<PAGE>
As filed with the Securities and Exchange Commission on December 13, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
REGISTRATION STATEMENT
on Form S-1
Under
THE SECURITIES ACT OF 1933
---------------------
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8742 36-4069408
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
875 North Michigan Avenue
Suite 3000
Chicago, Illinois 60611
(312) 255-5000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
Mr. Melvyn E. Bergstein
Chairman, Chief Executive Officer and President
Diamond Technology Partners Incorporated
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
(312) 255-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
Copies of all communications to:
<TABLE>
<S> <C> <C> <C>
James A. Ounsworth, Esq. N. Jeffrey Klauder, Esq. Mark L. Gordon, Esq. Robert H. Strouse, Esq.
Safeguard Scientifics, Inc. Morgan, Lewis & Bockius LLP Scott L. Glickson, Esq. Drinker Biddle & Reath
800 The Safeguard Building 2000 One Logan Square Gordon & Glickson P.C. 1000 Westlakes Drive
435 Devon Park Drive Philadelphia, Pennsylvania 19103-6993 444 North Michigan Avenue Suite 300
Wayne, Pennsylvania 19087 (215) 963-5694 Suite 3600 Berwyn, Pennsylvania 19312-2409
(610) 293-0600 Chicago, Illinois 60611-3903 (610) 993-2213
(312) 321-1700
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Title of each class of Amount to be Proposed Proposed maximum Amount of
securities to be registered registered(1) maximum offering aggregate offering price (2) registration fee
price per unit(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.001 par value 3,565,000 $6.00 $21,390,000 $6,482
- ---------------------------------------------------------------------------------------------------------------------
Subscription Rights (3) (3) --- --- ---
=====================================================================================================================
</TABLE>
(1) Includes 310,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Evidencing the rights to subscribe for 3,255,000 of the shares of Common
Stock described above.
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+ REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH +
+ THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD +
+ NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION +
+ STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER +
+ TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE +
+ OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+ WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+ SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 13, 1996
PROSPECTUS 3,255,000 Shares
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Class A Common Stock
(including Rights to acquire
up to 3,255,000 of such shares)
Diamond Technology Partners Incorporated ("Diamond" or the "Company")
is granting to holders of the outstanding common stock ("Safeguard Common
Shares") of Safeguard Scientifics, Inc. ("Safeguard") of record at the close of
business on ________, 1997 (the "Record Date"), transferable rights ("Company
Rights") to purchase up to 3,100,000 shares of Class A common stock of Diamond,
par value $.001 per share (the "Class A common stock," and together with the
Class B common stock of Diamond, par value $.001 per share (the "Class B common
stock"), the "Common Stock"). Safeguard and certain other selling stockholders
(the "Selling Stockholders") have agreed to sell an aggregate of 1,550,000
shares of Class A common stock owned by them upon the exercise of the Company
Rights and the Company will sell the remaining 1,550,000 shares. A record holder
of Safeguard Common Shares will receive one Company Right for every ten
Safeguard Common Shares owned on the Record Date (the "Rights Offering"). Each
Company Right will entitle the holder to purchase one share of Class A common
stock at a purchase price anticipated to be between $5.00 and $6.00 (the
"Exercise Price") per share. This Prospectus also relates to transferable rights
(the "Direct Rights") to purchase 155,000 additional shares of Class A common
stock that are being granted by the Company to certain persons selected by the
Company having a relationship with the Company, Safeguard, one of Safeguard's
other partnership companies or other persons selected by the Company (the
"Direct Purchasers"). Each Direct Right will entitle the holder to purchase one
share of Class A common stock from the Company at the Exercise Price. The
Company Rights and the Direct Rights are sometimes collectively referred to as
the "Rights." The exercise period for the Rights will expire at 5:00 p.m.,
Eastern Standard time, on __________, 1997 (the "Expiration Date"). Persons may
not exercise Rights for fewer than 50 shares of Class A common stock. This
minimum exercise requirement applies to each account in which Safeguard Common
Shares are held. Accordingly, persons holding fewer than 50 Rights will not have
the opportunity to exercise such Rights unless action is taken to comply with
such minimum exercise requirements. See "THE OFFERING--Exercise Privilege."
----------------------------------------------- (Continued on next page)
An investment in the Class A common stock offered hereby involves a high degree
of risk. See "RISK FACTORS" on pages 6 to 10.
-----------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================
Assumed Proceeds to Proceeds to the
Exercise and the Company Selling
Offering Price Underwriting Discount (1) (1)(2)(3) Stockholders(1)(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ...... $5.50 Min. $0.165 Max. $5.335 Max. $5.335
Max. $0.385 Min. $5.115 Min. $5.115
- --------------------------------------------------------------------------------------------------------------------
Total(3)........ $17,902,500 Min. $537,075 Max. $9,096,175 Max. $8,269,250
Max. $1,101,155 Min. $8,873,095 Min. $7,928,250
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In connection with the Offering, the Underwriters will receive (a) a
financial advisory fee in an amount equal to 3% of the Exercise Price of
each share of Common Stock sold in the Offering (the "Financial Advisory
Fee") and (b) an additional fee of 4% of the Exercise Price of each share
of Common Stock actually purchased by the Underwriters pursuant to the
Standby Underwriting Agreement or the Underwriters' exercise of Rights in
certain instances (the "Underwriting Discount" and, together with the
Financial Advisory Fee, the "Total Underwriting Discount"). If all of the
Rights offered hereby are exercised, no shares of Common Stock will be
required to be purchased by the Underwriters pursuant to the Standby
Underwriting Agreement. The "Minimum" Total Underwriting Discount assumes
that no shares of Common Stock are purchased by the Underwriters. The
"Maximum" Total Underwriting Discount assumes (i) that only the chairman
and chief executive officer of Safeguard and/or his assignees will elect to
acquire shares of Common Stock upon the exercise of Company Rights (for an
aggregate of approximately 236,000 shares) and that such shares will be
sold by the Company, (ii) that 300,000 shares of Common Stock are sold by
the Company to the Other Purchasers (defined below), (iii) that 155,000
shares are sold by the Company pursuant to the exercise of the Direct
Rights, and (iv) that a total of 2,564,000 shares of Common Stock are
purchased by the Underwriters pursuant to the Standby Underwriting
Agreement. In addition, the Company has agreed (i) under certain
circumstances, to pay to the Underwriters certain amounts as a non-
accountable expense allowance and (ii) to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "UNDERWRITING."
(2) Before deduction of expenses estimated to be $700,000 and payment of a non-
accountable expense allowance to the Underwriters.
(3) The Company has granted to the Underwriters a 20-day option commencing on
the Expiration Date to purchase a maximum of 310,000 additional shares of
Class A common stock to cover over-allotments. See "UNDERWRITING." If
such option is exercised in full, the net incremental proceeds to the
Company from the exercise of such option would be $1,585,650 and the Total
Underwriting Discount with respect to the shares issued pursuant to such
option would be $119,350.
TUCKER ANTHONY ROBERT W. BAIRD & CO.
INCORPORATED INCORPORATED
The date of this Prospectus is , 1997.
<PAGE>
(Continued from previous page)
Shares of Class A common stock that are not purchased upon exercise of Rights
(the "Unsubscribed Shares") will be sold, as to the first 300,000 Unsubscribed
Shares, at the Exercise Price to certain persons selected by the Company (the
"Other Purchasers") and will be sold, as to the number of Unsubscribed Shares
exceeding the 300,000 shares of Class A common stock offered to the Other
Purchasers (the "Excess Unsubscribed Shares"), at the Exercise Price (less the
Total Underwriting Discount) to Tucker Anthony Incorporated and Robert W. Baird
& Co. Incorporated (the "Underwriters") pursuant to a Standby Underwriting
Agreement (the "Standby Underwriting Agreement"). See "THE OFFERING--Sales of
Unsubscribed Shares; Standby Commitment." The Underwriters' standby underwriting
obligations are subject to certain conditions, including the condition that the
Other Purchasers have purchased the first 300,000 Unsubscribed Shares, although
the Underwriters may elect to purchase all, but not less than all, Unsubscribed
Shares in the event such condition is not met. Accordingly, there is no
assurance that the Other Purchasers or the Underwriters will purchase any
Unsubscribed Shares and the Rights Offering will be canceled if all of the
Unsubscribed Shares are not purchased. See "UNDERWRITING" and "THE OFFERING--
Cancellation of Rights Offering." The Rights Offering and the offering of Class
A common stock to the Other Purchasers are collectively referred to in this
Prospectus as the "Offering."
The number of Company Rights which will be granted to the holders of Safeguard
Common Shares is solely dependent upon the number of Safeguard Common Shares
which are outstanding on the Record Date. Accordingly, less than 3,100,000
Rights will be granted to holders of Safeguard Common Shares if there are less
than 31,000,000 Safeguard Common Shares outstanding on such date. The shares of
Class A common stock subject to such undistributed Company Rights (the
"Undistributed Rights"), however, will be offered by the Company to the Other
Purchasers at the Exercise Price. As a consequence, a total of 3,100,000 Rights
will be granted in the Rights Offering.
The Class A common stock and the Class B common stock are identical in all
aspects other than with respect to voting rights. Shares of Class A common stock
are entitled to one vote per share and shares of Class B common stock are
entitled to five votes per share. Accordingly, while the Class A common stock
will represent 53.1% of the outstanding Common Stock upon completion of the
Offering, such Shares will possess only 18.5% of the aggregate voting rights of
the Common Stock. The Class B common stock is convertible into Class A common
stock on a one-for-one basis at the election of the holder and automatically
upon certain transfers of the Class B common stock. See "DESCRIPTION OF CAPITAL
STOCK."
Of the shares of Common Stock offered hereby, 1,705,000 shares of Common Stock
will be sold by the Company and an aggregate of 1,550,000 shares of Common Stock
will be sold by the Selling Stockholders. Warren V. Musser, the chairman and
chief executive officer of Safeguard, and/or his assignees are expected to
exercise all Company Rights distributed to them and acquire approximately
236,000 shares of Common Stock through the Rights Offering. The Company will
receive no proceeds from the sale of any shares by the Selling Stockholders.
After the completion of the Offering, the Selling Stockholders, in the
aggregate, will beneficially own approximately 26.3% of the outstanding Common
Stock. See "PRINCIPAL AND SELLING STOCKHOLDERS."
The Rights being granted in the Rights Offering are subject to cancellation if
certain conditions are not satisfied. In that event, any payments received by
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, in respect of the
Exercise Price of the Rights shall be promptly returned. See "THE OFFERING--
Cancellation of Rights Offering."
Prior to the Rights Offering, there has been no public market for the Class A
common stock or the Rights. See "THE OFFERING-- Background" for factors
considered in determining the Exercise Price of the Rights. As a consequence,
there can be no assurance that a public market will develop, although the
Company has filed an application to have the Rights and the Class A common stock
approved for quotation on the Nasdaq National Market.
Prior to the Expiration Date, the Underwriters may offer shares of Class A
common stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of Rights, at prices set from time to time by the
Underwriters. Each such price when set will not exceed, if applicable, the
highest price at which a dealer not participating in the distribution is then
offering the Class A common stock to other dealers, plus an amount equal to a
dealer's concession, and an offering price set on any calendar day will not be
increased more than once during such day. After the Expiration Date, the
Underwriters may offer shares of Class A common stock, whether acquired pursuant
to the Standby Underwriting Agreement, the exercise of Rights or the purchase of
Class A common stock in the market, to the public at a price or prices to be
determined. The Underwriters may thus realize profits or losses independent of
the underwriting compensation specified herein. Shares of Class A common stock
subject to the Standby Underwriting Agreement will be offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters. It is expected that delivery of the shares of Class A
common stock will be made against payment therefor in Boston, Massachusetts on
or about _________________, 1997.
--------------------
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by independent certified public accountants.
--------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK, THE WHEN-ISSUED CLASS A COMMON STOCK OR THE RIGHTS OR ALL OF THE
FOREGOING AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus. Except as otherwise
indicated, all information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) assumes an Exercise Price of $5.50,
and (iii) gives effect to a 1.65-for-1 split of the Common Stock to be effected
prior to the consummation of the Offering. Unless the context otherwise
requires, all references to "Common Stock" refer collectively to the Class A
common stock and the Class B common stock. See "CERTAIN TRANSACTIONS" and
"DESCRIPTION OF CAPITAL STOCK--Common Stock." All references to fiscal years of
the Company in this Prospectus refer to the fiscal years ended on March 31 in
those years. All references to the term "Partner" refer to the internal
designation by Diamond of certain of its employees and does not refer to a
partner of a general or limited partnership. Unless the context otherwise
indicates, Diamond Technology Partners Incorporated and its subsidiary are
referred to collectively herein as "Diamond" or the "Company."
The Company
Diamond is a management consulting firm that devises business
strategies enabled by information technology ("IT") and manages the
implementation of those strategies. Diamond was founded upon, and continues to
stress, a business culture in which strategic consulting and IT expertise are
optimally integrated to provide superior client solutions. The Company believes
that the distinguishing qualities of its consulting process are its ability to
synthesize strategy with technology, deliver solutions with measurable results,
deliver services through small multidisciplinary project teams and maintain
objectivity in solution recommendations.
The Company leads its clients through a process which broadens their
understanding of the ways that IT can be incorporated into their businesses to
gain competitive advantage in their markets. Diamond's professionals, working
closely with client personnel, perform thorough analyses of the client's current
business with a focus on alternative IT-driven business strategies. When an
appropriate strategy has been developed, Diamond's professionals provide
important management oversight of the strategy implementation process, which
generally includes design, deployment and integration of IT solutions together
with modification of business processes and organizational structure. Diamond
manages the deployment phase by utilizing the client's internal resources or
third-party resources selected by Diamond for their particular expertise.
Throughout the entire process, Diamond transfers relevant knowledge to the
client organization.
Diamond has grown rapidly since its inception in January 1994,
generating $30.6 million in net revenues over the 12 month period ended
September 30, 1996 and expanding from 18 employees at inception to 177 as of
September 30, 1996. Diamond serves clients in a variety of industries, ranging
in size from Fortune 500 companies to smaller private companies. The number of
clients served by the Company in each fiscal quarter has increased from nine
clients served during the fiscal quarter ended June 30, 1994 to 25 clients
served during the fiscal quarter ended September 30, 1996. These clients are
primarily in the telecommunications, insurance, financial services and consumer
products and services industries. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Recent Developments."
Pursuant to the terms of the Amended and Restated Voting and Stock
Restriction Agreement dated as of April 1, 1996 (the "Voting and Stock
Restriction Agreement") among Safeguard, Technology Leaders L.P. ("TL") and
Technology Leaders Offshore C.V. ("TL Offshore" and together with TL,
"Technology Leaders") and CIP Capital L.P. ("CIP" and together with Safeguard
and Technology Leaders, the "1994 Purchasers"), CompuCom Systems, Inc.,
Cambridge Technology Partners (Massachusetts), Inc. and each employee-
stockholder of the Company, each-employee stockholder of the Company has granted
a proxy to the Chief Executive Officer of the Company (currently Melvyn E.
Bergstein) conveying the right to vote their shares of Common Stock.
Accordingly, after the completion of the Offering, the Company's Chief Executive
Officer will control approximately 81.9% of the voting rights of the outstanding
Common Stock.
The Company was initially incorporated in Illinois in 1994 and was
reincorporated in Delaware in 1996. The Company's principal executive offices
are located at 875 North Michigan Avenue, Suite 3000, Chicago, Illinois 60611,
and its telephone number is (312) 255-5000. The Company also has a homepage on
the World Wide Web and its e-mail address is [email protected].
Information contained in the Company's web site shall not be deemed to be part
of this Prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Terms of Offering............ Holders of record at the close of business on
________, 1997 of the outstanding Safeguard
Common Shares will receive one Company Right for
every ten Safeguard Common Shares. The Direct
Purchasers will be granted the Direct Rights.
Each Right will entitle the holder to purchase
one share of Class A common stock at a purchase
price anticipated to be between $5.00 and $6.00
per share. Persons may not exercise Rights for
fewer than 50 shares of Class A common stock.
Holders of Rights will have the opportunity to
acquire an aggregate of approximately _____
shares of Class A common stock upon exercise of
the Rights
Exercise Price............... Anticipated to be between $5.00 and $6.00 per
share of Class A common stock.
Expiration Date for Rights... _______ __, 1997 at 5:00 p.m., Eastern Standard
Time.
Rights....................... Rights will be evidenced by transferable
certificates that will be exercisable by the
holder until the Expiration Date, at which time
unexercised rights will be null and void. See
"THE OFFERING."
Exercise by Safeguard CEO.... The chairman and chief executive officer of
Safeguard and/or his assignees are expected to
exercise all Company Rights distributed to them
and acquire approximately 236,000 shares of
Class A common stock.
Sale to Other Persons........ The Direct Rights will be granted by the Company
to the Direct Purchasers. The first 300,000
Unsubscribed Shares and the shares of Class A
common stock subject to the Undistributed Rights
will be sold by the Company to the Other
Purchasers.
Standby Underwriting......... The Excess Unsubscribed Shares will be sold to
the Underwriters and offered to the public by
the Underwriters. See "THE OFFERING--Sales of
Unsubscribed Shares; Standby Commitment" and
"UNDERWRITING."
Class A common stock
Offered:
by the Company.............. 1,705,000 shares
by the Selling Stockholders. 1,550,000 shares
Common Stock to be
Outstanding After
the Rights Offering......... 11,256,398 shares (representing 5,974,787 shares
of Class A common stock and 5,281,611 shares of
Class B common stock) (1)
Voting Rights and
Conversion.................. Shares of Class A common stock are entitled
to one vote per share and shares of Class B
common stock are entitled to five votes per
share. Shares of Class B common stock are
convertible on a one-for-one basis into
shares of Class A common stock at the election
of the holder and automatically upon certain
transfers of the shares of Common Stock. See
"DESCRIPTION OF CAPITAL STOCK."
Use of Proceeds.............. $2.0 million for the repayment of debt to
Safeguard and the remainder for working capital,
general corporate purposes and capital
expenditures. A portion of the net proceeds may
be used for acquisitions, although the Company
is not currently engaged in any acquisition
negotiations. See "USE OF PROCEEDS."
Nasdaq National
Market Symbols:
Rights..................... DTPIR
Class A common stock....... DTPIV (when-issued)
DTPI (thereafter)
</TABLE>
- ---------------------
(1) Excludes as of December 9, 1996 (i) 2,652,654 shares of Common Stock
issuable upon the exercise of options (of which options to purchase
24,750 shares were exercisable at December 9, 1996) at a weighted average
exercise price of $2.04 per share and (ii) 526,598 shares of Common Stock
issuable upon the exercise of warrants (all of which were exercisable as
of December 9, 1996) at an exercise price of $5.50 per share. See
"MANAGEMENT--Stock Option Plan" and "CERTAIN TRANSACTIONS."
4
<PAGE>
Summary Financial Information
(in thousands, except per share data and number of clients)
<TABLE>
<CAPTION>
Inception Six Months Ended
to Year Ended March 31, September 30,
March 31, ---------------------- --------------------
1994 1995 1996 1995 1996(1)
--------------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.............................. $ 261 $12,843 $26,339 $11,838 $16,089
Income (loss) from operations............. (889) (462) 1,374 512 (1,804)
Net income (loss)......................... (886) (377) 1,236 471 (1,099)
Pro forma net income (loss) per share of
Common Stock.............................. $(.33) $(.04) $0.12 $0.05 $(0.11)
Shares used in computing pro forma net
income (loss) per share of Common
Stock..................................... 2,679 8,440 9,964 9,909 10,307
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar 31, Jun. 30, Sept. 30,
1995 1995 1995 1996 1996(1) 1996(1)
-------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.............................. $ 5,863 $ 5,975 $ 6,918 $ 7,583 $ 7,753 $ 8,336
Income (loss) from operations............. $ 363 $ 149 $ 433 $ 429 $(1,215) $ (589)
Net income (loss)......................... $ 312 $ 159 $ 383 $ 382 $ (714) $ (385)
Other Operating Data:
Number of clients served.................. 13 10 13 17 21 25
Number of clients generating
revenues greater than $250,000............ 8 9 8 7 11 11
Average revenue per client................ $ 451 $ 598 $ 532 $ 446 $ 369 $ 333
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------
Actual As Adjusted
(1) (2)
-------------------- ------------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $2,174 $10,222
Working capital......................... 4,664 12,712
Total assets............................ 10,473 18,521
Long-term debt, including current
portion (3)............................ 258 258
Total stockholders' equity.............. 7,056 15,104
</TABLE>
- ----------------------------------
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS--Recent Developments."
(2) Adjusted to give effect to the sale by the Company of 1,705 shares of
Common Stock and the receipt and application of approximately $8,048 in
net proceeds from this Offering, after deducting the maximum Total
Underwriting Discount with respect to such shares of approximately $504
and estimated offering expenses of $825 (including $125 representing the
maximum applicable non-accountable expense allowance to the Underwriters).
(3) As of November 15, 1996, the Company had actual long-term debt of
approximately $2,235. The "As Adjusted" long-term debt amount reflects the
borrowing of $2,000 from Safeguard on November 8, 1996 and the repayment
of such debt using net proceeds from this Offering. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources" and "USE OF PROCEEDS."
5
<PAGE>
RISK FACTORS
In evaluating the Company and its business, prospective investors
should consider carefully the following risk factors in addition to the other
information contained herein. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the following risk factors.
Recent Operating Losses and Limited Operating History. The Company has
only been in existence since January 28, 1994. In fiscal 1994 and fiscal 1995,
the Company experienced losses due primarily to the developmental nature of the
business. While the Company was profitable in fiscal 1996, the Company
experienced the cancellation of significant projects at its then two largest
clients in the last quarter of fiscal 1996 and the first quarter of fiscal 1997.
The cancellation of these projects resulted from each client's cancellation of
the business initiative for which the Company had been retained. In addition, in
order to support the growth of its business, the Company expanded its level of
operations in all areas during fiscal 1996 and fiscal 1997. As a result of the
cancellation of these two projects and the increase in the Company's operating
expenses caused by the Company's expansion, the Company experienced a net loss
of approximately $1.1 million during the first six months of fiscal 1997. The
Company's operating results and financial condition will be adversely affected
if revenues do not increase sufficiently to cover the Company's expanding level
of operations. There can be no assurance that the Company will be successful in
its efforts to so increase its revenues. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Variability of Quarterly Operating Results. The Company has
experienced and may in the future continue to experience fluctuations in its
quarterly operating results. Factors that may cause the Company's quarterly
operating results to vary include the number of active client projects, the
requirements of client projects, the termination of major client projects, the
loss of major clients, the timing of new client engagements and the timing of
personnel cost increases. Certain of these factors may also affect the Company's
personnel utilization rates which may cause further variation in quarterly
operating results. The timing of revenues is difficult to forecast because the
Company's sales cycle is relatively long and the Company's services are impacted
by general economic conditions. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the timing of the initiation or
the completion of client assignments, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter and could result in losses for any particular fiscal period. In
addition, many of the Company's engagements are, and may be in the future,
terminable by its clients without penalty. A termination of a major project
could require the Company to maintain under-utilized employees, resulting in a
higher than expected percentage of unassigned professionals or to terminate the
employment of excess personnel. The Company believes that it must at all times
maintain a sufficient number of senior professionals to oversee existing client
projects and participate in the Company's marketing efforts in securing new
client engagements. The Company's general policy is to not adjust its staffing
levels based upon what it views as short-term circumstances. Due to all of the
foregoing factors, there can be no assurance that the Company's operating
results will not be below the expectations of investors for any given fiscal
period. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Concentration of Revenues. The Company has in the past derived, and
may in the future derive, a significant portion of its revenues from a
relatively limited number of major projects. During fiscal 1996, the Company had
three clients which individually accounted for more than 10% of its net revenues
and collectively accounted for 51% of its net revenues. For the six months ended
September 30, 1996, the Company had two clients that individually accounted for
over 10% of its net revenues, and collectively accounted for 27% of its net
revenues. There are no long-term commitments by any of the Company's clients for
the Company's services. All of the Company's services are provided to its
clients on a project-by-project basis. During the last quarter of fiscal 1996
and the first quarter of fiscal 1997, the Company's then two largest clients
terminated projects with the Company, contributing to a net loss for the first
six months of fiscal 1997 of approximately $1.1 million. There can be no
assurance that the Company's major clients will continue their relationships
with the Company and be a significant source of revenue for the Company or that
they will not terminate major projects at any given time. Any unanticipated
termination of a major project or the loss of any one of the Company's large
clients will have a material adverse effect on the Company and its financial
results. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS--Sales, Marketing and Clients."
Control by Chief Executive Officer; Election of Future Chief Executive
Officers. Pursuant to the terms of the Voting and Stock Restriction Agreement,
each employee-stockholder of the Company has granted a proxy to the Chief
Executive Officer of the Company (currently Melvyn E. Bergstein) conveying the
right to vote their shares of Common Stock. Accordingly, after the completion of
the Offering, the Company's Chief Executive Officer will control the vote with
respect to 5,281,611 shares of Class B common stock and 107,663 Shares of Class
A common stock, constituting approximately 81.9% of the voting rights of the
outstanding Common Stock of the Company after the Offering and will have the
voting power to elect the
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Company's entire Board of Directors and to approve all matters requiring
stockholder approval. In addition, pursuant to the terms of the Amended and
Restated Partners' Operating Agreement among the Company and its Partners (the
"Partners' Operating Agreement"), the Company's Chief Executive Officer must be
selected from among the Partners pursuant to the procedures set forth in such
Agreement. While the Company's Board of Directors maintains veto rights with
respect to any such person nominated by the Partners, the inability of the Board
to elect a non-Partner as the Company's Chief Executive Officer significantly
limits the number of qualified persons which the Board may consider for such
office. Accordingly, there can be no assurance that the Company will be
successful in attracting future persons who are qualified to serve as the
Company's Chief Executive Officer and the inability to attract such persons
could have a material adverse effect on the Company. See "MANAGEMENT--Executive
Officers and Directors," "MANAGEMENT--Certain Relationships," "PRINCIPAL AND
SELLING STOCKHOLDERS," "CERTAIN TRANSACTIONS--Voting and Stock Restriction
Agreement" and "SHARES ELIGIBLE FOR FUTURE SALE."
Reliance on Senior Management. The Company's success depends upon the
continued service of its key executive officers. The Company maintains, and is
the beneficiary of, life insurance policies on the lives of Melvyn E. Bergstein
and Michael E. Mikolajczyk in the amounts of $3.0 million and $1.0 million,
respectively. The Company does not maintain key person life insurance on any of
its other key executive officers. The loss for any reason of one or more of its
key executive officers could have a material adverse effect on the Company and
its prospects. Furthermore, there can be no assurance that the Company will be
successful in attracting and retaining additional key executive officers that it
will require to accommodate growth successfully. See "MANAGEMENT."
Management of Growth. The Company has been experiencing a period of
substantial growth which has placed and may continue to place a strain on the
Company's financial and other resources. During fiscal 1996 and the first six
months of fiscal 1997, the size of the Company's professional staff increased
from 85 to 177 full-time employees. Further increases are anticipated during the
remainder of fiscal 1997. The Company's ability to manage its staff growth
effectively will require it to continue to improve its operational, financial
and other internal systems, and to train, motivate and manage its employees. If
the Company's management is unable to manage growth effectively and new
employees are unable to achieve anticipated performance levels, the Company's
results of operations could be adversely affected. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Dependence on Skilled Professionals. The Company's success will depend
in large part upon its ability to attract, retain and motivate highly skilled
professionals, particularly Partners and senior principals. Qualified client-
serving professionals are in particularly great demand and are likely to remain
a limited resource for the foreseeable future. There can be no assurance that
the Company will be successful in attracting and retaining the skilled
professionals it requires to conduct and expand its operations successfully. The
loss of some or all of the Company's professionals or the inability to attract,
hire and train additional skilled personnel could have a material adverse effect
on the Company, including its ability to secure and complete engagements. See
"BUSINESS--Human Resources and Culture."
Project Risks. Because many of the Company's projects are critical to
its clients, a failure or inability to meet a client's expectations could damage
the Company's reputation and adversely affect its ability to attract new
business. In addition, the failure of a project or the failure of the Company to
collect a large account receivable could also result in significant financial
exposure to the Company, which could have a material adverse effect on the
Company's financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS--Industry
Background."
Technological Advances. The Company's success will depend in part on
its ability to develop strategic business and IT solutions which keep pace with
continuing changes in evolving industry standards, IT and changing client
preferences. There can be no assurance that the Company will be successful in
addressing these developments on a timely basis or that, if addressed, the
Company will be successful in the marketplace. The Company's delay in addressing
or failure to address these developments could have a material adverse effect on
the Company's business. See "BUSINESS--Industry Background."
Competition. The management consulting and systems integration markets
include a large number of participants, are subject to rapid changes and are
highly competitive. The Company competes with and faces potential competition
for client assignments and experienced personnel from a number of companies that
have significantly greater financial, technical and marketing resources,
generate greater revenues than does the Company and have greater name
recognition. A majority of the Company's revenue is derived from Fortune 500
companies and other large organizations, and there are an increasing number of
professional services firms seeking consulting engagements from that client
base. The Company believes that the principal competitive factors in the segment
of the consulting industry in which the Company competes include scope of
services, service delivery approach, technical and industry expertise, perceived
value, objectivity and a results orientation. The Company believes that its
ability to compete also depends in part on a number of competitive factors
outside of its control, including the ability of its competitors to hire, retain
and motivate senior project managers, the price at which others offer comparable
services and the extent of its
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competitors' responsiveness to customer needs. There can be no assurance that
the Company will be able to compete successfully with its competitors in the
future. See "BUSINESS--Competition."
Liquidity. The Company was not profitable in the first two quarters of
fiscal 1997, and there can be no assurance that the Company will be profitable
in the future. The Company believes that the combination of the net proceeds
received by it from this Offering, the amounts available under its revolving
line of credit, cash generated from operations and existing cash balances will
be sufficient to satisfy its operating cash needs for the 12 months following
the consummation of this Offering. Any future decreases in its operating income,
cash flow, or stockholders' equity may impair the Company's future ability to
raise additional funds to finance operations. There can be no assurance that the
Company will in the future maintain adequate liquidity to support its
operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Broad Discretion in Application of Proceeds. After the repayment of
$2.0 million of debt to Safeguard, the Company intends to use a significant
portion of the net proceeds from the Offering for working capital, general
corporate purposes and capital expenditures. A portion of the net proceeds may
also be used to make acquisitions or to form strategic alliances. Accordingly,
the specific uses for the net proceeds will be at the complete discretion of the
Board of Directors of the Company and may be allocated based upon circumstances
arising from time to time in the future. See "USE OF PROCEEDS."
Dilution. The average price per share paid upon the issuance by the
Company of Common Stock prior to the Offering was $1.02. The average price per
share of Common Stock paid by the 1994 Purchasers in the 1994 Purchase was $0.91
per share. Purchasers of the Common Stock of the Company offered hereby will
suffer an immediate dilution of $4.13 in the net tangible book value per share
of the Common Stock from the Exercise Price of the Rights and the offering price
of the Common Stock issued to the Direct Purchasers. See "DILUTION" and "CERTAIN
TRANSACTIONS."
Benefits of Offering to Current Stockholders. The Offering will
provide significant benefits to the current stockholders of the Company,
including the creation of a public market for the Common Stock and the receipt
of proceeds from the sale of Common Stock in the Offering by the Selling
Stockholders. As a result, the Company's current stockholders will generally
have greater liquidity with respect to their investment in the Common Stock and
their holdings of Common Stock will potentially have a greater value.
Furthermore, the Company intends to use $2.0 million of the proceeds to the
Company to repay a loan from Safeguard, one of the Selling Stockholders. The
Selling Stockholders and the Company's other executive officers and directors
will own 4,841,696 shares of Common Stock. Based on the Exercise Price of $5.50,
such shares owned will have an aggregate market value of approximately $26.6
million. See "PRINCIPAL AND SELLING STOCKHOLDERS."
Requirements for Listing Securities on the Nasdaq National Market;
Application of the Penny Stock Rules. The Company has applied with the Nasdaq
National Market to have the Class A common stock and Rights (the "Listed
Securities") approved for listing upon completion of the Offering with respect
to the Class A common stock and from the date of this Prospectus through the
Expiration Date with respect to the Rights. If the Company is unable to maintain
the standards for continued listing, the Listed Securities could be subject to
delisting from the Nasdaq National Market. Trading, if any, in the Listed
Securities would thereafter be conducted on the Nasdaq Small Cap Market, if the
Listed Securities met the listing requirements for such market. If the Listed
Securities did not meet the Nasdaq Small Cap Market listing requirements, or if
the Listed Securities were delisted from the Nasdaq Small Cap Market, trading of
such securities would thereafter be conducted on an electronic bulletin board
established for securities that do not meet the Nasdaq listing requirements or
in what is commonly referred to as the "pink sheets." As a result, an investor
may find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1.0 million or annual income exceeding $200,000,
or $300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as defined in the regulations) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market
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in penny stocks. As a result, if the Common Stock is determined to be "penny
stock," an investor may find it more difficult to dispose of the Company's
Common Stock.
No Prior Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock or the Rights,
and there can be no assurance that an active public market will develop or be
sustained. The Exercise Price of the Rights and purchase price of the Common
Stock has been determined solely by negotiations between the Company, the
Selling Stockholders and the Underwriters and does not necessarily reflect the
price at which shares of Common Stock may be sold in the public market during or
after the Offering. See "THE OFFERING--Background" for a discussion of the
factors considered in determining the Exercise Price. The public markets, in
general, have from time to time experienced extreme price and volume
fluctuations, which have in some cases been unrelated to the operating
performance of particular companies, and the market for technology stocks, or
small capitalization stocks such as the Common Stock, can be subject to greater
price volatility than the stock market in general. In addition, factors such as
announcements of technological innovations, announcements of new products by the
Company's competitors or third parties, and market conditions in the IT industry
may have a significant impact on the market price of the Common Stock.
Shares Eligible for Future Sale. A substantial number of outstanding
shares of Common Stock and shares of Common Stock issuable upon exercise of
outstanding stock options and warrants will become eligible for future sale in
the public market at various times. In addition to the factors affecting the
stock market in general and the market for the Common Stock discussed above,
sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the Common Stock. Upon completion of the Offering, the Company will have
11,256,398 (11,566,398 if the Underwriters' over-allotment option is exercised
in full) shares of Common Stock outstanding, excluding 2,652,654 shares of
Common Stock issuable upon the exercise of stock options and 526,598 shares of
Common Stock issuable upon the exercise of warrants outstanding as of December
9, 1996 and excluding any stock options granted by the Company after December 9,
1996. Of these shares, the Common Stock sold in the Offering, except for certain
shares described below, will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Act"). The
remaining 8,001,398 shares of Common Stock (the "Restricted Shares") were sold
by the Company in reliance on exemptions from the registration requirements of
the Act and are "restricted securities" as defined in Rule 144 under the Act
("Rule 144") and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701 ("Rule 701") under the Act. Without considering the contractual
restrictions described below, approximately (i) 5,241,106 Restricted Shares will
be eligible for sale ninety days after the date of this Prospectus, subject to
volume and other resale conditions imposed by Rule 144, and (ii) 2,760,292
Restricted Shares will be eligible for future sale subject to the holding period
and other conditions imposed by Rule 144. Certain restrictions on shares of
Common Stock are applicable to (i) any shares of Common Stock purchased in the
Offering by affiliates of the Company, which may generally only be sold in
compliance with the limitations of Rule 144, except for the holding period
requirements thereunder, and (ii) the shares of Common Stock owned by the
Selling Stockholders that are not being offered hereby, all of which, together
with the shares of Common Stock owned by the Partners of the Company, each
director of the Company and certain other stockholders and 157,000 shares of
Common Stock beneficially owned by Warren V. Musser and/or his assignees, are
subject to lock-up agreements (the "Lock-Up Agreements") and pursuant to such
agreements will not be eligible for sale or other disposition until 180 days
after the Expiration Date (the "Lock-Up Expiry Date") without the prior written
consent of the Underwriters. Pursuant to the 1994 Purchase, the Company has
granted Safeguard, Technology Leaders and CIP certain registration rights
whereby they may cause the Company to register their shares of Common Stock
under the Act for public sale. See "SHARES ELIGIBLE FOR FUTURE SALE."
It is anticipated that a registration statement (the "Form S-8
Registration Statement") covering the Common Stock that may be issued pursuant
to the exercise of options awarded by the Company will be filed and become
effective prior to the Lock-Up Expiry Date, and that shares of Common Stock that
are so acquired or offered thereafter pursuant to the Form S-8 Registration
Statement generally may be resold in the public market without restriction or
limitation. Subject to the provisions of any Lock-Up Agreement, shares of Common
Stock may be resold in the public market beginning 90 days after the date of
this Prospectus pursuant to Rule 701 (i) by persons who are not affiliates of
the Company, without compliance with the public information, holding period,
volume limitation or notice provisions of Rule 144 and (ii) by affiliates of the
Company, without compliance with the holding period requirements of Rule 144.
See "MANAGEMENT--Stock Option Plan," "SHARES ELIGIBLE FOR FUTURE SALE--Options
and Warrants" and "UNDERWRITING."
Anti-takeover Provisions. Shares of preferred stock may be issued by
the Company in the future without stockholder approval and upon such terms as
the Board of Directors may determine. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding stock of the Company and
potentially prevent the payment of a premium to stockholders in an acquisition
transaction. The Company has no present plans to issue any shares of preferred
stock. See "CERTAIN TRANSACTIONS--Voting and Stock Restriction Agreement."
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The Company has adopted a number of provisions in its charter and
bylaws that may make a change in control difficult, if not impossible, and
therefore may tend to discourage an unsolicited or unfriendly takeover bid. The
Company's Class B common stock is entitled to five votes per share and currently
constitutes 81.5% of the voting power of the Common Stock. All of the issued and
outstanding Class B common stock is owned, and after the Offering will continue
to be owned, by employee stockholders of the Company, all of whom have granted
proxies to the Chief Executive Officer of the Company to vote their shares.
Therefore, the Chief Executive Officer (or his successors) will have the power
to determine all matters submitted to a vote of shareholders, including any
matter related to a change in control of the Company. The charter and bylaws of
the Company also provide that special stockholders meetings may be called only
by the Chairman of the Board of Directors, by the Secretary at the direction of
the Board of Directors, or by stockholders holding at least 30% of the shares of
outstanding Common Stock. Notice of stockholder proposals at annual meetings of
stockholders must be presented to the Company at least 45 days prior to the date
of the meeting. In addition, the Company's Board of Directors is divided into
three classes, each of which serves for a staggered three-year term, which may
make it more difficult for a third party to gain control of the Board of
Directors. See "DESCRIPTION OF CAPITAL STOCK."
No Dividends. To date, the Company has not paid any cash dividends on
its Common Stock, and does not expect to declare or pay any cash or other
dividends in the foreseeable future. Further, the secured credit agreement with
the Company's commercial lender prohibits payment of dividends or other
distributions on the Company's Common Stock. See "DIVIDEND POLICY."
Cancellation of Rights Offering. If the conditions precedent to the
sale to the Underwriters of the Excess Unsubscribed Shares on the sixth business
day after the Expiration Date (the "Closing Date") are not satisfied (assuming
that there are Excess Unsubscribed Shares), the Underwriters may elect, on or
before the Closing Date, to cancel the Rights Offering and the Company and the
Selling Stockholders will not have any obligations with respect to the Rights
except to return, without interest, any payment received in respect of the
Exercise Price. See "THE OFFERING--Cancellation of Rights Offering" and
"UNDERWRITING." The Company has been advised by the NASD that it is likely that
trades in the Rights and the when-issued shares of Common Stock in the market
would be canceled if the Rights Offering is not consummated.
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THE OFFERING
The Company is granting, at no cost, to the holders of Safeguard
Common Shares of record at the close of business on the Record Date, Company
Rights, on the basis of one Company Right for every ten Safeguard Common Shares.
The Selling Stockholders have agreed with the Company to sell 1,550,000 shares
of Class A common stock upon the exercise of the Company Rights. The Company
will sell the remaining 1,550,000 shares of Class A common stock upon the
exercise of the Company Rights. The Company is granting, at no cost, the 155,000
Direct Rights to the Direct Purchasers. Each Right enables the holder to
purchase one share of Class A common stock at an assumed Exercise Price of $5.50
per share. As of the close of business on the day before the date of this
Prospectus, there were approximately ___________ Safeguard Common Shares
outstanding. Accordingly, subject to changes in the number of outstanding
Safeguard Common Shares through the Record Date (principally as a result of the
exercise of options and the conversion of convertible securities to purchase
Safeguard Common Shares), a total of approximately _________ Company Rights are
expected to be issued to holders of Safeguard Common Shares outstanding on the
Record Date. In the event that Company Rights to purchase fewer than _________
shares of Common Stock are issued to holders of Safeguard Common Shares, the
shares of Common Stock subject to such Undistributed Rights will be offered by
the Company to the Other Purchasers at the Exercise Price.
Background
The Company has agreed with the Selling Stockholders to make a Rights
Offering to holders of Safeguard Common Shares on the terms set forth in this
Prospectus. The Company believes that the Rights Offering offers several
advantages over a traditional initial public offering, including, the
opportunity to offer its Common Stock to investors who, as Safeguard
shareholders, already have some knowledge of the Company's business, the
opportunity to achieve a broader distribution to a more stable shareholder base
and the minimization of underwriting discounts and commissions. In addition,
Safeguard has advised the Company that it prefers the Rights Offering to a
traditional initial public offering because it allows its shareholders the
opportunity to purchase shares of Common Stock at the initial offering price
before such shares are offered to the general public by the Underwriters.
Prior to the Rights Offering, there has been no public market for the
Common Stock or the Rights. Consequently, the Exercise Price was determined by
negotiations among the Company, the Selling Stockholders and the Underwriters.
In determining the Exercise Price, the Underwriters, the Board of Directors of
the Company and the Selling Stockholders considered such factors as the future
prospects and historical growth rate in revenues and earnings of the Company,
its industry in general and the Company's position in its industry; revenues,
earnings and certain other financial and operating information of the Company in
recent periods; market valuations of the securities of companies engaged in
activities similar to those of the Company; the management of the Company; and,
with respect to the Company, the advice of the Underwriters.
Exercise Privilege
Each Right will entitle the holder thereof to receive, upon payment of
the Exercise Price, one share of Class A common stock, subject to the
restrictions described herein (the "Exercise Privilege"). Persons may not
exercise Rights for fewer than 50 shares of Common Stock. In the event that a
holder of Rights meeting the minimum exercise requirement elects to exercise in
multiple transactions and one such transaction involves less than the minimum
exercise requirement, such holder should provide to the Rights Agent a letter
stating that such holder has already exercised a sufficient number of Rights to
satisfy the minimum exercise requirement. For purposes of the Rights Offering, a
person that holds Safeguard Common Shares in multiple accounts must meet the 50
share minimum purchase requirement in each account. Accordingly, persons holding
fewer than 50 Rights in an account should consider the advisability of
consolidating the Rights in one account, selling Rights, or purchasing
additional Rights to comply with the minimum exercise requirements of the Rights
Offering. The Company has established these minimum exercise requirements
primarily to limit the costs associated with a significant number of odd lots of
the Common Stock.
No Fractional Rights
No fractional Rights will be issued in the Rights Offering and a
holder of a number of Safeguard Common Shares not evenly divisible by ten will
be entitled to receive the next higher whole number of Rights. For purposes of
this rounding process, record holders of Safeguard Common Shares known to be
acting as nominees for beneficial holders of Safeguard Common Shares will be
disregarded, and the rounding process will take place with respect to the
aggregate holdings of Safeguard Common Shares by the beneficial holder.
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Expiration Date
The Rights Offering will terminate, and the Rights will expire, at
5:00 p.m., Eastern Standard time, on _____, 1997, the Expiration Date. After the
Expiration Date, unexercised Rights will be null and void. Neither the Company
nor any Selling Stockholder will be obligated to honor any purported exercise of
Rights received by ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent")
after the Expiration Date, regardless of when the documents relating to such
exercise were sent, except pursuant to the delayed delivery procedures described
below under "-- Method of Exercising Rights."
Method of Transferring Rights
Rights may be transferred, in whole or in part, by endorsing and
delivering to the Rights Agent, at the addresses set forth below under "--Method
of Exercising Rights," a Rights certificate that has been properly endorsed for
transfer, with instructions to reissue the Rights, in whole or in part, in the
name of the transferee. The Rights Agent will reissue certificates for the
transferred Rights to the transferee, and will reissue a certificate for the
balance, if any, to the holder of the Rights, in each case to the extent it is
able to do so prior to the Expiration Date. Safeguard and the Company believe
that a market for the Rights may develop during the period preceding the
Expiration Date. The Company has applied with the Nasdaq National Market to have
the Rights approved for quotation for the period ________, 1997 through ______,
1997 and has reserved "DTPIR" as the Nasdaq symbol under which the Rights will
trade during such period. Any questions regarding the transfer of Rights should
be directed to the Rights Agent at P.O. Box 798, Midtown Station, New York, NY
10018, Attention: Reorganization Department, telephone number (800) 223-6554.
Because persons may not exercise Rights for fewer than 50 shares of
Common Stock, persons holding fewer than 491 Safeguard Common Shares in one
account will not be entitled to exercise Rights unless they consolidate Rights
received in multiple accounts or acquire enough additional Rights in the market
to satisfy the 50 share minimum exercise requirement. Such holders should
consult with their regular investment advisor and review various alternatives,
including acquiring additional Rights or selling or otherwise transferring their
Rights. All commissions, fees and other expenses (including brokerage
commissions and any transfer taxes) incurred in connection with the purchase or
sale of Rights are for the account of the transferor and transferee of Rights,
and none of such commissions, fees or expenses will be paid by the Company or
the Selling Stockholders.
Method of Exercising Rights
Rights may be exercised by completing and signing the election to
purchase form that appears on the back of each Rights certificate. The completed
and signed election to purchase form, accompanied by payment in full of the
Exercise Price for all shares for which the Exercise Privilege has been
exercised, must be received by the Rights Agent on or before the Expiration
Date. Neither the Company nor the Selling Stockholders will be obligated to
honor any purported exercise of Rights received by the Rights Agent after the
Expiration Date, regardless of when the documents relating to such exercise were
sent, except pursuant to the delayed delivery procedures described below.
Therefore, the Company and Safeguard suggest, for the holders' protection, that
Rights be delivered to the Rights Agent by overnight or express mail courier,
or, if mailed, by registered mail. Persons may not exercise Rights for fewer
than 50 shares of Common Stock in each account.
The Rights and Exercise Price, if any, should be mailed or delivered
to the Rights Agent as follows:
By Mail: By Hand or by Overnight/Express Mail
Courier:
ChaseMellon Shareholder
Services, L.L.C. ChaseMellon Shareholder
Reorganization Department Services, L.L.C.
P.O. Box 798 Reorganization Department
Midtown Station 120 Broadway, 13th Floor
New York, NY 10018 New York, NY 10271
Payment of the Exercise Price must be made in U.S. dollars by cash, check or
money order payable to "Safeguard Escrow Account." Mellon Bank N.A. will serve
as the escrow agent of the Safeguard Escrow Account.
An exercise also will be in acceptable form if, on or before the
Expiration Date, the Rights Agent has received payment in full of the Exercise
Price for shares to be purchased pursuant to the Exercise Privilege and a letter
or
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telegraphic notice from a bank, trust company or member firm of the New York or
American Stock Exchange setting forth the subscriber's name, address and
taxpayer identification number, the number of shares subscribed for pursuant to
the Exercise Privilege, and guaranteeing that a properly completed and signed
election to purchase form will be delivered to the Rights Agent within three
business days after the Expiration Date. Acceptance of subscriptions in the
foregoing manner will be subject to receipt of the duly executed election to
purchase form with respect to the Exercise Privilege within such three business
day period. No formal arrangements for the deposit of election to purchase
forms have been made with any bank, trust company or member firm.
A holder of Rights who purchases less than all the shares of Common
Stock represented by his Rights certificate will receive from the Rights Agent a
new Rights certificate representing the balance of the unsubscribed Rights, to
the extent that the Rights Agent is able to reissue a Rights certificate prior
to the Expiration Date.
Certificates representing the Common Stock purchased by exercising the
Exercise Privilege will be issued as soon as practicable after the sale of the
Unsubscribed Shares and in no event later than six business days after the
Expiration Date. See "--Sales of Unsubscribed Shares; Standby Commitment." All
funds received by the Rights Agent in payment of the Exercise Price will be
retained in escrow by the Escrow Agent and will not be delivered to the Company
or the Selling Stockholders until the certificates representing Common Stock
have been issued.
Record holders of Safeguard Common Shares who hold such shares for the
account of others (e.g., brokers or depositories for securities), and who thus
receive Rights certificates representing Rights for the account of more than one
beneficial owner, should provide such beneficial owners with copies of this
Prospectus and should ascertain and execute on their behalf the intentions of
such beneficial owners as to the exercise or transfer of such Rights.
All questions as to the validity, form, eligibility (including times
of receipt, beneficial ownership and compliance with minimum exercise
provisions) and acceptance of subscription forms and the Exercise Price will be
determined by Safeguard, whose determination will be final and binding. Once
made, subscriptions are irrevocable, and no alternative, conditional or
contingent subscriptions will be accepted. Safeguard reserves the absolute
right to reject any or all purchases not properly submitted or the acceptance of
which would, in the opinion of its counsel, be unlawful. Safeguard also
reserves the right to waive any irregularities (or conditions) and Safeguard's
interpretations of the terms (and conditions) of the Rights Offering shall be
final and binding. Any irregularities in connection with purchases must be cured
within five business days of the giving of notice of defect by the Rights Agent,
but no later than three business days after the Expiration Date, unless waived
by Safeguard. The Company, the Selling Stockholders, the Underwriters and the
Rights Agent are not under any duty to give notification of defects in such
subscriptions and will not have any liability for failure to give such
notifications. Exercises will not be deemed to have been made until such
irregularities have been cured or waived and rejected exercises and the Exercise
Price paid therefor will be returned promptly by the Rights Agent to the
appropriate holders of the Rights.
Investor Information
Investors who desire additional copies of this Prospectus or
additional information should contact Gregory R. Rush at Tucker Anthony
Incorporated, One Beacon Street, Boston, Massachusetts 02108, telephone number
(617) 725-1757 or William J. Filip at Robert W. Baird & Co. Incorporated,
777 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202-5391, telephone number
(414) 298-7665.
Expectations Concerning the Exercise of Rights
Warren V. Musser, the chairman and chief executive officer of
Safeguard, and/or his assignees are expected to exercise all Rights distributed
to them and acquire approximately 236,000 shares of Common Stock through the
Rights Offering.
Sales of Unsubscribed Shares; Standby Commitment
The Unsubscribed Shares will be sold, as to the first 300,000
Unsubscribed Shares, at the Exercise Price to the Other Purchasers (who are
persons selected by the Company having a relationship with the Company,
Safeguard, one of Safeguard's other partnership companies or other persons
selected by the Company) and, as to the number of Unsubscribed Shares exceeding
the 300,000 shares of Common Stock offered to the Other Purchasers (the "Excess
Unsubscribed Shares"), to the Underwriters at the Exercise Price less the Total
Underwriting Discount pursuant to the Standby Underwriting Agreement.
13
<PAGE>
The Company is offering the first 300,000 Unsubscribed Shares at the
Exercise Price to the Other Purchasers and expects to enter into, prior to the
Expiration Date, agreements obligating it to sell up to an aggregate of 300,000
Unsubscribed Shares to the Other Purchasers and obligating the Other Purchasers
to purchase from it up to an aggregate of 300,000 Unsubscribed Shares. In the
event that less than 300,000 Unsubscribed Shares are available for sale to the
Other Purchasers as of the Expiration Date, the number of remaining Unsubscribed
Shares will be sold to each Other Purchaser, on a discretionary basis, as
derived by multiplying the maximum number of Unsubscribed Shares each Other
Purchaser has agreed to purchase by the fraction obtained after dividing the
aggregate number of remaining Unsubscribed Shares by 300,000. In the event that
the Other Purchasers fail to purchase any of the Unsubscribed Shares which they
are obligated to purchase such circumstances would result in the failure to
satisfy a condition precedent to the Underwriters' obligation to purchase Excess
Unsubscribed Shares under the Standby Underwriting Agreement which would result
in the termination of the Rights Offering and the return of payments received in
respect of the Exercise Price without interest unless the Underwriters elect to
purchase all, but not less than all, of the remaining Unsubscribed Shares. See
"--Cancellation of Rights Offering" and "UNDERWRITING."
In accordance with the Standby Underwriting Agreement, the
Underwriters (i) will receive the Financial Advisory Fee of 3% of the Exercise
Price for each share of Common Stock subject to the Offering, and (ii) will
purchase, within six business days after the Expiration Date and subject to the
terms and conditions of the Standby Underwriting Agreement, the Excess
Unsubscribed Shares at a price per share equal to the Exercise Price less the
Underwriting Discount equal to 4% of the Exercise Price for each Excess
Unsubscribed Share, in addition to the Financial Advisory Fee for such shares.
Under certain circumstances, the Underwriters may be entitled to receive the
Underwriting Discount for shares of Common Stock acquired by them pursuant to
the exercise of Rights purchased by them. See "UNDERWRITING." The Excess
Unsubscribed Shares acquired by the Underwriters pursuant to the Standby
Underwriting Agreement, the Common Stock acquired by the Underwriters pursuant
to the exercise of Rights and the Common Stock acquired by the Underwriters in
the market will be offered by the Underwriters to the public at prices which may
vary from the Exercise Price. If all of the Rights are exercised, or if the
number of Unsubscribed Shares is 300,000 or less, there will be no Excess
Unsubscribed Shares and the Underwriters will not be required to purchase any
Common Stock pursuant to the Standby Underwriting Agreement unless the Other
Purchasers do not fulfill their obligations to purchase the Unsubscribed Shares.
The Underwriters may terminate their obligations under the Standby Underwriting
Agreement if certain events occur, or if the Company or any Selling Stockholder
fails to comply with any of their respective obligations under the Standby
Underwriting Agreement. See "UNDERWRITING." The Company has granted to the
Underwriters a 20-day option commencing on the Expiration Date to purchase a
maximum of 310,000 additional shares of Common Stock to cover over-allotments,
if any. See "UNDERWRITING." The Company intends to supplement the Prospectus
after the Expiration Date to set forth the results of the Rights Offering, the
transactions by the Underwriters during the Exercise Period, the number of
Unsubscribed Shares purchased by the Other Purchasers, if any, the number of
Unsubscribed Shares purchased by the Underwriters, if any, and the subsequent
reoffering thereof.
Cancellation of Rights Offering
If the conditions precedent to the sale to the Underwriters of the
Excess Unsubscribed Shares on the sixth business day after the Expiration Date
(the "Closing Date") are not satisfied (assuming that there are Excess
Unsubscribed Shares), the Underwriters may elect, on or before the Closing Date,
to cancel the Rights Offering and the Company and the Selling Stockholders will
not have any obligations with respect to the Rights except to return, without
interest, any payment received in respect of the Exercise Price. See
"UNDERWRITING." The Company has been advised by the NASD that it is likely that
trades in the Rights and the when-issued shares of Common Stock in the market
would be canceled if the Rights Offering is not consummated.
Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences affecting holders of Safeguard Common Shares receiving Company
Rights in the Offering. In the opinion of Morgan, Lewis & Bockius LLP, the
distribution of the Company Rights by the Company may constitute taxable income
to holders of Safeguard Common Shares under the Internal Revenue Code of 1986,
as amended (the "Code"), and may also be subject to state or local income taxes.
Because of the complexity of the provisions of the Code referred to below and
because tax consequences may vary depending upon the particular facts relating
to each holder of Safeguard Common Shares, such holders should consult their own
tax advisors concerning their individual tax situations and the tax consequences
of the Offering under the Code and under any applicable state, local or foreign
tax laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code, and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard Common Shares receiving Company Rights in the Offering generally are
as follows:
14
<PAGE>
Distribution of Company Rights to Holders of Safeguard Shares
The Company Rights, representing the right to acquire shares of Common
Stock from the Company or the Selling Stockholders, can be considered as
constituting "property" within the meaning of Section 317(a) of the Code. The
federal income tax consequences of a distribution by the Company of the Company
Rights which are considered "property" to holders of Safeguard Common Shares, as
determined under the Code and the regulations thereunder, are as follows: (i)
each noncorporate holder of Safeguard Common Shares will be deemed to have
received a distribution from Safeguard, generally taxable as ordinary dividend
income, in an amount equal to the fair market value (if any) of the Company
Rights, as of the date of distribution, (ii) each corporate holder of Safeguard
Common Shares (other than foreign corporations and S corporations) will be
deemed to have received a distribution from Safeguard (generally taxable as a
dividend subject to the dividends received deduction for corporations (generally
70%, but 80% under certain circumstances)) in an amount equal to the fair market
value (if any) of the Company Rights, as of the date of distribution; and (iii)
the tax basis of the Company Rights in the hands of each holder (whether
corporate or noncorporate) of Safeguard Common Shares will be equal to the fair
market value (if any) of the Company Rights as of the date of distribution.
Because of the predominantly factual nature of determining the fair market
value, if any, of the Company Rights, Morgan, Lewis & Bockius LLP has expressed
no opinion with respect to the fair market value of the Company Rights.
Since the fair market value of the Company Rights will determine the
amount of taxable income deemed received by the holders of Safeguard Common
Shares, the determination of the fair market value of each Right as of the date
of distribution is critical. The Exercise Price was determined through arms-
length negotiations among the Company, the Selling Stockholders and the
Underwriters. Based on these negotiations and because Safeguard views the
Company Rights as merely a mechanism that permits the purchase of the Common
Stock, Safeguard's Board of Directors believes that the per share value of
Common Stock represented by the Company Rights at the date of the commencement
of the Offering approximates the Exercise Price, and that the Company Rights
should have no value for federal income tax purposes. However, the Internal
Revenue Service is not bound by this determination. See "--Background."
Exercise of Rights
Holders of Company Rights, whether corporate or noncorporate, will
recognize neither gain nor loss upon the exercise of the Company Rights. A
holder of Company Rights who receives shares of Common Stock upon the exercise
of the Company Rights will acquire a tax basis in such shares equal to the sum
of the Exercise Price paid under the Offering and the tax basis (if any) of the
holder of Company Rights in the Company Rights.
Transfer of Rights
The transferable nature of the Company Rights will permit a holder of
Company Rights to sell Company Rights prior to exercise. Pursuant to Section
1234 of the Code, a Company Rights holder who sells Company Rights prior to
exercise will be entitled to treat the difference between the amount received
for the Company Rights and the adjusted tax basis (if any) of the holder of
Company Rights in the Company Rights as a short-term capital gain or capital
loss, provided that Common Stock subject to the Company Rights would have been a
capital asset in the hands of the holder had it been acquired by him. The gain
or loss so recognized will be short-term since the Company Rights will have been
held for not longer than one year.
Non-Exercise of Rights
The income tax treatment applicable to holders of Company Rights who
fail to exercise or transfer their Company Rights prior to the Expiration Date
also is set forth in Section 1234 of the Code. Holders of Company Rights who
allow their Company Rights to lapse are deemed under the Code to have sold their
Company Rights on the date on which the Company Rights expire. Since upon such
lapse no consideration will be received by a holder of Company Rights, and since
the Company Rights will have been held for not longer than one year, a short-
term capital loss equal to the tax basis (if any) in the Company Rights will be
sustained by the holder on such lapse, provided that Common Stock subject to the
Company Rights would have been a capital asset in the hands of the holder had it
been acquired by him.
15
<PAGE>
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 1,705,000
shares of Common Stock offered by the Company hereby are estimated to be
approximately $8.0 million after deducting estimated offering expenses allocable
to and payable by the Company (including the maximum applicable non-accountable
expense allowance to the Underwriters) and assuming the sale of all such shares
pursuant to the Standby Underwriting Agreement (other than the 155,000 shares
sold to the Direct Purchasers pursuant to the exercise of the Direct Rights),
the payment to the Underwriters of the Total Underwriting Discount with respect
to the shares sold by the Company pursuant to the Standby Underwriting Agreement
and the payment of only the Financial Advisory Fee with respect to the shares of
Common Stock sold by the Company to the Direct Purchasers through the Direct
Rights. In the event more of the shares of Common Stock offered hereby are sold
pursuant to the exercise of Rights, the Company will not be obligated to pay the
Underwriting Discount with respect to such shares and will, therefore, realize
an amount of net proceeds greater than approximately in Application of Proceeds
$8.0 million. See "RISK FACTORS--Liquidity" and "--Broad Discretion in
Application of Proceeds," "THE OFFERING--Sales of Unsubscribed Shares; Standby
Commitment" and "UNDERWRITING." The Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholders.
The principal reason for the Offering is to establish a stronger
capital base for the Company to support the continued expansion of its revenues.
The Company intends to use the net proceeds, together with cash flow from
operations, to repay a $2.0 million loan from Safeguard (the "Safeguard Loan")
and for working capital, general corporate purposes and capital expenditures.
The loan has a maturity date of November 1, 2001 but must be prepaid in full
upon the consummation of this Offering and bears interest at rates which
escalate 1.0% annually, starting at 6.0% in the initial year. In addition, the
Company may expand its technical and marketing capabilities through the
acquisition of other companies or businesses that are complementary to the
Company's current business. A portion of the net proceeds from the Offering may
be used in the future for such acquisitions, although the Company has no
commitments or understandings with respect to future acquisitions, nor is it
currently actively considering any particular acquisition. The Company has not
determined the amounts it intends to utilize on each of the listed uses, or the
timing of such uses. The amounts actually expended for each use may vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash generated or used by the Company's operations
and the status of acquisition opportunities, if any, presented to the Company.
The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its current cash balances and cash flow from
future operations will be sufficient to fund its operating requirements for the
12 months following the consummation of this Offering. Pending such uses, the
net proceeds of the Offering will be invested in short-term, investment-grade,
interest-bearing securities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION--Liquidity and Capital Resources."
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. The payment of future dividends, if any, will depend, among
other things, on the Company's results of operations and financial condition,
any restriction in the Company's secured credit agreement and on such other
factors as the Company's Board of Directors may, in its discretion, consider
relevant. The Company's secured credit agreement with its commercial lender
currently prohibits the payment of dividends.
16
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
as of September 30, 1996, and as adjusted to reflect the sale of 1,705,000
shares of Class A common stock by the Company pursuant to the Offering and the
application of the estimated minimum net proceeds of approximately $8.0 million
therefrom. This table should be read in conjunction with the Financial
Statements and related notes thereto and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
----------------------------
(dollars in thousands,
except per share data)
As Adjusted
Actual ------------
----------- (1)(2)
<S> <C> <C>
Long-term debt, including current portion(3)............................................ $ 258 $ 258
Stockholders' equity(3):
Preferred Stock, $.001 par value; 2,000,000 shares authorized, and no shares issued
and outstanding...................................................................... - -
Class A common stock, $.001 par value; 40,000,000 shares authorized, and
4,258,238 and 5,963,238 (as adjusted) shares issued and outstanding.................. 4 6
Class B common stock, $.001 par value; 20,000,000 shares authorized, and
4,937,831 and 4,937,831 (as adjusted) shares issued and outstanding.................. 5 5
Additional paid-in capital........................................................... 8,480 16,526
Notes receivable from sale of Common Stock........................................... (308) (308)
Accumulated deficit.................................................................. (1,125) (1,125)
------- -------
Total stockholders' equity........................................................... 7,056 15,104
------- -------
Total capitalization.................................................................... $ 7,314 $15,362
===== ======
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale by the Company of 1,705,000 shares of
Class A common stock and the receipt and application of approximately
$8,048 in net proceeds from this Offering, after deducting the maximum
Total Underwriting Discount with respect to such shares of approximately
$504 and estimated offering expenses of $825 (including $125 representing
the maximum applicable non-accountable expense allowance to the
Underwriters).
(2) Excludes as of December 9, 1996 (i) 2,652,654 shares of Common Stock
issuable upon the exercise of options (of which options to purchase 24,750
shares were exercisable at December 9, 1996) at a weighted average exercise
price of $2.04 per share and (ii) 526,598 shares of Common Stock issuable
upon the exercise of warrants (all of which were exercisable as of December
9, 1996) at an exercise price of $5.50 per share. See "MANAGEMENT--Stock
Option Plan" and "CERTAIN TRANSACTIONS."
(3) As of November 15, 1996, the Company had actual long-term debt of
approximately $2,235. The "As Adjusted" long-term debt amount reflects the
borrowing of $2,000 from Safeguard on November 8, 1996 and the repayment of
such debt using proceeds from this Offering. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity
and Capital Resources" and "USE OF PROCEEDS."
17
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996
was approximately $6.9 million or $0.75 per share of Common Stock. Net tangible
book value per share of Common Stock represents the amount of the Company's
tangible assets less its total liabilities, divided by the total number of
shares of Common Stock outstanding. Without taking into account any changes in
net tangible book value after September 30, 1996, other than to give effect to
the items described in Note 1 appearing immediately below the following table,
the pro forma net tangible book value of the Company as of September 30, 1996
would have been approximately $15.0 million or $1.37 per share. This represents
an immediate increase in such pro forma net tangible book value of $0.62 per
share to existing stockholders and an immediate dilution of $4.13 per share to
investors purchasing Common Stock at the Exercise Price in the Offering. New
stockholders that acquire Common Stock from the Underwriters at a price greater
than the Exercise Price will experience greater dilution. The following table
illustrates this per share dilution in net tangible book value:
<TABLE>
<S> <C> <C>
Exercise Price.................................................. $5.50
Net tangible book value per share as of September 30, 1996.... $0.75
Increase per share attributable to new stockholders (1)....... 0.62
Pro forma net tangible book value per share as of September 30, ----
1996........................................................... 1.37
-----
Dilution per share to new stockholders.......................... $4.13
=====
</TABLE>
- --------------------
(1) Reflects the sale by the Company of 1,705,000 shares of Common Stock and
the receipt of approximately $8.0 million in net proceeds from the Offering
after deducting the maximum Total Underwriting Discount with respect to
such shares of approximately $504,000 and estimated offering expenses of
$825,000 (including $125,000 representing the maximum applicable non-
accountable expense allowance to the Underwriters).
The following table sets forth, on an adjusted basis as of December 9,
1996, the number of shares of Common Stock issued by the Company, the total
consideration paid and the average price per share paid upon original issuance
to stockholders prior to the Offering and by new investors, based upon the
Exercise Price of $5.50 per share before deducting the Underwriters'
compensation and estimated offering expenses:
<TABLE>
<CAPTION>
Average
Shares Total Price
Purchased (1) Consideration (2)(3) per Share (2)
------------------ ----------------------- -------------
Number Percentage Amount Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Existing shares.............. 9,551,398 84.9% $9,767,627 51.0% $1.02
New shares................... 1,705,000 15.1 9,377,500 49.0 5.50
--------- ----- ----------- -----
Total.................... 11,256,398 100.0% $19,145,127 100.0% 1.70
========== ===== =========== =====
</TABLE>
- --------------------
(1) Sales by the Selling Stockholders in the Offering will cause the number of
shares held by existing stockholders to be reduced to approximately
8,001,398 shares or 71.1% of the total shares of Common Stock to be
outstanding after the Offering, and will increase the number of shares held
by new investors to approximately 3,255,000 shares, or 28.9% of the total
shares of Common Stock to be outstanding after the Offering. See
"PRINCIPAL AND SELLING STOCKHOLDERS."
(2) Reflects gross consideration from the issuance of Common Stock and
therefore does not reflect deductions for stock issuance costs of $471,000
and notes issued in exchange for stock issuance of $308,000.
(3) Reflects gross consideration from the issuance of Common Stock and
therefore does not reflect deductions for the maximum Underwriting Discount
with respect to such shares of approximately $504,000 and estimated
offering expenses of $825,000.
The foregoing tables do not assume the exercise of any options. As of
December 9, 1996, there were outstanding options to purchase an aggregate of
2,652,654 shares of Common Stock (of which 24,750 were exercisable at December
9, 1996) at a weighted average exercise price of $2.04 per share and excludes
526,598 shares of Common Stock issuable upon the exercise of warrants at an
exercise price of $5.50 per share. As of December 9, 1996, the Company had an
additional 665,948 shares of Common Stock available for future grants and
other issuances under its Stock Option Plan. See "MANAGEMENT--Stock Option
Plan," "CERTAIN TRANSACTIONS" and Note 7 to the Consolidated Financial
Statements appearing elsewhere in this Prospectus.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The financial data presented below has been derived from the Company's
consolidated financial statements. The audited balance sheets as of March 31,
1995 and 1996 and the related statements of operations, stockholders' equity and
cash flows for each of the years in the two-year period ended March 31, 1996 and
for the period from January 28, 1994 (inception) to March 31, 1994 and the KPMG
Peat Marwick LLP report thereon and the Company's unaudited balance sheet as of
September 30, 1996 and the related statements of operations, stockholders'
equity and cash flows for the period then ended are included elsewhere in this
Prospectus. The data presented below should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," the Consolidated Financial Statements and the notes thereto and
other financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Inception Year Ended Six Months Ended
to March 31, September 30,
March 31, ------------------- -------------------
1994 1995 1996 1995 1996
---------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues........................ $ 261 $12,843 $26,339 $11,838 $16,089
----- ------ ------ ------ ------
Operating expenses:
Project personnel and related
expenses........................... 633 8,351 15,312 6,671 10,714
Professional development and
recruiting......................... 106 1,395 4,587 2,311 2,960
Marketing and sales................ 94 451 606 335 893
Management and administrative
support............................ 317 3,108 4,460 2,009 3,326
----- ------ ------- ------ ------
Total operating expenses........ 1,150 13,305 24,965 11,326 17,893
----- ------ ------ ------ ------
Income (loss) from operations...... (889) (462) 1,374 512 (1,804)
Interest income, net............... 3 85 164 75 11
----- ------ ------ ------ ------
Income (loss) before taxes......... (886) (377) 1,538 587 (1,793)
Income taxes....................... -- -- ( 302) (116) 694
----- ------ ------ ------ ------
Net income (loss).................. $(886) $(377) $1,236 $ 471 $ (1,099)
===== ====== ====== ====== ======
Pro forma net income (loss) per
share of Common Stock.............. $(.33) $(0.04) $0.12 $0.05 $(.11)
Shares used in computing pro forma
net income (loss) per share........ 2,679 8,440 9,964 9,909 10,307
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
------------------------------------ ---------------
1994 1995 1996 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $1,148 $4,690 $4,635 $2,174
Working capital....................... 558 4,345 4,396 4,664
Total assets.......................... 1,456 7,513 11,615 10,473
Long-term debt, including current
portion(1)............................ -- 256 125 258
Total stockholders' equity............ 766 5,187 6,568 7,056
</TABLE>
- -----------------------
(1) As of November 15, 1996, the Company had long-term debt of approximately
$2,235, which includes a loan from Safeguard for $2,000 made on November 8,
1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "RISK FACTORS."
Overview
Diamond is a management consulting firm that devises business strategies
enabled by information technology ("IT") and manages the implementation of those
strategies. Diamond was founded upon, and continues to stress, a business
culture in which strategic consulting and IT expertise are optimally integrated
to provide superior client solutions. The Company has experienced substantial
revenue growth as its net revenues have increased from $12.8 million in its
first full year of operations ending March 31, 1995 to $26.3 million in fiscal
1996 while growing its client base from 16 clients served in fiscal 1995 to 24
clients served in fiscal 1996. The number of the Company's client-serving
professionals has also grown during this two-year period from 72 to 118 at the
end of fiscal 1995 and fiscal 1996, respectively.
The Company's revenues are comprised of professional fees for services
rendered to clients which are billed either monthly or semi-monthly in
accordance with the terms of the client engagement. Prior to the commencement
of a client engagement, the Company and its client agree on fees for services
based upon the scope of the project, Diamond staffing requirements and the level
of client involvement. The Company recognizes revenues as services are
performed in accordance with the terms of the client engagement. Out-of-pocket
expenses are reimbursed by clients and offset against expenses incurred and are
not included in recognized revenues. Provisions are made for estimated
unbillable and uncollectible amounts based on the Company's experience.
Although the Company from time to time has been required to make revisions to
its clients' estimated deliverables, to date none of such revisions has had a
material adverse effect on the Company's operating or financial results.
The largest portion of the Company's costs consist primarily of employee-
related expenses for its client-serving professionals and other direct costs,
such as third-party vendor costs and unbilled travel costs, associated with the
delivery of services to clients. The remainder of the Company's costs are
comprised of the expenses associated with the development of the business and
the support of its client-serving professionals, such as professional
development and recruiting, marketing and sales, and management and
administrative support. Professional development and recruiting expenses
consist primarily of recruiting and training costs. Marketing and sales
expenses consist primarily of the costs associated with the Company's
development and maintenance of its marketing materials and programs, in addition
to other marketing programs. Management and administrative support expenses
consist primarily of the costs associated with operations, finance, human
resources, information systems, facilities and other administrative support for
project personnel.
The Company regularly reviews its fees for services, professional
compensation and overhead costs to ensure that its services and compensation are
competitive within the industry. In addition, Diamond monitors the progress of
client projects with client senior management on a periodic basis. The Company
manages activities of its professionals by closely monitoring engagement
schedules and staffing requirements for new engagements. Because most of the
Company's client engagements are, and may be in the future, terminable by the
client without penalty, an unanticipated termination of a client project could
require the Company to maintain under-utilized employees, resulting in a higher
than expected percentage and number of inactive professionals. While
professional staff must be adjusted to reflect active engagements, the Company
must maintain a sufficient number of senior professionals to oversee existing
client engagements and participate with the Company's sales efforts to secure
new client assignments.
Recent Developments
The Company's net revenues continued to grow during each of the quarters
ended June 30, 1996 and September 30, 1996, despite the cancellation of two
significant projects. The cancellation of these projects resulted from (a) one
client's acquisition of an existing business which eliminated its need for
Diamond's continued services in assisting the client in the establishment of a
similar business and (b) the other client's cancellation of the business
initiative for which the Company had been retained. The revenues from these two
clients represented approximately $3.8 million in the quarter ended
March 31, 1996, and after such cancellations, represented approximately $1.5
million and $300,000 in revenues in the quarters ended June 30, 1996 and
September 30, 1996, respectively. At the time of these project
20
<PAGE>
cancellations, the Company was in the process of increasing the number of its
client-serving professionals to support anticipated revenue growth.
Accordingly, the lost revenue associated with these projects, together with the
expanded capacity for future anticipated revenue growth, resulted in a higher
than expected percentage of unassigned professionals during each of the quarters
ended June 30, 1996 and September 30, 1996 and net losses of $714,000 and
$385,000, respectively. The Company responded to the impact of this lost
revenue and reduced utilization of its client-serving professionals by
evaluating its cost structure and eliminating, or deferring, certain planned
spending and terminating certain non-client-serving professionals. At the same
time, the Company elected to retain existing client-serving professionals so
that it could be in a position to respond to anticipated future growth.
Finally, the following compensation reductions were implemented to help the
Company recover from the situation.
. The Company eliminated employee bonuses for the year ending March 31,
1997.
. The Partners agreed to a temporary 8.3% reduction in compensation for
one year commencing with the quarter ending December 31, 1996.
. Certain of the Partners agreed to forgive prior years' deferred
compensation if the Company does not achieve certain revenue thresholds
during each of the quarters ending December 31, 1996 and March 31, 1997. To
the extent that such amounts are forgiven in each quarter, the Company will
recognize the amounts as a reduction in operating expenses for the
respective periods.
The Company's response to these project cancellations and the resulting
business circumstances effectively reduced spending levels, while maintaining
the consulting capacity required to support future growth. In the aggregate
(assuming the revenue thresholds related to potential forgiveness of deferred
compensation described above are not met), the Company reduced or will reduce
its expense levels by approximately $800,000 in the quarter ended September 30,
1996, approximately $1.1 million in each quarter ending December 31, 1996 and
March 31, 1997, and $200,000 in each quarter ending June 30, 1997 and
September 30, 1997 as compared to the expense levels included in the quarter
ended June 30, 1996.
Results of Operations
The Company's operations during the period from inception on January 28,
1994 to March 31, 1994 (the "Inception Period") reflect a loss of $886,000 which
was attributable to the developmental nature of the business during the start-up
phase of operations. The Company's investment in its consulting capacity and
marketing programs during the Inception Period was focused primarily on the
development of a core group of consultants and administrative personnel to start
the business, recruitment of new consultants to support the future growth of the
business and development of a corporate identity and marketing approach.
Accordingly, a comparison of fiscal 1995 to the Inception Period is not
meaningful and the discussion that follows is only directed toward a comparison
of the six months ended September 30, 1996 and 1995 and a comparison of fiscal
1996 and fiscal 1995.
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
--------------------- -----------------
1995 1996 1995 1996
------- ------ ----- ------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues..................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses
Project personnel and related
expenses........................ 65.0 58.1 56.3 66.6
Professional development and
recruiting...................... 10.9 17.4 19.6 18.4
Marketing and sales............. 3.5 2.3 2.8 5.5
Management and administrative
support......................... 24.2 17.0 17.0 20.7
----- ----- ----- -----
Total operating expenses..... 103.6 94.8 95.7 111.2
----- ----- ----- -----
Income (loss) from operations.... (3.6) 5.2 4.3 (11.2)
Interest income, net............. 0.7 0.6 0.7 0.1
----- ----- ----- -----
Income (loss) before taxes....... (2.9) 5.8 5.0 (11.1)
Income taxes..................... -- (1.1) (1.0) 4.3
----- ----- ----- -----
Net income (loss)................ (2.9%) 4.7% 4.0% (6.8%)
===== ===== ===== =====
</TABLE>
21
<PAGE>
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
The Company's net revenues increased 35.9% to $16.1 million during the six
months ended September 30, 1996, as compared to the same period in the prior
year. The increase in the Company's net revenues reflects an increase in the
volume of services delivered to new clients, as well as the leveraging of the
Company's existing client base by undertaking additional projects for these
clients. The Company served 29 clients during the six months ended September
30, 1996 (of which 15 were clients during the prior fiscal year) as compared to
13 clients during the same period in the prior year.
Project personnel and related expenses increased from $6.7 million to $10.7
million during the six months ended September 30, 1996 from the same period in
the prior year. In aggregate, project personnel and related expenses increased
60.6% from the same period in the prior year due to the increase in the number
of its client-serving professionals hired during the period to respond to
anticipated future growth. The Company increased its client-serving
professional staff from 96 at September 30, 1995 to 145 at September 30, 1996.
As a percentage of net revenues, project personnel and related expenses
increased from 56.3% to 66.6% during the six months ended September 30, 1996.
This largely reflects the impact of the reduced utilization that occurred as a
result of the cancellation of two significant projects in March and April 1996
as previously noted.
Professional development and recruiting expenses increased from $2.3 million
to $3.0 million, or 28.1%, during the six months ended September 30, 1996 due
to the increase in recruiting and the training of a higher number of
professional consultants. The increase also reflects the Company's continued
emphasis on its investment in recruiting and training to support the growth of
its business as partially offset by certain cost containment initiatives
undertaken in response to the events described in "--Recent Developments." As a
percentage of net revenues, professional development and recruiting expenses
decreased to 18.4% as compared to 19.6% during the same period in the prior
year.
Marketing and sales expenses increased from $335,000 to $893,000 during the
six months ended September 30, 1996. As a percentage of net revenues, these
expenses increased from 2.8% to 5.5%, reflecting the Company's expanded
investment in its marketing and sales programs.
Management and administrative support expenses increased from $2.0 million
to $3.3 million during the six months ended September 30, 1996. As a percentage
of net revenues, these expenses increased from 17.0% to 20.7%, reflecting the
cost associated with the additional facilities, equipment and personnel
necessary to support the Company's growth and increased consulting capacity and
the recognition of certain legal expenses. See "CERTAIN TRANSACTIONS--
Cancellation of Promissory Note."
Fiscal 1996 Compared to Fiscal 1995
The Company's net revenues increased 105.1% to $26.3 million in 1996, as
compared to $12.8 million in 1995. The increase in the Company's net revenues
reflects an increase in the volume of services delivered to new clients, as well
as the leveraging of the Company's existing client base by undertaking
additional projects for these clients. The Company served 24 clients during
1996 (of which 12 were clients during the prior year) as compared to 16 clients
during the same period in the prior year.
Project personnel and related expenses increased from $8.4 million to $15.3
million, or 83.4%. This reflects the increase in the number of professional
consultants required to support the Company's growth during the period and to
respond to anticipated future growth. In response to the Company's requirements
for additional project personnel, the Company increased its number of client-
serving professionals from 72 at March 31, 1995 to 118 at March 31, 1996.
<PAGE>
As a percentage of net revenues, these expenses decreased from 65.0% to 58.1%
during 1996, reflecting the Company's improved utilization of its client-serving
professionals relative to the preceding year.
Professional development and recruiting expenses increased from $1.4
million to $4.6 million during 1996. As a percentage of net revenues, these
expenses increased from 10.9% to 17.4% in 1996. This increase reflects the
Company's emphasis on its investment in recruiting and training to support the
growth of the business and to conduct internal training to support the
assimilation and development of its highly skilled employee base.
Marketing and sales expenses increased from $451,000 to $606,000, or 34.4%
as a result of the Company's expanded investment in its marketing and sales
programs. As a percentage of net revenues, these expenses decreased from 3.5%
in 1995 to 2.3% in 1996.
Management and administrative support expenses increased from $3.1 million
to $4.5 million, or 43.5% as a result of the additional facilities, equipment
and personnel necessary to support the Company's growth and increased consulting
capacity. As a percentage of net revenues, these expenses decreased from 24.2%
to 17.0% as a result of the Company's improved operating leverage resulting from
the Company's net revenue growth.
The Company's effective tax rate of 19.6% in 1996 was lower than the
federal statutory rate primarily due to the recognition of benefits not
recognized during fiscal 1994 and 1995. The Company did not recognize these
benefits in 1994 and 1995 because of its operating losses during those years,
its limited operating history and the likelihood of their realization at the end
of each of those fiscal years.
Unaudited Quarterly Results
Set forth below are selected statements of operations data for each of the
Company's full quarters since inception. In the Company's opinion, this data
has been prepared on the same basis as the audited financial statements and
includes all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the information for the period presented when read in
conjunction with the Consolidated Financial Statements and notes thereto
contained elsewhere herein. Results of operations for any previous fiscal
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar 31, Jun. 30, Sept. 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Statement of Operations Data:
Net revenues $1,332 $2,859 $3,542 $5,110 $5,863 $5,975 $6,918 $7,583 $7,753 $8,336
Income (loss) from operations $(1,188) $ (271) $ 112 $ 885 $ 363 $ 149 $ 433 $ 429 $(1,215) $(589)
Net income (loss) $(1,178) $ (243) $ 146 $ 898 $ 312 $ 159 $ 383 $ 382 $(714) $(385)
Other Operating Data:
Number of clients served 9 12 10 10 13 10 13 17 21 25
Number of clients
generating revenues
greater than $250,000 2 4 5 6 8 9 8 7 11 11
Average revenue per client $148 $ 238 $ 354 $ 511 $ 451 $ 598 $ 532 $ 446 $369 $333
</TABLE>
The Company has experienced quarterly fluctuations in its operating results
partially due to its rapid growth since inception, together with the impact of
the Company's considerable investments in recruiting and training during the
periods. Because the Company's revenues are derived from professional fees and
the Company is in its early stages of investment with many of its clients,
quarterly results can be affected by the commencement and completion of client
23
<PAGE>
engagements and the booking of new business. In addition, expenses are impacted
by the investment made in training programs, campus recruiting and the
development of new business.
The Company's loss from operations during the quarters ended June 30, 1994
and September 30, 1994 reflects the impact of the costs incurred in the
Company's efforts to increase the number of its client-serving professionals and
develop its corporate identity and marketing programs. Since that time, the
Company has expanded its client base and key client relationships, thereby
generating substantial growth in net revenues. The Company increased its
investment in recruiting and training during each of the quarters of fiscal 1996
partially offsetting the impact of increased revenues in these quarters. During
each of the quarters ended June 30, 1996 and September 30, 1996, the Company
continued to expand its client base, key client relationships and client-serving
professionals, despite the cancellation of two significant projects. See "--
Recent Developments" and "RISK FACTORS -- Concentration of Revenues."
Liquidity and Capital Resources
Historically, the Company has used proceeds from the private sales of
Common Stock and cash from operations to fund its operating and capital
requirements. The Company expects that cash from operations and the proceeds
from this Offering will provide the principal sources of future liquidity for
the Company. Variations in the Company's operating results have occurred in the
past and any significant decreases in net income could adversely affect
liquidity.
The Company is currently experiencing a period of growth which could place
a strain on the Company's financial resources. The Company expects to increase
its client-serving professional staff by nearly 30% during the next 12 months.
Although the Company's plans to hire personnel are driven in response to
increased demand for the Company's consulting services, a portion of these
expenses may be incurred in anticipation of increased demand. Operating results
and liquidity may be adversely affected if market demand and revenues do not
increase as anticipated. Capital expenditures for computer equipment,
telecommunications equipment, and furniture and fixtures and leasehold
improvements totaled $733,000 during the six months ended September 30, 1996 and
$1.8 million during the year ended March 31, 1996. The Company anticipates
that its capital expenditures for fiscal 1998 will not exceed $1.0 million.
The Company entered into a $2.0 million subordinated loan agreement with
Safeguard on November 8, 1996 for general working capital purposes. In
connection with this loan, the Company issued warrants to Safeguard for the
purchase of 526,598 shares of the Company's Common Stock at $5.50 per share. The
loan has a maturity date of November 1, 2001 but must be prepaid in full upon
the consummation of this Offering and bears interest at rates which escalate
1.0% annually, starting at 6.0% in the initial year.
The Company also obtained a revolving line of credit (pursuant to the terms
of a secured credit agreement) from a commercial bank under which the Company
may borrow up to $3.0 million at an annual interest rate based on the prime rate
or based on the LIBOR rate plus 2.5%, at the Company's discretion. As of
December 9, 1996, the Company had approximately $2.7 million available under
this line of credit. See Note 6 of Notes to Consolidated Financial Statements.
The Company may expand its capabilities through the acquisition of other
businesses that are complementary to the Company's business. A portion of the
net proceeds from this Offering may be used in the future for such acquisitions,
although the Company is not currently engaged in active discussions with respect
to any acquisition. See "USE OF PROCEEDS."
The Company currently anticipates that the net proceeds received by the
Company from this Offering, together with amounts available under its current
revolving line of credit, cash generated from operations and existing cash
balances will be sufficient to satisfy its operating cash needs for the 12
months following the consummation of this Offering. Should the Company's
business expand more rapidly than expected, the Company believes that additional
bank credit would be available to fund such operating and capital requirements.
In addition, the Company could consider seeking additional public or private
debt or equity financing to fund future growth opportunities.
24
<PAGE>
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") was issued in March 1995. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
anticipates the adoption of SFAS 121 will not have a material impact on its
results of operations or financial position.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock based awards or to continue to account for such
items using the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") with
pro forma disclosures of net income and net income per share as if the fair
value method had been applied. The Company intends to continue to apply APB 25
for future stock options and stock based awards, and accordingly, does not
anticipate that the adoption of SFAS 123 will have a material impact on its
results of operations or financial position.
The Company will adopt both SFAS 121 and 123 effective for its fiscal year
ending March 31, 1997.
25
<PAGE>
BUSINESS
Overview
Diamond is a management consulting firm that devises business strategies
enabled by information technology ("IT") and manages the implementation of those
strategies. Diamond was founded upon, and continues to stress, a business
culture in which strategic consulting and IT expertise are optimally integrated
to provide superior client solutions. The Company believes that the
distinguishing qualities of its consulting process are its ability to synthesize
strategy with technology, deliver solutions with measurable results, deliver
services through small multidisciplinary project teams and maintain objectivity
in solution recommendations.
The Company leads its clients through a process which broadens their
understanding of the ways that IT can be incorporated into their businesses to
gain competitive advantage in their markets. Diamond's professionals, working
closely with client personnel, perform thorough analyses of the client's current
business with a focus on alternative IT-driven business strategies. When an
appropriate strategy has been developed, Diamond's professionals provide
important management oversight of the strategy implementation process, which
generally includes design, deployment and integration of IT solutions together
with modification of business processes and organizational structure. Diamond
manages the deployment phase by utilizing the client's internal resources or
third-party resources selected by Diamond for their particular expertise.
Throughout the entire process, Diamond transfers relevant knowledge to the
client organization.
Diamond differentiates itself from other management consultants primarily
by its in-depth knowledge of IT and its broader scope of services, including
implementation management. The Company differentiates itself from systems
integrators primarily by its ability to devise business strategies, its focus on
knowledge transfer and program management during implementation, and its
objectivity in recommending solutions. Finally, in comparison to firms that
offer both management-consulting and systems-integration services through
separate business units, Diamond differentiates itself by its ability to offer
integrated strategy and IT services simultaneously through a single
multidisciplinary team and by its objectivity.
Diamond was founded in January 1994 by executives with extensive experience
with both major consulting firms and emerging growth technology businesses.
Diamond has grown rapidly since its inception, serving clients in a variety of
industries ranging in size from Fortune 500 companies to smaller private
companies.
Industry Background
The organizational structure and service offerings of consulting firms at
any given time coincide with the concerns of the businesses these firms serve.
For many decades, business organizations have retained management consultants to
provide general strategic advice. The advent of the computer, however, changed
the way businesses operate. Consequently, software developers emerged to offer
custom software applications that would improve the functionality of the
hardware in which businesses had invested. In the 1970s and 1980s, as the
investments businesses made in IT continued to grow (including investments in
hardware, networks and software provided by different vendors), systems
integrators emerged to help businesses integrate and deploy these products. By
the 1990s, IT had become a significant part of most business operations, and was
starting to be used for more strategic purposes. In response to these
developments, many consulting firms created or acquired complementary business
units in an attempt to provide a single source for all consulting needs of a
business.
Many large corporations face a rapidly changing business environment and
new bases of competition. Success in the midst of change may require mastering
increasing complexity, adapting products and services to dynamic market
conditions, reducing costs and improving quality. With businesses and consumers
becoming more comfortable with technology, IT is increasingly being used in a
variety of innovative, strategic ways to create new businesses, products and
services, open new sales and marketing channels and provide cost reduction and
time-to-market advantages. IT
26
<PAGE>
is also, however, creating new competitors, eliminating established sales and
marketing channels, and shortening research and development cycles. In response,
the Company's experiences indicate that business leaders are developing a
different and more sophisticated view of how technology can be used to create a
business strategy, rather than simply to enable a business strategy.
There is increasing recognition of the change in the business environment
driving this new use of technology. A company looking for help to develop a
business strategy incorporating IT generally has two choices: hire two separate
firms (a management consultant followed by a systems integrator) or hire one
firm that offers both management-consulting and systems-integration services.
When hiring separate firms, a management consultant first works with the
senior management of the company to develop a new business strategy. Senior
management then hires a systems integrator to determine and develop the
information systems to support the business strategy. The Company believes that
there are several inherent disadvantages to this two-step approach. First, a
management consultant that does not have a comprehensive understanding of IT may
not recognize the strategic potential of IT for that business, and therefore not
recommend a strategy that fully incorporates IT. Second, after a systems
integrator is hired to deploy the strategy, transition time is often required
for the integrator to fully understand the strategy recommended by the
management consultant. This transition between the two firms generally increases
the overall risk and length of the project (i.e., time-to-market), and may
threaten the integrity of the original strategy. In addition, systems
integrators often have proprietary software or have hardware reseller agreements
that give them an economic incentive to recommend a particular solution over a
potentially more advantageous one. The second alternative is to hire one firm
that offers both management-consulting and systems-integration services.
However, these services are typically delivered by separate practices or
business units within the same firm. The separate units generally function like
two separate firms, and typically require a transition period between strategy,
development and deployment.
The Company believes that it competes in a developing market comprised
of a segment of the management-consulting market and a segment of the systems-
integration market. International Data Corporation ("IDC"), an industry
analyst, defines the market for management-consulting service to include
strategy, business process reengineering, change management services,
operational analysis, process improvement and technology consulting. Diamond
participates in this entire market. IDC defines the market for systems-
integration services to include IT planning, IT design, custom software
development, project management, test and debug, installation,
training/knowledge transfer, system migration, staging, relocation services,
system configuration, software reengineering, site preparation, documentation
service, and business recovery. Diamond participates in the project management
and training/knowledge transfer segments of this market. IDC estimates
aggregate revenue from these segments of the systems-integration market and the
management-consulting market were $20.6 billion in 1995 and will grow at a
compound annual growth rate of 13.7% to $39.2 billion in the year 2000.
The Diamond Advantage
Diamond was founded with the objective of creating a common business
culture in which strategic consulting and IT expertise are optimally integrated
to provide superior client solutions. The Diamond solution is defined by the
ability to (i) consult with clients to synthesize strategy with technology,
(ii) deliver an operating solution with measurable results, (iii) deliver
services through small multidisciplinary project teams and (iv) maintain
solution objectivity.
Consult with Clients to Synthesize Strategy with Technology. Diamond
simultaneously provides expertise in strategy consulting, business processes
and IT. This enables the Company to identify strategic opportunities that
might not otherwise be considered by a management consulting firm or a
systems integration firm.
Deliver a Solution with Measurable Results. Diamond delivers a solution with
measurable goals for its clients that is supported by a cost/benefit
analysis. Because the solution is delivered to the client by the same
multidisciplinary team that created the strategy, the time-to-market and risk
associated with these projects is reduced.
27
<PAGE>
Utilize Small, Multidisciplinary Project Teams. The Company's services are
delivered through small, experienced and multidisciplinary teams that work
collaboratively with a client. The Company refers to its project staffing
model as a "diamond," which contemplates a team configuration of highly
skilled professionals representing multiple areas of expertise. The size and
composition of a "diamond" is determined based upon the needs of a given
project. Diamond consultants, working closely with the client, create an
environment in which knowledge and skills are constantly shared. This
transfer of knowledge is of significant value to the client.
Maintain Solution Objectivity. Diamond has intentionally refrained from
entering into alliances that might influence, or be perceived to influence,
the strategy that it recommends to a client. Furthermore, the Company does
not offer systems integration programming services that might bias its
recommendation. Diamond believes this objectivity is critical to its ability
to address strategic issues and earn its clients' trust.
Diamond's Strategy
Diamond's goal is to become the leader in the development and deployment of
business strategies that are enabled by IT. As a professional services firm,
there are two constituencies critical to the realization of this goal: the
Company's professionals and its clients. Accordingly, each of the following
strategies focus on developing, attracting and retaining the Company's
professionals and clients.
Develop a Culture of Multidisciplinary Teams. The Company seeks to develop and
sustain a strong culture that equally supports all disciplines within the
Company through common career paths, compensation programs and training. The
Company seeks to promote its culture by exposing its professionals to all of
the various services that Diamond provides while further developing skills in
each professional's principal area of expertise.
Develop Long-Term Client Relationships. The Company seeks to continue to
develop strong relationships with clients to sustain and grow repeat
business. The Company plans to expand marketing activities designed to
strengthen, encourage and accelerate relationship building with both current
and prospective clients.
Identify and Disseminate Intellectual Capital. Diamond utilizes its accumulated
knowledge and experience to provide relevant intellectual capital to a given
project and to develop innovative solutions for its clients. The Company
continuously seeks to identify and disseminate new intellectual capital
throughout its organization to keep abreast of business and technology
trends. Intellectual capital is provided by individuals both within and
outside the Company and incorporated into the Company's practice and training
to insure that all of the Company's professionals are provided with the most
current information on relevant topics.
Develop Diamond Brand Image. Diamond intends to continue to invest in the
creation and maintenance of its brand identity in the marketplace. The
Company promotes its name and credentials through publications, speaking
engagements, media relations, direct marketing and other efforts. The Company
believes that building a brand image facilitates the lead generation process
by raising awareness of the Company, and consequently, increasing the number
of opportunities to propose on new projects.
Refrain from Entering into Hardware or Software Agreements. In order to
maintain its objectivity, the Company intentionally refrains from entering
into relationships with computer hardware and software vendors that may
create a real or perceived bias in the solution it recommends to a client.
Diamond's Services
The Company devises and implements business strategies enabled by IT.
Diamond leads a client through a process combining creative and analytical
thinking with an in-depth understanding of IT to enable the client to
conceptualize its business differently, and then develop and implement a
business strategy that more effectively
28
<PAGE>
incorporates IT. This is fundamentally different than the traditional,
sequential approach that addresses strategy first, followed by development of
new or revised IT solutions.
While Diamond manages the implementation of IT-driven strategies, it does
not provide programming services. The Company's collaborative approach utilizes
the client's IT staff for programming functions. In the event that a client's
organization is unable to provide such functions internally, Diamond
subcontracts to third-party software programmers or systems integrators selected
for their expertise.
A small project team of Diamond consultants with expertise in strategy,
business processes and IT work closely with the client throughout this process.
See "--Human Resources and Culture--Organization." The phases which are
included on any given client project, and the amount of time spent on each phase
vary greatly depending upon the scope of work and the readiness of the client
organization to change. The Company's Service Delivery Process is generally
outlined in the following diagram:
Learning - Collaboration - Prototyping - Strategy - Architecture - Development -
Deployment
Executive Alignment --- Program Management
Executive Alignment Segment
The executive alignment segment of the process is designed to help the
client explore the new strategic possibilities of technology before determining
a strategy. This segment consists of three phases: learning, collaboration and
prototyping. Learning helps clients explore and understand the new strategic
possibilities of technology in order to set preliminary goals, collaboration
gains consensus within the client's organization on these preliminary goals and
prototyping tests the goals to ensure they are realistic and prioritizes them
based on desired results. This segment leads to the development of an IT-driven
business strategy to achieve a client's objectives.
Learning -- The objective of the learning phase is to help the client
evaluate the strategic possibilities of IT for its business and
explore an appropriate range of potential goals. During the learning
phase, all aspects of the attendant business issues (e.g., shrinking
margins, heightened competition, reduced market share, etc.) are
examined in order to identify and understand new alternatives based
on relationships between emerging technologies and the marketplace.
Collaboration -- The collaboration phase is an extension of the learning
phase in which specific alternatives are shared with key members of
the client organization. During the collaboration phase, Diamond
works with the client to gain consensus on the goals that were
preliminarily established in the learning phase.
Prototyping -- During the prototyping phase, the goals agreed upon in
the collaboration phase are translated into potential strategies.
These strategies are then modeled in a number of ways, including
using computer simulation technology or conducting a small market
test. Prototyping helps to prioritize and determine which strategies
are realistic by understanding their effect on the client's
customers, processes, organization and technology.
Strategy Segment
Based on the results of the executive alignment segment, an IT-driven
business strategy is then determined by the Company and the client. The
strategy is a blueprint to help the client reach its goal. When determining the
strategy, the team further evaluates the dynamics of the client's competitive
and financial environments. Importantly, specific
29
<PAGE>
performance goals and detailed deployment plans for the new strategy are
created, which constitute milestones by which the client can readily measure
results during the deployment phase. The deployment plans developed in this
phase correspond to the requirements of the project, but generally include an
organizational strategy, a process redesign strategy and an IT strategy.
Program Management Segment
The objective of the program management segment is to keep client and/or
third-party resources focused on the business value of the project throughout
the implementation of the strategy. Diamond's program management services
provide the leadership and management needed to implement adjustments to the
deployment plan as needed to deliver a solution on time and within budget. Key
variables managed throughout this segment include project content,
constituencies affected by the project, knowledge transferred, risk associated
with the project and resources utilized.
Program management services are delivered either as part of the
implementation of a strategy, or as a service by itself. As part of the
implementation of a strategy, program management consists primarily of three
phases: architecture, development and deployment. When delivered as a separate
service, program management services are used to manage very large, enterprise-
wide initiatives, or to help a client regain control of a project that has
materially deviated from plan.
Architecture--The architecture phase of the process defines how the
new strategy will be implemented. During this phase, the team
examines and defines the business and technical components of the
solution. Examples of business components include new/renovated
buildings, new/redesigned business processes, personnel training, or
organizational redesign. Technical architectures address tools,
methodologies, procedures and controls to build and support new and
existing IT systems; physical networks; and hardware and software
standards.
Development--The processes and systems to realize the benefits of the
new strategy are put into place during the development phase.
Diamond's program management services are most prominent in this
phase. During development, Diamond teaches, coaches and manages the
implementation team comprised primarily of client IT staff. Specific
knowledge about new technologies and processes are transferred more
broadly to the client organization during this phase, as the team
aligns the people, processes and technologies required for a
successful deployment.
Deployment--The strategy becomes operational during the deployment
phase. Diamond manages the implementation of the strategy using the
client's IT management and programming resources and, if needed,
third-party programmers or systems integrators. Diamond measures
results against the performance goals defined in the strategy phase.
Representative Projects
Diamond currently focuses on providing services to clients primarily in
four major industries: telecommunications, insurance, financial services, and
consumer products and services. The Company intends to expand the industries in
which it focuses as its expertise and market demands evolve.
The following are examples of projects that are representative of the
Company's business:
Consumer Products Company -- The operations of this consumer products company
were not able to keep pace with its rapid growth spurred primarily by new
international markets. A team of Diamond and client professionals examined
and evaluated potential benefits in various areas across the client's
organization. The team identified the following functions as having the
highest potential positive impact and addressed them simultaneously: IT
architecture, supply-chain processes and marketing strategy. The team updated
the IT architecture to accommodate
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international standards (e.g., multiple languages, currencies, procedures and
cultures), addressing all components of the architecture, including network,
operations, applications, data, execution and development. The team also
recommended and implemented supply-chain improvements to more closely link
the organization with its key vendors to improve forecasting, accountability
and delivery. Finally, recommendations to the marketing strategy were made to
reflect the growth that the client's operations were now able to support.
Insurance Company -- This insurance company initially engaged Diamond to assess
its IT capabilities in light of a corporate cost-cutting mandate. Through its
multidisciplinary approach, the client more than met its cost-cutting goals
and the team helped the client identify an opportunity to integrate IT in a
new sales strategy to give it an advantage over its competitors. During the
assessment, the team of Diamond and client personnel reviewed the client's IT
architecture, organization and operations, as well as the current and
potential impact of IT on the business. This assessment helped the project
team identify opportunities for improvement in four areas of the business:
new business, collections, policy service and claims. The team redesigned
business processes and deployed notebook computers throughout the field sales
force, fundamentally improving the way sales personnel sold new business,
served existing customers, managed claims and collected premiums.
Telecommunications Provider--This traditional telecommunications provider
engaged Diamond to define the requirements and costs of the customer service
and sales functions of a new market it was preparing to enter. The Diamond
project team identified a strategy to design and implement two sophisticated,
integrated inbound/outbound call centers. The call centers use various
technologies, including interactive voice response, computer/telephony
integration and knowledge-based systems (compilations of information and
experiences supported and distributed by IT) in order to create facilities
that are able to provide feedback and support to the marketing, customer
service and operations of the business. The project team designed and
implemented telephony and IT systems, as well as new processes, procedures
and training for the call center agents, supervisors and management. The
creation of the centers to support both inbound and outbound contacts enabled
the company to leverage critical information gathered in the centers with
other areas of its business.
Intellectual Capital
Consulting firms are notably knowledge-intensive organizations. In the
past, the existence of accumulated experience within a consulting firm was
enough to attract and retain clients. Today, information is more readily
accessible and the useful life of new knowledge is shortening. In recognition
of this trend, Diamond has developed programs to identify, capture and
disseminate intellectual capital from individuals both within and outside the
Company.
Knowledge Leaders--The Company has created a career path for certain of its
professionals who desire to specialize in a particular area, such as
technical architecture, electronic commerce or supply-chain operations.
Diamond refers to these professionals as "knowledge leaders" within its
organization. Knowledge leaders are responsible for identifying new
developments within their respective areas of expertise and capabilities, and
applying that knowledge on client projects. Diamond currently has four
Partner-level knowledge leaders and anticipates that more knowledge leaders
will be added in the future.
Diamond Exchange--The Diamond Exchange is an executive learning forum that the
Company plans to launch in February 1997. Senior executives ranging from CEOs
to CIOs will be invited to participate in the Diamond Exchange. The Company
will provide its paid-subscription members with innovative, leading-edge
research to explore and understand the strategic risks and opportunities of
emerging technologies. The Company anticipates that Diamond Exchange members
will meet three times a year to discuss research findings and their business
implications. During these meetings, Diamond will provide the members of the
Diamond Exchange with the opportunity to discuss their issues with Diamond
Network members and other business leaders. There will also be a number of
smaller working sessions throughout the year. The objectives of this program
are threefold: to help clients and prospects learn and research the strategic
possibilities of technology, to maintain and develop relationships with
clients, and to build intellectual capital and integrate it into the Company.
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Diamond Network--The Diamond Network is a group currently comprised of 12
recognized business and technology leaders associated with the Company.
Members of the Diamond Network provide Diamond with a set of skills which
augment and enhance the value which Diamond can provide to its clients.
Diamond Network members provide a source of intellectual capital, introduce
the Company to prospective clients, participate in joint-marketing
initiatives, and participate in client projects. Members are contractually
committed to a certain number of days dedicated to Diamond to support
marketing, sales, and client work. Diamond Network relationships are
generally non-exclusive, two-year contracts. Members are compensated with a
combination of stock options and per diem payments for services actually
provided to clients of the Company on the Company's behalf. Current members
of the Diamond Network include:
John Perry Barlow is a writer and lecturer on computer security, virtual
reality, digitized intellectual property, and the social and legal
conditions arising in the global network of connected digital
devices. Mr. Barlow is a Diamond Exchange fellow, a faculty member of
Diamond Technology Partners. He is a contributing editor of numerous
publications, including Communications of the ACM, Microtimes, and
Mondo 2000. He is also a contributing writer for Wired magazine. Mr.
Barlow is co-founder and vice chairman of the Electronic Frontier
Foundation, an organization that promotes freedom of expression in
digital media.
Gordon Bell is a senior researcher with Microsoft Corporation, computer
consultant-at-large and Diamond Exchange fellow. Mr. Bell spent 23
years at Digital Equipment Corp., most recently as vice president of
research and development and a member of Digital's executive
committee. While with Digital, he managed the development of time-
sharing and mini-computing, and led the development of the DEC VAX.
Mr. Bell also directed the National Science Foundation's efforts in
computing research, has written numerous books and has been awarded
several patents.
Leonard L. Berry, Ph.D. is a professor of marketing and director of the
Center for Retailing Studies at the College of Business
Administration at Texas A&M University. Dr. Berry is also the former
national president of the American Marketing Association. Dr. Berry
is the author of "On Great Service: A Framework for Action" (1995,
Free Press) and co-author of "Marketing Services: Competing Through
Quality" (1991, Free Press).
Tim Gallwey consults in the area of learning in the business environ-
ment and is a Diamond Exchange fellow. Mr. Gallwey has worked with a
number of major corporations to develop the coaching skills of their
managers and to create work environments that support learning and
peak performance. He is also the author of several books relating to
learning in the business environment.
James H. Gilmore is a co-founder (with B. Joseph Pine II) of Strategic
Horizons LLP. Mr. Gilmore provides expertise in the areas of
creativity and mass customization (using technology to provide goods
and services individually customized). Prior to co-founding Strategic
Horizons, Mr. Gilmore served as head of the process redesign practice
to CSC Consulting.
Alan Kay, Ph.D. is a Disney fellow and vice president of research and
development for Walt Disney Imagineering, Inc. Dr. Kay is also a
Diamond Exchange fellow and a member of Diamond's Board of Directors.
Dr. Kay was also a founding principal of the Xerox Palo Alto Research
Center (PARC), chief scientist of Atari Corporation and an Apple
Computer fellow. Dr. Kay was one of the principal inventors of
personal computing, the bit map screen, overlapping window
interfaces, and object-oriented programming. He contributed to the
inventions of 3D graphics and the ARPANet (now the Internet).
Andrew Lippman, Ph.D. is an associate director and a founding member of
the Media Lab at the Massachusetts Institute of Technology. Mr.
Lippman has served on advisory boards of IBM and various technology
start-up companies. He has presented his views on the future of the
information and television industries to Congressional subcommittees,
the National Endowment for the Arts, and the National Academy of
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Sciences. Currently, he is on the science council of the Corporation
for National Research Initiatives' program to develop global
information infrastructures.
B. Joseph Pine II is a co-founder (with James H. Gilmore) of Strategic
Horizons LLP. Mr. Pine provides expertise in the area of mass
customization (using technology to provide products and services
individually customized). He is author of "Mass Customization: New
Frontiers In Business Competition" (1993, Harvard Business School
Press). Mr. Pine is a Diamond Exchange fellow, and a member of the
Executive Education faculties at the UCLA Anderson Graduate School
for Management and the University of Michigan.
David Reed, Ph.D. is an information architect and independent
entrepreneur who focuses on designing the information space in which
people, groups and organizations operate. Dr. Reed is a Diamond
Exchange fellow. He was a senior scientist at Interval Research
Corp., vice president and chief scientist for Lotus Development
Corp.'s Software Business Group, and vice president of research and
development and chief scientist at Software Arts International (the
creator of VisiCalc, the first electronic spreadsheet). Before
joining Software Arts, he was an assistant professor of computer
science and engineering at the Massachusetts Institute of Technology.
Martin R. Stoller, Ph.D. is clinical full professor of Communications at
Northwestern University's J.L. Kellogg Graduate School of Management.
Dr. Stoller has consulted on many crisis communication issues that
have recently impacted businesses, primarily in the United States.
Dr. Stoller was founder and president of Plextel Telecommunications,
Inc. which pioneered pattern recognition software. Plextel is being
acquired by a firm which is listed on the New York Stock Exchange, in
a transaction scheduled to close early in 1997.
John J. Sviokla, DBA is an associate professor at the Harvard Business
School. Dr. Sviokla's current work focuses on electronic commerce and
knowledge management. He is the author of several books including
"Keeping Customers" (1993, Harvard Business School Press) and
"Seeking Customers" (1993, Harvard Business School Press), as well as
several Harvard Business Review articles including "Managing in the
Marketplace" and "Exploiting the Virtual Chain." Dr. Sviokla consults
to large and small firms, and teaches regularly in the Harvard
Business School masters in business program, as well as with a
variety of executive education programs.
Richard Y. Wang, Ph.D. is co-director for Total Data Quality Management
(TDQM) Research Program and associate professor at the Massachusetts
Institute of Technology Sloan School of Management, where he received
a Ph.D. degree with an IT concentration. He has published more than
twenty papers addressing issues related to the development of
concepts, models, and methods fundamental to the field of data
quality research and practice. Dr. Wang is the editor of the book,
"Information Technologies: Trends and Perspectives" (1993, Prentice
Hall). He is a founder of Cambridge Research Group, Inc. a firm
specializing in data quality management, and an organizer of the
Conference on Information Quality.
DiamondWorks--DiamondWorks (TM) is a proprietary knowledge management system (a
compilation of information and experiences supported and distributed by IT)
that accumulates, generates and disseminates intellectual capital developed
by Diamond professionals. The system shares the intellectual capital of the
Company among its employees by gathering best practices and synergies within
and across industries. DiamondWorks also provides Diamond consultants a
single place to search for information, approaches and frameworks across all
disciplines.
The intellectual capital gathered through these various programs is
shared throughout the Company in both formal and informal ways. Some formal
venues include frequent all-hands meetings, an interactive case-based
training system called ASK Diamond (TM), and the Company's training and
development programs.
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Sales, Marketing and Clients
The Company primarily markets its services to senior executives of large,
national and multinational corporations. The Company markets its services both
directly and on a collaborative basis with members of the Diamond Network and
through relationships with certain third-party industry sector specialists. To
date, Diamond has focused its efforts primarily in four industries:
telecommunications, insurance, financial services, and consumer products and
services. The Company expects this list of industries to change and grow as
Diamond's expertise and market demands evolve. As of September 30, 1996,
Diamond had five dedicated marketing personnel, including three full-time
Partners responsible for managing overall marketing, the Diamond Exchange, the
Diamond Network, lead identification and follow up. The majority of Diamond's
sales activities are pursued by its Partners.
Personal referrals and relationships have historically been among the
most successful methods of gaining new business. The Company has initiated a
number of relationship marketing programs designed to encourage and accelerate
personal relationships. The Diamond Network and the Diamond Exchange are two
such relationship marketing programs currently underway. See "-- Intellectual
Capital." The Company employs a variety of other business development and
marketing techniques to communicate directly with current and prospective
clients, including authoring articles, maintaining media and industry analyst
relations, conducting direct marketing, participating in conferences as speakers
and panelists, and providing a home page on the World Wide Web.
Although every client relationship is unique, the Company's client
relationships to date generally have included multiple projects for a client.
Fees generated from each of these projects generally ranged from less than
$100,000 to more than $3.0 million, and have spanned from one month to more than
20 months. Diamond's objective is to develop long-term relationships with its
clients in several different areas of the client organization, as appropriate,
over a period of time. While it is a goal of the Company to have less than 10%
of its net revenues from any given client during fiscal 1996, the Company had
three clients which individually accounted for more than 10% of its net revenues
and collectively accounted for 51% of its net revenues. For the six months
ended September 30, 1996, the Company had two clients that individually
accounted for over 10% of its net revenues, and collectively accounted for
approximately 27% of its net revenues.
Competition
While the Company believes that no one firm competes with it in all
service areas, several firms compete with it in one or more areas. The Company's
primary competitors include management consulting firms, systems integrators and
firms that provide both management-consulting and systems-integration services.
The Company believes that it competes favorably with these firms. In addition,
Diamond believes that future competition will also come from new entrants into
the market. Against these new entrants, the Company will compete based on its
early entry in the market and the reputation and awareness it is currently
developing. The Company believes that the principal criteria considered by
prospective clients when selecting a consulting firm to develop and implement
business strategies that incorporate IT include: scope of services, service
delivery approach, technical and industry expertise, perceived value,
objectivity and a results orientation. Many of the Company's competitors are
substantially larger than the Company and have significantly greater financial,
technical and marketing resources, greater name recognition and generate greater
revenues than the Company.
The recent growth in the IT services market has attracted many new
competitors and has afforded traditional competitors significant growth
opportunities. Diamond believes that a new and growing portion of this market in
the future is for consulting firms that are able to help clients synthesize
strategy with technology. While the Company believes that there will be a market
for general management consulting firms, it believes that firms that deliver
management consulting based on an in-depth understanding of technology will have
the greatest opportunity to grow. Furthermore, the Company believes that the
firms that will be sustainable will also be able to maintain solution
objectivity and to deliver an operating solution with measurable results. While
the Company believes some existing management consultants and systems
integrators will eventually be able to position themselves in such a manner,
there is currently a window of opportunity to establish an early and defensible
market position.
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Human Resources and Culture
As of September 30, 1996, Diamond had 145 client-serving professionals,
comprised of 26 Partners, 27 senior principals, 28 principals, 47 associates and
17 analysts. Employees designated as Partners also serve as officers of the
Company in the capacity of vice presidents. In addition, the Company had 32
management and administrative personnel comprising marketing, human resources,
finance, accounting, internal information systems and administrative support.
The responsibilities of a Partner include client relationship
development, business development, client management, program management,
thought leadership, professional staff development and mentoring. Partners
typically have ten to 20 years, or more, of experience. Senior principals and
principals have six to ten years, or more, of experience. Consultants at these
levels generally have an advanced degree and are primarily responsible for
project management, cost/benefit analysis, interview design and conduct,
operations and process evaluation, technical architecture design and evaluation,
and recommendation development and execution. Associates generally have four to
seven years of experience and are responsible for project team management,
financial modeling, process mapping, and economic analysis. Analysts have up to
five years of experience and are responsible for data collection and analysis,
industry and competitive research development, application design and
presentation development.
Culture
Diamond believes its ability to simultaneously provide expertise in
strategy, business processes and IT is dependent upon its ability to develop and
sustain a business culture that is common across all disciplines in the
organization. There are three primary elements that comprise Diamond's culture:
(i) an environment that intellectually challenges its people through continuous
training and client work; (ii) consistency in compensation and career paths
across all disciplines and skill sets within the firm; and (iii) participation
by all employees in the continuing development and ownership of the firm. The
Company plans to further strengthen its culture through various policies and
programs and by continuing to increase promotions from within the organization.
Examples of culture-developing programs include the Company's all-hands
meetings and its assimilation program. The Company has brought its employees
together in all-hands meetings on a regular basis (four to six times annually)
to further develop and reinforce Diamond's culture while also introducing
outside perspectives from leaders in business, technology and industry. During
these all hands meetings, employees are encouraged to exchange ideas and issues
related to the development of the Company. The Company's assimilation program
is designed to introduce new employees to Diamond's culture. It is supported by
an interactive computer system, ASK Diamond(TM), that shares the knowledge and
observations of the Company's founders ("corporate memories") through indexed
video clips.
Organization
Diamond's organization also reflects its multidisciplinary culture.
Diamond's client-serving professionals below the senior principal level are not
organized internally by skill or industry. Rather, in order to reduce the
barriers between people with different functional skills, the Company's
professional organization is grouped into multidisciplinary "staff teams." The
composition of the staff teams reflects the combination of skills represented on
a typical project. Project teams are generally comprised of professionals from
various staff teams.
Each staff team is typically comprised of ten to 15 people and is led by
a Partner. Team members interact as a group to build relationships and for
general communications, and individually with the Partner for project
assignments, annual performance reviews and general career development advice
and direction. While mentoring is the primary responsibility of the staff team
Partner, all Partners provide mentoring to Diamond's professionals to give
individuals access to numerous senior people with various perspectives and
experiences.
A project team's composition generally reflects the shape of a diamond
and represents the Company's commitment to provide services to its clients
through small, multidisciplinary teams of highly skilled and experienced
professionals. The size and composition of a "diamond" is determined by the
particular needs of a given project and
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is generally comprised of a Partner, who serves as the project leader, three to
five senior principals or principals and two to four associates or analysts.
Partners may, in some cases, serve as project leader for more than one project
team simultaneously.
From a marketing and client service perspective, Partners and senior
principals are assigned to one of several market-focused teams. These teams are
designed to capitalize on common issues impacting clients within the same
industry. To date, Diamond has concentrated its services primarily in four
industries: telecommunications, insurance, financial services, and consumer
products and services. The Company expects this list of industries to change
and grow as Diamond's expertise and market demands evolve.
Recruiting
The Company intends to grow primarily from within to maintain a strong
culture. The Company's success will depend on its ability to continue to
attract, retain and motivate highly skilled employees to support current
operations and future growth. The Company attributes its success in hiring
these people to its ability to provide individuals with competitive
compensation, multidisciplinary training and career development, attractive
long-term career advancement opportunities, small teams and a collaborative
approach to consulting.
Although a significant number of the Company's current employees were
hired directly from other firms, a growing number of associates are being hired
annually from graduate business programs at many of the country's leading
universities. The Company also has a summer associate program that provides an
additional source of graduate business program hires. Over time, the Company
expects to hire a majority of its employees from these programs and, as a
result, the more senior levels will be filled from internal promotions.
Training and Development
The Company's training and professional development programs help it to
deliver high-quality services to its clients, as well as to attract and retain
highly skilled professionals. The Company has developed programs that ensure
all individuals have the opportunity to develop consulting, business and IT
skills throughout their careers. These programs reinforce Diamond's culture by
exposing all professionals to the various services Diamond provides while
further developing deep skills in each professional's principal area of
expertise.
Diamond utilizes innovative, case-based training to simulate real client
projects with real client issues. This approach creates a "learn-by-doing"
environment supported by Diamond Partners and outside professionals who provide
coaching and feedback to participants. Industry executives are brought in to
simulate the role of the client executive during Diamond's training courses.
Because training is conducted in teams structured similarly to an actual
engagement, participants learn in an environment which resembles their work
environment. As a result, consultants are able to successfully transfer what
they learn to their projects.
Compensation
The Company's compensation programs have been structured to attract and
retain highly skilled professionals by offering competitive base salaries
coupled with annual cash bonus opportunities. Equity is used at all levels
within the organization to provide long-term wealth creation opportunities and
to retain individuals through vesting provisions. Diamond believes that those
professional services firms able to offer equity will be more successful in
attracting talented individuals to their organizations.
Individuals below the Partner level are awarded annual cash bonuses based
on their performance as it compares to their peers. Partners can receive an
annual bonus comprised of both cash and equity commensurate with their level of
responsibility and based on the overall performance of the Company. Non-Partners
are granted stock options at the time of hire and/or promotion, based on their
level. These options vest after three years. Partners buy stock and are
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granted stock options upon being elected a Partner. Additional equity grants are
made in conjunction with movement through the Partner levels. Stock and options
issued to Partners vest annually over five years.
Facilities
The Company's headquarters and principal administrative, information
systems, financial, accounting, marketing and human resources operations are
located in approximately 24,000 square feet of leased space in Chicago,
Illinois. The approximate payments due from the Company under this lease for the
1997 and 1998 fiscal years are $600,000 and $800,000, respectively. This lease
expires in 2002, but permits an extension of five years with notice (see Note 5
to the Financial Statements). Diamond has also leased approximately 7,000 square
feet of office space in Cleveland, Ohio. The approximate payments due from the
Company under this lease for the 1997 and 1998 fiscal years are $100,000 and
$200,000 respectively. This lease expires in 2001, but permits an extension of
three years with notice.
The Company anticipates that additional office space will be required as
business expands and believes that it will be able to obtain suitable space as
needed.
Legal Proceedings
In the opinion of management, there are no claims or actions against the
Company the ultimate disposition of which will have a material effect on the
Company's results of operations or financial position.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
Name Age Position(s)
---- --- -----------
Melvyn E. Bergstein......... 54 Chairman of the Board of Directors,
Chief Executive Officer and President
Christopher J. Moffitt...... 42 Senior Vice President, Secretary and
Director
Michael E. Mikolajczyk...... 45 Senior Vice President, Chief
Financial and Administrative Officer,
Treasurer and Director
James C. Spira.............. 54 Senior Vice President and Director
Donald R. Caldwell.......... 50 Director
Edward R. Anderson.......... 49 Director
John D. Loewenberg......... 56 Director
Alan Kay.................... 56 Director
Melvyn E. Bergstein co-founded the Company in January 1994 and has served
as its Chairman, Chief Executive Officer and President since that time. From
1991 to 1993, Mr. Bergstein at various times served as vice chairman, executive
vice president, president and co-chief executive officer, and a member of the
board of directors of Technology Solutions Company, a publicly traded, Chicago-
based systems integrator. From 1989 to 1991, he was senior vice president-
systems integration for Computer Sciences Corporation. From 1968 to 1989, Mr.
Bergstein held a number of positions with Arthur Andersen & Co.'s consulting
division (now Andersen Consulting). While with Andersen Consulting, Mr.
Bergstein served as partner from 1977 to 1989 and managing director of worldwide
technology from 1985 to 1989. Mr. Bergstein served on Arthur Andersen's Board
during the 1985 to 1989 period, and as chairman of Arthur Andersen's Consulting
Oversight Committee during 1989. Mr. Bergstein received his bachelors degree
from the University of Pennsylvania. Mr. Bergstein is also a member of the
board of directors of Integrated Systems Consulting Group, Inc., a publicly
traded company and a Safeguard partnership company.
Christopher J. Moffitt co-founded the Company in January 1994 and has
served as Senior Vice President, Secretary and a member of the Board of
Directors of the Company since that time. From 1988 to 1993, he served as
senior vice president of Technology Solutions Company. From 1986 to 1988, Mr.
Moffitt was a principal in the Management Consulting Group of Arthur Young (now
Ernst & Young) where he became partner in 1988. From 1981 to 1986, Mr. Moffitt
served as director of information systems for Neiman Marcus. Mr. Moffitt began
his career in 1974 with Electronic Data Systems as a systems engineer and
account manager. Mr. Moffitt received his bachelors degree from the University
of Miami.
Michael E. Mikolajczyk joined the Company in April 1994 and has served as
Senior Vice President, Chief Financial and Administrative Officer and a member
of its Board of Directors since that time. From 1993 to 1994, he served as
senior vice president of finance and administration and chief financial officer
for Technology Solutions
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Company. From 1981 to 1993, Mr. Mikolajczyk was with MCI Telecommunications
Corporation where he served at various times as vice president of finance and
administration for both its Business Services Division and its Central Division,
vice president of corporate development and analysis, vice president of business
analysis, tariffs and contracts, and vice president of marketing and finance for
MCI's Digital Information Services Company. Mr. Mikolajczyk received his
bachelors degree from Wayne State University and his M.B.A. from Harvard
Business School.
James C. Spira joined the Company in November 1995 and has served as Senior
Vice President since that time. He became a member of its Board of Directors in
February 1996. From 1991 to 1995, Mr. Spira was a group vice president of the
Tranzonic Companies, Inc., a $200 million public corporation specializing in the
manufacture and distribution of quality paper, cloth and vinyl products. Prior
to that time, Mr. Spira co-founded Cleveland Consulting Associates in 1974,
where he served as the firm's president and chief executive officer. Mr. Spira
serves on the board of directors of CIBER, Inc., and the Tranzonic Companies,
Inc. Mr. Spira holds an M.B.A. from the University of Pennsylvania's Wharton
School and a B.A. in history from Hobart College.
Donald R. Caldwell, a Director of the Company since June 1994, has been the
president and chief operating officer of Safeguard since February 1996 and a
director of Safeguard since May 1996. Mr. Caldwell was an executive vice
president of Safeguard from December 1993 to February 1996. Prior to such time,
Mr. Caldwell was the president of Valley Forge Capital Group, Ltd., a business
mergers and acquisition advisory firm that he founded, from April 1991 to
December 1993 and an executive officer of a predecessor company of Cambridge
Technology Partners (Massachusetts), Inc., a provider of information technology
consulting and software development, from December 1989 to March 1991. Mr.
Caldwell's prior positions included serving as a partner in the national office
of Arthur Young & Co. (a predecessor to Ernst & Young, LLP). Mr. Caldwell
serves on the board of directors of Integrated System Consulting Group, Inc.,
one of the Safeguard partnership companies. Mr. Caldwell also serves on the
boards of numerous privately held companies and other organizations such as the
Pennsylvania Academy of Fine Arts, Episcopal Community Services, the Committee
on Economic Development, and the Philadelphia Orchestra.
Edward R. Anderson, a Director of the Company since June 1994, has been
president, chief executive officer and a director of CompuCom Systems, Inc., a
PC dealer and network integration company and a Safeguard partnership company
since January 1994. He joined CompuCom as chief operating officer in August
1993. From 1988 to 1993, Mr. Anderson served as president and chief operating
officer of ComputerLand USA. From 1984 to 1988, he served as vice president of
marketing, chief financial officer, and as a member of the board of directors
and the executive management team of the Computer Factory. Mr. Anderson began
his career in 1974 as a financial analyst with W.R. Grace & Company, serving as
director of real estate and vice president of planning and control for specialty
retailing until 1980. He served as vice president of strategic planning and
business development for a division of the American Express Company.
John D. Loewenberg, a Director of the Company since October 1996, was an
executive vice president and chief operating officer of Connecticut Mutual, a
life insurance company, from May 1995 through 1996. Prior to joining
Connecticut Mutual, Mr. Loewenberg served as senior vice president of Aetna Life
and Casualty, a multi-line insurer, and as chief executive officer of Aetna
Information Technology, the information systems company of Aetna Life and
Casualty, from March 1989 to May 1995. Mr. Loewenberg was chairman of Precision
Systems, Inc. until April 1996 and is a director of CompuCom Systems, Inc., and
Sanchez Computer Associates, Inc., two of Safeguard's partnership companies.
Alan Kay, a Director of the Company since June 1996, is currently vice
president of research and development for Walt Disney Imagineering, Inc. and is
a Disney fellow. From 1984 to 1996, Dr. Kay was an Apple fellow at Apple
Computer, Inc. From 1982 to 1984, he was chief scientist of Atari Corporation.
From 1971 to 1982, he was a member of research staff, principal scientist, and
Xerox fellow at the Xerox Palo Alto Research Center. From 1969 to 1971, he was a
research associate and lecturer in computer science at Stanford University.
The Board of Directors is divided into three classes. Each Director will
serve for a term of three years and until his successor has been elected and
qualified. The classes of the current members will be determined prior to the
commencement of this Offering.
The Board of Directors has an Audit Committee, which reviews and recommends
to the Board internal accounting and financial controls for the Company and
accounting principles and auditing practices and procedures to be employed in
the preparation and review of financial statements. The Board of Directors also
has a Compensation Committee, which reviews and recommends to the Board
policies, practices and procedures relating to the compensation of managerial
employees and the establishment and administration of employee benefit plans,
except for stock option plans. The members of the Board's committees will be
determined prior to the commencement of this Offering.
39
<PAGE>
Compensation Committee Interlocks and Insider Participation
In fiscal 1996 the Company did not have a Compensation Committee or any
other committee of the Board of Directors performing similar functions.
Recommendations concerning the aggregate compensation of all of the Company's
Partners (including its executive officers) were made to the Board of Directors
by the Company's Chief Executive Officer and the Company's Management Committee.
The Management Committee is a non-board operating committee which has been
established by the Company pursuant to the terms of the Partners' Operating
Agreement. Pursuant to the terms of the Partners' Operating Agreement,
allocations among the Company's Partners (including its executive officers) were
made by the Management Committee upon approval of the aggregate amount of such
compensation by the Board of Directors and the approval of the actual
allocations by at least seventy percent of the Company's Partners. The Company
expects to generally continue these procedures except that the Compensation
Committee of the Board of Directors will review and approve the aggregate
recommendations made by the Chief Executive Officer and the Management Committee
and the actual allocations of such amounts which will be granted to the
Company's executive officers. See "CERTAIN TRANSACTIONS--Partners' Operating
Agreement."
Certain Relationships
Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders
Offshore C.V. are venture capital funds that are required by their governing
documents to make all investment, voting and disposition actions in tandem.
Technology Leaders L.P. and Technology Leaders Offshore C.V. are referred to
collectively in this Prospectus as "Technology Leaders." Technology Leaders
Management L.P. has sole responsibility for all investment, voting and
disposition decisions for Technology Leaders. The general partners of
Technology Leaders Management L.P. are (i) Technology Leaders Management, Inc.,
a privately held subsidiary of Safeguard, (ii) TL Partners I, a general
partnership among Technology Leaders Management, Inc. and the Managing Directors
of Technology Leaders Management, Inc., other than Mark J. DeNino, and (iii)
four other corporations (the "TLA Corporations") owned by individuals, one of
whom serves as a director of Safeguard, one of whom serves as a director and
officer of a majority-owned subsidiary of Safeguard and two of whom are not
currently otherwise affiliated with Safeguard or the Company. Technology
Leaders Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, that consists of seven voting
members including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J.
Anderson, M.D., each of whom are designees of Technology Leaders Management,
Inc., and (ii) one designee of each of the TLA Corporations. Clayton S. Rose is
a non-voting member of that executive committee. Technology Leaders Management,
Inc. is the administrative manager of Technology Leaders, subject to the control
and direction of the executive committee of Technology Leaders Management L.P.
Mr. Musser is the chief executive officer and Mr. Keith is president and chief
operating officer of Technology Leaders Management, Inc. and Mr. Keith, Ira M.
Lubert, Dr. Anderson, Jean C. Tempel, Mr. DeNino and Christopher Moller, Ph.D.,
are the managing directors of Technology Leaders Management, Inc. Mr. Keith,
Mr. Lubert, Dr. Anderson and Ms. Tempel are former officers of Safeguard and Mr.
Keith is a director of Safeguard.
Safeguard Scientifics (Delaware), Inc., a privately held subsidiary of
Safeguard, is a limited partner in Technology Leaders L.P. holding 3.3% of the
aggregate limited partnership interests in Technology Leaders L.P. Technology
Leaders Management, Inc. holds directly or indirectly 31% of the general
partnership interests in Technology Leaders Management L.P.
40
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
paid or accrued in fiscal 1996 with respect to the Company's Chief Executive
Officer, its other executive officers and a former executive officer at
March 31, 1996 (collectively, the "Named Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation(1) Awards
-------------------------------------- --------------
Other Annual Securities
Name and Fiscal ------------ Underlying All
Principal Position Year Salary Compensation Options Other Compensation
- ------------------ ------ ------ ------------ ------- ------------------
<S> <C> <C> <C> <C> <C>
Melvyn E. Bergstein...... 1996 $480,000 $127,207(2) -- $5,472(3)
Chairman, Chief
Executive Officer, and
President
Christopher J. Moffitt.... 1996 400,000 105,630(4) -- 1,938(3)
Senior Vice President,
and Secretary
Michael E. Mikolajczyk.... 1996 360,000 92,548(5) 16,500 1,938(3)
Senior Vice President,
Chief Financial and
Administrative Officer
and Treasurer
James C. Spira............ 1996 208,789 -- 74,250 456(3)
Senior Vice President
Alan J. Weyl............. 1996 307,864 -- -- 252,736(6)
Former Senior Vice
President
</TABLE>
_________________________
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Officers which are
available generally to all salaried employees of the Company and certain
perquisites and other personal benefits, securities or property received by
the Named Officers which do not exceed the lesser of $50,000 or 10% of the
aggregate of any such Named Officer's salary and bonus in fiscal 1996.
(2) Includes $120,000 of deferred compensation earned but not paid during the
year ended March 31, 1996 and $7,207 of interest on such cumulative
amounts.
(3) Represents excess group life insurance premiums paid.
(4) Includes $100,000 of deferred compensation earned but not paid during the
year ended March 31, 1996 and $5,630 of interest on such cumulative amounts
(5) Includes $90,000 of deferred compensation earned but not paid during the
year ended March 31, 1996 and $2,548 of interest on such cumulative amounts
(6) Represents severance payments of $250,000 and excess group life insurance
of $2,736.
41
<PAGE>
Deferred Compensation
From the inception of the Company through March 31, 1996, each Partner's
base salary was reduced by a percentage (initially up to 40% then subsequently
declining to 20%), which was to be paid at a future date, plus accrued interest.
Certain amounts of deferred compensation were exchanged for Common Stock in
January 1995.
After March 31, 1996, the deferral of compensation was discontinued. As a
result of the losses sustained by the Company in the first two quarters of
fiscal 1997, each of the Partners agreed to waive his rights to his deferred
compensation account balance if the Company fails to achieve certain revenue
targets in the third and fourth quarters of fiscal 1997. Pursuant to this
agreement the Partners would, in the aggregate, forgive approximately $450,000
of deferred compensation in each such quarter if these revenue targets are not
achieved. In the event that deferred compensation is forgiven, the Company will
recognize the amounts as a reduction in operating expense in the quarter in
which it is forgiven.
Employment Agreements
Mr. Bergstein and Mr. Moffitt each entered into an employment agreement
with the Company in February 1994. Mr. Mikolajczyk entered into an employment
agreement with the Company in April 1994. Mr. Spira entered into an employment
agreement with the Company effective November 1995. In each of the agreements,
the base salary is determined pursuant to annual review, and each agreement
provides for the possibility of an annual bonus pursuant to the terms of the
Partners Operating Agreement. In addition, each executive officer's employment
agreement is terminable at any time by either the Company or the executive
officer. Each of the agreements contains a non-competition provision, which
endures for eighteen months following the cessation of employment with the
Company, in addition to a non-disclosure provision.
Stock Option Plan
The Company's Amended and Restated 1994 Stock Option Plan (the "Stock
Option Plan") provides for the grant to any employee of the Company of
"incentive stock options" within the meaning of Section 422 of the Code. Under
the Stock Option Plan, the Company may grant options to purchase in the
aggregate 8,745,000 shares of Class B common stock, less (at the time of the
grant of any option) all shares (i) theretofore issued to any party other than
Safeguard, Technology Leaders Offshore C.V., CIP Capital L.P., Technology
Leaders L.P., or any member thereof or transferee therefrom, or (ii) subject to
any options granted by the Company. As of December 9, 1996, the Company has
granted options under the Stock Option Plan to purchase in the aggregate
2,652,654 shares of Common Stock (net of any expired or terminated options) at a
weighted average exercise price of $2.04 per share.
The Company's Board of Directors has the power to select employees to
whom options shall be granted under the Stock Option Plan and to determine the
terms of each grant, including the number of shares of Common Stock subject to
the option, the term of the option, the vesting schedule and the exercise price
(which may not be less than the fair market value of a share of Common Stock on
the date of grant). Options have been granted to Partners to purchase 813,450
shares of Common Stock which vest incrementally with 10%, 15%, 25%, 25% and 25%
of the option vesting on the first through fifth anniversaries of the date of
grant, respectively and expire on the seventh anniversary of the date of grant.
Options have been granted to employees to purchase 906,675 shares of Common
Stock which fully vest upon the third anniversary of the date of grant and
expire on the fifth anniversary of the date of grant. Options to purchase
445,669 shares of Common Stock which provide for an acceleration of the vesting
schedule to six months following the consummation of this Offering have been
granted to Partners and employees.
The Company's Board of Directors has granted non-qualified stock options
to purchase 486,860 shares of Common Stock to certain persons who are not
employees and certain non-employee members of the Board of Directors. These non-
qualified stock options have exercise prices equal to, or greater than, the fair
market value on the date of grant with vesting over periods ranging from
immediate to five years.
The Board of Directors may alter, suspend or discontinue the Stock Option
Plan in any respect whatsoever, provided, however, that certain amendments, as
required by the Code with respect to incentive stock options, are subject to
stockholder approval. The Stock Option Plan shall continue in effect until
terminated by the Board of Directors or until there is no more stock as to which
an option may be granted and no options are outstanding; provided, that all
options must be granted thereunder within ten years of the effective date of the
plan.
The options granted under the Stock Option Plan are not transferable in
any way other than upon the death of the employee. Shares issued upon the
exercise of any option granted under the Stock Option Plan are subject to the
terms and restrictions contained in the Voting and Stock Restriction Agreement.
Under Section 162(m) of the Code, the Company may be precluded from
claiming a federal income tax deduction for total remuneration in excess of
$1,000,000 paid to the Chief Executive Officer or to any of the other four most
highly compensated officers in any one year. Total remuneration would include
amounts received upon the exercise of stock options granted under the Stock
Option Plan. An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements. The
Stock Option Plan is intended to meet the requirements of Treasury Regulation
section 1.162-27(f), and the options granted under the Stock Option Plan are
intended to meet the requirements of "performance-based compensation."
42
<PAGE>
The following table provides information on stock options granted by the
Company in fiscal 1996 to the Named Officers. All Company option grants
depicted below were made pursuant to the Stock Option Plan.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of
Total Realizable Potential
Number of Options Value at Assumed
Shares Granted to Annual Rate of Stock
Underlying Employees Exercise Price Appreciation for
Options in Price Per Expiration Option
Name Granted Fiscal Year Share Date Term(1)
- ---- ------- ----------- --------- ---------- ----------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein -- -- -- -- -- --
Christopher J. Moffitt -- -- -- -- -- --
Michael E. Mikolajczyk(2) 16,500 1% $1.21 3/31/02 $8,142 $18,974
James C. Spira 74,250 4% $1.82 11/1/02 $54,959 $128,077
Alan J. Weyl -- -- -- -- -- --
- --------------------
</TABLE>
(1) The amounts shown are calculated assuming that the Common Stock market
value was equal to the exercise price per share as of the date of grant of
the options. This value is the approximate price per share at which shares
of the Common Stock would have been sold in private transactions on or
about the date on which the options were granted. The dollar amounts under
these columns assume a compounded annual market price increase for the
underlying shares of the Common Stock from the date of grant to the end of
the option term of 5% and 10%. This format is prescribed by the Commission
and is not intended to forecast future appreciation of shares of the Common
Stock. The actual value, if any, a Named Officer may realize will depend
on the excess of the market price for shares of the Common Stock on the
date the option is exercised over the exercise price. Accordingly, there
is no assurance that the value realized by a Named Officer will be at or
near the value estimated above.
(2) In fiscal 1997, Mr. Mikolajczyk received the following options: an option
to purchase 16,500 shares of Common Stock on April 1, 1996, which expires
on March 31, 2003 and has an exercise price of $1.82 per share, an option
to purchase 6,397 shares of Common Stock on November 1, 1996, which expires
on October 31, 2003 and has an exercise price of $3.18 per share and an
option to purchase 14,632 shares of Common Stock on November 1, 1996, which
expires on October 31, 2003 and has an exercise price of $2.27.
The following table sets forth information concerning options exercised
during fiscal 1996 and the number and the hypothetical value of certain
unexercised options of the Company held by the Named Officers as of March 31,
1996. This table is presented solely for purposes of complying with the
Commission rules and does not necessarily reflect the amounts the optionees will
actually receive upon any sale of the shares acquired upon exercise of the
options.
Aggregated Option Exercises and
Last Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-
Options at Money Options at
March 31, 1996 March 31, 1996
-------------------------------------------------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable(1)
- ---- --------------- -------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein -- -- -- -- -- --
Christopher J. Moffitt -- -- -- -- -- --
Michael E. Mikolajczyk -- -- 0 16,500 0 $70,785
James C. Spira -- -- 0 74,250 0 273,240
Alan J. Weyl -- -- -- -- -- --
- --------------------
</TABLE>
(1) Assumes, for presentation purposes only, a per share fair market value of
$5.50.
43
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to the terms of the 1994 Purchase, Safeguard, Technology
Leaders and CIP purchased from the Company 1,512,501 shares, 1,512,501 shares
and 274,999 shares, respectively, of the Common Stock at a purchase price of
approximately $0.91 per share and Safeguard was granted a warrant (the "1994
Purchase Warrant") exercisable for 825,000 shares of Common Stock at an exercise
price of $1.21 per share. Safeguard subsequently transferred to each of two of
its partnership companies, CompuCom Systems, Inc. ("CompuCom") and Cambridge
Technology Partners (Massachusetts), Inc. ("Cambridge"), a portion of the 1994
Purchase Warrant, each portion covering the purchase of 165,000 shares of Common
Stock. In the second quarter of fiscal 1997, Safeguard, CompuCom and Cambridge
exercised in full their respective portions of the 1994 Purchase Warrant in
accordance with its terms. After completion of the Offering, Safeguard,
Technology Leaders and CIP will beneficially own approximately 14.3%, 9.0% and
1.6%, respectively, of the Company's outstanding Common Stock and CompuCom and
Cambridge will each beneficially own approximately 1% of the Company's
outstanding Common Stock. In addition, pursuant to the terms of the 1994
Purchase, Safeguard, Technology Leaders and CIP were granted certain
registration rights and entered into certain arrangements with respect to
voting, which arrangements will terminate upon the consummation of the Offering
by their terms and without the need of any further action on the part of any
party thereto. See "SHARES ELIGIBLE FOR FUTURE SALE--Registration Rights."
In December 1996, the Company entered into an Agreement and Plan of
Recapitalization with Safeguard, Technology Leaders and each other holder of
Common Stock of the Company. Pursuant to such agreement, the Company
reclassified (i) the shares of Common Stock of the Company held by Safeguard,
Technology Leaders and all other nonemployee stockholders into shares of Class A
common stock of the Company and (ii) the shares of Common stock of the Company
held by employee stockholders into shares of Class B common stock of the
Company. See "Description of Capital Stock--Common Stock."
On November 8, 1996, the Company borrowed $2.0 million from Safeguard,
payable on November 1, 2001. Interest on the outstanding principal balance of
the loan accrues during the first year at an annual interest rate of 6% and the
interest rate increases as of each succeeding anniversary of the loan by one
percentage point to a rate of 10% per year during the fifth year. Interest is
payable quarterly during the term.
In connection with the loan, the Company granted Safeguard a security
interest in all of its assets. The obligations to repay the loan and the
security interest are subordinated to the interests of the commercial bank which
is the Company's principal lender. Notwithstanding the subordination, the
Company is required to repay the loan from Safeguard upon the closing of this
Offering, if the net proceeds received by the Company are sufficient to pay the
loan in full. As a condition to the making of the loan, the Company also
granted Safeguard a warrant to purchase 526,598 shares of Common Stock at an
exercise price of $5.50 per share. The rights granted under the warrant expire
on November 1, 2000.
The Company has granted options to purchase Common Stock to certain
non-employee Directors. In June 1996, Alan Kay received options to purchase
110,001 shares of Common Stock at an exercise price of $1.82 per share. In
October 1996, John D. Loewenberg and Edward R. Anderson each received options to
purchase 16,500 shares of Common Stock at an exercise price of $3.18 per share.
All of these options vest over a period of five years. See "MANAGEMENT - Stock
Option Plan."
In connection with his service as a member of the Diamond Network,
Alan Kay, a Director of the Company, will receive $250,000 per year from the
Company commencing in 1997.
Cancellation of Promissory Note
Until being finally resolved by a global settlement among all parties in
June 1996, Melvyn E. Bergstein, Chairman, Chief Executive Officer and President
of the Company, the Company and others were involved in a lawsuit with
Technology Solutions Company ("TSC"). Because of the nature of the claims by
Mr. Bergstein and TSC, Mr. Bergstein and the Company were represented by the
same counsel. During the course of the litigation, the Company and Mr.
Bergstein each paid legal fees attributable to the litigation. Mr. Bergstein
executed a promissory note, dated April 14, 1995, under which he agreed to pay
certain of the fees paid by the Company, with interest, after the conclusion of
the litigation. The Company subsequently determined, however, that the amounts
due under the note more accurately reflected fees attributable to the Company's
defense and settlement of these claims, and therefore the Company
canceled the full amount ($226,402) due under the note and expensed this amount
in the quarter ended September 30, 1996. "See MANAGEMENTS' DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Six Months Ended
September 30, 1996 Compared to Six Months Ended September 30, 1996."
44
<PAGE>
Voting and Stock Restriction Agreement
The Selling Stockholders and each employee-stockholder of the
Company have agreed to be bound by the Amended and Restated Voting and Stock
Restriction Agreement dated as of April 1, 1996 (the "Voting and Stock
Restriction Agreement"). Any employee considering purchasing shares of the
Common Stock from the Company must agree to become bound by and a party to the
Voting and Stock Restriction Agreement (to the extent not already bound).
The Voting and Stock Restriction Agreement provides for, among other
things: (i) the grant of a proxy by each employee-stockholder of the Company to
the Chief Executive Officer of the Company conveying the right to vote their
shares of Common Stock, (ii) rights to purchase shares of employee-stockholders
upon termination of employment; and (iii) rights of first offer of the Company
to purchase shares (other than shares sold in the Offering) offered by any (A)
employee-stockholder who is not also a Partner or (B) of the Selling Stock-
holders (excluding any shares offered in the Offering); and (iv) restrictions
on the transferability of certain shares of Common Stock.
Partners' Operating Agreement
All of the Partners of the Company have agreed to be bound by the
Partners' Operating Agreement. Each individual proposed to be hired as, or
promoted to, a Partner, must agree to become bound by and a party to the
Partners' Operating Agreement. The Partners' Operating Agreement provides for,
among other things: (i) nomination procedures for the nomination of candidates
to the office of Chief Executive Officer; (ii) procedures for the removal and
retention of the Chief Executive Officer; (iii) procedure for the admission
and removal of Partners; and (iv) the compensation of management personnel. In
addition, the Partners' Operating Agreement provides that the Chief Executive
Officer must be selected from among the Partners pursuant to the procedures set
forth in such Agreement, subject to the right of the Company's Board of
Directors to veto any such person nominated by the Partners. The Chief Executive
Officer may be removed by the Board of Directors or for certain other specified
reasons.
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Common Stock as of the date of this Prospectus, and
as adjusted to reflect the sale of the shares offered hereby, by (i) each
Selling Stockholder, (ii) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (iii) each
director of the Company, (iv) each Named Officer, and (v) all directors and
executive officers of the Company as a group. Holders of Class A common stock
are entitled to one vote per share and holders of Class B common stock are
entitled to five votes per share. Shares of Class B common stock are convertible
immediately into shares of Class A common stock on a one-for-one basis, and
accordingly, holders of Class B common stock are deemed to own the same number
of shares of Class A common stock. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
Number of Shares
Beneficial Ownership to be Sold in the Beneficial Ownership
Prior to the Offering (1) Offering After the Offering (1)
------------------------- ------------------- ----------------------
Number of Number of
Name and Address(2) shares Percentage Shares Percentage
- -------------------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Melvyn E. Bergstein(3) 5,389,274 56.4% -- 5,389,274 47.8%
Safeguard Scientifics, Inc.(4) 2,534,099 25.1 844,409 1,689,690 14.3
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Technology Leaders(5) 1,512,501 15.8 503,994 1,008,507 9.0
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Christopher J. Moffitt(6) 707,850 7.4 -- 707,850 6.3
Michael E. Mikolajczyk(7) 560,183 5.9 -- 560,183 5.0
James C. Spira(8) 205,425 2.1 -- 205,425 1.8
CIP Capital L.P. (9) 274,999 2.9 91,635 183,364 1.6
Cambridge Technology Partners
(Massachusetts), Inc.(9) 165,000 1.7 54,981 110,019 1.0
CompuCom Systems, Inc.(9) 165,000 1.7 54,981 110,019 1.0
John D. Loewenberg(10) 8,250 * -- 8,250 *
Alan Kay -- -- -- -- --
Donald R. Caldwell(11) -- -- -- -- --
Edward R. Anderson(12) -- -- -- -- --
All executive officers and
directors as a group (8
persons)(13) 5,406,549 56.6 -- 5,406,549 48.0
</TABLE>
--------------------------
* Less than 1% of the outstanding Common Stock
(1) Solely for the purpose of determining beneficial ownership herein, the
number of shares of Common Stock deemed outstanding prior to the
Offering (i) assumes 9,551,398 shares of Common Stock were outstanding
as of the date of this Prospectus, (ii) assumes 11,256,398 shares of
Common Stock will be outstanding upon the successful completion of the
Offering, and (iii) includes additional shares of Common Stock issuable
pursuant to options or warrants held by such owner which may be
exercised within 60 days after the date of this Prospectus ("presently
exercisable options"), as set forth below. The beneficial ownership
after the Offering does not account for the exercise of Rights by such
stockholders in the Offering.
46
<PAGE>
(2) The address of each of Messrs, Bergstein, Moffitt and Mikolajczyk is
875 North Michigan Avenue, Suite 3000, Chicago Illinois 60611.
(3) The shares of Common Stock include 5,281,611 shares of Class B common
stock and 107,663 shares of Class A common stock and together represent
81.9% of the aggregate voting rights of the Common Stock. Includes
4,487,548 shares of Class B common stock and 107,663 shares of Class A
common stock held by other persons whom have granted Mr. Bergstein the
right to vote such shares pursuant to the terms of irrevocable proxies.
(4) The shares are Class A common stock and represent 5.2% of the aggregate
voting rights of the Common Stock. Includes a warrant which is
presently exercisable for 526,598 shares of Class A common stock and
the shares of Common Stock owned by CompuCom Systems, Inc., of which
Safeguard owns approximately 50% of the voting securities. The warrant
and all shares of Class A common stock are held of record by Safeguard
Scientifics (Delaware), Inc., a privately held subsidiary of Safeguard.
Includes 153,689 shares of Common Stock granted by Safeguard to certain
of its employees pursuant to a long-term incentive plan (the "LTIP
Plan"). Safeguard will continue to exercise voting rights with respect
to these shares until the occurrence of certain vesting requirements.
Excludes all shares of Common Stock beneficially owned by Technology
Leaders, in which Safeguard has a beneficial interest. See
"MANAGEMENT--Certain Relationships" for a description of the
relationships between Safeguard and Technology Leaders. Excludes all
shares of Common Stock owned by Cambridge Technology Partners
(Massachusetts), Inc. of which Safeguard owns approximately 21% of the
voting securities.
(5) The shares are Class A common stock and represent 3.1% of the aggregate
voting rights of the Common Stock. See "MANAGEMENT--Certain
Relationships" for a description of the relationships between Safeguard
and Technology Leaders.
(6) The shares are Class B common stock and Mr. Moffitt has granted Mr.
Bergstein all voting rights with respect to these shares pursuant to an
irrevocable proxy. Excludes approximately ___ shares of Common Stock
purchasable upon the exercise of Company Rights.
(7) The shares are Class B common stock and Mr. Mikolajczyk has granted Mr.
Bergstein all voting rights with respect to these shares pursuant to an
irrevocable proxy. Includes 1,650 shares of Common Stock issuable
pursuant to presently exercisable options. Excludes approximately ___
shares of Common Stock purchasable upon the exercise of Company Rights.
(8) The shares are Class B common stock and Mr. Spira has granted Mr.
Bergstein all voting rights with respect to these shares of Common
Stock pursuant to an irrevocable proxy. Includes 7,425 shares of Common
Stock issuable pursuant to presently exercisable options. Excludes
approximately ___ shares of Common Stock purchasable upon the exercise
of Company Rights.
(9) The shares are Class A common stock and represent less than 1.0% of the
aggregate voting rights of the Common Stock.
(10) The shares of Common Stock represent less than 1.0% of the aggregate
voting rights of the Common Stock. Excludes approximately ___ shares of
Common Stock purchasable upon the exercise of Company Rights.
(11) Excludes all shares of Common Stock beneficially owned by Safeguard.
Mr. Caldwell serves as president and chief operating officer of
Safeguard. See "MANAGEMENT--Executive Officers and Directors." Mr.
Caldwell disclaims beneficial ownership of such shares. Excludes 28,050
shares of Common Stock allocated to Mr. Caldwell under the LTIP Plan,
of which Mr. Caldwell has neither dispositive nor voting power.
Excludes approximately ___ shares of Common Stock purchasable upon the
exercise of Company Rights.
(12) The shares of Common Stock represent less than 1.0% of the aggregate
voting rights of the Common Stock. Excludes approximately ___ shares of
Common Stock purchasable upon the exercise of Company Rights.
(13) Includes, in the aggregate, 9,025 shares of Common Stock issuable
pursuant to presently exercisable option. Excludes approximately ______
shares of Common Stock purchasable upon the exercise of Company Rights.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Class A common stock, par value $.001 per share, 20,000,000 shares of Class B
common stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.001 per share.
Common Stock
As of December 9, 1996, there were 9,551,398 shares of Common Stock
outstanding and held of record by 71 stockholders. After giving effect to the
issuance of the 1,705,000 shares of Common Stock offered by the Company hereby,
there will be 11,256,398 shares of Common Stock outstanding.
The Common Stock is divided into two classes, Class A and Class B. Class A
common stock is entitled to one vote per share and Class B common stock is
entitled to five votes per share on all matters submitted to vote on holders of
Common Stock. Class B common stock may be owned beneficially or of record only
by Permitted Holders (as defined below). In the event that any share of Class B
common stock ceases to be owned beneficially or of record by a Permitted Holder
or if a beneficial or record holder of a share of Class B common stock ceases to
be a Permitted Holder, the share automatically and immediately shall be
converted into a share of Class A common stock. In addition, shares of Class B
common stock may be converted into shares of Class A common stock at any time at
the election of the holder thereof. Shares of Class A Common Stock may not be
converted into shares of Class B common stock. On the date hereof, there are
4,269,787 shares of Class A common stock and 5,281,611 shares of Class B common
stock issued and outstanding. All of the shares of Common Stock being offered
by this Prospectus are shares of Class A common stock. The Company will not
issue any additional shares of Class B common stock in the future, other than
pursuant to the exercise of stock options outstanding as of the date hereof.
"Permitted Holders" of Class B common stock are (i) persons who are
employees of the Company or any of its majority-owned subsidiaries and (ii) the
Company. A person shall cease to be a Permitted Holder on the date on which he
or she ceases to be an employee of the Company or any of its majority-owned
subsidiaries.
The holders of Common Stock do not have cumulative voting rights. The
election of directors is determined by a plurality of votes cast and, except as
otherwise required by law or the Certificate of Incorporation of the Company,
all other matters are determined by a majority of the votes cast. Accordingly,
the holders of the Class B common stock may elect all directors standing for
election. See "RISK FACTORS -- Control by Principal Stockholders."
The holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of funds legally
available therefor, subject to any preferential dividend rights of outstanding
Preferred Stock. Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in the Offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. See "--Preferred Stock."
Rights
The Company is granting on the date hereof the Rights to the holders of
Safeguard Common Shares. The Rights, subject to minimum exercise requirements,
are each exercisable for one share of Common Stock at an exercise price
anticipated to be between $5.00 and $6.00 per share. Persons may not exercise
Rights for fewer than 50 shares of Common Stock. For purposes of the Rights
Offering, a person that holds Safeguard Common Shares in multiple accounts must
meet the 50 share minimum purchase requirement in each account. Accordingly,
persons holding fewer than 50 Rights in an account should consider the
advisability of consolidating the Rights in one account, selling Rights, or
purchasing additional Rights to comply with the minimum exercise requirements of
the Rights Offering. Rights may be transferred, in whole or in part, by
endorsing and delivering to the Rights Agent a Rights certificate that has been
properly endorsed for transfer, with instructions to reissue the Rights, in
whole or in part, in the name of the transferee. The Rights Agent will reissue
certificates for the transferred Rights to the transferee, and will reissue a
certificate for the balance, if any, to the holder of the Rights, in each case
to the extent it is able to do so prior to the Expiration Date.
48
<PAGE>
The Rights Offering will terminate and the Rights will expire at 5:00 p.m.,
Eastern Standard time, on the Expiration Date, which is ______, 1997. After the
Expiration Date, unexercised Rights will be null and void. For more information
about the Rights and the Rights Offering process, reference should be made to
"THE OFFERING" and to "RISK FACTORS--Cancellation of the Rights Offering."
Preferred Stock
The Company, by resolution of the Board of Directors and without any
further vote or action by the stockholders, has the authority, subject to
certain limitations prescribed by law, to issue from time to time up to an
aggregate of 2,000,000 shares of Preferred Stock in one or more classes or
series and to determine the designation and the number of shares of any class or
series as well as the voting rights, preferences, limitations and special
rights, if any, of the shares of any such class or series, including the
dividend rights, dividend rates, conversion rights and terms, voting rights,
redemption rights and terms, and liquidation preferences. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. As of the date of this Prospectus, there are
no shares of Preferred Stock outstanding, and the Company has no plans to issue
any shares of Preferred Stock.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., Reorganization Department, P.O. Box 798, Midtown
Station, New York, New York 10018.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 11,256,398,
(11,566,398 if the Underwriters' over-allotment option is exercised in full)
shares of Common Stock outstanding, excluding 2,652,654 shares of Common Stock
subject to stock options and 526,598 warrants outstanding as of December 9, 1996
and any stock options or warrants granted by the Company after December 9, 1996.
Of these shares, the Common Stock sold in the Offering, except for certain
shares described below, will be freely tradeable without restriction or further
registration under the Act. The remaining 8,001,398 shares of Common Stock (the
"Restricted Shares") were sold by the Company in reliance on exemptions from the
registration requirements of the Act and are "restricted securities" as defined
in Rule 144 and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701. See "RISK FACTORS--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if three years have
elapsed since the date of acquisition of restricted securities from the Company
or any affiliate and the acquiror or subsequent holder is not deemed to have
been an affiliate of the Company for at least 90 days prior to a proposed
transaction, such person would be entitled to sell such shares under Rule 144(k)
without regard to the limitations described below. If two years have elapsed
since the date of acquisition of restricted securities from the Company or any
affiliate, the acquiror or subsequent holder thereof (including persons who may
be deemed affiliates of the Company) is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then-
outstanding shares of Class A common stock or the average weekly trading volume
in the Class A common stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. Without
considering the contractual restrictions described below, approximately (i)
5,241,106 Restricted Shares will be eligible for sale ninety days after the date
of this Prospectus, subject to volume and other resale conditions imposed by
Rule 144, and (ii) 2,760,292 Restricted Shares will be eligible for future sale
subject to the holding period and other conditions imposed by Rule 144. Certain
restrictions apply to any shares of Common Stock purchased in the Offering by
affiliates of the Company, which may generally only be sold in compliance with
the limitations of Rule 144, except for the holding period requirements
thereunder. See "RISK FACTORS--Shares Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption from
the registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests at least $100 million in securities that, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
the Nasdaq National Market. The shares of Common Stock outstanding as of the
date of this Prospectus would be eligible for resale under Rule 144A because
such shares, when issued, were not of the same class as any listed or quoted
securities.
Options and Warrants
As of December 9, 1996, there were outstanding (i) options to purchase an
aggregate of 2,652,654 shares of Common Stock (of which 24,750 were exercisable
at December 9, 1996) and (ii) a presently exercisable warrant to purchase an
aggregate of 526,598 shares of Common Stock. The holders of options to purchase
a total of 1,210,901 shares are subject to Lock-Up Agreements, which restrict,
until after the Lock-Up Expiry Date (without the Underwriters' prior written
consent), the holders' ability to sell or otherwise dispose of Common Stock
acquired upon the exercise of such options and warrants. An aggregate of
665,948 additional shares are available for issuance pursuant to future grants
under the Stock Option Plan. See "MANAGEMENT--Stock Option Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, such employees of the Company who
prior to the Offering purchased shares pursuant to the Stock Option Plan are
entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule 144
commencing 90 days after the date of this Prospectus. Rule 701 also permits the
shares subject to unexercised options under such Plan to be sold upon exercise
without having to comply with such provisions of Rule 144. As of the date
hereof, (i) no shares of Common Stock will be eligible for sale under Rule 701
by Company employees, commencing 90 days after the date of this Prospectus, and
(ii) approximately 2,652,654 shares of Common Stock subject
50
<PAGE>
to unexercised options will be eligible for sale under Rule 701 by Company
employees commencing 90 days after the date of this Prospectus, subject to
applicable vesting provisions.
It is anticipated that a Form S-8 Registration Statement covering the
Common Stock that may be issued pursuant to the exercise of options after the
effectiveness of the Form S-8 Registration Statement will be filed and declared
effective prior to the Lock-Up Expiry Date and that shares of Common Stock that
are so acquired and offered thereafter pursuant to the Form S-8 Registration
Statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of the Company, which generally may
only resell such shares in compliance with Rule 144, except for the holding
period requirements thereunder.
Lock-Up Agreements
The Selling Stockholders, each Partner of the Company, each director of the
Company and certain other stockholders, who in the aggregate will own
approximately 7,831,601 shares of Common Stock after the completion of the
Offering and will be deemed to beneficially own an additional 535,673 shares of
Common Stock, have agreed with the Underwriters that they will not sell or
otherwise dispose of any shares of Common Stock (other than shares of Common
Stock sold in the Offering) until after the Lock-Up Expiry Date without the
prior written consent of the Underwriters. In addition, Warren V. Musser has
agreed that he and/or his assignees will not sell or otherwise dispose of
157,000 shares of Common Stock without the prior written consent of the
Underwriters.
Registration Rights
In connection with the 1994 Purchase, the Company granted certain
registration rights to Safeguard, Technology Leaders, CIP and certain employees
of the Company, including each Named Officer (collectively, the "Registration
Rights Holders"). In particular, under certain circumstances and subject to
certain limitations, the Registration Rights Holders can require the Company to
register under the Act (i) a minimum of 20% of the aggregate number of shares of
Common Stock acquired by them in connection with the 1994 Purchase, provided
that the Company is not obligated to effect more than one such registration, and
(ii) on Form S-3 such number of shares of Common Stock having a market value of
at least $500,000, provided that the Company is not required to effect more than
one such registration during any twelve-month period or three such registrations
in the aggregate. The Registration Rights Holders were also granted certain
"piggy-back" registration rights whereby on three occasions ending on the tenth
anniversary of the date of this Prospectus, under certain circumstances and
subject to certain conditions, they may include shares of Common Stock in any
registration of shares of Common Stock under the Act on a form which permits
registration of secondary shares.
51
<PAGE>
UNDERWRITING
The Company, the Selling Stockholders and the Underwriters have entered
into the Standby Underwriting Agreement on the date hereof, pursuant to which
the Underwriters are required, subject to certain terms and conditions (all of
which are set forth below), to purchase the Excess Unsubscribed Shares in
accordance with the percentages set forth below. If all of the Rights are
exercised, or if the number of Unsubscribed Shares is 300,000 or less, there
will be no Excess Unsubscribed Shares and the Underwriters will not be required
to purchase any shares of Common Stock.
<TABLE>
<CAPTION>
Underwriters % of Underwriter Shares
------------ -----------------------
<S> <C>
Tucker Anthony Incorporated................ 50%
Robert W. Baird & Co. Incorporated......... 50%
</TABLE>
The Underwriters have agreed, subject to the condition that the Company
and the Selling Stockholders comply with their respective obligations under
the Standby Underwriting Agreement and subject to the Underwriters' right to
terminate their obligations under the Standby Underwriting Agreement (as
specified below), to purchase all of the Excess Unsubscribed Shares. The
Company will pay the Underwriters the Financial Advisory Fee equal to 3%
of the Exercise Price for each share of Class A common stock included in the
Offering. The Financial Advisory Fee is for services and advice rendered in
connection with the structuring of the Offering, valuation of the business of
the Company, and financial advice to the Company before and during the Offering.
An additional fee of 4% of the Exercise Price will be paid to the Underwriters
(i) for each share of Class A common stock purchased by the Underwriters
pursuant to the Standby Underwriting Agreement and (ii) for each share of Class
A common stock purchased upon the Underwriters' exercise of Rights if such
Rights were purchased by the Underwriters at a time when the Class A common
stock was trading (on a "when issued" basis) at a per share price of less than
120% of the Exercise Price or if the Underwriters purchase such Rights with
Safeguard's prior acknowledgment that it would be entitled to receive the
Underwriting Discount for Class A common stock purchased pursuant to the
exercise of such Rights. In addition, the Company has agreed to pay the
Underwriters a non-accountable expense allowance in the aggregate amount of
$125,000, provided, however, such non-accountable expense allowance shall be
reduced to $50,000 or zero if, on the Expiration Date, the closing price for the
Class A common stock traded on a "when issued" basis is at least $10.00 per
share or greater than $12.00 per share, respectively. The Company has granted to
the Underwriters a 20-day option commencing on the Expiration Date to purchase a
maximum of 310,000 additional shares of Class A common stock at a per share
price equal to the Exercise Price less the Financial Advisory Fee and the
Underwriting Discount. The Underwriters may exercise such option in whole or in
part only to cover over-allotments made in connection with the sale of shares of
Class A common stock by the Underwriters.
Prior to the Expiration Date, the Underwriters may offer shares of Class A
common stock on a when-issued basis, including shares to be acquired through
the purchase and exercise of Rights, at prices set from time to time by the
Underwriters. Each such price when set will not exceed, if applicable, the
highest price at which a dealer not participating in the distribution is then
offering the Class A common stock to other dealers, plus an amount equal to a
dealer's concession, and an offering price set on any calendar day will not be
increased more than once during such day. After the Expiration Date, the
Underwriters may offer shares of Class A common stock, whether acquired pursuant
to the Standby Underwriting Agreement, the exercise of the Rights or the
purchase of Class A common stock in the market, to the public at a price or
prices to be determined. The Underwriters may thus realize profits or losses
independent of the Underwriting Discount and the Financial Advisory Fee. Shares
of Class A common stock subject to the Standby Underwriting Agreement will be
offered by the Underwriters when, as and if sold to, and accepted by, the
Underwriters and will be subject to their right to reject orders in whole or in
part.
In connection with the solicitation of Rights exercises, unless the
Underwriters are granted an exemption by the Commission from Rule 10b-6, the
Underwriters will be prohibited from engaging in any market making activities
with respect to the Company's when-issued Class A common stock and Class A
common stock until the Underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the Underwriters may be
unable to provide a market for the Company's when-issued Class A common stock
and Class A common stock should it desire to do so, during certain periods while
the Rights are exercisable.
52
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement of
which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
Underwriters may be required to make.
The Underwriters may terminate their obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted or, in the Underwriters' opinion, will in the
immediate future materially disrupt, the general securities market in the United
States; (ii) if trading in the Common Stock (on a when-issued basis) shall have
been suspended by the Commission or Nasdaq; (iii) if trading on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market or in
the over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or by order of the Commission or any other government authority having
jurisdiction; (iv) if the United States shall have become involved in a war or
major hostilities which, in the Underwriters' opinion, will affect the general
securities market in the United States; (v) if a banking moratorium has been
declared by a New York, Massachusetts, Pennsylvania, Illinois or federal
authority; (vi) if a moratorium in foreign exchange trading has been declared;
(vii) if the Company shall have sustained a loss material to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act, whether or not such loss shall have been insured, or from any
labor dispute or any legal or governmental proceeding; (viii) if there shall be
such material adverse market conditions (whether occurring suddenly or gradually
between the date of this Prospectus and the closing of the Offering) affecting
markets generally or technology issues particularly as in the Underwriters'
reasonable judgment would make it inadvisable to proceed with the offering, sale
or delivery of the shares of Class A common stock offered hereby; (ix) if there
shall have been such material adverse change, or any development involving a
prospective material adverse change (including a change in management or control
of the Company), in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company since March 31, 1996 or (x)
the Other Purchasers fail to purchase their aggregate allotment of Unsubscribed
Shares, which in no event will involve more than 300,000 shares of Class A
common stock. The Underwriters, however, may elect to purchase all, but not less
than all, Unsubscribed Shares in the event the Other Purchasers fail to purchase
any of the Unsubscribed Shares which they are obligated to purchase.
The Company has agreed that, without the prior written consent of the
Underwriters, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the "Securities") acquired in the Rights
Offering or held by it as of the date hereof until after the Lock-Up Expiry
Date, other than (i) Common Stock to be sold in the Offering, and (ii) Company
option issuances and sales of Common Stock pursuant to the Stock Option Plan and
(iii) Securities issued as consideration for an acquisition if the party being
issued the Securities agrees not to transfer, sell, offer for sale, contract or
otherwise dispose of such Securities until after the Lock-Up Expiry Date. The
Selling Stockholders, each Partner of the Company, each director of the Company,
and certain other stockholders, who will in the aggregate own approximately
7,831,601 shares of Common Stock after the completion of the Offering and will
be deemed to beneficially own an additional 551,348 shares of Common Stock, have
agreed with the Underwriters that they will not sell or otherwise dispose of any
shares of Common Stock (other than shares of Common Stock sold in the Offering)
until after the Lock-Up Expiry Date without the prior written consent of the
Underwriters. In addition, Warren V. Musser has agreed that he and/or his
assignees will not sell or otherwise dispose of 157,000 shares of Common Stock
without the prior written consent of the Underwriters. See "MANAGEMENT--Stock
Option Plan" and "SHARES ELIGIBLE FOR FUTURE SALE."
53
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gordon & Glickson P.C., Chicago, Illinois. Certain legal
matters in connection with the Offering are being passed upon for the
Underwriters by Drinker Biddle & Reath, Philadelphia, Pennsylvania. Certain
legal matters in connection with the Offering are being passed upon for
Safeguard by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Gordon &
Glickson P.C., general counsel to the Company, was granted by the Company on
November 18, 1996, a fully vested option to acquire 13,035 shares of Common
Stock, at an exercise price of $3.18 per share.
EXPERTS
The financial statements and schedule of Diamond Technology Partners
Incorporated as of March 31, 1995 and 1996 and for the period from January 28,
1994 (inception) through March 31, 1994 and for the years ended March 31, 1995
and 1996 have been included herein and in the registration statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing herein, and elsewhere in the Registration Statement, and
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Act with respect to the Common Stock and Rights offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock and Rights offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding
the contents of any agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549,
and the Commission's regional offices at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and copies of all or any part thereof may be
obtained from the reference section of the Commission, Washington, D.C. 20549,
upon payment of the prescribed fees. In addition, the Commission maintains a
site on the World Wide Web at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission.
54
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
Independent Auditors' Report................................................................................ F-2
Balance Sheets at March 31, 1995 and 1996 .................................................................. F-3
Statements of Operations for the period from January 28, 1994 (inception) through March 31, 1994
and years ended March 31, 1995 and 1996..................................................................... F-4
Statements of Stockholders' Equity for the period from January 28, 1994 (inception) through
March 31, 1994 and years ended March 31, 1995 and 1996...................................................... F-5
Statements of Cash Flows for the period from January 28, 1994 (inception) through March 31, 1994
and years ended March 31, 1995 and 1996..................................................................... F-6
Notes to Financial Statements............................................................................... F-8
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheet at September 30, 1996........................................................... F-15
Consolidated Statements of Operations for six month periods ended September 30, 1995
and 1996................................................................................................... F-16
Consolidated Statements of Cash Flows for six month periods ended September 30, 1995
and 1996................................................................................................... F-17
Notes to Unaudited Consolidated Financial Statements....................................................... F-19
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
When the transactions referred to in the first two paragraphs of Note 7 to the
financial statements have been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Diamond Technology Partners Incorporated:
We have audited the accompanying balance sheets of Diamond Technology Partners
Incorporated as of March 31, 1995 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the period from January 28,
1994 (inception) through March 31, 1994 and for the years ended March 31, 1995
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diamond Technology Partners
Incorporated as of March 31, 1995 and 1996, and the results of its operations
and its cash flows for the period from January 28, 1994 (inception) through
March 31, 1994 and for the years ended March 31, 1995 and 1996 in conformity
with generally accepted accounting principles.
Chicago, Illinois
April 19, 1996, except for the first two
paragraphs of Note 7 which are as of
- ----------------.
F-2
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Balance Sheets
March 31, 1995 and 1996
<TABLE>
<CAPTION>
==========================================================================================================
1995 1996
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,690,260 $ 4,634,594
Accounts receivable, net of allowance of $512,000
and $269,812 as of March 31, 1995 and 1996, respectively 1,435,432 3,304,255
Prepaid expenses 319,899 1,179,988
Notes receivable from stockholder - 225,819
Deferred income taxes 119,276 98,725
- -----------------------------------------------------------------------------------------------------------
Total current assets 6,564,867 9,443,381
Computers, equipment, and training software, net 573,413 2,010,424
Note receivable from stockholder 162,943 -
Deferred organization costs, net 211,889 161,216
- -----------------------------------------------------------------------------------------------------------
Total assets $ 7,513,112 $ 11,615,021
===========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 150,000 $ 125,000
Accounts payable 556,969 1,155,002
Accrued compensation 159,844 1,089,000
Deferred compensation 621,991 1,452,022
Income taxes payable 119,276 82,641
Other accrued liabilities 611,860 1,143,308
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 2,219,940 5,046,973
Notes payable 106,364 -
- -----------------------------------------------------------------------------------------------------------
Total liabilities 2,326,304 5,046,973
- -----------------------------------------------------------------------------------------------------------
Commitments
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares authorized,
no shares issued - -
Class A common stock, $.001 par value, 40,000,000 shares
authorized, 3,320,625 issued in 1995 and 3,370,125 issued in 1996 3,321 3,371
Class B common stock, $.001 par value; 20,000,000 shares
authorized, 4,392,092 issued in 1995 and 4,505,119 issued in 1996 4,392 4,505
Additional paid-in capital 6,532,635 6,843,972
Notes receivable from sale of common stock (90,957) (257,323)
Accumulated deficit (1,262,583) (26,477)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,186,808 6,568,048
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,513,112 $ 11,615,021
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
</TABLE>
F-3
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Statements of Operations
Period from January 28, 1994 (inception) through March 31, 1994 and years ended
March 31, 1995 and 1996
<TABLE>
<CAPTION>
============================================================================================================
1994 1995 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 261,166 $ 12,842,670 $ 26,338,732
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Project personnel and related expenses 633,405 8,351,461 15,312,436
Professional development and recruiting 105,767 1,394,432 4,586,682
Marketing and sales 94,186 450,848 605,639
Management and administrative support 317,135 3,108,314 4,459,820
------------------------------------------------------------------------------------------------------------
Total operating expenses 1,150,493 13,305,055 24,964,577
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations (889,327) (462,385) 1,374,155
Interest income 3,285 136,940 251,084
Interest expense - (51,096) (87,403)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (886,042) (376,541) 1,537,836
Income taxes - - (301,730)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (886,042) $ (376,541) $ 1,236,106
- ------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) per share of Common Stock $ (0.33) $ (0.04) $ 0.12
Shares used in computing pro forma net income (loss) per share
of Common Stock 2,678,830 8,439,626 9,964,148
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
</TABLE>
F-4
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Statements of Stockholders' Equity
Period from January 28, 1994 (inception) through March 31, 1994 and years ended
March 31, 1995 and 1996
<TABLE>
<CAPTION>
===============================================================================
Class A Class B
Class A Class B Common Common
Shares Shares Stock Stock
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of stock 1,100,000 825,000 $ 1,100 $ 825
Net loss - - -
- -------------------------------------------------------------------------------
Balance at March 31, 1994 1,100,000 825,000 1,100 825
Issuance of stock 2,220,625 3,608,342 2,221 3,608
Purchase of stock - (41,250) - (41)
Net loss - - - -
- -------------------------------------------------------------------------------
Balance at March 31, 1995 3,320,625 4,392,092 3,321 4,392
Issuance of stock - 746,627 - 747
Purchase of stock - (584,100) - (584)
Conversion to Class A 49,500 (49,500) 50 (50)
Repayment of notes - - - -
Net income - - - -
- -------------------------------------------------------------------------------
Balance at March 31, 1996 3,370,125 4,505,119 $ 3,371 $ 4,505
- -------------------------------------------------------------------------------
<CAPTION>
=============================================================================================
Notes
Additional Receivable Total
Paid-in From Sale of Accumulated Stockholders
Capital Common Stock Deficit Equity
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of stock $ 1,649,986 $ - $ - $ 1,651,911
Net loss - - (886,042) (886,042)
- ---------------------------------------------------------------------------------------------
Balance at March 31, 1994 1,649,986 - (886,042) 765,869
Issuance of stock 4,920,108 (90,957) - 4,834,980
Purchase of stock (37,459) - - (37,500)
Net loss - - (376,541) (376,541)
- ---------------------------------------------------------------------------------------------
Balance at March 31, 1995 6,532,635 (90,957) (1,262,583) 5,186,808
Issuance of stock 866,753 (257,323) - 610,177
Purchase of stock (555,416) - - (556,000)
Conversion to Class A - - - -
Repayment of notes - 90,957 - 90,957
Net income - - 1,236,106 1,236,106
- ---------------------------------------------------------------------------------------------
Balance at March 31, 1996 $6,843,972 $ (257,323) $ (26,477) $ 6,568,048
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Statements of Cash Flows
Period from January 28, 1994 (inception) through March 31, 1994 and years ended
March 31, 1995 and 1996
<TABLE>
<CAPTION>
================================================================================================
1994 1995 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (886,042) $ (376,541) $ 1,236,106
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 7,238 74,486 367,365
Deferred compensation 136,279 1,704,169 830,031
Deferred income taxes - (119,276) 20,551
Changes in assets and liabilities:
Accounts receivable (68,550) (1,366,882) (1,868,823)
Prepaid expenses (30,977) (288,922) (860,089)
Accounts payable 440,565 116,404 598,033
Accrued compensation 23,047 136,797 929,156
Income taxes payable - 119,276 (36,635)
Other accrued liabilities 90,386 321,474 531,448
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (288,054) 320,985 1,747,143
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (15,062) (600,335) (1,753,703)
Organization costs (200,454) (51,175) -
Notes receivable - (162,943) (62,876)
- ------------------------------------------------------------------------------------------------
Cash flows used in investing activities (215,516) (814,453) (1,816,579)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable - 300,000 175,000
Repayment of notes payable - (43,636) (306,364)
Stock issuance costs (98,089) (173,125) -
Issuance of common stock 1,750,000 3,989,648 701,134
Repurchase of common stock - (37,500) (556,000)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,651,911 4,035,387 13,770
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,148,341 3,541,919 (55,666)
Cash and cash equivalents at beginning of period - 1,148,341 4,690,260
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,148,341 $ 4,690,260 $ 4,634,594
================================================================================================
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Statements of Cash Flows, Continued
Period from January 28, 1994 (inception) through March 31, 1994 and years ended
March 31, 1995 and 1996
<TABLE>
<CAPTION>
==========================================================================================================================
1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - $ 51,096 $ 54,753
Cash paid during the year for income taxes - - 317,814
- --------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure for noncash investing and
financing activities:
Issuance of common stock for notes $ - $ 90,957 $ 257,323
Deferred and incentive compensation applied to
payment for common stock - 1,218,457 -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
(1) Description of Business
Diamond is a management consulting firm that devises business strategies
enabled by information technology ("IT") and manages the implementation of
those strategies. The Company's clients are generally located throughout
the United States.
(2) Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenues on contracts as work is performed, net of
provisions for estimated unbillable and uncollectible amounts. Actual
unbillable or uncollectible amounts are charged against this reserve when
they become known. Out-of-pocket expenses are reimbursed by clients and are
offset against expenses incurred.
Computers, Equipment and Training Software
Computers, equipment and training software are stated at cost less
accumulated depreciation. Depreciation is based on the estimated useful
lives of the assets (generally three years) and is computed using the
straight-line method. Costs capitalized for internally developed software
include external consulting fees and employee salaries. Depreciation and
amortization expense was $1,408 for the period from January 28, 1994
(inception) through March 31, 1994 and $40,576 and $316,692 for the years
ended March 31, 1995 and 1996, respectively.
Organization Costs
Organization costs consist of legal fees related to the start-up of the
Company. They are being amortized using the straight-line method over five
years. Accumulated amortization at March 31, 1995 and 1996 was $39,740 and
$90,413, respectively.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost, which approximates fair value.
Cash equivalents consist of money market funds and demand deposits.
Significant Customers
The Company had four customers which individually accounted for more than
10% of accounts receivable and revenues as of and for the year ended March
31, 1995. Collectively, these customers accounted for approximately 68% of
accounts receivable and 65% of revenues as of and for the year ended March
31, 1995. The Company had three customers which individually accounted for
more than 10% of accounts receivable and revenues as of and for the year
ended March 31, 1996. Collectively, these customers accounted for 56% of
accounts receivable and 51% of revenues as of and for the year ended March
31, 1996.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method in accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be reversed or settled.
F-8
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed using the weighted
average number of shares of common and common equivalent shares (stock
options and warrants) outstanding unless anti-dilutive. As required by
Staff Accounting Bulletin No. 83 issued by the Securities and Exchange
Commission, common and common equivalent shares issued by the Company
during the twelve-month period preceding the initial filing of the
Registration Statement for the Offering have been included in the
calculation as if they were outstanding for all periods presented (using
the treasury stock method and assuming the initial public offering price).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
The fair value of the Company's financial instruments approximates their
carrying value.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS
123 gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock based awards or to continue
to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
issued to Employees" ("APB 25"), with pro forma disclosures of net income
and net income per share as if the fair value method had been applied. The
Company intends to continue to apply APB 25 for future stock options and
stock based awards, and accordingly, does not anticipate that the adoption
of SFAS 123 will have a material impact on its results of operations or
financial position.
Long-lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121") was issued
in March 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company anticipates
the adoption of SFAS 121 will not have a material impact on its results of
operation or financial position.
F-9
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
(3) Computers, Equipment and Training Software
Computers, equipment and training software at March 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1995 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computers and equipment $480,431 $1,131,540
Training software 134,966 1,237,560
- ------------------------------------------------------------------------------------------------------
615,397 2,369,100
Less accumulated depreciation and amortization (41,984) (358,676)
- ------------------------------------------------------------------------------------------------------
$573,413 $2,010,424
- ------------------------------------------------------------------------------------------------------
</TABLE>
(4) Note Receivable from Stockholder
The Company has advanced money to an officer under a note arrangement that
allows for advances up to $500,000 bearing interest at a floating rate
based on the applicable federal rate under the Internal Revenue Code of
1986. Certain events have occurred during March 1996 that have caused this
note to become repayable, accordingly, such amounts have been classified as
current at March 31, 1996. The note and accumulated interest totaled
$162,943 and $225,819 at March 31, 1995 and 1996, respectively.
(5) Commitments
The Company leases office space and equipment under various operating
leases. As of March 31, 1996, the minimum future lease payments under
operating leases with noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year ending March 31, Amount
- -------------------------------------------------------------------------------
<S> <C>
1997 $ 515,316
1998 432,957
1999 318,802
2000 297,571
2001 212,822
Thereafter 299,248
- -------------------------------------------------------------------------------
$2,076,716
- -------------------------------------------------------------------------------
</TABLE>
Rent expense under operating leases amounted to $21,015 for the period from
January 28, 1994 (inception) through March 31, 1994 and for the years ended
March 31, 1995 and 1996 amounted to $140,426 and $477,930, respectively.
The Company is party to a standby letter of credit with a bank in support
of the minimum future lease payments under the lease for permanent office
space dated March 31, 1995 in the amount of $917,908, declining annually
during the lease term. This letter is guaranteed by Safeguard Scientifics,
Inc. ("Safeguard")
F-10
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
until the effective date of the Registration Statement filed in connection
with the initial public offering of the shares of the Company.
(6) Notes Payable and Line of Credit
Notes payable at March 31, 1995 consisted of two term loans in the amount
of $180,000 (10.10%) and $76,364 (10.05%) payable in monthly installments
including interest, maturing January 1, 1997. These notes were repaid in
November 1995.
Notes payable at March 31, 1996 consisted of an 8.4% term loan in the
amount of $125,000, payable in monthly installments, including interest,
that matures on December 31, 1996.
The Company has an available line of credit of $3,000,000 with a commercial
bank, which has been reduced by letters of credit of $322,590 to account
for letters of credit and other contingent obligations of the Company
currently outstanding. At March 31, 1996, all remaining amounts under this
line of credit were available to the Company at the bank's prime rate. Any
borrowings against this line will be secured by all the assets of the
Company. The line of credit expires July 31, 1997 unless renewed.
(7) Stockholders' Equity
Stock Split, Stock Recapitalization and Initial Public Offering
On December 7, 1996, the Board of Directors declared a 1.65 to 1 stock
split. All references in the Financial Statements to share and per share
data have been adjusted to effect this stock split. Concurrent with this
split, the Company divided its stock into two classes, Class A and Class B.
Class A common stock is entitled to one vote per share and Class B common
stock is entitled to five votes per share on all matters submitted to the
vote of holders of Common Stock. Class B common stock may be owned
beneficially or of record by employees of the Company or by the Company.
Also, the Board of Directors authorized 2,000,000 shares of Preferred
Stock, par value $.001 per share, the terms of which may be determined by
the Board.
On December 7, 1996, the Company's Board of Directors authorized the filing
of a Registration Statement on Form S-1 covering 3,255,000 shares of Class
A common stock to be sold in the initial public offering transaction. The
majority of shares (1,705,000) are being offered by the Company and the
remainder (1,550,000) by selling stockholders. This offering will be
conducted as a rights offering to Safeguard's stockholders, pursuant to
Safeguard's right to do so as described below.
Warrants
In March 1994, the Company granted warrants to Safeguard. The warrants
permit the holder to purchase up to 825,000 shares of stock at an exercise
price of $1.21 per share and expires on March 22, 2001. Safeguard
subsequently transferred 330,000 of these warrants to certain of its
affiliates. The Company has the right to require the warrant holders to
exercise the warrants at any time following the completion of the Company's
first full fiscal year of profitability. The Company has satisfied this
requirement during the fiscal year ended March 31, 1996 and intends to
exercise this right subsequent to fiscal year end by issuing 825,000 shares
of Class A common stock in exchange for $1,000,000 pursuant to the
provision of the warrants.
Safeguard also has the right, under certain conditions and with the
Company's consent, to conduct an offering of the Company's Class A common
stock to Safeguard stockholders. One-half of the shares of the Company's
common stock to be offered shall be new shares, and one-half shall be
shares held by Safeguard.
F-11
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- -----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Stock Options
Under the Company's 1994 Stock Option Plan (the Plan), the Company may
grant qualified incentive stock options to officers and employees of the
Company. Options granted to officers vest ratably at the end of each of the
three years following the date of grant and options granted to employees
other than officers fully vest three years following the date of grant.
Vested options expire five years from the date of grant. The Plan provides
that options may not be granted at less than the fair market value of the
Company's common stock at the date of grant. Effective April 1, 1996, the
Plan was amended, for a change in the vesting schedule for options granted
to officers to provide for vesting at the end of each of the five years
following the date of grant. The expiration of these officers' vested
options was also changed to seven years from the date of grant to reflect
this change in the vesting schedule.
- --------------------------------------------------------------------------------
The following table summarizes the transactions pursuant to the Plan.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Shares Under Range of
Option Prices
- -------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year 1994
Granted 138,600 $1.21
Exercised - -
Canceled - -
- -------------------------------------------------------------------------------
Balances, March 31, 1994 138,600 1.21
Granted 371,250 1.21
Exercised - -
Canceled - -
- -------------------------------------------------------------------------------
Balances, March 31, 1995 509,850 1.21
Granted 474,375 1.21 to 1.82
Exercised - -
Canceled 42,900 1.21
- -------------------------------------------------------------------------------
Balances, March 31, 1996 941,325 $1.21 to 1.82
- -------------------------------------------------------------------------------
</TABLE>
At March 31, 1996 , there were 8,250 exercisable options under the Plan, as
amended. During 1996, the Company also issued 174,900 non-qualified stock
options. 82,500 of these options, at an exercise price of $1.82, vest
ratably at the end of each year over the five year period beginning March
31, 1996. The remaining 92,400, at an exercise price of $1.82, vest in
January, 1999. None of these non-qualified stock options have been canceled
or are exercisable at March 31, 1996.
F-12
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
(8) Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 79,276 $156,363
Foreign - - 51,430
State - 40,000 73,386
- -------------------------------------------------------------------------------
119,276 281,179
Deferred taxes - (119,276) 20,551
- -------------------------------------------------------------------------------
$ - $ - $301,730
- -------------------------------------------------------------------------------
</TABLE>
The total tax provision differs from the amount computed by applying the
Federal income tax rate of 34 percent to income (loss) before income taxes
for the following reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $(301,254) $(128,024) $522,864
Effect of permanent differences 3,875 63,490 90,785
State income taxes, net of federal benefit - 26,400 48,435
Effect of deferred tax benefits 297,379 73,996 (371,375)
Other - (35,862) 11,021
- -------------------------------------------------------------------------------------------
$ - $ - $301,730
- ----------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
The tax effects of the temporary differences that give rise to the deferred
tax assets and liabilities at March 31, 1995 and 1996 are presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 211,477 $ 580,809
Other accruals 306,824 372,556
- -------------------------------------------------------------------------------
Total gross deferred tax assets 518,301 953,365
Less valuation allowance (371,375) -
- -------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 146,926 953,365
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation 27,650 45,290
Capitalized assets - 412,078
Accrued bonuses - 340,741
Other accruals - 56,531
- -------------------------------------------------------------------------------
Deferred tax liabilities 27,650 854,640
- -------------------------------------------------------------------------------
Net deferred income taxes $ 119,276 $ 98,725
- -------------------------------------------------------------------------------
</TABLE>
Management believes it is more likely than not that the deferred tax assets
will be realized in the future.
(9) Benefit Plans
Deferred Compensation
Certain officers of the Company previously agreed to defer a portion of
their annual compensation under a deferred compensation program. The
program provided that amounts deferred cannot be distributed prior to March
31, 1996 without approval by the Board of Directors. Amounts deferred under
this program accrue interest at rates available to the Company from its
bank and are immediately vested. Effective April 1, 1996, the Board of
Directors elected to discontinue this program. This liability will be paid
over a period up to three years.
401(k) Plan
The Company has a noncontributory defined contribution plan covering
substantially all of its employees. This plan is qualified under Section
401(k) of the Internal Revenue Code of 1986. The Company may elect to make
contributions to this plan but to date has not done so.
F-14
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
- ----------------------------------------
Consolidated Balance Sheet
September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
============================================================================================
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 2,174,277
Accounts receivable, net of allowance of $520,007 3,511,735
Prepaid expenses 1,387,779
Accrued and prepaid income taxes 909,317
Deferred income taxes 98,725
- --------------------------------------------------------------------------------------------
Total current assets 8,081,833
Computers, equipment, and training software, net 2,255,670
Deferred organization costs, net 135,823
- --------------------------------------------------------------------------------------------
Total assets $10,473,326
============================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 258,333
Accounts payable 1,132,957
Deferred compensation 1,172,253
Other accrued liabilities 853,923
- --------------------------------------------------------------------------------------------
Total current liabilities 3,417,466
- --------------------------------------------------------------------------------------------
Commitments
- --------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock $.001 par value, 2,000,000 shares authorized, no shares -
issued.
Class A common stock, $.001 par value, 40,000,000 shares authorized,
4,258,238 issued 4,258
Class B common stock, $.001 par value: 20,000,000 shares authorized,
4,937,831 issued. 4,938
Additional paid-in capital 8,479,651
Notes receivable from sale of common stock (307,748)
Accumulated deficit (1,125,239)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 7,055,860
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,473,326
============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-15
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Consolidated Statements of Operations
Six month periods ended September 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
=======================================================================================================================
1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $11,837,862 $16,088,874
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Project personnel and related expenses 6,671,230 10,713,892
Professional development and recruiting 2,310,818 2,960,005
Marketing and sales 335,091 892,728
Management and administrative support 2,008,247 3,325,812
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 11,325,386 17,892,437
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 512,476 (1,803,563)
Interest income 117,427 74,841
Interest expense (42,825) (63,544)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 587,078 (1,792,266)
Income taxes (116,000) 693,504
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 471,078 $(1,098,762)
=======================================================================================================================
Pro forma net income (loss) per share of common stock $ .05 $ (0.11)
Shares used in computing pro forma net income (loss) per share of common stock 9,909,179 10,306,606
=======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-16
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Consolidated Statements of Cash Flows
Six month periods ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
======================================================================================================================
1995 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 471,078 $ (1,098,762)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 116,626 512,713
Deferred compensation 343,471 (116,385)
Cancellation of note receivable - 225,819
Changes in assets and liabilities:
Accounts receivable (828,405) (240,864)
Prepaid expenses and other 79,734 (207,791)
Accounts payable 111,918 (22,045)
Accrued compensation 285,855 (1,089,000)
Income taxes (117,743) (991,958)
Other accrued liabilities 383,706 (289,385)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 846,240 (3,317,658)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (969,347) (732,566)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities (969,347) (732,566)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable - 250,000
Repayment of notes payable (76,909) (116,667)
Repurchase of Common Stock (453,000) (3,000)
Issuance of Common Stock 237,717 1,459,574
Net cash provided by (used in) financing activities (292,192) 1,589,907
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (415,299) (2,460,317)
Cash and cash equivalents at beginning of period 4,690,260 4,634,594
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,274,961 $ 2,174,277
======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-17
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Consolidated Statements of Cash Flows, Continued
Six month period ended September 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
======================================================================================================================
1995 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 29,919 $ 31,306
Cash paid during the year for income taxes 200,425 164,478
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock for notes $ 125,875 $ 201,413
Deferred and incentive compensation applied to payment
for common stock 1,218,457 130,000
======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-18
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) Basis of Presentation
The consolidated balance sheet as of September 30, 1996 and the
consolidated statements of operations and cash flows for the six months
ended September 30, 1995 and 1996 contained herein, which are unaudited,
include the accounts of the Company and its privately held subsidiary. All
significant intercompany accounts have been eliminated in consolidation. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Adjustments
consist only of normal recurring items. The results of operations for the
six months ended September 30, 1995 and 1996, are not necessarily
indicative of the results to be expected for the full fiscal year.
The consolidated financial statements do not include all information and
footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. Reference is made to the Company's 1995 and 1996
audited financial statements and related notes which provide additional
disclosure and a further description of accounting policies.
(2) Subsequent Events
The Company entered into a $2.0 million subordinated loan agreement with
Safeguard on November 8, 1996 for general working capital purposes. In
connection with this loan, the Company issued warrants to Safeguard for the
purchase of 526,598 shares of the Company's Class A Common Stock at $5.50
per share. The loan has a maturity date of November 1, 2001 but must be
prepaid in full upon the consummation of an initial public offering and
bears interest at rates which escalate 1% annually, starting at 6% in the
initial year.
On December 7, 1996, the Board of Directors declared a 1.65 to 1 stock
split. All references in the financial statements to share and per share
data have been adjusted to reflect this split. Concurrent with this split,
the Company divided its stock into two classes, Class A and Class B. Class
A common stock is entitled to one vote per share and Class B common stock
is entitled to five votes per share on all matters submitted to vote on
holders of Common Stock. Class B common stock may be owned by employees of
the Company or by the Company. Also, the Board of Directors authorized
2,000,000 shares of Preferred Stock, par value $.001 per share, the terms
of which may be determined by the Board.
On December 7, 1996, the Company's Board of Directors authorized the
filing of a Registration Statement on Form S-1 covering 3,255,000 shares of
Class A common stock to be sold in the initial public offering transaction.
The majority of shares (1,705,000) are being offered by the Company and the
remainder (1,550,000) by selling stockholders. This offering will be
conducted as a rights offering to Safeguard's stockholders.
F-19
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company, the Selling Stockholders or any Underwriter. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to its date. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities to which it relates. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy such securities
in any state in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Offering............................................................. 11
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 20
Business................................................................. 26
Management............................................................... 38
Certain Transactions..................................................... 44
Principal and Selling Stockholders....................................... 46
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 1997 (25 days after the expiration date of the Offering),
all dealers effecting transactions in Class A common stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
================================================================================
3,255,000 Shares
[LOGO]
DIAMOND TECHNOLOGY PARTNERS
INCORPORATED
Class A Common Stock
------------
PROSPECTUS
------------
, 1997
Tucker Anthony
Incorporated
Robert W. Baird & Co.
Incorporated
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and
underwriters' non-accountable expense allowance) payable in connection with the
offering of the Rights and the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 6,482
NASD filing fee.................................................. 2,639
Nasdaq filing fee................................................ *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses (including legal fees)................ *
Transfer agent and rights agent and registrar fees and expenses.. *
Miscellaneous.................................................... -------
Total............................................................ 700,000
=======
</TABLE>
- ----------------
* To be filed by amendment
The foregoing, except for the Securities and Exchange Commission
registration fee, the NASD filing fee, and the Nasdaq filing fee, are estimates.
All of the foregoing expenses will be borne by the Registrant.
Item 14. Indemnification of Directors and Officers
The Registrant's By-laws require the Registrant to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed proceeding by reason of the fact that he is or was a
director or officer of the Registrant or is or was serving at the request of the
Registrant as a director, officer, employee, fiduciary or agent of another
corporation, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such proceeding if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Registrant, and, with respect to any such criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Such
indemnification as to expenses is mandatory to the extent the individual is
successful on the merits of the matter. Delaware law permits the Registrant to
provide similar indemnification to employees and agents who are not directors or
officers. The determination of whether an individual meets the applicable
standard of conduct may be made by the disinterested directors, independent
legal counsel or the stockholders. Delaware law also permits indemnification in
connection with a proceeding brought by or in the right of the Registrant to
procure a judgment in its favor. Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the "Act") may be
permitted to directors, officers, or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
The Registrant expects to obtain a directors and officers liability insurance
policy prior to the effective date of this Registration Statement.
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of
Standby Underwriting Agreement which will be filed by amendment as Exhibit 1.1
hereto.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement,
the Registrant has issued the following securities that were not registered
under the Act (the following information does not reflect the 1.65 for 1 stock
split described in the Prospectus):
Since its inception on January 28, 1994 and through December 9, 1996,
the Company has sold to its Partners, certain of its other employees, certain
persons who are not employees and certain non-employee members of the Board of
Directors, 3,669,726 shares of its Common Stock. The initial price per share was
$1.50 and has since increased, in several increments, to $3.75. All such sales
were made under the exemption from registration provided under Section 4(2) of
the Securities Act of 1933 (the "Act").
In a series of three connected sales occurring in March, May and
July, 1994, the Company sold 916,667 shares of its Common Stock to Safeguard
Scientifics, Inc. ("Safeguard"), 427,992 shares of its Common Stock to Techno-
logy Leaders, L.P., 488,675 shares of its Common Stock to Technology Leaders
Offshore C.V., and 166,666 shares of its Common Stock to CIP, L.P., for a total
of 2,000,000 shares. The shares were sold at $1.50 per share under the exemption
from registration provided by Section 4(2) of the Act.
Coincident with its sales to Safeguard of 916,667 shares in 1994, the
Company issued to Safeguard a warrant for the purchase of 500,000 shares of
Common Stock for $2.00 per share. Safeguard subsequently transferred to Compu-
Com, Inc. its right to purchase 100,000 shares pursuant to the warrant and
transferred to Cambridge Technology Partners (Massachusetts), Inc. its right to
purchase 100,000 shares pursuant to the warrant. Safeguard, CompuCom and
Cambridge each exercised its respective warrant in May, 1996, and the Company
sold to them 300,000 shares, 100,000 shares and 100,000 shares, respectively at
the exercise price of $2.00 per share. These sales were made under the exemption
from registration provided under Section 4(2) of the Act.
On November 8, 1996, the Company issued to Safeguard a warrant to
purchase 319,150 shares of Common Stock at an exercise price of $9.08 per share.
In addition, on November 18, 1996, the Company issued to Gordon & Glickson P.C.
an option to purchase 7,900 shares of Common Stock at an exercise price of $5.25
per share. In issuing such warrant and option and selling the underlying
securities upon exercise, Registrant is relying on an exemption from
registration under Section 4(2) of the Act.
Pursuant to Registrant's Stock Option Plan, Registrant has granted
options to purchase a total of 1,607,669 shares of Common Stock to its employees
and directors during the past three fiscal years at exercise prices ranging from
$2.00 to $5.25 per share. For a more detailed description of the Plan, see
"MANAGEMENT--Stock Option Plan" in this Registration Statement. In granting the
options and selling the underlying securities upon option exercise, Registrant
is relying on exemptions from registration set forth in Rule 701 under, and
Section 4(2) of, the Act.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
1.1# Form of Standby Underwriting Agreement.
3.1# Amended and Restated Certificates of
Incorporation of the Company.
3.2# By-laws of the Company.
4.1# Specimen stock certificate representing
the Common Stock.
4.2# Specimen rights certificate representing the
Rights.
5.1# Opinion of Gordon & Glickson P.C.
8.1# Opinion of Morgan, Lewis & Bockius LLP regarding
tax matters.
10.1# Diamond Technology Partners Incorporated Stock Option
Plan adopted as of June 23, 1994.
10.2# Employment Agreement between Melvyn E. Bergstein and
Diamond Technology Partners Incorporated, dated February
1, 1994.
10.3# Employment Agreement between Michael E. Mikolajczyk and
Diamond Technology Partners Incorporated, dated April 18,
1994.
10.4# Employment Agreement between James C. Spira and
Diamond Technology Partners Incorporated, dated November
1, 1995.
10.5# Employment Agreement between Christopher J. Moffitt and
Diamond Technology Partners Incorporated, dated February
1, 1994.
10.6* Stock Purchase Agreement dated as of March 22, 1994 among
the Company, Melvyn E. Bergstein, Christopher J. Moffitt,
Safeguard Scientifics, Inc.and certain other investors, as
amended.
10.7* Amended and Restated Voting and Stock
Restriction Agreement dated as of April 1, 1996
among the Company,
Technology Leaders L.P., Technology Leaders
Offshore C.V., CIP Capital L.P., Safeguard
Scientifics (Delaware), Inc. and certain of the
shareholders of Diamond Technology Partners, Inc.
10.8* Amended and Restated Partners Operating Agreement dated as
of April 1, 1996 among the Company and the Partners of the
Company.
10.9# Loan Agreement dated as of November 8, 1996 among the
Company and Safeguard Scientifics (Delaware), Inc.
10.10# Amended and Restated Warrant Agreement dated as of
November 8, 1996 among the Company and Safeguard
Scientifics (Delaware), Inc.
10.11# Rights Agent Agreement among the Company, Safeguard
Scientifics, Inc., Technology Leaders, CIP Capital L.P.,
Cambridge Technology Partners (Massachusetts), Inc.,
CompuCom Systems, Inc., Chase/Mellon Shareholder Services,
L.L.C. and Mellon Bank, N.A.
11.1* Statement Regarding Computation of Earnings Per
Share.
21.1* Subsidiaries of the Registrant.
23.1# Consent of KPMG Peat Marwick LLP.
23.2# Consent of Gordon & Glickson P.C. (to be
included in Exhibit 5.1).
23.3# Consent of Morgan, Lewis & Bockius LLP (to be
included in Exhibit 8.1).
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
- -------------------
* Filed herewith.
# To be filed by amendment.
(b) Schedule II - Valuation and Qualifying Accounts
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; and
(iv) To reflect the results of the Offering.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chicago, Illinois, on December 13,
1996.
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
By: /s/ Melvyn E. Bergstein
-----------------------------------------
Melvyn E. Bergstein
Chairman, Chief Executive Officer,
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Melvyn E. Bergstein and Michael E. Mikolajczyk,
or either of them acting alone, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and a related registration statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, and in each case to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
- ---------- -------- ----
<S> <C> <C>
/s/ Melvyn E. Bergstein Chief Executive Officer,
- -------------------------- President (Principal Executive December 13, 1996
Melvyn E. Bergstein Officer) and Chairman
/s/ Michael E. Mikolajczyk Senior Vice President,
- -------------------------- Chief Financial December 13, 1996
Michael E. Mikolajczyk Officer and Treasurer
(Principal Financial and
Accounting Officer) and
Director
/s/ Christopher J. Moffitt Director
- -------------------------- December 13, 1996
Christopher J. Moffitt
/s/ Donald R. Caldwell Director
- -------------------------- December 13, 1996
Donald R. Caldwell
/s/ Edward R. Anderson Director
- -------------------------- December 13, 1996
Edward R. Anderson
/s/ Alan Kay Director
- -------------------------- December 13, 1996
Alan Kay
/s/ James C. Spira Director
- -------------------------- December 13, 1996
James C. Spira
/s/ John D. Loewenberg Director
- -------------------------- December 13, 1996
John D. Loewenberg
</TABLE>
II-4
<PAGE>
Independent Auditors' Report
When the transactions referred to in the first two paragraphs of Note 7 to the
financial statements have been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Diamond Technology Partners Incorporated
We have audited the accompanying balance sheets of Diamond Technology Partners
Incorporated as of March 31, 1995 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the period from January 28,
1994 (inception) through March 31, 1994 and for the years ended March 31, 1995
and 1996. In connection with our audits of the aforementioned financial
statements, we also audited the related financial statement schedule. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects, the information set forth therein.
Chicago, Illinois
April 19, 1996, except for the first two
paragraphs of Note 7 which are as of
- ------------------------
S-1
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning costs and end of
Description of Period expenses Deduction Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1996
Deducted from accounts receivable:
For uncollectible accounts: $512,000 $654,840 $897,028 $269,812
For the Year Ended March 31, 1995
Deducted from accounts receivable:
For uncollectible accounts: - 512,000 - 512,000
For the Period from January 28, 1994 (inception)
through March 31, 1994
Deducted from accounts receivable: - - - -
For uncollectible accounts:
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page No.
- -------------- ----------- -------
<S> <C>
1.1# Form of Standby Underwriting Agreement.
3.1# Amended and Restated Certificates of
Incorporation of the Company.
3.2# By-laws of the Company.
4.1# Specimen stock certificate representing
the Common Stock.
4.2# Specimen rights certificate representing the
Rights.
5.1# Opinion of Gordon & Glickson P.C.
8.1# Opinion of Morgan, Lewis & Bockius LLP regarding
tax matters.
10.1# Diamond Technology Partners Incorporated Stock Option
Plan adopted as of June 23, 1994.
10.2# Employment Agreement between Melvyn E. Bergstein and
Diamond Technology Partners Incorporated, dated February
1, 1994.
10.3# Employment Agreement between Michael E. Mikolajczyk and
Diamond Technology Partners Incorporated, dated April 18,
1994.
10.4# Employment Agreement between James C. Spira and
Diamond Technology Partners Incorporated, dated November
1, 1995.
10.5# Employment Agreement between Christopher J. Moffitt and
Diamond Technology Partners Incorporated, dated February
1, 1994.
10.6* Stock Purchase Agreement dated as of March 22, 1994 among
the Company, Melvyn E. Bergstein, Christopher J. Moffitt,
Safeguard Scientifics, Inc.and certain other investors, as
amended.
10.7* Amended and Restated Voting and Stock
Restriction Agreement dated as of April 1, 1996
among the Company,
Technology Leaders L.P., Technology Leaders
Offshore C.V., CIP Capital L.P., Safeguard
Scientifics (Delaware), Inc. and certain of the
shareholders of Diamond Technology Partners, Inc.
10.8* Amended and Restated Partners Operating Agreement dated as
of April 1, 1996 among the Company and the Partners of the
Company.
10.9# Loan Agreement dated as of November 8, 1996 among the
Company and Safeguard Scientifics (Delaware), Inc.
10.10# Amended and Restated Warrant Agreement dated as of
November 8, 1996 among the Company and Safeguard
Scientifics (Delaware), Inc.
10.11# Rights Agent Agreement among the Company, Safeguard
Scientifics, Inc., Technology Leaders, CIP Capital L.P.,
Cambridge Technology Partners (Massachusetts), Inc.,
CompuCom Systems, Inc., Chase/Mellon Shareholder Services,
L.L.C. and Mellon Bank, N.A.
11.1* Statement Regarding Computation of Earnings Per
Share.
21.1* Subsidiaries of the Registrant.
23.1# Consent of KPMG Peat Marwick LLP.
23.2# Consent of Gordon & Glickson P.C. (to be
included in Exhibit 5.1).
23.3# Consent of Morgan, Lewis & Bockius LLP (to be
included in Exhibit 8.1).
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
- -------------------
* Filed herewith.
# To be filed by amendment.
<PAGE>
EXHIBIT 10.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
relating to 2,000,000 shares of
Common Stock of
Diamond Technology Partners, Inc.
Dated: March 22, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Diamond Technology Partners, Inc.
STOCK PURCHASE AGREEMENT
Table of Contents
-----------------
1. Purchase and Sale of Stock..................................... 1
1.1 Sale and Issuance of Common Stock........................ 1
1.2 Closing.................................................. 2
2. Representations and Warranties of the Company.................. 3
2.1 Organization, Good Standing and Qualification............ 3
2.2 Capitalization and Reservation of Shares................. 3
2.3 Subsidiaries............................................. 4
2.4 Authorization............................................ 4
2.5 Valid Issuance of Warrant and Common Stock............... 4
2.6 Financial Information.................................... 5
2.7 Assumptions or Guarantees of Indebtedness of Other
Persons.................................................. 5
2.8 Investments in Other Persons............................. 5
2.9 Governmental Consents.................................... 5
2.10 Litigation.............................................. 5
2.11 Proprietary Information and Noncompete Agreements....... 6
2.12 Intellectual Property................................... 6
2.13 Compliance with Other Instruments....................... 7
2.14 Agreements.............................................. 7
2.15 Business Plan........................................... 7
2.16 Registration Rights..................................... 7
2.17 Title to Property and Assets............................ 8
2.18 Changes................................................. 8
2.19 Environmental and Safety Laws........................... 9
2.20 Employee Benefit Plans.................................. 9
2.21 Tax Returns, Payments and Elections..................... 9
2.22 Insurance............................................... 9
2.23 Minute Books............................................ 9
2.24 Labor Agreements and Actions............................ 9
2.25 Disclosure.............................................. 10
2.26 Real Property Holding Corporation....................... 10
3. Representations, Warranties and Obligations of the Investors... 10
3.1 Representations and Warranties........................... 10
3.2 Further Limitations on Disposition....................... 12
3.3 Legends.................................................. 12
3.4 Board of Directors....................................... 13
4. Conditions of Each Investor's Obligations at the Initial
Closing....................................................... 13
-i-
<PAGE>
4.1 Representations and Warranties........................... 13
4.2 Performance.............................................. 13
4.3 Compliance Certificate................................... 13
4.4 Proceedings and Documents................................ 13
4.5 Board of Directors....................................... 13
4.6 Management Group......................................... 13
4.7 Certain Ancillary Agreements............................. 13
4.8 Key-Man Insurance........................................ 14
4.9 Opinion of Company Counsel............................... 14
4.10 Securities Law Compliance............................... 14
5. Conditions of the Company's Obligations at Closing............. 14
5.1 Representations and Warranties........................... 14
5.2 Payment of the Purchase Price............................ 14
5.3 Ancillary Agreement...................................... 14
6. Registration Rights Generally.................................. 14
6.1 Definitions.............................................. 14
6.2 Request for Registration................................. 15
6.3 Company Registration..................................... 16
6.4 Obligations of the Company............................... 17
6.5 Furnish Information...................................... 18
6.6 Expenses of Demand Registration.......................... 18
6.7 Expenses of Company Registration......................... 18
6.8 Underwriting Requirements................................ 19
6.9 Delay of Registration.................................... 19
6.10 Indemnification......................................... 19
6.11 Reports Under Securities Exchange Act of 1934........... 22
6.12 Form S-3 Registration................................... 23
6.13 Assignment of Registration Rights....................... 24
6.14 Limitations on Subsequent Registration Rights........... 24
6.15 "Lock-up" Agreement..................................... 25
6.16 Mergers, Etc............................................ 26
6.17 Amendment of Registration Rights........................ 26
7. Special Registration in Connection with Rights Offering........ 27
7.1 Rights Offering.......................................... 27
7.2 Stock Split.............................................. 27
7.3 Rights Registration Statement............................ 28
7.4 Registration Services.................................... 28
7.5 Indemnification.......................................... 28
8 . Covenants of the Company...................................... 31
8.1 Delivery of Financial Statements........................ 31
8.2 Inspection; Observer Rights............................. 32
8.3 Employee Stock Issuances................................ 32
8.4 Right of First Offer.................................... 33
8.5 Insurance............................................... 34
8.6 Board of Directors...................................... 34
8.7 Other Affirmative Covenants............................. 34
8.8 Certain Negative Covenants.............................. 37
8.9 Indemnification......................................... 38
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<PAGE>
8.10 Employees 39
8.11 Termination of Certain Covenants 39
9. Miscellaneous 39
9.1 Survival of Warranties 39
9.2 Successors and Assigns 39
9.3 Governing Law 39
9.4 Counterparts 39
9.5 Titles and Subtitles 39
9.6 Notices 40
9.7 Finder's Fee 40
9.8 Expenses 40
9.9 Amendments and Waivers 40
9.10 Severability 41
9.11 Aggregation of Stock 41
INDEX Index of Defined Terms
SCHEDULE I Schedule of Purchase and Sale by Investors
SCHEDULE II Schedule of Purchase and Sale by Management Group
SCHEDULE III Schedule of Exceptions
EXHIBIT A Articles of Incorporation, as Amended
EXHIBIT B Form of Warrant
EXHIBIT C Form of Guarantee Undertaking
EXHIBIT D Capitalization
EXHIBIT E-1 Form of Partners Employment Agreement
EXHIBIT E-2 Form of Executive Employees Employment Agreement
EXHIBIT E-3 Form of Nondisclosure Agreement
EXHIBIT F Form of Voting and Stock Restriction Agreement
-iii-
<PAGE>
Diamond Technology Partners, Inc.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of March 22, 1994, by and between
Diamond Technology Partners, Inc., an Illinois corporation (the "Company"),
Melvyn E. Bergstein ("Bergstein") Christopher J. Moffitt ("Moffitt"), Safeguard
Scientifics, Inc., a Pennsylvania corporation ("Safeguard"), and the investors
listed on Schedule I hereto (each, an "Investor," and, together with Safeguard,
collectively, the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Common Stock.
---------------------------------
(a) The Company shall adopt and file with the Secretary of State of
the State of Illinois on or before the Closing (as defined below) the Articles
of Incorporation of the Company, as heretofore amended (the "Amended Articles")
in the form attached hereto as Exhibit A.
(b) Subject to the terms and conditions of this Agreement and in
reliance upon the representations and warranties and covenants contained herein,
at the Initial Closing, the Second Closing and the Third Closing (as such terms
are defined in Section 1.2), each Investor agrees, severally but not jointly, to
purchase, and the Company agrees to sell and issue to each Investor, the number
of shares of the Company's Common Stock, no par value per share (the "Common
Stock"), to be purchased by such Investor on such date, and at the Initial
Closing Safeguard agrees to purchase, and the Company agrees to sell to
Safeguard, the warrant to purchase 500,000 of shares of Common Stock in the form
attached hereto as Exhibit B (the "Warrant"), in each case as set forth on
Schedule I hereto, in exchange for the purchase price to be paid therefor, as
set forth on Schedule I and Exhibit C hereto. Safeguard guarantees the
performance, to the extent required by the terms and conditions hereof, by each
of the other Investors of its obligations hereunder to purchase that number of
shares of Common Stock at each of the First Closing, the Second Closing and the
Third Closing as is set forth opposite such Investor's name on Schedule I
hereto; such guaranty is unconditional, irrevocable, unlimited and continuing.
(c) *
* This paragraph was amended and restated in its entirety pursuant to the First
Amendment to Diamond Technology Partners, Inc. Stock Purchase Purchase
Agreement.
<PAGE>
1.2 Closing.
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(a) The purchase and sale of the Common Stock and the Warrant to the
Investors shall be consummated in a series of three closings (collectively, the
"Closing"), the first of which (the "Initial Closing") shall take place at the
offices of Safeguard, 800 The Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania, at 10:00 a.m., on March 22, 1994, or at such other time and place
as the Company and Investors agree upon orally or in writing. At the Initial
Closing the Company shall deliver to each Investor a certificate representing
the Common Stock that such Investor is purchasing at the Initial Closing,
against delivery to the Company by such Investor of the full purchase price
therefor as set forth on Schedule I hereto, by cashier's or certified check
payable to the Company's order or by wire transfer to such account as the
Company shall designate or by conversion of notes issued by the Company to
certain Investors, at the option of such Investor, and the Company shall deliver
to Safeguard the executed Warrant against delivery to the Company of an executed
guarantee undertaking, in the form attached hereto as Exhibit C. No Investor
shall be obligated to purchase any shares of Common Stock or the Warrant at the
Initial Closing unless an aggregate of at least the minimum number of shares of
Common Stock to be sold to the Management Group on such date pursuant to
Schedule II hereto shall have been purchased or are concurrently purchased in
accordance with Schedule II, or arrangements, satisfactory in all respects to
the Investor, shall have been made for the purchase of such shares within 30
days after the Initial Closing.
(b) Subject to the provisions set forth herein, the purchase and sale
of the Common Stock remaining to be purchased by and sold to the Investors
hereunder shall be consummated on each of the date that is 60 days after the
Initial Closing (the "Second Closing") and the date that is 120 days after the
Initial Closing (the "Third Closing"), in each case at the same time and place
as the Initial Closing or at such time and place as the Company and the
Investors shall agree upon orally or in writing. At each of the Second Closing
and the Third Closing, the Company shall deliver to each Investor a certificate
representing the Common Stock that such Investor is purchasing at the Closing
against delivery to the Company by such Investor of the full purchase price
therefor as set forth on Schedule I hereto, by cashier's or certified check
payable to the Company's order or by wire transfer to such account as the
Company shall designate or by conversion of notes issued by the Company to
certain
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<PAGE>
Investors, at the option of such Investor. No Investor shall be obligated to
purchase any shares of Common Stock at the Second Closing or the Third Closing
unless the Management Group (i) shall have purchased the minimum number of
shares of Common Stock to be sold to it prior thereto in accordance with
Schedule II hereto and (ii) concurrently purchases an aggregate of at least the
minimum number of shares of Common Stock to be sold to the Management Group on
such date pursuant to Schedule II, or arrangements, satisfactory in all respects
to the Investor, shall have been made for the purchase of such shares within 30
days after the Second Closing or the Third Closing, as the case may be.
(c) The term "Closing" as hereinafter used in this Agreement shall
refer only to the Initial Closing unless otherwise specified or required by the
context.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on a Schedule
of Exceptions attached as Schedule III hereto, each of which exceptions shall
specifically identify the relevant subparagraph hereof to which it relates and
shall be deemed to be representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of State of Illinois and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted in the
business plan dated November 1993 (the "Business Plan") heretofore furnished to
the Investors. The Company is not qualified to do business in any state other
than the State of Illinois but, when legally required to do so, shall become
duly qualified to transact business in each jurisdiction in which the failure so
to qualify would have a material adverse effect on its business or properties.
2.2 Capitalization and Reservation of Shares. The authorized capital of
----------------------------------------
the Company consists, or will consist at or prior to the Initial Closing, of
7,000,000 shares of Common Stock, of which 100 shares are issued and outstanding
and are owned by the persons and in the amounts specified in Exhibit D hereto.
Except for the shares of Common Stock to be issued pursuant to this Agreement or
upon exercise of the Warrant, the shares of Common Stock that may be issued
pursuant to Section 8.3 hereof and the rights of the Investors and the
Management Group under Section 8.4 hereof, there are not outstanding any
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. The Company has reserved out of the authorized but unissued
capital stock 2,000,000 shares of
-3-
<PAGE>
Common Stock exclusively for issuance to the Investors hereunder, 500,000 shares
of Common Stock exclusively for issuance upon exercise of the Warrant, 1,500,000
shares of Common Stock exclusively for issuance to the Management Group in
accordance with Section 1.1 hereof and Schedule II hereto, and 1,500,000 shares
of Common Stock exclusively for issuance to employees pursuant to Section 8.3
hereof.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association or
other business entity.
2.4 Authorization. All corporate action on the part of the Company, its
-------------
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement and the agreements attached hereto as exhibits or
as part of Schedule III (such agreements being herein referred to as the
"Ancillary Agreements"), the performance of all obligations of the Company under
each of the Agreement and the Ancillary Agreements, and the authorization,
issuance (or reservation for issuance) and delivery of the Common Stock being
sold hereunder and the Common Stock issuable upon exercise of the Warrant has
been taken or will be taken prior to the Initial Closing, and this Agreement and
the Ancillary Agreements constitute (or will constitute upon the execution
thereof) the valid and legally binding obligations of the Company and each of
the other parties thereto (other than the Investors), enforceable in accordance
with their respective terms.
2.5 Valid Issuance of Warrant and Common Stock.
------------------------------------------
(a) The Warrant and the Common Stock that are being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms hereof or thereof, will be duly and validly issued, fully paid and
nonassessable and, assuming the accuracy of the representations of the Investors
in this Agreement, will be issued in compliance with all applicable federal and
state securities laws. The Common Stock issuable upon exercise of the Warrant
purchased under this Agreement has been duly and validly reserved for issuance
and, upon issuance in accordance with the terms of the Amended Articles, shall
be duly and validly issued, fully paid and nonassessable, and issued in
compliance with all applicable securities laws, as presently in effect, of the
United States and each of the states whose securities laws govern the issuance
of any of the Common Stock or the Warrant hereunder.
(b) The outstanding shares of Common Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
-4-
<PAGE>
2.6 Financial Information. The unaudited balance sheet of the Company as
---------------------
at March 1, 1994 (the "Opening Balance Sheet"), which is attached to the
Schedule of Exceptions, presents fairly the position of the Company as at the
date thereof in accordance with generally accepted accounting principles
("GAAP"). Except as set forth on the Schedule of Exceptions, the Company does
not have any liability, contingent or otherwise, that is not adequately
reflected in or reserved against in the Opening Balance Sheet.
2.7 Assumptions or Guarantees of Indebtedness of Other Persons. The
----------------------------------------------------------
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable on (including without limitation liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in a debtor, or otherwise to assure a
creditor against loss), any indebtedness of any other person.
2.8 Investments in Other Persons. The Company has not made any advances
----------------------------
or loans to any person, nor is it committed or obligated to make any such loan
or advance, nor does the Company own any capital stock, assets comprising the
business of, obligations of, or any interest in, any person.
2.9 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the execution of this Agreement, the Ancillary
Agreements and the consummation of the transactions contemplated hereby or
thereby.
2.10 Litigation. Except as set forth on the Schedule of Exceptions,
----------
there is no action, suit, proceeding or investigation pending or currently
threatened against the Company of any nature whatsoever, including without
limitation any action, suit, proceeding or investigation which questions the
validity of this Agreement or any of the Ancillary Agreements, or the right of
the Company to enter into this Agreement or any of the Ancillary Agreements, or
to consummate the transactions contemplated hereby or thereby, nor is the
Company aware that there is any basis for the foregoing. The foregoing also
includes without limitation actions pending or threatened (or any basis therefor
known to the Company) against the Company or any of its key employees, in each
case involving the prior employment of any of the Company's employees, their use
in connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is
-5-
<PAGE>
no action, suit, proceeding or investigation by the Company currently pending or
which the Company intends to initiate.
2.11 Proprietary Information and Noncompete Agreements. The employees of
-------------------------------------------------
the Company identified on the Schedule of Exceptions constitute all of the
officers and key employees of the Company as of the date hereof, and each such
employee who is a partner has executed an employment agreement in the form
attached hereto as Exhibit E-1, each such employee who is an executive employee
has executed an employment agreement in the form attached hereto as Exhibit E-2,
and each other employee has executed a non-disclosure agreement in the form
attached hereto as Exhibit E-3. The Company, after reasonable investigation, is
not aware that any of its employees is in violation thereof, and the Company
will use its best efforts to prevent any such violation.
2.12 Intellectual Property. The Company has sufficient title and
---------------------
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes (the foregoing,
"Intellectual Property") used in its business as now conducted and as proposed
to be conducted as described in the Business Plan without any conflict with or
infringement of the rights of others. A list of all patents, patent
applications, trademarks, service marks, tradenames, and copyrights owned by the
Company is set forth in the Schedule of Exceptions. There are no outstanding
options, licenses, or agreements of any kind to which the Company is a party or
by which it is bound relating to any Intellectual Property, whether owned by the
Company or another person or entity. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business as proposed, would violate any of the Intellectual Property or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of such employee's best efforts to promote the interests
of the Company or that would conflict with the Company's business as proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
any contract, covenant or instrument under which any of such employees is now
obligated. The Company does not believe it is or will be necessary to utilize
any inventions of any of its employees (or people it currently intends to hire)
made prior to their employment by the Company.
-6-
<PAGE>
2.13 Compliance with Other Instruments. The Company is in compliance
---------------------------------
with each provision of its charter documents and bylaws, and with each judgment,
order, writ or decree, and with each material contract, agreement, instrument
and commitment to which it is a party or by which it is bound (collectively, the
"Material Contracts"), and each statute, rule or regulation applicable to the
Company, its assets or its business, and is not in violation or default of any
of the foregoing. A list of all of the Material Contracts is set forth on the
Schedule of Exceptions. There is no term or provision in any of the Material
Contracts which materially adversely affects the business (as now conducted or
as proposed to be conducted in the Business Plan), assets or financial condition
of the Company. The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in any
such violation or be in conflict with or constitute, with or without the passage
of time or giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.14 Agreements.
----------
(a) Except for agreements explicitly contemplated hereby, there are
no agreements between the Company and any of its officers, directors,
affiliates, employees or shareholders.
(b) Except as set forth on the Schedule of Exceptions, there are no
agreements to which the Company is a party or by which it is bound that involve
obligations of, or payments to, the Company in excess of $10,000.
2.15 Business Plan. The Business Plan has been prepared in good faith by
-------------
the senior management of the Company and does not contain any untrue statement
of a material fact nor does it omit to state a material fact necessary to make
the statements made therein not misleading in light of the circumstances in
which they are made, except that with respect to projections contained in the
Business Plan (and the revisions, with respect to the first two years thereof,
provided by letter dated January 4, 1994 to Mr. Don Caldwell from Moffitt) (the
"Letter Revisions"), the Company represents only that such projections were
prepared in good faith and that the Company reasonably believes the assumptions
upon which such projections are based are reasonably likely to occur.
2.16 Registration Rights. Except as provided in Section 6 of this
-------------------
Agreement, the Company has not granted or agreed to grant any registration
rights, including without limitation piggyback rights, to any person or entity.
-7-
<PAGE>
2.17 Title to Property and Assets. The Company has good and marketable
----------------------------
title to its property and assets free and clear of all mortgages, liens, claims
and encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
or the value of such property or assets. With respect to the property and
assets it leases, the Company is in compliance with such leases, enjoys peaceful
and undisturbed possession thereunder, and, holds a valid leasehold interest
free of any liens, claims or encumbrances.
2.18 Changes. Except as set forth on the Schedule of Exceptions, since
-------
November 1993, there has not been:
(a) any change in the projections contained in the Business Plan
except for the Letter Revisions;
(b) any declaration or payment of any dividend, or any
authorization or payment of any distribution, on any of the capital stock of the
Company, or any redemption or repurchase of any capital stock of the Company;
(c) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(d) any waiver by the Company of a valuable right or of a material
debt owed to it;
(e) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(f) any change or amendment to a material contract or arrangement
by which the Company or any of its assets or properties is bound or subject;
(g) any material change in any compensation arrangement or
agreement with any employee; or
(h) to the Company's knowledge, any other event or condition of any
character that might materially and adversely affect the assets, properties,
financial condition, operating results or business of the Company (as such
business is presently conducted and as it is proposed to be conducted).
-8-
<PAGE>
2.19 Environmental and Safety Laws. The Company is not in violation of
-----------------------------
any applicable statute, law or regulation relating to the environment or
occupational safety and health, and no material expenditures will be required in
order to comply with any such statute, law or regulation except in the ordinary
course of doing business.
2.20 Employee Benefit Plans. The Company does not have any employee
----------------------
benefit plan as defined in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
2.21 Tax Returns, Payments and Elections. The Company has timely filed
-----------------------------------
all tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due.
2.22 Insurance. The Company has in full force and effect (i) fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed, and (ii) such other insurance policies as
are listed in the Schedule of Exceptions.
2.23 Minute Books. The minute books of the Company provided to the
------------
Investors contain a complete summary of all meetings of directors and
stockholders or partners since the time of incorporation or creation and reflect
all transactions referred to in such minutes or records accurately in all
material respects.
2.24 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, that could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate his, her or its employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. The employment of each employee of the Company is terminable at the
will of the Company (subject, in certain cases, to 30 days' notice of
termination) without further liability of the Company
-9-
<PAGE>
to such employee except for the payment of such employee's normal salary accrued
but not paid through the date of such termination.
2.25 Disclosure. The Company has fully provided each Investor with all
----------
the information which such Investor has requested in writing from the Company or
the Management Group for deciding whether to purchase the Common Stock and, in
the case of Safeguard, the Warrant. None of this Agreement, any exhibit or
schedule hereto, any certificate furnished in connection herewith or the
Business Plan contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact within the knowledge of the Company or
any of its officers which has not been disclosed herein or in writing by them to
the Investors, and that materially adversely affects, or in the future in the
opinion of the Company or its officers may, insofar as they can now foresee,
materially adversely affect the business, properties, assets or condition,
financial or otherwise, of the Company, except for any facts generally available
to the public relating to the future of the consulting industry in general.
2.26 Real Property Holding Corporation. The Company is not and has never
---------------------------------
been a "United States real property holding corporation," (as that term is
defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended
(the "Code") and Treasury Regulation Section 1.897-2(b), and shall timely made
all filings required by Treasury Regulation Section 1.897-2(h)(l). If at any
time in the future the Company shall become a "United States real property
holding corporation," the Company shall, as promptly as practicable, so notify
each foreign investor.
3. Representations, Warranties and Obligations of the Investors.
------------------------------------------------------------
3.1 Representations and Warranties. Each Investor, severally with
------------------------------
respect to such Investor but not jointly nor with respect to any other Investor,
hereby represents and warrants that:
(a) Purchase Entirely for Own Account. This Agreement is made with each
---------------------------------
Investor in reliance upon such Investor's representation to the Company, which
by such Investor's execution of this Agreement such Investor hereby confirms,
that the Common Stock to be received by such Investor, or the Warrant to be
received by such Investor and, in the case of Safeguard, the Common Stock
issuable upon exercise of the Warrant, as the case may be (collectively, the
"Securities") will be acquired for investment for such Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that such Investor has no present intention of selling,
granting any participation in, or otherwise distributing
-10-
<PAGE>
the same, but subject to the ability of such of the Investors as may be
partnerships to distribute its assets to its partners. By executing this
Agreement, each Investor further represents that such Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant any participation to such person or to any third person, with
respect to any of the Securities. Each Investor represents that it has full
power and authority to enter into this Agreement.
(b) Investment Experience. Each Investor is an investor in securities or
---------------------
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Common Stock and the Warrant. Each
Investor also represents that it is an "accredited investor" as that term is
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933, as amended (the "Act") and that it has not been organized for the purpose
of acquiring the Common Stock or the Warrant.
(c) Restricted Securities. It understands that the shares of Common Stock
---------------------
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may not be resold without registration
under the Act, except in certain limited circumstances. In this connection,
each Investor represents that it is familiar with Rules 144 and 144A under the
Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
(d) Access. Each Investor represents and warrants that it has requested
------
in writing from the Company all of the information that it has deemed necessary
in order to decide whether to purchase the Common Stock and, in the case of
Safeguard, the Warrant, and that it has received from the Company all of such
information.
(e) Authorization. All actions on the part of such Investor, and of its
-------------
officers, directors and shareholders or its partners, as the case may be, that
are necessary for the authorization, execution, delivery and performance of this
Agreement have been taken, and this Agreement constitutes the valid and legally
binding obligation of such Investor, enforceable in accordance with its terms.
(f) No Conflicts. The execution, delivery and performance of this
------------
Agreement by such Investor and the consummation of the transactions contemplated
hereby will not (and would not, with the passage of time or the giving of
notice) constitute or result
-11-
<PAGE>
in any violation, breach, or default under, or conflict with, any provision of
such Investor's charter documents or bylaws or governing partnership agreement,
or of any judgment, order, writ or decree, or of any material contract,
agreement, instrument or commitment to which it is a party or by which it is
bound, or of any statute, rule or regulation applicable to such Investor.
3.2 Further Limitations on Disposition. Without in any way limiting the
----------------------------------
representations set forth above, each Investor further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) there is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b) (i) such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, such Investor shall have furnished the Company with an
opinion reasonably satisfactory to the Company of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such shares under the Act. It is agreed that the Company will not require an
opinion of counsel for any transactions made by an Investor pursuant to Rule 144
or 144A.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
by an Investor which is a partnership to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner or the transfer by gift, will or
intestate succession of any partner to his spouse or lineal descendants or
ancestors, if the transferee agrees in writing to be subject to the terms hereof
to the same extent as if he were an original Investor hereunder.
3.3 Legends. It is understood that the certificates evidencing the
-------
Common Stock (and the Common Stock issuable upon conversion thereof) shall bear
the following legend:
These securities have not been registered under the Securities Act of
1933. They may not be sold, offered for sale, pledged or hypothecated in
the absence of a registration statement in effect with respect to the
securities under such Act or an opinion of counsel, satisfactory to the
Company, that such registration is not required, or unless sold pursuant
to Rule 144 or 144A under such Act.
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<PAGE>
3.4 Board of Directors. The Investors shall vote their Common Stock in
------------------
accordance with the provisions of the form of Voting and Stock Restriction
Agreement attached hereto as Exhibit F.
4. Conditions of Each Investor's Obligations at the Initial Closing.
The obligations of each Investor under Section 1 of this Agreement are subject
to the fulfillment on or before the Initial Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor that
does not consent in writing thereto:
4.1 Representations and Warranties. The representations and warranties
------------------------------
of the Company contained in Section 2 shall be true on and as of the Initial
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Initial Closing.
4.2 Performance. The Company shall have performed and complied with all
-----------
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Initial
Closing.
4.3 Compliance Certificate. The President of the Company shall deliver
----------------------
to each Investor at the Initial Closing an accurate certificate certifying that
the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall has been no adverse change in the business, affairs, prospects,
operations, properties, assets or condition of the Company since November 1993.
4.4 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Initial Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Investor and Morgan, Lewis & Bockius, and the Investors shall
have received all such counterpart original and certified or other copies of
such documents as they may reasonably request.
4.5 Board of Directors. The directors of the Company shall consist of
------------------
the persons designated in accordance with the provisions of Section 3.4 hereof.
4.6 Management Group. The Management Group shall have purchased, and
----------------
shall purchase concurrently, the minimum number of shares of Common Stock
required to be purchased by it in accordance with Section 1.1 hereof and
Schedule II hereto.
4.7 Certain Ancillary Agreements. A Voting and Stock Restriction
----------------------------
Agreement in the form attached as Exhibit F shall have been executed and
delivered by each member of the Management Group.
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<PAGE>
4.8 Key-Man Insurance. The Company shall have obtained, and shall have
-----------------
furnished to the Investors copies of, term insurance (or binders with respect
thereto) on the lives of each of Bergstein and Moffitt, in each case in the
amount of $1.5 million and with the proceeds payable solely to the Company.
4.9 Opinion of Company Counsel. The Investors shall have received from
--------------------------
Gordon & Glickson, P.C., counsel for the Company, an opinion, dated as of the
Closing, in form and substance reasonably acceptable to the Investors.
4.10 Securities Law Compliance. The Company shall have complied with all
-------------------------
requirements of federal and state securities or "blue sky" laws with respect to
the issuance of the Common Stock to the Investors hereunder.
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company under Section 1 of this Agreement are subject to the fulfillment
on or before the Initial Closing of each of the following conditions:
5.1 Representations and Warranties. The representations and warranties
------------------------------
of the Investors contained in Section 3 shall be true on and as of the Initial
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Initial Closing.
5.2 Payment of the Purchase Price. The Investors shall have delivered
-----------------------------
the purchase price to be paid at the Initial Closing in accordance with Section
1.2 hereof and Schedule I hereto.
5.3 Ancillary Agreement. A Voting and Stock Restriction Agreement in the
-------------------
form attached as Exhibit F shall have been executed and delivered on behalf of
each of the Investors.
6. Registration Rights Generally. The Company covenants and agrees as
-----------------------------
follows:
6.1 Definitions. For purposes of this Section 6:
-----------
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
(b) The term "Registrable Securities" means (i) the Common Stock
issued to Investors hereunder, (ii) the Common Stock issued to an Investor upon
exercise of the Warrant, (iii) the Common Stock issued to the Management Group
in accordance with Section 1.1 hereof and Schedule II hereto, and (iv) any
Common
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<PAGE>
Stock of the Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Common Stock, excluding in all cases, however, any Registrable Securities sold
by a person in a transaction in which the person's rights under this Section 6
are not assigned.
(c) The number of shares of "Registrable Securities then outstanding"
shall be determined based upon the number of (i) outstanding shares of Common
Stock which are Registrable Securities, (ii) Warrant Shares issuable upon
exercise of the Warrant and (iii) shares of Common Stock issuable pursuant to
then exercisable or convertible securities which are Registrable Securities.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities hereunder or any assignee thereof in accordance
with Section 6.13 hereof.
(e) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the Securities and Exchange Commission ("SEC") which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
6.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the earlier of (i)
the fourth anniversary of date of this Agreement or (ii) six months after the
effective date of the first registration statement for a public offering of
securities of the Company, a written request from the Holders of a majority of
the Registrable Securities then outstanding that the Company file a registration
statement under the Act covering the registration of at least 20 percent of the
Registrable Securities then outstanding (or a lesser percent if the anticipated
aggregate offering price, net of underwriting discounts and commissions, would
exceed $2 million), then the Company shall, within ten days after the receipt
thereof, give written notice of such request to all Holders, and shall, subject
to the limitations of subsection 6.2(b), effect as soon as practicable, and in
any event within 90 days of the receipt of such request, the registration under
the Act of all Registrable Securities which the Holders request to be registered
within 20 days after the mailing of such notice by the Company in accordance
with Section 9.6. Neither the Company nor any person other than the Holders
shall be entitled to include shares in the registrations made under this Section
6.2.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the
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<PAGE>
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 6.2 and the Company shall include such information in the written
notice referred to in Section 6.2(a). In such event, the right of any Holder to
include his Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall enter into an underwriting agreement
(together with the Company as provided in Section 6.4(e)) in customary form with
the underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 6.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders of Registrable
Securities which would otherwise be underwritten pursuant hereto, and the number
of shares of Registrable Securities that may be included in the underwriting
shall be allocated among all Holders thereof, including the Initiating Holders,
in proportion (as nearly as practicable) to the amount of Registrable Securities
of the Company owned by each Holder.
(c) The Company is obligated to effect only one registration pursuant
to this Section 6.2.
(d) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 6.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would have a
materially adverse effect upon the Company and its shareholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for a period of not more than 120 days after receipt of the request
of the Initiating Holders; provided, however, that the Company may not utilize
this right more than once in any 12-month period.
6.3 Company Registration. If (but without any obligation to do so) the
--------------------
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its capital stock
or other securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, or a registration on
any form which does not include substantially the same information, other than
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<PAGE>
information related to the selling shareholders or their plan of distribution,
as would be required to be included in a registration statement covering the
sale of the Registrable Securities), the Company shall, at such time, promptly
give each Holder written notice of such registration. Upon the written request
of each Holder given within 20 days after mailing of such notice by the Company
in accordance with Section 9.6, the Company shall, subject to the provisions of
Section 6.8, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
6.4 Obligations of the Company. Whenever required under this Section 6
--------------------------
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required to qualify to do business or to
file a general consent to service or process in any such states of
jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
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<PAGE>
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) In the case of an underwritten public offering, furnish, at the
request of any Holder requesting registration of Registrable Securities pursuant
to this Section 6, on the date that such Registrable Securities are delivered to
the underwriters for sale in connection with a registration pursuant to this
Section 6, (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
6.5 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 6 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
6.6 Expenses of Demand Registration. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 6.2, including
without limitation all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company.
6.7 Expenses of Company Registration. The Company shall bear and pay all
--------------------------------
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
6.3 for each Holder (which right may be assigned as provided in Section 6.13),
including without limitation all registration, filing, and qualification fees,
printers and accounting fees relating or allocable thereto and the reasonable
fees and disbursements of one counsel for the selling Holders selected by them,
but
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<PAGE>
excluding underwriting discounts and commissions relating to Registrable
Securities.
6.8 Underwriting Requirements. In connection with any offering involving
-------------------------
an underwriting of shares being issued by the Company, the Company shall not be
required under Section 6.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it, and then only in such
quantity as will not, in the opinion of the underwriters, jeopardize the success
of the offering by the Company. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters reasonably believe compatible with the success of the offering,
then the Company shall be required to include in the offering only that number
of such securities, including Registrable Securities, which the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling shareholders according to
the total amount of securities entitled to be included therein owned by each
selling shareholder or in such other proportions as shall mutually be agreed to
by such selling shareholders) but in no event shall the amount of securities of
the selling Holders included in the offering be reduced below 25 percent of the
total amount of securities included in such offering, unless such offering is
the initial public offering of the Company's securities in which case the
selling Holders may be excluded if the underwriters make the determination
described above and no other shareholder's securities are included. For
purposes of the preceding parenthetical concerning apportionment, for any
selling Holder which is partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling shareholder," and
any pro-rata reduction with respect to such "selling shareholder" shall be
based upon the aggregate amount of shares carrying registration rights owned by
all entities and individuals included in such "selling shareholder," as defined
in this sentence.
6.9 Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 6.
6.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 6:
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<PAGE>
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus (but only if
such is not corrected in the final prospectus) contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading (but only if such is not corrected in
the final prospectus) or (iii) any violation or alleged violation by the Company
in connection with the registration of Registrable Securities under the Act, the
1934 Act, any state securities law or any rule or regulation promulgated under
the Act, the 1934 Act or any state securities law; and the Company will pay to
each such Holder, underwriter or controlling person, as incurred, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this Section 6.10(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation
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<PAGE>
occurs in reliance upon and in conformity with written information furnished by
such Holder expressly for use in connection with such registration; and each
such Holder will pay, as incurred, any legal or other expenses reasonably
incurred by any person intended to be indemnified pursuant to this Section
6.10(b), in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this Section 6.10(b) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; provided, that, in no event shall any indemnity under
this Section 6.10(b) exceed the gross proceeds from the offering received by
such Holder.
(c) If the indemnification provided for in this Section 6.10 is
unavailable or insufficient to hold harmless an indemnified party under Section
6.10(a) or (b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of the losses, claims, damages or liabilities referred to in
Section 6.10(a) or (b) in such proportion as is appropriate to reflect the
relative fault of the indemnifying party in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The parties agree that it would not be just and
equitable if contributions pursuant to this Section 6.10(c) were to be
determined by pro rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to in the next
preceding sentence. The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this Section 6.10(c) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any loss, claim, damage, liability or
proceeding which is the subject of this Section 6.10(c). No person guilty of
fraudulent misrepresentation within the meaning of Section 11(f) of the Act
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(d) Promptly after receipt by an indemnified party under this Section
6.10 of notice of the commencement of any action (including any governmental
action), such indemnified
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<PAGE>
party will, if a claim in respect thereof is to be made against any indemnifying
party under this Section 6.10, deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
6.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 6.10.
(e) The obligations of the Company and the Holders under this Section
6.10 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 6, and otherwise.
6.11 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rules 144 and 144A promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after 90 days following the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public.
(b) Take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective.
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<PAGE>
(c) File with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act.
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company as to
its compliance with the reporting requirements of SEC Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company), the Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), or as to its qualification that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such rule or
regulation.
6.12 Form S-3 Registration. In case the Company shall receive from any
---------------------
Holder or Holders of at least 10 percent of the Registrable Securities then
outstanding a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) Promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders.
(b) As soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within 15
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this section 6.12: (i) if Form S-3 is
not available for such offering by the Holders; (ii) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000; (iii) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that
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<PAGE>
in the good faith judgment of the Board of Directors of the Company, it would
have a materially adverse effect on the Company and its shareholders for such
Form S-3 Registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration statement
for a period of not more than 60 days after receipt of the request of the Holder
or Holders under this Section 6.12; provided, however, that the Company shall
not utilize this right more than once in any 12-month period; (iv) if the
Company has, within the 12-month period preceding the date of such request,
already effected one registration on Form S-3 for the Holders pursuant to this
Section 6.12; (v) if the Company has already effected three registrations on
Form S-3 for the Holders pursuant to this Section 6.12; or (vi) in any
particular jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with the registrations
requested pursuant to Section 6.12, including without limitation all
registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for the Company, shall be borne by the Company. Any underwriters'
discounts or commissions associated with Registrable Securities pursuant to
Section 6.12 shall be borne pro rata by the Holder or Holders participating in
the Form S-3 Registration. Registrations effected pursuant to this Section 6.12
shall not be counted as demands for registration or registrations effected
pursuant to Sections 6.2.
6.13 Assignment of Registration Rights. The rights to cause the Company
---------------------------------
to register Registrable Securities pursuant to this Section 6 may be assigned by
a Holder to a transferee or assignee of any Registrable Securities; provided,
however, the Company is, within a reasonable time after such transfer, furnished
with written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being
assigned; and provided, further, that such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act; and provided,
further, that registration rights may not be transferred to a competitor of the
Company.
6.14 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of
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<PAGE>
the outstanding Registrable Securities, enter into any agreement with any holder
or prospective holder of any securities of the Company which would allow such
holder or prospective holder (a) to include such securities in any registration
filed under Section 6.2 hereof, unless under the terms of such agreement, such
holder or prospective holder may include such securities in any such
registration only to the extent that the inclusion of such holder's securities
will not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in Section 6.2(a)(i) or (ii) or within 120 days of the
effective date of any registration effected pursuant to Section 6.2.
6.15 "Lock-up" Agreement.
-------------------
(a) Each Holder agrees, if so requested by the Company or an
underwriter of Common Stock or other securities of the Company, not to sell,
grant any option or right to buy or sell, or otherwise transfer or dispose in
any manner (whether in privately-negotiated or open-market transactions) of any
Common Stock (or other securities) of the Company held by such Holder during the
180-day period following the effective date of the registration statement filed
under the Act in connection with the initial public offering of the Common
Stock, provided that: (i) such agreement shall apply only to the initial public
offering of the Common Stock and (ii) all Holders, any holders of Common Stock
whose securities are included in such registration statement, and all officers,
directors and key employees of the Company shall also enter into, and be bound
by, similar agreements. Such agreement shall be in writing and in a form
satisfactory to the Company and such underwriter, and may be included in the
underwriting agreement. The Company may impose stop-transfer instructions with
respect to the securities subject to the foregoing restriction until the end of
the 180-day period.
No Holder shall be so restricted unless all shareholders are similarly and
proportionally restricted.
(b) Each Holder agrees that if, after its initial registered public
offering of Common Stock, the Company proposes to offer any its Common Stock or
other equity securities for sale to the public and:
(i) if such Holder is an "affiliate" of the Company (e.g.,
because a general partner of the Holder is a director of the Company) or
otherwise holds beneficially or of record ten percent or more of the outstanding
equity securities of the Company;
-25-
<PAGE>
(ii) if so requested by the Company or an underwriter of Common
Stock or other securities of the Company; and
(iii) if all other similarly situated "affiliates" and ten-
percent beneficial holders are requested by the Company and such underwriter to
sign, and actually do sign, a lock-up agreement containing the restrictions
described herein;
then, such Holder will not sell, grant any option or right to buy or sell, or
otherwise transfer or dispose in any manner to the public in open-market
transactions any Common Stock (or other securities) of the Company held by such
Holder during the 90-day period following the effective date of the registration
statement filed under the Act. Such agreement shall be in writing and in form
and substance reasonably satisfactory to the Holder, the Company and such
underwriter. The Company may impose stop-transfer instructions with respect to
the securities subject to the foregoing restriction until the end of the 90-day
period.
6.16 Mergers, Etc. The Company shall not, directly or indirectly, enter
-------------
into any merger, consolidation or reorganization in which the Company shall not
be the surviving corporation unless the proposed surviving corporation shall,
prior to such merger, consolidation or reorganization, agree in writing to
assume the obligations of the Company under this Section 6, and for that purpose
references herein to Registrable Shares shall be deemed to be references to the
securities which the Investors would be entitled to receive in exchange for
Registrable Shares under any such merger, consolidation or reorganization;
provided, however, that the provisions of this Section 6.16 shall not apply in
the event of any merger, consolidation or reorganization in which the Company is
not the surviving corporation if all Holders are entitled to receive in exchange
for their Registrable Shares consideration consisting solely of (a) cash, (b)
securities of the acquiring corporation which may be immediately sold to the
public without registration under the Act or (c) securities of the acquiring
corporation which the acquiring corporation has agreed to register for resale to
the public under the Act within 90 days after completion of the merger,
consolidation or reorganization.
6.17 Amendment of Registration Rights. Any provision of this Section 6
--------------------------------
may be amended or the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority of the Registrable
Securities then held by the Investors. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such
-26-
<PAGE>
securities are convertible), each future holder of all such securities, and the
Company.
7. Special Registration in Connection with Rights Offering.
-------------------------------------------------------
7.1 Rights Offering.
---------------
(a) *
(b) Safeguard may initiate the Rights Offering at any time during
the period between the second and eighth anniversaries of the Initial Closing at
such time as the total market value of the Company is at least $30 million,
which determination shall be made in good faith, upon request by Safeguard from
time to time, by the Board of Directors of the Company with the assistance and
advice of such experts or consultants as the Board may choose to retain, if any.
(c) The gross proceeds of the Rights Offering, less the aggregate
amount of the underwriting discounts and commissions paid in respect of all the
Rights, shall be shared equally by the Company and Safeguard.
7.2 Stock Split. After Safeguard has notified the Company of its
-----------
intention to commence the Rights Offering, the Company
-27-
* This paragraph was amended and restated in its entirety pursuant to the First
Amendment to Diamond Technology Partners, Inc. Stock Purchase Agreement.
<PAGE>
shall, prior to the filing of the Rights Registration Statement (or such earlier
date as may be agreed to by the Company and Safeguard), take all such actions as
shall be necessary to cause a split of the Common Stock in such ratio as
Safeguard shall determine. All references to share amounts in this Agreement
other than as specifically noted shall be deemed to refer to share amounts prior
to such split.
7.3 Rights Registration Statement. Upon notice by Safeguard to the
-----------------------------
Company of its intention to commence the Rights Offering, the Company shall
promptly prepare the Rights Registration Statement on Form S-1, or any form then
applicable under the Act, to register under the Act the Rights and the shares of
Common Stock to be issued upon exercise of the Rights (the "Rights Shares").
The Company covenants that the Rights Registration Statement and the prospectus
included therein shall be in form reasonably satisfactory to Safeguard, shall
comply in all respects with the Act and the rules and regulations thereunder,
and shall not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
7.4 Registration Services. The Company shall cause its regular counsel
---------------------
and auditors and the Company's employees to render such assistance in
consummating the Rights Offering, at the Company's expense, as is customary in
the consummation by a company of its initial public offering. Safeguard also
may engage special legal counsel, one or more rights, registrar and transfer
agents, and such other consultants as Safeguard may deem necessary or desirable
in connection with the Rights Offering, the expenses of which shall be paid by
the Company. In addition, Safeguard may require the Company to engage a
registered broker-dealer of Safeguard's designation, subject to the reasonable
approval of the Company, to provide such services in connection with the Rights
Offering as Safeguard may deem reasonably necessary or desirable, including
without limitation to effect or underwrite the offering of the Rights or the
Rights Shares in states in which applicable state laws require that a registered
broker-dealer effect such offering. The Company shall bear and pay all expenses
incurred in connection with the registration, filing or qualification of the
Rights, excluding the underwriting discounts and commissions relating to one-
half of the Rights, which discounts and commissions shall be borne by Safeguard.
7.5 Indemnification.
---------------
(a) To the extent permitted by law, the Company will indemnify and
hold harmless Safeguard, its executive officers, directors, each person who
controls Safeguard within the meaning of the Act, each person who participates
as an underwriter and
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<PAGE>
each person who controls any such participating underwriter against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively, a "Rights Violation"): (i) any untrue statement or
alleged untrue statement of a material fact contained in the Rights Registration
Statement, including any preliminary prospectus (but only if such is not
corrected in the final prospectus) contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading (but only if such is not corrected in the final
prospectus) or (iii) any violation or alleged violation by the Company in
connection with the registration of the Rights or the Rights Shares under the
Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Act, the 1934 Act or any state securities law; and the
Company will pay to each such person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 7.5(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Rights Violation which occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by such person.
(b) To the extent permitted by law, Safeguard will indemnify and
hold harmless the Company, each of its directors, each of its officers who has
signed the registration statement, each person, if any, who controls the Company
within the meaning of the Act, each person who participates as an underwriter
and each person who controls any such participating underwriter against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Rights
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by Safeguard expressly for use in connection with the Rights
Registration
-29-
<PAGE>
Statement; and Safeguard will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
Section 7.5(b), in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 7.5(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of Safeguard, which consent shall not
be unreasonably withheld; provided, however, that in no event shall any
indemnity under this Section 7.5(b) exceed the gross proceeds from the offering
received by Safeguard.
(c) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under Section
7.5(a) or (b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of the losses, claims, damages or liabilities referred to in
Section 7.5(a) or (b) in such proportion as is appropriate to reflect the
relative fault of the indemnifying party in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The parties agree that it would not be just and
equitable if contributions pursuant to this Section 7.5(c) were to be determined
by pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to in the next preceding
sentence. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities, or actions in respect thereof, referred to in
the first sentence of this Section 7.5(c) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any loss, claim, damage, liability or proceeding
which is the subject of this Section 7.5(c). No person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) Promptly after receipt by an indemnified party under this
Section 7.5 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.5, deliver to
the
-30-
<PAGE>
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 7.5, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 7.5.
(e) The obligations of the Company and Safeguard under this Section
7.5 shall survive the completion of the Rights Offering in a Rights Registration
Statement under this Section 7, and otherwise.
8. Covenants of the Company.
------------------------
8.1 Delivery of Financial Statements. The Company shall deliver to each
--------------------------------
Investor:
(a) As soon as practicable, but in any event within 90 days after
the end of each fiscal year of the Company, the balance sheet of the Company as
of the end of such fiscal year, statements of operations of the Company for such
fiscal year and statements of cash flow of the Company for such fiscal year,
such year-end financial reports to be in reasonable detail, prepared in
accordance with GAAP, and audited and certified by independent public
accountants of nationally recognized standing selected by the Company.
(b) As soon as practicable, but in any event within 45 days after
the end of each of the first three quarters of each fiscal year of the Company,
an unaudited balance sheet of the Company as at the end of such fiscal quarter,
and unaudited statements of operations and statements of cash flow for such
fiscal quarter, in reasonable detail and prepared in accordance with GAAP.
(c) Within 30 days after the end of each month, an unaudited balance
sheet of the Company as at the end of such month, and unaudited statements of
operations and statements of
-31-
<PAGE>
cash flow for such month, in reasonable detail and prepared in accordance with
GAAP, together with an analysis by management of the Company's financial
condition and results of operations during such period and explanation by
management of any differences between such condition or results and the budget
and business plan for such period.
(d) As soon as practicable, but in any event 30 days prior to the
end of each fiscal year, a budget and business plan for the next fiscal year,
prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company.
(e) With respect to the financial statements called for in Section
8.1(b) and (c), an instrument executed by the Chief Financial Officer or
President of the Company and certifying that such financial statements were
prepared in accordance with GAAP consistently applied with prior practice for
earlier periods and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to normal year-end
audit adjustment, and certifying that such officer has reviewed the provisions
of this Agreement and has no knowledge of any default by the Company in the
performance or observance of any of the provisions of this Agreement or, if such
officer has such knowledge, specifying such default and the nature thereof.
(f) Such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor may from
time to time reasonably request.
8.2 Inspection; Observer Rights. The Company shall permit each Investor,
---------------------------
at such Investor's expense, to visit and inspect the Company's properties, to
examine its books of account and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may be
requested by the Investor; provided, however, that the Company shall not be
obligated pursuant to this Section 8.2 to provide access to any information that
it reasonably considers to be a trade secret or the disclosure of which the
Company reasonably believes may adversely affect its business. The Company will
give each Investor (or any representative designated by such Investor) not less
than two days' prior written notice of each meeting of the Board of Directors of
the Company and of any committee of the Board of Directors, specifying the time
and place of such meeting and, to the extent then known, the matters to be
discussed thereat and inviting each such Investor (or such representative) to
attend and participate therein (without, however, a right to vote thereat in
such capacity).
-32-
<PAGE>
8.3 Employee Stock Issuances. Each of the parties to this Agreement
------------------------
consents and agrees that after the date hereof the Company may issue, or grant
options with respect to, that number of shares of Common Stock (adjusted to
reflect subsequent stock dividends, stock splits or recapitalizations) as shall
be determined pursuant to the next succeeding sentence, to such employees of the
Company, as may be determined and specified from time to time, at any time after
the date of this Agreement, by the Chief Executive Officer of the Company, based
upon such information and committee recommendations as he deems necessary; it is
anticipated that such options will carry five-year, proportional vesting.*
During the first year after the date of this Agreement, the purchase price of
any shares of Common Stock issued, and the exercise price of any options
granted, to employees pursuant to this Section 8.3 shall be equal to $1.50 per
share, or underlying share, of Common Stock, as the case may be. From the first
anniversary of the date of this Agreement until thereafter changed by action of
the Board of Directors, the purchase price of any shares of Common Stock issued,
and the exercise price of any options granted, to employees pursuant to this
Section 8.3 shall be equal to $2.00 per share, or underlying share, of Common
Stock, as the case may be.
8.4 Right of First Offer. Subject to the terms and conditions specified
--------------------
in this paragraph 8.4, the Company hereby grants to each Investor and to each
member of the Management Group (in each case, so long as such person holds at
least 2% of the aggregate number of shares of Common Stock purchased hereunder
by all of the Investors or the Management Group and the Common Stock issued, or
issuable, upon exercise of the Warrant (collectively, the "Eligible
Purchasers"), adjusted to reflect subsequent changes after the date hereof in
the number of shares of Common Stock outstanding by reason of stock dividends,
stock splits or recapitalizations or the like), a right of first offer with
respect to future sales by the Company of its Shares (as hereinafter defined).
Each time the Company proposes to offer any shares of, or securities convertible
into or exercisable for any shares of, any class of its capital stock
("Shares"), the Company shall first make an offering of such Shares to each
Eligible Purchaser in accordance with the following provisions:
(a) The Company shall deliver a notice pursuant to Section 9.6
("Notice") to each of the Eligible Purchasers stating (i) its bona fide
intention to offer such Shares, (ii) the number of such Shares to be offered and
(iii) the price, if any, for which it proposes to offer such Shares.
-33-
* This paragraph was amended and restated in its entirety pursuant to the
Second Amendment to the Stock Purchase Agreement.
<PAGE>
(b) Within 15 calendar days after mailing of the Notice, each
Eligible Purchaser may elect to purchase, at the price and on the terms
specified in the Notice, all but not less than all of such Shares which equals
(such number of Shares, the "First Offer Shares") the proportion that (x) the
number of shares of Common Stock then held, or Warrant Shares issuable upon
exercise of the Warrant, by such Eligible Purchaser bears to (y) the aggregate
number of shares of Common Stock then held by all Eligible Purchasers and
Warrant Shares issuable upon exercise of the Warrant by any Eligible Purchaser.
(c) The Company may, during the 120-day period following the
expiration of the period provided in Section 8.4(b) hereof, offer any Shares
which have not been subscribed for pursuant to Section 8.4(b) to any person or
persons at a price not less than, and upon terms no more favorable to the
offeree than, those specified in the Notice. If the Company does not consummate
the proposed sale of the Shares within such period, the right provided hereunder
shall be deemed to be revived and such Shares shall not be offered unless first
re-offered to the Eligible Purchaser in accordance herewith.
(d) The right of first offer in this Section 8.4 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options
therefor) pursuant to Section 8.3 hereof, (ii) to shares issued or issuable by
the Company in connection with any merger or reorganization transaction in which
the Company is the surviving company, (iii) to the Rights Shares, (iv) to the
Warrant Shares or (v) to or after consummation of the Company's sale of its
Common Stock to the public in a bona fide, firm commitment underwriting pursuant
to a registration statement on Form S-1 under the Act (or any equivalent
successor form).
8.5 Insurance. The Company shall maintain term insurance on the lives of
---------
each of Bergstein and Moffitt, in each case in the amount of $1.5 million, with
the proceeds payable solely to the Company.
8.6 Board of Directors. The Company shall use its best efforts to fix
------------------
and maintain the number of directors on the Board of Directors of the Company at
five and to cause and maintain the election to the Board of Directors of the
persons designated from time to time in accordance the provisions of the form of
Voting and Stock Restriction Agreement attached hereto as Exhibit F. The Company
shall promptly reimburse such directors for any expenses incurred by them in
connection with their activities as directors of the Company. The Company shall
indemnify each of such directors against liability to the fullest extent
permitted by applicable law. The Company shall hold meetings of its Board of
Directors not less than once every three months.
-34-
<PAGE>
8.7 Other Affirmative Covenants. Without limiting any other covenants
---------------------------
and provisions hereof, the Company covenants and agrees that it will perform and
observe, and cause each of its subsidiaries in existence from time to time to
observe and perform, the following covenants and provisions, unless, with
respect to a specific transaction, a waiver of certain specified provisions of
this Section 8.7 in connection solely with such transaction is given by the
affirmative vote of the holders of no less than 66-2/3% of the outstanding
shares of Common Stock then held, or Warrant Shares issuable upon exercise of
the Warrant, by any of the Investors:
(a) Payment of Taxes and Trade Debt. Pay and discharge all taxes,
-------------------------------
assessments and governmental charges or levies imposed upon it or upon its
income, profits or business, or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any properties of the Company,
provided that the Company shall not be required to pay any such tax, assessment,
charge, levy or claim which is being contested in good faith and by appropriate
proceedings if the Company shall have set aside on its books sufficient
reserves, if any, with respect thereto. Pay, when due, or in conformity with
customary trade terms but not later than 90 days from the due date, all lease
obligations, all trade debt, and all other indebtedness incident to the
operations of the Company, except such as are being contested in good faith and
by proper proceedings if the Company shall have set aside on its books
sufficient reserves, if any, with respect thereto.
(b) Maintenance of Insurance. Maintain insurance with responsible
------------------------
and reputable insurance companies or associations in such amounts and covering
such risks as is customarily carried by companies engaged in similar businesses
and owning similar properties in the same general areas in which the Company
operates, but in any event in amounts sufficient to prevent the Company from
becoming a co-insurer.
(c) Preservation of Corporate Existence. Preserve and maintain its
-----------------------------------
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary or desirable in view
of its business and operations or the ownership or lease of its properties.
Preserve and maintain all licenses and other rights to use Intellectual Property
owned or possessed by it and deemed by the Company to be necessary or useful to
the conduct of its business.
(d) Compliance with Laws. Comply with the requirements of all
--------------------
applicable laws, rules, regulations and orders of any governmental authority,
the non-compliance with
-35-
<PAGE>
which could materially adversely affect its business or condition, financial or
otherwise.
(e) Keeping of Records and Books of Account. Keep adequate records
---------------------------------------
and books of account in which complete entries will be made in accordance with
generally accepted accounting principles consistently applied, reflecting all
financial transactions of the Company and in which, for each fiscal year, all
proper reserves for depreciation, depletion, obsolescence, amortization, taxes,
bad debts and other purposes in connection with its business shall be made.
(f) Maintenance of Properties. Maintain and preserve all of its
-------------------------
properties and assets, necessary or useful in the proper conduct of its
business, in good repair, working order and condition, ordinary wear and tear
excepted.
(g) Compliance with ERISA. Comply with all minimum funding
---------------------
requirements applicable to any pension, employee benefit plans or employee
contribution plans which are subject to ERISA or to the Code, and comply in all
other material respects with the provisions of ERISA and the Code, and the rules
and regulations thereunder, which are applicable to any such plan. The Company
shall not permit any event or condition to exist which could permit any such
plan to be terminated under circumstances which would cause the lien provided
for in Section 4068 of ERISA to attach to the assets of the Company.
(h) Approval of Budgets and Business Plan. Prior to the commencement
-------------------------------------
of each fiscal year commencing after the date hereof, prepare and submit to, and
obtain the approval of the Board of Directors of, monthly capital and operating
expense budgets, cash flow projections, profit and loss projections, and a
revised business plan. The operations of the Company's business shall be
conducted in a manner consistent with the Business Plan, as revised and approved
from time to time by the Board of Directors, including without limitation all
executive compensation and benefits set forth therein. The Company shall not
enter into any activity not envisioned by the budget and business plan as then
approved by the Board of Directors.
(i) Financings. Promptly, fully and in detail, inform the Board of
----------
Directors of any discussions, offers or contracts relating to possible
financings of any nature for the Company, whether initiated by the Company or
any other person, except for minor financings of less than $50,000 which do not
include as a feature thereof any right to acquire any of the equity securities
of the Company.
(j) New Developments. Cause all technological developments,
----------------
inventions, discoveries or improvements by the Company's employees or agents to
be fully documented in
-36-
<PAGE>
accordance with the Company's existing practices, cause all key employees and
consultants of the Company to execute appropriate patent assignment agreements
to the Company and, where possible and appropriate, to file and prosecute United
States and foreign patent applications relating to and protecting such
developments on behalf of the Company.
(k) Compensation. Prepare and submit to, and obtain the approval of,
------------
the Board of Directors of a compensation policy for its officers, which shall
contain guidelines for reasonable levels of salary and other employment
benefits, and which shall be periodically updated, and comply with such
compensation policy in making all compensation offers to new officers and
compensation changes to existing officers, of which all cash compensation and
equity compensation offers or changes shall be subject to the approval of the
Board of Directors.
(l) Employees. *
---------
8.8 Certain Negative Covenants. Without limiting any other covenants and
--------------------------
provisions hereof, the Company covenants and agrees that it will comply with and
observe the following negative covenants and provisions and will not, unless,
with respect to a specific transaction, a waiver of certain specified provisions
of this Section 8.8 in connection solely with such transaction is given by the
affirmative vote of the holders of no less than 66-2/3% of the outstanding
shares of Common Stock then held by, or Warrant Shares issuable upon exercise of
the Warrant by, any of the Investors:
(a) Merger or Sale of Assets. Merge or consolidate with, or sell,
------------------------
assign, lease or otherwise dispose of or voluntarily part with the control of
(whether in one transaction or in a series of transactions) a material portion
of its assets to any person (whether now owned or hereinafter acquired) or sell,
assign or otherwise dispose of (whether in one transaction or in a series of
transactions) any of its accounts receivable (whether now in existence or
hereinafter created) at a discount or with recourse, to any person, except for
sales or other dispositions of assets in the ordinary course of business.
(b) Dealings with Affiliates. Enter into any transaction, including
------------------------
without limitation any loans or extensions of credit or royalty agreements with
any officer or director of the Company or holder of any class of capital stock
of the
-37-
* This paragraph was amended and restated in its entirety pursuant to the First
Amendment to Diamond Technology Partners, Inc. Stock Purchase Agreement.
<PAGE>
Company, or any member of their respective immediate families or any corporation
or other entity directly or indirectly controlled by one or more of such
officers, directors or stockholders or members of their immediate families
except in the ordinary course of business and on terms not less favorable to the
Company than it would obtain in a transaction between unrelated parties.
(c) Change in Nature of Business. Make, or permit any material
----------------------------
change in the nature of its business as carried on at the date hereof or as
contemplated in the Business Plan prior to the date hereof.
(d) Acquisition of Shares by the Company. Redeem, purchase or
------------------------------------
otherwise acquire for value (or pay into or set aside for a sinking fund for
such purchase), any share or shares of any equity security of the Company,
except for shares of stock that are required or permitted to be purchased by the
Company from employees who are leaving the Company or pursuant to a right of
first refusal, in each case pursuant to any agreement disclosed herein or set
forth as an exhibit hereto.
(e) Amendment to Charter. Make any amendment to its Amended Articles
--------------------
or Bylaws which limits its legal capacity or ability to perform its obligations
under this Agreement, the Ancillary Agreements, the Business Plan, the
memorandum relating to governance matters dated December 1, 1993, as updated
January 7, 1994, or any other instrument or agreement executed or to be executed
pursuant to the provisions hereof or thereof or which may materially adversely
affect the rights of the Investors.
(f) Dividends and Distributions. Declare or pay any dividend or
---------------------------
distribution on its capital stock.
(g) Restriction on Indebtedness. Except in accordance with the
---------------------------
budgets then approved by the Board of Directors pursuant to Section 8.7(h),
incur, create or assume any indebtedness, or incur any guarantee or similar
contingent obligation in respect of the indebtedness of others, whether or not
classified on the Company's balance sheet as a liability, or permit any
subsidiary of the Company to do any of the foregoing.
(h) Restriction on Certain Amendments. Amend the Diamond Technology
---------------------------------
Partners, Inc. Partners' Operating Agreement between the Company and Bergstein,
Moffitt and Michael E. Mikolaiczyk (as the Initial Partners) and Bergstein (as
the CEO), or any of the Diamond Technology Partners' Inc. Employees' Proxy and
Stock Restriction Agreements now or hereafter entered into by and between the
Company, an employee of the Company and the person who is the Chairman of the
Board and Chief Executive Officer of the Company.
-38-
<PAGE>
8.9 Indemnification. The Company shall indemnify and hold harmless each
---------------
Investor, and each of its officers, directors or partners, and agents, from and
against any losses, claims, damages and liabilities, and any reasonable legal or
other expenses incurred by any of them, arising as a result of claims brought
against such person by the previous employer of any employee of the Company, (i)
alleging any breach, for the benefit of the Company, of such employee's
obligations to the previous employer with respect to confidential information of
the previous employer, (ii) based upon the Company's hiring of such employee or
(iii) that are deemed by the Company, in its sole discretion, to be frivolous or
harassing.
8.10 Employees. Except with the approval of the Board of Directors,
---------
employ any key employee who is not a partner.
8.11 Termination of Certain Covenants. The covenants set forth in
--------------------------------
Sections 8.1(c), (d), (e) and (f), and Sections 8.2, 8.3, 8.4, 8.6, 8.7, 8.8 and
8.10 shall terminate and be of no further force or effect upon the consummation
of the first public offering of securities of the Company pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(including without limitation the Rights Offering).
9. Miscellaneous.
-------------
9.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and each
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
9.2 Successors and Assigns. The terms and conditions of this Agreement
----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
9.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the Commonwealth of Pennsylvania as applied to agreements
entered into and to be performed entirely within Pennsylvania.
9.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-39-
<PAGE>
9.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6 Notices. Unless otherwise provided, any notice required or permitted
-------
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified, either personally or
by recognized courier service, or upon deposit with the United States Post
Office, by registered or certified mail, in each case with charges prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by ten days' advance written notice to the other parties.
9.7 Finder's Fee. Each party represents that it neither is nor will be
------------
obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
9.8 Expenses. Irrespective of whether any Closing is effected, each
--------
party shall pay all costs and expenses incurred by it with respect to the
negotiation, execution, delivery and performance of this Agreement, including
without limitation the reasonable fees and expenses of its counsel. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the Amended Articles or any of the Ancillary Agreements, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
9.9 Amendments and Waivers. Except as specified in Section 6.17, any
----------------------
term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the holders of a majority of the Common Stock held by the Investors or
issuable to an Investor upon exercise of the Warrant. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holders of
any securities purchased under this Agreement at the time outstanding
-40-
<PAGE>
(including securities into which such securities are convertible), each future
holder of all such securities, and the Company; provided, however, that no
condition set forth in Section 4 hereof may be waived with respect to any
Investor who does not consent thereto.
9.10 Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstance is held invalid or unenforceable in any
jurisdiction, the remainder of this Agreement, and the application of such
provision to such person or circumstance in any other jurisdiction or to other
persons or circumstances in any jurisdiction, shall not be affected thereby, and
to this end the provisions of this Agreement shall be severable.
9.11 Aggregation of Stock. All shares of the Common Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
IN WITNESS WHEREOF, the undersigned have executed, or caused to be executed
on their behalf by an agent thereunto duly authorized, this Agreement as of the
date first above written.
The Company: DIAMOND TECHNOLOGY PARTNERS, INC.
By: [SIGNATURE APPEARS HERE]
---------------------------------
Title: Chairman
Address: Chicago, Ill.
The Investors: TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management, Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
---------------------------------
As its: Managing Director
TECHNOLOGY LEADERS OFFSHORE C.V.
By: Technology Leaders Management, Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
----------------------------------
As its: Managing Director
(Signatures Continued)
-41-
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
By: [SIGNATURE APPEARS HERE]
--------------------------------------
As its: Ex. V.P.
CIP, L.P.
By:
--------------------------------------
As its:
/s/ Melvyn E. Bergstein
--------------------------------------
Melvyn E. Bergstein
/s/ Christopher J. Moffitt
------------------------------
Christopher J. Moffitt
-42-
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
By: [SIGNATURE APPEARS HERE]
------------------------------
As its:
CIP CAPITAL L.P.
By: [SIGNATURE APPEARS HERE]
------------------------------
As its: President, CIP Capital
Management Inc.
(General Partner)
/s/ Melvyn E. Bergstein
---------------------------------
Melvyn E. Bergstein
/s/ Christopher J. Moffitt
---------------------------------
Christopher J. Moffitt
-42-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Defined Term Page
- ------------ ----
<S> <C>
1934 Act............................................................. 20
Act.................................................................. 11
Amended Articles...................................................... 1
Ancillary Agreements.................................................. 4
Bergstein............................................................. 1
Business Plan......................................................... 3
Closing............................................................ 2, 3
Code................................................................. 10
Common Stock.......................................................... 1
Company............................................................... 1
Eligible Purchaser................................................... 33
ERISA................................................................. 9
First Offer Shares................................................... 34
Form S-3............................................................. 15
GAAP.................................................................. 5
Holder............................................................... 15
Initial Closing....................................................... 2
Initiating Holders................................................... 15
Intellectual Property................................................. 6
Investor.............................................................. 1
Investors............................................................. 1
Letter Revisions...................................................... 7
Management Group...................................................... 2
Material Contracts.................................................... 7
Moffitt............................................................... 1
Notice............................................................... 33
Opening Balance Sheet................................................. 5
Register............................................................. 14
Registrable Securities............................................... 14
Registrable Securities then outstanding.............................. 15
Registration......................................................... 14
Rights............................................................... 27
Rights Offering...................................................... 27
Rights Registration Statement........................................ 27
Rights Shares........................................................ 28
Rights Violation..................................................... 29
Safeguard............................................................. 1
SEC.................................................................. 15
Second Closing........................................................ 2
Securities........................................................... 10
Shares............................................................... 33
Third Closing........................................................ 2
TSC.................................................................. 39
Violation............................................................ 20
Warrant............................................................... 1
</TABLE>
<PAGE>
FIRST AMENDMENT TO
DIAMOND TECHNOLOGY PARTNERS, INC
STOCK PURCHASE AGREEMENT
This is an amendment ("Amendment"), dated November ___, 1994, to a certain
Diamond Technology Partners, Inc. Stock Purchase Agreement dated as of March 22,
1994 (the "Stock Purchase Agreement") by and among Diamond Technology Partners,
Inc. (the "Company"), Melvyn E. Bergstein ("Bergstein"), Christopher J. Moffitt
("Moffitt"), Safeguard Scientifics, Inc. ("Safeguard"), and the investors listed
on Schedule I to the Stock Purchase Agreement (each, an "Investor," and,
together with Safeguard, collectively, the "Investors"); this Amendment is made
between the Company and the Investors.
In consideration of the mutual promises set forth in the Stock Purchase
Agreement and of the continuing mutual interests of the Company and the
Investors, the parties, in accordance with paragraph 9.9 of the Stock Purchase
Agreement, hereby amend that agreement as follows:
1. Paragraph 1.1 (c) is hereby amended so as to read, in its entirety, as
follows:
"(c) Except as otherwise provided in Schedule II hereto and Section 1.2(a)
and (b) hereof, concurrently with the purchase and sale by the Investors
under this Agreement at the Initial Closing, the Second Closing and the
Third Closing, a group of the Company's managers including Bergstein and
Moffitt and such additional managers as Bergstein and Moffitt shall have
designated (each of whom, as well as each individual designated by the
Company after the Third Closing as a "Partner", shall (for so long
thereafter as he or she remains a Partner) be deemed a member of the
"Management Group" herein), will purchase from the Company, and the Company
shall sell to the Management Group, the number of shares of Common Stock
set forth on Schedule II hereto, in exchange for the purchase price to be
paid therefor as set forth thereon."
2. Paragraph 7.1(a) is hereby amended so as to read, in its entirety, as
follows:
"(a) In consideration of the purchase of certain Common Stock and
the Warrant by Safeguard subject to the conditions set forth in this
Section 7, the Company hereby grants to Safeguard the right to conduct a
rights offering (the "Rights Offering") to Safeguard's stockholders in
respect of so many shares of Common Stock as Safeguard may specify, and the
Company agrees to register such Rights Offering under the Act in accordance
with Section 7.3 hereof. The rights to be issued in the Rights Offering
(the "Rights") shall be issued pursuant to a registration statement filed
under the Act (the "Rights Registration Statement"), shall be exercisable
for a period of no longer than 45 days after the commencement of the Rights
Offering and shall be transferable by the holder thereof during such
period. One-half of the shares of Common Stock in respect of which the
Rights are to be offered shall be newly authorized shares, and one-half of
such shares shall be shares theretofore held by Safeguard. Prior to the
commencement of the Rights Offering, the Company shall use its best efforts
to cause any holder of more than two
<PAGE>
percent of the Common Stock (or rights to acquire more than two percent of
the Common Stock) to execute and deliver to the underwriter of the Rights
Offering an agreement to withhold such Common Stock from the market for such
period, not to exceed the period commencing 30 days prior to the effective date
of the registration statement for the Rights Offering and ending 90 days
following the closing thereof, or such other period as the underwriter shall
request."
3. Paragraph 8.7(l) is hereby amended so as to read, in its entirety, as
follows:
"(l) Employees. Enter into an agreement in respect of employment and
---------
proprietary information nondisclosure containing provisions substantially in the
form of paragraphs 6, 7 and 8 of Exhibit E-1 attached hereto, in the case of
each new partner, and containing provisions substantially in the form of
paragraphs 6, 7, 8 and 9 of Exhibit E-2 attached hereto, in the case of each
other new executive employee; and enter into an agreement with each other new
employee in respect of proprietary information nondisclosure substantially in
the form attached hereto as Exhibit E-3."
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to
Diamond Technology Partners, Inc. Stock Purchase Agreement on the date first
written above.
DIAMOND TECHNOLOGY PARTNERS, INC.
By:[SIGNATURE APPEARS HERE]
----------------------------------------
As its:
TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management, Inc.
(General Partner)
By:[SIGNATURE APPEARS HERE]
----------------------------------------
As its:
TECHNOLOGY LEADERS OFFSHORE C.V.
By: Technology Leaders Management, Inc.
(General Partner)
By:[SIGNATURE APPEARS HERE]
----------------------------------------
As its:
SAFEGUARD SCIENTIFICS, INC.
By:[SIGNATURE APPEARS HERE]
----------------------------------------
As its:
CIP, L.P.
By:[SIGNATURE APPEARS HERE]
----------------------------------------
As its:
-3-
<PAGE>
SECOND AMENDMENT TO
DIAMOND TECHNOLOGY PARTNERS, INC.
STOCK PURCHASE AGREEMENT
This is an amendment ("Amendment"), dated as of April 27, 1995, to the
Diamond Technology Partners, Inc. Stock Purchase Agreement dated as of March 22,
1994 (the "Stock Purchase Agreement") by and among Diamond Technology Partners,
Inc. (the "Company"), Melvyn E. Bergstein ("Bergstein"), Christopher J. Moffitt
("Moffitt"), Safeguard Scientifics, Inc. ("Safeguard"), and the investors listed
on Schedule I to the Stock Purchase Agreement (each, an "Investor," and,
together with Safeguard, collectively, the "Investors"), as amended by the First
Amendment to Diamond Technology Partners, Inc. Stock Purchase Agreement dated as
of November 30, 1994.
WHEREAS, in connection with previous amendments to various agreements of
the Company, including the Stock Purchase Agreement and the Articles of
Incorporation of the Company, the authorized number of shares of common stock of
the Company was increased and 1,500,000 shares thereof were reserved for sale or
as option shares to employees of the Company hired on or after January 2, 1995;
and
WHEREAS, the parties desire to further amend the Stock Purchase Agreement
to clarify a provision thereof;
In consideration of the foregoing and the mutual promises set forth in the
Stock Purchase Agreement and of the continuing mutual interests of the Company
and the Investors, and for other good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties, in
accordance with paragraph 9.9 of the Stock Purchase Agreement, hereby agree as
follows:
1. The second sentence of Section 8.3 of the Stock Purchase Agreement is
hereby amended to read, in its entirety, as follows:
"The number of shares of Common Stock that may be issued, or made subject
to options granted, pursuant to this Section 8.3 shall be equal to
4,500,000 minus the number of shares of Common Stock actually purchased by
the Management Group pursuant to Section 1.2 hereof and Schedule II
hereto."
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment to
Diamond Technology Partners, Inc. Stock Purchase Agreement on the date first
written above.
DIAMOND TECHNOLOGY PARTNERS, INC.
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management, Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
TECHNOLOGY LEADERS OFFSHORE C.V.
By: Technology Leaders Management, Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
SAFEGUARD SCIENTIFICS, INC.
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
CIP CAPITAL L.P. (Formerly, CIP, L.P.)
By: CIP Capital Management Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
<PAGE>
THIRD AMENDMENT TO
DIAMOND TECHNOLOGY PARTNERS, INC.
STOCK PURCHASE AGREEMENT
This is an amendment ("Amendment"), dated as of October 21, 1996, to the
Diamond Technology Partners, Inc. Stock Purchase Agreement dated as of March 22,
1994 (the "Stock Purchase Agreement") by and among Diamond Technology Partners
Incorporated, a Delaware corporation and the successor in interest by merger
to Diamond Technology Partners, Inc., an Illinois corporation (the "Company"),
Melvyn E. Bergstein, Christopher J. Moffitt, Safeguard Scientifics, Inc.
("Safeguard"), and the investors listed on Schedule I to the Stock Purchase
Agreement (each, an "Investor," and, together with Safeguard, the "Investors"),
as amended by (i) the First Amendment to Diamond Technology Partners, Inc. Stock
Purchase Agreement dated as of November 30, 1994, and (ii) the Second Amendment
to the Diamond Technology Partners, Inc. Stock Purchase Agreement dated as of
April 27, 1995.
WHEREAS, in connection with the authorization of an initial public
offering of the Company's Common Stock as contemplated by a rights offering to
the shareholders of Safeguard, the Board of Directors agreed with Safeguard that
Safeguard would approve, and seek approval of the other Investors, an increase
of 200,000 shares of Common Stock, as available for issuance by the Company
under Section 8.3 of the Stock Purchase Agreement, and
WHEREAS, the Company intends to (i) offer to its Partners the opportunity
to purchase, and receive options to purchase, additional shares of Common Stock,
and (ii) grant to certain of its other employees options to purchase additional
shares of Common Stock, and in connection therewith, it is necessary and
desirable to further increase, by 600,000 shares, the limit of the number of
shares of Common Stock available for issuance by the Company under Section 8.3,
and
In consideration of the foregoing and the mutual promises set forth in the
Stock Purchase Agreement and of the continuing mutual interests of the Company
and the Investors, and for other good and valuable consideration, the receipt,
sufficiency, and adequacy of which are hereby acknowledged, the parties, in
accordance with paragraph 9.9 of the Stock Purchase Agreement, hereby agree that
the second sentence of Section 8.3 of the Stock Purchase Agreement is hereby
amended to read, in its entirety, as follows:
"The number of shares of Common Stock that may be issued, or made
subject to options granted, pursuant to this Section 8.3 shall be
equal to 5,300,000 minus the number of shares of Common Stock
actually purchased by the Management Group pursuant to Section 1.2
hereof and Schedule II hereto."
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Third Amendment to
Diamond Technology Partners, Inc. Stock Purchase Agreement as of the date first
written above.
DIAMOND TECHNOLOGY PARTNERS
INCORPORATED
By:[SIGNATURE APPEARS HERE]
-------------------------------------
As its:
TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management, Inc.
(General Partner)
By:[SIGNATURE APPEARS HERE]
-------------------------------------
As its:
TECHNOLOGY LEADERS OFFSHORE C.V.
By: Technology Leaders Management, Inc.
(General Partner)
By: [SIGNATURE APPEARS HERE]
-------------------------------------
As its:
SAFEGUARD SCIENTIFICS, INC.
By:[SIGNATURE APPEARS HERE]
-------------------------------------
As its:
CIP CAPITAL L.P. (Formerly, CIP, L.P.)
By: CIP Capital Management Inc.
(General Partner)
By:[SIGNATURE APPEARS HERE]
-------------------------------------
As its:
2
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED
VOTING AND STOCK RESTRICTION AGREEMENT
--------------------------------------
THIS AMENDED AND RESTATED VOTING AND STOCK RESTRICTION AGREEMENT (the
"Agreement"), is entered into as of the 1st day of April, 1996, among DIAMOND
TECHNOLOGY PARTNERS, INC., an Illinois corporation (the "Company"), TECHNOLOGY
LEADERS L.P. ("TLP"), TECHNOLOGY LEADERS OFFSHORE C.V. ("TLCV"), CIP CAPITAL
L.P. (formerly, CIP, L.P.) ("CIP"), SAFEGUARD SCIENTIFICS (DELAWARE), INC.
("Safeguard" and collectively with TLP, TLCV, CIP, the "Investors"), the
individual shareholders designated by the Company or any "Affiliates" (as
defined in Section 3.4 hereof) as "Partners" and listed on the signature pages
hereto (collectively, the "Partners") and the individual non-Partner
shareholders listed on the signature pages hereto (the "Non-Partner Employee
Shareholders" and collectively with the Partners, the "Employee Shareholders").
WITNESSETH:
WHEREAS, the parties to this Agreement entered into that certain Voting and
Stock Restriction Agreement dated as of March 22, 1994, which agreement was
amended by: (i) a certain Amendment to Voting and Stock Restriction Agreement
dated as of March 22, 1994; (ii) a certain Amendment Number Two to Voting and
Stock Restriction Agreement dated as of November 30, 1994; and (iii) a certain
Amendment Number Three to Voting and Stock Restriction Agreement dated as of
April 27, 1995 (collectively, the "Prior Voting and Stock Restriction
Agreement");
WHEREAS, the Company and each of the Non-Partner Employee Shareholders
entered into a Diamond Technology Partners, Inc. Employee's Proxy and Stock
Restriction Agreement, each of which were amended by an Amendment Number One to
Diamond Technology Partners, Inc. Employee's Proxy and Stock Restriction
Agreement (collectively, the "Employee Proxy and Stock Restriction Agreements");
WHEREAS, the Company and each of the Partners entered into that certain
Diamond Technology Partners, Inc. Partners' Operating Agreement dated as of
March 22, 1994, which agreement was amended by: (i) a certain First Amendment
to Diamond Technology Partners, Inc. Partners' Operating Agreement dated June
24, 1994; (ii) a certain Second Amendment to Diamond Technology Partners, Inc.
Partners' Operating Agreement dated as of November 30, 1994; and (iii) a certain
Amendment Number Three to Diamond Technology Partners, Inc. Partners' Operating
Agreement dated as of April 27, 1995 (collectively, the "Prior Partners'
Operating Agreement");
WHEREAS, the parties wish to amend each of the aforementioned agreements
and, in light of the agreements having already been amended several times, now
wish to amend and restate the Prior Voting and Stock Restriction Agreement in
its entirety, to incorporate substantially all of the provisions of the Employee
Proxy and Stock Restriction Agreements and certain of the provisions of the
Prior Partners' Operating Agreement and to terminate the Employee Proxy and
Stock Restriction Agreements;
<PAGE>
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Prior Partners' Operating Agreement is being amended and restated
in its entirety (as amended from time to time, the "Partners' Operating
Agreement");
NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
PROXY PROVISIONS
----------------
1.1 Grant of Proxy.
--------------
Each Employee Shareholder hereby grants to the person presently holding the
position of Chief Executive Officer of the Company and each successor to the
Chief Executive Officer of the Company (the "CEO"), and each future Employee
Shareholder, upon and by virtue of his or her having become a shareholder of the
Company and a party to this Agreement, shall be deemed to have granted to the
CEO at that time, a proxy to vote for all shares of stock of the Company, of any
class or series, that he or she may at any time own or acquire. Each proxy:
(a) shall be irrevocable, as it shall be coupled with an interest,
because (among other reasons) the proxy being appointed is a party to a
voting agreement created under Section 7.70 of the Illinois Business
Corporation Act of 1983;
(b) shall be for all voting purposes when the subject shares provide
voting rights to a shareholder, but without limiting the foregoing shall in
any event not apply regarding: (i) decisions as to whether to hold or to
sell the subject shares; (ii) decisions regarding the selection of a
successor CEO by the Partners pursuant to the Partners' Operating
Agreement; (iii) decisions by Partners regarding Partner nominees to the
Board of Directors and the committees described in the Partners' Operating
Agreement; (iv) actions by a Partner on any committee of the Company; and
(v) the voting by Partners, for the admission of new Partners or approval
of compensation recommendations pursuant to the Partners' Operating
Agreement; and (vi) the exercise of any right to purchase shares of stock
of the Company, of any class or series, pursuant to this Agreement;
(c) shall be binding upon the estate, heirs, successors and assigns of
the Employee Shareholder who granted it (in order to prevent the stock from
being voted by someone who is not an employee);
(d) shall inure to the benefit of the estate, heirs, successors and
assigns of the CEO in the event of the death or legal incapacity of the
CEO, but may not be exercised by them or any of them pending selection of a
successor-CEO pursuant to the Partners' Operating Agreement;
2
<PAGE>
(e) shall cover not only all shares of the Common Stock, no par value,
of the Company owned by such Employee Shareholders, but also any other
shares of stock or other voting securities, of any class or series, of the
Company or of any entity into or with which the Company may be merged or
consolidated, that such Employee Shareholders may hereafter acquire by any
means from the Company or from any other person or entity, including shares
issued as stock dividends or pursuant to any recapitalization or
reorganization, and shares issued in exchange for such shares in any
merger, consolidation, reorganization, or transfer or exchange of assets,
of the Company; and
(f) shall terminate with respect to any Common Stock transferred, in
compliance with the provisions of Articles III or IV hereof, to any person
or entity other than another Employee Shareholder.
1.2 Obligations of the Proxy.
------------------------
The initial Partner who is presently the CEO, Melvyn E. Bergstein (the
"Initial CEO"), and each and every successor CEO, upon acceptance of such
appointment, hereby promises and agrees not to assign, convey, transfer, pledge,
or encumber the proxy granted to him or her under this Article I, except as
follows:
(a) any assignment, transfer or conveyance by him or her, including any
accomplished involuntarily or by operation of law, shall be subject to all
of the terms and conditions of this Agreement; any assignee, and the CEO's
estate, heirs, successors and assigns, shall be bound by all of the
restrictions set forth herein.
(b) upon any CEO's ceasing to hold the office of CEO, and his or her
successor's having been selected in accordance with the Partners' Operating
Agreement, said CEO (or his or her estate, heirs, successors or assigns)
shall assign (or be deemed to have assigned) this proxy to such successor.
For purposes hereof, the Initial CEO shall be deemed to have resigned on
the first to occur of the following events:
(i) the sixth (6th) anniversary of the effective date (the "IPO
Date") of the registration statement filed under the Securities Act of
1933 (as amended), in connection with the first public offering of
securities of the Company (the "IPO"), whether in the Rights Offering
(as defined in that certain Stock Purchase Agreement dated as of March
22, 1994 by and among the Company and each of the Investors (as the same
has been and may be amended, the "Stock Purchase Agreement")) or
otherwise pursuant to the Stock Purchase Agreement; or
(ii) his attainment of age sixty-five (65), unless, and to the
extent that, by the affirmative vote of at least two-thirds (2/3rds) of
the Partners, such retirement age shall be extended;
(iii) his legal incapacity, as determined by a final, non-
appealable order by a court of competent jurisdiction;
3
<PAGE>
(iv) his failure, on account of illness or injury, to perform the
duties of the CEO, where such failure persists for a period of ninety
(90) consecutive days or for any ninety (90) non-consecutive days out of
any period of one hundred fifty (150) consecutive days;
(v) his conviction of the commission of a felony;
(vi) his resignation from the position of CEO;
(vii) his removal from the position of CEO by the Board of
Directors of the Company after the IPO Date (the "Board of Directors");
or
(viii) any assignment, transfer or conveyance of the proxy to any
person or entity that is not the CEO or a successor CEO appointed
pursuant to the Partners' Operating Agreement; or
(ix) his removal after the IPO Date, pursuant to the provisions
of the Partners' Operating Agreement.
In the case of any CEO other than the Initial CEO, he or she (or his or her
estate, heirs, successors, and assigns) shall be deemed to have resigned on the
first to occur of:
(A) any of the types of events, as to such CEO, specified in
Section 1.1(b)(ii) through (b)(ix); or
(B) the sixth (6th) anniversary of the date on which the proxy
was last assigned to him or her (subject to his or her right to re-
designation as proxy-holder, if he or she is designated to succeed
himself or herself pursuant to the Partners' Operating Agreement, in
which case this clause shall be deemed to refer to the sixth (6th)
anniversary of the date of such re-designation).
The person to whom the proxy shall be deemed assigned shall be such person as
shall have been selected as the successor CEO by the Partners pursuant to the
provisions of the Partners' Operating Agreement.
(c) Subject to Section 1.1(b), each person who shall at any time be the
holder of the proxy described in this Article I shall have the right to exercise
and vote such proxy as he or she sees fit; provided, however, that at any
meeting (or in any action by written consent in lieu of a meeting) to elect or
remove or replace a member or members of the Board of Directors, said holder of
the proxy shall exercise and vote such proxy so that:
(i) The Partner who is the CEO or successor CEO selected pursuant
to the Partners' Operating Agreement, as the case may be, shall be a
member of the Board of Directors; and
(ii) Each additional member of the Board of Directors whom the
Employee Shareholders, as a group, have the right and the power to elect
to said
4
<PAGE>
board, based upon the number of shares held by them and their rights
hereunder, shall be a Partner who has been selected for nomination to the
Board of Directors by the Partners pursuant to the Partners' Operating
Agreement.
ARTICLE II
ELECTION OF DIRECTORS
---------------------
2.1 Election of Directors.
---------------------
Prior to the closing of the IPO, at any time at which the shareholders of
the Company will have the right to, or will, vote for or consent in writing to
the election of directors to the Board of Directors, each of the Company, the
Investors and the Employee Shareholders hereby agrees to vote all shares of
Common Stock presently owned or hereafter acquired by them, or in respect of
which any of the them presently or hereafter holds a proxy pursuant to Article I
hereof, in favor of the following action:
(a) to cause and maintain the election to the Board of Directors of
two representatives designated by the Investors (collectively, the
"Investor Directors"), provided that each of such Investor Directors shall
have executed and delivered to the Company, as a condition of the Partners'
voting for his or her election, an agreement in the form attached hereto as
Exhibit A;
(b) to cause and maintain the election to the Board of Directors of
three representatives recommended by the CEO and approved by the Partners
(the "Management Directors").
The Company shall cause the nomination for election to the Board of Directors of
the individuals set forth above.
2.2 Vacancies and Removal.
---------------------
(a) Each of the directors designated in Section 2.1 shall be elected
at an annual or special meeting of shareholders (or by written consent in
lieu of a meeting of shareholders) and shall serve until his or her
successor is elected and qualified or until his or her earlier resignation
or removal.
(b) An Investor Director may be removed during his or her term of
office, without cause, by and only by the affirmative vote or the written
consent of the Investors. A Management Director may be removed during his
or her term of office, without cause, by and only by the affirmative vote
or written consent of the Partner holding the proxy to vote the outstanding
shares of Common Stock held by the Employee Shareholders.
(c) A vacancy in the office of an Investor Director may be filled by
the vote or written consent of the Investors holding a majority of the
outstanding shares of Common Stock held by all of the Investors. A vacancy
in the office of a Management Director may be filled by the vote or written
consent of the Partner holding the proxy to vote the
5
<PAGE>
outstanding shares of Common Stock held by the Employee Shareholders, all
in accordance with the Articles of Incorporation, By-laws of the Company,
applicable law, and the Partners' Operating Agreement.
2.3 Size of Board.
-------------
Prior to the closing of the IPO, each of the parties hereto agrees to vote
all shares of Common Stock now owned or hereafter acquired by each such party to
fix and maintain the number of directors on the Board of Directors at not more
than seven members, and provide that the Board of Directors shall meet at least
once every three months. In the event that, notwithstanding the foregoing, the
size of the Board of Directors shall be changed, the provisions of Section 2.1
shall thereby be deemed amended by amending paragraphs (a) and (b) of said
Section so that paragraph (a) shall refer to the largest integral number that is
a minority of the new size of the board and paragraph (b) shall refer to the
smallest integral number that is a majority of the new size of the board.
ARTICLE III
BUY-BACK PROVISIONS UPON TERMINATION OF EMPLOYMENT
--------------------------------------------------
3.1 Repurchase Upon Termination of Employment Prior to the IPO.
----------------------------------------------------------
(a) Repurchase Rights. Prior to the IPO, upon the cessation, for any
-----------------
reason, of the employment relationship between the Company and any Employee
Shareholder, the CEO shall so promptly notify the Partners (excluding the
Partner whose employment relationship had ceased, if applicable), the
Company and the Investors, and the departing Employee Shareholder (or his
or her estate, heirs, successors, and assigns), shall be deemed to have
offered to sell, and the Partners (excluding the Partner whose employment
relationship had ceased, if applicable), the Company and the Investors
shall have the option to purchase, all (but not less than all) of the
Common Stock then owned by the departing Employee Shareholder, on the
following terms and conditions:
(i) Of Partners. The Partners other than the departing Partner
-----------
(the "Remaining Partners") shall have the exclusive first right to
accept the offer and to purchase all (but not less than all) of the
offered Common Stock. The offer may be accepted by all or by fewer
than all of the Remaining Partners, pro rata (based on their
--- ----
respective holdings of Common Stock) or non-pro rata, but it may not
--- ----
be accepted unless at least a majority of Remaining Partners have
agreed that all or any of the Remaining Partners shall be permitted to
purchase the offered Common Stock; the Remaining Partners shall vote
on the matter within five (5) days of the date of the notice from the
CEO informing them of their right to purchase the offered Common
Stock. If the Remaining Partners so determine that all or any of the
Remaining Partners shall be permitted to purchase the offered Common
Stock, then such Common Stock shall be offered to the Remaining
Partners in the following manner:
6
<PAGE>
(A) Within five (5) days of the vote of the Remaining Partners, any
Remaining Partners desiring to purchase any of the offered Common Stock
shall notify the CEO of the number of shares he or she has elected to
purchase and the CEO shall promptly notify all of the Partners of such
elections.
(B) If greater than all of the offered Common Stock is subscribed
for, then each Remaining Partner who subscribed for shares may only
purchase his or her pro rata share of the offered Common Stock based on the
--- ----
then current holdings of each such Remaining Partner, or as otherwise
agreed upon by such Partners.
(C) If less than all of the offered Common Stock is subscribed for,
then each Remaining Partner who subscribed for shares, may purchase his or
her pro rata share of the unsubscribed shares based on the then current
--- ----
holdings of each such Remaining Partner, or as otherwise agreed upon by
such Partners.
(D) If all of the offered Common Stock is not subscribed for, then
the Remaining Partners shall be deemed to have declined to purchase the
offered Common Stock. If all of the offered Common Stock is subscribed for,
then at least a majority of the Remaining Partners must approve who the
purchasers shall be and the allocation of the offered Common Stock among
them and notify the CEO of the same within the appropriate time period for
the CEO to respond to the offering Partner. In the event the approval
required by the preceding sentence is not obtained, then the Remaining
Partners shall be deemed to have declined to purchase the offered Common
Stock.
For purposes of this Section, each Partner who owns any options to purchase
Common Stock shall be deemed to own that number of shares that would be issuable
upon the exercise of the options, without consideration to vesting. To accept,
the CEO must deliver to the offering Partner, the Company and the Investors, on
behalf of the purchasing Partners, within twenty (20) days after the delivery of
the notice to the Remaining Partners required under this Section, a written
notice of acceptance indicating that the purchase has been approved by at least
a majority of the Remaining Partners, who the purchasers shall be and the
allocation of the offered Common Stock among the purchasers.
(ii) Of the Company. If the Remaining Partners shall not purchase all of
--------------
the shares of Common Stock then owned by such departing Employee Shareholder,
then the Company shall have the exclusive next right to purchase all (but not
less than all) of the shares of Common Stock owned by such Employee
Shareholder. The Company may exercise such right by delivering to such
departing Employee Shareholder and to each of the Investors and the Remaining
Partners, within twenty (20) days after the expiration of the Remaining
Partners' right to purchase such shares pursuant to Section 3.1(a)(i) hereof,
a written notice,
7
<PAGE>
addressed to such departing Employee Shareholder (or his or her estate), of
the Company's intent to effect such purchase.
(iii) Of the Investors. If for any reason the Company does not
----------------
exercise its right under the immediately preceding Section to purchase
all of the shares of Common Stock of any Employee Shareholder whose
employment with the Company shall have been terminated, then the
Investors shall have the exclusive next right to purchase all (but not
less than all) of the shares of Common Stock owned by such Employee
Shareholder. The Investors may exercise such right by delivering to
such departing Employee Shareholder and to each of the Company and the
Remaining Partners, within twenty (20) days after the expiration of
the Company's right to purchase such shares pursuant to Section
3.1(a)(ii), a written notice, addressed to such departing Employee
Shareholder (or his or her estate), of the Investors' intent to
purchase all (but not less than all) of such shares.
(b) Purchase Price. The purchase price payable under Section 3.1(a)
--------------
shall be equal to the purchase price(s) paid by the departing Employee
Shareholder for the Common Stock.
(c) Closing. The closing shall occur on the thirtieth (30th) business
-------
day after acceptance of the offer pursuant to Section 3.1(a)(i), (ii) or
(iii), as applicable. On the date of the closing, the departing Employee
Shareholder shall deliver the certificate(s) for all the shares being
transferred, properly endorsed for transfer, to the applicable purchasers.
As of the closing date, title to such shares shall be deemed transferred to
the applicable purchasers, whether or not delivered as contemplated by the
preceding sentence, upon tender by the applicable purchasers of the
purchase price for such shares, as provided in Section 3.1(d). Upon such
deliveries, such departing Employee Shareholder shall cease to have any
rights as a holder of such shares, the Company shall cancel such shares,
and such shares shall be deemed canceled for all purposes of this Agreement
or otherwise. If the departing Employee Shareholder does not deliver such
shares as contemplated by this Section, the applicable purchasers may elect
to tender payment of the purchase price and such amount will be released to
the departing Employee Shareholder upon delivery by him or her of the
shares to the Company.
(d) Payment of Purchase Price. The purchase price shall be payable in
-------------------------
cash at the closing or, in the purchasers' discretion, in so many equal
annual principal installments as they may prefer, provided that if they
elect to pay in installments:
(i) if all or any of the Remaining Partners are the purchasers,
they may pay in not more than five equal annual installments, the
first of which shall be payable upon the closing, and, if the Company
or the Investors are the purchasers, they may pay in not more than two
equal annual installments, the first of which shall be payable upon
the closing; and
(ii) the unpaid principal balance shall bear interest, payable
annually, at the floating "prime rate" as announced from time to time
by American National Bank and
8
<PAGE>
Trust Company of Chicago (and adjusted for changes at the time of each
announced change in said rate).
(e) Option of Partners Not to Sell. Notwithstanding the foregoing, if
------------------------------
any Partner ceases to be an employee of the Company on account of death, or
on account of an illness or injury that results in his or her failure or
inability to perform his or her duties as an employee; and if such
cessation occurs before the effective date of the IPO; and if the Partner
(or the executor or personal representative of his or her estate) shall
notify the Company in writing, within sixty (60) days after such cessation,
that he or she prefers not to make the offer of sale of the Partner's
Common Stock contemplated by this Section 3.1; then the Partner (and his or
her estate, heirs, successors, and assigns) shall have no duty to sell, and
shall not be deemed to have offered to sell, any Common Stock pursuant to
this Section 3.1. (Such Common Stock shall, however, remain subject to all
of the remaining Sections of this Agreement.)
3.2 Repurchase upon Termination of Employment of a Partner After the IPO.
--------------------------------------------------------------------
After the IPO, the disposition of the Common Stock of any Partner whose
employment relationship with the Company ceases for any reason shall be governed
exclusively by the Diamond Technology Partners, Inc. Partner Compensation
Program, as in effect at the time (the "Partner Compensation Program").
3.3 Repurchase Upon Termination of Employment of a Non-Partner Employee
-------------------------------------------------------------------
Shareholder After the IPO.
- -------------------------
(a) Repurchase Rights. After the IPO, upon the cessation, for any
-----------------
reason, of the employment relationship between the Company and any Non-
Partner Employee Shareholder, the CEO shall so notify the Company promptly,
and the departing Employee Shareholder (or his or her estate, heirs,
successors, and assigns), shall be deemed to have offered to sell, and the
Company shall have the option to purchase, all (but not less than all) of
the Common Stock then owned by such departing Non-Partner Employee
Shareholder, on the terms and conditions contained in this subsection. The
Company shall have the exclusive first right to purchase all (but not less
than all) of the shares of Common Stock owned by such Non-Partner Employee
Shareholder. The Company may exercise such right by delivering to such
departing Non-Partner Employee Shareholder, within twenty (20) days after
its receipt of notice from the CEO, a written notice, addressed to such
departing Non-Partner Employee Shareholder (or his or her estate), of the
Company's intent to effect such purchase.
(b) Purchase Price. The purchase price shall be equal to the fair
--------------
market value of the Common Stock on the date of such cessation or transfer,
consisting of the mean of the bid and ask prices at the close of trading on
said date (or if not a trading day, on the next succeeding trading day), if
such shares are listed on a national securities exchange or traded through
NASDAQ.
(c) Closing. The closing shall occur on the thirtieth (30th) business
-------
day after acceptance of the offer pursuant to Section 3.3(a). On the date
of the closing, the
9
<PAGE>
departing Non-Partner Employee Shareholder shall deliver the certificate(s)
for all the shares being transferred, properly endorsed for transfer, to
the applicable purchasers. As of the closing date, title to such shares
shall be deemed transferred to the applicable purchasers, whether or not
delivered as contemplated by the preceding sentence, upon tender by the
applicable purchasers of the purchase price for such shares, as provided in
Section 3.3(d). Upon such deliveries, such departing Non-Partner Employee
Shareholder shall cease to have any rights as a holder of such shares, the
Company shall cancel such shares, and such shares shall be deemed canceled
for all purposes of this Agreement or otherwise. If the departing Non-
Partner Employee Shareholder does not deliver such shares as contemplated
by this Section, the applicable purchasers may elect to tender payment of
the purchase price and such amount will be released to the departing Non-
Partner Employee Shareholder upon delivery by him or her of the shares to
the Company.
(d) Payment of Purchase Price. The purchase price shall be payable
-------------------------
in cash at the closing, or in the purchasers' discretion, in so many equal
annual principal installments as they may prefer, provided that if they
elect to pay in installments:
(i) they may pay in not more than two equal annual installments,
the first of which shall be payable upon the closing; and
(ii) the unpaid principal balance shall bear interest, payable
annually, at the floating "prime rate" as announced from time to time by
American National Bank and Trust Company of Chicago (and adjusted for
changes at the time of each announced change in said rate).
3.4 Termination of Employment.
-------------------------
For purposes of this Article III, cessation of any Employee Shareholder's
employment with the Company shall also include employment with any Affiliate;
for purposes of this Agreement, the term "Affiliate" shall mean any affiliate,
subsidiary, or parent of, or any other entity controlling, controlled by, or
under common control of, the Company.
ARTICLE IV
STOCK TRANSFER RESTRICTIONS
4.1 Stock Transfer Restrictions in General.
--------------------------------------
(a) Each Employee Shareholder and Investor promises not to voluntarily
sell, assign, convey, transfer, pledge, hypothecate or encumber any or all
of his, her or its Common Stock, nor any or all options, warrants, or other
rights to acquire any Common Stock (which rights, solely for purposes of
this Article IV, shall also be deemed "Common Stock"), except in compliance
with the terms and conditions of this Article IV.
(b) Definitions. As used herein, the following terms shall have the
-----------
indicated meanings:
10
<PAGE>
(i) "Outsider," as used herein, means any person or entity other
than the Company and the Partners, in the case of any Employee Shareholder,
or the Investors, in the case of any Investor.
(ii) "Transfer," when used as a noun herein, means any sale,
gift, assignment, distribution, conveyance, pledge, hypothecation, or other
transfer or encumbrance of title, whether accomplished voluntarily or by
order of court, by operation of law, pursuant or incident to any agreement
or decree of divorce or dissolution of marriage or marital separation, or
otherwise and including transfers taking effect upon (or as a consequence
of) death; when used as a verb, it means to consummate such a transaction.
"Transferor" means the maker, and "Transferee" means the recipient, of a
Transfer.
4.2 Right to First Refusal Prior to the IPO.
---------------------------------------
(a) Transfer By Employee Shareholder. If any Employee Shareholder
--------------------------------
(the "Prospective Employee Shareholder Transferor") wishes to Transfer for
consideration any or all Common Stock beneficially owned by him or her (the
"Offered Securities") to, and has received a bona fide written offer from,
an Outsider, he or she may do so, provided that prior to making such
Transfer, he or she shall have first offered to the Partners, excluding a
Partner who is the Prospective Employee Shareholder Transferor (the "Other
Partners"), then to the Company and then to the Investors, in the manner
provided for in this Section, the prior opportunity to purchase the Offered
Securities at the price and upon the terms and conditions hereinafter set
forth:
(i) Notice of Intent to Make Transfer. The Prospective Employee
---------------------------------
Shareholder Transferor shall serve upon the Other Partners, the
Company and the Investors, a written notice of his or her intention to
make a Transfer, which notice shall include the following:
(A) The number and type of shares of Common Stock that the
Prospective Employee Shareholder Transferor intends to Transfer;
(B) The name and address of the Outsider to whom he or she
proposes to Transfer the Offered Securities;
(C) The amount of the consideration offered by the Outsider
for the Offered Securities and the terms and conditions of such
offer;
(D) A photostatic copy of any written offer or
correspondence relating to the proposed Transfer of the Offered
Securities to the Outsider in question;
(E) Reasonable evidence of the ability of the Outsider to
pay the indicated purchase price; and
11
<PAGE>
(F) An offer by the Prospective Transferor to Transfer to the Other
Partners, the Company and the Investors, as hereinafter provided, the
Offered Securities.
If the purchase price to be paid by the Outsider is to be payable in property
other than in cash, the Other Partners, the Company or the Investors (as
applicable) shall have the right to pay the purchase price in the form of cash
in an amount equal to the fair market value (as determined in good faith by the
Board of Directors) of such non-cash property. In the event of any dispute
between a Prospective Employee Shareholder Transferor and the Other Partners,
the Company or the Investors regarding the determination of the fair market
value of non-cash property, at the request of such Prospective Employee
Shareholder Transferor, the Company shall engage a consulting or investment
banking firm selected by the Board of Directors and approved by the Prospective
Employee Shareholder Transferor to prepare an independent appraisal of the fair
market value of such property, which appraisal shall be binding on all parties.
The expense of any appraisal by such a consulting or investment banking firm
shall be borne equally by the Prospective Employee Shareholder Transferor and
the Other Partners, the Company or the Investors, as the case may be.
(ii) Right of First Refusal of Partners. The Other Partners shall have
----------------------------------
the exclusive first right to accept the offer and to purchase all (but not
less than all) of the Offered Securities. The offer may be accepted by all or
fewer than all of the Other Partners, pro rata (based on their respective
--- ----
holdings of Common Stock) or non-pro rata, but it may not be accepted unless at
--- ----
least a majority of the Other Partners have agreed that all or any of the Other
Partners shall be permitted to purchase the Offered Securities; the Other
Partners shall vote on the matter within five (5) days of the date of the notice
from the Prospective Employee Shareholder Transferee informing them of their
right to purchase the Offered Securities. If the Other Partners so determine
that all or any of the Other Partners shall be permitted to purchase the Offered
Securities, then such shares shall be offered to such Partners in the following
manner:
(A) Within five (5) days of the vote of the Other Partners, any of
the Other Partners desiring to purchase any of the Offered Securities shall
notify the CEO of the number of shares he or she has elected to purchase
and the CEO shall promptly notify all of the Other Partners of such
elections.
(B) If greater than all of the Offered Securities is subscribed for,
then each Other Partner who subscribed for shares may only purchase his or
her pro rata share of the Offered Securities based on the then current
--- ----
holdings of each such Other Partners, or as otherwise agreed upon by such
Partners.
(C) If less than all of the Offered Securities is subscribed for,
then each Other Partner who subscribed for shares, may purchase his or her
12
<PAGE>
pro rata share of the unsubscribed shares based on the then current
--- ----
holdings of each such Other Partner, or as otherwise agreed upon by such
Partners
(D) If all of the Offered Securities are not subscribed for, then
the Other Partners shall be deemed to have declined to purchase the Offered
Securities. In the event that all of the Offered Securities are subscribed
for, then at least a majority of the Other Partners must approve who the
purchasers shall be and the allocation of the Offered Securities among them
and notify the CEO of the same within the appropriate time period for the
CEO to respond to the Prospective Transferor. In the event the approval
required by the preceding sentence is not obtained, then the other Partners
shall be deemed to have declined to purchase the Offered Securities.
In the case of Partners who own options to purchase Common Stock, for purpose of
determining such Partners' rights to participate pro rata with the Other
--- ----
Partners, each such Partner shall be deemed to own that number of shares that
would be issuable upon the exercise of the options without consideration to
vesting. To accept, the CEO must deliver to the Prospective Transferor, the
Company and the Investors, on behalf of the purchasing Partners, within twenty
(20) days after the delivery of the notice to the Other Partners required under
Section 4.2(a)(i) hereof, a written notice of acceptance indicating that the
purchase has been approved by at least a majority of the Other Partners, who the
purchasers shall be and the allocation of the Offered Securities among them.
(iii) Right of First Refusal of the Company. If the Other Partners
-------------------------------------
shall have failed to accept the offer in accordance with Section 4.2(a)(ii)
hereof, then the Company shall have the exclusive next right to accept the offer
to purchase all (but not less than all) of the Offered Securities. To accept,
the Company must deliver to the Prospective Transferor, within thirty (30) days
after the delivery of the notice required under Section 4.2(a)(i) hereof, a
written notice of acceptance.
(iv) Right of First Refusal of Investors. If the Company shall
-----------------------------------
have failed to accept the offer in accordance with Section 4.2(a)(iii), then the
Investors shall have the exclusive next right to accept the offer to purchase
all (but not less than all) of the Offered Securities. To accept, the Investors
must deliver to the Prospective Transferor, within sixty (60) days after the
delivery of the notice required under Section 4.2(a)(i) hereof, a written notice
of acceptance.
(v) Purchase Price and Other Terms of Transfer. The purchase
------------------------------------------
price and the other terms of a Transfer under Section 4.2(a)(ii), (iii) or (iv)
hereof, and the collateral security therefor (if any), shall be the same as
those offered by the Outsider, provided that the closing of the sale shall not
be any earlier than ninety (90) days after the delivery of the notice required
under Section 4.2(a)(i) hereof.
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<PAGE>
(vi) Transfer to Outsider. The Prospective Employee Shareholder
--------------------
Transferor shall be entitled to consummate the proposed sale to the
Outsider unless some or all of the Other Partners, the Company or the
Investors purchase all of the Offered Securities in accordance with the
preceding Sections of this Section 4.2(a); provided, however, that the sale
to the Outsider shall be permitted only if: (A) it is consummated within
ninety (90) days after the giving of the notice under Section 4.2(a)(i)
hereof; (B) it is consummated with respect to all of the Offered Securities
and at the same price, terms and collateral arrangements as those described
in said notice; and (C) the purchaser complies with Section 4.7 hereof. If
the Offered Securities are not sold within the ninety (90) day period, they
shall again be subject to the requirements of this Section 4.2. Subject to
the provisions of Section 5.7 hereof, if the Offered Securities are sold to
the Outsider, the Offered Securities so sold shall no longer be subject to
any of the restrictions imposed by this Agreement.
(b) Transfer by Investor. If any Investor (the "Prospective Investor
--------------------
Transferor") wishes to Transfer for consideration any or all Common Stock
beneficially owned by it (the "Offered Securities") to, and has received a bona
fide written offer from, an Outsider, it may do so, provided that prior to
making such Transfer, it shall have first offered to the Partners, then to the
Company and then to the other Investors, in the manner provided for in this
Section, the prior opportunity to purchase the Offered Securities at the price
and upon the terms and conditions hereinafter set forth:
(i) Notice of Intent to Make Transfer. The Prospective Investor
---------------------------------
Transferor shall serve upon the Partners, the Company and the other
Investors, a written notice of its intention to make a Transfer, which
notice shall include the following:
(A) The number and type of shares of Common Stock that the
Prospective Investor Transferor intends to Transfer;
(B) The name and address of the Outsider to whom it proposes
to Transfer the Offered Securities;
(C) The amount of the consideration offered by the Outsider
for the Offered Securities and the terms and conditions of such offer;
(D) A photostatic copy of any written offer or correspondence
relating to the proposed Transfer of the Offered Securities to the
Outsider in question;
(E) Reasonable evidence of the ability of the Outsider to pay
the indicated purchase price; and
(F) An offer by the Prospective Investor Transferor to
Transfer to the Partners, the Company and the other Investors, as
hereinafter provided, the Offered Securities.
14
<PAGE>
If the purchase price to be paid by the Outsider is to be payable in property
other than in cash, the Other Partners, the Company or the Investors (as
applicable) shall have the right to pay the purchase price in the form of cash
in an amount equal to the fair market value (as determined in good faith by the
Board of Directors) of such non-cash property. In the event of any dispute
between a Prospective Employee Shareholder Transferor and the Other Partners,
the Company or the Investors regarding the determination of the fair market
value of non-cash property, at the request of such Prospective Employee
Shareholder Transferor, the Company shall engage a consulting or investment
banking firm selected by the Board of Directors and approved by the Prospective
Employee Shareholder Transferor to prepare an independent appraisal of the fair
market value of such property, which appraisal shall be binding on all parties.
The expense of any appraisal by such a consulting or investment banking firm
shall be borne equally by the Prospective Employee Shareholder Transferor and
the Other Partners, the Company or the Investors, as the case may be.
(ii) Right of First Refusal of Partners. The Other Partners shall
----------------------------------
have the exclusive first right to accept the offer and to purchase all (but not
less than all) of the Offered Securities. The offer may be accepted by all or
fewer than all of the Other Partners, pro rata (based on their respective
--- ----
holdings of Common Stock) or non-pro rata, but it may not be accepted unless at
--- ----
least a majority of the Other Partners have agreed that all or any of the Other
Partners shall be permitted to purchase the Offered Securities; the Other
Partners shall vote on the matter within five (5) days of the date of the notice
from the Prospective Employee Shareholder Transferee informing them of their
right to purchase the Offered Securities. If the Other Partners so determine
that all or any of the Other Partners shall be permitted to purchase the Offered
Securities, then such shares shall be offered to such Partners in the following
manner:
(A) Within five (5) days of the vote of the Other Partners, any
of the Other Partners desiring to purchase any of the Offered Securities
shall notify the CEO of the number of shares he or she has elected to
purchase and the CEO shall promptly notify all of the Other Partners of
such elections.
(B) If greater than all of the Offered Securities is subscribed
for, then each Other Partner who subscribed for shares may only purchase
his or her pro rata share of the Offered Securities based on the then
--- ----
current holdings of each such Other Partners, or as otherwise agreed
upon by such Partners.
(C) If less than all of the Offered Securities is subscribed
for, then each Other Partner who subscribed for shares, may purchase
his or her pro rata share of the unsubscribed shares based on the then
--- ----
current holdings of each such Other Partner, or as otherwise agreed upon
by such Partners
(D) If all of the Offered Securities are not subscribed for,
then the Other Partners shall be deemed to have declined to purchase the
Offered Securities. In the event that all of the Offered Securities are
subscribed for, then at least a majority of the Other Partners must
approve who the purchasers
15
<PAGE>
shall be and the allocation of the Offered Securities among them and
notify the CEO of the same within the appropriate time period for the
CEO to respond to the Prospective Transferor. In the event the approval
required by the preceding sentence is not obtained, then the other
Partners shall be deemed to have declined to purchase the Offered
Securities.
In the case of Partners who own options to purchase Common Stock, for purpose
of determining such Partners' rights to participate pro rata with the Other
--- ----
Partners, each such Partner shall be deemed to own that number of shares that
would be issuable upon the exercise of the options without consideration to
vesting. To accept, the CEO must deliver to the Prospective Transferor, the
Company and the Investors, on behalf of the purchasing Partners, within twenty
(20) days after the delivery of the notice to the Other Partners required under
Section 4.2(a)(i) hereof, a written notice of acceptance indicating that the
purchase has been approved by at least a majority of the Other Partners, who the
purchasers shall be and the allocation of the Offered Securities among them.
(iii) Right of First Refusal of the Company. If the Other
-------------------------------------
Partners shall have failed to accept the offer in accordance with Section
4.2(a)(ii) hereof, then the Company shall have the exclusive next right to
accept the offer to purchase all (but not less than all) of the Offered
Securities. To accept, the Company must deliver to the Prospective Transferor,
within thirty (30) days after the delivery of the notice required under Section
4.2(a)(i) hereof, a written notice of acceptance.
(iv) Right of First Refusal of Investors. If the Company
-----------------------------------
shall have failed to accept the offer in accordance with Section 4.2(a)(iii),
then the Investors shall have the exclusive next right to accept the offer to
purchase all (but not less than all) of the Offered Securities. To accept, the
Investors must deliver to the Prospective Transferor, within sixty (60) days
after the delivery of the notice required under Section 4.2(a)(i) hereof, a
written notice of acceptance.
(v) Purchase Price and Other Terms of Transfer. The purchase price
------------------------------------------
and the other terms of a Transfer under Section 4.2(a)(ii), (iii) or (iv)
hereof, and the collateral security therefor (if any), shall be the same as
those offered by the Outsider, provided that the closing of the sale shall not
be any earlier than ninety (90) days after the delivery of the notice required
under Section 4.2(a)(i) hereof.
(vi) Transfer to Outsider. The Prospective Employee Shareholder
--------------------
Transferor shall be entitled to consummate the proposed sale to the Outsider
unless some or all of the Other Partners, the Company or the Investors purchase
all of the Offered Securities in accordance with the preceding Sections of this
Section 4.2(a); provided, however, that the sale to the Outsider shall be
permitted only if: (A) it is consummated within ninety (90) days after the
giving of the notice under Section 4.2(a)(i) hereof; (B) it is consummated with
respect to all of the Offered Securities and at the same price, terms and
collateral arrangements as those described in said notice; and (C) the purchaser
16
<PAGE>
complies with Section 4.7 hereof. If the Offered Securities are
not sold within the ninety (90) day period, they shall again be
subject to the requirements of this Section 4.2. Subject to the
provisions of Section 5.7 hereof, if the Offered Securities are
sold to the Outsider, the Offered Securities so sold shall no
longer be subject to any of the restrictions imposed by this
Agreement.
4.3 Right of First Refusal Regarding the IPO.
----------------------------------------
If the IPO is the Rights Offering, the Partners and the Company shall
have no rights of first refusal with respect to the shares offered by the
Investors or the Company thereunder. With respect to any other shares of Common
Stock intended to be offered by the Investors or the Employee Shareholders and
to be covered by the same registration statement as the Rights Offering, and
with respect to all shares of Common Stock intended to be offered by the
Investors or the Employee Shareholders in the IPO if the IPO is not a Rights
Offering (collectively, the "Offered Shares"), the following rights of first
refusal shall apply:
(a) Shares to be Offered by Employee Shareholders. With
---------------------------------------------
respect to all shares to be offered by Employee Shareholders, the
offering Employee Shareholders shall submit a written offer (the
"Offer") to sell all (but not less than all) of the Offered Shares to
the Investors, at a price per share equal to the amount estimated in
good faith by the underwriter (or, if there is to be no underwriter, by
the Employee Shareholders), as set forth in a written estimate addressed
to the Investors, of the price at which the shares will be offered to
the public, less all anticipated commissions and discounts with respect
thereto. The Offer shall be delivered to the Company and the Investors.
(b) Shares to be Offered by Investors. With respect to all
---------------------------------
shares to be offered by Investors, the offering Investors shall submit
an Offer to sell all (but not less than all) of the Offered Shares to
the Partners or to the Company, at a price per share equal to the amount
estimated in good faith by the underwriter (or, if there is to be no
underwriter, by the Investors), as set forth in a written estimate
addressed to the Partners, of the price at which the shares will be
offered to the public, less all anticipated commissions and discounts.
The Offer shall be delivered to the Company and to the Partners.
(c) Exercise of Purchase Right by Investors. The Investors
---------------------------------------
shall have the right, for a period of fifteen (15) days after receipt of
an Offer pursuant to Section 4.3(a), to accept the Offer, by written
notice delivered to the Employee Shareholders. Such notice shall state
the number of shares that each purchasing Investor desires to purchase
and shall be delivered to the offering shareholders within said fifteen
(15) day period. Such notice shall, when taken in conjunction with the
Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the purchase of the Offered Shares. If a notice of intent
to purchase shall not have been duly given within such fifteen (15) day
period, the offering Employee Shareholders shall use their best efforts
to consummate the sale of the Offered Shares pursuant to the IPO at the
price set forth in their (or their underwriter's) estimate to the
Investors.
17
<PAGE>
(d) Exercise of Purchase Right by Partners or the Company. The
-----------------------------------------------------
Company and the Partners shall have the right, for a period of fifteen
(15) days after receipt of an Offer pursuant to Section 4.3(b), to
accept the Offer, by written notice delivered to the offering Investors;
in case both Partners and the Company shall accept, the acceptance of
Partners shall control, and the Company's acceptance shall be deemed
void. In the case of the Partners, the Offer may be accepted by all or
by fewer than all of the other Partners, pro rata (based on their
--- ----
respective holdings of Common Stock) or non-pro rata, in accordance with
the procedure for acceptance by Partners of offers to purchase Common
Stock provided in Section 4.2(b)(ii) hereof (except as specified
otherwise herein). In the case of Partners who own options to purchase
Common Stock, for purpose of determining such Partners' rights to
participate pro rata with the other Partners, each such Partner shall
--- ----
be deemed to own that number of shares that would be issuable upon the
exercise of the options without consideration to vesting. The notice of
acceptance shall state, in case Partners are to be the purchaser, the
number of shares that each purchasing Partner desires to purchase, and
in any event the Company's or the Partners' notice shall be delivered to
the offering Investors within such fifteen (15) day period. Such notice
shall, when taken in conjunction with the Offer, be deemed to constitute
a valid, legally binding and enforceable agreement for the purchase of
the Offered Shares. If a notice of intent to purchase shall not have
been given within such fifteen (15) day period, the offering Investors
shall use their best efforts to consummate the sale of the Offered
Shares pursuant to the IPO at the price set forth in their or their
underwriter's estimate to the Partners.
4.4 Right of First Offer After the IPO.
----------------------------------
(a) Transfers by Partners. After the effective date of the
---------------------
IPO, any Transfers of Common Stock by Partners shall be governed solely
by the Partner Compensation Program.
(b) Offer by a Non-Partner Employee Shareholder to the Company.
----------------------------------------------------------
If at any time after the IPO, a Non-Partner Employee Shareholder desires
to Transfer for cash or any other form of consideration (including a
promissory note or other deferred consideration) any shares of Common
Stock beneficially owned by such Non-Partner Employee Shareholder
otherwise than to the Company or to any other Employee Shareholder, the
Non-Partner Employee Shareholder shall submit an Offer to sell all (but
not less than all) of the Offered Shares to the Company, at a price per
share equal to the closing selling price of one share of Common Stock on
the date of the Offer, or if a closing price shall not be quoted, the
mean of the bid and ask prices at the close of trading on such date, or
if neither a reported closing selling price nor bid and ask prices at
the close of trading on such date are quoted, then the closing selling
price or the bid and ask prices at the close of trading on the next
preceding date for which such quotation exists. The Offer shall be
delivered to the Company.
(c) Offer by an Investor to the Company. If at any time after
-----------------------------------
the IPO an Investor desires to Transfer for cash or any other form of
consideration (including a promissory note or other deferred
consideration) any shares of Common Stock beneficially
18
<PAGE>
owned by such Investor otherwise than to the Company or to other Investors, the
Investor shall submit an Offer to sell all (but not less than all) of the
Offered Shares to the Company, at a price per share equal to the closing selling
price of one share of Common Stock on the date of the Offer, or if there is no
reported closing selling price on such date, or if a closing price shall not be
quoted, the mean of the bid and ask prices at the close of trading on such date,
or if neither a reported closing selling price nor bid and ask prices at the
close of trading on such date are quoted, then the closing selling price or the
bid and ask prices at the close of trading on the next preceding date for which
such quotation exists. The Offer shall be delivered to the Company.
(d) Exercise of Purchase Right.
--------------------------
(i) Low Volume Sales. If the number of Offered Shares
----------------
shall be equal to or less than the greater of: (A) one percent of the
number of outstanding shares of Common Stock; or (B) the average weekly
reported volume of trading in the Common Stock during the four calendar
weeks preceding the date the Offer is delivered to the Company, the
purchase rights under Section 4.4(b) and (c) shall be exercisable as
provided in this subsection. The Company shall have the right, for a
period of forty-eight (48) hours (excluding all hours on nontrading
days) after receipt of an Offer pursuant to Section 4.4(c) to accept the
Offer (as to all, but not less than all, of the Offered Shares), by
written notice to the offering Non-Partner Employee Shareholder or
Investor, as applicable. Such notice shall state the number of shares
that the Company desires to purchase and shall be delivered within the
forty-eight (48) hour period to the offering Non-Partner Employee
Shareholder or Investor, as applicable. Such notice shall, when taken in
conjunction with the Offer, be deemed to constitute a valid, legally
binding and enforceable agreement for the sale and purchase of the
Offered Shares to the Company, as set forth therein. If a notice of
intent to purchase shall not have been duly given within such forty-
eight (48) hour period, the offering Non-Partner Employee Shareholder or
Investor, as applicable, may sell the Offered Shares at any time within
six months thereafter without any further obligation to the Company
hereunder and without any restriction on the sale price thereof.
(ii) High Volume Sales. If the number of Offered Shares shall
-----------------
be greater than the greater of: (A) one percent of the number of
outstanding shares of Common Stock; or (B) the average weekly reported
volume of trading in the Common Stock during the four calendar weeks
preceding the date the Offer is delivered to the Company, the purchase
rights under this Section 4.4(b) and (c) shall be exercisable as
provided in this subsection. The Company shall have the right, for a
period of seven trading days after receipt of an Offer pursuant to
Section 4.4(c) to accept the Offer (as to all, but not less than all, of
the Offered Shares), by written notice to the offering Non-Partner
Employee Shareholder or Investor, as applicable. Such notice shall state
the number of shares that the Company desires to purchase and shall be
delivered within the seven trading-day period to the offering Non-
Partner Employee Shareholder or Investor, as applicable. Such notice
shall, when taken in conjunction with the Offer, be deemed
19
<PAGE>
to constitute a valid, legally binding and enforceable agreement for
the sale and purchase of the Offered Shares to the Company as set
forth therein. Any of the Offered Shares as to which a notice of
intent to purchase shall not have been duly given within such seven
trading-day period, may be sold without any further obligation to the
Company hereunder and without any restriction on the sale price
thereof at any time prior to the date that is eight months after such
seven-trading-day period plus the period, if any, during which the
filing of the registration statement for such resale shall have been
deferred at the request of the Company.
(e) Settlement. The closing of the purchase and sale of any shares
----------
pursuant to this Section 4.4 shall be made at the offices of the Company
on such date as may be agreed upon by the offering Non-Partner Employee
Share-holder or Investor, as the case may be, and the Company, but not
later than the seventh day after the date of the Offer in respect of
shares sold pursuant to Section 4.4(d)(i) or the fifteenth (15th) day
after the date of the Offer in respect of shares sold pursuant to Section
4.4(d)(ii), as the case may be. Such sales shall be effected by delivery
to each purchaser of a certificate or certificates evidencing the shares
to be purchased by it, duly endorsed for transfer to such purchaser,
against payment to the seller of the purchase price therefor.
4.5 Short Selling after the IPO.
---------------------------
After the IPO, short selling of Common Stock by any Employee Shareholder
is strictly prohibited.
4.6 Right of Participation in Sales.
-------------------------------
(a) Co-Sale Right. If at any time one or more Employee Shareholders
-------------
or one or more Investors desire to sell fifteen percent (15%) or more of
the outstanding shares of Common Stock (in each case, the "Take-Along
Shares") to any Proposed Transferee prior to the first to occur of the IPO
or the Rights Offering and such Employee Shareholders or Investors are
permitted to make such sale under Section 4.2, the Employee Shareholder(s)
or Investor(s) shall make effective arrangement (which shall be a
condition to any such sale) so that each of the Investors, in the case of
selling Employee Shareholder(s), or each of the Partners, in the case of
selling Investors, shall have the right to sell to the Proposed
Transferee, at the same price per share and other terms and conditions as
involved in such sale by the selling Employee Shareholders or Investors,
as the case may be, such number of shares of Common Stock (calculated on a
fully-diluted basis) equal to the Take-Along Shares multiplied by a
fraction, (i) the numerator of which is the aggregate number of shares of
Common Stock owned by the Investor or Partner, as the case may be,
desiring to participate in the sale (calculated on a fully-diluted basis),
and (ii) the denominator of which is the sum of all shares of Common Stock
owned by the selling Employee Shareholder(s) or Investor(s) and all of the
Investors or Partners, as the case may be, desiring to participate in the
sale to the Proposed Transferee under this Section (calculated on a fully-
diluted basis).
20
<PAGE>
(b) Notice of Intent to Participate. Each Investor or Partner
-------------------------------
wishing to so participate in any sale under this Section 4.6 shall notify
the selling Employee Shareholder(s) or Investor(s), as the case may be, in
writing of such intention as soon as practicable after such Investor's or
Partner's receipt of the notice of the proposed Transfer, and in any event
within fifteen (15) days after the date the notice of the proposed
Transfer was given. Such notification shall be delivered in person or
mailed to the selling Employee Shareholder(s) or Investor(s).
(c) Sale to Proposed Transferee. The selling Employee Shareholder(s)
---------------------------
or Investor(s) and each Investor or Partner participating in the sale
shall sell to the Proposed Transferee all, or at the option of the
Proposed Transferee, any part of the shares proposed to be sold by them at
not less than the price and upon other terms and conditions, if any, not
more favorable to the Proposed Transferee than those in the Offer;
provided, however, that any purchase of less than all of such Shares by
the Proposed Transferee shall be made from the selling Employee
Shareholder(s) or Investor(s) and each participating Investor or Partner
pro rata based upon the relative amount of the shares that each of them
--- ----
is otherwise entitled to sell pursuant to Section 4.6(a).
4.7 Limitation on Transfer.
----------------------
Except for transactions involving the financing of the purchases of
shares of Common Stock by an Employee Shareholder or an Investor in accordance
with this Agreement, each of the Employee Shareholders and Investors agrees that
he, she or it will not mortgage, pledge, hypothecate or otherwise encumber any
of the Common Stock or rights or options to purchase Common Stock beneficially
owned by such Employee Shareholder or Investor without the prior written consent
of Partners and Investors holding at least a majority of the outstanding shares
of Common Stock then held by all of the Partners and Investors, and will not
prior to the IPO Date, otherwise sell, assign, transfer or dispose of: (a) any
rights or options to purchase Common Stock; or (b) any Common Stock, to any
person or entity engaging, as all or part of its business, in businesses
substantially similar to those of the Company. Except as otherwise provided
pursuant to Section 4.2(a)(vi) and 4.2(b)(vi) hereof, each of the Employee
Shareholders and Investors agrees not to sell, transfer, assign or dispose of
any of his, her or its Common Stock unless the Transferee agrees in writing to
be bound by the terms and conditions of this Agreement and executes a
counterpart of this Agreement, and unless such Employee Shareholder or Investor
has complied with applicable law in connection with such transfer. Each party
hereto agrees not to sell, transfer, assign or dispose of any Common Stock
(other than in a public offering registered under the Securities Act of 1933, as
amended) if, as a result thereof, the Company would be required to register such
Common Stock under Section 12 of the Securities Exchange Act of 1934, as
amended.
4.8 Transfers in Violation.
----------------------
Any transfers in violation of this Agreement shall be null and void
and of no effect. The Company shall prohibit its stock transfer agent from
transferring on the stock records of the Company any securities of the Company
except upon such agent's receipt of a notice from the Company that such transfer
is being accomplished in compliance with this Agreement.
21
<PAGE>
ARTICLE V
MISCELLANEOUS
-------------
5.1 Duration of Agreement.
---------------------
The rights and obligations of the Company, each Employee Shareholder
and each Investor under this Agreement shall terminate, on the earlier to occur
of the following: (a) upon the consummation of the sale of all, or
substantially all, of the Company's assets or Common Stock either through a
direct sale, merger, reorganization, consolidation or other form of business
combination in which control of the Company is transferred; (b) December 31,
2015; and (c) such time as the aggregate number of shares of Common Stock then
held by all of the Employee Shareholders or by all of the Investors represents
less than ten percent (10%) of the then outstanding shares of Common Stock.
5.2 Legend.
------
Each certificate representing shares of Common Stock beneficially
owned by the Employee Shareholders and the Investors shall bear a legend in
substantially the following form, until such time as the shares of Common Stock,
represented thereby are no longer subject to the provisions hereof:
"The sale, transfer or assignment of the securities represented by this
certificate are subject to the terms and conditions of a certain Amended
and Restated Voting and Stock Restriction Agreement dated _____________
_____________, 1996, as amended from time to time, among the Company and
certain holders of its outstanding Common Stock. Said Agreement includes
an agreement regarding the management of the Company, pursuant to Section
7.71 of the Illinois Business Corporation Act. Copies of such Agreement
may be obtained at no cost by written request made by the holder of record
of this certificate to the Secretary of the Company."
5.3 Severability; Governing Law.
---------------------------
If any provisions of this Agreement shall be determined to be illegal or
unenforceable by any court of law, the remaining provisions shall be severable
and enforceable to the maximum extent possible in accordance with their terms.
This Agreement shall be governed by, and construed in accordance with, the laws
of the state of organization of the Company from time to time, initially the
State of Illinois.
5.4 Injunctive Relief.
-----------------
It is acknowledged that it will be impossible to measure the damages
that would be suffered by the Investors or the Employee Shareholders if an
Employee Shareholder or Investor fails to comply with the provisions of this
Agreement and that in the event of any such failure, the Investors and the
Employee Shareholder will not have an adequate remedy at law. The Investors and
the Employee Shareholders shall, therefore, be entitled to obtain specific
performance of the
22
<PAGE>
Employee Shareholder's and/or Investor's obligations hereunder and to obtain
immediate injunctive relief.
5.5 Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their permitted successors and assigns, legal representatives
and heirs. Further, this Agreement shall be binding upon and inure to the
benefit of any entity, the capital stock of which is issued in exchange for the
Common Stock of the Company pursuant to any merger, consolidation,
reorganization, or transfer or exchange of assets, of the Company; in such
event, the term "Company" shall be deemed to mean such entity.
5.6 Modification or Amendment.
-------------------------
Neither this Agreement nor any provision hereof can be modified,
amended, changed, discharged or terminated except by an instrument in writing,
signed by: (a) any of the Employee Shareholders who are the beneficial owners of
at least a majority of the total number of shares of Common Stock held by all
the Employee Shareholders; and (b) the consent of the Investors who are the
beneficial owners of at least a majority of the Common Stock held by all the
Investors; provided, however, that any amendment, modification, change,
discharge or termination of the provisions relating to: (i) any increase of the
obligations or decrease of the rights of the Investors or the election of the
Investor Directors shall require the consent of the Investors holding a majority
of the outstanding shares of Common Stock held by all of the Investors, voting
separately; and (ii) any increase of the obligations or decrease of the rights
of the Employee Shareholders shall require the consent of the holder of the
proxy to vote the outstanding shares of Common Stock held by the Employee
Shareholders.
5.7 Additional Parties and Definitions.
----------------------------------
(a) The Company, Investors and Employee Shareholders shall cause
the following to occur:
(i) Any person or entity who acquires Common Stock from an
Investor (other than in a transaction which was subject to, and
complied with, Sections 4.2, 4.3 or 4.4 and Section 4.6 hereof) shall
be deemed an Investor hereunder, unless at the time of such purchase
such person or entity was an Employee Shareholder or an employee of
the Company, in which case such person or entity still remains or
becomes deemed (as the case may be) an Employee Shareholder
hereunder;
(ii) Any person or entity who acquires Common Stock from an
Employee Shareholder hereunder (other than in a transaction which was
subject to, and complied with, Sections 4.2, 4.3 or 4.4 and Section
4.6 hereof), shall be deemed an Employee Shareholder hereunder,
unless at the time of such acquisition such person or entity was an
Investor; and
23
<PAGE>
(iii) Any person who, while employed by the Company or in
connection with becoming employed by the Company, acquires Common
Stock from the Company, shall be deemed an Employee Shareholder
hereunder.
Execution by such persons or entities of a counterpart of this Agreement
and an amendment adding their names hereto shall be a condition of any
acquisition of such shares by such person or entity.
(b) As used herein, the term "Common Stock" shall mean all shares
of the Common Stock, no par value, of the Company and any other shares of
stock or other voting securities, of any class or series, of the Company
or of any entity into or with which the Company may be merged or
consolidated, that any shareholder may hereafter acquire by any means from
the Company or from any other person or entity, including shares issued as
stock dividends or pursuant to any recapitilization or reorganization, and
shares issued in exchange for such shares in any merger, consolidation,
reorganization, or transfer or exchange of assets, of the Company.
5.8 Counterparts.
------------
This Agreement may be executed in one or more counterparts each of which
shall be deemed to be an original, but all of which taken together shall
constitute one and the same instrument.
5.9 Notices.
-------
All notices to be given or otherwise made to any part to this Agreement
shall be deemed to be sufficient if contained in a written instrument, delivered
by hand in person, or by express overnight courier service, or by electronic
facsimile transmission (with a confirming copy sent by U.S. mail, registered or
certified, return receipt requested), or by registered or certified mail, return
receipt requested, postage prepaid, addressed to such party at the address set
forth herein, or (in the case of assignees) at the address last given by them to
the Company, or (as to parties or assignees) at such other address as may
hereafter be designated in writing by the addressee to the addressor listing all
parties. All such notices shall, when mailed or telegraphed, be effective when
received or when attempted delivery is refused.
5.10 Merger Provision.
----------------
This Agreement and the Stock Purchase Agreement, along with all exhibits
and schedules to the various agreements, constitute the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersede all
prior and contemporaneous agreements and understandings, whether oral or
written, of any of the parties hereto concerning the subject matter hereof. This
Agreement supersedes and replaces the Prior Voting and Stock Restriction
Agreement. Further, each and every Employee Proxy and Stock Restriction
Agreement between the Company and each Non-Partner Employee Shareholder in
effect immediately prior to the execution hereof is hereby terminated and of no
further force or effect.
24
<PAGE>
5.11 Further Assurances.
------------------
From and after the date of this Agreement, upon the request of any
Investor or the Company, the Company, the Employee Shareholders and the
Investors shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.
[SIGNATURE PAGES FOLLOW]
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Voting and Stock Restriction Agreement to be executed as of the date
first above written.
DIAMOND TECHNOLOGY PARTNERS, INC.
By:[SIGNATURE APPEARS HERE]
---------------------------------
Title:
------------------------------
INVESTORS:
TECHNOLOGY LEADERS, L.P.
By: Technology Leaders Management, Inc. (General Partner)
By:[SIGNATURE APPEARS HERE]
---------------------------------
Title:
------------------------------
TECHNOLOGY LEADERS OFFSHORE C.V.
By: Technology Leaders Management, Inc. (General Partner)
By:[SIGNATURE APPEARS HERE]
---------------------------------
Title:
------------------------------
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By:[SIGNATURE APPEARS HERE]
---------------------------------
Title:
------------------------------
CIP CAPITAL L.P. (formerly, CIP, L.P.)
By: CIP Capital Management Inc.
(General Partner)
By:[SIGNATURE APPEARS HERE]
---------------------------------
Title:
------------------------------
[SIGNATURES CONTINUE ON FOLLOWING TWO PAGES]
26
<PAGE>
PARTNERS:
/s/ Anthony L. Abbattista
- -------------------------------------
Anthony L. Abbattista
/s/ Melvyn E. Bergstein
- -------------------------------------
Melvyn E. Bergstein
/s/ Laura M. Bestor
- -------------------------------------
Laura M. Bestor
/s/ Karl E. Bupp
- -------------------------------------
Karl E. Bupp
/s/ Michael J. Connolly
- -------------------------------------
Michael J. Connolly
/s/ Craig D. Elderkin
- -------------------------------------
Craig D. Elderkin
/s/ Elwood G. Forsythe
- -------------------------------------
Elwood G. Forsythe
/s/ Adam J. Gutstein
- -------------------------------------
Adam J. Gutstein
/s/ Carl J. Hugener
- -------------------------------------
Carl J. Hugener
/s/ Jay R. Kingley
- -------------------------------------
Jay R. Kingley
/s/ Chapman H. Kistler
- -------------------------------------
Chapman H. Kistler
/s/ Alan A. Matsumura
- -------------------------------------
Alan A. Matsumura
/s/ James V. McGee
- -------------------------------------
James V. McGee
/s/ Michael E. Mikolajczyk
- -------------------------------------
Michael E. Mikolajczyk
/s/ Christopher J. Moffitt
- -------------------------------------
Christopher J. Moffitt
/s/ James W. Niland
- -------------------------------------
James W. Niland
/s/ Michael J. Palmer
- -------------------------------------
Michael J. Palmer
/s/ Bruce R. Quade
- -------------------------------------
Bruce R. Quade
/s/ David M. Rappaport
- -------------------------------------
David M. Rappaport
/s/ Mark R. Siefertson
- -------------------------------------
Mark E. Siefertson
/s/ Kirk E. Siefkas
- -------------------------------------
Kirk E. Siefkas
/s/ Martha J. Silva
- -------------------------------------
Martha J. Silva
/s/ James C. Spira
- -------------------------------------
James C. Spira
/s/ Ronald V. Coughlin
- -------------------------------------
Ronald V. Coughlin
27
<PAGE>
NON-PARTNER EMPLOYEE SHAREHOLDERS:
/s/ William Abbott
- -------------------------------------
William Abbott
/s/ David C. Baker
- -------------------------------------
David C. Baker
/s/ Michael J. Beller
- -------------------------------------
Michael J. Beller
/s/ Travis D. Cole
- -------------------------------------
Travis D. Cole
/s/ Christy Deckys
- -------------------------------------
Christy Deckys
/s/ Robert Michael DeCuyper
- -------------------------------------
Robert Michael DeCuyper
/s/ James P. Dooley
- -------------------------------------
James P. Dooley
/s/ Ronald P. Fleischer
- -------------------------------------
Ronald P. Fleischer
/s/ Philip B. Garrison
- -------------------------------------
Philip B. Garrison
/s/ James R. Hegerty
- -------------------------------------
James R. Hegerty
/s/ Gregory V. Jaros
- -------------------------------------
Gregory V. Jaros
/s/ Robert J. Kiep
- -------------------------------------
Robert J. Kiep
/s/ Thomas C. Kraczkowsky
- -------------------------------------
Thomas C. Kraczkowsky
/s/ Karen M. Lektzian
- -------------------------------------
Karen M. Lektzian
/s/ Charles Brent Lohrmann
- -------------------------------------
Charles Brent Lohrmann
/s/ Michael J. Martinez
- -------------------------------------
Michael J. Martinez
/s/ Timothy J. McKula
- -------------------------------------
Timothy J. McKula
/s/ Scott A. McMillen
- -------------------------------------
Scott A. McMillen
/s/ James R. Mondi
- -------------------------------------
James R. Mondi
/s/ Jeffrey R. Opie
- -------------------------------------
Jeffrey R. Opie
/s/ Scott Rupple
- -------------------------------------
Scott Rupple
/s/ Jeffrey A. Schuchert
- -------------------------------------
Jeffrey A. Schuchert
/s/ Michael L. Shinnick
- -------------------------------------
Michael L. Shinnick
/s/ Jeffrey C. Smith
- -------------------------------------
Jeffrey C. Smith
/s/ Steven G. Steinberg
- -------------------------------------
Steven G. Steinberg
/s/ Barry J. Uphoff
- -------------------------------------
Barry J. Uphoff
/s/ Steven R. VanErmen
- -------------------------------------
Steven R. VanErmen
/s/ Julia Wallace
- -------------------------------------
Julia Wallace
/s/ Derek O. Walter
- -------------------------------------
Derek O. Walter
/s/ Thomas E. Weakland
- -------------------------------------
Thomas E. Weakland
/s/ Peter M. Wilson
- -------------------------------------
Peter M. Wilson
28
<PAGE>
EXHIBIT A
---------
DIAMOND TECHNOLOGY PARTNERS, INC.
DIRECTOR CONFIDENTIALITY AGREEMENT
I, __________________________, in consideration of the opportunity to
serve on the Board of Directors of Diamond Technology Partners, Inc. (the
"Company") and of any compensation that I might receive for such services,
promise and agree as follows:
I will not, either during the term while I am serving as a Director of the
Company or at any time thereafter, except as required in the performance of my
duties as a director of the Company or as authorized in writing by the Company,
reveal to any person or entity any trade secrets or other non-public information
of the Company or of third parties in respect of which the Company has, and has
made known to me, an obligation of confidentiality, in each case that I may
acquire during my tenure, and by reason of my acting, as a Director of the
Company.
Signed: [SIGNATURE APPEARS HERE]
------------------------- ----------------------------------
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
PARTNERS' OPERATING AGREEMENT
-----------------------------
THIS AMENDED AND RESTATED PARTNERS' OPERATING AGREEMENT (this "Agreement")
is entered into as of the 1st day of April, 1996, among DIAMOND TECHNOLOGY
PARTNERS, INC., an Illinois corporation (the "Company") and certain individuals
designated by the Company or any "Affiliate" (as defined in Section 1.1(f)
hereof) as a "Partner;" said individuals and all other persons who may hereafter
be designated by the Company or any Affiliate as "Partners" pursuant to the
provisions hereof, are referred to herein collectively as the "Partners" and
individually as a "Partner."
WITNESSETH:
WHEREAS, the parties to this Agreement entered into that certain Partners'
Operating Agreement dated as of March 22, 1994, which was amended by: (i) a
certain First Amendment to Diamond Technology Partners, Inc. Partners' Operating
Agreement dated June 24, 1994; (ii) a certain Second Amendment to Diamond
Technology Partners, Inc. Partners' Operating Agreement dated as of November 30,
1994; and (iii) a certain Third Amendment to Diamond Technology Partners, Inc.
Partners' Operating Agreement dated as of April 27, 1995 (collectively, the
"Prior Partners' Operating Agreement"), whereby the parties established a set of
procedures relating to the utilization of the combined voting power of the
Partners' shares of stock of the Company, including internal governance and
compensation provisions to be realized through the strength of said combined
voting power and whereby the parties granted a proxy to the person holding the
position of Chairman of the Board and Chief Executive Officer of the Company and
provided for the selection of any successors to such Chief Executive Officer
("CEO");
WHEREAS, the parties to this Agreement and various other shareholders of
the Company entered into that certain Voting and Stock Restriction Agreement
dated as of March 22, 1994, which was amended by: (i) a certain Amendment to
Voting and Stock Restriction Agreement dated as of March 22, 1994; (ii) a
certain Amendment Number Two to Voting and Stock Restriction Agreement dated as
of November 30, 1994; and (iii) a certain Amendment Number Three to Voting and
Stock Restriction Agreement dated as of April 27, 1995 (collectively the "Prior
Voting Agreement");
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Prior Voting Agreement is being amended and restated in its
entirety, to provide, among other things, for the incorporation therein of the
provisions relating to the grant of the proxy to the CEO (the "Voting
Agreement");
WHEREAS, a Delaware company has been, or will be, organized by the
shareholders of the Company to own the stock of, and to provide certain
management services for, the Company and other possible Affiliates; and
<PAGE>
WHEREAS, the parties wish to amend each of the aforementioned agreements,
and, in light of the agreements having already been amended several times, now
wish to amend and restate the Prior Partners' Operating Agreement in its
entirety, to eliminate certain provisions that will be incorporated into the
Voting Agreement and to modify the Prior Partners' Operating Agreement to
incorporate the new company structure resulting from the reincorporation and the
formation of a wholly owned subsidiary;
NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
SUCCESSOR CEO
-------------
1.1. Selection of Successor.
----------------------
Upon any CEO of the Company ceasing to hold the office of CEO as determined
according to the terms of the Voting Agreement, his or her successor shall be
selected by means of the following procedures, which shall be conducted as
expeditiously as possible as soon as the occasion shall arise:
(a) The Management Committee of the Partners (as constituted
pursuant to Section 2.1 hereof), by vote of a majority of its members,
shall slate six Partners for election of three of them to a "CEO
Nominating Committee," to consist of three Partners;
(b) The Partners shall vote on the six nominees, and the three
receiving the highest number of votes shall constitute the CEO
Nominating Committee;
(c) The CEO Nominating Committee, by vote of a majority of its
members, shall select a Partner as its nominee (who may, if said
committee so desires, be the incumbent CEO) and shall propose such
nominee to the Partners;
(d) The Partners, by the affirmative vote of a simple majority of
the Partners, may approve the nominee who shall thereby become the
holder of the proxy granted under the Voting Agreement; however, if they
shall fail to approve the nominee, the entire procedure set forth in
this Section 1.1 shall be repeated, beginning with the slating and
election of a new CEO Nominating Committee;
(e) The nominee shall be submitted to the Board of Directors of the
Company (the "Board of Directors"), which shall vote on his or her
election as CEO. The Board of Directors shall only consider nominations
for CEO pursuant to the procedures provided in this Section 1.1. It is
intended and understood that each person selected under the foregoing
procedures to be the successor CEO shall become the successor holder of
the
<PAGE>
proxy granted under the Voting Agreement; and
(f) The CEO of the Company, and each successor CEO, shall also be
submitted to the Board of Directors of each Affiliate (as defined in
this Section), which shall vote on his or her election as CEO of the
Affiliate (or such other position of comparable authority). The CEO of
each Affiliate shall be deemed to have resigned from that position upon
his or her resignation or removal as the CEO of the Company. For
purposes of this Agreement, the term "Affiliate" shall mean any
affiliate, subsidiary, or parent of, or any other entity controlling,
controlled by, or under common control of, the Company.
1.2. Removal of CEO.
--------------
Notwithstanding the foregoing, the present CEO shall be subject to
removal by the Board of Directors from said position at any time after the
effective date (the "IPO Date") of the registration statement filed under the
Securities Act of 1933 (as amended), in connection with the first public
offering of securities of the Company, and each subsequent CEO shall be subject
to removal at any time -- i.e., shall be required to resign as CEO and to assign
the proxy to a successor pursuant to the Voting Agreement, who shall be selected
in accordance with Section 1.1 hereof -- in the event that either of the
following shall occur:
(a) if the Management Compensation Committee (as constituted
pursuant to Article II hereof) shall have sent to the Partners a
proposal to initiate the CEO nominating process, and the proposal is
approved by the affirmative vote of two-thirds (2/3) of the total number
of Partners; or
(b) if an annual compensation plan, as presented to the
Partners pursuant to Article III hereof, is not approved by at least
seventy percent (70%) of the Partners, pursuant to Section 3.6.
1.3. Retention of Present CEO.
------------------------
Each Partner hereby promises and agrees that, subject to the provisions
of the Voting Agreement relating to the CEO ceasing to hold office, the present
CEO shall continue to hold such office until the sixth (6th) anniversary date of
the IPO Date. Accordingly, each Partner elected to the Board of Directors shall
vote to elect and retain the present CEO in such position until the IPO Date.
Further, each Partner elected to the Board of Directors of any Affiliate shall
also vote to elect and retain the present CEO as the CEO (or such other position
of comparable authority) of the Affiliate until the IPO Date.
ARTICLE II
----------
COMMITTEE STRUCTURE
-------------------
2.1. Management Committee.
--------------------
<PAGE>
There shall be a "Management Committee," consisting of the CEO and
Partners appointed to the Management Committee by the CEO (each of whom shall be
appointed for an indefinite term and who may be removed from such position at
any time by the CEO). The Management Committee is a committee of the Partners
and may take any action within its authority for the Company and any of the
Affiliates.
2.2. Management Compensation Committee and Nominating Committee.
----------------------------------------------------------
In addition to the CEO Nominating Committee and the Management
Committee, there shall be a "Management Compensation Committee" and a
"Nominating Committee," each consisting of three Partners. For each position to
be filled on one of such committees, the Management Committee shall nominate
three candidates; the Partners shall vote on the three nominees, and the Partner
receiving the highest number of votes shall be deemed elected to the committee.
Members of each of these committees shall be elected for staggered terms of
three years each, with one member elected each year (except for the three
initial members of the committee, who shall be elected for terms of one, two,
and three years, respectively, with the Partner receiving the most votes deemed
elected to the longest term). No Partner may serve consecutive terms on either
of these committees, no Partner may serve simultaneously on both committees, and
the CEO may not serve on either committee. Each committee can have, at most,
one member of the Management Committee as a member of the committee. In case of
tie votes, or of the death of a Partner or the inability of a Partner to
continue to serve or his or her resignation from a committee or the Company, the
CEO shall break the tie or specify the replacement for such Partner.
2.3. Duties of Nominating Committee.
------------------------------
(a) The Nominating Committee's objectives are to screen thoroughly
all new Partner candidates for the Company and any Affiliates, and to present
those it deems appropriate to the Partners for a vote of admittance. The
Nominating Committee will work within the guidelines presented by the Management
Committee regarding the need for and limitations to the number of new Partners.
(b) A new Partner will be admitted when he or she has the endorsement of the
Nominating Committee and the affirmative vote of eighty percent (80%) of the
Partners, at which time he or she shall be submitted for election by the Board
of Directors as an officer of the Company or the Affiliate employing such
Partner, as the case may be; provided, however, that no person shall be deemed
to have become a "Partner" for purposes of this Agreement until such person
shall have executed a written agreement in which he or she agrees to be subject
to all of the provisions hereof and to accept, assume and perform all of the
duties and obligations of a Partner hereunder.
2.4. Duties of Management Committee.
------------------------------
(a) The Management Committee will review all new proposals, new
work,
<PAGE>
new contracts and proposed new client relationships for the Company and any
Affiliates. The Management Committee shall have the sole authority to accept
new work and make all decisions regarding staffing. Additionally, no new client
relationships will be initiated without approval of the Management Committee and
the assignment of a client director.
(b) On an annual basis, the Management Committee will be responsible for
the preparation of a strategic update and an operating plan for each of the
Company and any of the Affiliates, as necessary. These documents will be
presented at a full Partners' meeting for discussion and comment. They will then
be presented to the Board of Directors of the Company for approval.
2.5. Other Duties.
------------
(a) Any Partner may be removed from his or her position as a Partner
and have his or her employment relationship with the Company and/or an Affiliate
terminated, at any time and without any reason or cause or the need to assert or
demonstrate any reason or cause, if the CEO shall recommend such removal and
termination and if the recommendation shall be approved by the affirmative vote
of at least two-thirds (2/3) of the members of the Management Compensation
Committee and by all of the members (other than such Partner, if a member) of
the Management Committee.
(b) The functions of the Management Compensation Committee, and
related functions of the other committees, are set forth in Article III, below.
ARTICLE III
ANNUAL COMPENSATION PLAN
------------------------
3.1. Aggregate Compensation.
----------------------
At the beginning of the last quarter of each fiscal year, the CEO and
the Management Committee shall commence deliberations and determine
recommendations concerning the aggregate amount of bonuses (if any) and the
aggregate number of stock options (if any) to be granted to all employees, based
on their performance during said fiscal year, and the aggregate amount of base
compensation to be payable to all employees for the coming fiscal year. The CEO
and the Management Committee shall send the recommendations to the Board of
Directors of the Company and each of the Affiliates (as applicable).
3.2. Board of Directors Approval.
---------------------------
The Board of Directors of the Company and each of the Affiliates (as
applicable), after receiving such recommendation, shall make a decision
regarding these aggregate amounts. If such Boards of Directors (or their
respective Compensation Committee) shall have approved the recommendation, it
shall be sent to the Management Committee; if it shall not approve the
recommendation, the matter shall be referred back to the CEO and the Management
Committee,
<PAGE>
and the entire procedure shall re-commence.
3.3. Allocations to Partners.
-----------------------
(a) The Management Committee, after the Board of Directors has
approved the aggregate recommendations, shall recommend specific allocations to
individual Partners of the aggregate amounts of bonuses, options and base
compensation set forth in the recommendations, and shall refer the matter to the
Management Compensation Committee.
(b) The Management Compensation Committee, after receiving the
recommendations, shall make a decision thereon:
(i) If it approves the recommendations, it shall submit the
recommendations to the Partners for approval; or
(ii) If it shall not approve the recommendations, it shall
refer the matter back to the Management Committee.
3.4. Approval by Partners.
--------------------
If, after receiving the recommendations, at least seventy percent
(70%) of the Partners shall approve them, the recommendations shall be referred
to the Board of Directors of the Company and the Affiliates (as applicable) for
final approval; if fewer than seventy (70%) of the Partners shall approve the
recommendations, the matter shall be referred back to the CEO and the Management
Committee (under Section 3.1 of this Agreement) and, subject, in the case of
recommendations made after the IPO Date, to the implementation of the removal
procedures set forth in Section 1.2 hereof, the entire process of this Article
III shall be repeated until concluded.
3.5. Implementation.
--------------
The recommendations shall be implemented if approved by the Board of
Directors of the Company and each of the Affiliates (as applicable). The
recommendations shall apply to the Company and each of the Affiliates (as
applicable).
ARTICLE IV
----------
PARTNERS' COMPENSATION PROGRAM
- ------------------------------
4.1. Adoption of Program.
-------------------
The Partners' hereby adopt the compensation program (the "Program"),
substantially in the form attached as Exhibit A hereto, and shall hold all
shares of common stock, no par value, of the Company (including all shares of
common stock, no par value, of Company owned by such Partner, and any other
shares of stock or other voting securities, of any class or series, of Company,
of any Affiliate, or of any entity into or with which Company or any Affiliate
may be
<PAGE>
merged or consolidated, that the Partner may hereafter acquire by any means from
Company, any Affiliate or from any other person or entity, including shares
issued as stock dividends or pursuant to any recapitalization or reorganization,
and shares issued in exchange for such shares in any merger, consolidation,
reorganization, or transfer or exchange of assets, of Company or any Affiliate,
and any options, warrants, or other rights to acquire any such common stock;
collectively, the "Common Stock") subject to the terms of the Program.
4.2. Amendment.
---------
Except as may be provided in the Program, the Program may be amended from time
to time by recommendation of the Management Committee and the Management
Compensation Committee to the Board of Directors and by action of the Board of
Directors, subject to approval of a majority of all of the Partners. All of the
Partners agree to be bound by the terms of any amendments to the Program
approved according to the foregoing procedures.
ARTICLE V
---------
DEFERRED COMPENSATION PLAN
- --------------------------
The Deferred Compensation Plan that was instituted for certain Partners
pursuant to the Prior Partners' Operating Agreement is hereby terminated in all
respects. The Deferred Credits (as defined under the Prior Partners' Operating
Agreement) accrued for the benefit of each Partner who joined the Company (or
any Affiliate) prior to February 28, 1995, plus an amount equal to interest on
the undistributed portion thereof, compounded annually, at a rate equal to the
floating "prime rate" as announced from time to time by American National Bank
and Trust Company of Chicago (and adjusted for changes at the time of each
announced change in such rate), shall be payable by the Company to such Partner
pursuant to the recommendations of the Management Committee to the Board of
Directors and by action of the Board of Directors.
ARTICLE VI
- ----------
MISCELLANEOUS
-------------
5.1. Stock Issuances to Employees.
----------------------------
The Company promises and agrees not to grant, issue or sell any shares
of the Common Stock:
(a) to any person seeking to become a Partner until such
person shall have adopted this Agreement as if he or she was an original party
hereto; and
(b) to any person who is an employee of the Company
(including any person seeking to become a Partner), or as an inducement to a
person to become an employee of the Company, until such person shall have
adopted the Voting Agreement as if he or she was an original party thereto.
<PAGE>
5.2. Affiliates.
----------
The Partners and the Company agree to use their best efforts to cause each
Affiliate of the Company, now or hereafter existing, to adopt this Agreement as
if such entity was an original party hereto.
5.3. Termination.
-----------
This Agreement shall terminate upon the dissolution of the Company or at such
earlier time as only one Partner owns Common Stock.
5.4. Amendment.
---------
This Agreement may be amended in any manner by a written instrument
duly executed by the Company and all of the Partners.
5.5. Successors and Assigns.
----------------------
All of the terms, provisions and conditions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, administrators, executors, successors and assigns.
5.6. Severability.
------------
If any portion or provision of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions hereof shall
nevertheless be deemed valid, enforceable and carried into effect, unless the
effect thereof would clearly violate the manifest present intention of the
parties hereto.
5.7. Governing Law.
-------------
This Agreement shall be subject to and governed by the laws of the
State of Illinois irrespective of the fact that any of the parties hereto may be
or become a resident of a different state.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Partners Operating Agreement to be executed as of the date first written above.
DIAMOND TECHNOLOGY
PARTNERS, INC.
By:
----------------------------------
Title:
-------------------------------
PARTNERS:
/s/ Anthony L. Abbattista
- ------------------------------------
Anthony L. Abbattista
/s/ Melvyn E. Bergstein
- ------------------------------------
Melvyn E. Bergstein
/s/ Laura M. Bestor
- ------------------------------------
Laura M. Bestor
/s/ Karl E. Bupp
- ------------------------------------
Karl E. Bupp
/s/ Michael J. Connolly
- ------------------------------------
Michael J. Connolly
/s/ Craig D. Elderkin
- ------------------------------------
Craig D. Elderkin
/s/ Elwood G. Forsythe
- ------------------------------------
Elwood G. Forsythe
/s/ Adam J. Gutstein
- ------------------------------------
Adam J. Gutstein
/s/ Carl J. Hugener
- ------------------------------------
Carl J. Hugener
/s/ Jay R. Kingley
- ------------------------------------
Jay R. Kingley
/s/ Chapman H. Kistler
- ------------------------------------
Chapman H. Kistler
<PAGE>
/s/ Alan A. Matsumura
- --------------------------------
Alan A. Matsumura
/s/ James V. McGee
- --------------------------------
James V. McGee
/s/ Michael E. Mikolajczyk
- --------------------------------
Michael E. Mikolajczyk
/s/ Christopher J. Moffitt
- --------------------------------
Christopher J. Moffitt
/s/ James W. Niland
- --------------------------------
James W. Niland
/s/ Michael J. Palmer
- --------------------------------
Michael J. Palmer
/s/ Bruce R. Quade
- --------------------------------
Bruce R. Quade
/s/ David M. Rappaport
- --------------------------------
David M. Rappaport
/s/ Mark E. Siefertson
- --------------------------------
Mark E. Siefertson
/s/ Kirk E. Siefkas
- --------------------------------
Kirk E. Siefkas
/s/ Martha J. Silva
- --------------------------------
Martha J. Silva
/s/ James C. Spira
- --------------------------------
James C. Spira
/s/ Ronald V. Coughlin
- --------------------------------
Ronald V. Coughlin
<PAGE>
EXHIBIT 11.1
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Statement Regarding Computation of Net Income (Loss) per share of Common Stock
<TABLE>
<CAPTION>
Six Months Ended
Inception Years Ended March 31, September 30,
(June 28, 1994) ---------------------- ----------------
to March 31, 1994 1995 1996 1995 1996
----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) (886,042) (376,541) (1,236,106) 471,078 (1,098,762)
- ------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 310,485 6,071,281 7,625,091 7,541,634 8,878,032
Additional shares pursuant
to SAB83 competition 2,368,345 2,368,345 2,339,057 2,368,345 1,428,574
----------------------------------------------------------------------
Shares used in computing
proforma net income (loss)
per share of Common Stock 2,678,830 8,439,626 8,964,148 9,909,979 10,306,606
----------------------------------------------------------------------
Pro forma net income (loss)
per share of Common Stock (0.33) (0.04) 0.12 0.05 (0.11)
----------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
--------------------
Diamond Partners Incorporated, an Illinois Corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1996
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 SEP-30-1996
<CASH> 4,635 2,174
<SECURITIES> 0 0
<RECEIVABLES> 3,304 3,512
<ALLOWANCES> 267 520
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,443 8,082
<PP&E> 2,010 2,256
<DEPRECIATION> 359 845,998
<TOTAL-ASSETS> 11,615 10,473
<CURRENT-LIABILITIES> 5,047 3,417
<BONDS> 0 0
0 0
0 0
<COMMON> 8 9
<OTHER-SE> 6,560 8,471
<TOTAL-LIABILITY-AND-EQUITY> 11,615 10,473
<SALES> 0 0
<TOTAL-REVENUES> 26,339 16,089
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 24,965 17,892
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (87) (64)
<INCOME-PRETAX> 1,538 (1,792)
<INCOME-TAX> 302 (694)
<INCOME-CONTINUING> 1,236 (1,099)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,236 (1,099)
<EPS-PRIMARY> .12 (.10)
<EPS-DILUTED> .12 (.10)
</TABLE>
