Texas, as the Board of Directors of the Company (the
"Board") may from time to time determine or as the business and affairs of the
Company may require.
ARTICLE 2
SHAREHOLDER MEETINGS
Section 2.1. Annual Meetings. Annual meetings of shareholders shall be
held at a place and time on any weekday which is not a holiday as shall be
designated by the Board and stated in the notice of the meeting, at which the
shareholders shall elect the directors of the Company and transact such other
business as may properly be brought before the meeting.
Section 2.2. Special Meetings. Special meetings of the shareholders,
for any purpose or purposes, unless otherwise prescribed by law or by the
Articles of Incorporation, (i) may be called by the Chairman of the Board or the
President and (ii) shall be called by the President or Secretary at the request
in writing of a majority of the Board or shareholders owning capital stock of
the Company representing at least fifty percent (50%) of the votes of all
capital stock of the Company entitled to vote thereat. Such request of the Board
or the shareholders shall state the purpose or purposes of the proposed meeting.
Section 2.3. Notices. Written or printed notice of each shareholders'
meeting stating the place, date and hour of the meeting shall be given to each
shareholder of record entitled to vote thereat by or at the direction of the
President, the Secretary or the officer or
<PAGE>
person calling such meeting not less than ten (10) nor more than sixty (60) days
before the date of the meeting. If said notice is for a shareholders' meeting
other than an annual meeting, it shall in addition state the purpose or purposes
for which said meeting is called, and the business transacted at such meeting
shall be limited to the matters so stated in said notice and any matters
reasonably related thereto. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to each shareholder
at his address as it appears on the stock transfer books of the Company, with
postage thereon prepaid.
Section 2.4. Quorum. The presence at a shareholders' meeting of the
holders, present in person or represented by proxy, of capital stock of the
Company representing a majority of the votes of all capital stock of the Company
entitled to vote thereat shall constitute a quorum at such meeting for the
transaction of business except as otherwise provided by law, the Articles of
Incorporation or these Bylaws. If a quorum shall not be present or represented
at any meeting of the shareholders, the holders of capital stock of the Company
representing a majority of the votes of all capital stock of the Company
entitled to vote thereat and present in person or represented by proxy shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At any such reconvened meeting at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
reconvened meeting, a notice of said reconvened meeting shall be given to each
shareholder entitled to vote at said meeting. The shareholders present at a
duly convened meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Section 2.5. Voting of Shares.
2.5.1. Voting Lists. The officer or agent who has charge of the
stock transfer books of the Company shall prepare, at least ten (10) days before
every meeting of shareholders, a complete list of the shareholders entitled to
vote thereat arranged in alphabetical order and showing the address and the
number of shares registered in the name of each shareholder. Such list shall be
open to the examination of any such shareholder, for any purpose germane to the
meeting, during ordinary business hours for a period of at least ten (10) days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held and at the registered
office of the Company. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
shareholder who is present. The original stock transfer books shall be prima
facie evidence as to who are the shareholders entitled to examine such list or
transfer books or to vote at any meeting of shareholders. Failure to comply with
the requirements of this Section shall not affect the validity of any action
taken at said meeting.
<PAGE>
2.5.2. Votes Per Share. Unless otherwise provided by law or in the
Articles of Incorporation, each shareholder shall be entitled to one vote, in
person or by proxy, on each matter submitted to a vote at a meeting of the
shareholders, for each share of capital stock held by such shareholder.
2.5.3. Proxies. Every shareholder entitled to vote at a meeting or
to express consent or dissent without a meeting or a shareholder's duly
authorized attorney-in-fact may authorize another person or persons to act for
him by proxy. Each proxy shall be in writing, executed by the shareholder group,
the proxy or by his duly authorized attorney. No proxy shall be voted on or
after eleven (11) months from its date, unless the proxy provides for a longer
period. Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law.
2.5.4. Required Vote. When a quorum is present at any meeting, the
vote of the holders of capital stock of the Company representing a majority of
the votes of all capital stock of the Company entitled to vote thereat and
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which, by express provision
of law or the Articles of Incorporation or these Bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
2.5.5. Consents in Lieu of Meeting. Any action required to be or
which may be taken at any meeting of shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holder or holders of
shares having not less than the minimum number of votes that would be necessary
to take such action at a meeting at which the holders of all shares entitled to
vote on the action were present and voted. Such signed consent shall have the
same force and effect as a unanimous vote of shareholders and shall be filed
with the minutes of proceedings of the shareholders.
ARTICLE 3
DIRECTORS
Section 3.1. Purpose. The business and affairs of the Company
shall be managed by or under the direction of the Board, which may exercise all
such powers of the Company and do all such lawful acts and things as are not by
law, the Articles of Incorporation or these Bylaws directed or required to be
exercised or done by the shareholders. Directors need not be shareholders or
residents of the State of Texas.
Section 3.2. Number. The number of directors constituting the Board
shall never be less than one (1) and shall be determined by resolution of the
Board, except for the number of
<PAGE>
directors constituting the initial Board, which number is fixed by the Articles
of Incorporation.
Section 3.3. Election. Directors shall be elected by the shareholders
by plurality vote at each annual meeting of shareholders, except as hereinafter
provided, and each director so elected shall hold office until his successor has
been duly elected and qualified.
Section 3.4. Vacancies and Newly-Created Directorships.
3.4.1. Vacancies. Any vacancy occurring in the Board may be filled
in accordance with subsection 3.4.3 or may be filled by the affirmative vote of
a majority of the remaining directors though less than a quorum of the Board. A
director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.
3.4.2. Newly-Created Directorships. A directorship to be filled by
reason of an increase in the number of directors may be filled in accordance
with subsection 3.4.3 or may be filled by the Board for a term of office
continuing only until the next election of one or more directors by the
shareholders; provided that the Board may not fill more than two such
directorships during the period between any two successive annual meetings of
shareholders.
3.4.3. Election by Shareholders. Any vacancy occurring in the
Board or any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual or special meeting of
shareholders called for that purpose.
Section 3.5. Removal. Any director or the entire Board of Directors
may be removed, but only for cause, by the holders of a majority of the shares
then entitled to vote at an election of directors.
Section 3.6. Compensation. Unless otherwise restricted by the Articles
of Incorporation or these Bylaws, the Board shall have the authority to fix the
compensation of directors. The directors may be reimbursed for their expenses,
if any, of attendance at each meeting of the Board and may be paid either a
fixed sum for attendance at each meeting of the Board or a stated salary as
director. No such payment shall preclude any director from serving the Company
in any other capacity and receiving compensation therefor. Members of committees
of the Board may be allowed like compensation for attending committee meetings.
ARTICLE 4
BOARD MEETINGS
Section 4.1. Annual Meetings. The Board shall meet as soon as
practicable after the adjournment of each annual shareholders' meeting at the
place of such shareholders' meeting.
<PAGE>
No notice to the directors shall be necessary to legally convene this meeting,
provided a quorum is present.
Section 4.2. Regular Meetings. Regularly scheduled, periodic meetings
of the Board may be held without notice at such times and places as shall from
time to time be determined by resolution of the Board and communicated to all
directors.
Section 4.3. Special Meetings. Special meetings of the Board (i) may
be called by the Chairman of the Board or President and (ii) shall be called by
the President or Secretary on the written request of two directors or the sole
director, as the case may be. Notice of each special meeting of the Board shall
be given, either personally or as hereinafter provided, to each director at
least (i) twenty-four (24) hours before the meeting if such notice is delivered
personally or by means of telephone, telegram, telex or facsimile transmission
delivery; (ii) two days before the meeting if such notice is delivered by a
recognized express delivery service; and (iii) three days before the meeting if
such notice is delivered through the United States mail. Any and all business
may be transacted at a special meeting which may be transacted at a regular
meeting of the Board. Except as may be otherwise expressly provided by law, the
Articles of Incorporation or these Bylaws, neither the business to be transacted
at, nor the purpose of, any special meeting need be specified in the notice or
waiver of notice of such meeting.
Section 4.4. Quorum, Required Vote. A majority of the directors shall
constitute a quorum for the transaction of business at any meeting of the Board,
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board, except as may be otherwise
specifically provided by law, the Articles of Incorporation or these Bylaws. If
a quorum shall not be present at any meeting, a majority of the directors
present may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present.
Section 4.5. Consent In Lieu of Meeting. Unless otherwise restricted
by the Articles of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board or any committee thereof may
be taken without a meeting, if a consent in writing, setting forth the action so
taken, is signed by all the members of the Board or committee, as the case may
be. Such signed consent shall have the same force and effect as a unanimous vote
at a meeting and shall be filed with the minutes of proceedings of the Board or
committee.
ARTICLE 5
COMMITTEES OF DIRECTORS
Section 5.1. Establishment; Standing Committees. The Board may by
resolution establish, name or dissolve one or more committees, each committee to
consist of one or more of the directors. Each committee, to the extent provided
in such resolution, shall have and may
<PAGE>
exercise all of the authority of the Board of Directors, except that no such
committee shall have the authority of the Board of Directors in reference to
amending the Articles of Incorporation, approving a merger or consolidation,
recommending to the shareholders the sale, lease or exchange of all or
substantially all of the property and assets of the corporation otherwise than
in the usual and regular course of business, recommending to the shareholders a
voluntary dissolution of the corporation or a revocation thereof, amending,
altering, or repealing the bylaws of the corporation or adopting new bylaws for
the corporation, filling vacancies in the Board or any such committee, filling
any directorship to be filled by reason of an increase in the number of
directors, electing or removing officers or members of any such committee,
fixing the compensation of any member of such committee or altering or repealing
any resolution of the Board which by its term provides that it shall not be so
amendable or repealable, and, unless such resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of shares of the corporation. Each committee shall keep
regular minutes of its meetings and report the same to the Board when required.
5.1.1. Audit Committee. The Audit Committee shall, from time to
time and to the extent it exists, but no less than two times per year, meet to
review and monitor the financial and cost accounting practices and procedures of
the Company, review the qualifications of the Company's independent auditors,
make recommendations to the Board of Directors regarding the selection of
independent auditors, review the scope, fees and results of any audit, review
non-audit services and related fees provided by the independent auditors, and to
report its findings and recommendations to the Board for final action. The Audit
Committee shall not be empowered to approve any corporate action, of whatever
kind or nature, and the recommendations of the Audit Committee shall not be
binding on the Board, except when, pursuant to the provisions of Section 5.2 of
these Bylaws, such power and authority have been specifically delegated to such
committee by the Board by resolution. In addition to the foregoing, the specific
duties of the Audit Committee shall be determined by the Board by resolution.
5.1.2. Compensation Committee. The Compensation Committee shall,
from time to time and to the extent it exists, meet to review the various
compensation plans, policies and practices of the Company, and to report its
findings and recommendations to the Board for final action. The Compensation
Committee shall be responsible for the administration of all salary for the
executive officers of the Company, including bonuses, and the administration of
the Company's compensation programs, including the grant of options under the
Company's 1997 Stock Option Plan, unless the Board has otherwise established a
Stock Option Committee to administer the Company's 1997 Stock Option Plan. The
Compensation Committee shall not be empowered to approve any other corporate
action, of whatever kind or nature, and any recommendations of the Compensation
Committee shall not be binding on the Board, except when, pursuant to the
provisions of Section 5.2 of these Bylaws, such power and authority have been
specifically delegated to such committee by the Board by resolution. In addition
to the foregoing, the specific duties of the Compensation Committee shall be
determined by the Board by resolution.
<PAGE>
Section 5.2. Available Powers. Any committee established pursuant to
Section 5.1 of these Bylaws, including the Audit Committee and the Compensation
Committee, but only to the extent provided in the resolution of the Board
establishing such committee or otherwise delegating specific power and authority
to such committee and as limited by law, the Articles of Incorporation and these
Bylaws, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Company, and may authorize the
seal of the Company to be affixed to all papers which may require it.
Section 5.3. Alternate Members. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee.
Section 5.4. Procedures. Time, place and notice, if any, of meetings
of a committee shall be determined by the members of such committee. At meetings
of a committee, a majority of the number of members designated by the Board
shall constitute a quorum for the transaction of business. The act of a majority
of the members present at any meeting at which a quorum is present shall be the
act of the committee, except as otherwise specifically provided by law, the
Articles of Incorporation or these Bylaws. If a quorum is not present at a
meeting of a committee, the members present may adjourn the meeting from time to
time, without notice other than an announcement at the meeting, until a quorum
is present.
ARTICLE 6
OFFICERS
Section 6.1. Elected Officers. The Board shall elect a President and
Secretary (collectively, the "Required Officers") having the respective duties
enumerated below and may elect such other officers having the titles and duties
set forth below which are not reserved for the Required Officers or such other
titles and duties as the Board may by resolution from time to time establish:
6.1.1. Chairman of the Board. The Chairman of the Board, or in his
absence, the President, shall preside when present at all meetings of the
shareholders and the Board. The Chairman of the Board shall advise and counsel
the President and other officers and shall exercise such powers and perform such
duties as shall be assigned to or required of him from time to time by the Board
or these Bylaws. The Chairman of the Board may execute bonds, mortgages and
other contracts requiring a seal under the seal of the Company, except where
required by law to be otherwise signed and executed and except where the signing
and execution thereof shall be expressly delegated by the Board to some other
officer or agent of the Company. The Chairman of the Board may delegate all or
any of his powers or duties to the President, if and to the extent deemed by the
Chairman of the Board to be desirable or appropriate.
<PAGE>
6.1.2. President. The President shall be the Chief Executive Officer
of the Company, unless the Board of Directors designates the Chairman of the
Board as Chief Executive Officer, and shall have general and active management
of the business and affairs of the Company and shall see that all orders and
resolutions of the Board are carried into effect. The President may agree upon
and execute all leases, contracts, evidences of indebtedness, and other
obligations in the name of the corporation and may sign all certificates for
shares of capital stock of the corporation; and shall have such other powers and
duties as designated in accordance with these Bylaws and as from time to time
may be assigned to him by the Board of Directors. In the absence of the Chairman
of the Board or in the event of his inability or refusal to act, the President
shall perform the duties and exercise the powers of the Chairman of the Board.
6.1.3. Chief Operating Officer. The chief operating officer shall have
supervision of the operation of the corporation, subject to the policies and
directions of the Board. He shall provide for the proper operation of the
corporation and oversee the internal interrelationship amongst any and all
departments of the corporation. He shall submit to the chief executive officer
and the board of directors timely reports on the operations of the corporation.
6.1.4. Chief Financial Officer. The chief financial officer shall be
the chief accounting officer of the corporation and shall arrange for the
keeping of adequate records of all assets, liabilities and transactions of the
corporation. He shall provide for the establishment of internal controls and see
that adequate audits are currently and regularly made. He shall submit to the
chief executive officer and the board timely statements of the accounts of the
corporation and the financial results of the operations thereof.
6.1.5. Vice Presidents. In the absence of the President or in the
event of his inability or refusal to act, the Vice President (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Board, or in the absence of any designation, then in the order
of their election or appointment) shall perform the duties of the President, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. The Vice Presidents shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
6.1.6. Secretary. The Secretary shall attend all meetings of the
shareholders, the Board and (as required) committees of the Board and shall
record all the proceedings of such meetings in minute books to be kept for that
purpose. He shall give, or cause to be given, notice of all meetings of the
shareholders and special meetings of the Board and shall perform such other
duties as may be prescribed by the Board or the President. He shall have custody
of the corporate seal of the Company and he, or an Assistant Secretary, shall
have authority to affix the same to any instrument requiring it, and when so
affixed, it may be attested by his signature or by the signature of such
Assistant Secretary. The Board may give general authority to any other officer
to affix the seal of the Company and to attest the affixing thereof by his
signature.
<PAGE>
6.1.7. Assistant Secretaries. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
(or if there be no such determination, then in the order of their election or
appointment) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
6.1.8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities, shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board. He shall
disburse the funds of the Company as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the President and the
Board, at its regular meetings, or when the Board so requires, an account of all
his transactions as treasurer and of the financial condition of the Company. He
may, when necessary or proper, endorse on behalf of the corporation for
collection checks, notes and other obligations and shall deposit the same to the
credit of the corporation in such banks or depositories as shall be designated
in the manner prescribed by the Board of Directors, and he may sign all receipts
and vouchers for payments made to the corporation, either along or jointly with
such other officer as is designated by the Board of Directors.
6.1.9. Assistant Treasurers. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board (or if there be no such determination, then in the order of their election
or appointment) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
6.1.10. Divisional Officers. Each division of the Company, if any,
may have a President, Secretary, Treasurer or Controller and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other assistant
officers. Any number of such offices may be held by the same person. Such
divisional officers will be appointed by, report to and serve at the pleasure of
the Board and such other officers that the Board may place in authority over
them. The officers of each division shall have such authority with respect to
the business and affairs of that division as may be granted from time to time by
the Board, and in the regular course of business of such division may sign
contracts and other documents in the name of the division where so authorized;
provided that in no case and under no circumstances shall an officer of one
division have authority to bind any other division of the Company except as
necessary in the pursuit of the normal and usual business of the division of
which he is an officer.
<PAGE>
Section 6.2. Election. All elected officers shall serve until their
successors are duly elected and qualified or until their earlier death,
disqualification, retirement, resignation or removal from office.
Section 6.3. Appointed Officers. The Board may also appoint or
delegate the power to appoint such other officers, assistant officers and
agents, and may also remove such officers and agents or delegate the power to
remove same, as it shall from time to time deem necessary, and the titles and
duties of such appointed officers may be as described in Section 6.1 for elected
officers; provided that the officers and any officer possessing authority over
or responsibility for any functions of the Board shall be elected officers.
Section 6.4. Multiple Officeholders, Shareholder and Director
Officers. Any number of offices may be held by the same person, unless the
Articles of Incorporation or these Bylaws otherwise provide. Officers need not
be shareholders or residents of the State of Texas. Officers, such as the
Chairman of the Board, possessing authority over or responsibility for any
function of the Board must be directors.
Section 6.5. Compensation, Vacancies. The compensation of elected
officers shall be set by the Board. The Board shall also fill any vacancy in an
elected office. The compensation of appointed officers and the filling of
vacancies in appointed offices may be delegated by the Board to the same extent
as permitted by these Bylaws for the initial filling of such offices.
Section 6.6. Additional Powers and Duties. In addition to the
foregoing especially enumerated powers and duties, the several elected and
appointed officers of the Company shall perform such other duties and exercise
such further powers as may be provided by law, the Articles of Incorporation or
these Bylaws or as the Board may from time to time determine or as may be
assigned to them by any competent committee or superior officer.
Section 6.7. Removal. Any officer or agent or member of a committee
elected or appointed by the Board may be removed by the Board whenever in its
judgment the best interest of the Company will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent or member of a
committee shall not of itself create contract rights.
ARTICLE 7
SHARE CERTIFICATES
Section 7.1. Entitlement to Certificates. Every holder of the capital
stock of the Company, unless and to the extent the Board by resolution provides
that any or all classes or series of stock shall be uncertificated, shall be
entitled to have a certificate, in such form as is
<PAGE>
approved by the Board and conforms with applicable law, certifying the number of
shares owned by him. Each certificate representing shares shall state upon the
face thereof:
(1) that the corporation is organized under the laws of the State of Texas;
(2) the name of the person to whom issued;
(3) the number and class of shares and the designation of the series, if any,
which such certificate represents; and
(4) the par value of each share represented by such certificate, or a statement
that the shares are without par value.
Section 7.2. Multiple Classes of Stock; Preemptive Rights. In the
event the Company shall be authorized to issue shares of more than one class,
each certificate representing shares issued by the Company (1) shall
conspicuously set forth on the face or back of the certificate a full statement
of (a) all of the designations, preferences, limitations and relative rights of
the shares of each class authorized to be issued and, (b) if the Company is
authorized to issue shares of any preferred or special class in series, the
variations in the relative rights and preferences of the shares of each such
series to the extent they have been fixed and determined and the authority of
the Board to fix and determine the relative rights and preferences of subsequent
series; or (2) shall conspicuously state on the face or back of the certificate
that (a) such a statement is set forth in the Articles of Incorporation on file
in the office of the Secretary of State of the State of Texas and (b) the
Company will furnish a copy of such statement to the record holder of the
certificate without charge on written request to the Company at its principal
place of business or registered office. In the event the Company has by its
Articles of Incorporation limited or denied the preemptive right of shareholders
to acquire unissued or treasury shares of the Company, each certificate
representing shares issued by the Company (1) shall conspicuously set forth on
the face or back of the certificate a full statement of the limitation or denial
of preemptive rights contained in the Articles of Incorporation, or (2) shall
conspicuously state on the face or back of the certificate that (a) such a
statement is set forth in the Articles of Incorporation on file in the office of
the Secretary of State of the State of Texas and (b) the Company will furnish a
copy of such statement to the record holder of the certificate without charge on
request to the Company at its principal place of business or registered office.
Section 7.3. Signatures. Each certificate representing capital stock
of the Company shall be signed by or in the name of the Company by (1) the
Chairman of the Board, the Chief Executive Officer, the President or a Vice
President; and (2) the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of the Company. The signatures of the officers of the
Company may be facsimiles. In case any officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office before such certificate is issued, it may be issued by the Company with
the same effect as if he held such office on the date of issue.
<PAGE>
Section 7.4. Issuance and Payment. Subject to any provision of the
Constitution of the State of Texas to the contrary, the Board may authorize
shares to be issued for consideration consisting of any tangible or intangible
benefit to the Company, including, cash, promissory notes, services performed,
contracts for services to be performed, or other securities of the Company.
Shares may not be issued until the full amount of the consideration, fixed as
provided by law, has been paid. When such consideration shall have been paid to
the Company or to a corporation of which all the outstanding shares of each
class are owned by the Company, the shares shall be deemed to have been issued
and the subscriber or shareholder entitled to receive such issue shall be a
shareholder with respect to such shares, and the shares shall be considered
fully paid and non-assessable. In the absence of fraud in the transaction, the
judgment of the Board or the shareholders, as the case may be, as to the value
of the consideration received for shares shall be conclusive.
Section 7.5. Lost Certificates. The Board may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Company alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Company a bond in such sum as it may direct as indemnity against any
claim that may be made against the Company with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 7.6. Transfer of Stock. Upon surrender to the Company or its
transfer agent, if any, of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignation or authority to transfer and of
the payment of all taxes applicable to the transfer of said shares, the Company
shall be obligated to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books; provided,
however, that the Company shall not be so obligated unless such transfer was
made in compliance with applicable state and federal securities laws.
Section 7.7. Registered Shareholders. The Company shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, vote and be held liable for calls and
assessments and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any person other than such
registered owner, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
<PAGE>
ARTICLE 8
INDEMNIFICATION
Section 8.1. Definitions. For purposes of this Article VIII:
(1) "Corporation" includes any domestic or foreign predecessor entity of the
Company in a merger, consolidation, or other transaction in which the
liabilities of the predecessor are transferred to the Company by operation
of law and in any other transaction in which the Company assumes the
liabilities of the predecessor but does not specifically exclude
liabilities that are the subject matter of this article;
(2) "Director" means any person who is or was a director of the Company and any
person who, while a director of the Company, is or was serving at the
request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another
foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise;
(3) "Expenses" include, without limitation, court costs and attorneys' fees;
(4) "Official capacity" means
(i) when used with respect to a Director, the office of Director of the
Company, but does not include service for any other foreign or domestic
corporation or any partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise;
(ii) when used with respect to a person other than a Director, the
elective or appointive office in the Company held by the officer or the
employment or agency relationship undertaken by the employee or agent on behalf
of the Company, but does not include service for any other foreign or domestic
corporation or any partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise; and
(5) "Proceeding" means any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, any appeal in such an action, suit, or proceeding, and any
inquiry or investigation that could lead to such an action, suit, or
proceeding.
Section 8.2. Mandatory Indemnification. The Company shall indemnify a
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a Director only if it is determined
in accordance with Section 8.6 of this Article 8 that the person:
(a) conducted himself in good faith;
(b) reasonably believed:
<PAGE>
(i) in the case of conduct in his official capacity
as a Director of the Company, that his conduct was in the
Company's best interests; and
(ii) in all other cases, that his conduct was at
least not opposed to the Company's best interests; and
(c) in the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
In the event it is determined in accordance with Section 8.6 of this Article 8
that a person has met the applicable standard of conduct as to some matters but
not as to others, amounts to be indemnified may be reasonably prorated.
Section 8.3. Prohibited Indemnification. Except to the extent
permitted by Section 8.5 of this Article 8, a Director may not be indemnified
under Section 8.2 of this Article 8 in respect of a proceeding:
(a) in which the person is found liable on the basis that
personal benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's official capacity; or
(b) in which the person is found liable to the Company.
Section 8.4. Termination of Proceedings. The termination of a
proceeding by judgment, order, settlement, or conviction, or on a plea of nolo
contendere or its equivalent is not of itself determinative that the person did
not meet the requirements set forth in Section 8.2 of this Article 8. A person
shall be deemed to have been found liable in respect of any claim, issue or
matter only after the person shall have been so adjudged by a court of competent
jurisdiction after exhaustion of all appeals therefrom.
Section 8.5. Judgments, Expenses, etc. A person may be indemnified
under Section 8.2 of this Article 8 against judgments, penalties (including
excise and similar taxes), fines, settlements, and reasonable expenses actually
incurred by the person in connection with the proceeding; but if the person is
found liable to the Company or is found liable on the basis that personal
benefit was improperly received by the person, the indemnification (1) is
limited to reasonable expenses actually incurred by the person in connection
with the proceeding and (2) shall not be made in respect of any proceeding in
which the person shall have been found liable for willful or intentional
misconduct in the performance of his duty to the Company.
Section 8.6. Determination of Indemnification. A determination of
indemnification under Section 8.2 of this Article 8 must be made:
<PAGE>
(a) by a majority vote of a quorum consisting of
directors who at the time of the vote are not named defendants or respondents in
the proceeding;
(b) if such a quorum cannot be obtained, by a majority
vote of a committee of the Board, designated to act in the matter by a majority
vote of all directors, consisting solely of two or more directors who at the
time of the vote are not named defendants or respondents in the proceeding;
(c) by special legal counsel selected by the Board or a
committee thereof by vote as set forth in subsection (1) or (2) of this Section
8.6, or, if such a quorum cannot be obtained and such a committee cannot be
established, by a majority vote of all Directors; or
(d) by the shareholders of the Company in a vote that
excludes the shares held by Directors who are named defendants or respondents in
the proceeding.
Section 8.7. Determination of Reasonableness of Expenses.
Determination as to reasonableness of expenses must be made in the same manner
as the determination that indemnification is permissible, except that if the
determination that indemnification is permissible is made by special legal
counsel, determination as to reasonableness of expenses must be made in the
manner specified by subsection (c) of Section 8.6 of this Article 8 for the
selection of special legal counsel.
Section 8.8. Indemnification Against Reasonable Expenses. The Company
shall indemnify a Director against reasonable expenses incurred by him in
connection with a proceeding in which he is a named defendant or respondent
because he is or was a Director if he has been wholly successful, on the merits
or otherwise, in the defense of the proceeding.
Section 8.9. Payments in Advance of Disposition. Reasonable expenses
incurred by a Director who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without any
of the determinations specified in Sections 8.6 and 8.7 of this Article 8, after
the Company receives a written affirmation by the Director of his good faith
belief that he has met the standard of conduct necessary for indemnification
under this Article 8 and a written undertaking by or on behalf of the Director
to repay the amount paid or reimbursed if it is ultimately determined that he
has not met those requirements.
Section 8.10. Written Undertaking. The written undertaking required by
Section 8.9 of this Article 8 must be an unlimited general obligation of the
Director but need not be secured. It may be accepted without reference to
financial ability to make repayment.
Section 8.11. Consistency with Articles of Incorporation. Any
provision for the Company to indemnify or to advance expenses to a Director who
was, is, or is threatened to be
<PAGE>
made a named defendant or respondent in a proceeding, whether contained in the
Articles of Incorporation, these Bylaws, a resolution of shareholders or
Directors, an agreement, or otherwise, except in accordance with Section 8.16 of
this Article 8, is valid only to the extent it is consistent with this Article 8
as limited by the Articles of Incorporation, if such a limitation exists.
Section 8.12. Other Expenses. Notwithstanding any other provision of
this Article 8, the Company may pay or reimburse expenses incurred by a Director
in connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Section 8.13. Officers, Employees and Agents. An officer, employee or
agent of the Company shall be indemnified as, and to the same extent, provided
by Section 8.8 of this Article 8 for a Director and is entitled to seek
indemnification under such Section to the same extent as a Director. The
Company shall advance expenses to an officer and may advance expenses to an
employee or agent of the Company to the same extent that it shall advance
expenses to Directors under this Article 8.
Section 8.14. Other Capacities. A corporation may indemnify and
advance expenses to persons who are not or were not officers, employees, or
agents of the Company, but who are or were serving at the request of the Company
as a director, officer, partner, venturer, proprietor, trustee, employee, agent,
or similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise to the same extent that it shall indemnify and advance expenses to
Directors under this Article 8.
Section 8.15. Further Indemnification. The Company may indemnify and
advance expenses to an officer, employee, agent, or person identified in Section
8.14 of this Article 8 and who is not a Director to such further extent,
consistent with law, as may be provided by the Articles of Incorporation, these
Bylaws, general or specific action of the Board, or contract or as permitted or
required by common law.
Section 8.16. Continuation of Indemnification. The indemnification and
advance payment provided by this Article 8 shall continue as to a person who has
ceased to hold his position as a director, officer, employee or agent, or other
person described in Article 8, Section 8.14, and shall inure to his heirs,
executors and administrators.
Section 8.17. Insurance. The Company may purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
Director, officer, employee, or agent of the Company or who is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, against any liability asserted
against him and incurred by him in
<PAGE>
such a capacity or arising out of his status as such a person, whether or not
the Company would have the power to indemnify him against that liability under
this Article 8. If the insurance or other arrangement is with a person or entity
that is not regularly engaged in the business of providing insurance coverage,
the insurance or arrangement may provide for payment of a liability with respect
to which the Company would not have the power to indemnify the person only if
including coverage for the additional liability has been approved by the
shareholders of the Company. Without limiting the power of the Company to
procure or maintain any kind of insurance or other arrangement, the Company may,
for the benefit of persons indemnified by the Company, (1) create a trust fund;
(2) establish any form of self-insurance; (3) secure its indemnity obligation by
grant of a security interest or other lien on the assets of the Company; or (4)
establish a letter of credit, guaranty, or surety arrangement. The insurance or
other arrangement may be procured, maintained, or established within the Company
or with any insurer or other person deemed appropriate by the Board regardless
of whether all or part of the stock or other securities of the insurer or other
person are owned in whole or part by the Company. In the absence of fraud, the
judgment of the Board as to the terms and conditions of the insurance or other
arrangement and the identity of the insurer or other person participating in an
arrangement shall be conclusive and the insurance or arrangement shall not be
voidable and shall not subject the Directors approving the insurance or
arrangement to liability, on any ground, regardless of whether Directors
participating in the approval are beneficiaries of the insurance or arrangement.
Section 8.18. Report To Shareholders. Any indemnification of or
advance of expenses to a Director in accordance with this Article 8 shall be
reported in writing to the shareholders with or before the notice or waiver of
notice of the next shareholders' meeting or with or before the next submission
to shareholders of a consent to action without a meeting pursuant to Section A,
Article 9.10, of the Texas Business Corporation Act and, in any case, within the
12-month period immediately following the date of the indemnification or
advance.
Section 8.19. Employee Benefit Plans. For purposes of this Article 8,
the Company is deemed to have requested a Director to serve in capacity in
connection with an employee benefit plan whenever the performance by him of his
duties to the Company also imposes duties on or otherwise involves services by
him to the plan or participants or beneficiaries of the plan. Excise taxes
assessed on a Director with respect to an employee benefit plan pursuant to
applicable law are deemed fines. Action taken or omitted by him with respect to
an employee benefit plan in the performance of his duties for a purpose
reasonably believed by him to be in the interest of the participants and
beneficiaries of the plan is deemed to be for a purpose which is not opposed to
the best interests of the Company.
Section 8.20. Change in Governing Law. In the event of any amendment
or addition to Article 2.02-1 of the Texas Business Corporation Act or the
addition of any other section to such law which shall limit indemnification
rights thereunder, the Company shall, to the extent permitted by the Texas
Business Corporation Act, indemnify to the fullest extent
<PAGE>
authorized or permitted hereunder, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the Company), by reason of the fact
that he is or was a Director, officer, employee or agent of the Company or is
or was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise, against all
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses (including attorneys' fees and court costs) actually and
reasonably incurred by him in connection with such action, suit or proceeding.
Section 8.21. Construction. The indemnification provided by this
Article shall be subject to all valid and applicable laws, including, without
limitation, Article 2.02-1 of the Texas Business Corporation Act, and, in the
event this Article or any of the provisions hereof or the indemnification
contemplated hereby are found to be inconsistent with or contrary to any such
valid laws, the latter shall be deemed to control and this Article 8 shall be
regarded as modified accordingly, and, as so modified, to continue in full force
and effect.
Section 8.22. Contract Right. The foregoing indemnification and
advancement of expenses provisions shall be deemed to be a contract between the
corporation and each director and officer who serves in any such capacity at any
time while these provisions, as well as the relevant provisions of the Texas
Business Corporation Act, are in effect, and any repeal or modification thereof
shall not affect any right or obligation then existing with respect to any state
of facts then or previously existing or any action, suit, or proceeding
previously or thereafter brought or threatened based in whole or in part upon
any such state of facts. Such a "contract right" may not be modified
retroactively without consent of such director, officer, employee or agent.
Notwithstanding this provision and subject to applicable provisions of the Texas
Business Corporation Act, the corporation may enter into additional contracts of
indemnity with these persons to provide rights provided in these bylaws, or to
otherwise modify, amend, increase or decrease these rights, as the Board of
Directors may see fit.
Section 8.23. Effect of Amendment. No amendment, modification or
repeal of this Article 8 or any provision hereof shall in any manner terminate,
reduce or impair the right of any past, present or future persons to be
indemnified by the corporation, nor the obligation of the corporation to
indemnify any such persons, under and in accordance with the provisions of this
Article as in effect immediately prior to such amendment, modification or
repeal, with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
<PAGE>
ARTICLE 9
INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS
Section 9.1. Validity; Disclosure; Approval. No contract or
transaction between the Company and one or more of its directors or officers, or
between the Company and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers or have a financial interest, shall be void or voidable
solely because the director or officer is present at or participates in the
meeting of the Board or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(1) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or
(3) the contract or transaction is fair as to the Company as of the
time it is authorized, approved, or ratified by the Board, a committee thereof,
or the shareholders.
Section 9.2. Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board or of a committee
which authorizes the contract or transaction.
Section 9.3. Nonexclusive. This Article 9 shall not be construed to
invalidate any contract or transaction which would be valid in the absence of
this Article 9.
ARTICLE 10
MISCELLANEOUS
Section 10.1. Place of Meetings. All shareholders, directors and
committee meetings shall be held at such place or places, within or without the
State of Texas, as shall be designated from time to time by the Board or such
committee and stated in the notices thereof. If no such place is so designated,
said meetings shall be held at the principal business office of the Company.
<PAGE>
Section 10.2. Fixing Record Dates.
(a) In order that the Company may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, to receive payment of any dividend or other
distribution or allotment of any rights, to exercise any rights in respect of
any change, conversion or exchange of stock or to effect any other lawful
action, or to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
may fix, in advance, a record date for any such determination of shareholders,
which shall not be more than sixty (60) nor less than ten (10) days prior to the
date on which the particular action requiring such determination of shareholders
is to be taken. In the absence of any action by the Board, the date on which a
notice of meeting is given, or the date the Board adopts the resolution
declaring a dividend or other distribution or allotment or approving any change,
conversion or exchange, as the case may be, shall be the record date. A record
date validly fixed for any meeting of shareholders and the determination of
shareholders entitled to vote at such meeting shall be valid for any adjournment
of said meeting except where such determination has been made through the
closing of stock transfer books and the stated period of closing has expired.
(b) In order that the Company may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board, and which date shall not be more than ten (10) days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is otherwise required, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Company by delivery to its registered
office in the State of Texas, its principal place of business, or an officer or
agent of the Company having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to the Company's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board and prior action by the Board is
required, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the Board adopts the resolution taking such prior action.
Section 10.3. Notice and Waiver of Notice. Whenever any notice is
required to be given under law, the Articles of Incorporation or these Bylaws, a
written waiver of such notice, signed before or after the date of such meeting
by the person or persons entitled to said notice, shall be deemed equivalent to
such required notice. All such waivers shall be filed with the corporate
records. Attendance at a meeting shall constitute a waiver of notice of such
meeting, except where a person attends for the express purpose of objecting to
the transaction of any business on the ground that the meeting is not lawfully
called or convened. Whenever any notice is required to be given under law, the
Articles of Incorporation or these Bylaws, said notice shall be deemed to be
sufficient if given by depositing the same in a post office box in a
<PAGE>
sealed prepaid envelope addressed to the person entitled thereto at his post
office address as it appears on the books of the Company and such notice shall
be deemed to have been given on the day of such mailing.
Section 10.4. Attendance via Communications Equipment. Unless
otherwise restricted by law, the Articles of Incorporation or these Bylaws,
members of the Board, members of any committee thereof or the shareholders may
hold a meeting by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can
effectively communicate with each other. Such participation in a meeting shall
constitute presence in person at the meeting, except where a person participates
in the meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
Section 10.5. Dividends. Dividends on the capital stock of the
Company, paid in cash, property, or securities of the Company, or any
combination thereof, and as may be limited by applicable law and applicable
provisions of the Articles of Incorporation (if any), may be declared by the
Board at any regular or special meeting.
Section 10.6. Reserves. Before payment of any dividend, there may be
set aside out of any funds of the Company available for dividends such sum or
sums as the Board from time to time, in its absolute discretion, thinks proper
as a reserve or reserves to meet contingencies, for equalizing dividends, for
repairing or maintaining any property of the Company, or for such other purpose
as the Board shall determine to be in the best interest of the Company; and the
Board may modify or abolish any such reserve in the manner in which it was
created.
Section 10.7. Reports to Shareholders. The Board shall present at each
annual meeting of shareholders, and at any special meeting of shareholders when
called for by vote of the shareholders, a statement of the business and
condition of the Company.
Section 10.8. Contracts and Negotiable Instruments. Except as
otherwise provided by law or these Bylaws, any contract or other instrument
relative to the business of the Company may be executed and delivered in the
name of the Company and on its behalf by the Chairman of the Board, the
President, its Chief Operating Officer, the Chief Financial Officer or any Vice
President; and the Board may authorize any other officer or agent of the Company
to enter into any contract or execute and deliver any contract in the name and
on behalf of the Company, and such authority may be general or confined to
specific instances as the Board may by resolution determine. All bills, notes,
checks or other instruments for the payment of money shall be signed or
countersigned by such officer, officers, agent or agents and in such manner as
are permitted by these Bylaws and/or as, from time to time, may be prescribed by
resolution (whether general or special) of the Board. Unless authorized so to do
by these Bylaws or by the Board, no officer, agent or employee shall have any
power or authority to bind the Company by
<PAGE>
any contract or engagement, or to pledge its credit, or to render it liable
pecuniarily for any purpose or to any amount.
Section 10.9. Fiscal Year. The fiscal year of the Company shall be
fixed by resolution of the Board.
Section 10.10. Seal. The seal of the Company shall be in such form as
shall from time to time be adopted by the Board. The seal may be used by
causing it or a facsimile thereof to be impressed, affixed or otherwise
reproduced.
Section 10.11. Books and Records. The Company shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders, Board and committees and shall keep at its registered
office or principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
Section 10.12. Resignation. Any director, committee member, officer or
agent may resign by giving written notice to the Chairman of the Board, the
President or the Secretary. The resignation shall take effect at the time
specified therein, or immediately if no time is specified. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 10.13. Surety Bonds. Such officers and agents of the Company
(if any) as the Chairman of the Board, the President or the Board may direct,
from time to time, shall be bonded for the faithful performance of their duties
and for the restoration to the Company, in case of their death, resignation,
retirement, disqualification or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in their possession or under
their control belonging to the Company, in such amounts and by such surety
companies as the Chairman of the Board, the President or the Board may
determine. The premiums on such bonds shall be paid by the Company and the bonds
so furnished shall be in the custody of the Secretary.
Section 10.14. Proxies in Respect of Securities of Other Corporations.
The Chairman of the Board, the President, any Vice President or the Secretary
may from time to time appoint an attorney or attorneys or an agent or agents for
the Company to exercise, in the name and on behalf of the Company, the powers
and rights which the Company may have as the holder of stock or other securities
in any other corporation to vote or consent in respect of such stock or other
securities, and the Chairman of the Board, the President, any Vice President or
the Secretary may instruct the person or persons so appointed as to the manner
of exercising such powers and rights; and the Chairman of the Board, the
President, any Vice President or the Secretary may execute or cause to be
executed, in the name and on behalf of the Company and under its corporate seal
or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in order that the Company may exercise such powers and
rights.
<PAGE>
Section 10.15. Amendments. These Bylaws may be altered, amended,
repealed or replaced by the shareholders, or by the Board when such power is
conferred upon the Board by the Articles of Incorporation, at any annual
shareholders meeting or annual or regular meeting of the Board, or at any
special meeting of the shareholders or of the Board if notice of such
alteration, amendment, repeal or replacement is contained in the notice of such
special meeting. If the power to adopt, amend, repeal or replace these Bylaws
is conferred upon the Board by the Articles of Incorporation, the power of the
shareholders to so adopt, amend, repeal or replace these Bylaws shall not be
divested or limited thereby.
Bylaws Amended and Restated April 13, 1998
Section 2.1 Amended and Restated March 26, 1999
Section 5.1.2 Amended and Restated August 6, 1999
<PAGE>
EXHIBIT 10.1
CHANGE IN CONTROL
SEPARATION AGREEMENT
AGREEMENT between DA CONSULTING, GROUP, INC., a Texas corporation (the
"Company"), and Dennis Fairchild ("Executive"),
W I T N E S S E T H :
WHEREAS, the Company desires to retain certain key employee personnel and,
accordingly, the Board of Directors of the Company (the "Board") has approved
the Company entering into a separation agreement with Executive in order to
encourage Executive's continued service to the Company; and
WHEREAS, Executive is prepared to perform such services in return for
specific arrangements with respect to separation compensation and other
benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Executive agree as follows:
1. DEFINITIONS.
(a) "CHANGE IN CONTROL" means (i) any merger, consolidation, or
reorganization in which the Company is not the surviving entity (or survives
only as a subsidiary of an entity), (ii) any sale, lease, exchange, or other
transfer of all or substantially all of the assets of the Company to any other
person or entity (in one transaction or a series of related transactions), (iii)
dissolution or liquidation of the Company, (iv) as a result of or in connection
with a contested election of directors, the persons who were directors of the
Company before such election shall cease to constitute a majority of the Board,
or (v) any event that is reported by the Company under Item 1 of a Form 8-K
filed with the Securities and Exchange Commission; provided, however, that the
term "Change in Control" shall not include any reorganization, merger,
consolidation, sale, lease, exchange, or similar transaction involving solely
the Company and one or more previously wholly-owned subsidiaries of the Company
unless such matter is described in clause (v) above.
(b) "CHANGE IN DUTIES" shall mean the occurrence, on the date upon
which a Change in Control occurs or within two years thereafter, of any one or
more of the following:
(i) A significant reduction in the nature or scope of Executive's
authorities or duties from those applicable to Executive immediately prior
to the date on which a Change in Control occurs;
<PAGE>
(ii) A reduction in Executive's annual base salary or target
opportunity under any applicable bonus or incentive compensation plan or
arrangement from that provided to Executive immediately prior to the date
on which a Change in Control occurs;
(iii) A diminution in Executive's eligibility to participate in
bonus, stock option, incentive award and other compensation plans which
provide opportunities to receive compensation which are the greater of (A)
the opportunities provided by the Company (including its subsidiaries) for
executives with comparable duties or (B) the opportunities under any such
plans under which Executive was participating immediately prior to the date
on which a Change in Control occurs;
(iv) A diminution in employee benefits (including but not limited
to medical, dental, life insurance, and long-term disability plans) and
perquisites applicable to Executive from the greater of (A) the employee
benefits and perquisites provided by the Company (including its
subsidiaries) to executives with comparable duties or (B) the employee
benefits and perquisites to which Executive was entitled immediately prior
to the date on which a Change in Control occurs; or
(v) A change in the location of Executive's principal place of
employment by the Company by more than 50 miles from the location where
Executive was principally employed immediately prior to the date on which a
Change in Control occurs.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMPENSATION" shall mean the greater of:
(i) Executive's annual base salary at the rate in effect
immediately prior to the date on which a Change in Control occurs;
(ii) Executive's annual base salary at the rate in effect sixty
days prior to the date of Executive's Involuntary Termination; or
(iii) Executive's annual base salary at the rate in effect at
the time of Executive's Involuntary Termination.
(d) "INVOLUNTARY TERMINATION" shall mean any termination of
Executive's employment with the Company which:
(i) does not result from a resignation by Executive (other than
a resignation pursuant to clause (ii) of this subparagraph (d)); or
(ii) results from a resignation by Executive on or before the
date which is sixty days after the date upon which Executive receives
notice of a Change in Duties;
provided, however, the term "Involuntary Termination" shall not include a
Termination for Cause or any termination as a result of death, disability under
circumstances entitling Executive to benefits under the Company's long-term
disability plan, or Retirement.
2
<PAGE>
(e) "RETIREMENT" shall mean Executive's resignation on or after the
date Executive reaches age sixty-five.
(f) "SEPARATION AMOUNT" shall mean two hundred forty-three thousand,
two hundred fifty dollars ($243,250.00).
(g) "TERMINATION FOR CAUSE" shall mean Executive (i) has engaged in
gross negligence or willful misconduct in the performance of Executive's duties,
(ii) has willfully refused without proper legal reason to perform Executive's
duties and responsibilities, (iii) has materially breached any material
provision of any agreement between the Company and Executive, including without
limitation paragraph 2 herein, (iv) has materially breached any material
corporate policy maintained and established by the Company that is of general
applicability to the Company's executive employees, (v) has willfully engaged in
conduct that Executive knows or should know is materially injurious to the
Company or any of its affiliates, or (vi) has engaged in illegal conduct or any
act of serious dishonesty which adversely affects, or reasonably could in the
future adversely affect, the value, reliability, or performance of Executive in
a material manner; provided, however, that in no event shall a termination of
Executive's employment constitute a "Termination for Cause" unless such
termination is approved by at least two-thirds of the members of the Board after
Executive has been given written notice by the Company of the specific reason
for such termination and an opportunity for Executive, together with Executive's
counsel, to be heard before the Board. Members of the Board may participate in
any hearing that is required pursuant to this subparagraph (g) by means of
conference telephone or similar communications equipment by means of which all
persons participating in the hearing can hear and speak to each other; provided,
however, that at least one-half of the members of the Board shall attend the
hearing in person.
(h) "WELFARE BENEFIT PLANS" shall mean the medical, dental, life
insurance, accidental death and dismemberment, and long-term disability plans
provided by the Company to its active employees.
2. SERVICES. Executive agrees that Executive shall (a) render services to
the Company (as well as any subsidiary thereof or successor thereto) during the
period of Executive's employment to the best of Executive's ability and in a
prudent and businesslike manner and (b) devote substantially the same time,
efforts, and dedication to Executive's duties as heretofore devoted.
3. SEPARATION BENEFITS. If Executive's employment by the Company or any
successor thereto shall be subject to an Involuntary Termination that occurs on
the date upon which a Change in Control occurs or within two years thereafter,
then Executive shall be entitled to receive, as additional compensation for
services rendered to the Company (including its subsidiaries), the following
separation benefits:
(a) A lump sum cash payment in an amount equal to the Separation
Amount, which shall be paid to Executive on or before the thirty-first day after
the last day of Executive's employment with the Company.
(b) All of the outstanding stock options granted by the Company to
Executive shall become immediately exercisable in full upon Executive's
termination of employment and for
3
<PAGE>
a period of three months thereafter or for such greater period as may be
provided in the plan or plans pursuant to which such stock options were granted
(but in no event shall any such stock option be exercisable after the expiration
of the original term of such stock option).
(c) A lump sum cash payment in an amount equal to the greater of (i)
the Company's cost of coverage for Executive and those of Executive's dependents
(including Executive's spouse) who were covered, under the Welfare Benefit Plans
on the day prior to Executive's Involuntary Termination or (ii) the Company's
cost of such coverage paid immediately prior to the Change in Control, for a
period of two years. Nothing herein shall be deemed to adversely affect in any
way the rights of Executive and Executive's eligible dependents to health care
continuation coverage as required pursuant to Part 6 of Title I of the Employee
Retirement Income Security Act of 1974, as amended.
(d) Executive shall be entitled to receive out-placement services in
connection with obtaining new employment up to a maximum cost of twenty-five
thousand dollars ($25,000.00) (which shall be paid directly by the Company to
the provider of such services).
4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in
Paragraph 3(a) hereof is not made when due, the Company shall pay to Executive
interest on the amount payable from the date that such payment should have been
made under such paragraph until such payment is made, which interest shall be
calculated at the rate of 1% per month (with a partial month counting as a full
month).
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything
to the contrary in this Agreement, in the event that any payment or distribution
by the Company to or for the benefit of Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest or penalties, are hereinafter
collectively referred to as the "Excise Tax"), the Company shall pay to
Executive an additional payment (a "Gross-up Payment") in an amount such that
after payment by Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed on any
Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to
the Excise Tax imposed upon the Payments. The Company and Executive shall make
an initial determination as to whether a Gross-up Payment is required and the
amount of any such Gross-up Payment. Executive shall notify the Company
immediately in writing of any claim by the Internal Revenue Service which, if
successful, would require the Company to make a Gross-up Payment (or a Gross-up
Payment in excess of that, if any, initially determined by the Company and
Executive) within ten days of the receipt of such claim. The Company shall
notify Executive in writing at least ten days prior to the due date of any
response required with respect to such claim if it plans to contest the claim.
If the Company decides to contest such claim, Executive shall cooperate fully
with the Company in such action; provided, however, the Company shall bear and
pay directly or indirectly all costs and expenses (including additional interest
and penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including interest and penalties with respect thereto, imposed as a result
of the Company's action. If, as a result of the Company's action with respect
to a claim, Executive receives a refund of any amount paid by the
4
<PAGE>
Company with respect to such claim, Executive shall promptly pay such refund to
the Company. If the Company fails to timely notify Executive whether it will
contest such claim or the Company determines not to contest such claim, then the
Company shall immediately pay to Executive the portion of such claim, if any,
which it has not previously paid to Executive.
6. GENERAL.
(a) TERM. The effective date of this Agreement is September 30, 1999.
Within sixty days from and after the expiration of two years after said
effective date and within sixty days after each successive two-year period of
time thereafter that this Agreement is in effect, the Company shall have the
right to review this Agreement, and in its sole discretion either continue and
extend this Agreement, terminate this Agreement, or offer Executive a different
agreement. The Compensation Committee of the Board (excluding any member of
such committee who is covered by this Agreement or by a similar agreement with
the Company) will vote on whether to so extend, terminate, or offer Executive a
different agreement and will notify Executive of such action within said sixty-
day time period mentioned above. This Agreement shall remain in effect until so
terminated or modified by the Company. Failure of the Compensation Committee of
the Board to take any action within said sixty days shall be considered as an
extension of this Agreement for an additional two-year period of time.
Notwithstanding anything to the contrary contained in this "sunset provision,"
it is agreed that if a Change in Control occurs while this Agreement is in
effect, then this Agreement shall not be subject to termination or modification
under this "sunset provision," and shall remain in force for a period of two
years after such Change in Control, and if within said two years the contingency
factors occur which would entitle Executive to the benefits as provided herein,
this Agreement shall remain in effect in accordance with its terms. If, within
such two years after a Change in Control, the contingency factors that would
entitle Executive to said benefits do not occur, thereupon this two-year "sunset
provision" shall again be applicable with the sixty-day time period for action
by the Compensation Committee of the Board to thereafter commence at the
expiration of said two years after such Change in Control and on each two-year
anniversary date thereafter.
(b) INDEMNIFICATION. If Executive shall obtain any money judgment or
otherwise prevail with respect to any litigation brought by Executive or the
Company to enforce or interpret any provision contained herein, the Company, to
the fullest extent permitted by applicable law, hereby indemnifies Executive for
Executive's reasonable attorneys' fees and disbursements incurred in such
litigation and hereby agrees (i) to pay in full all such fees and disbursements
and (ii) to pay prejudgment interest on any money judgment obtained by Executive
from the earliest date that payment to Executive should have been made under
this Agreement until such judgment shall have been paid in full, which interest
shall be calculated at the rate of 1% per month (with a partial month counting
as a full month).
(c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or
cause one of its subsidiaries to pay) Executive the amounts and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company (including
its subsidiaries) may have against Executive or anyone else. All amounts
payable by the Company (including its subsidiaries hereunder) shall be paid
without notice or demand. Executive
5
<PAGE>
shall not be obligated to seek other employment in mitigation of the amounts
payable or arrangements made under any provision of this Agreement, and, except
as provided in Paragraph 3(c) hereof, the obtaining of any such other employment
shall in no event effect any reduction of the Company's obligations to make (or
cause to be made) the payments and arrangements required to be made under this
Agreement.
(d) SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company, by merger or otherwise.
This Agreement shall also be binding upon and inure to the benefit of Executive
and Executive's estate. If Executive shall die prior to full payment of amounts
due pursuant to this Agreement, such amounts shall be payable pursuant to the
terms of this Agreement to Executive's estate.
(e) SEVERABILITY. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction by reason of applicable law shall, as to
such jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
(f) NON-ALIENATION. Executive shall not have any right to pledge,
hypothecate, anticipate or assign this Agreement or the rights hereunder, except
by will or the laws of descent and distribution.
(g) NOTICES. Any notices or other communications provided for in this
Agreement shall be sufficient if in writing. In the case of Executive, such
notices or communications shall be effectively delivered if hand delivered to
Executive at Executive's principal place of employment or if sent by registered
or certified mail to Executive at the last address Executive has filed with the
Company. In the case of the Company, such notices or communications shall be
effectively delivered if sent by registered or certified mail to the Company at
its principal executive offices.
(h) CONTROLLING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas without regard to
conflict of law.
(i) FULL SETTLEMENT; WITHHOLDING. If Executive is entitled to and
receives the benefits provided hereunder, performance of the obligations of the
Company hereunder will constitute full settlement of all claims that Executive
might otherwise assert against the Company on account of Executive's termination
of employment. Any separation benefits paid pursuant to this Agreement shall be
deemed to be a separation payment and not "Compensation" for purposes of
determining benefits under the Company's qualified plans (unless and to the
extent that any such qualified plan expressly provides otherwise), and shall be
subject to any required tax withholding.
(j) UNFUNDED OBLIGATION. The obligation to pay amounts under this
Agreement is an unfunded obligation of the Company (including its subsidiaries),
and no such obligation shall create a trust or be deemed to be secured by any
pledge or encumbrance on any property of the Company (including its
subsidiaries).
6
<PAGE>
(k) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be deemed
to constitute a contract of employment, nor shall any provision hereof affect
(i) the right of the Company (or its subsidiaries) to discharge Executive at
will or (ii) the terms and conditions of any other agreement between the Company
and Executive except as provided herein.
(l) NUMBER AND GENDER. Wherever appropriate herein, words used in the
singular shall include the plural and the plural shall include the singular.
The masculine gender where appearing herein shall be deemed to include the
feminine gender.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
2nd day of November, 1999.
"EXECUTIVE"
/s/Dennis C. Fairchild
----------------------
"COMPANY"
DA CONSULTING GROUP, INC.
By: /s/ Nicholas H. Marriner
------------------------
Name: Nicholas H. Marriner
--------------------
Title: Chairman and Chief Executive Officer
------------------------------------
7
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