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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 000-26970
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 36-4069408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 N. MICHIGAN AVENUE, SUITE 3000 60611
CHICAGO, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)
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Registrant's telephone number, including area code: (312) 255-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 31, 1999 there were 10,138,248 shares of Class A Common Stock and
3,462,556 shares of Class B Common Stock of the Registrant outstanding. The
aggregate market value of the voting stock of the Registrant held by
non-affiliates was an estimated $272 million based upon the closing price of
$24.00 per share on May 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
portions of the Registrant's definitive proxy statement, to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year; provided that if such proxy statement is not filed with the
Commission in such 120-day period, an amendment to this Form 10-K shall be filed
no later than the end of the 120-day period.
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DIAMOND TECHNOLOGY PARTNERS INCORPORATED
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
MARCH 31, 1999
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Sensitive Instruments....................................... 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 13. Certain Relationships and Related Transactions.............. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 21
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PART I
ITEM 1. BUSINESS
OVERVIEW
Diamond Technology Partners Incorporated (the "Company" or "Diamond") is an
e-commerce consulting firm. Positioned as the CEO's guide to e-commerce, the
Company helps its leading national and multinational clients create and
implement digital strategies--business strategies for the digital age. The
Company serves clients primarily in the telecommunications, energy, financial
services, insurance, healthcare, consumer products, and consumer services
industries. The Company offers services in digital strategy development, program
management, change management and profit improvement. Diamond was founded upon a
belief that effective e-commerce digital strategies can be conceived only when
strategy and technology are considered in tandem, not in sequence.
The Company works with its clients to help them understand, develop and
then manage the implementation of digital strategies. The Company leads its
clients through a process that broadens their understanding of the ways
e-commerce and information technology ("IT") can be used strategically to gain
competitive advantage in their rapidly changing markets. Diamond's
professionals, working closely with client personnel, perform thorough analyses
of the client's current business with a focus on alternative technology-driven
business strategies. When an appropriate strategy has been developed, Diamond
stays with the client to manage the implementation of the strategy, which
generally includes design, deployment and integration of IT solutions, together
with modification of business processes, organizational structure and the
training of client personnel. Because Diamond works in small teams, relevant
knowledge is transferred to the client organization throughout the process.
RECENT EVENTS
On April 26, 1999, Diamond acquired change management firm OmniTech
Consulting Group, Inc. ("OmniTech"). OmniTech specializes in web-based and other
multimedia corporate learning. OmniTech has 43 client-serving professionals and
has offices in Chicago (headquarters), Boston and Bridgewater, New Jersey.
OmniTech offers a variety of web-based and multimedia change management
solutions as well as custom change programs for organizations' leaders and work
teams. OmniTech's clients include well-known companies such as AT&T, Ameritech,
Bell Atlantic, Bell South, Carrier Corporation, Fidelity, Lucent, Microsoft,
Motorola and Xerox.
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. 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 addition,
the pace of change today -- primarily driven by the Internet and e-commerce --
dictates that the same firm that develops the strategy also be responsible for
implementing that strategy.
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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
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 strategy combines business strategy and technology in innovative
ways. The Company recognizes that technology does not merely support business,
it creates business. Diamond simultaneously provides expertise in strategic
consulting, business processes and IT, enabling the Company to identify
e-commerce digital strategy opportunities for its clients that might not
otherwise be considered by traditional management consulting or systems
integration firms. 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 should not be in the
business of selling software or hardware. Diamond has intentionally avoided
entering into alliances that might influence, or be perceived to influence, the
strategy that it recommends to a client. Diamond believes this objectivity earns
its clients' trust and is a key component of its ability to create digital
strategies and implement the results.
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
e-commerce digital strategies. Diamond has three fundamental areas of focus:
People, the Company's "product"; Clients, the Company's revenue source; and
Brand and Intellectual Capital, the Company's entree to new business.
People
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 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.
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.
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Clients
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."
The Company believes that its vertical market focus provides a scalable
structure for growth. Through a vertical focus in seven key markets
(telecommunications, energy, financial services, insurance, health care,
consumer products, and consumer services), the Company is able to offer
e-commerce digital 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.
Brand and Intellectual Capital
Diamond utilizes its accumulated knowledge and experience to provide
relevant and sustainable 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 created by
individuals both within and outside the Company and incorporated into the
Company's practice and training. The Company's intellectual capital is often its
entree into a new client project.
Diamond intends to continue to invest in the development and maintenance of
its brand identity in the marketplace, driven by its intellectual capital. 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 potential clients.
DIAMOND'S SERVICES
The Company designs and manages the delivery of digital 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 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.
Digital Strategy
The development of a digital strategy begins with an executive alignment
segment 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 strategy to achieve a client's objectives.
Based on the results of the executive alignment, a digital strategy is then
determined and prototyped 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
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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
The objective of Diamond's program management services is to maintain focus
on the business value of the project throughout the implementation of the
strategy. Diamond manages the implementation of digital strategies using a
collaborative approach, often utilizing the client's IT staff. 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.
Change Management
The Company's change management services address the people aspects of the
business model change inherent in fundamental e-commerce initiatives. Through
its recently acquired business, OmniTech Consulting Group, Diamond offers a
variety of web-based and multimedia change management solutions as well as
custom change programs for organizations' leaders and work teams. Change
management services typically overlap the end of the program management segment.
Change management services may also be delivered as a stand-alone service.
Profit Improvement
Diamond provides profit improvement services to drive restructuring of
costs and improve a company's cost position through the innovative application
of technology. Diamond provides profit improvement services as part of larger
digital strategy projects, or as a stand-alone service offering. While client
companies participate in profit improvement work during both good and bad
economic times, it is most prevalent during economic recessions when there is
increased scrutiny on companies' cost structures.
SALES AND MARKETING
The principal sales activities of the Company are managed by senior
Partners and supported by a Chief Marketing Officer. 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
several industry sectors: insurance, health care, telecommunications, energy,
financial services, 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
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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 eighteen CREs focusing in each of the industries Diamond serves.
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 a magazine, books, newsletters, media
and analyst relations, speeches and an interactive homepage on the World Wide
Web. Three of the more substantive marketing efforts include: (i) the
publication of the business magazine, Context; (ii) a book focusing on digital
strategy, "Unleashing the Killer App: Digital Strategies for Market Dominance";
and (iii) two series of executive seminars called the Diamond Exchange and
Insight (see "Intellectual Capital"). Each of these programs is designed to
educate the market on the opportunities of digital 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 to approximately
35,000 senior executives (CEOs and their direct reports in the United States).
In early fiscal year 2000, Diamond increased the frequency of Context from
quarterly to bi-monthly and began distributing the magazine on newsstands.
"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
was published in the first quarter of fiscal 1999. The Diamond Exchange and
Insight seminars provide forums to talk to clients and prospects face-to-face
about the opportunities and challenges of the Internet and e-commerce.
REPRESENTATIVE CLIENTS
Diamond currently focuses on providing services to clients in several
industry sectors: insurance, health care, telecommunications, energy, financial
services, 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:
Agricultural Chemicals Company
One of the world's largest agricultural chemicals companies approached
Diamond to explore how we could apply Killer App design principles to enter a
new market in a centuries-old commodity business: fertilizer. Traditionally, the
production and distribution of fertilizer is typified by large investments in
production facilities and huge inventories (due to seasonality), resulting in
large fixed costs. This is a mature industry and sales are highly cyclical. The
practice of large-scale fertilization of agricultural land is under pressure
from environmentalists claiming a risk of run-off pollution. Diamond was
retained to define and test a new business model that would give the client more
control of the economic drivers of the business. The goal was to create a
higher-margin, lower-cost commercial platform, while at the same time offering a
more differentiated value proposition to its end customer. Diamond helped the
client adapt a more customer-centric approach using Internet technology to
bypass current distribution channels.
Diamond designed and managed the implementation of a complete e-commerce
solution for the prototype -- complete with interfaces to the client's financial
and production systems -- in less than 6 months. Diamond also reconfigured the
client's organization, pricing structure, and business processes, including the
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conversion of sales staff (traditionally selling to distributors) into farm
advisors (building relationships directly with farmers).
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 strategy that would 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 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.
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 migration and consolidation requirements for the client's
benefits function, as well as defined criteria for the client to assess
potential outsourcing vendors.
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.
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
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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. 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.
INSIGHT Seminars
Diamond's INSIGHT seminars, launched in fiscal year 1999, are a series of
one-day seminars in the theory and practice of digital strategy. Diamond is
holding eight seminars in fiscal year 2000: four breakfast seminars co-sponsored
by Microsoft in Chicago, one co-sponsored with Diebold in Germany, and three
hosted by Diamond in Chicago, San Francisco and Atlanta.
Diamond Network
The Diamond Network is a group currently comprised of 14 recognized
business and technology leaders. 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 given 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 focusing
on telepresence, and author of High-Tech Ventures. 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. He teaches at the Kellogg Graduate
School of Business at Northwestern University and co-authored "Unleashing
the Killer App: Digital Strategies for Market Dominance," which was
published by Harvard Business School Press in May 1998.
Tim Gallwey is a consultant and author 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 reduce
the internal obstacles that interfere with learning and create work
environments that support peak performance.
James H. Gilmore is co-founder (with B. Joseph Pine II) of Strategic
Horizons LLP, a consultancy specializing in the strategic marketing and
operating issues of electronic commerce, and co-author of The Experience
Economy (1999).
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 Computer
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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 co-director and founding member of the Media
Lab at the Massachusetts Institute of Technology. He is an influential
expert on future technologies and an advisor to the federal government,
corporations and startup ventures. He is on the science council of the
Corporation for National Research Initiatives' program to develop global
information infrastructures.
Anthony J. Paoni is a Clinical Professor of Management Information at
the Kellogg Graduate School of Management at Northwestern University. Paoni
is an expert in the areas of strategic impact of information technology,
information management tools, and managing in a digital economy.
B. Joseph Pine II is co-founder (with James H. Gilmore) of Strategic
Horizons LLP, a consultancy specializing in the strategic marketing and
operating issues of electronic commerce. Pine is author of Mass
Customization: The New Frontier In Business Competition and co-author of
The Experience Economy (1999).
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 within the rapidly expanding
Internet environment. He was formerly chief scientist for Lotus Development
Corp., a senior scientist at Interval Research Corp., and chief scientist
and vice-president of research and development for Software Arts Inc.
Mohanbir S. Sawhney is a Tribune Professor of Electronic Commerce at
the Kellogg Graduate School of Management at Northwestern University.
Sawhney helps companies rethink their industry position in terms of
customer activities rather than corporate products and services. He has
particular expertise in e-commerce and the role of technology in marketing
and new product development.
Richard Y. Wang, Ph.D. is an associate professor at the MIT Sloan
School of Management with expertise in database management systems,
connectivity among information systems, and data quality management. Wang
is also 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 quarterly all-hands meetings for all Diamond employees, the Diamond
Exchange learning forum, and the Company's interactive case-based training and
development programs.
HUMAN RESOURCES AND CULTURE
As of March 31, 1999, Diamond had 309 employees. Of these employees, 239
were client-serving professionals and 70 were management and administrative
personnel comprising marketing, human resources, finance, accounting, legal,
internal information systems and administrative support.
Culture
Diamond believes its ability to simultaneously provide expertise in digital
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
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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 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 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.
Training and Development
The Company's training and professional development programs help it
deliver high-quality services to its clients, as well as 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 than those firms that do not offer
equity at all levels.
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,
e-commerce integrators and firms that provide both management consulting and
e-commerce 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 strategy market. The
Company believes that the principal criteria considered by prospective clients
when selecting a consulting firm to develop and implement e-commerce digital
strategies include: scope of services, service delivery approach, technical and
industry expertise, perceived value, and achievement of results.
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<PAGE> 12
Furthermore, the Company faces the additional challenge of competing for
and retaining the best personnel available in the digital strategy market. As
other firms enter the digital strategy market, the Company believes that its
client-serving professionals and employees may be targeted by other firms to
satisfy their own personnel needs.
FORWARD-LOOKING STATEMENTS
Statements contained anywhere in this report that are not historical facts
contain forward-looking statements including such statements identified by the
words "anticipate", "believe", "estimate", "expect" and 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. For a statement of the Risk Factors that might adversely affect the
Company's operating or financial results, see Exhibit 99.1 to this Annual Report
on Form 10-K.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, information
systems, financial, accounting, marketing, legal and human resources operations
are located in approximately 51,000 square feet of leased space in Chicago,
Illinois, comprised of two lease agreements. The initial lease agreement covers
35,000 square feet. In September 1998, the Company subleased an additional
16,000 square feet of office space at the same location. The total approximate
payments due from the Company under these leases for fiscal year 2000 are
$1,300,000. The initial lease expires in 2002, but permits an extension of five
years with notice. The sublease for the additional space expires in 2006.
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 fiscal 2000 are $219,000. This lease expires in 2001, but permits an
extension of three years with notice. See Note 4 of Notes to Consolidated
Financial Statements. In connection with its acquisition of OmniTech, Diamond
assumed OmniTech's obligations under its principal office lease in Chicago,
Illinois. The Chicago lease covers approximately 16,500 square feet, has total
approximate payments due for fiscal year 2000 of $374,000 and expires in 2004.
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 1999.
12
<PAGE> 13
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Melvyn E. Bergstein 57 Chairman of the Board of Directors and Chief Executive
Officer
Karl E. Bupp 36 Treasurer and Chief Financial
and Administrative Officer
Adam Gutstein 36 Chief Operating Officer
Michael E. Mikolajczyk 47 President and Director
Christopher J. Moffitt 44 Senior Vice President, Secretary and Director
James C. Spira 55 Senior Vice President and Director
</TABLE>
Melvyn E. Bergstein co-founded the Company in January 1994 and served as
its Chairman, Chief Executive Officer and President until July 1998, and its
Chairman and Chief Executive Officer since then. 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.
Karl E. Bupp joined the Company in April 1994 as vice president of
financial planning responsible for the firm's internal planning, analysis and
treasury functions. Since July 1998, Bupp has served as Chief Financial Officer.
Prior to joining Diamond, Bupp was the corporate controller, and director of
planning and treasury services for Technology Solutions Company. From 1985 to
1993, he held various financial management and analyst positions with MCI
Telecommunications Corporation.
Adam Gutstein was a co-founder of the Company in January 1994 and served as
a partner of the Company. Since July 1998 he has served as Chief Operating
Officer responsible for the client-serving operations of the Company including
revenue and profit contribution. Prior to joining Diamond, Gutstein was a vice
president at Technology Solutions Company and a manager with Andersen
Consulting.
Michael E. Mikolajczyk joined the Company in April 1994 and served as its
Senior Vice President, Chief Financial and Administrative Officer, and a member
of its Board of Directors until July 1998. Effective July 1, 1998, Mr.
Mikolajczyk became President of the Company and continues to serve as a member
of its Board of Directors. From 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.
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
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<PAGE> 14
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.
James C. Spira joined the Company in November 1995 and has served as its
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 sales prices for the Class A Common Stock.
<TABLE>
<CAPTION>
CLOSING PRICE
PER SHARE
-----------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ending March 31, 1998:
First Quarter............................................. $12.125 $ 5.750
Second Quarter............................................ 15.750 10.125
Third Quarter............................................. 17.750 12.375
Fourth Quarter............................................ 27.250 13.750
Fiscal year ending March 31, 1999:
First Quarter............................................. $31.000 $21.250
Second Quarter............................................ 31.500 16.000
Third Quarter............................................. 21.000 7.500
Fourth Quarter............................................ 30.250 16.000
</TABLE>
On June 14, 1999, the closing price of Class A Common Stock was $21.625 per
share. At such date, the Company had approximately 7,100 holders of record of
Class A Common Stock.
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
therefore, subject to any preferential dividend rights of outstanding Preferred
Stock. 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. The Company's financing arrangements currently do not
prohibit the Company from declaring or paying dividends or making other
distributions on the Common Stock.
During fiscal year 1999, the Company sold to its Partners, 5,200 shares of
its Class B Common Stock at $11.63 per share. These sales were made under the
exemption from registration provided under Section 4(2) of the Securities Act of
1933.
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<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
form the Company's consolidated financial statements. The data presented below
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," the Consolidated Financial
Statements and the notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $12,843 $26,339 $37,557 $58,369 $82,389
------- ------- ------- ------- -------
Operating expenses:
Project personnel and related expenses.... 8,351 15,312 21,863 31,619 43,275
Professional development and recruiting... 1,395 4,587 6,272 6,155 9,448
Marketing and sales....................... 451 606 1,928 3,210 4,669
Management and administrative support..... 3,108 4,460 6,348 8,602 11,298
------- ------- ------- ------- -------
Total operating expenses.......... 13,305 24,965 36,411 49,586 68,690
------- ------- ------- ------- -------
Income (loss) from operations............... (462) 1,374 1,146 8,783 13,699
Interest income, net........................ 85 164 172 1,150 2,488
------- ------- ------- ------- -------
Income (loss) before taxes.................. (377) 1,538 1,318 9,933 16,187
Income taxes................................ -- 302 685 3,925 6,351
------- ------- ------- ------- -------
Net income (loss)........................... $ (377) $ 1,236 $ 633 $ 6,008 $ 9,836
======= ======= ======= ======= =======
Basic earnings (loss) per share of Common
Stock(1).................................. $ (0.06) $ 0.16 $ .07 $ .51 $ .74
Shares used in computing basic earnings
(loss) per share of Common Stock(1)....... 6,071 7,620 9,144 11,756 13,277
Diluted earnings (loss) per share of Common
Stock(1).................................. $ (0.06) $ 0.16 $ .06 $ .42 $ .63
Shares used in computing diluted earnings
(loss) per share of Common Stock(1)....... 6,071 7,620 9,904 14,172 15,564
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $4,690 $4,635 $17,547 $31,437 $47,698
Working capital................................ 4,345 4,397 15,725 26,236 46,872
Total assets................................... 7,513 11,615 25,494 40,352 67,086
Long-term debt, including current portion...... 256 125 2,000 -- --
Total stockholders' equity..................... 5,187 6,568 18,300 28,767 53,301
</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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Annual Report on
15
<PAGE> 16
Form 10-K. This Annual Report on Form 10-K 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 (See
Item 1. Business).
OVERVIEW
Diamond is an e-commerce consulting firm. Positioned as the CEO's guide to
e-commerce, the Company helps its leading national and multinational clients
create and implement digital strategies -- business strategies for the digital
age. The Company has experienced substantial revenue growth in its five years
since inception, generating net revenues of $82.4 million from 85 clients during
the twelve months ended March 31, 1999. The Company had 239 client-serving
professionals as of March 31, 1999.
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 consists 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. 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 its clients' 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 could
require the Company to maintain underutilized employees.
RECENT DEVELOPMENTS
On April 23, 1999, the Company acquired OmniTech, a Chicago-based change
management firm specializing in web-based and other multimedia corporate
learning. OmniTech, with 43 client-serving professionals and offices in Chicago,
Boston and New Jersey, offers a variety of web-based and multimedia change
management solutions as well as customer change programs for companies. Under
the terms of the acquisition agreement, the Company paid $4.0 million in cash,
and issued a $1.0 million note and 115,641 shares of the Company's Class A
Common Stock. The acquisition will be accounted for under the purchase method of
accounting.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net Revenues................................................ 100.0% 100.0% 100.0%
----- ----- -----
Operating Expenses:
Project personnel and related expenses.................... 58.2 54.2 52.5
Professional development and recruiting................... 16.7 10.6 11.5
Marketing and sales....................................... 5.1 5.5 5.7
Management and administrative support..................... 16.9 14.7 13.7
----- ----- -----
Total operating expenses.......................... 96.9 85.0 83.4
----- ----- -----
Income from operations...................................... 3.1 15.0 16.6
Interest income, net........................................ 0.4 2.0 3.0
----- ----- -----
Income before taxes......................................... 3.5 17.0 19.6
Income taxes................................................ 1.8 6.7 7.7
----- ----- -----
Net income.................................................. 1.7% 10.3% 11.9%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net income of $9.8 million during fiscal 1999 improved from
net income of $6.0 million during fiscal 1998 as a result of increased revenues
combined with an improvement in the utilization of client-serving professionals,
partially offset by an increase in expenses required to support the Company's
growth during the period.
The Company's net revenues increased 41.2% to $82.4 million during fiscal
1999 as compared to fiscal 1998. 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 fiscal 1999, $16.9
million of revenue was derived from services delivered to new clients and $65.5
million related to the completion of projects or the undertaking of additional
projects from the Company's client base of the previous fiscal year. The Company
served 85 clients during fiscal 1999 as compared to 65 clients served during
fiscal 1998.
Project personnel and related expenses increased $11.7 million, or 36.9%,
to $43.3 million during fiscal 1999 as compared to fiscal 1998. This increase
resulted from an increase in the number of client-serving professionals to
respond to growth. The Company increased its client-serving professional staff
from 175 at March 31, 1998 to 239 at March 31, 1999. As a percentage of net
revenues, project personnel and related expenses decreased from 54.2% to 52.5%
during fiscal 1999, reflecting the improvement in utilization of client-serving
professionals.
Professional development and recruiting expenses increased $3.3 million
during fiscal 1999 as compared to fiscal 1998. This increase reflects the
Company's recruiting and training of a higher number of client-serving
professionals during fiscal 1999. 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 increased from 10.6%
to 11.5% during fiscal 1999.
Marketing and sales expenses increased $1.5 million to $4.7 million during
fiscal 1999 as compared to fiscal 1998 as a result of the Company's investment
in its marketing and branding programs. The Company's marketing activities in
fiscal 1999 were focused on (i) the continued development of its magazine,
"Context", which was launched during the quarter ended December 31, 1997, (ii)
the promotion of intellectual capital through the Diamond Exchange, the
Company's executive learning forum for senior executives and (iii) the
17
<PAGE> 18
conduct of three one-day digital strategy executive seminars for prospective
clients. As a percentage of net revenues, marketing and sales expenses increased
from 5.5% to 5.7%.
Management and administrative support expenses increased from $8.6 million
to $11.3 million, or 31.3%, during fiscal 1999 as compared to fiscal 1998. This
increase resulted from the cost of 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 14.7% to 13.7% as a result of the Company's improved
operating leverage resulting from its net revenue growth.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net income of $6.0 million during fiscal 1998 improved from
net income of $633,000 during fiscal 1997 as a result of increased revenues
combined with an improvement in the utilization of client-serving professionals,
partially offset by an increase in expenses required to support the Company's
growth during the period. The Company's net income in fiscal 1997 included net
losses for the first six months of the fiscal year, which resulted primarily
from the loss of two projects as a result of clients' cancellations of business
initiatives. 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
fiscal 1997. The Company reinstated its bonus programs effective for fiscal
1998. Accordingly, the Company recognized bonus expense of $7.6 million during
fiscal 1998 as compared to none during fiscal 1997.
The Company's net revenues increased 55.4% to $58.4 million during fiscal
1998 as compared to 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. For fiscal 1998, $20.1
million of revenue was derived from services delivered to new clients and $38.3
million related to the completion of projects or the undertaking of additional
projects from the Company's client base of the previous fiscal year. The Company
served 65 clients during fiscal 1998 as compared to 45 clients served during
fiscal 1997.
Project personnel and related expenses increased $9.8 million, or 44.6%, to
$31.6 million during fiscal 1998 as compared to fiscal 1997. 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 fiscal 1998. The Company increased its client-serving
professional staff from 146 at March 31, 1997 to 175 at March 31, 1998. As a
percentage of net revenues, project personnel and related expenses decreased
from 58.2% to 54.2% during fiscal 1998, reflecting the improvement in
utilization of client-serving professionals.
Professional development and recruiting expenses decreased $117,000 during
fiscal 1998 as compared to fiscal 1997. This decrease reflects the initial
investment in certain intellectual capital programs during fiscal 1997,
partially offset by the Company's training of a higher number of client-serving
professionals during fiscal 1998. The Company 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 from 16.7%
to 10.6% during fiscal 1998 as a result of the Company's improved operating
leverage resulting from its net revenue growth.
Marketing and sales expenses increased $1.3 million to $3.2 million during
fiscal 1998 as compared to fiscal 1997 as a result of the Company's investment
in its marketing and branding programs. The Company's marketing activities in
fiscal 1998 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 5.1% to 5.5%.
Management and administrative support expenses increased from $6.3 million
to $8.6 million, or 35.5%, during fiscal 1998 as compared to fiscal 1997. 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,
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<PAGE> 19
management and administrative support expenses decreased from 16.9% to 14.7% as
a result of the Company's improved operating leverage resulting from its net
revenue growth.
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 Scientifics, Inc.
In April 1998, the Company sold approximately 650,000 shares of Class A
Common Stock as part of a secondary offering. Net proceeds to the Company
totaling approximately $15.9 million were realized in April 1998.
The Company also maintains a revolving line of credit pursuant to the terms
of an unsecured credit agreement from a commercial bank under which the Company
may borrow up to $10.0 million at an annual interest rate based on the prime
rate or based on the LIBOR plus 1.75%, at the Company's discretion. This line of
credit has been reduced to account for letters of credit outstanding. As of
March 31, 1999, the Company had approximately $9.6 million available under this
line of credit.
The Company's billings for the quarter ended March 31, 1999 totaled $26.5
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 $10.9 million at March 31,
1999 represents 37 days of billings for the quarter.
The Company believes that the net proceeds from the sale of the Class A
Common Stock in April 1998, together with its current cash balances and cash
flow from future operations, will be sufficient to fund its operating
requirements for at least fiscal 2000. 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.
YEAR 2000 ISSUE
Existing computer programs of many companies 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 of these computer applications could fail or create erroneous
results by or at the year 2000 (the "Year 2000 Issue" or "Y2K"). The Company has
conducted an assessment of the potential impact of the Year 2000 Issue on its
operations and mission critical vendors. In light of the fact that the Company
has only been in existence for a little over five years, the Company's key
financial, information and operation systems have been designed to be Year 2000
compliant without the need for any modifications or conversions. Accordingly,
the Company does not expect the Year 2000 Issue to have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
The Company has participated in certain projects that involve Y2K issues
for some of its clients. Generally, the Company includes provisions in client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties and limit the company's liability to the amount
of fees paid by the client to the Company in connection with the project. The
Company also maintains insurance to protect against potential liability that may
arise in connection with Y2K issues at its clients. Although the Company has no
reason to believe that any such work will result in litigation against the
Company, it is possible that the Company could be adversely affected by
litigation in connection with these projects. There can be no assurance that the
Company will be able to obtain the desired contractual protections in
agreements, or that any such contractual provisions will prevent clients from
asserting claims against the Company with respect to the Y2K issue. There can
also be no assurance that the contractual protections, if any, obtained by the
19
<PAGE> 20
Company or the insurance coverage will operate to protect the Company from, or
adequately limit the amount of, any liability arising from claims asserted
against the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SENSITIVE
INSTRUMENTS
The Company does not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements and schedules set forth in Item 14(a) under the captions
"Consolidated Financial Statements" and "Financial Statement Schedules" as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Part III of this Annual Report on Form 10-K incorporates by reference
portions of the Registrant's definitive proxy statement, to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year; provided that if such proxy statement is not filed with the
Commission in such 120-day period, an amendment to this Form 10-K shall be filed
no later than the end of the 120-day period.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company will be set forth in
the forthcoming Proxy Statement under the heading "Election of Directors," which
information is incorporated herein by reference or in an amendment to this Form
10-K. Information regarding the executive officers of the Company is included as
Item 4A of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b)
of Regulation S-K. Information required by Item 405 of Regulation S-K will be
set forth in the forthcoming Proxy Statement under the heading "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be set forth in the
Proxy Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference (except for the Compensation
Committee report on Executive Compensation and the Performance Graph), or in an
amendment to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be set forth in the forthcoming Proxy Statement under the
heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference, or in an amendment to this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions will be
set forth in the forthcoming Proxy Statement, which information is incorporated
herein by reference, or in an amendment to this Form 10-K.
20
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The financial statements and schedule listed in the index on page
F-1 are filed as part of this Form 10-K on pages F-2 to F-13
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
(2) see (1) above
(3) see (c) below
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999. A report on Form 8-K was filed on April 23, 1999
related to the acquisition of OmniTech Consulting Group, Inc.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Form 10-K. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1** -- Form of Restated Certificate of Incorporation of the
Company.
3.2** -- Form of Amended and Restated By-laws of the Company.
10.1** -- Amended and Restated Diamond Technology Partners
Incorporated 1994 Stock Option Plan, as amended.
10.2** -- Employment Agreement between Melvyn E. Bergstein and the
Company, dated February 1, 1994, as amended.
10.3** -- Employment Agreement between Michael E. Mikolajczyk and
the Company, dated April 18, 1994, as amended.
10.4** -- Employment Agreement between James C. Spira and the
Company, dated November 1, 1995, as amended.
10.5** -- Employment Agreement between Christopher J. Moffitt and
the Company, dated February 1, 1994, as amended.
10.6** -- Stock Purchase Agreement dated as of March 22, 1994 among
the Company, Melvyn E. Bergstein, Christopher J. Moffitt,
Safeguard Scientifics, Inc. and certain other investors,
as amended.
10.7** -- Amended and Restated Voting and Stock Restriction
Agreement dated as of April 1, 1996 among the Company,
Technology Leaders L.P., Technology Leaders Offshore C.
V., CIP Capital L.P., Safeguard Scientifics (Delaware),
Inc. and certain of the shareholders of the Company.
10.8** -- Amended and Restated Partners Operating Agreement dated
as of April 1, 1996 among the Company and the Partners of
the Company.
10.9** -- Amended and Restated Warrant Certificates to Purchase
Common Stock dated as of November 8, 1996 among the
Company and Safeguard Scientifics (Delaware), Inc.
10.11** -- Warrant Certificate to Purchase Common Stock dated as of
January 31, 1997 between Safeguard Scientifics
(Delaware), Inc. and the Company.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12** -- Warrant Certificate to Purchase Common Stock dated as of
January 31, 1997 between Capital, L.P. and the Company.
10.13** -- Warrant Certificate to Purchase Common Stock dated as of
January 31, 1997 between Technology Leaders FR Corp. and
the Company.
10.14** -- Warrant Certificate to Purchase Common Stock dated as of
January 31, 1997 between Technology Leaders, L.P. and the
Company.
10.15* -- Asset Purchase Agreement, dated as of April 23, 1999 by
and among OmniTech Consulting Group, Inc, its
stockholders and the Registrant.
21.1** -- Subsidiaries of the Registrant.
24.1* -- Power of Attorney (included on signature page).
24.2* -- Consent of Independent Public Accountants.
27.1* -- Financial Data Schedule.
99.1* -- Risk Factors.
</TABLE>
- ---------------
* Filed herewith
** Incorporated by reference to the corresponding exhibits filed with the
Company's Registration Statement on Form S-1 (No. 333-17785)
22
<PAGE> 23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DIAMOND TECHNOLOGY PARTNERS
INCORPORATED
By: /s/ MELVYN E. BERGSTEIN
----------------------------------
Melvyn E. Bergstein
Chairman and Chief Executive
Officer
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.
Mikolaczyk, 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 Annual Report on Form 10-K, 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 Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ MELVYN E. BERGSTEIN Chief Executive Officer, June 14, 1999
- ----------------------------------------------------- Chairman and Director
Melvyn E. Bergstein
/s/ MICHAEL E. MIKOLAJCZYK President (Principal Executive June 14, 1999
- ----------------------------------------------------- Officer), Director
Michael E. Mikolajczyk
/s/ KARL E. BUPP Treasurer, Chief Financial June 14, 1999
- ----------------------------------------------------- Officer (Principal Financial
Karl E. Bupp and Accounting Officer)
/s/ CHRISTOPHER J. MOFFITT Director June 14, 1999
- -----------------------------------------------------
Christopher J. Moffitt
/s/ DONALD R. CALDWELL Director June 14, 1999
- -----------------------------------------------------
Donald R. Caldwell
/s/ EDWARD R. ANDERSON Director June 14, 1999
- -----------------------------------------------------
Edward R. Anderson
/s/ ALAN C. KAY Director June 14, 1999
- -----------------------------------------------------
Alan C. Kay
/s/ JAMES C. SPIRA Director June 14, 1999
- -----------------------------------------------------
James C. Spira
/s/ JOHN D. LOEWENBERG Director June 14, 1999
- -----------------------------------------------------
John D. Loewenberg
</TABLE>
23
<PAGE> 24
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1997, 1998 and 1999............................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1997, 1998 and 1999................. F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1998 and 1999............................. F-6
Notes to Consolidated Financial Statements.................. F-7
SUPPLEMENTAL FINANCIAL SCHEDULES:
Independent Auditors' Report................................ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Stockholders and 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, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended March 31, 1999.
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, 1998 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 1999 in conformity with generally
accepted accounting principles.
[LOGO]
Chicago, Illinois
April 19, 1999
F-2
<PAGE> 26
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $31,437 $47,698
Accounts receivable, net of allowance of $559 and $419 as
of March 31, 1998 and 1999, respectively............... 5,063 10,434
Prepaid expenses.......................................... 548 1,790
Deferred income taxes..................................... 773 735
------- -------
Total current assets.............................. 37,821 60,657
Computers, equipment and software, net...................... 1,644 3,419
Other assets................................................ 887 3,010
------- -------
Total assets...................................... $40,352 $67,086
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,734 $ 1,468
Accrued compensation...................................... 6,535 8,835
Deferred revenue.......................................... 1,129 709
Other accrued liabilities................................. 2,187 2,773
------- -------
Total current liabilities......................... 11,585 13,785
------- -------
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000 shares authorized,
no shares issued....................................... -- --
Class A Common Stock, $.001 par value, 40,000 shares
authorized, 7,298 issued in 1998 and 10,005 issued in
1999................................................... 7 10
Class B Common Stock, $.001 par value, 20,000 shares
authorized, 4,887 issued in 1998 and 3,649 issued in
1999................................................... 5 4
Additional paid-in capital................................ 22,463 42,152
Notes receivable from sale of common stock................ (323) (32)
Retained earnings......................................... 6,615 16,451
------- -------
28,767 58,585
Less Class A Common Stock in treasury, at cost, 304 shares
in 1999................................................ -- 5,284
------- -------
Total stockholders' equity........................ 28,767 53,301
------- -------
Total liabilities and stockholders' equity........ $40,352 $67,086
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 27
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net revenues................................................ $37,557 $58,369 $82,389
------- ------- -------
Operating expenses:
Project personnel and related expenses.................... 21,863 31,619 43,275
Professional development and recruiting................... 6,272 6,155 9,448
Marketing and sales....................................... 1,928 3,210 4,669
Management and administrative support..................... 6,348 8,602 11,298
------- ------- -------
Total operating expenses............................... 36,411 49,586 68,690
------- ------- -------
Income from operations...................................... 1,146 8,783 13,699
Interest income............................................. 183 1,201 2,534
Interest expense............................................ (11) (51) (46)
------- ------- -------
Income before taxes......................................... 1,318 9,933 16,187
Income taxes................................................ 685 3,925 6,351
------- ------- -------
Net income.................................................. $ 633 $ 6,008 $ 9,836
======= ======= =======
Basic earnings per share of common stock.................... $ 0.07 $ 0.51 $ 0.74
Shares used in computing basic earnings per share of common
stock..................................................... 9,144 11,756 13,277
Diluted earnings per share of common stock.................. $ 0.06 $ 0.42 $ 0.63
Shares used in computing diluted earnings per share of
common stock.............................................. 9,904 14,172 15,564
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 28
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
CLASS A CLASS B CLASS A ADDITIONAL FROM SALE OF RETAINED TOTAL
COMMON COMMON STOCK PAID-IN COMMON (DEFICIT) TREASURY STOCKHOLDERS'
STOCK STOCK SUBSCRIBED CAPITAL STOCK EARNINGS STOCK EQUITY
------- -------- ---------- ---------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996.... $3 $4 $ -- $ 6,844 $(257) $ (26) $ -- $ 6,568
Stock issued and
subscribed................. 2 1 8,476 2,488 (120) -- -- 10,847
Purchase of stock............ -- -- -- (3) -- -- -- (3)
Repayment of notes........... -- -- -- -- 255 -- -- 255
Net income................... -- -- -- -- -- 633 -- 633
-- -- ------- ------- ----- ------- ------- -------
Balance at March 31, 1997.... 5 5 8,476 9,329 (122) 607 -- 18,300
Issuance of stock............ 2 -- (8,476) 11,555 (443) -- -- 2,638
Exercise of stock options.... -- -- -- 1,192 -- -- -- 1,192
Income tax benefit related to
stock option exercises..... -- -- -- 480 -- -- -- 480
Purchase of stock............ -- -- -- (93) -- -- -- (93)
Repayment of notes........... -- -- -- -- 242 -- -- 242
Net income................... -- -- -- -- -- 6,008 -- 6,008
-- -- ------- ------- ----- ------- ------- -------
Balance at March 31, 1998.... 7 5 -- 22,463 (323) 6,615 -- 28,767
Issuance of stock............ 1 -- -- 15,998 (60) -- -- 15,939
Exercise of warrants......... -- -- -- 1,326 -- -- -- 1,326
Exercise of stock options.... -- 1 -- 1,460 -- -- -- 1,461
Income tax benefit related to
stock option exercises..... -- -- -- 1,331 -- -- -- 1,331
Purchase of stock............ -- -- -- (426) -- -- (5,284) (5,710)
Conversion to Class A........ 2 (2) -- -- -- -- -- --
Repayment of notes........... -- -- -- -- 351 -- -- 351
Net income................... -- -- -- -- -- 9,836 -- 9,836
-- -- ------- ------- ----- ------- ------- -------
Balance at March 31, 1999.... $10 $4 $ -- $42,152 $ (32) $16,451 $(5,284) $53,301
== == ======= ======= ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 29
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 633 $ 6,008 $ 9,836
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,290 871 998
Deferred compensation forgiven......................... (967) -- --
Cancellation of notes receivable....................... 226 -- --
Deferred income taxes.................................. (213) (461) 38
Changes in assets and liabilities:
Accounts receivable.................................. (1,192) (567) (5,371)
Prepaid expenses and other........................... 617 15 (1,242)
Accounts payable..................................... 454 125 (266)
Deferred compensation................................ (248) -- --
Accrued compensation................................. (1,089) 6,535 2,300
Deferred revenue..................................... 710 419 (420)
Income taxes payable................................. 480 (82) --
Other assets and liabilities......................... 603 655 (1,314)
------- ------- -------
Net cash provided by operating activities................... 1,304 13,518 4,559
------- ------- -------
Cash flows used in investing activities:
Capital expenditures, net................................. (1,218) (475) (2,773)
Other assets.............................................. (476) (648) (223)
------- ------- -------
Cash flows used in investing activities..................... (1,694) (1,123) (2,996)
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable............................... 2,250 -- --
Repayment of notes payable................................ (375) (2,000) --
Stock issuance costs...................................... (692) (649) (1,523)
Common stock issued and subscribed........................ 12,122 4,237 21,931
Purchase of treasury stock................................ -- -- (5,284)
Repurchase of common stock................................ (3) (93) (426)
------- ------- -------
Net cash provided by financing activities................... 13,302 1,495 14,698
------- ------- -------
Net increase in cash and cash equivalents................... 12,912 13,890 16,261
Cash and cash equivalents at beginning of year.............. 4,635 17,547 31,437
------- ------- -------
Cash and cash equivalents at end of year.................... $17,547 $31,437 $47,698
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 44 $ 51 $ 24
Cash paid during the year for income taxes................ 418 4,558 5,875
Supplemental disclosure for noncash investing and financing
activities:
Issuance of common stock for notes........................ $ 120 $ 443 $ 60
Stock issuance costs accrued but not paid................. 609 -- --
Deferred and incentive compensation applied to
Payment for common stock............................... 155 1,041 --
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 30
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Diamond Technology Partners Incorporated (the "Company" or "Diamond") is an
e-commerce consulting firm. Positioned as the CEO's guide to e-commerce, the
Company helps its leading national and multinational clients create and
implement digital strategies -- business strategies for the digital age. The
Company serves clients primarily in the telecommunications, energy, financial
services, insurance, healthcare, consumer products, and consumer services
industries. The Company offers services in digital strategy development, program
management, change management and profit improvement. Diamond was founded upon a
belief that effective e-commerce digital strategies can be conceived only when
strategy and technology are considered in tandem, not in sequence.
(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 Software
Computers, equipment and software are stated at cost less accumulated
depreciation. Depreciation is based on the estimated useful lives of the assets
and is computed using the straight-line method. Costs capitalized for internally
developed software include external consulting fees and employee salaries.
Depreciation and amortization expense was $1,239,000, $720,000 and $998,000 for
the years ended March 31, 1997, 1998 and 1999, respectively.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost, which approximates fair value. Cash
equivalents consist of money market funds and demand deposits.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high quality
financial institutions. Trade receivables potentially subject the Company to
credit risk. The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. The Company has historically incurred
minimal credit losses. The Company had one customer which individually accounted
for 14% of revenues as of and for the year ended March 31, 1997. No customers
individually accounted for more than 10% of revenues as of and for the year
ended March 31, 1998. The Company had two customers which collectively accounted
for 25% of revenues as of and for the year ended March 31, 1999.
F-7
<PAGE> 31
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of 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 Per Share
The Company's basic earnings per share and diluted earnings per share are
computed in accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share," and are presented in accordance with Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 98. 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.
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 (in thousands) used in computing basic and diluted
earnings per share for the fiscal years ended March 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Shares used in computing basic earnings per share........... 9,144 11,756 13,277
Dilutive effect of stock options and warrants............... 760 2,416 2,287
----- ------ ------
Shares used in computing diluted earnings per share......... 9,904 14,172 15,564
===== ====== ======
Antidilutive securities not included in dilutive earnings
per share calculation..................................... 637 44 16
===== ====== ======
</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 assets and liabilities and the
disclosure of contingent assets and liabilities, and revenues and expenses
during the period reported. 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> 32
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) COMPUTERS, EQUIPMENT AND TRAINING SOFTWARE
Computers, equipment and software at March 31, 1998, and 1999 are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Computers and equipment..................................... $ 2,322 $ 4,272
Software.................................................... 1,429 2,252
------- -------
3,751 6,524
Less accumulated depreciation and amortization.............. (2,107) (3,105)
------- -------
$ 1,644 $ 3,419
======= =======
</TABLE>
(4) COMMITMENTS
The Company leases office space and equipment under various operating
leases. As of March 31, 1999, the minimum future lease payments under operating
leases with noncancelable terms in excess of one year are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
2000........................................................ $1,878
2001........................................................ 1,115
2002........................................................ 811
2003........................................................ 403
2004........................................................ 324
Thereafter.................................................. 647
------
$5,178
======
</TABLE>
Rent expense under operating leases amounted to $980,000, $1,611,000 and
$1,660,000 for the years ended March 31, 1997, 1998, and 1999, respectively.
The Company is party to standby letters of credit in support of the minimum
future lease payments under leases for permanent office space and office
furniture amounting to $367,000 as of March 31, 1999, declining annually during
the lease terms.
(5) NOTES PAYABLE AND LINE OF CREDIT
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 ("IPO").
The Company has an available line of credit of $10,000,000 with a
commercial bank, which has been reduced by letters of credit outstanding as of
March 31, 1999 in the amount of $367,000. At March 31, 1999, all remaining
amounts under this line of credit were available to the Company at the bank's
prime rate or LIBOR plus 1.75%, at the Company's discretion.
F-9
<PAGE> 33
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCKHOLDERS' EQUITY
Stock Split, Stock Recapitalization and Public Offerings
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 IPO and sold 1,755,000 of its
common shares at the price of $5.50 per share. The Company realized $8,476,000
in connection with the sale, net of the payment of the underwriters commissions
and other expenses of the offering. Of the net proceeds, $2,000,000 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, were $1,595,000.
In April 1998, the Company completed an offering and sold 654,792 shares of
Class A Common Stock at a price of $26.75 per share. The Company realized
approximately $15.9 million in connection with the sale, net of payment of the
underwriters' commissions and other expenses of the offering. In the offering,
an additional 2,345,208 shares were sold by selling stockholders.
In September 1998, the Company's Board of Directors authorized the
repurchase, from time to time, of up to one million shares of the Company's
Class A Common Stock. These repurchases were authorized to be made in the open
market or in privately negotiated transactions. At March 31, 1999, the number of
shares purchased under this authorization was 303,800 at an aggregate cost of
$5,284,176. The Company funded the repurchases through its cash balances.
Warrants and Stock Options
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. Of these warrants, 241,182 were exercised on April 7, 1998.
Under the Company's 1994 Stock Option Plan and under the Company's 1998
Equity Incentive Plan (collectively, the "Stock Option Plans" or "Plans"), the
Company may grant qualified incentive stock options to officers and employees of
the Company. The Stock Option Plans provide that, subsequent to the IPO, options
will be granted at the average of the closing price of a share of Class A Common
Stock on the Nasdaq Stock Market System for the ten trading days immediately
preceding 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 fifth anniversary of the date of grant. Options were also granted
to employees at various times which vest over periods ranging from 18 months to
3 years from the date of grant and which 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
F-10
<PAGE> 34
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Plans (amounts in thousands, except price per
share amounts).
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE
UNDER RANGE OF PRICE
OPTION PRICES PER SHARE
------ ---------------- ---------
<S> <C> <C> <C>
Balances, March 31, 1996................................. 1,116 $ 1.21 to 1.82 $ 1.48
Granted................................................ 2,204 1.82 to 5.50 3.22
Exercised.............................................. -- -- --
Canceled............................................... (152) 1.21 to 5.45 2.02
------ ---------------- ------
Balances, March 31, 1997................................. 3,168 1.21 to 5.50 2.66
Granted................................................ 1,629 6.40 to 22.60 19.46
Exercised.............................................. (548) 1.21 to 5.50 2.18
Canceled............................................... (143) 1.21 to 19.25 3.01
------ ---------------- ------
Balances, March 31, 1998................................. 4,106 1.21 to 22.60 9.38
Granted................................................ 2,353 10.10 to 29.80 13.74
Exercised.............................................. (648) 1.21 to 13.40 2.28
Canceled............................................... (1,703) 1.82 to 29.80 19.11
------ ---------------- ------
Balances, March 31, 1999................................. 4,108 $ 1.21 to $27.40 $ 9.30
====== ================ ======
</TABLE>
At March 31, 1997, 1998 and 1999, 198,000, 621,000 and 515,000 options were
exercisable, respectively, under the Plans.
The following table summarizes information about stock options under the
Plans at March 31, 1999 (share amounts in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- ---------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE AT EXERCISE
EXERCISE PRICES AT 3/31/99 CONTRACTUAL LIFE EXERCISE PRICE 3/31/99 PRICE
- --------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.21 to $ 1.82 837 3.23 $ 1.76 196 $ 1.73
2.27 to 6.60 807 3.69 4.39 297 3.64
10.01 to 11.63 1,749 5.26 11.61 5 11.63
12.15 to 19.90 415 5.27 15.13 17 13.36
21.45 to 27.40 300 5.66 21.92 -- --
- ----------------- ----- ---- ------ --- ------
$ 1.21 to $27.40 4,108 4.57 $ 9.30 515 $ 3.31
================= ===== ==== ====== === ======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its option plans. Accordingly, no compensation expense has been recognized. Had
compensation expense for the Company's Stock Option Plans been determined based
on the fair value at the grant date for awards under these plans 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 $229,000 or $.02 per share
in 1997, $345,000 or $.02 per share in 1998, and $2,099,000 or $.14 per share in
1999. The weighted-average fair value of the options granted under the Stock
Option Plans in 1997,
F-11
<PAGE> 35
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and 1999, calculated using the Black-Scholes pricing model, was $.70,
$6.72, and $4.02 respectively. The following assumptions were used in the
Black-Scholes pricing model for options granted in 1997, 1998 and 1999:
risk-free interest rate ranging from 4.4% to 6.3%, estimated volatility of 35%,
expected dividend yield 0% and an expected life of 1 to 6 years.
(7) INCOME TAXES
The provision for income taxes for fiscal years ended March 31, 1997, 1998
and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................. $ 656 $3,781 $5,654
Foreign................................................. 131 -- --
State................................................... 111 605 659
----- ------ ------
898 4,386 6,313
Deferred.................................................. (213) (461) 38
----- ------ ------
$ 685 $3,925 $6,351
===== ====== ======
</TABLE>
The total tax provision differs from the amount computed by applying the
federal income tax rate of 34 percent for 1997 and 1998 and 35 percent for 1999
to income (loss) before income taxes for the following reasons (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Federal income taxes at statutory rate..................... $448 $3,377 $5,665
Effect of permanent differences............................ 185 194 254
State income taxes, net of federal benefit................. 52 354 432
---- ------ ------
$685 $3,925 $6,351
==== ====== ======
</TABLE>
The tax effects of the temporary differences that give rise to the deferred
tax assets and liabilities at March 31, 1998 and 1999 are presented below (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances................................... 814 521
Accrued bonuses........................................... 101 318
Accrued recruiting........................................ 145 247
---- ------
Total gross deferred tax assets........................ 1,060 1,086
---- ------
Deferred tax liabilities:
Accelerated depreciation.................................. 97 157
Capitalized assets........................................ 120 18
Other..................................................... 70 176
---- ------
Total deferred tax liabilities......................... 287 351
---- ------
Net deferred income taxes.............................. $773 $ 735
==== ======
</TABLE>
Management believes it is more likely than not that the deferred tax assets
will be realized in the future.
F-12
<PAGE> 36
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) 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
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.
(9) SUBSEQUENT EVENTS (UNAUDITED)
On April 23, 1999, the Company acquired OmniTech Consulting Group, Inc.
("OmniTech"), a Chicago-based change management firm specializing in web-based
and other multimedia corporate learning. Under the terms of the acquisition
agreement, the Company paid $4.0 million in cash, and issued a $1.0 million note
and 115,641 shares of the Company's Class A Common Stock. Additionally, OmniTech
may be paid a maximum of $2 million over the next two years upon the achievement
of certain performance measures. The acquisition will be accounted for under the
purchase method of accounting.
F-13
<PAGE> 37
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the unaudited quarterly financial information
for fiscal 1997, 1998 and 1999 (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, 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
YEAR ENDED MARCH 31, 1998
Net revenues................................... $12,101 $14,359 $15,390 $16,519
Income from operations......................... 1,260 2,105 2,498 2,920
Income before taxes............................ 1,471 2,387 2,825 3,250
Net income..................................... 867 1,433 1,724 1,984
Basic earnings per share....................... 0.07 0.12 0.15 0.16
Diluted earnings per share..................... $ 0.06 $ 0.10 $ 0.12 $ 0.14
YEAR ENDED MARCH 31, 1999
Net revenues................................... $18,375 $20,136 $21,194 $22,684
Income from operations......................... 2,932 3,289 3,448 4,030
Income before taxes............................ 3,529 3,938 4,117 4,603
Net income..................................... 2,135 2,383 2,511 2,807
Basic earnings per share....................... 0.16 0.18 0.19 0.21
Diluted earnings per share..................... $ 0.14 $ 0.15 $ 0.17 $ 0.18
</TABLE>
F-14
<PAGE> 38
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, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended March 31, 1999.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
[LOGO]
Chicago, Illinois
April 19, 1999
S-1
<PAGE> 39
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ---------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999:
Deducted from accounts receivable for
uncollectible accounts........................ $559 $1,159 $1,299 $419
For the Year Ended March 31, 1998:
Deducted from accounts receivable for
uncollectible accounts........................ 566 438 445 559
For the Year Ended March 31, 1997:
Deducted from accounts receivable for
uncollectible accounts........................ 270 488 192 566
</TABLE>
S-2
<PAGE> 1
ASSET PURCHASE AGREEMENT
DATED AS OF APRIL 23, 1999
BY AND AMONG
OMNITECH CONSULTING GROUP, INC.
AND
THE PERSONS IDENTIFIED HEREIN AS ITS STOCKHOLDERS
AND
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II SALE AND PURCHASE OF PURCHASED ASSETS . . . . . . . . . . . . 7
2.1 Sale and Purchase of Purchased Assets . . . . . . . . . . . . 7
2.2 Payment of the Purchase Price . . . . . . . . . . . . . . . . 7
2.3 Earn-Out Adjustment . . . . . . . . . . . . . . . . . . . . . 8
2.4 Earn-Out Payments . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Net Worth Adjustment. . . . . . . . . . . . . . . . . . . . . 9
2.6 Net Worth Payment . . . . . . . . . . . . . . . . . . . . . . 9
2.7 Assumption of Liabilities . . . . . . . . . . . . . . . . . . 10
2.8 Sales and Transfer Taxes. . . . . . . . . . . . . . . . . . . 10
2.9 Allocation. . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS.... 11
3.1 Corporate Status; Authority of Sellers; Enforceability. . . . 11
3.2 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . 12
3.3 Intellectual Property . . . . . . . . . . . . . . . . . . . . 12
3.4 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . 13
3.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.7 Personnel Identification and Compensation . . . . . . . . . . 13
3.8 [INTENTIONALLY DELETED] . . . . . . . . . . . . . . . . . . . 13
3.9 Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . 13
3.10 [INTENTIONALLY DELETED] . . . . . . . . . . . . . . . . . . . 13
3.11 Certain Transactions. . . . . . . . . . . . . . . . . . . . . 13
3.12 Employee Benefit Matters. . . . . . . . . . . . . . . . . . . 14
3.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.14 Title to Assets; Condition. . . . . . . . . . . . . . . . . . 15
3.15 Real Property . . . . . . . . . . . . . . . . . . . . . . . . 16
3.16 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.17 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . 16
3.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.19 Financial Statements. . . . . . . . . . . . . . . . . . . . . 16
3.20 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . 16
3.21 Conduct of Business Since Reference Balance Sheet Date. . . . 16
3.22 Broker's or Consultant's Fees . . . . . . . . . . . . . . . . 17
3.23 Banking Arrangements. . . . . . . . . . . . . . . . . . . . . 17
<PAGE> 3
3.24 Independent Investigation. . . . . . . . . . . . . . . . . . . 17
3.25 Restrictions on Transfer . . . . . . . . . . . . . . . . . . . 18
3.26 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER. . . . . . . . . . 18
4.1 Corporate Status; Due Authorization. . . . . . . . . . . . . . 18
4.2 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.3 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . 19
4.4 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.5 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.6 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 19
4.7 Broker's or Consultant's Fees. . . . . . . . . . . . . . . . . 19
4.8 Reports and Financial Statements . . . . . . . . . . . . . . . 19
4.9 Absence of Certain Changes or Events . . . . . . . . . . . . . 20
4.10 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE V COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.1 Non-Transferrable Contracts. . . . . . . . . . . . . . . . . . 20
5.2 General Restrictions on Transfer . . . . . . . . . . . . . . . 20
5.3 Name Change; D/B/A Names . . . . . . . . . . . . . . . . . . . 21
5.4 Change of Control. . . . . . . . . . . . . . . . . . . . . . . 21
5.5 Internal Revenue Forms . . . . . . . . . . . . . . . . . . . . 22
5.6 Miscellaneous Actions. . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VI CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.1 Time and Place . . . . . . . . . . . . . . . . . . . . . . . . 23
6.2 Closing Transactions . . . . . . . . . . . . . . . . . . . . . 23
6.3 Deliveries by Sellers to Purchaser . . . . . . . . . . . . . . 23
6.4 Deliveries by Purchaser to Seller. . . . . . . . . . . . . . . 24
ARTICLE VII OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 Further Assurance. . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 25
7.3 Employment Matters . . . . . . . . . . . . . . . . . . . . . . 26
7.4 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . 26
7.5 Non-Competition Agreement. . . . . . . . . . . . . . . . . . . 26
ARTICLE VIII INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 27
8.1 Indemnification by Seller. . . . . . . . . . . . . . . . . . . 27
8.2 Indemnification by Purchaser . . . . . . . . . . . . . . . . . 28
8.3 Procedure for Indemnification. . . . . . . . . . . . . . . . . 28
8.4 Limitations on Indemnity . . . . . . . . . . . . . . . . . . . 28
8.5 Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.6 Set-Off. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE IX SELLER'S REPRESENTATIVE. . . . . . . . . . . . . . . . . . . . 30
9.1 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 30
9.3 Irrevocable Appointment. . . . . . . . . . . . . . . . . . . . 31
9.4 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . 31
-ii-
<PAGE> 4
9.5 Purchaser's Reliance. . . . . . . . . . . . . . . . . . . . . 31
9.6 Exculpation and Indemnification . . . . . . . . . . . . . . . 31
ARTICLE IX MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . 31
10.1 Post-Closing Deliveries . . . . . . . . . . . . . . . . . . . 31
10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.3 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.4 Benefit of the Agreement. . . . . . . . . . . . . . . . . . . 33
10.5 Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . 33
10.6 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . 33
10.8 Modifications and Waivers . . . . . . . . . . . . . . . . . . 33
10.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 33
10.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 33
10.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 33
10.12 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.13 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 34
EXHIBITS
Exhibit A Form of Assumption Agreement
Exhibit B Form of Bill of Sale and Assignment
Exhibit C Form of Promissory Note
Exhibit D Earn-Out Formula
Exhibit E Allocation of Purchase Price
Exhibit F Form of Withholding Certificate
Exhibit G Form of Employment Agreement
SCHEDULES
Schedule 1.2 Retained Assets
Schedule 2.7 Plan Liabilities
Schedule 3.1 Corporate Status
Schedule 3.3 Intellectual Property
Schedule 3.4 Contracts
Schedule 3.6 Litigation
Schedule 3.7 Personnel Identification and Compensation
Schedule 3.11 Certain Transactions
Schedule 3.12 Employee Benefit Matters
Schedule 3.14 Title to Assets
Schedule 3.15 Leased Real Property
Schedule 3.16 Consents
Schedule 3.17 Licenses and Permits
Schedule 3.18 Insurance
-iii-
<PAGE> 5
Schedule 3.19 Financial Statements
Schedule 3.20 Undisclosed Liabilities
Schedule 3.21 Conduct of Business
Schedule 3.22 Broker's or Consultant's Fees
Schedule 3.23 Banking Arrangements
-iv-
<PAGE> 6
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is entered into as of this 23rd day of April,
1999 by and among DIAMOND TECHNOLOGY PARTNERS INCORPORATED, a Delaware
corporation (together with its successors and permitted assigns, "Purchaser"),
the individuals identified on the signature page hereto as "Stockholders"
(each, a "Stockholder", and collectively, the "Stockholders"), and Omnitech
Consulting Group, Inc., an Illinois corporation ("Seller").
RECITALS
WHEREAS, Seller wishes to sell and transfer substantially all of its assets
and substantially all of its liabilities to Purchaser, and Purchaser wishes to
purchase such assets from and assume such liabilities of Seller, all as more
fully described below;
WHEREAS, Stockholders, collectively, own all of the issued and outstanding
shares of capital stock of Seller and, as a result of the transactions
contemplated under this Agreement, will receive direct and indirect benefits;
and
WHEREAS, Seller is engaged in the business of providing and building custom
management, sales and marketing training programs (the "Business");
NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual
agreements and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Purchaser, Stockholders and Seller hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 GENERAL. Each term defined in the first paragraph of this Agreement
and in the Recitals shall have the meaning set forth above whenever used herein,
unless otherwise expressly provided or unless the context clearly requires
otherwise.
1.2 DEFINITIONS. As used herein, the following terms shall have the
meanings ascribed to them in this Section 1.2:
ACCOUNTS RECEIVABLE. All rights to payment for goods sold or services
rendered whether or not earned by performance, including, without limitation,
all accounts or notes receivable owned or held by Seller and accrued on the
books of Seller in accordance with GAAP (as hereafter defined).
ADVERSE CONSEQUENCES. All allegations, charges, complaints, actions,
suits, proceedings, hearings, investigations, claims, demands, judgments,
orders, decrees, stipulations, injunctions,
<PAGE> 7
damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities,
Taxes, interest, Liens, losses, expenses and fees, including all reasonable
accounting, consultant and attorneys' fees and court costs, costs of expert
witnesses and other expenses of litigation.
AFFILIATE. As set forth in Rule 12b-2 of the regulations promulgated under
the Securities Exchange Act of 1934.
AGREEMENT. This Asset Purchase Agreement, together with all Exhibits and
Schedules referred to herein, as amended, modified or supplemented from time to
time in accordance with the terms hereof.
ASSUMPTION AGREEMENT. The Assumption Agreement between Purchaser and
Seller substantially in the form of Exhibit A hereto.
AUTHORITY. Any governmental, regulatory or administrative body, agency or
authority, any court of judicial authority, any arbitrator or any public,
private or industry regulatory authority, whether foreign, federal, state or
local.
BILL OF SALE AND ASSIGNMENT. The Bill of Sale and Assignment between
Purchaser and Seller substantially in the form of Exhibit B hereto.
BOARD. As defined in Section 5.4.
BUSINESS. As defined in the Recitals hereto.
CHANGE OF CONTROL. As defined in Section 5.4.
CLOSING. The conveyance, transfer, assignment and delivery of the
Purchased Assets to Purchaser, and the assumption of the Liabilities of Seller
(excluding the Retained Liabilities) by Purchaser, in exchange for the
consideration payable to Seller pursuant to this Agreement.
CLOSING BALANCE SHEET. As defined in Section 2.5(a).
CODE. Internal Revenue Code of 1986.
CONFIDENTIAL INFORMATION. As defined in Section 7.2(a).
CONTRACTS. All contracts, leases, subleases, arrangements, commitments and
other agreements of Seller, including all customer agreements, vendor
agreements, purchase orders, installation and maintenance agreements, computer
software licenses, hardware lease or rental agreements, contract claims and all
other arrangements and understandings related to the Business.
EMPLOYMENT AGREEMENTS. As defined in Section 6.3(m).
ERISA. Employee Retirement Income Security Act of 1974.
EXCHANGE ACT. Securities Exchange Act of 1934.
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EARN-OUT ADJUSTMENT REPORT. As defined in SECTION 2.3(b).
EARN-OUT CALCULATION. As defined in SECTION 2.3(a).
EARN-OUT SETTLEMENT DATE. As defined in SECTION 2.3(d).
FINANCIAL STATEMENTS. The Reference Balance Sheet and the audited balance
sheets, statements of cash flows and income statements of Seller for the two
(2) years ended December 31, 1996 and 1997 and the unaudited balance sheet and
income statement of Seller for the year ended December 31, 1998, copies of which
are attached hereto as Schedule 3.19.
GAAP. Generally accepted accounting principles consistently applied.
INCUMBENT BOARD. As defined in Section 5.4.
INDEMNIFIED PARTY. As defined in Section 8.3.
INDEMNIFYING PARTY. As defined in Section 8.3.
INDEPENDENT AUDITORS. As defined in Section 2.3(c).
INTELLECTUAL PROPERTY. (i) All discoveries and inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications (either filed or in
preparation for filing), and patent disclosures, together with all reissuances,
continuations, continuations-in-part, revisions, extensions and reexaminations,
(ii) all trademarks, service marks, trade dress, brand names, logos, domain
names, trade names and corporate names, together with all translations,
adaptations, derivations and combinations thereof and including, without
limitation, all goodwill associated therewith, and all applications (either
filed or in preparation for filing), registrations and renewals in connection
therewith, (iii) all copyrightable works (including, without limitation,
computer software), all copyrights and all applications (either filed or in
preparation for filing), registrations and renewals in connection therewith,
(iv) all trade secrets and confidential business information (including, without
limitation, ideas, research and development, know-how, formulas, compositions,
recipes, manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and cost
information and business and marketing plans and proposals), (v) all other
proprietary rights currently owned by Seller, (vi) all copies and tangible
embodiments of the foregoing (in whatever form or medium), (vii) all licenses or
agreements in connection with the foregoing, and (viii) the right to sue for
infringement of any of the foregoing rights and to collect damages in such suits
in each case to the extent relating to, or used, useable, or held for use in
connection with the Business.
IRS. Internal Revenue Service.
LAW. Any applicable law, statute, regulation, rule, ordinance,
requirement, announcement or other binding action or requirement of an
Authority.
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LEASED REAL PROPERTY. Those certain parcels of real property subject to
the leases more fully described on Schedule 3.15 to this Agreement.
LIABILITIES. Any obligation or liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated and whether due or to become
due), including, without limitation, any liability for Taxes.
LIEN. Any lien (statutory or other), mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance or preference, priority or
security agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, the interest of a vendor or lessor under any
conditional sale, capitalized lease or other title retention agreement) other
than (a) liens for Taxes not yet due and payable, (b) purchase money security
interests, (c) liens securing rent obligations, and (d) other liens arising in
the Ordinary Course of Business and not incurred in connection with the
borrowing of money.
MATERIAL CONTRACTS. As defined in Section 3.4.
NET WORTH. The aggregate amount of stockholder's equity of Seller as of
the Closing determined in accordance with GAAP.
NET WORTH ADJUSTMENT REPORT. As defined in Section 2.5(b).
NET WORTH CALCULATION. As defined in Section 2.5(a).
NET WORTH SETTLEMENT DATE. As defined in Section 2.5(d).
ORDER. Any applicable decree, order, judgment, writ, award, injunction,
stipulation or consent of or by an Authority.
ORDINARY COURSE OF BUSINESS. The ordinary course of business of Seller in
accordance with past custom and practice (including with respect to quantity and
frequency).
OUTSTANDING COMPANY COMMON STOCK. As defined in Section 5.4.
OUTSTANDING COMPANY VOTING SECURITIES. As defined in Section 5.4.
PERMITS. As defined in Section 3.17.
PERSON. Any natural person, corporation, limited liability company,
partnership, firm, joint venture, joint-stock company, trust, association,
Authority, unincorporated entity or organization of any kind.
PLAN. As defined in Section 3.12(a).
PURCHASE PRICE. As defined in Section 2.2.
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PURCHASED ASSETS. All the assets, rights, properties and business of
Seller used or held in the conduct of or in connection with the Business,
whether tangible or intangible, real, personal or mixed, and whenever located
(but, in any event, excluding the Retained Assets), including without
limitation, the following:
(a) the Seller's leasehold interest in the Leased Real Property;
(b) Accounts Receivable, together with all other receivables and loans
owing to Seller;
(c) Seller's Intellectual Property;
(d) all installations, fixtures, improvements, betterments and additions
located on or within the Leased Real Property, machinery, equipment,
appliances, furniture, office furniture, fixtures, office supplies and office
equipment, computers, computer terminals and printers, computer software,
telephone systems, telecopiers and photocopiers, and other tangible personal
property of every kind and description that are located upon or within the
Leased Real Property, which are owned or leased by Seller;
(e) all assignable Permits (including, without limitation, any assignable
permanent certificates of occupancy);
(f) all books of account, ledgers, forms, records, documents, files,
invoices, vendor or supplier lists, business records (excluding corporate minute
books and stock ownership records), plans and other data which are necessary to
or desirable for the ownership, use, maintenance or enjoyment of the Purchased
Assets or the operation of the Business and which are owned or used by Seller,
including, without limitation, all personnel, payroll, payroll tax and labor
relations records, all handbooks, technical manuals and data, engineering
specifications and work papers, all pricing and cost information, all sales
records, all accounting and financial records, all sales and use tax returns,
reports, files and records, asset history records and files, all data entry and
accounting systems used to conduct the day-to-day operations of the Business,
all maintenance and repair records, all correspondence, notices, citations and
all other documents received from, sent to or in Seller's possession in
connection with any Authorities (collectively, the ""Records''); provided,
however, that Seller may retain copies of such Records as are reasonably
necessary to enable Seller to fulfill its regulatory or statutory obligations
after the date hereof;
(g) all sales and marketing plans, projections, studies, reports and other
documents and data (including, without limitation, creative materials,
advertising and promotional matters and current and past lists of customers),
and all training materials and marketing brochures related to the Business;
(h) all cash and cash equivalents, if any (whether on hand or deposit or
in transit), prepaid expenses, deposits and advance payments, other prepaid
items, and all rights of Seller to receive discounts, refunds, rebates, awards
and the like;
(i) Seller's goodwill related to the Business;
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(j) all of Seller's rights and remedies on and after the date hereof,
under warranty or otherwise, against a manufacturer, vendor or other Person for
any defects in any Purchased Asset;
(k) all deposits held by Seller with respect to services to be performed
or products to be delivered after the date hereof;
(l) all other properties, assets and rights of every kind, character or
description which are owned or used by Seller and which are not Retained Assets;
(m) all Contracts and rights under Contracts related to the Business,
including, without limitation, sales orders, customer contracts, equipment
leases, insurance contracts, agreements for the provision of services by Seller
to customers, and other matters used in or related to the Business.
PURCHASER SEC REPORTS. As defined in Section 4.8.
PURCHASER SHARES. As defined in Section 2.2(a)(iii).
PURCHASER WARRANTY CLAIM. As defined in Section 8.1(a).
REFERENCE BALANCE SHEET. The unaudited balance sheet and statement of
income for Seller dated the Reference Balance Sheet Date.
REFERENCE BALANCE SHEET DATE. March 31, 1999.
RELATED ENTITIES. Purchaser, Seller and their respective Affiliates.
REPRESENTATIVE. As defined in Section 9.1.
RETAINED ASSETS. All of the following assets of Seller: (i) any benefit,
right or claim relating to any contract or liability not assumed by Purchaser;
(ii) tax records, corporate books and records of Seller to the extent such
records and books do not relate to the Business; (iii) income or franchise tax
refunds, assessments or charges due to Seller; (iv) any employee benefit or
incentive plan, agreement or arrangement, including without limitation, any
pension, life insurance, profit sharing, bonus, incentive, deferred
compensation, stock purchase, stock option, group insurance, cafeteria, vacation
pay, severance pay or retirement plan, agreement or arrangement (other than
those plans or agreements related to the Liabilities set forth on Schedule 2.7
hereto); (v) rights under this Agreement; and (vi) any other assets identified
under the heading ""Retained Assets'' on Schedule 1.2.
RETAINED LIABILITIES. As defined in Section 2.7(b).
SEC. The Securities and Exchange Commission.
SECURITIES ACT. Securities Act of 1933.
SELLER WARRANTY CLAIM. As defined in Section 8.2.
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SELLER'S KNOWLEDGE. The actual knowledge of Joel Krauss, Fred Belmont and
Michael Krauss after reasonable investigation.
TAXES. As defined in Section 3.13(a).
TRANSFERRED EMPLOYEES. As defined in Section 7.3(b).
1.3 INTERPRETATION. Unless otherwise expressly provided or unless the
context requires otherwise, (a) all references in this Agreement to Articles,
Sections, Schedules and Exhibits shall mean and refer to Articles, Sections,
Schedules and Exhibits of this Agreement; (b) all references to statutes and
related regulations shall include all amendments of the same and any successor
or replacement statutes and regulations; (c) words using the singular or plural
number also shall include the plural and singular number, respectively;
(d) references to "hereof", "herein", "hereby" and similar terms shall refer
to this entire Agreement (including the Schedules and Exhibits hereto); and
(e) references to any Person shall be deemed to mean and include the successors
and permitted assigns of such Person (or, in the case of an Authority, Persons
succeeding to the relevant functions of such Person).
ARTICLE II
SALE AND PURCHASE OF PURCHASED ASSETS
2.1 SALE AND PURCHASE OF PURCHASED ASSETS.
(a) Subject to the terms and conditions of this Agreement, and in reliance
upon the representations, warranties, covenants and agreements made in this
Agreement by Purchaser, Seller and Stockholders, Purchaser shall purchase and
accept from Seller, and Seller shall sell, transfer, convey, assign and deliver
to Purchaser, on the date hereof, all of the Purchased Assets and Purchaser
shall assume all Liabilities (except for Retained Liabilities) of Seller.
(b) Notwithstanding anything in this Agreement to the contrary, Seller is
retaining ownership and possession of, and Seller is not selling, transferring,
conveying, assigning or delivering to Purchaser any right, title or interest of
Seller in, to or under any of the Retained Assets.
2.2 PAYMENT OF THE PURCHASE PRICE.
(a) The purchase price (as adjusted pursuant to Sections 2.4 and 2.6, the
"Purchase Price") payable by Purchaser to Seller in consideration for the
Purchased Assets shall be the assumption of the Liabilities (other than the
Retained Liabilities) of Seller and SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS
($7,500,000.00) payable at the Closing in the following manner:
(i) an aggregate amount of $4,000,000 in cash to Seller;
(ii) an aggregate amount of $1,000,000 to Seller pursuant to the
Promissory Note substantially in the form attached hereto as Exhibit C; and
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(iii) an aggregate amount of 115,641 shares of Class A Common Stock,
par value $.001 per share of Purchaser (collectively, the "Purchaser
Shares") to Seller.
(b) The cash amounts paid pursuant to Section 2.2(a)(i) above and Section
2.4 below (if any) shall be by wire transfer of immediately available federal
funds to an account designated in writing to Purchaser by Seller. Seller shall
receive certificates representing the number of Purchaser Shares to which Seller
is entitled in accordance with Section 2.2(a)(iii) above.
2.3 EARN-OUT ADJUSTMENT.
(a) Within forty-five (45) days after the end of (i) the period commencing
on May 1, 1999 and ending March 31, 2000, and (ii) the twelve-month period
commencing April 1, 2000 and ending March 31, 2001 (each, a "Period"),
Purchaser shall prepare and deliver to the Representative an "earn-out"
calculation in accordance with Exhibit D for such prior Period (the "Earn-Out
Calculation"), together with all relevant work papers and supporting
calculations. The Earn-Out Calculation shall be prepared in accordance with GAAP
and pursuant to the principles and terms described on Exhibit D hereto.
(b) Within twenty (20) days after the Earn-Out Calculation is delivered to
the Representative pursuant to Section 2.3(a), the Representative shall deliver
to Purchaser either (i) a written acknowledgment accepting the Earn-Out
Calculation or (ii) a written report setting forth in reasonable detail any
proposed adjustments to the Earn-Out Calculation (the "Earn-Out Adjustment
Report"). If the Representative fails to respond to Purchaser within such
20-day period, Seller shall be deemed to have accepted and agreed to the
Earn-Out Calculation as delivered pursuant to Section 2.3(a). Purchaser shall
provide the Representative with reasonable access to the books and records of
Seller in order to verify the accuracy of any Earn-Out Calculation.
(c) In the event that the Representative and Purchaser fail to agree on
any of the Representative's proposed adjustments set forth in the Earn-Out
Adjustment Report within thirty (30) days after Seller provides the Purchaser
with its proposed adjustments to the Earn-Out Adjustment Report, Seller and
Purchaser agree that a mutually acceptable independent accounting firm of
nationally recognized standing (the "Independent Auditors") within the 30-day
period immediately following such 30-day period, shall make the final
determination with respect to any disputed portion of the Earn-Out Calculation.
Purchaser and the Representative shall each provide the Independent Auditors
with their respective determinations of the Earn-Out Calculation. The decision
of the Independent Auditors shall be rendered in writing and shall be final and
binding on Seller and Purchaser and the reasonable fees, costs and expenses of
the Independent Auditors shall be paid by the non-prevailing party.
(d) The date on which the Earn-Out Calculation is finally determined
pursuant to this Section 2.3 shall hereinafter be referred to as the "Earn-Out
Settlement Date".
2.4 EARN-OUT PAYMENTS. No later than fifteen (15) days after the Earn-Out
Settlement Date, Purchaser shall pay to Seller an amount specified in the
Earn-Out Calculation; provided, however, notwithstanding the actual Earn-Out
Calculation, the aggregate amounts payable (i) in the
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initial Period shall not in any event exceed $1,000,000 and (ii) for both
Periods on a combined basis shall not in any event exceed $2,000,000.
2.5 NET WORTH ADJUSTMENT. Purchaser shall prepare and deliver to the
Representative within forty-five (45) days after the date hereof, (i) an audited
balance sheet of the Business immediately prior to the Closing (the "Closing
Balance Sheet") and (ii) a calculation setting forth the result of (A) Net
Worth as of the date hereof minus (B) $857,064 plus (C) the aggregate amount of
the Retained Liabilities reflected on the Closing Balance Sheet (the "Net Worth
Calculation"), together with all relevant work papers and supporting
calculations. The Closing Balance Sheet and the Net Worth Calculation shall be
prepared in accordance with GAAP consistent with the preparation of the
Reference Balance Sheet.
(b) Within twenty (20) days after the Closing Balance Sheet and the Net
Worth Calculation are delivered to the Representative pursuant to Section
2.5(a), the Representative shall deliver to Purchaser either (i) a written
acknowledgment accepting the Closing Balance Sheet and the Net Worth Calculation
or (ii) a written report setting forth in reasonable detail any proposed
adjustments to the Closing Balance Sheet and the Net Worth Calculation (the
"Net Worth Adjustment Report"). If the Representative fails to respond to
Purchaser within such 20-day period, Seller shall be deemed to have accepted and
agreed to the Closing Balance Sheet and the Net Worth Calculation as delivered
pursuant to Section 2.5(a).
(c) In the event that Purchaser and the Representative fail to agree on
any of the Representative's proposed adjustments set forth in the Net Worth
Adjustment Report within twenty (20) days after Purchaser receives the Net Worth
Adjustment Report, Seller and Purchaser agree that the Independent Auditors
shall, within the 20-day period immediately following such 20-day period, make
the final determination with respect to any disputed portion of the Net Worth
Calculation. Purchaser and the Representative shall each provide the Independent
Auditors with their respective determinations of the Net Worth Calculation. The
Independent Auditors shall select either Purchaser's or the Representative's
determination in establishing the final Net Worth Calculation. The decision of
the Independent Auditors shall be rendered in writing and shall be final and
binding on Seller and Purchaser. The fees, costs and expenses of the Independent
Auditors shall be paid by the non-prevailing party.
(d) The date on which the Closing Balance Sheet and the Net Worth
Calculation are finally determined pursuant to this Section 2.5 shall
hereinafter be referred to as the "Net Worth Settlement Date". Purchaser shall
pay the aggregate fees and costs of auditing the Closing Balance Sheet and Net
Worth Calculation to the extent such fees and costs exceed $2,750.
2.6 NET WORTH PAYMENT.
(a) In the event that the Net Worth Calculation is less than zero, no
later than ten (10) days after the Net Worth Settlement Date, Seller shall pay
to Purchaser an amount equal to the absolute value of the Net Worth Calculation.
In the event the Net Worth Calculation is greater than zero, no later than ten
(10) days after the Net Worth Settlement Date, Purchaser shall pay to Seller an
amount equal to the Net Worth Calculation.
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(b) Any payment required to be made pursuant to Section 2.6(a) shall be by
certified or cashier's check, or at the option of the recipient, by the
transfer of immediately available federal funds for credit to recipient at a
bank account designated by the recipient.
2.7 ASSUMPTION OF LIABILITIES.
(a) As additional consideration for the Purchased Assets, Purchaser shall,
on the date hereof, by its execution and delivery of the Assumption Agreement,
assume and agree to pay and perform all Liabilities of Seller (other than the
"Retained Liabilities," as defined below) relating to the Business.
(b) Purchaser shall not assume, pay or perform and Seller shall remain
obligated for the following Liabilities of Seller, whether or not relating to
the Business (collectively, the "Retained Liabilities"):
(i) any Liability relating to the violation or failure to comply with
any Law relating to the operation of the Business prior to date hereof;
(ii) any Liability arising out of or relating to the Retained Assets;
(iii)any Liability of Seller for any Taxes for any periods (or
portions thereof) prior to the date hereof, whether or not relating to the
Business and, with respect to periods subsequent to the date hereof, other
than with respect to the operation of the Business or the ownership or use
of the Purchased Assets; or
(iv) any Liability of Seller with respect to any employee benefit or
incentive plan, agreement or arrangement, including without limitation, any
pension, life insurance, profit sharing, bonus, incentive, deferred
compensation, stock purchase, stock option, group insurance, cafeteria,
vacation pay, severance pay or retirement plan, agreement or arrangement
except as specifically set forth herein (excluding, however, those
Liabilities set forth on Schedule 2.7 hereto);
(v) the fees, costs and expenses of any person, firm, corporation or
other entity acting on behalf of, or representing the Seller or the
Stockholders as broker, finder, investment banker, financial advisor,
accountant, attorney or in any similar capacity, whether in connection with
this Agreement and the transactions contemplated hereby or otherwise;
(vi) any Liability of Seller arising after Closing to its officers,
employees or affiliates including, without limitation, the Stockholders.
2.8 SALES AND TRANSFER TAXES. Seller and Purchaser shall each pay
one-half of any and all transfer, sales, purchase, use, value added, excise or
similar tax imposed under the laws of the United States, or any state or
political subdivision thereof, which arises out of the transfer by Seller to
Purchaser of the Purchased Assets and Liabilities (other than Retained
Liabilities) of Seller.
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2.9 ALLOCATION. Seller and Purchaser (a) mutually agree on the allocation
of the Purchase Price among the Purchased Assets as set forth on Exhibit E, and
(b) acknowledge that the allocation set forth on Exhibit E was the result of
arms-length negotiations. Each of Seller and Purchaser agrees that for income
tax purposes, it (i) shall report the transactions contemplated by this
Agreement in accordance with the allocation set forth on Exhibit E and (ii) will
not take any contrary position in any related administrative or legal
proceeding.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS
As an inducement to Purchaser to enter into and perform its obligations
under this Agreement, and in consideration of the covenants of Purchaser
contained herein, Seller and each Stockholder, jointly and severally, represent
and warrant to Purchaser (which representations and warranties shall survive the
Closing (subject to Section 8.4) regardless of what examinations, inspections,
audits and other investigations Purchaser has heretofore made with respect to
such representations and warranties) as follows:
3.1 CORPORATE STATUS; AUTHORITY OF SELLER; ENFORCEABILITY.
(a) Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Illinois and, except as set forth on
Schedule 3.1, is qualified to do business as a foreign corporation in each other
jurisdiction where the failure to so qualify could reasonably be expected to
have a material adverse effect on the business, operations or condition
(financial or otherwise) of Seller or the Purchased Assets. Seller has the
corporate power and authority necessary to (i) own, lease, operate or otherwise
hold its properties and assets and to carry on its business as presently
conducted and (ii) execute and deliver this Agreement and perform its
obligations hereunder.
(b) Each Stockholder has the capacity to execute and deliver this
Agreement and to perform his obligations hereunder. The execution and delivery
by Seller of this Agreement, and the performance by Seller of its obligations
hereunder, have been duly and validly authorized and approved by all necessary
corporate action on the part of Seller. This Agreement, the Bill of Sale and
Assignment and the Assumption Agreement are each binding upon, and enforceable
against, Seller and each Stockholder in accordance with their terms, subject
to bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally and by general principles of equity (whether in a proceeding
at law or in equity).
(c) Except as set forth on Schedule 3.1, neither the execution or delivery
of this Agreement by Seller or any Stockholder nor the performance by Seller or
any Stockholder of its or his obligations under this Agreement will (assuming
the receipt of all consents referred to in SECTION 3.16), conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any material contract, lease, license, franchise, permit, indenture,
mortgage, deed of trust, note agreement or other agreement or instrument to
which any Stockholder or Seller is a party or is bound, the articles of
incorporation or by-laws of Seller or any applicable Law or Order to which
Seller or any Stockholder is a party or by which Seller or Stockholder is bound.
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3.2 ACCOUNTS RECEIVABLE. Except as reserved against on the Reference
Balance Sheet, the Accounts Receivable reflected on such balance sheet: (a) were
acquired by Seller in the Ordinary Course of Business and represent bona fide
transactions; (b) to the Seller's Knowledge, are not subject to any material
claim, counterclaim, set-off or deduction; (c) represent valid obligations owing
to Seller by account debtors that are not Affiliates of Seller, which are
enforceable in accordance with their respective terms, subject to bankruptcy
insolvency, reorganization and other laws affecting creditors' rights generally,
and by general principals of equity (whether in a proceeding at law or in
equity); and (d) are owned by Seller free and clear of all Liens.
INTELLECTUAL PROPERTY. Schedule 3.3 sets forth all of the Intellectual
Property owned or licensed for use by Seller (or material to the Business)
including any United States or foreign registrations or applications therefor.
All of the registrations and applications set forth in Schedule 3.3 are in full
force and effect and all necessary registration, maintenance and renewal fees
in connection therewith have been made and all necessary documents and
certificates in connection therewith have been filed with the relevant patent,
copyright, trademark or other Authority for the purpose of maintaining the
registrations or applications for registration of such Intellectual Property.
Seller owns all right, title, and interest in and to each item of such
Intellectual Property disclosed in Schedule 3.3, except for those items of
Intellectual Property which have been licensed to or by Seller, which are
identified therein (the "Intellectual Property License Agreements"). All
Intellectual Property disclosed in Schedule 3.3 (i) is free and clear of any
and all Liens and (ii) there are no restrictions on the direct or indirect
transfer of any such Intellectual Property. Seller has taken commercially
reasonable measures to protect the secrecy, confidentiality and value of their
trade secrets and proprietary information. Seller has not granted any license,
agreement or other permission to use such Intellectual Property except as
disclosed on Schedule 3.3. To Seller's Knowledge, (i) no Intellectual Property
is being infringed by any other Person, and (ii) Seller is not infringing on
any intellectual property of any other Person, and no claim is pending, or, to
the Seller's Knowledge, has been threatened to such effect or with respect to
the ownership, validity, license or use of, or any infringement resulting from,
the Intellectual Property or the sale of any products or services by Seller.
There is no dispute between Seller and any licensor under any applicable
Intellectual Property License Agreement.
3.4 CONTRACTS. Copies of all Contracts to which Seller is party or by
which Seller is currently bound which provide for annual payments to or from
Seller in excess of $25,000 (the "Material Contracts") have been provided to
Purchaser (A) in those certain binders labeled "Omnitech(R)
Consulting Group, Response To: Diamond Technology Partners, Inc., REQUEST FOR
INFORMATION, March 22, 1999, Book 1 and 2" and (B) those certain Contracts
referenced in the letter dated April 14, 1999 from Desiree Thompson to Fred
Belmont. Identified with an asterisk on Schedule 3.4 are those Material
Contracts which are not, by their terms, assignable to Purchaser. Seller is not
a party to, nor are the Purchased Assets bound by, any Material Contract, not
entered into in the Ordinary Course of Business. Each Material Contract is in
full force and effect and constitutes a legal, valid and binding obligation of
Seller and, to the Seller's Knowledge, each other party thereto, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, reorganization and
other laws affecting creditors' rights generally and by general principals
equity (whether in a proceeding at law or in equity). Neither Seller nor, to
Seller's Knowledge, any other party to such Material Contract is, or has
received notice that it is in violation or breach of or default
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under any such Material Contract (or with notice or lapse of time or both, would
be in violation or breach of or default under any such Material Contract).
3.5 COMPLIANCE WITH LAWS. Seller has complied with all, and is not in
violation of any, applicable Laws or Orders affecting the Purchased Assets or
the operation of the Business, the failure with which to comply could reasonably
be expected to have a material adverse effect on the Business or the Purchased
Assets. Seller has not received any notice, citation, claim, assessment or
proposed assessment as to or alleging any violation of any Law nor, to Seller's
Knowledge, has Seller been subject to any investigation by any Authority within
the prior three (3) years.
3.6 LITIGATION. Schedule 3.6 sets forth a brief description of all suits,
actions, arbitrations, and legal, administrative and other proceedings and
governmental investigations pending or, to the Seller's Knowledge, threatened
against or affecting Seller or the Purchased Assets. None of the matters set
forth in Schedule 3.6, if decided adversely to Seller, could reasonably be
expected to have a material adverse effect on the Business or the Purchased
Assets. Seller is not presently engaged in any legal action to recover moneys
due to it for damages sustained by it.
3.7 PERSONNEL IDENTIFICATION AND COMPENSATION. Schedule 3.7 contains a
true and complete list of the names and titles of all current officers,
directors and employees of Seller. Seller has previously delivered to Purchaser
a true and correct schedule stating the rates of compensation payable (or paid,
as the case may be) to each such person.
3.8 [INTENTIONALLY DELETED]
3.9 STOCKHOLDERS. The persons listed as "Stockholders" on the signature
pages of this Agreement are all of the record and beneficial owners of all of
the issued and outstanding capital stock of Seller.
3.10 [INTENTIONALLY DELETED].
3.11 CERTAIN TRANSACTIONS. All purchases and sales or other transactions,
if any, between Seller, on the one hand, and any officer, director, shareholder
or key employee or Affiliate thereof, on the other hand, within the three (3)
years immediately preceding the date hereof have been made on the basis of
prevailing market rates and terms such that from the perspective of Seller, all
such transactions have been made on terms no less favorable than those which
would have been available from unrelated third parties. Schedule 3.11 sets forth
a summary of each officer, director, shareholder, key employee or Affiliate of
Seller to which Seller is indebted to, the outstanding principal amount of such
indebtedness together with accrued and unpaid interest thereon and the interest
rates and maturity dates related to such indebtedness. Except as set forth on
Schedule 3.11, neither any officer, nor any director or employee of Seller, nor
any spouse, child or other relative of any of such persons, owns, or has any
interest, directly or indirectly, in any of the real or personal property owned
by or leased to Seller or any copyrights, patents, trademarks, trade names or
trade secrets owned or licensed by Seller.
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3.12 EMPLOYEE BENEFIT MATTERS.
(a) Schedule 3.12 contains a true, complete and correct list of each
pension, retirement, profit sharing, savings, stock option, restricted stock,
severance, termination, bonus, fringe benefit, insurance, supplemental benefit,
medical, education reimbursement or other employee benefit plan, program,
agreement or arrangement, including each "employee benefit plan" as defined in
Section 3(3) of ERISA, sponsored, maintained or contributed to or required to be
contributed to by Seller for the benefit of current or former employees of the
Business (each a "Plan").
(b) True, complete and correct copies of the following items relating to
each Plan, where applicable, have been delivered to Purchaser:
(i) the most recent determination letter, if any, received from the
IRS with respect to each such Plan that is intended to be qualified under
Section 401 of the Code; and
(ii) the most recent Form 5500, summary plan description, summary of
material modifications and all material communications to participants.
(c) Each of the Plans has been operated and administered in accordance
with the applicable provisions of Laws, and there are no actions, suits or
claims pending or threatened against any Plan or any administrator or fiduciary
thereof, nor do any facts exist which could give rise to any such action, suit
or claim.
3.13 TAX MATTERS. Other than as disclosed on Schedule 3.13:
(a) The term "Taxes" means all net income, capital gains, gross income,
gross receipts, sales, use, transfer, ad valorem, franchise, profits, license,
capital, withholding, payroll, employment, excise, goods and services,
severance, stamp, occupation, premium, property, assessments or other
governmental charges of any kind whatsoever, together with any interest, fines
and any penalties, additions to tax or additional amounts incurred or accrued
under applicable federal, state, local or foreign tax law or assessed, charged
or imposed by any Authority, domestic or foreign, provided that any interest,
penalties, additions to tax or additional amounts that relate to Taxes for any
taxable period (including any portion of any taxable period ending on or before
the date hereof) shall be deemed to be Taxes for such period, regardless of when
such items are incurred, accrued, assessed or charged. For the purposes of this
Section 3.13, Seller shall be deemed to include any predecessor to Seller and
any Person from which Seller incurs a liability for Taxes as a result of
transferee liability, joint and several liability or otherwise.
(b) Seller has duly and timely filed (and prior to the date hereof will
duly and timely file) true, correct and complete Tax returns, reports or
estimates, all prepared in material accordance with applicable Laws, for all
years and periods (and portions thereof), for all jurisdictions (whether
federal, state, local or foreign) in which any such returns, reports or
estimates were due on or prior to the date hereof. All Taxes shown as due and
payable on such returns, reports and estimates have been paid (or will be paid
prior to the Closing), and there is no current liability for any Taxes due and
payable in connection with any such returns. Any charges, accruals and reserves
for Taxes
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provided for on the Financial Statements are adequate. There are no existing
Liens for Taxes upon any of the Purchased Assets. Seller has provided to
Purchaser copies of all federal, state and foreign tax returns filed by Seller
for the past five (5) years.
(c) Seller has withheld all required amounts from its employees, agents
and contractors and remitted such amounts to the proper Authorities; paid all
employer contributions and premiums; and filed all federal, state, local and
foreign returns and reports with respect to employee income Tax withholding,
and social security and unemployment Taxes and premiums, all in compliance with
the withholding provisions of the Code, or any prior provision of the Code and
other applicable Laws.
(d) None of Seller's assets is tax exempt use property under Code Section
168(h). None of Seller's assets is property that Seller is required to treat as
being owned by any other Person pursuant to the safe harbor lease provision of
former Code Section 168(f)(8).
(e) No portion of the cost of any of Seller's assets was financed directly
or indirectly from the proceeds of any tax exempt state or local government
obligation described in Code Section 103(a).
(f) Seller has no (and has not previously had any) permanent establishment
in any foreign country and Seller does not engage (and has not previously
engaged) in a trade or business within the meaning of the Code relating to the
creation of a permanent establishment in any foreign country.
(g) Seller is not a foreign person within the meaning of Code
Section 1445.
(h) Seller is not a party to any joint venture, partnership or other
arrangement that could be treated as a partnership for federal income
Tax purposes.
(i) To Seller's Knowledge, no federal, state, local or foreign Tax audits
or other administrative proceedings, discussions or court proceedings are
presently pending with regard to any Taxes or Tax returns of Seller and no
additional issues are being asserted against Seller in connection with any
existing audits of Seller.
(j) Seller made a valid election on January 1, 1989 under subchapter S
of the Code to be treated as an "S corporation." Such election will be in
effect until the Closing Date.
3.14 TITLE TO ASSETS; CONDITION. Other than as set forth on Schedule 3.14,
Seller has (i) good and marketable title to, or with respect to the Leased Real
Property, a valid and binding leasehold interest in, the Purchased Assets, free
and clear of all Liens and (ii) owns or otherwise has an enforceable right to
use all of the Purchased Assets. All of Seller's assets are adequate and fit
to be used for the purposes for which they are currently used and are in good
operating condition subject to normal wear and tear and obsolescence.
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<PAGE> 21
3.15 REAL PROPERTY. Other than as lessee under the leases identified on
Schedule 3.15, Seller has no title to or interests in any real property. All
amounts due and payable with respect to such leases have been paid.
3.16 CONSENTS. Except as otherwise disclosed on Schedule 3.16, no material
consent, approval, order or authorization of, or registration, declaration
or filing with, any Authority or any other Person is required to be obtained
or made by the Stockholders or Seller in connection with the execution and
delivery of this Agreement or the performance by the Stockholders or Seller
of their obligations hereunder.
3.17 LICENSES AND PERMITS. Schedule 3.17 lists and describes all material
qualifications, registrations, filings, privileges, franchises, immunities,
licenses, permits, authorizations and approvals of Authorities which are used
or required in order for Seller to own and operate the Business (collectively,
the "Permits"); and each Permit is valid and subsisting, and in full force and
effect in accordance with its terms..
3.18 INSURANCE.
(a) Schedule 3.18 sets forth a list and brief description of all insurance
policies maintained by Seller. Seller is not in default with respect to any
provision contained in any insurance policy maintained by Seller, nor has it
failed to give any notice or present any claim thereunder with respect to any
pending matter in a due and timely fashion.
3.19 FINANCIAL STATEMENTS. The Financial Statements attached hereto as
Schedule 3.19 were prepared by Seller from the books and records of the Business
and, except as described therein, in accordance with generally accepted
accounting principles consistently applied and present fairly the financial
position and results of operations of Seller at the dates and for the periods
indicated therein.
3.20 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule 3.20. on the
Reference Balance Sheet Date, Seller had no Liability with respect to the
Business of any nature (whether accrued, absolute, contingent or otherwise)
of the type which are required to be reflected in balance sheets (including the
notes thereto) prepared in accordance with GAAP which was not fully disclosed,
reflected or reserved against in the Reference Balance Sheet (subject to normal
year-end adjustments); and, except for Liabilities which have been incurred
since the Reference Balance Sheet Date in the Ordinary Course of Business, since
the Reference Balance Sheet Date Seller has not incurred any Liability of any
nature.
3.21 CONDUCT OF BUSINESS SINCE REFERENCE BALANCE SHEET DATE. Except as
set forth on Schedule 3.21, since the Reference Balance Sheet Date:
(a) the Business has been conducted only in the Ordinary Course of
Business;
(b) except for equipment and supplies purchased, leased, sold or otherwise
disposed of in the Ordinary Course of Business, Seller has not purchased, sold,
leased, mortgaged, pledged or otherwise acquired or disposed of any properties
or assets;
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<PAGE> 22
(c) Seller has not sustained or incurred any loss or damage with respect
to the Purchased Assets (whether or not insured against) on account of fire,
flood, accident or other calamity which has interfered with or affected, or may
interfere with or affect, the operation of the Purchased Assets;
(d) Seller has not increased the rate of compensation of any officer or
other employee of the Business, except in the Ordinary Course of Business, and
has not declared any dividends or made any distributions to its stockholders;
(e) there has been no material adverse change in or with respect to the
condition (financial or otherwise), operations, business, prospects, rights,
properties, assets or liabilities of the Business or Seller's relations with
Authorities or its employees, creditors, advertisers, suppliers, distributors,
customers or others having business relationships with Seller;
(f) Seller has not canceled any of its debts or claims owed to it and has
paid and satisfied its account payables in the Ordinary Course of Business;
(g) Seller has not changed any accounting methods or practices (including,
without limitation, any change in depreciation or amortization policies
or rates); or
(h) Seller has not agreed to take any of the actions described in
paragraphs (b), (d), (f) or (g) above.
3.22 BROKER'S OR CONSULTANT'S FEES. Except as set forth on Schedule 3.22,
each Seller represents and warrants that it has dealt with no broker, finder or
consultant in connection with any of the transactions contemplated by this
Agreement, and, to the Seller's Knowledge, no Person is entitled to any
commission, broker's or finder's fee in connection with the sale of the
Purchased Assets to Purchaser.
3.23 BANKING ARRANGEMENTS. Except as set forth in Schedule 3.23, Seller
has no banking, borrowing or depository relationship, or accounts or deposits of
funds, and all persons authorized as signatories on each such account are
listed in Schedule 3.23. No Person holds any power of attorney from Seller.
3.24 INDEPENDENT INVESTIGATION. Each Stockholder and Seller has such
knowledge and experience in financial and business matters that he or it is
capable of evaluating the merits and risks of Seller owning the Purchaser
Shares. In making the decision to receive the Purchaser Shares that are
delivered as part of the Purchase Price, each Stockholder and Seller has relied
solely upon independent investigations made by him or it. No representations or
warranties have been made by Purchaser or any director, manager, officer,
employee, agent or affiliate of Purchaser to any Stockholder or Seller other
than as set forth in this Agreement. Each Stockholder and Seller represents and
warrants that such Stockholder and Seller has been offered the opportunity to
obtain additional information, to evaluate the merits and risks of Seller owning
the Purchaser Shares and to ask questions of and receive satisfactory answers
from the Purchaser concerning the terms and conditions of owning the Purchaser
Shares. In making the decision whether to own the Purchaser Shares, each
Stockholder and Seller has relied solely on the information contained in this
Agreement
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and the Purchaser SEC Reports (as hereafter defined). To the extent
any Stockholder or Seller has deemed it appropriate, such Stockholder or Seller
has consulted with attorneys with respect to all matters concerning this
investment.
3.25 RESTRICTIONS ON TRANSFER. Each Stockholder and Seller understands and
agrees that because the Purchaser Shares delivered in connection with this
Agreement have not been registered under federal or state securities laws, none
of the Purchaser Shares acquired may at any time be sold or otherwise disposed
of by Seller unless they are registered under the Securities Act or there is
applicable to such sale or other disposition one of the exemptions from
registration set forth in the Securities Act, the rules and regulations of the
SEC thereunder and applicable state law. Each Stockholder and Seller further
understands that Purchaser has no obligation or present intention to register
the Purchaser Shares or to permit their sale other than in strict compliance
with the Securities Act, SEC rules and regulations thereunder and applicable
state law. Each Stockholder and Seller recognizes that, as a result of the
aforementioned restrictions, there is and may be no public market for the
Purchased Shares.
3.26 DISCLOSURE. None of the representations and warranties made by Seller
or any Stockholder in this Agreement or in the Schedules hereto, contains or
will contain any untrue statement of a material fact, or omits any material fact
the omission of which would make the statements made therein misleading.
Any matter set forth on any disclosure schedule to Seller's representations
and warranties in this Article III shall be deemed to be disclosed with regard
to, and constitute an exception to, each of Seller's representations and
warranties in this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller and each Stockholder to enter into and perform
their obligations under this Agreement, and in consideration of the covenants of
Seller and each Stockholder contained herein, Purchaser represents and warrants
to Seller and each Stockholder (which representations and warranties shall
survive the Closing (subject to Section 8.4) regardless of what examinations,
inspections, audits and other investigations Seller and each Stockholder have
heretofore made with respect to such representations and warranties) as
follows:
4.1 CORPORATE STATUS; DUE AUTHORIZATION. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Purchaser has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. The execution
and delivery by Purchaser of this Agreement, and the performance by Purchaser
of its obligations hereunder (including the execution and delivery of the
Promissory Note and the issuance of the Purchaser Shares), have been duly and
validly authorized and approved by all necessary corporate action on the part
of Purchaser.
4.2 NO CONFLICT. Neither the execution or delivery of this Agreement by
Purchaser nor the performance by Purchaser of its obligations under this
Agreement will conflict with or result in
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<PAGE> 24
a breach of any of the terms or provisions of, or constitute a default under,
any contract, lease, license, franchise, permit, indenture, mortgage, deed of
trust, note agreement or other agreement or instrument to which Purchaser is a
party or is bound, its certificate of incorporation, by-laws or any applicable
Law or Order to which Purchaser is a party or by which Purchaser is bound.
4.3 ENFORCEABILITY. This Agreement, the Bill of Sale and Assignment,
Assumption Agreement and the Promissory Note are binding upon, and enforceable
against, Purchaser in accordance with their terms, subject, in each case, to
bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally and by principles of equity (whether in a proceeding at law or
in equity).
4.4 CONSENTS. Except for filings required by the Commission or NASDAQ or
as otherwise contemplated by this Agreement, no consent, approval, Order or
authorization of, or registration, declaration or filing with, any Authority or
any other Person is required to be obtained or made by Purchaser in connection
with its execution and delivery of this Agreement or the performance by it of
its obligations hereunder.
4.5 SECURITIES. The offer and issuance of the Purchaser Shares and the
Promissory Note pursuant to this Agreement are exempt from the registration
requirements of the Securities Act. The Purchaser Shares, when issued in
consideration of the transactions contemplated by this Agreement, will be
validly issued, fully paid and non-assessable.
4.6 CAPITALIZATION. The authorized capital stock of the Purchaser is as
follows:
(a) 2,000,000 shares of preferred stock, $1.00 par value per share, none
of which is outstanding;
(b) 40,000,000 shares of Class A Common Stock, $.001 par value per share,
of which 9,700,598 shares were outstanding as of April 1, 1999; and
(c) 20,000,000 share of Class B Common Stock, $.001 par value per share,
of which 3,649,180 shares were outstanding as of April 1, 1999.
4.7 BROKER'S OR CONSULTANT'S FEES. Purchaser represents and warrants that
it has dealt with no broker, finder or consultant in connection with any of the
transactions contemplated by this Agreement, and no Person claiming through
Purchaser is entitled to any commission, broker's or finder's fee in connection
with the sale of the Purchased Assets to Purchaser.
4.8 REPORTS AND FINANCIAL STATEMENTS. Purchaser has filed all reports
required to be filed with the SEC pursuant to the Exchange Act (such reports
together with all registration statements, prospectuses and information
statements filed by Purchaser being hereinafter collectively referred to as the
"Purchaser SEC Reports"), and has previously furnished the Representative with
true and complete copies of all such Purchaser SEC Reports filed during the last
three (3) fiscal years. As of their respective dates, all such Purchaser SEC
Reports complied as to form in all material respects with the applicable
requirements of the Securities Act. Each of the balance sheets (including the
related notes) included in the Purchaser SEC Reports fairly presents the
financial position of
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Purchaser as of the respective dates thereof, and the other related statements
(including the related notes) included therein fairly present the results of
operations and the changes in financial position of Purchaser for the respective
periods or as of the respective dates set forth therein (subject, where
appropriate to normal year-end adjustments), all in conformity with GAAP during
the periods involved except as otherwise noted therein.
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Purchaser SEC Reports, since March 31, 1999, Purchaser has not: (a) suffered any
change which had or would have a material adverse effect on the financial
condition of Purchaser or (b) conducted its business and operations other than
in the ordinary course of business and consistent with past practices.
4.10 DISCLOSURE. None of the representations and warranties made by
Purchaser in this Agreement contains or will contain any untrue statement of a
material fact, or omits any material fact the omission of which would make the
statements made herein misleading.
ARTICLE V
COVENANTS
Each Stockholder, Seller and Purchaser covenant and agree that:
5.1 NON-TRANSFERRABLE CONTRACTS.
(a) Seller shall use all commercially reasonable efforts to obtain and
deliver to Purchaser such consents as are required to allow the assignment by
Seller to Purchaser of Seller's right, title and interest in, to and under any
Contract included in the Purchased Assets. To the extent any such Contract is
not assigned or if such assignment or attempted assignment would constitute a
breach thereof or a violation of any Law or Order, this Agreement shall not
constitute an assignment or an attempted assignment of such Contract.
(b) To the extent that such consents and waivers are not obtained by
Seller, this Agreement, to the extent permitted by law, shall constitute an
equitable assignment by the Seller to Purchaser of all of Seller's rights,
benefits, title and interest in and to such Material Contracts, and Purchaser
shall be deemed to be the Seller's agent for the purpose of completing,
fulfilling and discharging all of the Seller's rights and liabilities arising
after the date hereof under such Material Contracts.
5.2 GENERAL RESTRICTIONS ON TRANSFER. (a) In no event will Seller or any
Stockholder sell, transfer, assign, pledge, hypothecate or otherwise dispose of
("Transfer") all or any portion of the Purchaser Shares prior to April 23, 2000.
During the twelve month period beginning on April 24, 2000, Seller or any
Stockholder shall be permitted to Transfer not more than one-half of the
Purchaser Shares received by Seller or any Stockholder. Thereafter, Seller and
each Stockholder shall be permitted to Transfer the remaining Purchaser Shares
at any time after (but not before) the second anniversary of the date hereof.
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(b) Purchaser shall not be required to reflect on its books any purported
Transfer in violation of any of the provisions set forth in this Section 5.2, to
treat any purported transferee of such Purchaser Shares as a record owner of
such Purchaser Shares, or (iii) to afford such purported transferee any right to
vote, or to receive dividends in respect of, such Purchaser Shares.
(c) Notwithstanding the foregoing provisions, each Stockholder may
Transfer the Purchaser Shares to a spouse, a lineal ancestor or descendant, or
adopted child, of such Stockholder, or a trust for the primary benefit of any of
such Stockholder or the foregoing, provided, that the transferee of such
Purchaser Shares shall agree to be bound by the limitations set forth in this
Section 5.2.
5.3 NAME CHANGE; D/B/A NAMES. Seller shall take or cause to be taken all
necessary action in order to change its corporate name to a name reasonably
approved by Purchaser shall have effected such name change by filing an
amendment to its Articles of Incorporation with the Illinois Secretary of State
within fourteen (14) days hereafter. Seller shall execute and deliver such
consents, waivers and other documents as are necessary or, in Purchaser's
determination, advisable in order for Purchaser to use the corporate name
"Omnitech", any derivation of any such name or any other name associated with
or relating to the Business.
5.4 CHANGE OF CONTROL. Effective immediately upon a Change of Control,
(i) Purchaser's obligations under the Promissory Note and the Earn-Out
Calculation shall become due and payable without any further action on the part
of Seller and Purchaser shall pay to Seller (A) the then outstanding principal
amount (together with accrued interest thereon) of the Promissory Note and (B)
the maximum amount Seller could have received pursuant to the Earn-Out
Calculation after the date of the Change of Control; and (ii) the limitations on
Transfer set forth in Section 5.2 hereof shall be null and void and of no
further force or effect.
For purposes of this Agreement, a "Change of Control" shall mean:
(a) individuals who, as of the date hereof, constitute the Board of
Directors of Purchaser (the "Board") (as of the date hereof, the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Purchaser's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14A-11 of Regulation 14A promulgated under the Exchange Act or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board); or
(b) approval by the stockholders of Purchaser of a "Business
Combination," which shall mean a reorganization, merger or consolidation, in
each case, unless, following such reorganization, merger of consolidation,
(i) more than 50% of respectively, the then outstanding common shares of the
corporation resulting from such reorganization, merger of consolidation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the
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election of directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the then outstanding shares of common stock of
Purchaser ("Outstanding Company Common Stock") and the combined voting power
of the then outstanding voting securities of the Purchaser entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities") immediately prior to such reorganization, merger or consolidation
of the Outstanding Company Common Shares and Outstanding Company Voting
Securities, as the case may be, and (ii) at least a majority of the members of
the board of directors of the corporation resulting from such reorganization,
merger or consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization, merger or
consolidation; or
(c) approval by the stockholders of Purchaser of (i) a complete
liquidation or dissolution of Purchaser or (ii) the sale of other disposition of
all or substantially all of the assets of Purchaser, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 50% of, respectively, the then outstanding common shares of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Shares and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Shares and
Outstanding Company Voting Securities, as the case may be, and (B) at least a
majority of the members of the board of directors of such corporation were
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Company.
For purposes of the foregoing definition of "Change of Control," a
"subsidiary" of Purchaser shall mean any corporation in which Purchaser,
directly or indirectly, holds a majority of the voting power of such
corporation's outstanding shares of capital stock.
5.5 INTERNAL REVENUE FORMS. Each of Seller and Purchaser agree that, in
accordance with the "Alternative Procedure" provided in Section 5 of Revenue
Procedure 96-60, 1990-2 Internal Revenue Bulletin 399, with respect to filing
and furnishing Internal Revenue Service Forms W-2, W-3 and 941, (i) each of
Seller and Purchaser shall report on a 'predecessor successor' basis as set
forth herein, (ii) Seller shall be relieved from furnishing Forms W-2 to the
employees of Seller to whom Seller would have been obligated to furnish such
Forms to for the full 1999 calendar year, and (iii) Purchaser will assume the
obligation of Seller to furnish such Forms to such employees for the full 1999
calendar year.
5.6 MISCELLANEOUS ACTIONS.
(a) Immediately following the Closing, Purchaser shall pay to Seller in
cash the full aggregate amount set forth on Schedule 2.7 and Seller shall use
such payments to promptly satisfy the obligations described thereon;
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(b) Concurrent with the Closing, Purchaser shall pay to Seller an
aggregate amount equal to Seller's payroll obligations for the period beginning
on April 1, 1999 and ending April 30, 1999 and Seller shall use such payments to
satisfy such payroll obligations in full;
(c) No later than ten (10) days after the Closing, Seller shall cause
Purchaser to be named as an "additional insured" on each of its existing
policies of insurance; and
(d) No later than fifteen (15) days after Closing, Seller shall cause to
be delivered to Purchaser a cash flow statement for the year ended December 31,
1998 and for the period beginning January 1, 1999 and ending March 31, 1999.
ARTICLE VI
CLOSING
6.1 TIME AND PLACE. The Closing shall take place at 10:00 a.m. (Chicago
time) on the date hereof at the offices of Winston & Strawn, 35 West Wacker
Drive, Chicago, Illinois.
6.2 CLOSING TRANSACTIONS. All documents and other instruments required to
be delivered at the Closing shall be regarded as having been delivered
simultaneously, and no document or other instrument shall be regarded as having
been delivered until all have been delivered.
6.3 DELIVERIES BY SELLER TO PURCHASER. At the Closing, Seller shall
deliver or cause to be delivered to Purchaser:
(a) the Bill of Sale and Assignment, the Assumption Agreement and warranty
bills of sale, lease assignments, contract assignments, vehicle titles and other
documents and instruments of sale, assignment, conveyance and transfer as
Purchaser may deem necessary or desirable, each as duly executed by Seller;
(b) articles of incorporation of Seller certified by the Secretary of
State of the State of Illinois as of a date not earlier than five (5) days prior
to the date hereof;
(c) a certificate of the Secretary or Assistant Secretary of Seller, dated
as of the date hereof, certifying to (i) the by-laws of Seller, and
(ii) resolutions of the Board of Directors of Seller approving the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby;
(d) certificates of good standing for Seller from the State of Illinois
and any state where Seller's failure to be qualified to transact business as a
foreign corporation would have a material adverse effect on Seller or its
business or financial condition;
(e) an executed original of each consent required to be obtained pursuant
to Section 3.16;
(f) an affidavit of the President or a Vice President of Seller stating,
under penalty of perjury, Seller's United States taxpayer identification number
and that Seller is not a foreign person, pursuant to Section 1442(b)(2) of the
Code;
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(g) all releases necessary to terminate and discharge any Liens on the
Purchased Assets;
(h) a withholding certificate, in the form of Exhibit G executed by
Seller;
(i) evidence of the repayment in full of the aggregate amount of all
loans, if any, due and owing to Seller from any Stockholder or any of Seller's
Affiliates, employees, officers or directors;
(j) a legal opinion from Ehrenreich Eilenberg Krause & Zivian LLP, special
counsel to Seller and the Stockholders, in form and substance satisfactory to
Purchaser;
(k) evidence of name change by Seller;
(l) the Allocation Agreement executed by Seller;
(m) Employment Agreements substantially in the form of Exhibit H executed
by each Stockholder (collectively, the "Employment Agreements"); and
(n) such other instruments and documents as are: required by any other
provisions of this Agreement to be delivered on the date hereof by Seller to
Purchaser; or reasonably necessary, in the opinion of Purchaser, to effect the
performance of this Agreement by Seller and the Stockholders.
6.4 DELIVERIES BY PURCHASER TO SELLER. At the Closing, Purchaser shall
deliver or cause to be delivered to Seller:
(a) (i) the Purchase Price in accordance with Section 2.2, the Promissory
Note and (iii) certificates representing the Purchaser Shares issued in the name
of Seller;
(b) each of the Bill of Sale and Assignment and the Assumption Agreement
duly executed by Purchaser;
(c) a certificate of the Vice President and General Counsel of Purchaser,
dated as of the date hereof, certifying to (i) the by-laws of Purchaser; and
(ii) resolutions of the Board of Directors of Purchaser approving the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby;
(d) certification of incorporation of Purchaser certified by the Secretary
of State of the State of Delaware as of a date not earlier than five (5) days
prior to the date hereof;
(e) the Allocation Agreement executed by Purchaser;
(f) each of the Employment Agreements executed by Purchaser;
(g) a legal opinion from Winston & Strawn, special counsel to Purchaser,
in form and substance satisfactory to Seller; and
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(h) such other instruments and documents as are: (i)required by any other
provisions of this Agreement to be delivered on the date hereof by Purchaser to
Seller; or (ii)reasonably necessary, in the opinion of Seller, to effect the
performance of this Agreement by Purchaser.
ARTICLE VII
OTHER AGREEMENTS
7.1 FURTHER ASSURANCE. At any time and from time to time from and after
the date hereof, Seller, Stockholders and Purchaser will, at the request and
expense of the other parties hereto, execute, acknowledge and deliver, or cause
to be executed, acknowledged and delivered, such instruments and other documents
and perform or cause to be performed such acts and provide such information, as
may reasonably be required to evidence or effectuate the sale, conveyance,
transfer, assignment and delivery to Purchaser of the Purchased Assets or for
the performance by Seller, Stockholders or Purchaser of any of their other
respective obligations under this Agreement.
7.2 CONFIDENTIALITY.
(a) The parties hereto agree with respect to the terms and conditions of
this Agreement, including, without limitation, the Purchase Price, and all
information that is furnished or disclosed by the other party (collectively,
"Confidential Information"), that (i)such Confidential Information is
confidential and/or proprietary to the furnishing/disclosing party and entitled
to and shall receive treatment as such by the receiving party; (ii)the receiving
party will hold in confidence and not disclose nor use (except in respect of the
transactions contemplated by this Agreement) any such Confidential Information,
treating such Confidential Information with the same degree of care, but not
less than a reasonable degree of care, and confidentiality as it accords its own
confidential and proprietary information; provided, however, that the receiving
party shall not have any restrictive obligation with respect to any Confidential
Information which (A)is contained in a printed publication available to the
general public, (B)is or becomes publicly known through no wrongful act or
omission of the receiving party, (C) is known by the receiving party without any
proprietary restrictions by the furnishing/disclosing party at the time of
receipt of such Confidential Information, or (D)is legally required to be
disclosed, in which case the receiving party shall notify the disclosing party a
reasonable time prior to disclosure and allow the disclosing party a reasonable
opportunity to seek appropriate protective measures; and (iii)all such
Confidential Information furnished to either party by the other, unless
otherwise specified in writing, shall remain the property of the
furnishing/disclosing party, and in the event this Agreement is terminated,
shall be returned to it, together with any and all copies made thereof, upon
request for such return by it (except for documents submitted to an Authority
with the consent of the furnishing/disclosing party or upon subpoena and which
cannot be retrieved with reasonable effort).
(b) Each party hereto acknowledges that the remedy at law for any breach
by either party of its obligations under Section 7.2(a) is inadequate and that
the other party shall be entitled to equitable remedies, including an
injunction, in the event of breach of any other party.
<PAGE> 31
7.3 EMPLOYMENT MATTERS.
(a) Purchaser shall offer employment to all of the employees of Seller
engaged full-time or part-time in the conduct of the Business at not less than
their current salary from Seller (and on other terms and conditions
substantially similar to the terms and conditions to which similarly situated
non-probationary employees of Purchaser are subject) and Seller shall facilitate
the employment of such persons by Purchaser, including termination of the
employment of such persons by Seller on the date hereof. Seller shall be
responsible for the payment of all compensation and other benefits payable to,
or accrued in respect of, all such employees for all times prior to the
termination of their employment with Seller. Seller shall retain all Liabilities
(including, without limitation, any severance claims or other causes of action)
that relate to or arise out of employment with Seller) that are asserted by any
employee or former employee of Seller (including any and all beneficiaries
thereof) who do not become employees of Purchaser.
(b) All hourly and salaried employees of Seller who accept employment with
Purchaser and commence such employment after the Closing (the "Transferred
Employees") will be included in Purchaser's existing employee welfare benefit
plans and will be subject to Purchaser's existing employment policies, as
applicable to Purchaser's employees who are similarly situated.
7.4 EMPLOYEE BENEFITS. (a) Seller shall remain solely responsible for
Liabilities arising from workers' compensation claims, both medical and
disability, or other government-mandated programs which are based on injuries
occurring prior to the date hereof regardless of when such claims are filed.
Purchaser shall be solely responsible for such claims of Transferred Employees
based on injuries occurring after the date hereof.
(b) Seller shall remain solely responsible for the satisfaction of all
claims for medical, dental, life insurance, health, accident, disability or
other benefits brought by or in respect of Transferred Employees and former
employees of Seller under any of Seller's welfare benefit plans where the claims
were incurred prior to the date hereof regardless of when such claims are filed.
(c) Seller shall remain solely responsible for all Liabilities in
connection with claims for benefits brought by or in respect of all employees
and former employees of Seller (other than Transferred Employees) under any of
Seller's welfare benefit plans with respect to medical, dental, life insurance,
health, accident or disability or other benefits, including without limitation
continuation coverage pursuant to Section 4980B of the Code and Part 6 of
Title I of ERISA.
7.5 NON-COMPETITION AGREEMENT.
7.5.1 In partial consideration for the Purchase Price paid to Seller for
the Purchased Assets, for a period of three (3) years from and after the date
hereof, Seller shall not, directly or indirectly, or as the agent of another
Person or through other Persons as an agent:
(a) participate or engage in, directly or indirectly (as an owner,
partner, employee, officer, director, independent contractor, consultant,
advisor or in any other capacity calling for the rendition of services, advice,
or acts of management, operation or control), any business that is
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competitive with the Business within any geographic area in which any of the
Related Entities does business; provided, however, that Seller may own up to
five percent (5%) of any class of securities of a corporation engaged in such a
competitive business if such securities are listed on a national securities
exchange or registered under the Exchange Act;
(b) solicit any current employee of the Related Entities or any
individual who becomes an employee during such period to leave such employment;
or
(c) seek to divert or dissuade from continuing to do business with or
entering into business with any of the Related Entities, any supplier, customer
or other Person that had a business relationship with or with which any Related
Entity was actively planning or pursuing a business relationship during such
three-year period.
7.5.2 The necessity of protection against the competition of Seller
against Purchaser and the nature and scope of such protection has been carefully
considered by the parties hereto. The parties hereto agree and acknowledge that
the duration, scope and geographic areas applicable to the covenant
not-to-compete described in this Section 7.5 are fair, reasonable and necessary
and that adequate compensation has been received by Sellers for such
obligations. If, however, for any reason any court determines that the
restrictions in this Section 7.5 are not reasonable or that consideration is
inadequate, such restrictions shall be interpreted, modified or rewritten to
include as much of the duration, scope and geographic area identified in this
Section 7.5 as will render such restrictions valid and enforceable.
7.5.3 In the event of a breach or threatened breach of this Section 7.5,
Purchaser shall be entitled, without the posting of a bond, to an injunction
restraining such breach. Nothing herein contained shall be construed as
prohibiting any party from pursuing any other remedy available to it for such
breach or threatened breach.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY SELLER. Seller and Stockholders, jointly and
severally, agree to indemnify, defend and hold harmless Purchaser and all of its
officers, directors, shareholders, Affiliates, employees and agents (the
"Purchaser Indemnified Persons") after the Closing from and against any
Adverse Consequence arising out of or resulting from:
(a) the untruth, inaccuracy or incompleteness as of the date hereof of any
representation or warranty of Seller or any Stockholder contained in this
Agreement or Schedules hereto (or in any document, writing, certificate, data or
financial statements delivered or required to be delivered by Seller or any
Stockholder pursuant to this Agreement) (each a "Purchaser Warranty Claim") or
the failure by any Stockholder or Seller to perform any of his or its covenants
or obligations hereunder;
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(b) any brokers' commissions, finders' fees or other like payments
incurred or alleged to have been incurred by Seller or any Stockholder in
connection with the sale of the Shares or the consummation of the transactions
contemplated by this Agreement; and
(c) any and all Retained Liabilities of Seller.
8.2 INDEMNIFICATION BY PURCHASER. Purchaser agrees to indemnify, defend
and hold harmless Seller, each Stockholder and their respective employees,
agents and Affiliates after the Closing from and against any Adverse
Consequences arising out of or resulting from (a) the untruth, inaccuracy or
incompleteness as of the date hereof of any representation or warranty of
Purchaser contained in this Agreement (or in any document, writing or
certificate delivered by Purchaser under this Agreement) (each a "Seller
Warranty Claim"), (b) the failure by Purchaser to perform any of its covenants
or obligations hereunder, (c) any brokers' commissions, finders' fees or other
like payments incurred or alleged to have been incurred by Purchaser in
connection with the sale of the Purchased Assets or the consummation of the
transactions contemplated by this Agreement and (d) any and all Purchased Assets
and Liabilities (other than Retained Liabilities) of Seller.
8.3 PROCEDURE FOR INDEMNIFICATION. If any Person shall claim
indemnification (the "Indemnified Party") hereunder for any claim other than a
third-party claim, the Indemnified Party shall promptly give written notice to
the other party from whom indemnification is sought (the "Indemnifying Party")
of the nature and amount of the claim. If an Indemnified Party shall claim
indemnification hereunder arising from any claim or demand of a third party, the
Indemnified Party shall promptly give written notice (a "Third-Party Notice")
to the Indemnifying Party of the basis for such claim or demand, setting forth
the nature of the claim or demand in detail. The Indemnifying Party shall have
the right to compromise or, if appropriate, defend at its own cost and through
counsel of its own choosing, any claim or demand set forth in a Third-Party
Notice giving rise to such claim for indemnification. In the event the
Indemnifying Party undertakes to compromise or defend any such claim or demand,
it shall promptly (and in any event, no later than fifteen (15) days after
receipt of the Third-Party Notice) notify the Indemnified Party in writing of
its intention to do so. The Indemnified Party shall fully cooperate with the
Indemnifying Party and its counsel in the defense or compromise of such claim or
demand. After the assumption of the defense by the Indemnifying Party, the
Indemnified Party shall not be liable for any legal or other expenses
subsequently incurred by the Indemnifying Party, in connection with such
defense, but the Indemnified Party may participate in such defense at its own
expense. No settlement of a third party claim or demand defended by the
Indemnifying Party shall be made without the written consent of the Indemnified
Party, such consent not to be unreasonably withheld. The Indemnifying Party
shall not, except with the written consent of the Indemnified Party, consent to
the entry of a judgment or settlement which does not include as an unconditional
term thereof, the giving by the claimant or plaintiff to the Indemnified Party
of an unconditional release from all liability in respect of such third party
claim or demand.
8.4 LIMITATIONS ON INDEMNITY. (a) The indemnities contained in this
Article VIII with respect to Purchaser Warranty Claims and Seller Warranty
Claims shall expire eighteen (18) months following the date hereof, except with
respect to claims under Section 3.13 as to which the indemnification obligation
shall survive until thirty (30) days after the expiration of any applicable
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statute of limitations; provided, that if at the stated expiration of any
indemnification obligation there shall then be pending any indemnification claim
by a Person, such Person shall continue to have the right to such
indemnification with respect to such claim notwithstanding such expiration.
(b) Seller's and Stockholder's maximum aggregate liability to the
Purchaser Indemnified Persons for indemnification of Purchaser Warranty Claims
pursuant to Section 8.1(a) shall not exceed $7,500,000.
(c) Purchaser's maximum aggregate liability to Seller and Stockholders for
indemnification of Seller Warranty Claims pursuant to Section 8.2(a) shall not
exceed $2,500,000.
(d) No Purchaser Indemnified Person shall be entitled to indemnification
pursuant to Section 8.1 for any Purchaser Warranty Claims unless and until the
aggregate Adverse Consequences suffered by all Purchaser Indemnified Persons
collectively exceeds $300,000 whereupon the Purchaser Indemnified Persons
shall be entitled to indemnification hereunder from Seller and Stockholders for
all Adverse Consequences suffered by Purchaser Indemnified Persons regardless
of such threshold amount.
(e) Seller and Stockholders shall not be entitled to indemnification
pursuant to Section 8.2 for any Seller Warranty Claims unless and until the
aggregate Adverse Consequences suffered by Seller and Stockholders exceeds
$50,000, whereupon Seller and Stockholders shall be entitled to indemnification
hereunder from Purchaser for all Adverse Consequences suffered by Seller and
Stockholders regardless of such threshold amount.
8.5 PAYMENT. Except for third-party claims and disputes subject
to arbitration under Section 10.13 being defended in good faith by the
Indemnifying Party in accordance with Section 8.3, the Indemnifying Party shall
satisfy its obligations hereunder within fifteen (15) days after receipt of
notice of a claim.
8.6 SET-OFF. If Seller or any Stockholder fails to make any payment with
respect to any indemnification claim in accordance with this Article VIII when
due, Purchaser may, in addition to any other rights hereunder, upon seven (7)
days notice to Seller, set-off the amount of such claim against any amounts
payable by Purchaser to Seller under this Agreement, (including, without
limitation, payments to be made pursuant to the Promissory Note and Section 2.4
hereof). Notwithstanding anything in this Article VIII to the contrary,
Purchaser and Seller each agrees that (i) any claim for indemnification by
Purchaser shall be charged first against any amounts owing to Seller under the
Promissory Note, in the inverse order of the installments owing thereunder, (ii)
any additional amounts shall then be charged against any payments which may
become owing to Seller pursuant to Section 2.3, and (iii) in no event shall
Purchaser have any right of set-off or deduction against any compensation in
whatever form paid to any of the Stockholders in their capacities as employees
or officers of, or consultants, to, Purchaser or any Affiliate thereof on
account of any indemnification obligation owing to Purchaser by the Seller or
any Stockholder hereunder.
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ARTICLE IX
SELLER'S REPRESENTATIVE
9.1 APPOINTMENT. Seller hereby irrevocably makes, constitutes and
appoints Joel D. Krauss as representative on behalf of Seller and Stockholders
(the "Representative") for all purposes under this Agreement. In the event of
the death, resignation or incapacity of the Representative, Seller shall
promptly designate another individual to act as their representative under this
Agreement so that at all times there will be a Representative with the
authority provided in this Article IX. Such successor Representative shall be
designated by Seller by an instrument in writing signed by Seller (or its
successors in interest), and such appointment shall become effective as to the
successor Representative when such instrument shall have been delivered to him
or her and a copy thereof delivered to Purchaser.
9.2 AUTHORIZATION. Seller and each Stockholder hereby authorizes the
Representative, on their behalf and in its or his name, to:
(a) receive all notices or documents given or to be given to Seller or
Stockholders by the Purchaser pursuant hereto or in connection herewith and
to receive and accept service of legal process in connection with any suit or
proceeding arising under this Agreement. The Representative shall make a good
faith reasonable effort to forward a copy of such notice of process to Seller
and each Stockholder;
(b) deliver at the Closing the Purchased Assets in exchange for the
consideration payable with respect to such Purchased Assets;
(c) upon confirmation of the receipt of wire transfers or certified or
official bank check, sign and deliver to Purchaser at the Closing a receipt for
Seller's consideration;
(d) deliver to Purchaser at the Closing all certificates and documents
to be delivered to Purchaser by Seller pursuant to this Agreement, together with
any other certificates and documents executed by Seller and deposited with the
Representative for such purpose;
(e) engage counsel, and such accountants and other advisors for Seller and
incur such other expenses on behalf of Seller in connection with this Agreement
and the transactions contemplated hereby as the Representative may deem
appropriate; and
(f) take such action on behalf of Seller as the Representative may deem
appropriate in respect of:
(i) waiving any inaccuracies in the representations or warranties
of Purchaser contained in this Agreement or in any document delivered by
Purchaser pursuant hereto;
(ii) taking such other action as the Representative is authorized to
take under this Agreement including, without limitation, Section 2.3;
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(iii) receiving all documents or certificates and making all
determinations, on behalf of Seller, required under this Agreement;
(iv) all such other matters as the Representative may deem necessary
or appropriate to consummate this Agreement and the transactions
contemplated hereby; and
(v) taking all such action as may be necessary after the date hereof
to carry out any of the transactions contemplated by this Agreement.
9.3 IRREVOCABLE APPOINTMENT. The appointment of the Representative
hereunder is irrevocable and any action taken by the Representative pursuant to
the authority granted in this Article IX shall be effective and absolutely
binding on Seller and each Stockholder notwithstanding any contrary action of,
or direction from, Seller or a Stockholder, except for actions taken by the
Representative which are in bad faith or grossly negligent. The death or
incapacity of a Stockholder shall not terminate the prior authority and agency
of the Representative.
9.4 RESIGNATION. The Representative may resign at any time by giving
notice to Seller, and such resignation shall be effective upon the appointment
and qualification of a successor. The Representative may be discharged, and
replaced by another person to act as his or her successor, by an instrument in
writing signed by Seller (or its successors in interest) or Stockholders
holding a majority of the Purchaser Shares at the time of determination.
9.5 PURCHASER'S RELIANCE. Purchaser shall not be obliged to inquire into
the authority of the Representative, and Purchaser shall be fully protected in
dealing with the Representative in good faith.
9.6 EXCULPATION AND INDEMNIFICATION. In performing any of his or her
duties as Representative under this Agreement, the Representative shall not
incur any Liability to any Person, except for Liability caused by the
Representative's willful misconduct or gross negligence. Accordingly, the
Representative shall not incur any such Liability for (i) any action that is
taken or omitted in good faith regarding any questions relating to the duties
and responsibilities of the Representative under this Agreement, or (ii) any
action taken or omitted to be taken in reliance upon any instrument that the
Representative shall in good faith believe to be genuine, to have been signed or
delivered by a proper person or persons and to conform with the provisions of
this Agreement.
(b) Stockholders, jointly and severally, shall indemnify, defend and hold
harmless the Representative against, from and in respect of any Adverse
Consequence arising out of or resulting from the performance of his or her
duties hereunder or in connection with this Agreement (except for Liabilities
arising from the gross negligence or willful misconduct of the Representative).
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 POST-CLOSING DELIVERIES. After the Closing, any monies, checks,
instruments, invoices, bills, receipts, notices, mail and other communications
received by one party but directed
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toward or due to another shall be promptly delivered to the other party. Seller
shall cooperate with Purchaser after the Closing to ensure the orderly
transition of the operation of the Purchased Assets from Seller to Purchaser.
10.2 NOTICES. All notices or other communications required or permitted
by this Agreement shall be in writing and shall be deemed to have been duly
received (a) if given by telecopier, when transmitted and the appropriate
telephonic confirmation received if transmitted on a business day and during
normal business hours of the recipient, and otherwise on the next business day
following transmission, (b) if given by certified or registered mail, return
receipt requested, postage prepaid, three business days after being deposited in
the U.S. mails and (c) if given by courier or other means, when received or
personally delivered, and, in any such case, addressed as follows:
(i) if to Purchaser:
Diamond Technology Partners Incorporated
John Hancock Center
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
Attention: Nancy K. Bellis, Vice President and General Counsel
Facsimile: (312)-255-5820
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: Leland E. Hutchinson
Facsimile: (312) 558-5700
(ii) if to Seller or Representative:
Joel D. Krauss
431 West Oakdale, Apt. 4D
Chicago, IL 60657
with a copy to:
John E. Campbell & Associates, Ltd.
1801-H North Mill Street
Naperville, Illinois 60653
Attention: David Campbell
Facsimile: (630) 420-1918
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or to such other addresses as may be specified by any such Person to the other
Person pursuant to notice given by such Person in accordance with the provisions
of this Section 10.2.
10.3 ASSIGNMENT. No party may assign or transfer any or all of its
rights or obligations under this Agreement without the prior written approval of
all the other parties; provided, however, that Purchaser may assign or transfer
all (but not less than all) of its rights and obligations under this Agreement
to any Person that is wholly-owned, directly or indirectly, by Purchaser;
provided, further, Seller may transfer all or any portion of its interest in the
Purchaser Shares or the Promissory Note to any Stockholder.
10.4 BENEFIT OF THE AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement shall not be construed so as to confer any
right or benefit upon any Person, other than the parties hereto and their
respective successors and permitted assigns.
10.5 EXHIBITS AND SCHEDULES. The Exhibits and Schedules hereto shall be
construed with and as an integral part of this Agreement to the same effect as
if the contents thereof had been set forth verbatim herein.
10.6 HEADINGS. The headings used in this Agreement are for convenience
of reference only and shall not be deemed to limit, characterize or in any way
affect the interpretation of any provision of this Agreement.
10.7 ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding of the parties with respect to the subject matter hereof, and no
other representations, promises, agreements or understandings regarding the
subject matter hereof shall be of any force or effect unless in writing,
executed by the party to be bound thereby and dated on or after the date hereof.
10.8 MODIFICATIONS AND WAIVERS. No change, modification or waiver of
any provision of this Agreement shall be valid or binding unless it is in
writing, dated subsequent to the date hereof and signed by Purchaser and Seller.
No waiver of any breach, term or condition of this Agreement by any party shall
constitute a subsequent waiver of the same or any other breach, term or
condition.
10.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
10.10 SEVERABILITY. In case any one or more of the provisions contained
herein for any reason shall be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be construed as
if such invalid, illegal or unenforceable provision or provisions had never been
contained herein.
10.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO THE
CONFLICT OF LAWS PROVISIONS THEREOF.
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10.12 EXPENSES. Except as otherwise expressly provided herein, each
party hereto shall pay all of its own costs and expenses incurred or to be
incurred in negotiating and preparing this Agreement and in closing and carrying
out the transactions contemplated by this Agreement.
10.13 ARBITRATION. Any dispute among the parties in connection with or
arising with respect to any provision of this Agreement shall be subject to
binding arbitration in Chicago, Illinois. To commence arbitration, one of the
Purchaser, Seller or the Representative, as the case may be, shall deliver
written notice of dispute and written demand for arbitration to the other
parties. Purchaser, Seller and the Representative shall, within thirty (30) days
of delivery of such notice, mutually agree in writing to an independent
arbitrator. If the parties are unable to agree by the thirtieth day after
delivery of notice, the party demanding arbitration shall request the American
Arbitration Association to appoint an arbitrator located in Chicago, Illinois.
The arbitration shall be conducted according to the rules of the American
Arbitration Association within the following guidelines:
(a) each party shall present its case in writing to the arbitrator
within sixty (60) days of the appointment of the arbitrator. There shall be one
reply brief submitted by each party;
(b) each party shall be allowed a maximum of two days to make its
presentations to the arbitrator;
(c) the decision of the arbitrator shall be in writing and final and
binding on the parties, and may be entered and enforced by any court of
competent jurisdiction; and
(d) each party shall bear its own expenses in connection with the
arbitration.
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement as of the date first written above.
<TABLE>
<S> <C>
PURCHASER: DIAMOND TECHNOLOGY
PARTNERS INCORPORATED
By:___________________________
Name:_________________________
Title:________________________
SELLER: OMNITECH CONSULTING GROUP, INC.
By:___________________________
Name:_________________________
Title:________________________
STOCKHOLDERS:
___________________________ ______________________________
Matthew Adlai-Gail Edward G. Arnold
___________________________ ______________________________
Fredrick A. Belmont John A. Faier
___________________________ ______________________________
Michael R. Hoffman Joel D. Krauss
___________________________ ______________________________
Michael C. Krauss Edward W. Miller
</TABLE>
<PAGE> 41
EXHIBIT A
FORM OF ASSUMPTION AGREEMENT
<PAGE> 42
EXHIBIT B
FORM OF BILL OF SALE AND ASSIGNMENT
<PAGE> 43
EXHIBIT C
FORM OF PROMISSORY NOTE
<PAGE> 44
EXHIBIT D
EARN-OUT FORMULA
<PAGE> 45
EXHIBIT E
ALLOCATION OF PURCHASE PRICE
Seller and Purchaser hereby agree to allocate the tax basis of the
Purchased Assets and assumed Liabilities as follows:
(1) equipment and other fixed assets will be reflected at their net book
value as set forth on the audited Closing Balance Sheet; and
(2) all other Purchased Assets and assumed Liabilities will be reflected
at their respective balance as set forth on the audited Closing
Balance Sheet; and
(3) any excess will be allocated to goodwill.
<TABLE>
<S> <C>
PURCHASER: DIAMOND TECHNOLOGY
PARTNERS INCORPORATED
By:____________________________
Name:__________________________
Title:_________________________
SELLER: OMNITECH CONSULTING GROUP, INC.
By:____________________________
Name:__________________________
Title:_________________________
</TABLE>
<PAGE> 46
EXHIBIT F
FORM OF WITHHOLDING CERTIFICATE
I, ________________ , on behalf of Omnitech Consulting Group, Inc. (the
"Company") hereby certify as to the following:
1. This Company is not a nonresident alien for purposes of U.S. income
taxation;
2. The Company's U.S. taxpayer identification number is ________________;
and
3. The Company's address is
_________________________
_________________________
I understand that this certification may be disclosed to the Internal
Revenue Service.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete.
OMNITECH CONSULTING GROUP, INC.
By:___________________________
Name:_________________________
Title:________________________
Date April 23, 1999
<PAGE> 47
EXHIBIT G
FORM OF EMPLOYMENT AGREEMENT
<PAGE> 48
SCHEDULE 2.7
LIABILITIES ASSUMED
<TABLE>
<S> <C>
1998 Bonus Pool B as of 4/23/99..................... $ 247,350
1998 Bonus Pool C as of 4/23/99..................... 350,000
1998 Profit Sharing Pool (Pool D) as of 4/23/99..... 440,011
1998 Bonus Pool E as of 4/23/99..................... 759,788
1999 Profit Sharing and Bonus Pool as of 3/31/99.... 325,500
1999 Net Income Bonus Pool as of 3/31/99............ 104,584
---------
2,227,233
=========
</TABLE>
<PAGE> 49
LIST OF EXHIBITS AND SCHEDULES
The following is a list identifying all omitted exhibits and schedules to
the Agreement. Registrant agrees to furnish supplementally to the Commission
upon request a copy of any omitted exhibits or schedules.
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
Exhibit A Form of Assumption Agreement
Exhibit B Form of Bill of Sale and Assignment
Exhibit C Form of Promissory Note
Exhibit D Earn-out Calculation
Exhibit E Allocation of Purchase Price
Exhibit F Form of Withholding Certificate
Exhibit G Form of Employment Agreement
SCHEDULES
- ---------
Schedule 1.2 Retained Assets
Schedule 2.7 Liabilities Assumed
Schedule 3.1 Corporate Status; Authority of Seller
Schedule 3.3 Intellectual Property
Schedule 3.7 Personnel Identification and Compensation
Schedule 3.11 Certain Transactions
Schedule 3.12 Employee Benefit Matters
Schedule 3.13(i) Taxes
Schedule 3.14 Title to Assets
Schedule 3.16 Consents
Schedule 3.17 Licenses and Permits
Schedule 3.18 Insurance
Schedule 3.19 Financial Statements
Schedule 3.20 Undisclosed Liabilities
Schedule 3.21 Conduct of Business Since Reference Balance Sheet
Schedule 3.22 Brokers or Consultants Fees
Schedule 3.23 Banking Arrangements
</TABLE>
<PAGE> 1
EXHIBIT 24.2
The Board of Directors
Diamond Technology Partners Incorporated:
We consent to incorporation by reference in the registration statements
(No. 33-31943 and No. 33-31965) on Form S-8 of Diamond Technology Partners
Incorporated of our report dated April 19, 1999, relating to the consolidated
balance sheets of Diamond Technology Partners Incorporated and subsidiary as of
March 31, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1999, and the related schedule, which reports appear in
the March 31, 1999 annual report on Form 10-K of Diamond Technology Partners
Incorporated.
KPMG LLP
Chicago, Illinois
June 23, 1999
<PAGE> 1
EXHIBIT 99.1
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 Annual Report on Form 10-K 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. During fiscal 1998 the Company had one
client that individually accounted for 9% of its net revenues. During fiscal
1999, the Company had two clients that individually accounted for 15% and 10%
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.
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.
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, 1997, 1998 and 1999, the Company experienced the cancellation of
significant projects at its then two largest clients in the last quarter of
fiscal 1996 and the first quarter of fiscal 1997. The cancellation of these
projects resulted from each client's cancellation of the business initiative
for which the Company had been retained. 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, fiscal 1998 and fiscal 1999. 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.
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, as of March 31, 1999, the
<PAGE> 2
Company's current Chief Executive Officer controls (including Class A Common
Stock owned by such individual) approximately 65.9% 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.
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.
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.
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 1998 and fiscal 1999, the size of
the Company's employee base increased from 223 to 309 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.
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 March 31, 1999, the Company
has written off accounts receivable totaling approximately $2.8 million which it
could not collect.
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.
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,
<PAGE> 3
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.
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 to be profitable in the
future. The Company believes that 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 next 12 months.
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.
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 $31.50 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999
<PERIOD-START> APR-01-1997 APR-01-1998
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> $31,437 $47,698
<SECURITIES> 0 0
<RECEIVABLES> 5,622 10,853
<ALLOWANCES> 559 419
<INVENTORY> 0 0
<CURRENT-ASSETS> 37,821 60,657
<PP&E> 3,751 6,524
<DEPRECIATION> 2,107 3,105
<TOTAL-ASSETS> 40,352 67,086
<CURRENT-LIABILITIES> 11,585 13,785
<BONDS> 0 0
0 0
0 0
<COMMON> 12 14
<OTHER-SE> 28,755 53,287
<TOTAL-LIABILITY-AND-EQUITY> 40,352 67,086
<SALES> 0 0
<TOTAL-REVENUES> 58,369 82,389
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 49,586 68,690
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (50) (46)
<INCOME-PRETAX> 9,933 16,187
<INCOME-TAX> 3,925 6,351
<INCOME-CONTINUING> 6,008 9,836
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,008 9,836
<EPS-BASIC> .51 .74
<EPS-DILUTED> .42 .63
</TABLE>
