<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-4069408
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) 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)
MELVYN E. BERGSTEIN
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
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>
LELAND E. HUTCHINSON MARK L. GORDON DAVID C. CHAPIN
WINSTON & STRAWN GORDON & GLICKSON PC ROPES & GRAY
35 WEST WACKER DRIVE 444 NORTH MICHIGAN AVENUE ONE INTERNATIONAL PLACE
CHICAGO, ILLINOIS 60601 SUITE 3600 BOSTON, MASSACHUSETTS 02110
(312) 558-5600 CHICAGO, ILLINOIS 60611 (617) 951-7000
(312) 321-1700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
======================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
Class A Common Stock 3,000,000 $21.00 $63,000,000.00 $18,585.00
======================================================================================================================
</TABLE>
(1) Includes 350,000 shares of Class A Common Stock that the Underwriters have
the option to purchase solely to cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) on the basis of the average of the high and low prices
reported on the Nasdaq National Market on February 26, 1998.
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 MARCH 3, 1998
2,650,000 SHARES
DIAMOND TECHNOLOGY PARTNERS LOGO
CLASS A COMMON STOCK
(PAR VALUE $.001 PER SHARE)
------------------------
Of the 2,650,000 shares of Class A Common Stock offered hereby, 304,792
shares are being sold by the Company and 2,345,208 shares are being sold by the
Selling Stockholders. The Company will not receive any of the proceeds from the
sale of the shares being sold by the Selling Stockholders. See "Principal and
Selling Stockholders."
The last reported sale price of the Class A Common Stock, which is quoted
under the symbol "DTPI," on the Nasdaq National Market on March 2, 1998 was
$23.25 per share. See "Price Range of Class A Common Stock."
SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE CLASS A COMMON STOCK.
------------------------
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>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
-------------- ------------ ------------- -------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $550,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 350,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
April , 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
ADAMS, HARKNESS & HILL, INC.
------------------------
The date of this Prospectus is March , 1998.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON
STOCK ON THE NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
A two-page gatefold with a depiction of the Company's Service Delivery
Process (which also appears on Page 34) appears here with the following text:
Explore & Exploit the possibilities of the digital future. Strategy is
the bridge between exploring and exploiting the possibilities of the digital
future. Diamond can help you develop detailed plans that have strategic vision
and sound performance goals. Competitive and financial analyses integrate the
results of learning, collaborating and prototyping. Executive alignment is the
most important results of Exploration. Diamond can help your company's
executives to confront together the new realities of the digital age and commit
to a winning strategy. Program management maintains executive alignment and
keeps the process of implementation energized and focused on results.
Diamond's seven-point methodology monitors key variables and points of stress.
Brutally honest measurement and reporting identify every opportunity for
improvement.
Navigating the Digital Future [Diamond logo]
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the consolidated financial statements and related notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes the completion of the Offering at a price
of $23.25 per share and no exercise of the Underwriters' over-allotment option.
Unless the context otherwise requires, all references to "Common Stock" refer
collectively to the Company's Class A Common Stock, par value $.001 per share
(the "Class A Common Stock"), and Class B Common Stock, par value $.001 per
share (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.
The offering of Class A Common Stock described in this Prospectus is referred to
herein as the "Offering." All references to the term "Partner" refer to the
internal designation by Diamond of certain of its employees and do not refer to
a partner of a general or limited partnership. Unless the context otherwise
indicates, Diamond Technology Partners Incorporated and its wholly-owned
subsidiary are referred to collectively herein as "Diamond" or the "Company."
THE COMPANY
Diamond is a management consulting firm that synthesizes business strategy
with information technology ("IT") to create innovative "digital business
strategies" for leading national and multinational corporations. Diamond was
founded upon a belief that effective digital business strategies can be
conceived only when strategy and technology are considered in tandem, not in
sequence. Once conceived, the Company believes such strategies must be
implemented rapidly to maximize competitive benefits. The Company believes that
the distinguishing qualities of its consulting process are its abilities to
synthesize business strategy with technology, maintain solution objectivity and
be accountable for the ultimate delivery of the benefits. The Company has
experienced substantial revenue growth in its four years since inception,
generating net revenues of $53.2 million from 62 clients during the most recent
twelve months ended December 31, 1997. The Company had 162 client-serving
professionals as of December 31, 1997.
The Company works with its clients to help them understand, develop and
then manage the implementation of digital business strategies. The Company leads
its clients through a process which broadens their understanding of the ways IT
can be used strategically 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 consulting firms
primarily by its in-depth knowledge of IT and its broader scope of services,
including implementation management and accountability for delivery of benefits.
The Company differentiates itself from systems integrators primarily by its
ability to devise business strategies, its focus on knowledge transfer and
implementation management, and its objectivity in recommending solutions.
Finally, in comparison to full-service 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 in recommending business solutions.
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 home page
3
<PAGE> 5
on the World Wide Web at www.diamtech.com and its e-mail address is
[email protected]. Information contained in the Company's home page shall
not be deemed to be part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered
by the Company............................. 304,792 shares
by the Selling Stockholders................ 2,345,208 shares
Common Stock to be outstanding after the
Offering(1)................................ 12,626,076 shares (8,717,506 shares of Class A Common
Stock and 3,908,570 shares of Class B Common Stock)
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 automatically upon
certain transfers of the shares or termination of
employment with the Company. See "DESCRIPTION OF
CAPITAL STOCK."
Use of proceeds.............................. For general corporate purposes, principally working
capital. See "USE OF PROCEEDS."
Nasdaq National Market Symbol for Class A
Common Stock............................... DTPI
</TABLE>
- ---------------
(1) Excludes as of February 15, 1998 (i) 395,697 shares of Class A Common Stock
and 2,562,648 shares of Class B Common Stock issuable upon the exercise of
outstanding options (of which options to purchase 648,050 shares were
exercisable as of February 15, 1998) at a weighted average exercise price of
$4.40 per share and (ii) 285,415 shares of Class A Common Stock issuable
upon the exercise of warrants (all of which were exercisable as of February
15, 1998) at an exercise price of $5.50 per share. See "MANAGEMENT -- Stock
Options" and "CERTAIN TRANSACTIONS."
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF CLIENTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- ---------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $12,843 $26,339 $37,557 $26,245 $41,850
Income (loss) from operations............................... $ (462) $ 1,374 $ 1,146 $ (569) $ 5,863
Net income (loss)........................................... $ (377) $ 1,236 $ 633 $ (380) $ 4,024
Basic earnings (loss) per share of Common Stock(1).......... $ (0.06) $ 0.16 $ 0.07 $ (0.04) $ 0.35
Shares used in computing basic earnings (loss) per share of
Common Stock(1)........................................... 6,071 7,620 9,144 9,000 11,659
Diluted earnings (loss) per share of Common Stock(1)........ $ (0.06) $ 0.16 $ 0.06 $ (0.04) $ 0.29
Shares used in computing diluted earnings (loss) per share
of Common Stock(1)........................................ 6,071 7,620 9,904 9,000 14,052
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
-----------------------------------------------------------------------
JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1996 1996 1996 1997 1997 1997 1997
-------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 7,753 $8,336 $10,156 $11,312 $12,101 $14,359 $15,390
Income (loss) from operations............ $(1,215) $ (589) $ 1,235 $ 1,715 $ 1,260 $ 2,105 $ 2,498
Net income (loss)........................ $ (714) $ (385) $ 719 $ 1,013 $ 867 $ 1,433 $ 1,724
OTHER OPERATING DATA:
Number of clients served................. 21 25 29 32 33 30 35
Number of clients generating revenues
greater than $250...................... 11 11 16 16 14 17 19
Average revenue per client............... $ 369 $ 333 $ 350 $ 354 $ 367 $ 479 $ 440
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $27,831 $35,727
Working capital............................................. 22,664 30,560
Total assets................................................ 34,642 42,538
Total stockholders' equity.................................. 24,868 32,764
</TABLE>
- ---------------
(1) The Company's basic earnings per share and diluted earnings per share are
computed in accordance with Statement of Financial Accounting Standards No.
128 and are presented in accordance with Staff Accounting Bulletin ("SAB")
No. 98 issued by the Securities and Exchange Commission. SAB No. 98 revised
the calculation of pre-initial public offering common stock and common stock
equivalent shares previously governed by SAB No. 83. The Company has
retroactively applied SAB No. 98 to all periods prior to fiscal year 1998.
(2) Adjusted to give effect to the (i) sale by the Company of 304,792 shares of
Class A Common Stock and the receipt of approximately $6,093,513 in net
proceeds from this Offering, after deducting the Underwriters' discount and
Offering expenses; (ii) issuance of 28,763 shares of Class A Common Stock
and 117,111 shares of Class B Common Stock in connection with the exercise
of options and the issuance of 4,000 shares of Class B Common Stock between
December 31, 1997 and February 15, 1998, resulting in proceeds of $397,226;
and (iii) issuance of 241,182 shares of Class A Common Stock in connection
with the exercise of warrants and 25,000 shares of Class A Common Stock and
14,748 shares of Class B Common Stock in connection with the exercise of
options which will be exercised in conjunction with this Offering, resulting
in proceeds of $1,405,368.
5
<PAGE> 7
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.
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
clients. During fiscal 1997, the Company had one client which individually
accounted for 14% of its net revenues. For the nine months ended December 31,
1997, the Company had one client that individually accounted for 11% of its net
revenues. From quarter to quarter, revenues from one or more individual clients
may exceed 10% of the Company's revenues for the quarter. In general, there are
no long-term commitments by any of the Company's clients for the Company's
services and many of the Company's engagements are, and may be in the future,
terminable without penalty. 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's business, financial condition and
results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS -- Sales and Marketing."
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 both the financial condition and management decisions
of its clients and general economic conditions. Because a high percentage of the
Company's expenses are relatively fixed at the beginning of any period and the
Company's general policy is to not adjust its staffing levels based upon what it
views as short-term circumstances, a variation in the timing, initiation or
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 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. Due to all of the foregoing factors, there can be no
assurance that the Company's results of operations 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."
RECENT OPERATING LOSSES AND LIMITED OPERATING HISTORY
The Company has 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 and fiscal 1997, 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
6
<PAGE> 8
fiscal 1997. The cancellation of these projects resulted from each client's
cancellation of the business initiative for which the Company had been retained.
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. In addition, to support the growth of its business, the Company
expanded its level of operations and increased operating expenses in all areas
during fiscal 1996, fiscal 1997 and fiscal 1998. The Company's business,
financial condition and results of operations will be adversely affected in any
period if revenues do not increase sufficiently to cover the Company's expanded
level of operations and increased operating expenses. 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."
CONTROL BY CHIEF EXECUTIVE OFFICER; ELECTION OF FUTURE CHIEF EXECUTIVE OFFICERS
All employee-stockholders of the Company have granted a proxy to vote their
shares of Class B Common Stock to the person holding the position of Chief
Executive Officer of the Company. Accordingly, upon completion of the Offering,
the Company's current Chief Executive Officer will control (including Class A
Common Stock owned by such individual) approximately 69.7% of the voting rights
of the outstanding Common Stock of the Company and will have the voting power to
elect the Company's entire Board of Directors and to approve all matters
requiring stockholder approval. In addition, an agreement among the Company and
the Partners requires that the Company's Chief Executive Officer be selected
from the Partners. This significantly limits the number of qualified persons
that may be considered 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's
business, financial condition and results of operations. See
"MANAGEMENT -- Executive Officers and Directors," "PRINCIPAL AND SELLING
STOCKHOLDERS," "CERTAIN TRANSACTIONS -- Voting and Stock Restriction Agreement"
and "SHARES ELIGIBLE FOR FUTURE SALE."
RELIANCE ON KEY PERSONNEL; RECRUITMENT AND RETENTION OF PROFESSIONALS
The Company's success depends upon the continued service of its key
executive officers and its ability to attract, retain and motivate highly
skilled professionals at all levels. Qualified client-serving professionals are
in particularly great demand and are likely to remain a limited resource for the
foreseeable future. The loss for any reason of a key executive officer or a
number of the Company's client-serving professionals or the inability to attract
qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "MANAGEMENT" and
"BUSINESS -- Human Resources and Culture."
ABSENCE OF LONG-TERM CONTRACTS
The Company's clients are generally able to reduce or cancel their use of
the Company's professional services without penalty and with little or no
notice. As a result, the Company believes that the number of clients or the
number and size of its existing projects are not reliable indicators or measures
of future revenue. The Company has in the past provided, and is likely in the
future to provide, services to clients without a long-term agreement. When a
client defers, modifies or cancels a project, the Company must be able to
rapidly deploy its professionals to other projects in order to minimize the
underutilization of employees and the resulting adverse impact on operating
results. In addition, the Company's operating expenses are relatively fixed and
cannot be reduced on short notice to compensate for unanticipated variations in
the number or size of projects in progress. As a result, any termination,
significant reduction or modification of its business relationships with any of
its significant clients or with a number of smaller clients could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE> 9
MANAGEMENT OF GROWTH
The Company has been experiencing a period of substantial growth that has
placed, and is anticipated to continue to place, a strain on the Company's
financial and other resources. During fiscal 1997 and the first nine months of
fiscal 1998, the size of the Company's employee base increased from 145 to 206
full-time employees. Further increases are anticipated in the future. The
Company's ability to manage the growth of its professional staff 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 business, financial condition and
results of operations could be adversely affected. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
PROJECT RISKS
Because many of the Company's projects are critical to its clients, a
failure or inability of the Company or one of its subcontractors to meet a
client's expectations could damage the Company's reputation and adversely affect
its ability to attract new business. Although the Company generally attempts to
limit its liability by contractual terms, the failure of a significant project
could lead to claims by a client for economic damages. 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 business, financial condition
and results of operations. From inception through December 31, 1997, the Company
has written off accounts receivable totaling approximately $1.4 million which it
could not collect. 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
industry standards, IT and 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, financial condition
and results of operations. See "BUSINESS -- Industry Background."
COMPETITION
The management consulting and systems integration services 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, greater
name recognition, and greater revenues than the Company. 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
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 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.
While the Company has been profitable since the third quarter of fiscal 1997,
there can be no assurance that the Company will continue
8
<PAGE> 10
to be profitable in the future. The Company believes that the combination of the
net proceeds received by it from this Offering, existing cash resources, the
amounts available under its revolving line of credit and cash generated from
operations will be sufficient to satisfy its operating cash needs for at least
the 12 months following the completion 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."
NO SPECIFIC ALLOCATION OF NET PROCEEDS
The Company has not yet quantified the amount of the net proceeds of this
Offering that will be used for the various purposes described under "USE OF
PROCEEDS." The exact uses of the net proceeds, and the amount allocated for each
use, will be subject to the discretion of management. 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 $1.94. Purchasers of the Class A Common Stock of
the Company offered hereby will suffer an immediate dilution of $20.66 in the
net tangible book value per share as of December 31, 1997 of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The Class A Common Stock of the Company has been listed on the Nasdaq
National Market since February 1997. The market price of the Class A Common
Stock has experienced variations, ranging from a high of $23.75 to a low of
$5.75, and there can be no assurance that the market price of the Class A Common
Stock will not experience fluctuations in the future or will not fall below such
levels. The market price of the Class A Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in earnings estimates by analysts, announcements of new contracts or service
offerings by the Company or its competitors, general economic or stock market
conditions unrelated to the Company's operating performance or other events or
factors.
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 Class A Common Stock discussed above, future sales of substantial amounts of
Class A Common Stock in the public market could adversely affect prevailing
market prices and could impair the Company's future ability to raise capital
through the sale of its equity securities. Upon completion of the Offering, the
Company will have 12,626,076 (12,976,076 if the Underwriters' over-allotment
option is exercised in full) shares of Common Stock outstanding. As of February
15, 1998, 10,726,462 shares of Common Stock are freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Act"). Without considering the contractual restrictions described in
"SHARES ELIGIBLE FOR FUTURE SALE -- Lock-Up Agreements," the remaining 1,899,614
shares of Common Stock will be eligible for sale in reliance on exemptions from
the registration requirements of the Act, including Rule 144. Additionally, as
of February 15, 1998, 2,958,345 shares of Common Stock are issuable upon the
exercise of outstanding options (of which options to purchase 648,050 shares are
exercisable as of such date). Of the 648,050 shares, 514,802 shares will be
freely tradeable without restriction or further registration under the Act and
133,248 shares will be eligible for sale in reliance on exemptions from
registration requirements under the Act. On February 3, 1998, the Board of
Directors voted to increase the number of shares in the Stock Option Plan by
3,500,000 to 12,410,000, subject to approval by the stockholders at the next
annual meeting of stockholders. Of such shares, an aggregate of 3,531,952 shares
of Class B Common Stock are available for issuance pursuant to future grants
under the Stock Option Plan. Certain restrictions on shares of Common Stock are
applicable to (i) any shares of
9
<PAGE> 11
Class A Common Stock purchased in the Offering by affiliates of the Company,
which generally may only be sold in compliance with the limitations of Rule 144
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
others, 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 120 days after the completion of the Offering (the "Lock-Up Expiry Date")
without the prior written consent of Goldman, Sachs & Co. Pursuant to a stock
purchase agreement, dated March 22, 1994, among the Company, Melvyn E.
Bergstein, Christopher J. Moffitt, Safeguard Scientifics, Inc. ("Safeguard") and
the investors named therein (the "1994 Purchase"), the Company has granted
Safeguard, Technology Leaders L.P. ("TL"), Technology Leaders Offshore C.V. ("TL
Offshore" and together with TL, "Technology Leaders"), CIP Capital L.P. ("CIP"
and together with Safeguard and Technology Leaders, the "1994 Purchasers"),
CompuCom Systems, Inc. ("CompuCom"), Cambridge Technology Partners
(Massachusetts), Inc. ("Cambridge") and the Partners certain registration rights
whereby they may cause the Company to register their shares of Common Stock
under the Act for public sale. All such parties have entered into Lock-Up
Agreements and waived such registration rights through the Lock-Up Expiry Date.
See "SHARES ELIGIBLE FOR FUTURE SALE," "MANAGEMENT -- Stock Options," "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." 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, upon completion of the Offering, will
constitute 69.1% 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 person holding the position of Chief Executive Officer of the
Company to vote their shares. Therefore, upon completion of the Offering, the
current Chief Executive Officer will control (including Class A Common Stock
owned by such individual) approximately 69.7% of the voting rights of the
outstanding Common Stock of the Company and will have the voting power to elect
the Company's entire Board of Directors and to approve all matters requiring
stockholder approval, 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 voting power of the issued and
outstanding 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. See "DIVIDEND POLICY."
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 304,792 shares of
Class A Common Stock offered by the Company pursuant to this Offering are
estimated to be approximately $6,093,513 ($13,722,419 if the Underwriters'
over-allotment option is exercised in full), assuming an initial public offering
price of $23.25 per share and after deducting the estimated underwriting
discount and Offering expenses. The Company will not receive any proceeds from
the sale of shares of Class A Common Stock by the Selling Stockholders
hereunder. See "PRINCIPAL AND SELLING STOCKHOLDERS."
The Company plans to use the net proceeds from this Offering for general
corporate purposes, principally working capital for the expansion of its
business. The Company may also use a portion of the net proceeds of this
Offering to fund acquisitions of complementary businesses, products or
technologies, although there are currently no commitments or understandings with
respect to any such transactions. Pending such uses, the Company intends to
invest such funds in short-term, investment-grade, interest-bearing instruments.
The Company does not believe it can accurately estimate the amounts to be used
for each purpose at this time. See "RISK FACTORS -- No Specific Allocation of
Net Proceeds."
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 on the Company's
results of operations and financial condition, and on such other factors as the
Company's Board of Directors may, in its discretion, consider relevant.
PRICE RANGE OF CLASS A COMMON STOCK
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "DTPI". The following table sets forth for the periods indicated the high
and low closing prices for the Class A Common Stock.
<TABLE>
<CAPTION>
CLOSING PRICE
PER SHARE
------------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ending March 31, 1997:
Fourth Quarter(1)......................................... $ 8.750 $ 6.000
Fiscal year ending March 31, 1998:
First Quarter............................................. $11.875 $ 5.750
Second Quarter............................................ 15.625 10.500
Third Quarter............................................. 17.250 13.375
Fourth Quarter (through March 2, 1998).................... 23.250 14.000
</TABLE>
- ---------------
(1) Does not represent a full fiscal quarter. The Class A Common Stock began
trading on the Nasdaq National Market on February 25, 1997.
On March 2, 1998, the closing price of Class A Common Stock was $23.25 per
share. At such date, the Company had approximately 7,100 holders of record of
Class A Common Stock.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of December 31, 1997, and as adjusted to reflect the sale of 304,792 shares of
Class A Common Stock by the Company pursuant to the Offering and the receipt of
the estimated net proceeds therefrom. This table should be read in conjunction
with the consolidated financial statements and related notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
AS
ACTUAL ADJUSTED(1)
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $1.00 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 6,857,050 and 8,717,506 (as adjusted)
shares issued and outstanding(2)....................... 7 9
Class B Common Stock, $.001 par value; 20,000,000 shares
authorized and 5,033,430 and 3,908,570 (as adjusted)
shares issued and outstanding(2)....................... 5 4
Additional paid-in capital(2)............................... 20,433 28,328
Notes receivable from sale of Common Stock.................. (208) (208)
Retained earnings........................................... 4,631 4,631
------- -------
Total stockholders' equity.................................. 24,868 32,764
------- -------
Total capitalization................................... $24,868 $32,764
======= =======
</TABLE>
- ---------------
(1) Adjusted to give effect to the (i) sale by the Company of 304,792 shares of
Class A Common Stock and the receipt of approximately $6,093,513 in net
proceeds from this Offering, after deducting the Underwriters' discount and
Offering expenses; (ii) issuance of 28,763 shares of Class A Common Stock
and 117,111 Shares of Class B Common Stock in connection with the exercise
of options and the issuance of 4,000 shares of Class B Common Stock between
December 31, 1997 and February 15, 1998, resulting in proceeds of $397,226;
(iii) issuance of 241,182 shares of Class A Common Stock in connection with
the exercise of warrants and 25,000 shares of Class A Common Stock and
14,748 shares of Class B Common Stock in connection with the exercise of
options which will be exercised in conjunction with this Offering, resulting
in proceeds of $1,405,368; (iv) the conversion of 382,019 shares of Class B
Common Stock to Class A Common Stock between December 31, 1997 and February
15, 1998; and (v) the conversion of 878,700 shares of Class B Common Stock
to Class A Common Stock in conjunction with this Offering.
(2) Excludes as of February 15, 1998 (i) 395,697 shares of Class A Common Stock
and 2,562,648 shares of Class B Common Stock issuable upon the exercise of
outstanding options (of which options to purchase 648,050 shares were
exercisable at February 15, 1998) at a weighted average exercise price of
$4.40 per share and (ii) 285,415 shares of Class A Common Stock issuable
upon the exercise of warrants (all of which were exercisable as of February
15, 1998) at an exercise price of $5.50 per share. See "MANAGEMENT -- Stock
Options" and "CERTAIN TRANSACTIONS."
12
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial 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 the other financial information appearing elsewhere or incorporated
by reference in this Prospectus. The selected consolidated financial data for
each of the three fiscal years ended March 31, 1995, 1996 and 1997, and for the
nine-months ended December 31, 1997 are derived from the consolidated financial
statements of the Company which have been audited by KPMG Peat Marwick LLP,
independent public accountants. See "Experts." The data presented for the
nine-month period ended December 31, 1996 are derived from unaudited financial
statements and include, in the judgment of management, all adjustments necessary
to present fairly the data for such period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ----------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $12,843 $26,339 $37,557 $26,245 $41,850
------- ------- ------- ------- -------
Operating expenses:
Project personnel and related
expenses............................ 8,351 15,312 21,863 16,307 22,859
Professional development and
recruiting.......................... 1,395 4,587 6,272 4,478 4,448
Marketing and sales.................... 451 606 1,928 1,189 2,378
Management and administrative
support............................. 3,108 4,460 6,348 4,840 6,302
------- ------- ------- ------- -------
Total operating expenses............ 13,305 24,965 36,411 26,814 35,987
------- ------- ------- ------- -------
Income (loss) from operations............ (462) 1,374 1,146 (569) 5,863
Interest income, net..................... 85 164 172 82 820
------- ------- ------- ------- -------
Income (loss) before taxes............... (377) 1,538 1,318 (487) 6,683
Income taxes............................. -- (302) (685) 107 (2,659)
------- ------- ------- ------- -------
Net income (loss)........................ $ (377) $ 1,236 $ 633 $ (380) $ 4,024
======= ======= ======= ======= =======
Basic earnings (loss) per share of Common
Stock(1)............................... $ (0.06) $ 0.16 $ 0.07 $ (0.04) $ 0.35
Shares used in computing basic earnings
(loss) per share of Common Stock(1).... 6,071 7,620 9,144 9,000 11,659
Diluted earnings (loss) per share of
Common Stock(1)........................ $ (0.06) $ 0.16 $ 0.06 $ (0.04) $ 0.29
Shares used in computing diluted earnings
(loss) per share of Common Stock(1).... 6,071 7,620 9,904 9,000 14,052
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1996 1997 1997
---- ---- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,635 $17,547 $27,831
Working capital............................................. 4,397 15,725 22,664
Total assets................................................ 11,615 25,494 34,642
Long-term debt, including current portion................... 125 2,000 --
Total stockholders' equity.................................. 6,568 18,300 24,868
</TABLE>
- ---------------
(1) The Company's basic earnings per share and diluted earnings per share are
computed in accordance with Statement of Financial Accounting Standards No.
128 and are presented in accordance with SAB No. 98 issued by the Securities
and Exchange Commission. SAB No. 98 revised the calculation of pre-initial
public offering common stock and common stock equivalent shares previously
governed by SAB No. 83. The Company has retroactively applied SAB No. 98 to
all periods prior to fiscal year 1998.
13
<PAGE> 15
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 included
elsewhere or incorporated by reference in this Prospectus. Statements made
anywhere or incorporated by reference in this Prospectus that are not historical
facts may be forward-looking statements, including such statements identified by
the words "anticipate", "believe", "estimate", "expect" or similar terminology
used with respect to the Company and its management. These forward-looking
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance and prospects to differ materially from
those expressed in, or implied by, the forward-looking statements. The
forward-looking statements speak only as of the date hereof and the Company
undertakes no obligation to revise or update them to reflect events or
circumstances that arise in the future. Readers are cautioned not to place undue
reliance on forward-looking statements. Among the risks and uncertainties
affecting the forward looking statements are the Company's ability to manage its
rapid growth and keep pace with evolving technology, and the variability of the
Company's quarterly operating results due to, among other things, variations in
the number of active client projects, and the other risks described in "RISK
FACTORS" above.
OVERVIEW
Diamond is a management consulting firm that synthesizes business strategy
with IT to create innovative "digital business strategies" for leading national
and multinational corporations. The Company has experienced substantial revenue
growth in its four years since inception, generating net revenues of $53.2
million from 62 clients during the most recent twelve months ended December 31,
1997. The Company had 162 client-serving professionals as of December 31, 1997.
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 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, 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 periodically monitors the
progress of client projects with client senior management. 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
14
<PAGE> 16
could require the Company to maintain underutilized employees. 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 in the Company's sales efforts to secure new
client assignments.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Operating expenses:
Project personnel and related
expenses............................. 65.0 58.1 58.2 62.1 54.6
Professional development and
recruiting........................... 10.9 17.4 16.7 17.1 10.6
Marketing and sales..................... 3.5 2.3 5.1 4.5 5.7
Management and administrative support... 24.2 17.0 16.9 18.4 15.1
----- ----- ----- ----- -----
Total operating expenses............. 103.6 94.8 96.9 102.1 86.0
----- ----- ----- ----- -----
Income (loss) from operations............. (3.6) 5.2 3.1 (2.1) 14.0
Interest income, net...................... 0.7 0.6 0.4 0.3 2.0
----- ----- ----- ----- -----
Income (loss) before taxes................ (2.9) 5.8 3.5 (1.8) 16.0
Income taxes.............................. -- (1.1) (1.8) 0.4 (6.4)
----- ----- ----- ----- -----
Net income (loss)......................... (2.9)% 4.7% 1.7% (1.4)% 9.6%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
The Company's net income of $4.0 million during the nine months ended
December 31, 1997 improved from the net loss of $380,000 during the same period
in the prior year as a result of increased revenues combined with an improvement
in the utilization of its client-serving professionals, partially offset by an
increase in expenses required to support the Company's growth during the period.
The Company's net loss in the year-earlier period resulted primarily from the
loss of two projects as a result of clients' cancellations of business
initiatives during the last quarter of fiscal 1996 and the first quarter of
fiscal 1997. The Company responded to these project cancellations and the
resulting business circumstances during the quarter ended September 30, 1996, by
reducing spending levels, including the elimination of its bonus programs for
the year ended March 31, 1997, while maintaining the consulting capacity
required to support growth.
The Company has reinstated its bonus programs effective for fiscal 1998 and
will award bonuses to Partners and employees at the end of the fiscal year
ending March 31, 1998 if the Company's overall performance during the nine
months ended December 31, 1997 is sustained for the remainder of the fiscal
year. Accordingly, the Company has recognized bonus expense of $4.5 million
during the nine months ended December 31, 1997 as compared to none during the
same period in the prior year. The amount of the bonus expense for the full
fiscal year will depend on the Company's results of operations and other
performance measures for the remainder of the fiscal year.
The Company's net revenues increased 59.5% to $41.9 million during the nine
months ended December 31, 1997 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. For the nine months ended December 31, 1997, $12.1 million
of revenue was derived from services delivered to new clients and $29.8 million
related to the completion of
15
<PAGE> 17
projects or the undertaking of additional projects from the Company's client
base of the previous fiscal year. The Company served 54 clients during the nine
months ended December 31, 1997 (of which 26 were clients during the prior fiscal
year) as compared to 39 clients served during the same period in the prior year.
Project personnel and related expenses increased $6.6 million, or 40.2%, to
$22.9 million during the nine months ended December 31, 1997 as compared to the
same period in the prior year. This increase resulted from an increase in the
number of client-serving professionals to respond to growth, combined with the
impact of the reinstatement of the bonus program during the current year. The
Company increased its client-serving professional staff from 143 at December 31,
1996 to 162 at December 31, 1997. As a percentage of net revenues, project
personnel and related expenses decreased from 62.1% to 54.6% during the nine
months ended December 31, 1997, reflecting the improvement in utilization of its
client-serving professionals.
Professional development and recruiting expenses decreased $30,000 during
the nine months ended December 31, 1997 as compared to the same period in the
prior year. This decrease reflects the initial investment in certain
intellectual capital programs during the nine months ended December 31, 1996,
partially offset by the Company's training of a higher number of client-serving
professionals during the nine months ended December 31, 1997. The Company has
continued its recruiting and training programs to support the growth of the
business. As a percentage of net revenues, professional development and
recruiting expenses decreased to 10.6% as compared to 17.1% during the same
period in the prior year as a result of the Company's improved operating
leverage resulting from its net revenue growth.
Marketing and sales expenses increased $1.2 million to $2.4 million during
the nine months ended December 31, 1997 as compared to the same period in the
prior year as a result of the Company's investment in its marketing and branding
programs. The Company's marketing activities in the current fiscal year were
focused on (i) the development of its magazine, "Context", which was launched
during the quarter ended December 31, 1997 and (ii) the promotion of
intellectual capital through the Diamond Exchange, the Company's executive
learning forum for senior executives. As a percentage of net revenues, marketing
and sales expenses increased from 4.5% to 5.7%.
Management and administrative support expenses increased from $4.8 million
to $6.3 million, or 30.2%, during the nine months ended December 31, 1997 as
compared to the same period in the prior year. This increase resulted from the
cost of additional facilities, equipment and personnel necessary to support the
Company's growth and increased consulting capacity, combined with the impact of
the reinstatement of bonus programs. As a percentage of net revenues, management
and administrative support expenses decreased from 18.4% to 15.1% as a result of
the Company's improved operating leverage resulting from its net revenue growth.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net income decreased $603,000 during fiscal 1997
fundamentally because of a net loss incurred during the six months ended
September 30, 1996 totaling $1.1 million. This net loss was more than offset by
net income of $1.7 million during the subsequent six months ended March 31,
1997. The Company's net income improvement during the last half of fiscal 1997
resulted from increased revenues, combined with the impact of cost reductions
implemented during the year.
The Company's net revenues continued to grow during each of the quarters in
fiscal 1997, despite the cancellation of two significant projects during the
last quarter of fiscal 1996 and the first quarter of fiscal 1997. The
cancellation of these projects resulted from (i) 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 (ii) 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 in the quarter ended June 30, 1996,
$300,000 in the quarter ended September 30,
16
<PAGE> 18
1996 and zero in the quarter ended December 31, 1996. At the time of these
project 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 in these quarters 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: (i)
the Company eliminated employee bonuses for the year ended March 31, 1997; (ii)
the Partners agreed to a temporary 8.3% reduction in compensation for one year
commencing with the quarter ended December 31, 1996; and (iii) certain of the
Partners forgave prior years, deferred compensation totaling approximately
$485,000 during each of the quarters ended December 31, 1996 and March 31, 1997,
which were recognized as a reduction in operating expenses in 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 the
Company reduced its expense levels by approximately $800,000 in the quarter
ended September 30, 1996, approximately $1.1 million in each of the quarters
ended December 31, 1996, and March 31, 1997, and $200,000 in each quarter ended
June 30, 1997 and September 30, 1997 as compared to the expense levels included
in the quarter ended June 30, 1996.
The Company's net revenues increased 42.6% to $37.6 million in fiscal 1997.
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. For
the year ended March 31, 1997, $18.3 million of revenue was derived from
services delivered to new clients and $19.3 million related to the completion of
projects or undertaking additional projects from the Company's client base of
the previous fiscal year. The Company served 45 clients during fiscal 1997 (of
which 16 were clients during the prior fiscal year) as compared to 24 clients
during fiscal 1996.
Project personnel and related expenses increased $6.6 million to $21.9
million during fiscal 1997. In the aggregate, project personnel and related
expenses increased 42.8% from 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 115 at March 31, 1996 to 146 at March 31, 1997. As a percentage of
net revenues, project personnel and related expenses increased slightly from
58.1% to 58.2% during fiscal 1997.
Professional development and recruiting expenses increased from $4.6
million to $6.3 million, or 36.7%, during fiscal 1997 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
previously described project cancellations. As a percentage of net revenues,
professional development and recruiting expenses decreased to 16.7% as compared
to 17.4% during fiscal 1996.
Marketing and sales expenses increased from $606,000 to $1.9 million during
fiscal 1997. As a percentage of net revenues, these expenses increased from 2.3%
to 5.1%, reflecting the Company's expanded investment in its marketing and sales
programs.
Management and administrative support expenses increased from $4.5 million
to $6.3 million during fiscal 1997, or 42.3% as a result of the additional
facilities, equipment and personnel necessary to
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support the Company's growth and increased consulting capacity. As a percentage
of net revenues, management and administrative support expenses decreased
slightly from 17.0% to 16.9%.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net revenues increased 105.1% to $26.3 million in fiscal
1996, as compared to $12.8 million in fiscal 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. For the year ended March 31,
1996, $6.9 million of revenue was derived from services delivered to new clients
and $19.4 million related to the completion of projects or undertaking
additional projects from the Company's client base of the previous fiscal year.
The Company served 24 clients during fiscal 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 client-serving
professionals 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 69 at March 31, 1995 to 115 at March 31, 1996.
As a percentage of net revenues, these expenses decreased from 65.0% to 58.1%
during fiscal 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 fiscal 1996. As a percentage of net revenues,
these expenses increased from 10.9% to 17.4% in fiscal 1996. This increase
reflects the Company's emphasis on its investment in recruiting and training to
support the growth of its 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%,
during fiscal 1996 as a result of the Company's expanded investment in its
marketing and sales programs. As a percentage of net revenues, marketing and
sales expenses decreased from 3.5% in 1995 to 2.3% in fiscal 1996.
Management and administrative support expenses increased from $3.1 million
to $4.5 million, or 43.5%, during fiscal 1996 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, management
and administrative support 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 fiscal 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 fiscal 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.
SELECTED QUARTERLY RESULTS OF OPERATIONS
Set forth below are selected statements of operations and other operating
data for each of the Company's full quarters covering the last two fiscal years
and the nine months ended December 31, 1997. 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
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<PAGE> 20
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
---------------------------------------------------------------------------------
JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- ------- ------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $5,863 $5,975 $6,918 $7,583 $ 7,753 $8,336 $10,156 $11,312
Income (loss) from
operations................... $ 363 $ 149 $ 433 $ 429 $(1,215) $ (589) $ 1,235 $ 1,715
Net income (loss)............. $ 312 $ 159 $ 383 $ 382 $ (714) $ (385) $ 719 $ 1,013
OTHER OPERATING DATA:
Number of clients served...... 13 10 13 17 21 25 29 32
Number of clients generating
revenues greater than $250... 8 9 8 7 11 11 16 16
Average revenue per client.... $ 451 $ 598 $ 532 $ 446 $ 369 $ 333 $ 350 $ 354
<CAPTION>
QUARTER ENDED
-----------------------------
JUNE 30, SEPT 30, DEC 31,
1997 1997 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $12,101 $14,359 $15,390
Income (loss) from
operations................... $ 1,260 $ 2,105 $ 2,498
Net income (loss)............. $ 867 $ 1,433 $ 1,724
OTHER OPERATING DATA:
Number of clients served...... 33 30 35
Number of clients generating
revenues greater than $250... 14 17 19
Average revenue per client.... $ 367 $ 479 $ 440
</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, training and marketing
during the periods.
The Company has recovered from the net losses incurred during the two
quarters ended September 30, 1996, primarily because of the expansion of its
client base and key client relationships. The resulting growth in net revenues
since that time has enabled the Company to continue to increase the number of
client-serving professionals and develop its corporate identity and marketing
programs to support future growth. See "Nine Months Ended December 31, 1997
Compared to Nine Months Ended December 31, 1996," "Fiscal 1997 Compared to
Fiscal 1996" and "RISK FACTORS -- Recent Operating Losses and Limited Operating
History," "-- Variability of Quarterly Operating Results," and "-- Concentration
of Revenues."
LIQUIDITY AND CAPITAL RESOURCES
The Company closed its initial public offering of common stock in April
1997 and received net proceeds totaling approximately $10.1 million. The Company
used $2.0 million of the proceeds from the initial public offering to repay a
loan from Safeguard.
The Company also maintains 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. This line of
credit is secured by a lien on all of the property of the Company and the
Company's wholly owned subsidiary. This line of credit has been reduced to
account for letters of credit outstanding. As of December 31, 1997, the Company
had approximately $2.3 million available under this line of credit.
The Company's billings for the quarter ended December 31, 1997 totaled
$17.8 million. These amounts include billings to clients for out-of-pocket
expenses that are reimbursed by clients which are not included in recognized
revenues. The Company's gross accounts receivable balance of $4.4 million at
December 31, 1997 represents 22 days of billings for the quarter.
The Company believes that the net proceeds from the sale of the Class A
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 at least the 12 months following the completion 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.
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<PAGE> 21
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century and consequently
use only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). The Company has reviewed the potential impact of
the Year 2000 Issue on its operations and has concluded that it will not be
material.
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<PAGE> 22
BUSINESS
OVERVIEW
Diamond is a management consulting firm that synthesizes business strategy
with IT to create innovative "digital business strategies" for leading national
and multinational corporations. Diamond was founded upon a belief that effective
digital business strategies can be conceived only when strategy and technology
are considered in tandem, not in sequence. Once conceived, the Company believes
such strategies must be implemented rapidly in order to maximize competitive
benefits.
The Company works with its clients to help them understand, develop and
then manage the implementation of digital business strategies. The Company leads
its clients through a process which broadens their understanding of the ways IT
can be used strategically 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. Throughout the entire process, Diamond transfers
relevant knowledge to the client organization.
INDUSTRY BACKGROUND
Many leading corporations face a rapidly changing business environment and
new competitive pressures. Success in the midst of change requires mastering
increasing complexity, adapting products and services to dynamic market
conditions, reducing costs and improving quality. 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. For instance, technology has enabled book
retailing to be accomplished in cyberspace, with no physical retail presence.
Stocks and bonds can be purchased and sold on a home computer at negligible
cost. Packages can be delivered overnight, with each step in the journey
traceable through the Internet. As IT takes on a more prominent role as a driver
of business strategy, it also creates new competitors, eliminates established
sales and marketing channels, and shortens research and development cycles.
Business leaders no longer view IT solely as a support function, but often
struggle to incorporate the potential that technology holds as a driver of
business strategies. Many senior executives realize that they do not have the
internal expertise and capability to define and address challenges presented by
blending strategy and IT. Historically, these organizations have had two
options: (i) hire two separate firms (a strategic management consultant to
define the problem and a systems integrator to provide a solution) or (ii) hire
a full-service 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 this
approach is inherently flawed, increases overall project cost and risk, and
threatens the integrity of the strategy. Traditional management consultants
typically do not have the in-depth understanding of technology needed to
formulate digital business strategies. In addition, the transition to a systems
integrator, which often lacks a common vision of the business objective,
requires additional time and resources. The second alternative is to hire a
full-service 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. This alternative creates two problems:
economic incentive to sell other proprietary products and services that may not
be required, and transition issues similar to those experienced in hiring two
firms.
The Company believes that the current business environment provides an
opportunity for a firm that offers high-level strategic management consulting
with an in-depth understanding of technology. In
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<PAGE> 23
particular, management believes business leaders will increasingly seek this
expertise from objective consultants unaffected by commercial interests in
software, hardware or IT services practices.
THE DIAMOND ADVANTAGE
Diamond was founded with the objective of providing superior client
solutions by creating a common business culture in which strategic consulting
and IT expertise are optimally integrated to design and deliver digital business
strategies. The Diamond solution is distinguished by the combination of three
essential characteristics: (i) the synthesis of business strategy and
technology, (ii) solution objectivity, and (iii) accountability for the delivery
of benefits.
THE SYNTHESIS OF BUSINESS STRATEGY AND TECHNOLOGY
A digital business strategy combines business strategy and technology in
innovative new ways. The Company recognizes that technology does not merely
support business, it creates business. Diamond simultaneously provides expertise
in strategy consulting, business processes and IT, enabling the Company to
identify digital business strategy opportunities for its clients that might not
otherwise be considered by a management consulting firm or a systems integration
firm. The Company's services are delivered through small, experienced and
multidisciplinary teams that work collaboratively with the client to create an
environment in which knowledge and skills are constantly shared. This transfer
of knowledge is of significant value to the client.
SOLUTION OBJECTIVITY
A consulting firm that objectively advises on strategy cannot be in the
business of selling software, hardware, or the services of programmers. Diamond
has intentionally avoided 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.
ACCOUNTABILITY FOR THE DELIVERY OF BENEFITS
In the digital age, business environments change so rapidly that the same
team that develops a business strategy must be held accountable for the delivery
of its benefits to the client. Rather than defining the success of an engagement
by the delivery of a strategy or application, Diamond measures success in terms
of the project's accomplishment of stated strategic goals such as return on
investment or reduction in manufacturing cycle times. Because the Diamond
solution is delivered to the client by the same multidisciplinary team that
created the strategy, the time-to-market and other transition risks associated
with these projects are reduced.
DIAMOND'S GROWTH STRATEGY
Diamond's goal is to become the leader in the design and delivery of
digital business strategies. As a professional services firm, there are two
primary constituencies critical to the realization of this goal: the Company's
professionals and its clients. Accordingly, each of the following strategies
focuses on attracting, developing and retaining the Company's professionals and
clients.
ATTRACT AND RETAIN SKILLED PERSONNEL
The Company believes that its continued success and growth require it to
expand its base of highly skilled professionals. This emphasis on human
resources begins with the Company's recruitment of client-serving professionals
from the best business and technical schools, continues through the process of
training, developing and promoting promising professionals within the Company
and culminates in the sharing of equity in the Company as both an acknowledgment
of merit and a means of retention.
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<PAGE> 24
LEVERAGE VERTICAL EXPERTISE
The Company believes that its vertical market focus provides a scalable
structure for growth. Through a vertical focus in four key markets (insurance
and health care, telecommunications and energy, financial services, and consumer
products and services), the Company is able to offer digital business strategies
anchored by an in-depth understanding of market-specific knowledge. The Company
expects the number of vertical markets on which it focuses to change and grow as
the Company's expertise and market demands evolve.
EXPAND CLIENT RELATIONSHIPS
The Company seeks to develop strong relationships with clients that sustain
and grow repeat business. The access, contact and goodwill generated through its
existing client relationships afford the Company significant opportunities to
provide additional services and solutions. In addition, the Company plans to
continue investing in several sales and marketing activities designed to further
demonstrate the Company's capabilities to both new and existing clients. See
"-- Sales and Marketing."
DELIVER SERVICES THROUGH MULTIDISCIPLINARY TEAMS
In order to maintain a differentiated service offering, the Company seeks
to develop and sustain a business culture that is common across all disciplines
in the organization. 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.
NURTURE AND PROMOTE 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.
MARKET DIAMOND BRAND IMAGE
Diamond intends to continue to invest in the development and maintenance of
its brand identity in the marketplace. The Company promotes its name and
credentials through publications, seminars, speaking engagements, media and
analyst relations, direct marketing, the World Wide Web 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.
DIAMOND'S SERVICES
The Company designs and manages the delivery of digital business
strategies. 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 designs and delivers a digital
business strategy. This is fundamentally different than the traditional,
sequential approach that addresses strategy first, followed by development of
new or revised IT solutions.
A small project team of Diamond consultants with expertise in strategy,
business processes and IT works closely with the client throughout this process.
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
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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.
Prototyping tests the goals to ensure they are realistic and prioritizes them
based on desired results. This segment leads to the development of a digital
business strategy to achieve a client's objectives.
STRATEGY SEGMENT
Based on the results of the executive alignment segment, a digital 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 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 maintain focus on the
business value of the project throughout the implementation of the strategy.
While Diamond manages the implementation of digital business 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. 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. Architecture defines the
implementation of a new strategy, including its business and technical
components. Development involves the transfer of specific knowledge about new
technologies and processes to the client. Deployment consists of the management
of the implementation of the strategy using the client's IT management and
programming resources. 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.
SALES AND MARKETING
The principal sales activities of the Company are managed by senior
Partners. The senior Partners are responsible for building relations with senior
executives of existing and potential clients and for formulating and executing
the Company's sales and marketing strategy. The senior Partners call on existing
and potential clients, discuss potential engagements, negotiate the terms of
engagements, and direct the staffing and execution of consulting projects.
The Company primarily sells its services to senior executives of national
and multinational corporations. Although every client relationship is unique,
the Company's client relationships to date generally have included multiple
projects. Diamond has divided its Partners into vertical groups focused on four
industry sectors: insurance and health care, telecommunications and energy,
financial services, and
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<PAGE> 26
consumer products and services. The sales efforts in each group are led by a
senior Partner who is assigned revenue and profit contribution responsibility.
New projects are sought within each group from both new prospects and existing
clients. Each vertical group maintains a current list of targeted prospects
which are tracked on an ongoing basis by senior management of the Company.
Building on leads generated through the Company's marketing programs, senior
Partners engage in dialogue with client and prospect senior management which can
result in formal consulting engagements.
The primary focus of the Company's marketing programs is to generate leads
through building relationships and educating client prospects about Diamond. The
Company has initiated a number of relationship-marketing programs designed to
complement, encourage and accelerate personal relationships. The Company builds
relationships both directly and on a collaborative basis with members of the
Diamond Network (see "-- Intellectual Capital") and through relationships with
certain third-party industry executives, called "client relationship executives"
(CREs). Members of the CRE program are typically semi-retired senior executives
with a wide network of contacts in a given industry. The Company currently has
eight CREs focusing in the telecommunications and energy, financial services,
and consumer products and services industries.
Complementing the relationship-marketing programs are a variety of other
business development and marketing techniques used to communicate directly with
current and prospective clients, including publications, surveys, a promotion of
an upcoming book, newsletters, media and analyst relations, speeches and a
homepage on the World Wide Web. Three of the more substantive marketing efforts
include the publication of the business magazine, Context; the development and
publishing of Digital Strategies Surveys; and an upcoming book focusing on
digital business strategy. Each of these three programs is designed to educate
the market on the opportunities of digital business strategies, demonstrate the
Company's intellectual capital, and create an ongoing dialogue with client
prospects.
Context is a controlled-circulation magazine covering the growing
intersection of business and technology that is distributed quarterly to
approximately 32,000 senior executives (CEOs and their direct reports in the
United States). The Digital Business Strategy Surveys are a series of research
that provide benchmarks for senior executives facing the convergence of business
strategy and technology. "Unleashing the Killer App: Digital Strategies for
Marketing Dominance" is a book co-authored by a Diamond Partner and a member of
the Diamond Network and is scheduled to be published in May 1998.
REPRESENTATIVE CLIENTS
Diamond currently focuses on providing services to clients primarily in
four major industry sectors: insurance and health care, telecommunications and
energy, 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 clients that are representative of the Company's
business:
INSURANCE COMPANY
This multi-billion dollar specialty insurer initially engaged Diamond to
design strategies to sustain the superior revenue performance and growth in
shareholder wealth that it had experienced over the last several years. The
project commenced with a 1 1/2-day executive workshop where management explored
the potential impacts of technology on the company. The project then evolved
into the development of a model for a technology-based, customer-centric
strategy to reshape the company into a customer-focused business. Diamond was
then engaged to work with the client to assess the IT organization and develop
business, economic and technical architecture implementation plans. The plans
called for revamping the client's entire operations (including product
development, marketing, sales and service functions) in order to focus on the
customer using the Internet and other technologies. Diamond is currently working
with the client to create the first of a series of deployment plans to implement
the customer-centric strategy and realize the benefits. In concurrent projects,
Diamond reviewed the
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<PAGE> 27
migration and consolidation requirements for the client's benefits function, as
well as defined criteria for the client to assess potential outsourcing vendors.
ENERGY RETAILER
Diamond was initially engaged to assist this investor-owned electric
utility in developing a new business that offered power from renewable sources
to consumers in newly deregulated markets. Diamond worked with the client to
develop a digital business strategy that will differentiate the company by
creating an electronic dialogue with its customers over the Internet, track
behaviors and subsequently adapt to their specific desires over time. Diamond's
relationship with this client consists of five separate, but related, projects:
(i) the conduct of an economic viability study that explored technology and
industry trends affecting the ability of the client to reach retail and
small-business customers with renewable power, (ii) the development of the
digital business strategy and business plan to secure the external funding
needed, (iii) the development of a fundable business strategy and technology/
operations implementation plan, (iv) the management of the technology and
operations infrastructure roll-out, including a network of third-party vendors,
and (v) the ongoing counsel to the client with respect to its efforts in shaping
the rules of engagement in the deregulated energy markets.
FINANCIAL SERVICES COMPANY
This large, middle-market commercial finance company identified technology
as a key factor in its plan to capitalize on attractive opportunities in the
emerging market made up of small- to mid-size borrowers. Diamond was selected to
work with the client as a result of contacts developed through the Diamond
Exchange, the Company's executive learning forum, and capabilities demonstrated
to the client on prior projects. Diamond's initial role was to develop a
technical architecture plan to effectively leverage the client's IT
infrastructure investment. This role expanded into the implementation of the new
technical architecture, as well as a project to help the client design an
intranet to facilitate corporate communications. This role evolved into the
exploration of a digital business strategy to capitalize on the new small- to
mid-size market. The digital business strategy project grew through three
phases: (i) the exploration with the client's senior management to discover
various opportunities offered by technology, (ii) the development of a working
business strategy and plan balanced with the operational capabilities of the
client, and (iii) the development of a sequence of implementation plans to
realize the benefits identified in the strategy.
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 to client projects
and within the organization. Diamond currently has four Partner-level knowledge
leaders and anticipates that more knowledge leaders will be added in the future.
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DIAMOND EXCHANGE
The Diamond Exchange is a series of executive learning forums that the
Company launched in February 1997. Senior executives ranging from CEOs to CIOs
are invited to participate in the Diamond Exchange. The Company provides its
paid-subscription members with innovative, leading-edge research to explore and
understand the strategic risks and opportunities of emerging technologies.
Diamond Exchange members meet three times a year to discuss current issues and
research findings, and their business implications. During these meetings,
Diamond provides the members of the Diamond Exchange with the opportunity to
discuss their issues with Diamond Network members and other business leaders.
There are also three smaller working sessions throughout the year. The
objectives of this program are threefold: (i) to help clients and prospects
learn and research the strategic possibilities of technology in the digital
future; (ii) to maintain and develop relationships with clients; and (iii) to
build intellectual capital and integrate it into the Company.
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 that augment and enhance
the value that Diamond can provide to its clients. Diamond Network members
provide a source of intellectual capital, introduce the Company to prospective
clients, serve as faculty to the Diamond Exchange (see above), and participate
in client projects. Members are contractually committed to dedicate a certain
number of days 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 provided to the Company or its clients on the Company's behalf. Current
members of the Diamond Network include:
JOHN PERRY BARLOW is a writer and lecturer on the social, legal and
economic issues arising on the border between the physical and virtual
worlds. He is a contributing writer for Wired magazine and 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 and
computer consultant-at-large. Mr. Bell spent 23 years at Digital Equipment
Corp. as vice president of research and development where he managed the
development of the first time-sharing and mini-computers, and led the
development of the DEC VAX.
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 the former national president of the
American Marketing Association and holds the JC Penney Chair in Retailing
Studies.
LARRY DOWNES is a consultant and speaker on the impact of digital
technologies on business strategy. Mr. Downes has co-authored "Unleashing
the Killer App: Digital Strategies for Market Dominance," which is
scheduled to be published by Harvard Business School Press in May 1998.
TIM GALLWEY consults in the area of learning in the business
environment. 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.
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 efficiently customize goods and
services to individual customers).
ALAN C. KAY, PH.D. is a Disney fellow and vice-president of research
and development for Walt Disney Imagineering and also a member of Diamond's
Board of Directors. Dr. Kay was also a founding principal of the Xerox Palo
Alto Research Center, chief scientist of Atari, Inc. and an Apple
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<PAGE> 29
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. 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 efficiently customize goods and services to individual
customers). He is author of "Mass Customization: The New Frontier In
Business Competition".
DAVID P. REED, PH.D. is an information architect and independent
entrepreneur who focuses on designing the information space in which
people, groups and organizations operate. He was a senior scientist at
Interval Research Corp., vice-president and chief scientist for Lotus
Development Corp., and vice-president of research and development and chief
scientist at Software Arts Inc.
RICHARD Y. WANG, PH.D. is co-director for Total Data Quality
Management Research Program at the Massachusetts Institute of Technology
and founder of Cambridge Research Group, a firm specializing in data
quality management.
MARVIN ZONIS, PH.D. is a professor of international political economy
and leadership at the University of Chicago Graduate School of Business. He
is an expert and consultant on political risk and emerging markets, Mideast
politics, the oil industry, and the foreign policies of Russia and the
United States.
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, the Diamond Exchange learning forum, and
the Company's interactive case-based training and development programs.
HUMAN RESOURCES AND CULTURE
As of December 31, 1997 Diamond had 206 employees. Of these employees, 162
were client-serving professionals and 44 were management and administrative
personnel comprising marketing, human resources, finance, accounting, legal,
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.
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. Three primary elements comprise Diamond's culture: (i) an
environment that intellectually challenges its personnel 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.
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
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<PAGE> 30
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.
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 and retaining 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 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.
COMPETITION
The Company's primary competitors include management consulting firms,
systems integrators and firms that provide both management consulting and
systems integration services. 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 greater revenues
than the Company. Management believes that competition may increase from the
large traditional management consulting firms as these firms increase their use
of IT in their consulting services and enter the digital business strategy
market. The Company believes that the principal criteria considered by
prospective clients when selecting a consulting firm to develop and implement
digital business strategies include: scope of services, service delivery
approach, technical and industry expertise, perceived value, objectivity and a
results orientation.
Furthermore, the Company faces the additional challenge of competing for
and retaining the best personnel available in the digital business strategy
market. As other firms enter the digital business strategy market, the Company
believes that its client-serving professionals and employees may be targeted by
other firms to satisfy their own personnel needs.
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<PAGE> 31
FACILITIES
The Company's headquarters and principal administrative, information
systems, financial, accounting, marketing, legal and human resources operations
are located in approximately 35,000 square feet of leased space in Chicago,
Illinois. The approximate payments due from the Company under this lease for the
1998 and 1999 fiscal years are $800,000 and $1,000,000, respectively. This lease
expires in 2002, but permits an extension of five years with notice. 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 1998 and
1999 fiscal years are $200,000 and $219,000, respectively. This lease expires in
2001, but permits an extension of three years with notice. See Note 5 of Notes
to Consolidated Financial Statements.
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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<PAGE> 32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------
<S> <C> <C>
Melvyn E. Bergstein(1)............................ 56 Chairman of the Board of Directors,
Chief Executive Officer and President
Christopher J. Moffitt(2)(5)...................... 43 Senior Vice President, Secretary and
Director
Michael E. Mikolajczyk(3)......................... 46 Senior Vice President, Chief Financial
and Administrative Officer, Treasurer
and Director
James C. Spira(2)(4).............................. 55 Senior Vice President and Director
Donald R. Caldwell(3)(4)(5)....................... 51 Director
Edward R. Anderson(2)(5).......................... 51 Director
John D. Loewenberg(1)(4).......................... 57 Director
Alan C. Kay(3).................................... 57 Director
</TABLE>
- ---------------
(1) Term expires as of the 1998 Annual Meeting of Stockholders
(2) Term expires as of the 1999 Annual Meeting of Stockholders
(3) Term expires as of the 2000 Annual Meeting of Stockholders
(4) Member of the Audit Committee
(5) Member of the Compensation Committee
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 as 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 & Co. (a
predecessor to Ernst & Young, LLP) 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
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<PAGE> 33
1993 to 1994, he served as senior vice president of finance and administration
and chief financial officer for Technology Solutions 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 include serving as a partner in the national office
of Arthur Young & Co. (a predecessor to Ernst & Young, LLP). Mr. Caldwell
currently serves on the boards of directors of Integrated System Consulting
Group, Inc. and CompuCom Systems, Inc., two of the Safeguard partnership
companies. Mr. Caldwell also serves on the boards of numerous privately held
companies and other organizations, including 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. Mr.
Anderson is also a member of the board of directors of The M/A/R/C Group.
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.,
Sanchez Computer Associates, Inc., and DocuCorp International, Inc., three of
Safeguard's partnership companies.
ALAN C. 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.
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<PAGE> 34
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 serves
for a term of three years and until his successor has been elected and
qualified. The Board of Directors has an Audit Committee, which reviews and
recommends to the Board of Directors 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
policies to the Board of Directors, practices and procedures relating to the
compensation of managerial employees and the establishment and administration of
employee benefit plans, except for stock option plans, which are managed by the
Board of Directors as a whole. The Company's By-laws provide that a majority of
the Compensation Committee shall consist of members of the Board of Directors
who are not officers or employees of the Company or any subsidiary of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") was established on February 18, 1997 and did not meet
to consider executive compensation for the fiscal year ended March 31, 1997.
Accordingly, the functions of the Compensation Committee were carried out by the
full Board of Directors. 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) are 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 70% 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."
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued in fiscal years 1997 and 1996 with respect to the Company's
Chief Executive Officer and all of its other executive officers at March 31,
1997 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS --
----------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS COMPENSATION(2)
- -------------------------------- ------ -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Melvyn E. Bergstein............. 1997 $503,125 $ -- -- $8,550
Chairman, Chief Executive 1996 480,000 127,207(3) -- 5,472
Officer and President
Christopher J. Moffitt.......... 1997 431,250 -- -- 1,938
Senior Vice President and 1996 400,000 105,630(4) -- 1,938
Secretary
Michael E. Mikolajczyk.......... 1997 383,333 -- 37,529 3,306
Senior Vice President, Chief 1996 360,000 92,548(5) 16,500 1,938
Financial and Administrative
Officer and Treasurer
James C. Spira.................. 1997 479,169 -- -- 5,472
Senior Vice President 1996 208,789(6) -- 74,250 456
</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 or
fiscal 1997.
(2) Represents excess group life insurance premiums paid.
(3) Includes $120,000 of deferred compensation earned but not paid during the
fiscal year ended March 31, 1996 and $7,207 of interest on such cumulative
amounts.
(4) Includes $100,000 of deferred compensation earned but not paid during the
fiscal 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
fiscal year ended March 31, 1996 and $2,548 of interest on such cumulative
amounts.
(6) Represents a partial year as Mr. Spira joined the Company in November 1995.
DEFERRED COMPENSATION
From the inception of the Company through March 31, 1996, certain Partners'
base salaries were reduced by a percentage which was to be paid at a future
date, plus accrued interest. Amounts deferred under this program initially
ranged from 20% to 40% of base salary and were subsequently revised to 20% of
base salary effective April 1, 1995 for all participants. Certain amounts of
this deferred compensation were exchanged for Common Stock in January 1995,
April 1996 and November 1996.
After March 31, 1996, the deferral of compensation for these Partners was
discontinued. As a result of the losses sustained by the Company in the first
two quarters of fiscal 1997, these Partners agreed to waive their rights to
deferred compensation if the Company did not achieve certain revenue targets in
the third and fourth quarters of fiscal 1997. Pursuant to this agreement and the
Company's revenue shortfall from target in the third and fourth quarters of
fiscal 1997, these Partners forgave prior years deferred compensation totalling
approximately $485,000 during each of the quarters ended December 31, 1996
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<PAGE> 36
and March 31, 1997. The Company recognized these amounts as reductions in
operating expenses in the respective periods.
EMPLOYMENT AGREEMENTS
The Company entered into Employment Agreements with Mr. Bergstein, Mr.
Moffitt, Mr. Mikolajczyk and Mr. Spira that provide for annual salaries and
bonuses of up to 120% of annual salaries for the fiscal year ended March 31,
1998. The annual salaries are subject to annual reviews. The Employment
Agreements are terminable at any time by either party and contain
non-competition provisions, which last for 18 months following cessation of
employment with the Company. In addition, the Employment Agreements prohibit the
individuals from disclosing any of the Company's confidential information and
require the individuals to disclose to the Company, and to grant ownership to
the Company of all ideas, inventions and business plans developed during the
course of employment to the extent they relate to the business of the Company,
result from work performed for the Company or result from use of any of the
Company's property. For the fiscal year ended March 31, 1998, Mr. Bergstein's
agreement provides for an annual salary of $525,000; Mr. Moffitt's agreement
provides for an annual salary of $450,000; Mr. Mikolajczyk's agreement provides
for an annual salary of $400,000; and Mr. Spira's agreement provides for an
annual salary of $450,000.
STOCK OPTIONS
The Company's Amended and Restated 1994 Stock Option Plan (the "Stock
Option Plan" or "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 8,910,000 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 previously granted by the Company. On February 3, 1998, the Board of
Directors voted to increase the number of shares in the Stock Option Plan by
3,500,000 to 12,410,000, subject to approval by the stockholders at the next
annual meeting of stockholders. Of such shares, an aggregate of 3,531,952
additional shares of Class B Common Stock are available for issuance pursuant to
future grants. As of February 15, 1998, the Company has granted options to
purchase in the aggregate 3,456,957 shares of Common Stock (net of any expired
or terminated options) at a weighted average exercise price of $4.05 per share.
In connection with year-end annual promotions and performance bonus awards, the
Company expects to grant certain of its employees options to acquire up to
approximately 1,100,000 shares of Class B Common Stock in April 1998.
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 Class B 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 Class B Common
Stock on the date of grant). Options have been granted to Partners to purchase
1,098,875 (net of any expired or terminated options) shares of Class B 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 1,282,625 (net of any expired
or terminated options) shares of Class B 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 480,836 (net of any expired or terminated
options) shares of Class B Common Stock were granted to Partners and employees
on November 1, 1996 and February 10, 1997 which vested on August 25, 1997.
The Company's Board of Directors has also granted non-qualified stock
options to purchase 594,621 (net of any expired or terminated options) shares of
Common Stock to certain persons who were not employees on the date of grant 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.
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<PAGE> 37
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 no
options may be granted thereunder after ten years of the effective date of the
Stock Option 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."
The following table provides information on stock options granted by the
Company in fiscal 1997 to the Named Officers. All Company option grants depicted
below were made pursuant to the Stock Option Plan.
OPTION GRANTS DURING FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE AT ASSUMED
ANNUAL RATE OF
NUMBER OF PERCENT OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------- ---------- ------------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein............ -- -- -- -- -- --
Christopher J. Moffitt......... -- -- -- -- -- --
Michael E. Mikolajczyk......... 16,500(2) 1% $1.82 3/31/03 $12,225 $28,490
6,397(3) -- 3.18 10/31/03 8,281 19,299
14,632(3) 1 2.27 10/31/03 13,522 31,511
James C. Spira................. -- -- -- -- -- --
</TABLE>
- ---------------
(1) The amounts shown are calculated assuming that the Class B Common Stock fair
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 Class B 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 Class B 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 Class B 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 Class B 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) Options to purchase Class B Common Stock granted on April 1, 1996, vesting
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
expiring on the seventh anniversary of the date of grant. The options are
not transferable in any way other than upon the death of the employee.
Shares issued upon the exercise of these options are subject to the terms
and restrictions contained in the Voting and Stock Restriction Agreement.
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<PAGE> 38
(3) Options to purchase Class B Common Stock granted on November 1, 1996, fully
vesting on August 25, 1997 and expiring on the seventh anniversary of the
date of grant. The options are not transferable in any way other than upon
the death of the employee. Shares issued upon the exercise of these options
are subject to the terms and restrictions contained in the Voting and Stock
Restriction Agreement.
The following table sets forth information concerning options exercised
during fiscal 1997 and the number and the hypothetical value of certain
unexercised options of the Company held by the Named Officers as of March 31,
1997. 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 DURING FISCAL YEAR ENDED MARCH 31, 1997
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED MARCH 31, 1997 MARCH 31, 1997
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein...... -- -- -- -- -- --
Christopher J. Moffitt... -- -- -- -- -- --
Michael E. Mikolajczyk... -- -- 1,650 52,379 $ 6,897 $213,725
James C. Spira........... -- -- 7,425 66,825 31,037 279,329
</TABLE>
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 and Cambridge, a portion of the 1994
Purchase Warrant, each portion covering the purchase of 165,000 shares of Class
A 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 12.1%,
0% and 2.6%, respectively, of the Company's outstanding Class A Common Stock and
CompuCom and Cambridge will beneficially own approximately 0% and 1.3%,
respectively, of the Company's outstanding Class A 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. Such voting arrangements terminated upon
the consummation of the rights offering in April 1997, 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."
On February 18, 1997, the Company effected an Agreement and Plan of
Recapitalization. Pursuant to such agreement, the Company reclassified (i) the
shares of Common Stock of the Company held by Safeguard, Technology Leaders and
all other non-employee 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, or upon the
successful completion of a rights offering, with an annual interest rate of 6%
in the initial year, and increasing as of each succeeding anniversary of the
loan by one percentage point to a rate of 10% per year during the fifth year. As
a condition to the making of the loan, the Company also granted Safeguard a
warrant to purchase 526,597 shares of Class A Common Stock at
37
<PAGE> 39
an exercise price of $5.50 per share. On January 31, 1997, Safeguard transferred
warrants to purchase 241,182 shares of Class A Common Stock to Technology
Leaders and warrants to purchase 44,233 shares of Class A Common Stock to CIP.
The rights granted under the warrants expire on November 1, 2001. This loan was
repaid in full on April 10, 1997 in accordance with its payment terms.
The Company has granted options to purchase Common Stock to certain
non-employee Directors. In June 1996, Alan C. 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. In November 1997, Mr.
Loewenberg received additional options to purchase 10,000 shares of Common Stock
at an exercise price of $14.40 per share. See "MANAGEMENT -- Stock Options."
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 due under the note ($226,402) and expensed this amount in the
quarter ended September 30, 1996.
VOTING AND STOCK RESTRICTION AGREEMENT
Each employee-stockholder of the Company, the Investors and certain of the
Selling Stockholders are bound by the Second Amended and Restated Voting and
Stock Restriction Agreement dated as of August 4, 1997 (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 person holding the position of Chief Executive Officer of the Company
conveying the right to vote their shares of Class B Common Stock; (ii) rights of
first offer of the Company to purchase shares of Class B Common Stock (other
than shares sold in the Offering) offered by any employee-stockholder; (iii) for
so long as the Investors own in the aggregate in excess of 10% of the
outstanding Common Stock, rights of first offer of the Company to purchase
shares of Class A Common Stock (other than shares sold in the Offering) offered
by any Investor; 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) procedures 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.
38
<PAGE> 40
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. Shares of Class B Common
Stock to be sold in this Offering will be automatically converted into 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>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) NUMBER OF AFTER THE OFFERING(1)
------------------------- SHARES -----------------------------
NUMBER OF TO BE SOLD IN NUMBER OF
NAME SHARES PERCENTAGE THE OFFERING SHARES PERCENTAGE
- -------------------------------- ---------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony L. Abbattista(2) Class A 4,288 * -- 4,288 *
Class B 81,675 1.7% 16,300 65,375 1.7%
Edward R. Anderson(3)(4) Class A 18,920 * -- 18,920 *
Class B -- -- -- -- --
Timothy A. Andrews(2) Class A 288 * -- 288 *
Class B 62,287 1.3% 23,600 38,687 *
Michael J. Beller Class A 17,500 * -- 17,500 *
Class B 107,250 2.2% 21,400 85,850 2.2%
Melvyn E. Bergstein, Class A 159,288 2.1% -- 159,288 1.8%
individually
(2)(4)(5)(6)(7) Class B 594,083 12.4% 89,000 505,083 12.9%
Melvyn E. Bergstein, as proxy Class A -- -- -- -- --
holder(8) Class B 4,193,187 87.6% -- 3,403,487 87.1%
Laura M. Bestor(2) Class A 288 * -- 288 *
Class B 73,426 1.5% 16,200 57,226 1.5%
Robert E. Bloyd(2) Class A 1,288 * -- 1,288 *
Class B 28,875 * 18,200 10,675 *
Karl E. Bupp(2) Class A 8,788 * -- 8,788 *
Class B 122,513 2.6% 24,500 98,013 2.5%
Donald R. Caldwell(4)(9) Class A 46,517 * -- 46,517 *
Class B -- -- -- -- --
CompuCom Systems, Inc. Class A 65,019 * 65,019 -- --
Class B -- -- -- -- --
Michael J. Connolly(2) Class A 13,288 * -- 13,288 *
Class B 49,502 1.0% 16,300 33,202 *
Elwood G. Forsythe(2) Class A 15,588 * -- 15,588 *
Class B 236,776 4.9% 48,800 187,976 4.8%
Adam J. Gutstein(2) Class A 11,288 * -- 11,288 *
Class B 199,856 4.2% 44,600 155,256 4.0%
Alan C. Kay(4) Class A 22,001 * -- 22,001 *
Class B -- -- -- -- --
Jay R. Kingley(2) Class A 2,288 * -- 2,288 *
Class B 92,400 1.9% 20,000 72,400 1.9%
Chapman H. Kistler(2) Class A 21,288 * -- 21,288 *
Class B 47,850 1.0% 14,500 33,350 *
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) NUMBER OF AFTER THE OFFERING(1)
------------------------- SHARES -----------------------------
NUMBER OF TO BE SOLD IN NUMBER OF
NAME SHARES PERCENTAGE THE OFFERING SHARES PERCENTAGE
- -------------------------------- ---------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
John D. Loewenberg(4) Class A 16,800 * -- 16,800 *
Class B -- -- -- -- --
Charles B. Lohrmann(2) Class A 290 * -- 290 *
Class B 64,764 1.3% 19,600 45,164 1.2%
Alan A. Matsumura(2) Class A 1,288 * -- 1,288 *
Class B 120,244 2.5% 18,000 102,244 2.6%
James V. McGee(2) Class A 1,288 * -- 1,288 *
Class B 150,873 3.2% 30,000 120,873 3.1%
Michael E. Mikolajczyk Class A 3,788 * -- 3,788 *
(2)(4)(5)(7)(10) Class B 550,687 11.4% 85,000 465,687 11.8%
Christopher J. Moffitt Class A 40,270 * -- 40,270 *
(2)(4)(5)(7)(11) Class B 330,600 6.9% 51,000 279,600 7.2%
Elizabeth M. Moffitt(11) Class A 293,000 3.9% 50,000 243,000 2.8%
Class B -- -- -- -- --
James W. Niland Class A 288 * -- 288 *
Class B 173,044 3.6% 35,800 137,244 3.5%
Michael J. Palmer(2) Class A 5,588 * -- 5,588 *
Class B 236,776 4.9% 48,800 187,976 4.8%
Claire M. Parker Class A 78,127 1.0% 25,000 53,127 *
Class B -- -- -- -- --
Bruce R. Quade(2) Class A 1,288 * -- 1,288 *
Class B 189,131 3.9% 39,500 149,631 3.8%
David M. Rappaport(2) Class A 2,288 * -- 2,288 *
Class B 167,888 3.5% 33,000 134,888 3.5%
Scott H. Rupple(2)(12) Class A 2,190 * -- 2,190 *
Class B 54,038 1.1% 10,300 43,738 1.1%
Safeguard Scientifics, Inc. Class A 1,079,959 13.9% -- 1,079,959 12.1%
(13)(14) Class B -- -- -- -- --
Mark E. Siefertson(2)(15) Class A 9,288 * -- 9,288 *
Class B 122,059 2.5% 15,000 107,059 2.7%
Kirk E. Siefkas(2) Class A 1,288 * -- 1,288 *
Class B 189,132 3.9% 39,500 149,632 3.8%
Martha J. Silva Class A 23,388 * 23,100 288 *
Class B -- -- -- -- --
James C. Spira Class A 29,588 * -- 29,588 *
(2)(4)(7) Class B 216,564 4.5% 40,000 176,564 4.5%
Steven G. Steinberg Class A 51,563 * 13,200 38,363 *
Class B -- -- -- -- --
Strategic Horizons, LLP Class A 33,000 * 25,000 8,000 *
Class B -- -- -- -- --
Technology Leaders(14)(16) Class A 1,249,689 16.6% 1,249,689 -- --
Class B -- -- -- -- --
All Directors and Named Officers Class A 335,088 4.4% -- 335,088 3.8%
as a group (8 persons) Class B 4,839,238 100.0% 878,700 3,960,538 100.0%
(17)(18)
Other Selling Stockholders (each Class A 111,658 1.5% 15,500 96,158 1.1%
of whom are selling 10,000 Class B 603,419 12.4% 59,800 543,619 13.7%
or fewer shares of Common
Stock) (13 persons)(19)
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock
40
<PAGE> 42
(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 7,534,014 shares of Class A Common Stock and 4,787,270 shares
of Class B Common Stock were outstanding as of the date of this Prospectus,
(ii) assumes 8,717,506 shares of Class A Common Stock and 3,908,570 shares
of Class B 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.
(2) Such Stockholder is a Partner.
(3) Excludes 4,000 shares of Class A Common Stock held in trust for certain
members of the Anderson family.
(4) Such Stockholder is a Director of the Company.
(5) The address of each of Messrs. Bergstein, Moffitt and Mikolajczyk is 875
North Michigan Avenue, Suite 3000, Chicago Illinois 60611.
(6) Excludes 199,880 shares of Class A Common Stock held in trust for certain
members of the Bergstein family.
(7) Mr. Bergstein is the Chairman, Chief Executive Officer and President of the
Company. Mr. Moffitt is a Senior Vice President and the Secretary of the
Company. Mr. Mikolajczyk is a Senior Vice President, the Chief Financial
and Administrative Officer and the Treasurer of the Company. Mr. Spira is a
Senior Vice President of the Company.
(8) Excludes all shares of Common Stock directly owned by Mr. Bergstein.
(9) 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. Includes certain shares held in trust.
(10) Excludes 41,250 shares of Class A Common Stock held in trust for certain
members of the Mikolajczyk family.
(11) Excludes 84,250 shares of Class A Common Stock held in trust for certain
members of the Moffitt family.
(12) Includes 900 shares of Class A Common Stock owned by Jill Marie Rupple, the
wife of Mr. Rupple.
(13) Excludes the shares of Common Stock owned by CompuCom Systems, Inc., of
which Safeguard owns approximately 50% of the voting securities. CompuCom
Systems, Inc. is selling all of its shares of Class A Common Stock in this
Offering.
(14) The address of Technology Leaders and Safeguard Scientifics, Inc. is 800
The Safeguard Building 435 Devon Park Drive Wayne, PA 19087.
(15) Excludes 7,260 shares of Class A Common Stock held in trust for certain
members of the Siefertson family.
(16) Includes 537,635 shares of Class A Common Stock held by Technology Leaders
Offshore C.V. and 470,872 shares of Class A Common Stock held by Technology
Leaders, L.P. 112,692 shares are issuable to Technology Leaders, L.P.
pursuant to a presently exercisable warrant and includes 128,490 shares of
Class A Common Stock issuable to Technology Leaders F.R. Corp. pursuant to
a presently exercisable warrant.
(17) All holders of Class B Common Stock have granted Mr. Bergstein the right to
vote such shares pursuant to the terms of irrevocable proxies. Prior to the
Offering, includes 4,193,187 shares of Class B Common Stock held by other
persons who have granted Mr. Bergstein the right to vote such shares
pursuant to the terms of irrevocable proxies. After the Offering, includes
3,403,487 shares of Class B Common Stock subject to such proxies. Includes
in the aggregate 51,968 shares of Class B Common Stock issuable pursuant to
presently exercisable options held by all Executive Officers and Directors
as a group.
(18) The total number of shares of Class B Common Stock to be sold in the
Offering is 878,700, of which 265,000 shares of Class B Common Stock are
currently held individually by the Directors and Executive Officers as a
group.
(19) Includes 9 Partners.
41
<PAGE> 43
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 $1.00 per share (the "Preferred Stock").
COMMON STOCK
As of February 15, 1998, there were 12,040,354 shares of Common Stock
outstanding and held of record by approximately 7,100 stockholders. After giving
effect to the issuance of the 304,792 shares of Common Stock offered by the
Company hereby, there will be 12,626,076 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 a vote of 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 is transferred to any party other than 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. Shares of Class A Common Stock
may not be converted into shares of Class B Common Stock. As of February 15,
1998, there were 7,267,832 shares of Class A Common Stock and 4,772,522 shares
of Class B Common Stock issued and outstanding. Upon completion of the Offering,
there will be 8,717,506 shares of Class A Common Stock (9,067,506 shares in the
event that the Underwriters' over-allotment option is exercised in full) and
3,908,570 shares of Class B Common Stock outstanding.
"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 Chief Executive Officer; Election of
Future Chief Executive Officers."
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 other than as described herein. The outstanding shares of
Common Stock are, and the shares offered by the Company and the Selling
Stockholders 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."
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
42
<PAGE> 44
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., Overpeck Centre, 85 Challenger Road, Ridgefield
Park, New Jersey 07660, telephone number (800) 526-0801.
SHARES ELIGIBLE FOR FUTURE SALE
The Class A Common Stock has only been publicly traded since the Company's
initial public offering of the Class A Common Stock on February 25, 1997, and
there is no assurance that a significant public market for the Class A Common
Stock will be sustained after this Offering. Future sales of substantial amounts
of shares of the Class A Common Stock in the public market could adversely
affect prevailing market prices and could impair the Company's future ability to
raise capital through the sale of its equity securities. See "RISK FACTORS --
Shares Eligible for Future Sale."
Upon completion of the Offering, the Company will have 12,626,076
(12,976,076 if the Underwriters' over-allotment option is exercised in full)
shares of Common Stock outstanding. As of February 15, 1998, 10,726,462 shares
of Common Stock will be freely tradeable without restriction or further
registration under the Act. Without considering the contractual restrictions
described below in "--Lock-Up Agreements," the remaining 1,899,614 shares of
Common Stock will be eligible for sale in reliance on exemptions from the
registration requirements of the Act, including Rule 144.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least one year, is entitled to sell within any three month period a number of
shares that does not exceed the greater of (i) 1% of the Class A Common Stock
then outstanding (which will equal approximately 87,175 shares immediately after
the Offering or 90,675 shares if the Underwriters' over-allotment option is
exercised in full) or (ii) the average weekly trading volume in the Class A
Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed pursuant to Rule 144.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements and availability of current information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is not
an "affiliate" of the Company, as defined in Rule 144, for at least 90 days
prior to a sale and who has beneficially owned "restricted securities" for at
least two years is entitled to sell such shares under Rule 144 without regard to
the limitations described above.
OPTIONS AND WARRANTS
As of February 15, 1998, there were outstanding (i) options to purchase an
aggregate of 2,958,345 shares of Common Stock (of which 648,050 were exercisable
at February 15, 1998) and (ii) presently exercisable warrants to purchase an
aggregate of 285,415 shares of Class A Common Stock. Of the 648,050 shares
issuable pursuant to presently exercisable options, 514,802 shares will be
freely tradeable without restriction or further registration under the Act and
133,248 shares will be eligible for sale in reliance on exemptions from
registration requirements under the Act. On February 3, 1998, the Board of
Directors voted to increase the number of shares in the Stock Option Plan by
3,500,000 to 12,410,000, subject to approval by the stockholders at the next
annual meeting of stockholders. An aggregate of 3,531,952 additional shares of
Class B Common Stock are available for issuance pursuant to future grants under
the Stock Option Plan. See "MANAGEMENT -- Stock Options."
43
<PAGE> 45
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 shares of Common Stock after the completion of the
Offering and will be deemed to beneficially own an additional 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.
REGISTRATION RIGHTS
In connection with the 1994 Purchase, the Company granted certain
registration rights to Safeguard, Technology Leaders, CIP, CompuCom, Cambridge
and the Partners 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 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. In connection with the
Offering, the Registration Rights Holders have waived their registration rights
through the Lock-Up Expiry Date.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Winston & Strawn, Chicago, Illinois and Gordon &
Glickson P.C., Chicago, Illinois. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Ropes & Gray, Boston,
Massachusetts. 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 consolidated financial statements of Diamond Technology Partners
Incorporated as of March 31, 1996 and 1997 and December 31, 1997, and for each
of the years in the three-year period ended March 31, 1997 and the nine-month
period ended December 31, 1997 have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and, in accordance therewith, files
periodic reports and other information with the Commission. The Company has
filed with the Commission a Registration Statement on Form S-3 (including all
amendments thereto, the "Registration Statement") under the Act with respect to
the Class A Common Stock 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 Class A Common Stock 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
44
<PAGE> 46
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, without charge, at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 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. Copies of such materials 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.
The Class A Common Stock of the Company is quoted on the Nasdaq National
Market. Reports, proxy and information statements and other information
concerning the Company can be inspected at the Nasdaq National Market.
The Company distributes to the holders of its shares of Common Stock annual
reports containing consolidated financial statements audited by an independent
public accountant.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or information filed by the Company (File No.
000-22125) with the Commission are incorporated in this Prospectus by reference
and made a part hereof:
(1) Annual Report on Form 10-K for the year ended March 31, 1997;
(2) Quarterly Reports on Form 10-Q for the quarters ended June 30,
1997, September 30, 1997 and December 31, 1997;
(3) Proxy Statement for the 1997 Annual Meeting of Stockholders;
(4) The description of common stock contained in the Registration
Statement on Form 8-A as filed with the Commission on February 10, 1997;
and
(5) All documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 14(d) of the Exchange Act subsequent to the
date hereof and prior to the termination of the Offering.
Any statement contained in a document or a portion of which is incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any and all of the documents incorporated herein by reference (other
than exhibits not specifically incorporated herein by reference). Requests for
such copies should be directed to Investor Relations, Diamond Technology
Partners Incorporated, 875 North Michigan Avenue, Suite 3000, Chicago, Illinois
60611, telephone number (312) 255-5000, e-mail address [email protected].
45
<PAGE> 47
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997
and December 31, 1997..................................... F-3
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1995, 1996 and 1997 and the nine months
ended December 31, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended March 31, 1995, 1996 and 1997 and the
nine months ended December 31, 1997....................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1995, 1996 and 1997 and the nine months
ended December 31, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diamond Technology Partners Incorporated:
We have audited the accompanying consolidated balance sheets of Diamond
Technology Partners Incorporated and subsidiary as of March 31, 1996 and 1997
and December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended March 31, 1997 and the nine-month period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diamond
Technology Partners Incorporated and subsidiary as of March 31, 1996 and 1997
and December 31, 1997, and the results of its operations and its cash flows for
each of the years in the three-year period ended March 31, 1997 and the
nine-month period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 27, 1998
F-2
<PAGE> 49
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1997 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 4,635 $ 8,184 $27,831
Cash in escrow from subscribed stock..................... -- 9,363 --
Accounts receivable, net of allowance of $270 and $566 as
of March 31, 1996 and 1997, respectively, and $532 as
of December 31, 1997.................................. 3,304 4,496 3,856
Prepaid expenses......................................... 1,180 564 371
Notes receivable from stockholder........................ 226 -- --
Deferred income taxes.................................... 99 312 380
------- ------- -------
Total current assets.................................. 9,444 22,919 32,438
Computers, equipment, and training software, net........... 2,010 1,989 1,619
Other assets............................................... -- 476 508
Deferred organization costs, net........................... 161 110 77
------- ------- -------
Total assets.......................................... $11,615 $25,494 $34,642
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................ $ 125 $ 2,000 $ --
Accounts payable......................................... 1,155 1,609 1,463
Accrued compensation..................................... 1,089 -- 4,490
Deferred compensation.................................... 1,452 -- --
Income taxes payable..................................... 83 562 286
Deferred revenue......................................... -- 710 923
Accrued stock issuance costs............................. -- 609 --
Other accrued liabilities................................ 1,143 1,704 2,612
------- ------- -------
Total current liabilities............................. 5,047 7,194 9,774
------- ------- -------
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000 shares authorized
and no shares issued.................................. -- -- --
Class A Common Stock, $.001 par value, 40,000 shares
authorized and 3,370 and 4,594 shares issued at March
31, 1996 and 1997, respectively and 6,857 shares
issued at December 31, 1997........................... 3 5 7
Class B Common Stock, $.001 par value, 20,000 shares
authorized and 4,505 and 4,967 shares issued at March
31, 1996 and 1997, respectively and 5,033 shares
issued at December 31, 1997........................... 4 5 5
Class A Common Stock subscribed, 1,755 shares at March
31, 1997.............................................. -- 8,476 --
Additional paid-in capital............................... 6,844 9,329 20,433
Notes receivable from sale of Common Stock............... (257) (122) (208)
Retained earnings (deficit).............................. (26) 607 4,631
------- ------- -------
Total stockholders' equity............................ 6,568 18,300 24,868
------- ------- -------
Total liabilities and stockholders' equity............ $11,615 $25,494 $34,642
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 50
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND
NINE-MONTHS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------- ----------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $12,843 $26,339 $37,557 $26,245 $41,850
------- ------- ------- ------- -------
Operating expenses:
Project personnel and related
expenses............................. 8,351 15,312 21,863 16,307 22,859
Professional development and
recruiting........................... 1,395 4,587 6,272 4,478 4,448
Marketing and sales..................... 451 606 1,928 1,189 2,378
Management and administrative support... 3,108 4,460 6,348 4,840 6,302
------- ------- ------- ------- -------
Total operating expenses........ 13,305 24,965 36,411 26,814 35,987
------- ------- ------- ------- -------
Income (loss) from operations........ (462) 1,374 1,146 (569) 5,863
Interest income........................... 136 251 183 121 830
Interest expense.......................... (51) (87) (11) (39) (10)
------- ------- ------- ------- -------
Income (loss) before taxes........... (377) 1,538 1,318 (487) 6,683
Income taxes.............................. -- (302) (685) 107 (2,659)
------- ------- ------- ------- -------
Net income (loss)......................... $ (377) $ 1,236 $ 633 $ (380) $ 4,024
======= ======= ======= ======= =======
Basic earnings (loss) per share of common
stock................................... $ (0.06) $ 0.16 $ 0.07 $ (0.04) $ 0.35
Shares used in computing basic earnings
(loss) per share of common stock........ 6,071 7,620 9,144 9,000 11,659
Diluted earnings (loss) per share of
common stock............................ $ (0.06) $ 0.16 $ 0.06 $ (0.04) $ 0.29
Shares used in computing diluted earnings
(loss) per share of common stock........ 6,071 7,620 9,904 9,000 14,052
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 51
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND
NINE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
CLASS A CLASS B CLASS A ADDITIONAL FROM SALE OF RETAINED
CLASS A CLASS B COMMON COMMON STOCK PAID-IN COMMON EARNINGS
SHARES SHARES STOCK STOCK SUBSCRIBED CAPITAL STOCK (DEFICIT)
------- ------- ------- ------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.... 1,100 825 $ 1 $ 1 $ -- $ 1,650 $ -- $ (885)
Issuance of stock............ 2,221 3,608 2 3 -- 4,920 (91) --
Purchase of stock............ -- (41) -- -- -- (37) -- --
Net loss..................... -- -- -- -- -- -- -- (377)
----- ----- --- --- ------- ------- ----- -------
Balance at March 31, 1995.... 3,321 4,392 3 4 -- 6,533 (91) (1,262)
Issuance of stock............ -- 746 -- 1 -- 866 (257) --
Purchase of stock............ -- (584) -- (1) -- (555) -- --
Conversion to Class A........ 49 (49) -- -- -- -- -- --
Repayment of notes........... -- -- -- -- -- -- 91 --
Net income................... -- -- -- -- -- -- -- 1,236
----- ----- --- --- ------- ------- ----- -------
Balance at March 31, 1996.... 3,370 4,505 3 4 -- 6,844 (257) (26)
Stock issued and
subscribed................. 843 846 2 1 8,476 2,488 (120) --
Purchase of stock............ -- (3) -- -- -- (3) -- --
Conversion to Class A........ 381 (381) -- -- -- -- -- --
Repayment of notes........... -- -- -- -- -- -- 255 --
Net income................... -- -- -- -- -- -- -- 633
----- ----- --- --- ------- ------- ----- -------
Balance at March 31, 1997.... 4,594 4,967 5 5 8,476 9,329 (122) 607
Issuance of stock............ 2,075 17 2 -- (8,476) 10,304 (235) --
Exercise of stock options.... 29 284 -- -- -- 683 -- --
Income tax benefit related to
stock option exercises..... -- -- -- -- -- 210 -- --
Purchase of stock............ -- (76) -- -- -- (93) -- --
Conversion to Class A........ 159 (159) -- -- -- -- -- --
Repayment of notes........... -- -- -- -- -- -- 149 --
Net income................... -- -- -- -- -- -- -- 4,024
----- ----- --- --- ------- ------- ----- -------
Balance at December 31,
1997....................... 6,857 5,033 $ 7 $ 5 $ -- $20,433 $(208) $ 4,631
===== ===== === === ======= ======= ===== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at March 31, 1994.... $ 767
Issuance of stock............ 4,834
Purchase of stock............ (37)
Net loss..................... (377)
-------
Balance at March 31, 1995.... 5,187
Issuance of stock............ 610
Purchase of stock............ (556)
Conversion to Class A........ --
Repayment of notes........... 91
Net income................... 1,236
-------
Balance at March 31, 1996.... 6,568
Stock issued and
subscribed................. 10,847
Purchase of stock............ (3)
Conversion to Class A........ --
Repayment of notes........... 255
Net income................... 633
-------
Balance at March 31, 1997.... 18,300
Issuance of stock............ 1,595
Exercise of stock options.... 683
Income tax benefit related to
stock option exercises..... 210
Purchase of stock............ (93)
Conversion to Class A........ --
Repayment of notes........... 149
Net income................... 4,024
-------
Balance at December 31,
1997....................... $24,868
=======
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 52
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------- ----------------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (377) $ 1,236 $ 633 $ (380) $ 4,024
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 74 367 1,290 884 642
Deferred compensation (forgiven)............. 1,704 830 (967) (485) --
Cancellation of notes receivable............. -- -- 226 226 --
Deferred income taxes........................ (119) 21 (213) -- (69)
Changes in assets and liabilities:
Accounts receivable........................ (1,367) (1,869) (1,192) 144 640
Prepaid expenses and other................. (289) (860) 617 371 193
Accounts payable........................... 117 598 454 25 (146)
Deferred compensation...................... -- -- (248) (224) --
Accrued compensation....................... 137 929 (1,089) (1,089) 4,490
Deferred revenue........................... -- -- 710 -- 213
Income taxes payable....................... 119 (37) 480 (406) (65)
Other accrued liabilities.................. 322 532 603 98 1,024
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................ 321 1,747 1,304 (836) 10,946
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures, net.................... (600) (1,753) (1,218) (1,151) (238)
Organization costs........................... (51) -- -- -- --
Other assets................................. -- -- (476) -- (273)
Notes receivable............................. (163) (63) -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities... (814) (1,816) (1,694) (1,151) (511)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable.................. 300 175 2,250 2,250 --
Repayment of notes payable................... (44) (306) (375) (198) (2,000)
Stock issuance costs......................... (173) -- (403) -- (649)
Common stock issued and subscribed........... 3,990 701 11,833 2,432 2,591
Repurchase of common stock................... (38) (556) (3) -- (93)
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ 4,035 14 13,302 4,484 (151)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 3,542 (55) 12,912 2,497 10,284
Cash and cash equivalents at beginning of year... 1,148 4,690 4,635 4,635 17,547
------- ------- ------- ------- -------
Cash and cash equivalents at end of year......... $ 4,690 $ 4,635 $17,547 $ 7,132 $27,831
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......... $ 51 $ 55 $ 44 $ 43 $ 10
Cash paid during the year for income taxes..... -- 318 418 298 2,793
Supplemental disclosure for noncash investing and
financing activities:
Issuance of common stock for notes........... $ 91 $ 257 $ 120 $ 201 $ 235
Stock issuance costs accrued but not paid.... -- -- 609 -- --
Deferred and incentive compensation applied
to payment for common stock................ 1,218 -- 155 130 --
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 53
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
(1) DESCRIPTION OF BUSINESS
Diamond Technology Partners Incorporated (the "Company") is a management
consulting firm that synthesizes business strategy with information technology
to create innovative digital business strategies for leading national and
multi-national corporations. The Company's clients are generally located
throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All intercompany accounts and
balances have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with current period presentation.
REVENUE RECOGNITION
The Company recognizes revenues on contracts as work is performed, net of
provisions for estimated uncollectible amounts. Actual 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
$40,576, $316,692 and $1,239,571 for the fiscal years ended March 31, 1995,
1996, and 1997, respectively, and $604,258 for the nine-months ended December
31, 1997.
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, 1996 and 1997 was $39,740,
$90,413 and $141,199 respectively, and $179,289 at December 31, 1997.
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 revenues for the fiscal year ended March 31, 1995. Collectively, these
customers accounted for approximately 65% of revenues for the fiscal 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 fiscal year
ended March 31, 1996. Collectively, these customers accounted for 56% of
accounts receivable and 51% of revenues as of and for the fiscal year ended
March 31, 1996. The Company had two customers which individually accounted for
more than 10% of accounts receivable and one which accounted for more than 10%
of revenues as of and for the fiscal year ended March 31, 1997. Collectively,
the two customers accounted for 38% of accounts receivable and the one customer
accounted for 14% of revenues as of and for the fiscal year ended March 31,
1997. The Company had one customer which accounted for more than 10% of accounts
receivable and one which accounted for more than 10% of revenues as of and for
the nine-months ended December 31, 1997. One customer accounted for 12% of
accounts receivable
F-7
<PAGE> 54
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
and another customer accounted for 11% of revenues as of and for the nine months
ended December 31, 1997.
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.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and the assumed exercise of
stock options and warrants (using the treasury stock method). Following is a
reconciliation of the shares used in computing basic and diluted earnings (loss)
per share (in thousands) for the fiscal years ended March 31, 1995, 1996 and
1997 and the nine months ended December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Shares used in computing basic earnings
(loss) per share........................ 6,071 7,620 9,144 11,659
Dilutive effect of:
Stock options and warrants.............. -- -- 760 2,393
----- ----- ----- ------
Shares used in computing diluted earnings
(loss) per share........................ 6,071 7,620 9,904 14,052
===== ===== ===== ======
Antidilutive securities not included in
dilutive earnings per share
calculation............................. 510 1,116 637 99
===== ===== ===== ======
</TABLE>
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.
F-8
<PAGE> 55
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
(3) COMPUTERS, EQUIPMENT AND TRAINING SOFTWARE
Computers, equipment and training software at March 31, 1996, and 1997 and
December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1996 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Computers and equipment........................ $ 1,131 $ 1,943 $ 2,086
Training software.............................. 1,238 1,431 1,429
------- ------- -------
2,369 3,374 3,515
Less accumulated depreciation and
amortization................................. (359) (1,385) (1,896)
------- ------- -------
$ 2,010 $ 1,989 $ 1,619
======= ======= =======
</TABLE>
(4) NOTE RECEIVABLE FROM STOCKHOLDER
The Company advanced money to an officer under a note arrangement that
allowed 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. The note
and accumulated interest totaled $225,819 at March 31, 1996. The Company
canceled the full amount of the note during September of 1996.
(5) COMMITMENTS
The Company leases office space and equipment under various operating
leases. As of December 31, 1997, the minimum future lease payments under
operating leases with noncancelable terms in excess of one year are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ---------
<S> <C>
1998................................................. $1,467
1999................................................. 989
2000................................................. 802
2001................................................. 598
2002................................................. 183
------
$4,039
======
</TABLE>
Rent expense under operating leases amounted to $140,426, $477,930 and
$980,440 for the fiscal years ended March 31, 1995, 1996 and 1997, respectively,
and $1,069,196 for the nine months ended December 31, 1997.
The Company is party to standby letters of credit in support of the minimum
future lease payments under the lease for permanent office space and office
furniture amounting to $682,745 as of December 31, 1997, declining annually
during the lease terms.
(6) NOTES PAYABLE AND LINE OF CREDIT
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
matured on December 31, 1996. Notes payable at March 31, 1997 consisted of a
$2,000,000 loan from Safeguard Scientifics, Inc. ("Safeguard"). Interest on the
outstanding principal balance of the loan was payable quarterly at a rate of 6%.
The Company repaid the loan from Safeguard in April 1997 following the closing
of its Initial Public Offering.
F-9
<PAGE> 56
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
The Company has an available line of credit of $3,000,000 with a commercial
bank, which has been reduced by letters of credit outstanding as of December 31,
1997 in the amount of $682,745. At December 31, 1997, all remaining amounts
under this line of credit were available to the Company at the bank's prime rate
or LIBOR plus 2.5%. All borrowings, if any, against this line are secured by all
the assets of the Company. The line of credit expires July 31, 1998.
(7) STOCKHOLDERS' EQUITY
STOCK SPLIT, STOCK RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Board of Directors authorized a 1.65 to 1 stock split in the form of a
stock dividend effective February 18, 1997. All references in the financial
statements to share and per share data have been adjusted to effect this stock
split. Additionally, on February 18, 1997 the Company amended its certificate of
incorporation to divide its common stock into two classes, Class A and Class B,
and authorized 2,000,000 shares of Preferred Stock, par value $1.00 per share,
the terms of which may be determined by the Board of Directors. 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 only be owned beneficially or of record by
employees of the Company or by the Company.
On March 31, 1997, the Company completed its Initial Public Offering and
sold 1,755,000 of its common shares at the price of $5.50 per share. The Company
realized $8,476,404 in connection with the sale, net of the payment of the
underwriters commissions and other expenses of the offering. $2,000,000 of the
net proceeds were used to repay a loan from Safeguard. In the offering, an
additional 1,600,000 shares were sold by selling stockholders. On April 8, 1997,
the underwriters, pursuant to their exercise of the over-allotment option,
purchased an additional 320,000 shares of the Company's common stock at $5.50
per share. The Company's proceeds from these additional shares, net of expenses
was $1,594,968.
WARRANTS AND STOCK OPTIONS
In March 1994, the Company granted warrants to Safeguard. The warrants
allowed the holder to purchase up to 825,000 shares of stock at an exercise
price of $1.21 per share. Safeguard subsequently transferred 330,000 of these
warrants to certain of its affiliates. The Company had 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 satisfied
this requirement during the fiscal year ended March 31, 1996 and issued 825,000
shares of Class A Common Stock in exchange for $1,000,000 pursuant to the
provisions of the warrants.
In November 1996, the Company granted additional warrants to Safeguard. The
warrants permit the holder to purchase up to 526,597 shares of stock at an
exercise price of $5.50 per share and expire on November 1, 2001. On January 31,
1997, Safeguard transferred 285,415 of these warrants to certain of its
affiliates.
Under the Company's 1994 Stock Option Plan (the "Stock Option Plan" or
"Plan"), the Company may grant qualified incentive stock options to officers and
employees of the Company. The Stock Option 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. Options have been granted to officers 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 which
fully vest upon the third anniversary of the date of grant and expire on the
F-10
<PAGE> 57
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
fifth anniversary of the date of grant. Options were separately granted to
employees on November 1, 1996 and February 10, 1997 which vest August 25, 1997
and expire on the fifth anniversary of the date of grant. The Company's Board of
Directors has also granted non-qualified stock options to certain persons who
were not employees on the date of grant and certain non-employee members of the
Board of Directors. These non-qualified stock options vest over periods ranging
from immediate to five years.
The following table summarizes the transactions, both incentive and
nonqualified, pursuant to the Plan.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES UNDER RANGE OF EXERCISE PRICE
OPTION PRICES PER SHARE
------------ -------- ----------------
<S> <C> <C> <C>
Balances, March 31, 1994...................... 138,600 $ 1.21 $1.21
Granted..................................... 371,250 1.21 1.21
Exercised................................... -- --
Canceled.................................... -- -- --
--------- --------------- -----
Balances, March 31, 1995...................... 509,850 $ 1.21 $1.21
Granted..................................... 723,525 1.21 to 1.82 1.69
Exercised................................... -- -- --
Canceled.................................... (117,150) 1.21 to 1.82 1.63
--------- --------------- -----
Balances, March 31, 1996...................... 1,116,225 $1.21 to $ 1.82 $1.48
Granted..................................... 2,204,042 1.82 to 5.50 3.22
Exercised................................... -- -- --
Canceled.................................... (152,130) 1.21 to 5.45 2.02
--------- --------------- -----
Balances, March 31, 1997...................... 3,168,137 $1.21 to $ 5.50 $2.66
Granted..................................... 336,300 6.40 to 15.70 13.70
Exercised................................... (312,990) 1.21 to 5.45 2.18
Canceled.................................... (128,480) 1.21 to 5.45 2.26
--------- --------------- -----
Balances, December 31, 1997................... 3,062,967 $1.21 to $15.70 $3.94
========= =============== =====
</TABLE>
At March 31, 1995, 1996 and 1997 and December 31, 1997, zero, 8,250,
198,249 and 790,884 options were exercisable, respectively, under the Stock
Option Plan.
The following table summarizes information about stock options under the
Stock Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------- ---------------------------------
OPTIONS WEIGHTED AVERAGE OPTIONS
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.21 399,036 2.44 $ 1.21 205,575 $1.21
1.82 1,127,774 4.34 1.82 108,560 1.82
2.27 - 3.18 667,164 5.01 3.03 386,251 2.92
5.45 - 6.60 540,993 4.78 5.47 90,498 5.45
10.01 to 15.70 328,000 5.93 13.89 -- --
--------------- --------- ---- ------ ------- -----
$1.21 to $15.70 3,062,967 4.49 $ 3.94 790,884 $2.62
=============== ========= ==== ====== ======= =====
</TABLE>
F-11
<PAGE> 58
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its option plan. Accordingly, no compensation expense has been recognized. Had
compensation expense for the Company's Stock Option Plan been determined based
on the fair value at the grant date for awards under this plan consistent with
the methodology prescribed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
diluted earnings per share would have been reduced by $10,000 in fiscal 1996,
$229,000, or $.02 per share, in fiscal 1997 and $190,000, or $.02 per share, in
the nine-months ended December 31, 1997. The weighted average fair value of the
options granted under the Stock Option Plan in fiscal years 1996 and 1997, and
the nine-months ended December 31, 1997, calculated using the Black-Scholes
pricing model, was $.24, $.70, and $6.74, respectively. The following
assumptions were used in the Black-Scholes pricing model for options granted in
fiscal years 1996 and 1997 and the nine months ended December 31, 1997:
risk-free interest rate ranging from 5.5% to 6.3%, estimated volatility of 35%,
expected dividend yield 0% and an expected life of 1 to 5 years.
(8) INCOME TAXES
The provision for income taxes for the fiscal years ended March 31, 1995,
1996 and 1997 and the nine months ended December 31, 1997 consists of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal............................... $ 79 $ 156 $ 656 $2,299
Foreign............................... -- 52 131 --
State................................. 40 73 111 428
----- ----- ----- ------
119 281 898 2,727
Deferred................................ (119) 21 (213) (68)
----- ----- ----- ------
$ -- $ 302 $ 685 $2,659
===== ===== ===== ======
</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 fiscal years ended March 31, 1995, 1996 and 1997 and the nine months ended
December 31, 1997 for the following reasons (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate... $(128) $ 523 $448 $2,272
Effect of permanent differences.......... 64 91 185 111
State income taxes, net of federal
benefit................................ 26 48 52 276
Effect of deferred tax benefits.......... 74 (371) -- --
Other.................................... (36) 11 -- --
----- ----- ---- ------
$ -- $ 302 $685 $2,659
===== ===== ==== ======
</TABLE>
F-12
<PAGE> 59
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
The tax effects of the temporary differences that give rise to the deferred
tax assets and liabilities at March 31, 1996 and 1997 and December 31, 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------- DECEMBER 31,
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation......................... $ 581 $ 33 $ --
Other accruals................................ 372 748 658
----- ----- -----
Total gross deferred tax assets................. 953 781 658
Less valuation allowance...................... -- -- --
----- ----- -----
Deferred tax assets, net of valuation
allowance..................................... 953 781 658
----- ----- -----
Deferred tax liabilities:
Accelerated depreciation...................... 45 70 94
Capitalized assets............................ 412 239 132
Accrued bonuses............................... 341 128 24
Other accruals................................ 56 32 28
----- ----- -----
Total deferred tax liabilities.................. 854 469 278
----- ----- -----
Net deferred income taxes....................... $ 99 $ 312 $ 380
===== ===== =====
</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 could not be distributed prior to March 31, 1996,
without approval by the Board of Directors. Amounts deferred under this program
accrued interest at rates available to the Company from its bank and were
immediately vested. Effective April 1, 1996, the Board of Directors elected to
discontinue this program. Pursuant to an agreement entered into by all officers
who had deferred compensation, approximately $967,000 was forgiven during the
fiscal year ended March 31, 1997.
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-13
<PAGE> 60
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1995, 1996 AND 1997 AND DECEMBER 31, 1997
(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the unaudited quarterly financial information
for fiscal 1996 and 1997 and the nine months ended December 31, 1997 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
JUNE 30 SEPT 30 DEC 31 MAR 31
------- ------- ------ ------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996
Net revenues......................................... $ 5,863 $ 5,975 $ 6,918 $ 7,583
Income from operations............................... 363 149 433 429
Income before taxes.................................. 388 199 476 475
Net income........................................... 312 159 383 382
Basic earnings per share............................. $ 0.04 $ 0.02 $ 0.05 $ 0.05
Diluted earnings per share........................... 0.04 0.02 0.05 0.05
YEAR ENDED MARCH 31, 1997
Net revenues......................................... $ 7,753 $ 8,336 $10,156 $11,312
Income (loss) from operations........................ (1,215) (589) 1,235 1,715
Income (loss) before taxes........................... (1,193) (600) 1,306 1,805
Net income (loss).................................... (714) (385) 719 1,013
Basic earnings (loss) per share...................... $ (0.09) $ (0.04) $ 0.08 $ 0.11
Diluted earnings (loss) per share.................... (0.09) (0.04) 0.07 0.09
NINE MONTHS ENDED DECEMBER 31, 1997
Net revenues......................................... $12,101 $14,359 $15,390
Income from operations............................... 1,260 2,105 2,498
Income before taxes.................................. 1,471 2,387 2,825
Net income........................................... 867 1,433 1,724
Basic earnings per share............................. $ 0.07 $ 0.12 $ 0.15
Diluted earnings per share........................... 0.06 0.10 0.12
</TABLE>
F-14
<PAGE> 61
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Lehman Brothers Inc., and Adams, Harkness & Hill, Inc. are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Class A Common Stock
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.........................................
Lehman Brothers Inc.........................................
Adams, Harkness & Hill, Inc.................................
------------
Total.............................................
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain brokers and dealers. After the shares of Class A Common
Stock are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 350,000
additional shares of Class A Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,650,000 shares of Class A
Common Stock offered.
In connection with the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions, "passive" market making (see below)
and purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Class A
Common Stock; and syndicate short positions involve the sale by the Underwriters
of a greater number of shares of Class A Common Stock than they are required to
purchase from the Company in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Class A Common Stock may make bids for or purchases of the Class A Common
Stock in the Nasdaq National Market until such time,
U-1
<PAGE> 62
if any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (i) a passive market maker's net daily purchases of the
Class A Common Stock may not exceed 30% of its average daily trading volume in
such securities for the two full consecutive calendar months (or any 60
consecutive days ending within the 10 days) immediately preceding the filing
date of the registration statement of which this Prospectus forms a part, (ii) a
passive market maker may not effect transactions or display bids for the Class A
Common Stock at a price that exceeds the highest independent bid for the Class A
Common Stock by persons who are not passive market makers and (iii) bids made by
passive market makers must be identified as such.
The Company and the Selling Stockholders have agreed that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 120 days after the date of the Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than pursuant to employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding, on
the date of this Prospectus) which are substantially similar to the shares of
Class A Common Stock or which are convertible into or exchangeable for
securities which are substantially similar to the shares of Class A Common Stock
without the prior written consent of Goldman, Sachs & Co., except for the shares
of Class A Common Stock offered in connection with the Offering.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Act.
U-2
<PAGE> 63
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
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.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Dividend Policy....................... 11
Price Range of Class A Common Stock... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 21
Management............................ 31
Certain Transactions.................. 37
Principal and Selling Stockholders.... 39
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 44
Legal Matters......................... 45
Experts............................... 45
Additional Information................ 45
Incorporation of Certain Information
by Reference........................ 46
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
</TABLE>
===============================================================================
2,650,000 SHARES
DIAMOND TECHNOLOGY PARTNERS
CLASS A COMMON STOCK
(PAR VALUE $.001 PER SHARE)
---------------
[DIAMOND TECHNOLOGY LOGO]
---------------
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
ADAMS, HARKNESS & HILL, INC.
REPRESENTATIVES OF THE UNDERWRITERS
===============================================================================
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meaning assigned to them in the Prospectus which forms
a part of this Registration Statement.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Class A Common Stock being registered. All amounts are
estimates except the Securities and Exchange Commission registration and NASD
filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $18,585
NASD filing fee............................................. $6,800
Nasdaq National Market listing fee.......................... $17,500
Printing expenses........................................... $100,000
Legal fees and expenses..................................... $300,000
Accounting fees and expenses................................ $75,000
Miscellaneous............................................... $32,115
--------
Total.................................................. $550,000
========
</TABLE>
ITEM 15. 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
maintains a directors and officers liability insurance policy.
II-1
<PAGE> 65
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
**5.1 Opinion of Winston & Strawn
**23.1 Consent of Winston & Strawn (contained in Exhibit 5.1)
*23.2 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney (included on signature page)
</TABLE>
- -------------------------
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 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 that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on March 3, 1998.
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
By: /s/ MELVYN E. BERGSTEIN
---------------------------------------
Melvyn E. Bergstein
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Melvyn E. Bergstein and Michael E.
Mikolajczyk, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any Registration
Statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all 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 in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each 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>
<C> <C> <C>
/s/ MELVYN E. BERGSTEIN Chief Executive Officer, President and March 3, 1998
- ----------------------------------- Chairman (Principal Executive Officer)
Melvyn E. Bergstein
/s/ MICHAEL E. MIKOLAJCZYK Senior Vice President, Chief Financial March 3, 1998
- ----------------------------------- Officer, Treasurer and Director (Principal
Michael E. Mikolajczyk Financial and Accounting Officer)
/s/ CHRISTOPHER J. MOFFITT Director March 3, 1998
- -----------------------------------
Christopher J. Moffitt
/s/ DONALD R. CALDWELL Director March 3, 1998
- -----------------------------------
Donald R. Caldwell
/s/ EDWARD R. ANDERSON Director March 3, 1998
- -----------------------------------
Edward R. Anderson
/s/ ALAN C. KAY Director March 3, 1998
- -----------------------------------
Alan C. Kay
/s/ JAMES C. SPIRA Director March 3, 1998
- -----------------------------------
James C. Spira
/s/ JOHN D. LOEWENBERG Director March 3, 1998
- -----------------------------------
John D. Loewenberg
</TABLE>
II-3
<PAGE> 1
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CLASS A COMMON STOCK
($.001 PAR VALUE)
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UNDERWRITING AGREEMENT
....................., 1998
Goldman, Sachs & Co.,
Lehman Brothers Inc.,
Adams, Harkness & Hill, Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Diamond Technology Partners Incorporated, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 304,792 shares and, at the election of the
Underwriters, up to 350,000 additional shares of Class A Common Stock, par value
$.001 per share ("Stock"), of the Company and the stockholders of the Company
named in Schedule II hereto (the "Selling Stockholders") propose, subject to the
terms and conditions stated herein, to sell to the Underwriters an aggregate of
2,345,208 shares of Stock. The aggregate of 2,650,000 shares to be sold by the
Company and the Selling Stockholders is herein called the "Firm Shares" and the
aggregate of 350,000 additional shares to be sold by the Company is herein
called the "Optional Shares". The Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-3 (File No. 333-....)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto but including all documents
incorporated by reference in the prospectus contained therein, to you
for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the
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size of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement or document incorporated
by reference therein has heretofore been filed with the Commission; no
stop order suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for
that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement
or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including
all exhibits thereto and including (i) the information contained in the
form of final prospectus filed with the Commission pursuant to Rule
424(b) under the Act in accordance with Section 5(a) hereof and deemed
by virtue of Rule 430A under the Act to be part of the registration
statement at the time it was declared effective and (ii) the documents
incorporated by reference in the prospectus contained in the Initial
Registration Statement at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective,
each as amended at the time such part of the registration statement
became effective are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus"; any
reference herein to any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as of
the date of such Preliminary Prospectus or Prospectus, as the case may
be; any reference to any amendment or supplement to any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and incorporated by reference in
such Preliminary
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Prospectus or Prospectus, as the case may be; and any reference to any
amendment to the Registration Statement shall be deemed to refer to and
include any annual report of the Company filed pursuant to Section
13(a) or 15(d) of the Exchange Act after the effective date of the
Initial Registration Statement that is incorporated by reference in the
Registration Statement;
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(iii) The documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and any further documents
so filed and incorporated by reference in the Prospectus or any further
amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
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statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(iv) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(v) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus;
(vi) The Company and its subsidiaries do not own any real
property and have good and marketable title to all
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personal property owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries;
(vii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which the failure to so qualify would have a material
adverse effect on the Company's business, financial condition or
results of operations; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as
a foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction;
(viii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description of the
Stock contained in the Prospectus; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and
are owned directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims except as described in the
Prospectus;
(ix) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and
non-assessable and will conform in all material respects to the
description of the Stock contained in the Prospectus;
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(x) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
material terms or provisions of, or constitute a material default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(xi) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate descriptions
of such terms and provisions in all material respects;
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(xiii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a material adverse effect on the current or
future consolidated financial position, stockholders' equity or results
of operations of the Company and its subsidiaries; and, to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xiv) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xv) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes; and
(xvi) KPMG Peat Marwick LLP, who have certified certain
financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Stockholder of
this Agreement and the Power of Attorney and the Custody Agreement
hereinafter referred to, and for the sale and delivery of the Shares to
be sold by such Selling Stockholder hereunder, have been obtained; and
such Selling Stockholder has full right, power and authority to enter
into this Agreement, the Power-of-Attorney and the Custody
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Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder
with all of the provisions of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach
or violation of any of the material terms or provisions of, or
constitute a material default under, any statute, indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
such Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of such
Selling Stockholder is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, the Partnership Agreement of such Selling Stockholder if
such Selling Stockholder is a partnership [ADD TRUST LANGUAGE] or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to
each Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have, good and valid title to the Shares to be sold by
such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities or claims, will
pass to the several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 120 days after the date of the
Prospectus, such Selling Stockholder will not (and will not permit any
other person, to the extent allowable by law, who holds of record any
of such Selling Stockholder's shares of Stock, or substantially similar
securities of the Company, to, with respect to the shares so held),
directly or indirectly, sell, offer to sell, contract to sell, grant
any option for the sale of, or otherwise
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dispose of, any shares of Stock, or securities of the Company
substantially similar to Stock, or any security convertible or
exchangeable into or exercisable for or representing the right to
receive Stock, or any such substantially similar securities, owned by
such Selling Stockholder or with respect to which such Selling
Stockholder has the power of disposition, otherwise than (A) as part of
the sale of Shares under the terms of this Agreement, (B) as a gift,
provided the donee thereof agrees in writing to be bound by the terms
hereof, (C) transfers to such Selling Stockholder's affiliates, as such
term is defined in Rule 405 promulgated under the Act, provided that
each transferee agrees in writing to be bound by the terms hereof, or
(D) with the prior written consent of Goldman, Sachs & Co.;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, such Preliminary
Prospectus and the Registration Statement did, and the Prospectus and
any further amendments or supplements to the Registration Statement and
the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and will 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 not misleading;
(vii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling
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Stockholder will deliver to you prior to or at the First Time of
Delivery (as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu
thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder have been
placed in custody under a Custody Agreement and Waiver, in the form
heretofore furnished to you (the "Custody Agreement"), duly executed
and delivered by such Selling Stockholder to Mr. Charles Brown, as
custodian (the "Custodian"), and such Selling Stockholder has duly
executed and delivered an Irrevocable Power of Attorney, in the form
heretofore furnished to you (the "Power of Attorney"), appointing the
persons indicated in Schedule II hereto, and each of them, as such
Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of such
Selling Stockholder, to determine the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in Section 2
hereof, to authorize the delivery of the Shares to be sold by such
Selling Stockholder hereunder and otherwise to act on behalf of such
Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in
custody for such Selling Stockholder under the Custody Agreement are
subject to the interests of the Underwriters hereunder; the
arrangements made by such Selling Stockholder for such custody, and the
appointment by such Selling Stockholder of the Attorneys-in-Fact by the
Power of Attorney, are to that extent irrevocable; the obligations of
the Selling Stockholders hereunder shall not be terminated by operation
of law, whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such estate
or trust, or in the case of a partnership or corporation, by the
dissolution of such partnership or corporation, or by the occurrence of
any other event; if any individual Selling Stockholder or any such
executor or trustee should die or become
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incapacitated, or if any such estate or trust should be terminated, or
if any such partnership or corporation should be dissolved, or if any
other such event should occur, before the delivery of the Shares
hereunder, certificates representing the Shares shall be delivered by
or on behalf of the Selling Stockholders in accordance with the terms
and conditions of this Agreement and of the Custody Agreements; and
actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or
not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $.............. (the initial
public offering price less the underwriting discount), the number of Firm Shares
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Shares to be sold by the Company and each of
the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Stockholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such
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Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 350,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co., for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer, payable to the
order of the Company and [THE CUSTODIAN] in federal (same day) funds. The
Company will cause the certificates representing the Shares to be made available
for checking and packaging at least twenty-four hours prior to the Time of
Delivery (as defined below) with respect thereto at the office of [DTC OR ITS
DESIGNATED CUSTODIAN][GOLDMAN, SACHS & CO., 85 BROAD STREET, NEW YORK, NEW YORK
10004] (the "Designated Office"). The time and date of such delivery and payment
shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on . . . .
. . . . , 1998 or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing, and, with respect to the Optional Shares,
9:30
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a.m., New York time, on the date specified by Goldman, Sachs & Co. in the
written notice given by Goldman, Sachs & Co. of the Underwriters' election to
purchase such Optional Shares, or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery", such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of [WINSTON & STRAWN, 35 WEST WACKER DRIVE, 47TH FLOOR, CHICAGO, ILLINOIS
60601-9703] (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at the
Closing Location at .......p.m., New York City time, on the New York Business
Day next preceding such Time of Delivery, at which meeting the final drafts of
the documents to be delivered pursuant to the preceding sentence will be
available for review by the parties hereto. For the purposes of this Section 4,
"New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior to
the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
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Prospectus has been filed and to furnish you with copies thereof; to file
promptly all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the
Prospectus and for so long as the delivery of a prospectus is required in
connection with the offering or sale of the Shares; to advise you, promptly
after it receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus, of the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission for
the amending or supplementing of the Registration Statement or Prospectus or
for additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary Prospectus
or prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material
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fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus or to file under the Exchange Act any document incorporated by
reference in the Prospectus in order to comply with the Act or the Exchange
Act, to notify you and upon your request to file such document and to prepare
and furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such statement
or omission or effect such compliance, and in case any Underwriter is required
to deliver a prospectus in connection with sales of any of the Shares at any
time nine months or more after the time of issue of the Prospectus, upon your
request but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to
and including the date 120 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder,
any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of,
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the date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds"; and
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ").
If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission
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<PAGE> 17
the filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with the several Underwriters that (a) the Company will pay or cause to be paid
the following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section; and (b) such Selling
Stockholder will pay or cause to be paid all costs and expenses incident to the
performance of such Selling Stockholder's obligations hereunder which are not
otherwise specifically provided for in this Section, including (i) any fees and
expenses of counsel for such Selling Stockholder, (ii) such Selling
Stockholder's pro rata share of the fees and expenses of the Attorneys-in-Fact
and the Custodian, and (iii) all expenses and taxes incident to the sale and
delivery of the Shares to be sold by such Selling Stockholder to the
Underwriters hereunder. It is understood, however, that the Company shall bear,
and the Selling Stockholders shall not be required to pay or to reimburse the
Company for, the cost of any
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<PAGE> 18
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Ropes & Gray, counsel for the Underwriters, shall have furnished to
you such written opinion or opinions (a draft of each such opinion is attached
as Annex II(a) hereto), dated such Time of Delivery, with respect to the
matters covered in paragraphs (i) and (ii) of subsection (c) below and in
paragraphs (i), (ii) and (xi) of subsection (d) below, as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;
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(c) Winston & Strawn, counsel for the Company, shall have furnished to
you such written opinion or opinions (a draft of such opinion is attached as
Annex II(b) hereto) in form and substance satisfactory to you, dated such Time
of Delivery, with respect to the matters covered in paragraphs (ii), (vi),
(vii), (x) and (xi) of subsection (d) below as well as to the effect that:
(i) This Agreement has been duly authorized, executed and
delivered by the Company;
(ii) No consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters; and
(iii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate descriptions
of such terms and provisions in all material respects;
(d) Gordon & Glickson PC, counsel for the Company, shall have furnished
to you such written opinion or opinions (a draft of such opinion is attached as
Annex II(c) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company has been
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<PAGE> 20
duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the Shares being delivered at such Time
of Delivery, have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the
description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which the failure to so
qualify would have a material adverse effect on the Company's business,
financial condition or results of operations (such counsel being
entitled to rely in respect of the opinion in this clause upon opinions
of local counsel and in respect of matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly qualified
as a foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which the failure
to so qualify would have a material adverse effect on the Company's
business, financial condition or results of operations; and all of the
issued shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
and are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims except as described in the
Prospectus (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
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<PAGE> 21
(v) Any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries (in giving
the opinion in this clause, such counsel may state that no examination
of record titles for the purpose of such opinion has been made, and
that they are relying upon a general review of the leases, upon
opinions of counsel to the lessors of such property and, in respect of
matters of fact, upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates; provided, further that
such counsel may assume that the lessors with respect to such leases
had the power to execute such leases and that such leases are
enforceable against such lessor);
(vi) To such counsel's knowledge and other than as set forth
in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or
of which any property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries; and, to such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery to be sold by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the material terms or
provisions of, or constitute a material default under, any indenture,
mortgage, deed
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<PAGE> 22
of trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or
to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties;
(viii) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in material
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, or lease or agreement or other instrument known
to such counsel to which it is a party or by which it or any of its
properties may be bound;
(ix) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act;
(x) The documents incorporated by reference in the Prospectus
or any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements and
related schedules and other financial data contained therein, as to
which such counsel need express no opinion), when they became effective
or were filed with the Commission, as the case may be complied as to
form in all material respects with the requirements of the Act or the
Exchange Act, as applicable and the rules and regulations of the
Commission thereunder; and they have no reason to believe that any of
such documents, when such documents became effective or were so filed,
as the case may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement of a material
fact, or omitted to state a material fact required to be stated therein
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<PAGE> 23
or necessary to make the statements therein not misleading,
or, in the case of other documents which were filed under the
Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made when such documents
were so filed, not misleading; and
(xi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and other financial data contained therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules and regulations
thereunder; although they do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this Section 7(c), they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and other financial data contained therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other
financial data contained therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other
financial data contained therein, as to which such counsel need express
no opinion) contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
and they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be incorporated by reference into the
Prospectus or required to be described in the Registration Statement or
the Prospectus which are not filed or incorporated by reference or
described as required;
(e) The respective counsel for each of the Selling
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<PAGE> 24
Stockholders, as indicated in Schedule II hereto, each shall have furnished to
you their written opinion with respect to each of the Selling Stockholders for
whom they are acting as counsel, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been
duly executed and delivered by such Selling Stockholder and constitute
valid and binding agreements of such Selling Stockholder in accordance
with their terms;
(ii) This Agreement has been duly executed and delivered by
or on behalf of such Selling Stockholder; and the sale of the Shares to
be sold by such Selling Stockholder hereunder and the compliance by
such Selling Stockholder with all of the provisions of this Agreement,
the Power-of-Attorney and the Custody Agreement and the consummation of
the transactions herein and therein contemplated will not conflict with
or result in a breach or violation of any terms or provisions of, or
constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such
counsel to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of the property or assets
of such Selling Stockholder is subject, nor will such action result in
any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, the Partnership Agreement of such Selling Stockholder if
such Selling Stockholder is a partnership [ADD TRUSTS] or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any
court or governmental agency or body known to such counsel is required
for the consummation of the transactions contemplated by this Agreement
in connection with the Shares to be sold by such Selling Stockholder
hereunder, except which has been duly
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<PAGE> 25
obtained and is in full force and effect, such as have been
obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of such Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder had good and valid title to the Shares to be sold at such
Time of Delivery by such Selling Stockholder under this Agreement, free
and clear of all liens, encumbrances, equities or claims, and full
right, power and authority to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder; and
(v) Assuming that the Underwriters are bona fide purchasers
purchasing in good faith without notice of any adverse claim within the
meaning of the Uniform Commercial Code, upon the delivery of and
payment for the Shares to be sold by such Selling Stockholder as
contemplated by this Agreement, each of the Underwriters will acquire
the Shares purchased by it from such Selling Stockholders free of any
adverse claim.
In rendering the opinion in paragraph (iv), such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
(f) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, KPMG Peat Marwick LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of
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<PAGE> 26
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of
Delivery is attached as Annex I(b) hereto);
(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or Illinois State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if the effect of any such event specified in
this Clause (iv) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
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(i) The Shares at such Time of Delivery shall have been duly listed
for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of the [LIST APPROPRIATE STOCKHOLDERS
OF THE COMPANY OTHER THAN THE SELLING STOCKHOLDERS], substantially to the effect
set forth in Subsection 1(b)(iv) hereof in form and substance satisfactory to
you;
(k) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholders, respectively, satisfactory to
you as to the accuracy of the representations and warranties of the Company and
the Selling Stockholders, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling Stockholders of
all of their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as you may reasonably
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (g) of this
Section; and
(l) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement.
8. (a) The Company and each of the Selling Stockholders identified as
"Group (a) Selling Stockholders" on Schedule II attached hereto, jointly and
severally, will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or
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<PAGE> 28
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company and the
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; provided, further, however, that the liability of
each Selling Stockholder pursuant to this Subsection 8(a) shall not exceed the
product of the number of Shares sold by such Selling Stockholder and the initial
public offering price of the Shares as set forth in the Prospectus.
(b) Each of the Selling Stockholders identified as "Group (b) Selling
Stockholders" on Schedule II attached hereto, will indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon 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, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that such Selling
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or
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<PAGE> 29
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein; provided, further, however, that the liability of each Selling
Stockholder pursuant to this Subsection 8(b) shall not exceed the product of the
number of Shares sold by such Selling Stockholder and the initial public
offering price of the Shares as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon 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, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which
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<PAGE> 30
it may have to any indemnified party otherwise than under such subsection. In
case any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
(wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such
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<PAGE> 31
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The 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 the Company or the Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, each of the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (e),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. 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
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<PAGE> 32
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this subsection (e) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Stockholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
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<PAGE> 33
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any
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<PAGE> 34
Underwriter or any controlling person of any Underwriter, or the Company, or any
of the Selling Stockholders, or any officer or director or controlling person of
the Company, or any controlling person of any Selling Stockholder, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and each of
the Selling Stockholders pro rata (based on the number of Shares to be sold by
the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set
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<PAGE> 35
forth in the Registration Statement, Attention: Secretary; provided, however,
that any notice to an Underwriter pursuant to Section 8(d) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such Underwriter
at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us ten counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as
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to the authority of the signers thereof.
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<PAGE> 37
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
By:____________________________________
Name:
Title:
[NAMES OF SELLING STOCKHOLDERS]
By:____________________________________
Name:
Title:
As Attorney-in-Fact acting on behalf
of each of the Selling Stockholders named
in Schedule II to this Agreement.
Accepted as of the date hereof at
..................................
Goldman, Sachs & Co.,
Lehman Brothers,
Adams, Harkness & Hill, Inc.,
By: _________________________________
Goldman, Sachs & Co.
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<PAGE> 38
On behalf of each of the Underwriters
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<PAGE> 39
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES TO BE MAXIMUM OPTION
UNDERWRITER PURCHASED EXERCISED
- ----------- --------------------------------------
Goldman, Sachs & Co. ...................
Lehman Brothers ........................
Adams, Harkness & Hill, Inc. ...........
[NAMES OF OTHER UNDERWRITERS] ..........
TOTAL..................................... 2,650,000
=========
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<PAGE> 40
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES TO MAXIMUM OPTION
UNDERWRITER BE PURCHASED EXERCISED
- ----------- -------------------------------------
<S> <C> <C>
The Company ........................................ 304,792 350,000
The Selling Stockholder(s): ................ 2,345,208 --
[NAME OF SELLING STOCKHOLDER](A) ..........
[NAME OF SELLING STOCKHOLDER](B) ..........
[NAME OF SELLING STOCKHOLDER](C) ..........
[NAME OF SELLING STOCKHOLDER](D) ..........
[NAME OF SELLING STOCKHOLDER](E) ..........
Total .............................................. 2,650,000 350,000
============= =============
</TABLE>
- ----------
(a) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(d) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(e) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
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<PAGE> 1
The Board of Directors
Diamond Technology Partners Incorporated:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Chicago, Illinois
March 3, 1998
