AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CLAREMONT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
OREGON 7373 93-1004490
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
1600 N.W. Compton Drive, Suite 210
Beaverton, Oregon 97006
(503) 690-4000
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
Paul J. Cosgrave, President
Claremont Technology Group, Inc.
1600 N.W. Compton Drive, Suite 210
Beaverton, Oregon 97006
(503) 690-4000
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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COPIES TO:
WILLIAM C. CAMPBELL, ESQ. THOMAS A. BEVILACQUA, ESQ.
Ater Wynne Hewitt Dodson & Skerritt, Brobeck, Phleger & Harrison LLP
LLP One Market, Spear Street Tower
222 S.W. Columbia, Suite 1800 San Francisco, California 94105
Portland, Oregon 97201 (415) 442-0900
(503) 226-1191
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
Common Stock, no par value.... 3,105,000 $19.00 $58,995,000 $20,343.10
(1) Includes 405,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CLAREMONT TECHNOLOGY GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING LOCATION OF INFORMATION REQUIRED BY FORM S-1
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Forepart of the Registration Statement; Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Principal and Selling Shareholders
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Dividend
Policy; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Outside Front Cover Page of Prospectus; Summary; Risk
Factors; Dividend Policy; Selected Consolidated
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal and Selling Shareholders; Description of
Capital Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 24, 1996
[CLAREMONT LOGO]
2,700,000 SHARES
COMMON STOCK
Of the 2,700,000 shares of Common Stock offered hereby, 1,750,000 shares are
being sold by Claremont Technology Group, Inc. ("Claremont" or the "Company")
and 950,000 shares are being sold by the Selling Shareholders. See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of the shares by the Selling Shareholders. Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$17.00 and $19.00 per share. See "Underwriting" for information relating to the
method of determining the initial public offering price.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY (1) SHAREHOLDERS
Per Share............... $ $ $ $
Total (2)............... $ $ $ $
(1) Before deducting expenses payable by the Company estimated at $800,000.
(2) The Company and the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to an additional 405,000 shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively.
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The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
THE DATE OF THIS PROSPECTUS IS , 1996
[INSIDE COVER GRAPHICS--Graphical Depiction of the three phases of the Company's
TISE methodology]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
PAGE
---------
Summary.................................................................................................... 4
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 12
Dividend Policy............................................................................................ 12
Capitalization............................................................................................. 13
Dilution................................................................................................... 14
Selected Consolidated Financial Data....................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16
Business................................................................................................... 23
Management................................................................................................. 31
Certain Transactions....................................................................................... 38
Principal and Selling Shareholders......................................................................... 40
Description of Capital Stock............................................................................... 42
Shares Eligible for Future Sale............................................................................ 44
Underwriting............................................................................................... 45
Legal Matters.............................................................................................. 46
Experts.................................................................................................... 46
Additional Information..................................................................................... 46
Index to Consolidated Financial Statements................................................................. F-1
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The Company intends to furnish to its shareholders annual reports containing
audited consolidated financial statements and an opinion thereon expressed by
its independent public accountants, and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
The Company was incorporated in Oregon in 1989 under the name Claremont
Consulting Group, Inc. The Company's name was changed to Claremont Technology
Group, Inc. in 1993. The Company's executive offices are located at 1600 N.W.
Compton Drive, Suite 210, Beaverton, Oregon 97006, and its telephone number is
503-690-4000.
Clarety-TM-, HWIMSy-TM-, The Node Connection-TM-, Northern Diamond-TM-,
Premost-TM-, Spibox-TM-, TISE-TM-, Value Server-TM-, and Value Software-TM- are
United States trademarks of the Company. Tradenames and trademarks of other
companies appearing in this Prospectus are the property of their respective
holders.
3
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
Claremont Technology Group, Inc. ("Claremont" or the "Company"), provides
enterprise-wide information technology ("IT") solutions that re-engineer
mission-critical business processes such as customer service, order processing,
billing and logistics. Claremont delivers its services, including IT planning,
systems integration and development and outsourcing, through a project
management methodology that can employ reusable object oriented software modules
and transferable design frameworks on a fixed-price, fixed-delivery-schedule
basis or a time and materials basis. Claremont provides solutions to large
organizations in select high demand, vertical markets including communications,
financial services and pension/retirement services. Claremont's clients consist
of large corporations and government organizations in the United States and
foreign markets including Canada, the United Kingdom, Saudi Arabia, New Zealand
and Australia.
Claremont provides its services to organizations within industries where
technology-enabled change and re-engineering of business processes can have a
significant competitive impact. The Company's focus on select vertical markets
is complemented by its expertise with the particular customer interface within
these markets and its dedication to partner with clients to co-develop large
scale business solutions. Claremont's industry specific expertise and its
partnership approach to client relationships gives Claremont a competitive
advantage in marketing additional services to its clients and results in high
customer retention levels. Clients representing 94% of Claremont's fiscal 1995
revenue continue as clients today. The Company's clients include: AT&T and its
subsidiaries, Fred Meyer, Inc., Lucent Technologies, Ohio State Teachers
Retirement System and PacificCorp.
Claremont's Total Information Systems Engagement ("TISE") three-phase
methodology provides a structure through which the Company's skills and
knowledge can be effectively deployed. TISE begins with an intensive design
phase in which Claremont works with its clients to define their business problem
and to develop a high level system design. In the systems development and
integration phase, Claremont's consultants can draw from its previously
developed reusable object oriented software modules and transferable design
frameworks to cost-effectively co-develop and quickly deploy applications
solutions. Claremont's approach emphasizes the replacement of outdated and
inflexible legacy code as part of the re-engineering process rather than the
mere addition of new interfaces. In the final phase of TISE, the Company can
provide outsourcing services for ongoing system maintenance and enhancement.
To achieve its objective of becoming a leading provider of enterprise-wide
solutions, the Company intends to expand its client base by leveraging its
vertical market expertise, increasing penetration of its existing clients,
capitalizing on the benefits of its TISE methodology and providing expertise in
high demand, leading edge technologies. Further, Claremont's strategy is to
attract and retain superior, highly innovative IT professionals. The Company
also plans to expand its geographic presence, industry expertise and technical
scope through strategic acquisitions. To facilitate its delivery of high demand
technological expertise, Claremont has developed working relationships with
companies such as Arbor Software Corporation, Forte Software, Inc., Hewlett
Packard Company, International Business Machines Corp. ("IBM"), Microsoft
Corporation, Netscape Communications Corporation, Oracle Technology, Inc.,
Silicon Graphics, Inc. and Sybase, Inc.
4
THE OFFERING
Common Stock Offered by the Company.................. 1,750,000 shares
Common Stock Offered by the Selling Shareholders..... 950,000 shares
Common Stock Outstanding after the Offering.......... 6,755,611 shares (1)
Use of Proceeds...................................... For repayment of principal and
interest on revolving line of
credit; working capital and general
corporate purposes.
Proposed Nasdaq National Market Symbol............... CLMT
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Total revenue.............................. $ 4,057 $ 9,368 $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 33,675
Income (loss) from operations.............. (185) 125 2,774 2,393 3,432 2,790 3,879
Net income (loss).......................... (135) 102 1,591 1,452 2,147 1,743 2,205
Net income (loss) per common share (2)..... $ (0.03) $ 0.02 $ 0.28 $ 0.24 $ 0.31 $ 0.25 $ 0.29
Weighted average number of common and
common equivalent shares outstanding (2).. 4,532 4,544 5,796 6,269 7,319 7,215 7,662
MARCH 31, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 80 $ 28,575
Working capital........................................................................ 3,066 31,561
Total assets........................................................................... 18,278 46,773
Long-term debt, excluding current installments......................................... 1,756 1,756
Shareholders' equity................................................................... 8,129 36,624
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(1) Excludes 2,953,397 shares of Common Stock reserved for issuance upon
exercise of currently outstanding options at a weighted average exercise
price of $1.81 per share, of which 1,224,830 are currently
exercisable and 400,000 shares of Common Stock issuable upon exercise of an
outstanding warrant. See "Management -- Stock Option Plans" and "Certain
Transactions."
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income (loss) per
common share.
(3) Adjusted to give effect to the sale by the Company of 1,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$18.00 per share and the application of the estimated net proceeds therefrom
as set forth in "Use of Proceeds."
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UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING." AS USED IN THIS PROSPECTUS, THE TERM FISCAL YEAR SHALL REFER TO
THE TWELVE-MONTH PERIOD ENDED OR ENDING JUNE 30 OF THE YEAR GIVEN.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
5
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
CLIENT AND INDUSTRY CONCENTRATION; DEPENDENCE ON LARGE PROJECTS
The Company has derived, and believes that it will continue to derive, a
significant portion of its revenue from a limited number of large client
projects and in a limited number of industries. The Company's five largest
clients accounted for approximately 76% and 63% of its revenue in fiscal 1995
and the first nine months of fiscal 1996, respectively. The Ohio State Teachers'
Retirement System and AT&T Network Systems (now Lucent Technologies) accounted
for 38% and 19%, respectively, of the Company's revenue in fiscal 1995. Lucent
Technologies, Ohio State Teachers' Retirement System, Mississippi Public
Employees Retirement System, Fred Meyer, Inc. and PacifiCorp accounted for 24%,
14%, 12%, 8% and 5%, respectively, of the Company's revenue in the nine months
ended March 31, 1996. The volume of work performed for specific clients is
likely to vary from year to year, and a major client in one year may not use the
Company's services in a subsequent year. The loss of any large client could have
a material adverse effect on the Company's business, financial condition and
results of operations. Most of the Company's contracts are terminable by the
client following limited notice and without significant penalty to the client.
The cancellation of a large project or a significant reduction in the scope of
such a project could have a material adverse effect on the Company's business,
financial condition and results of operations, and in the past the cancellation
of a large project has had such an effect. Furthermore, a decision by any large
client not to proceed with a project to the stage anticipated by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. As a result of the Company's focus in
specific industries the Company's business, financial condition and results of
operations are influenced by economic and other conditions affecting these
industries, such as economic downturns in the communications or financial
services industries, which could lead to a reduction in capital spending on IT
projects, or changes in government regulations, which could obsolete or require
substantial changes to Claremont's existing pre-developed proprietary software
products. Any such change could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Strategy," and "Business -- Markets and Clients."
NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF
The Company's business is labor intensive and depends upon the delivery of
professional services. Professional fees represented 100%, 100% and 94% of the
Company's revenue in fiscal 1994, fiscal 1995 and the nine months ended March
31, 1996, respectively. The Company's success will depend in large part upon its
ability to attract, train, retain and motivate highly-skilled employees,
particularly project managers and other senior technical personnel. There is
significant competition for employees with the skills required to perform the
services offered by the Company. Qualified project managers and senior technical
and professional staff are in great demand and are likely to remain a limited
resource for the foreseeable future. There can be no assurance that the Company
will be successful in attracting a sufficient number of highly-skilled employees
in the future, or that it will be successful in training, retaining and
motivating employees. The Company's inability to attract, train and retain
skilled employees or the Company's employees' inability to achieve expected
levels of performance could impair the Company's ability to adequately manage
and complete its existing projects and to bid for or obtain new projects. This
in turn could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Claremont
Personnel."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's revenue and operating results may fluctuate from quarter to
quarter based on a number of factors including the number, size and scope of
projects in which the Company is engaged, the contractual terms and degree of
completion of such projects, any delays incurred in connection with a project,
employee hiring and utilization rates, the adequacy of provisions for losses,
the accuracy of estimates of resources required to complete ongoing projects and
general economic conditions. In addition, the timing of revenue is difficult to
6
forecast because the Company's sales cycle is relatively long. A high percentage
of the Company's operating expenses, particularly personnel and rent, are
relatively fixed in advance of any particular quarter. For example, while the
number of professional staff the Company employs may be adjusted to reflect
active projects, such adjustments take time and the Company must maintain a
sufficient number of senior professionals to oversee existing clients and to
focus on securing new client engagements. As a result, unanticipated variations
in the number or progress toward completion of the Company's projects or in
employee utilization rates may cause significant variations in operating results
in any particular quarter and could result in adverse changes to the Company's
business, financial condition and results of operation. Seasonal factors such as
weather related shut-downs in major markets, vacation days, total business days
in a quarter, or the business practices of clients such as deferring commitments
on new projects until after the end of the calendar or the client's fiscal year
could require the Company to maintain under-utilized employees and could
therefore have a material adverse effect on the Company's business, financial
condition and results of operations. Any shortfall in revenue or earnings from
expected levels or other failure to meet expectations of securities analysts or
the market in general regarding results of operations could have an immediate
and significant adverse effect on the market price of the Company's Common
Stock. Given the possibility of such fluctuations, the Company believes that
comparisons of its results of operations for preceding quarters are not
necessarily meaningful and that such results for one quarter should not be
relied upon as an indication of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Selected
Quarterly Results of Operations."
MANAGEMENT OF GROWTH
The Company's growth has placed significant demands on its management and
other resources. The Company's professional fees increased 67% to $31.7 million
for the nine months ended March 31, 1996, from $19.0 million in the comparable
period of fiscal 1995. During the same period, the Company's staff increased
from 267 to 480 full-time employees and further significant increases are
expected. The Company has also expanded geographically by opening new offices
and may open additional offices in the future. The Company's ability to manage
its growth effectively will require it to continue to develop and improve its
operational, financial and other internal systems, as well as its business
development capabilities and to train, motivate and manage its employees. In
addition, the Company's success will depend in large part on its ability to
continue to maintain high rates of employee utilization, set fixed-price fees
accurately, maintain project quality and meet delivery dates particularly if the
average size of the Company's projects increases. If the Company is unable to
manage its growth and projects effectively, such inability would have a material
adverse effect on the quality of the Company's services and products, its
ability to retain key personnel and its business, financial condition and
results of operations. No assurance can be given that the Company's growth rate
will continue to be achieved, or if achieved, be maintained or that the Company
will be successful in managing its growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FIXED-PRICE CONTRACTS AND OTHER PROJECT RISKS.
Through the ten-month period ended April 30, 1996, approximately 37% of the
Company's revenue was generated on a fixed-price, fixed-delivery-schedule
("fixed-price") basis, rather than on a time and materials basis. The Company's
failure to accurately estimate the resources required for a fixed-price project
or its failure to complete its contractual obligations in a manner consistent
with the project plan upon which its fixed-price, contract was based could
adversely affect the Company's results of operations and could have a material
adverse effect on the Company's business and financial condition. In the past,
the Company has been required to commit unanticipated additional resources to
complete certain projects, which negatively affected the profitability generated
on such projects and has found it necessary to revise project plans during the
project, and to change project managers to insure projects are completed on
schedule. The Company may experience similar situations in the future. Failure
to anticipate such needs could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may establish a price before the design specifications are finalized,
which could result in a fixed price that turns out to be too low and therefore
adversely affects the Company's business, financial condition and results of
operations. Furthermore, many of the Company's engagements involve projects
which are critical to the operations of its clients' businesses and which
provide benefits that may be difficult to quantify. The Company's failure to
meet a client's expectations in the performance of its services could damage the
Company's reputation and adversely affect its ability to attract
7
new business, and may have a material adverse effect upon its business,
financial condition and results of operations. The Company has undertaken and
may in the future undertake projects in which the Company guarantees performance
based upon defined operating specifications or guaranteed delivery dates.
Unsatisfactory performance or unanticipated difficulties in completing such
projects may result in client dissatisfaction and a reduction in payment to, or
payment of damages by, Claremont, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
EMERGING MARKET; TECHNOLOGICAL ADVANCES
The Company has derived and will continue to derive a substantial portion of
its revenue from projects based on open computing systems. The open computing
systems market is continuing to develop and is subject to rapid change. The
Company's success will also depend in part on its ability to develop IT
solutions which keep pace with continuing changes in information processing
technology, evolving industry standards and changing client preferences. There
can be no assurance that the Company will be successful in addressing these
developments in a timely manner or that if addressed the Company will be
successful in the marketplace. The Company's delay or failure to address these
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that products or technologies developed by third parties will not
render the Company's services noncompetitive or obsolete. See "Business --
Industry Background."
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that it currently competes principally with the internal information
systems groups of its prospective clients, as well as consulting and software
integration firms including Andersen Consulting, the "Big Six" accounting firms,
ISSC (an affiliate of IBM), Computer Sciences Corporation, and with other
hardware and application software vendors. In addition there are a number of
systems integrators who serve similar markets or provide similar services, such
as Cambridge Technology Partners, Renaissance Solutions, Inc., SHL Systemhouse
(a subsidiary of MCI), Sapient Corporation and Technology Solutions Company,
with whom the Company may compete in the future. Many of these companies have
significantly greater financial, technical and marketing resources than the
Company, generate greater revenues and have greater name recognition than the
Company. In addition, there are relatively low barriers to entry into the
Company's markets and the Company has faced and expects to continue to face
additional competition from new entrants into its markets.
The Company believes that the principle competitive factors in its markets
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise and ability to deliver on a
fixed-price as well as a time and materials basis. The Company believes that its
ability to compete also depends in part on a number of competitive factors
outside its control, including the ability of its competitors to hire, retain
and motivate project managers and other senior technical staff; the ownership by
competitors of software used by potential clients; the development by others of
products and services that are competitive with the Company's products and
services; the price at which others offer comparable services and the extent of
its competitors' responsiveness to client needs. There can be no assurance that
the Company will be able to compete effectively on pricing or other requirements
with current and future competitors or that competitive pressures faced by the
Company will not cause the Company's gross margins to decline or otherwise
materially adversely affect its business, financial condition and results of
operations. See "Business -- Competition."
GROWTH THROUGH BUSINESS COMBINATIONS AND INTERNAL EXPANSION
The Company intends to continue to seek opportunities to expand by acquiring
systems integration and professional consulting businesses in attractive markets
or with desirable client relationships, as well as by acquiring businesses with
complementary software. The Company continuously evaluates potential business
combinations in the ordinary course of business and aggressively pursues
attractive transactions. From January 1995 through January 1996, the Company
completed the acquisition of Tony Martins & Associes, Inc. and The Node
Connection. The success of this strategy depends not only upon the Company's
ability to identify and acquire businesses on a cost-effective basis, but also
upon its ability to integrate acquired operations into its
8
organization effectively, to retain and motivate key personnel and to retain
clients of acquired firms. Additionally, the Company experiences competition for
such acquisitions. The Company may start new branch offices or new industry
practice areas with its own personnel. Many of the Company's branch offices were
originally start-up operations, and not all branch offices and practice areas,
whether start-up or acquired, have been successful. There can be no assurance
that the Company will be able to identify, acquire or integrate other
businesses, or that it will be able successfully to start-up branch operations
or industry practice areas. Such efforts, if unsuccessful, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in part upon the continued services of a
number of key employees. The loss of the services of the Company's key personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, if one or more of the
Company's key employees resigns from the Company to join a competitor or to form
a competing company, the loss of such personnel and any resulting loss of
existing or potential clients to any such competitor could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event of the loss of any such personnel, there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its technical knowledge, practices or procedures by such personnel.
See "Management -- Employment Agreements."
CONCENTRATION OF CONTROL
Upon completion of this offering, the officers, directors and 5%
shareholders of the Company will beneficially own approximately 54.4% of the
Company's outstanding Common Stock (approximately 52.4% if the Underwriters'
over-allotment option is exercised in full). As a result, these shareholders, if
acting together, will have the ability to influence the election of the
Company's directors and the outcome of other corporate actions requiring
shareholder approval. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. Inasmuch as the
Company does not have cumulative voting in the election of directors,
shareholders with a minority interest are not assured of the ability to elect a
representative to the Board of Directors. See "Management" and "Principal and
Selling Shareholders."
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent upon maintenance and protection of its
intellectual property rights. The Company relies on a combination of copyrights,
trade secrets and trademarks to protect its technology. The Company has
applications pending at the United States Patent and Trademark Office with
respect to the Company's CLARETY, NORTHERN DIAMOND, PREMOST and TISE trademarks.
The Company's practice has been to enter into confidentiality agreements with
its employees and signed agreements that include nondisclosure provisions with
clients. Despite these activities, no assurance can be given that the steps
taken by the Company will provide adequate protection of its intellectual
property rights or that competitors will not be able to develop similar or
functionally equivalent methodologies or products. Additionally, no assurance
can be given that foreign copyright and trade secret laws will protect the
Company's intellectual property rights. Furthermore, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. In addition, litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the intellectual property rights of others
or to defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be given that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims against third parties, such
as clients) will not be asserted against the Company or that any such assertions
would not have a material adverse effect on the Company's business, financial
condition or results of operations. If infringement or invalidity claims are
asserted against the Company, litigation may be necessary to defend the Company
against such claims, and in certain circumstances the Company may choose to seek
to obtain a license under the third-party's intellectual property rights. There
can be no assurance that such licenses will be available on terms acceptable to
the Company, if at all. See "Business -- Intellectual Property Rights."
9
FOREIGN OPERATIONS
The Company derived approximately 2% and 5% of its total revenue from
clients outside of the United States in fiscal 1995 and in the first nine months
of fiscal 1996, respectively. The Company's international business operations
are subject to a number of risks, including difficulties in building and
managing foreign operation, in translating its methodologies into foreign
language, in enforcing agreements and collecting receivables through foreign
legal systems; longer payment cycles; fluctuations in the value of foreign
currencies and unexpected regulatory, economic or political changes in foreign
markets. There can be no assurance that these factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DISCRETION AS TO USE OF PROCEEDS
The Company has not yet identified specific uses of a significant portion of
the net proceeds from this offering. The Company's management will retain broad
discretion to allocate the net proceeds from this offering to uses that the
shareholders may not deem desirable, and there can be no assurance that the
proceeds can or will yield a significant return. It is currently anticipated
that net proceeds will be used for repayment of indebtedness, general corporate
purposes and expansion of the Company's business, including acquisitions, as
opportunities arise. See "Use of Proceeds."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock. No assurance can be given that an active public market for the
Common Stock will develop or be sustained after the offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price will be determined by negotiation among
the Company and the representatives of the Underwriters. See "Underwriting" for
a discussion of the factors considered in determining the initial public
offering price.
The market for securities of early stage, small market capitalization
companies has been highly volatile in recent years as a result of factors often
unrelated to a company's operations. In addition, the Company believes factors
such as quarterly variations in operating results, announcements of
technological innovations or new products or services by the Company or its
competitors, general conditions in the IT industry or the industries in which
Claremont's clients compete and changes in earnings estimates by securities
analysts, could contribute to the volatility of the price of the Company's
Common Stock and could cause significant fluctuations. These factors, as well as
general economic conditions such as recessions or high interest rates, could
adversely affect the market price of the Common Stock. Further, in the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has occurred against the issuing company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Board of Directors has the authority to issue up to 10,000,000 shares of
undesignated Preferred Stock and to determine the preferences, limitations and
relative rights of shares of Preferred Stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the Company's shareholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to the
rights of the Common Stock. The potential issuance of Preferred Stock may delay
or prevent a change in control of the Company, discourage bids for the Common
Stock at a premium over the market price, and adversely affect the market price
and the voting and other rights of the holders of the Common Stock. See
"Principal and Selling Shareholders" and "Description of Capital Stock --
Preferred Stock."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Second Restated Articles of
Incorporation ("Restated Articles"), Second Amended and Restated Bylaws
("Restated Bylaws") and the Oregon Business Corporation Act will effectively
make it more difficult for a party to acquire control of the Company through
either a tender offer or a
10
proxy contest for the election of directors. The Oregon Control Share Act and
the Oregon Business Combination Act limit the ability of parties who acquire a
significant amount of voting stock to exercise control of the Company. In
addition, the Company's Restated Articles contain provisions which (i) when the
Company has six or more directors, classify the Board of Directors into three
classes, with one class being elected each year, (ii) provide that directors may
be removed by shareholders only for cause and only upon the vote of 75% of the
votes then entitled to be cast for the election of directors and (iii) require
the approval of holders of 67% of the outstanding shares of the Company entitled
to vote to effect a merger or consolidation of the Company, the sale, lease or
exchange of all or substantially all of the Company's assets or the dissolution
or liquidation of the Company. These provisions may have the effect of
lengthening the time required for a person to acquire control of the Company
through a proxy contest for the election of a majority of the Board of
Directors, may discourage bids for the Common Stock at a premium over the market
price and may deter efforts to obtain control of the Company. See "Description
of Capital Stock -- Oregon Control Share and Business Combination Statutes;
Certain Provisions of Restated Articles."
DILUTION; NO DIVIDENDS
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors participating in this
offering will therefore incur immediate, substantial dilution of $13.86 per
share. To the extent outstanding options or warrants to purchase the Company's
Common Stock are exercised, there will be further dilution. The Company has
never declared or paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. See "Dilution"
and "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market following this
offering could adversely affect the market price of the Company's Common Stock.
Of the 6,755,611 shares of Common Stock to be outstanding after the offering
(7,044,198 shares if the Underwriters' over-allotment option is exercised in
full), the 2,700,000 shares sold in this offering (3,105,000 if the
Underwriters' over-allotment option is exercised in full) will be available for
resale without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are held by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act. In addition,
approximately 556,500 shares will be eligible for immediate sale in the public
market without restriction pursuant to Rule 144(k) under the Securities Act.
Approximately 1,851,227 additional shares outstanding upon completion of this
offering will be eligible for sale pursuant to Rule 144 and approximately
130,217 shares will be eligible for sale under Rule 701, in each case after the
expiration of the 90-day period after the date of this Prospectus. The holders
of 2,359,227 shares of Common Stock and the holders of a warrant and options to
purchase 1,471,972 shares of Common Stock, have agreed, subject to certain
exceptions, not to sell or otherwise dispose of any of their shares for a period
of 180 days after the effective date of the Registration Statement. Robertson,
Stephens & Company LLC may, in its sole discretion, at any time without notice,
release all or any portion of the shares subject to lock-up agreements. Sales of
Common Stock in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Common Stock. As soon as
practicable following 180 days after the effective date of the Registration
Statement, the Company intends to file a registration statement under the
Securities Act to register approximately 5,200,000 shares of Common Stock
reserved for issuance under the Company's stock option plans. Following the
closing of the offering, the holders of 2,191,328 shares of Common Stock
(including shares issuable upon exercise of warrants) will be entitled to
certain demand and piggyback registration rights with respect to such shares.
See "Description of Capital Stock," "Shares Eligible for Future Sale,"
"Underwriting" and "Certain Transactions."
11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$28.5 million, assuming an initial public offering price of $18.00 per share and
after deducting estimated underwriting commissions and offering expenses ($32.9
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use a portion of the net proceeds of this offering to repay
all indebtedness owed under its $4.0 million revolving line of credit with Bank
of America Oregon, a subsidiary of BankAmerica Corporation, outstanding
borrowings under which bear interest at Bank of America's NT&SA Reference Rate,
plus one quarter of one percent (a rate of 8.5% on May 20, 1996.) As of May 20,
1996 the Company had borrowed approximately $3.0 million under that line of
credit. The balance of the net proceeds will be used for working capital and
other general corporate purposes. In the normal course of business, the Company
evaluates potential acquisitions of businesses, products and technologies that
would complement or expand the Company's business. A portion of the net proceeds
may be used for one or more such transactions, although the Company has no
present commitments or agreements with respect to any such transactions. The
Company will not receive any of the proceeds from the sale of Common Stock by
Selling Shareholders. See "Principal and Selling Shareholders."
Pending application of the proceeds as described above, the Company intends
to invest the net proceeds of this offering in investment-grade obligations,
including short-term, interest-bearing money market funds. Returns on such
investments may be less than those that might otherwise result if the Company
were able to use such funds immediately in its operations.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain future earnings, if any, to finance
operations and expansion of its business and does not expect to pay any
dividends on its Common Stock in the foreseeable future. Future cash dividends,
if any, will be determined by the Board of Directors and will be based upon the
Company's earnings, capital, financial condition and other factors deemed
relevant by the Board of Directors.
12
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization of the Company; and (ii) the as adjusted capitalization of the
Company after giving effect to certain amendments to the Company's Articles of
Incorporation increasing the number of shares of authorized Common Stock to
25,000,000 and Preferred Stock to 10,000,000 and the sale of the 1,750,000
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $18.00 per share. See "Use of Proceeds." The
information set forth below should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus.
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Long-term debt, excluding current installments (1)......................................... $ 1,756 $ 1,756
Shareholders' equity:
Preferred stock, no par value per share, 2,000,000 shares authorized, actual; 10,000,000
shares authorized, as adjusted; none outstanding, actual; none outstanding, as
adjusted................................................................................ -- --
Common stock, no par value per share, 10,000,000 shares authorized, actual 25,000,000
shares authorized, as adjusted; 4,767,182 shares issued and outstanding, actual;
6,517,182 shares issued and outstanding, as adjusted (2)................................ 1,303 29,798
Retained earnings........................................................................ 6,831 6,831
Cumulative translation adjustment........................................................ (5) (5)
--------- -----------
Total shareholders' equity............................................................. 8,129 36,624
--------- -----------
Total capitalization................................................................. $ 9,885 $ 38,380
--------- -----------
--------- -----------
- ------------
(1) See Notes 5 and 6 of Notes to Consolidated Financial Statements for
description of the Company's long-term debt, excluding current installments.
(2) Excludes 3,189,096 shares of Common Stock issuable upon exercise of options
outstanding on March 31, 1996 at a weighted average exercise price of $1.68
per share, of which 1,419,080 were then exercisable. Also excludes 400,000
shares of Common Stock issuable upon exercise of an outstanding warrant
issued May 20, 1996 at an exercise price of $10.33 per share. See
"Management -- Stock Option Plans," and "Certain Transactions."
13
DILUTION
The net tangible book value of the Company as of March 31, 1996 was $5.4
million, or $1.14 per share. Net tangible book value per share is determined by
dividing the Company's tangible net worth (tangible assets less total
liabilities) by the number of shares of Common Stock outstanding. Assuming that
the 1,750,000 shares of Common Stock offered by the Company hereby had been sold
as of March 31, 1996 at an assumed initial public offering price of $18.00 per
share, the Company's pro forma net tangible book value at that date (after
deducting estimated underwriting discounts and commissions and estimated
offering expenses) would have been $27.1 million, or $4.16 per share as of March
31, 1996. This represents an immediate increase in net tangible book value of
$3.02 per share to existing shareholders and an immediate dilution of $13.84 per
share to purchasers of Common Stock in this offering. Dilution to new investors
is determined by subtracting the pro forma net tangible book value per share
after this offering from the initial public offering price per share. The
following table illustrates this per share dilution.
Assumed initial public offering price per share..................... $ 18.00
Pro forma net tangible book value per share as of March 31,
1996............................................................. $ 1.14
Increase per share attributable to new investors.................. 3.02
---------
Pro forma net tangible book value per share after this offering..... 4.16
---------
Dilution per share to new investors................................. $ 13.84
---------
---------
The following table summarizes on a pro forma basis, as of March 31, 1996,
the difference between existing shareholders and the purchasers of Common Stock
in this offering with respect to the number of shares of Common Stock purchased
from the Company, the approximate total consideration paid and the average price
per share based on an assumed initial public offering price of $18.00 per share
and before deducting estimated underwriting discounts and commissions and
estimated offering expenses:
SHARES PURCHASED (1) TOTAL CONSIDERATION
------------------------ ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------------ --------- ------------ -------------
Existing shareholders................................... 4,767,182 73% $ 1,303 4% $ .27
New investors........................................... 1,750,000 27 31,500 96 18.00
-- --
---------- ---------
Total............................................... 6,517,182 100% $ 32,803 100%
-- --
-- --
---------- ---------
---------- ---------
- ------------
(1) Does not reflect the sale of Common Stock by the Selling Shareholders. The
sale of Common Stock by the Selling Shareholders in this offering will
reduce the pro forma number of shares held by existing shareholders as of
March 31, 1996 to 3,817,182, or approximately 59% of the total number of
shares of Common Stock outstanding and will increase the number of shares to
be purchased by new investors to 2,700,000, or approximately 41% of the
total number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Shareholders."
The foregoing calculations assume no exercise of outstanding stock options.
The Company has reserved 5,200,000 shares of Common Stock for issuance pursuant
to the Company's stock option plans. Options to purchase 3,189,096 shares of
Common Stock were outstanding at March 31, 1996 at a weighted average exercise
price of $1.68 per share, of which options to purchase 1,419,080 shares were
then exercisable. The foregoing calculations also assume no exercise of the
warrant issued May 20, 1996, for 400,000 shares of Common Stock at $10.33 per
share. To the extent any of these options or the warrant are exercised, there
will be further dilution to new investors. See "Management -- Stock Option
Plans," "Certain Transactions," "Description of Capital Stock" and Note 8 of
Notes to Consolidated Financial Statements.
14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
years in the three-year period ended June 30, 1995 and for the nine-month period
ended March 31, 1996 and the balance sheet data as of June 30, 1994 and 1995 and
March 31, 1996 are derived from the Consolidated Financial Statements of the
Company, which are included elsewhere in this Prospectus and have been audited
by KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon also is included herein. The selected financial data as of June 30, 1992
and 1993, and for the year ended June 30, 1992 has been derived from the
consolidated financial statements audited by KPMG Peat Marwick LLP, and not
included herein. The statement of operations data for the year ended June 30,
1991 and the nine months ended March 31, 1995 and the balance sheet data as of
June 30, 1991 have been derived from the Company's unaudited consolidated
financial statements. Such unaudited financial data has been prepared on the
same basis as the audited financial data and reflects all normally recurring
adjustments which are, in the opinion of management of the Company, necessary
for a fair presentation in accordance with generally accepted accounting
principles. The selected consolidated financial data should be read in
conjunction with, and are qualified by reference to "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto and other financial information appearing
elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Professional fees..................... $ 4,057 $ 9,368 $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 31,711
Resold products and services.......... -- -- -- -- -- -- 1,964
--------- --------- --------- --------- --------- --------- ---------
Total revenue....................... $ 4,057 $ 9,368 $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 33,675
Costs and expenses:
Project costs and expenses............ 2,836 6,275 9,112 9,106 13,704 9,267 16,791
Resold products and services.......... -- -- -- -- -- -- 1,874
Selling, general and administrative... 1,406 2,968 3,781 4,214 10,156 6,931 11,131
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses............ 4,242 9,243 12,893 13,320 23,860 16,198 29,796
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations....... (185) 125 2,774 2,393 3,432 2,790 3,879
Other income (expense), net............. (55) 45 21 12 67 50 (58)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes.......... (240) 170 2,795 2,405 3,499 2,840 3,821
Income tax expense...................... (105) 68 1,204 953 1,352 1,097 1,616
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ (135) $ 102 $ 1,591 $ 1,452 $ 2,147 $ 1,743 $ 2,205
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common share
(1)................................ $ (.03) $ .02 $ .28 $ .24 $ .31 $ .25 $ .29
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
(1).................................... 4,532 4,544 5,796 6,269 7,319 7,215 7,662
JUNE 30,
-----------------------------------------------------
1991 1992 1993 1994 1995 MARCH 31, 1996
--------- --------- --------- --------- --------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 364 $ 513 1,818 1,870 $ 340 $ 80
Working capital (deficit)........................ (349) (434) 1,014 2,045 2,453 3,066
Total assets..................................... 1,074 2,798 4,620 5,492 9,578 18,278
Long-term debt, excluding current installments... -- 178 120 8 334 1,756
Total shareholders' equity (deficit)............. (88) 7 1,583 2,883 5,101 8,129
- ------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income (loss) per
common share.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
Claremont was organized in June 1989 and secured its first systems
consulting and implementation project in July 1989. The Company provides
enterprise-wide IT solutions that re-engineer core business processes such as
customer service, order processing, billing, ordering and logistics. In order to
provide mission-critical business solutions, Claremont has developed vertical
industry expertise and an object oriented project management methodology that
focuses on the client's fundamental business processes and that takes advantage
of the benefits available from reusable software modules and transferable design
frameworks. Claremont's services include IT planning, systems integration and
development and outsourcing of enhancement/maintenance services for large
corporations and government organizations in 12 locations worldwide including
the United States, Canada, the United Kingdom, Saudi Arabia, New Zealand and
Australia.
Claremont's revenue is derived primarily from professional fees billed to
clients on either a time and materials or a fixed-price basis. Time and
materials revenue is recognized as services are performed. Fixed-price revenue
is recognized using the percentage-of-completion method, based on the ratio of
costs incurred to total estimated project costs. Where these revenue recognition
policies result in recognition of revenue before invoices are sent, the revenue
in excess of billings is recorded as a current asset on the Company's balance
sheet. The cumulative impact of any revisions to the estimate of the
percentage-of-completion of any fixed-price contract is reflected in the quarter
in which such impact becomes known. Substantially all of Claremont's contracts
are terminable by the client following limited notice and without significant
penalty to the client. See "Risk Factors -- Fixed-Price Contracts and Other
Project Risks." To date, the Company generally has been able to obtain an
adjustment in its fees in the event of any significant change in the assumptions
upon which the original estimate was made, but no assurances can be given that
Claremont will be successful in obtaining such adjustments in the future.
Project costs consist primarily of salaries paid to Claremont's consultants.
Client project margins and personnel utilization percentages are important
components in determining Claremont's income from operations. Claremont manages
its personnel utilization rates by carefully monitoring its personnel needs and
basing most personnel increases on specific project requirements. Utilization
reports are produced and reviewed weekly by operating management and monthly by
senior management. The number of staff assigned to Claremont's projects may vary
widely depending on the size, duration, degree of completion and complexity of
each engagement. In addition, project completions and implementation delays may
result in periods when personnel are not assigned to active systems projects.
The Company must maintain appropriate numbers of senior professionals to both
oversee all aspects of existing engagements and participate in business
development activities.
16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenue:
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenue:
Professional fees.......................................... 100% 100% 100% 100% 94%
Resold products and services............................... -- -- -- -- 6
-- -- -- -- --
Total revenue............................................ 100 100 100 100 100
Costs and expenses:
Project costs and expenses................................. 58 58 50 49 50
Resold products and services............................... -- -- -- -- 5
Selling, general and administrative........................ 24 27 37 36 33
-- -- -- -- --
Total costs and expenses................................. 82 85 87 85 88
-- -- -- -- --
Income from operations................................... 18 15 13 15 12
Other income (expense), net.................................. -- -- -- -- --
Income before income taxes............................... 18 15 13 15 12
Income tax expense........................................... 8 6 5 6 5
-- -- -- -- --
Net income............................................... 10% 9% 8% 9% 7%
-- -- -- -- --
-- -- -- -- --
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUE. The Company's revenue consists primarily of professional fees
(including license fees for Claremont's reusable software modules), and to a
lesser extent resold hardware and software products and resold contract
services. The Company's professional fees increased 67% from $19.0 million in
the nine months ended March 31, 1995 to $31.7 million in the nine months ended
March 31, 1996. Professional fees increased primarily due to an increase in the
number of projects performed, both for new and existing clients. In the nine
months ended March 31, 1996, $2.0 million, or 6% of revenue, resulted from
resold products and services; there was no similar revenue of a material nature
in the nine months ended March 31, 1995. Resold products and services are
offered to clients on an as needed project basis and are resold with little or
no mark-up. The Company does not expect resold products and services to
contribute materially to its income from operations, and generally expects to
make little or no profit on such products and services. The Company expects to
provide such products and services only as an accommodation to the Company's
clients as requested for particular projects. Revenue from foreign operations
increased from $197,000 in the nine months ended March 31, 1995 to $1.7 million
in the nine months ended March 31, 1996. The increase resulted primarily from
operations at the Company's Montreal, Canada software factory, largely in
support of U.S. domestic clients.
Claremont's revenue has become decreasingly dependent upon its largest
clients, though such concentration remains a characteristic of Claremont's
business. The top five clients accounted for 63% of revenue for the nine months
ended March 31, 1996, down from 82% of revenue for the nine months ended March
31, 1995. In the nine months ended March 31, 1996 and March 31, 1995 the largest
client accounted for 24% and 46% of revenue, respectively. During the nine
months ended March 31, 1996, eight clients generated revenue in excess of $1.0
million, compared to six clients during the nine months ended March 31, 1995. No
assurance can be given that such a reduction in concentration will continue or
that client concentration will not leave the Company vulnerable to loss of
projects or clients, or that such a loss would not have a material adverse
impact upon the Company's business, financial condition and results of
operations. See "Risk Factors -- Client and Industry Concentration; Dependence
on Large Projects."
17
PROJECT COSTS AND EXPENSES. Project costs and expenses consist primarily of
salaries and employee benefits for personnel dedicated to client projects and
associated overhead costs including equipment depreciation and amortization.
Project costs and expenses increased 81% from $9.3 million in the nine months
ended March 31, 1995 to $16.8 million in the nine months ended March 31, 1996,
representing 49% of professional fees in the nine months ended March 31, 1995,
and 53% of professional fees in the nine months ended March 31, 1996. Project
personnel increased 85% from 245 at the end of the nine months ended March 31,
1995 to 453 at the end of the nine months ended March 31, 1996 and further
increases are expected.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs and expenses consist of costs associated with the Company's executive
staff, finance, facilities and human resources departments (collectively,
"Administrative Personnel") and travel and business development costs. Selling,
general and administrative costs and expenses increased 61% from $6.9 million in
the nine months ended March 31, 1995 to $11.1 million in the nine months ended
March 31, 1996. The increase is primarily due to a $1.5 million increase in
professional development and recruiting expenses associated with the increased
professional personnel and $1.6 million in increased facility expenses
associated with the software factories and development labs. In addition, the
Company incurred approximately $300,000 in non-recurring charges attributable to
separation agreements with two terminated executives and expansion into
international markets during the quarter ended March 31, 1996. See "Certain
Transactions." Selling, general and administrative costs and expenses declined
from 36% of professional fees in the nine months ended March 31, 1995, to 35% of
professional fees in the nine months ended March 31, 1996, due to revenue growth
outpacing selling, general and administrative costs and expenses increases on a
percentage basis in the period. Administrative Personnel increased 23% from 22
at the end of the nine months ended March 31, 1995 to 27 at the end of the nine
months ended March 31, 1996.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense associated with short term borrowings and interest income on
cash and cash equivalents. Other income (expense), net changed from a net income
of $50,000 for the nine months ended March 31, 1995 to a net expense of $58,000
for the nine months ended March 31, 1996. The change is primarily attributable
to interest expense associated with the Company's acquisition of computer
equipment through bank financing.
INCOME TAX EXPENSE. Income tax expense represents combined federal, state
and foreign taxes at an effective rate of 42% for the nine months ended March
31, 1996 and 39% for the nine months ended March 31, 1995. The increase in the
effective tax rate is due to a change in the mix of jurisdictions in which the
Company does business, as well as changes in certain federal tax laws.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUE. The Company's revenue, substantially all of which is attributable
to professional fees, increased 74% from $15.7 million in fiscal 1994 to $27.3
million in fiscal 1995. Revenue increased primarily due to an increase in the
number of major projects performed, both for new clients in new markets and
industries and for existing clients. In addition, in fiscal 1995 the Company
received performance bonuses of approximately $1.0 million. In fiscal 1995 the
top five clients accounted for 76% of revenue; in fiscal 1994 the top five
clients accounted for 92% of revenue. In fiscal 1995 the largest client
accounted for 38% of revenue, compared to 72% of revenue in fiscal 1994. In
fiscal 1995 seven clients generated revenue of $1.0 million or more; in fiscal
1994 two clients generated revenue of $1.0 million or more.
PROJECT COSTS AND EXPENSES. Project costs and expenses increased 51% from
$9.1 million in fiscal 1994 to $13.7 million in fiscal 1995, but decreased as a
percentage of revenue, representing 58% of revenue in fiscal 1994 and declining
to 50% of revenue in fiscal 1995. Project personnel increased 62% from 175 at
the end of fiscal 1994 to 283 at the end of fiscal 1995. The decrease as a
percentage of revenue was due to increased revenue and stronger utilization
levels for project personnel.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs and expenses increased substantially from $4.2 million in fiscal 1994 to
$10.2 million in fiscal 1995, and increased from 27% of revenue in fiscal 1994
to 37% of revenue in fiscal 1995. In 1995 the Company invested in its global
infrastructure to sell and service new clients, to enter new industries and
markets and to invest in the continued development of its professional staff. In
fiscal 1994 the Company had active practices in two domestic locations:
Portland, Oregon
18
and Columbus, Ohio; in fiscal 1995 the Company developed active practices in
four additional domestic locations -- Basking Ridge, New Jersey; Cleveland,
Ohio; Sacramento, California; Seattle, Washington; and two international sites
- -- Montreal, Canada and London, United Kingdom. Additionally, the Company
developed and implemented career path programs for its consulting staff and
initiated associated training programs. Administrative Personnel increased 127%
from 11 at the end of fiscal 1994 to 25 at the end of fiscal 1995.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased
primarily due to increased interest income associated with higher cash balances.
INCOME TAX EXPENSE. Income tax expense increased from $1.0 million in
fiscal 1994 to $1.4 million in fiscal 1995 representing an approximate effective
tax rate of 40% in both years. The Company changed its method of recognizing
income and expenses for income tax purposes from a cash basis to an accrual
basis effective July 1, 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUE. The Company's revenue, substantially all of which is attributable
to professional fees, was unchanged at $15.7 million for both fiscal 1993 and
fiscal 1994, as the Company began development of its vertical market focus and
expansion of business developments efforts which encompass a long sales cycle.
In fiscal 1994 the largest client accounted for 72% of revenue, compared to 78%
in fiscal 1993. In fiscal 1994 two clients generated revenues of $1.0 million or
more; in fiscal 1993 three clients generated revenues of $1.0 million or more.
PROJECT COSTS AND EXPENSES. Project costs and expenses remained unchanged
from fiscal 1993 to fiscal 1994 at $9.1 million, representing 58% of revenue in
fiscal 1993 and fiscal 1994. Project personnel increased 51% from 116 at the end
of fiscal 1993 to 175 at the end of fiscal 1994, as the Company positioned
itself near the end of fiscal 1994 for anticipated growth.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs and expenses increased 12% from $3.8 million in fiscal 1993 to $4.2
million in fiscal 1994, representing 24% and 27% of revenue, respectively.
Administrative Personnel decreased 39% from 18 at the end of fiscal 1993 to 11
at the end of fiscal 1994.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased
primarily due to a decline in interest income associated with lower cash
balances.
INCOME TAX EXPENSE. The Company's effective tax rate declined from 43% in
fiscal 1993 to 40% in fiscal 1994 due to a change in accounting for incomes
taxes as described in Note 7 of Notes to the Consolidated Financial Statements.
19
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
statement of operations data for each of the seven quarters in the period ended
March 31, 1996 and the percentage of the Company's total revenue represented by
each item in the respective quarter. In the opinion of management, this
information has been presented on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with the Consolidated Financial Statements of the
Company and related Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
QUARTER ENDED
----------------------------------------------------------------------------------
FISCAL YEAR 1995 FISCAL YEAR 1996
---------------------------------------------- ----------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Revenue:
Professional fees..................... $ 6,044 $ 6,431 $ 6,513 $ 8,304 $ 8,874 $ 10,813 $ 12,024
Resold products and services.......... -- -- -- -- 9 1,094 861
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 6,044 6,431 6,513 8,304 8,883 11,907 12,885
Costs and expenses:
Project costs and expenses............ 2,803 3,069 3,395 4,437 4,709 5,463 6,619
Resold products and services.......... -- -- -- -- 8 1,049 817
Selling, general and administrative... 1,953 2,004 2,974 3,225 3,230 3,328 4,573
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 4,756 5,073 6,369 7,662 7,947 9,840 12,009
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations.............. 1,288 1,358 144 642 936 2,067 876
Other income (expense), net............. 8 10 32 17 (5) (36) (17)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.......... 1,296 1,368 176 659 931 2,031 859
Income tax expense...................... 501 529 68 254 393 859 364
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.......................... $ 795 $ 839 $ 108 $ 405 $ 538 $ 1,172 $ 495
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
AS A PERCENTAGE OF REVENUE
----------------------------------------------------------------------------------
Revenue:
Professional fees..................... 100% 100% 100% 100% 100% 91% 93%
Resold products and services.......... -- -- -- -- -- 9 7
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 100 100 100 100 100 100 100
Costs and expenses:
Project costs and expenses............ 47 48 52 53 53 46 51
Resold products and services.......... -- -- -- -- -- 9 6
Selling, general and administrative... 32 31 46 39 37 28 36
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 79 79 98 92 90 83 93
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations.............. 21 21 2 8 10 17 7
Other income (expense), net............. -- -- 1 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.......... 21 21 3 8 10 17 7
Income tax expense...................... 8 8 1 3 4 7 3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.......................... 13% 13% 2% 5% 6% 10% 4%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
The Company's quarterly revenue and results of operations have fluctuated
significantly in the past and will likely fluctuate in the future. Factors
causing such fluctuations have included and may include, among other factors,
the number, size and scope of projects in which the Company is engaged, the
contractual terms and degree of completion of such projects, any delays incurred
in connection with a project, employee hiring and
20
utilization rates, the adequacy of provisions for losses, the accuracy of
estimates of resources required to complete ongoing projects, general economic
conditions, weather-related shut-downs in major markets, vacation days, total
business days in a quarter and the business practices of clients such as
deferring commitments on new projects until after the end of the calendar or
fiscal year.
The Company's revenue has increased in each of the quarters presented above.
These increases have resulted primarily from an increase in professional fees
generated from an increase in the number of projects performed, both for new and
existing clients.
Project costs and expenses have increased in each quarter due to an
increased number of project personnel employed to support an increased number of
projects. Variability in utilization rates for project personnel has resulted in
some quarterly fluctuations in project costs and expenses as a percentage of
revenue. Utilization rates may vary based on training schedules, vacation and
holiday schedules, severe weather conditions, recruiting requirements, client
start-up of new projects and other administrative requirements of project
personnel. In the last two quarters presented, resold products and services
passed through to clients with less than 5% margin caused a fluctuation in the
quarterly results. Without the revenue from resold products and services,
project costs and expenses as a percentage of professional fees was 51% and 55%,
respectively, in the quarters ended December 31, 1995 and March 31, 1996.
Selling, general and administrative expenses have increased in each quarter
presented as these activities have grown in support of increased revenue. In the
quarter ended March 31, 1995 these expenses increased substantially as selling
efforts expanded and internal infrastructure investments were made in training,
career development and recruiting. In the subsequent quarters these expenses
declined as a percentage of sales with the exception of the last quarter
presented. Without the revenue from resold products and services, selling,
general and administrative expenses as a percentage of professional fees only
was 31% and 38% in the quarters ended December 31, 1995 and March 31, 1996. In
the last quarter presented, non-recurring charges associated with changes of
personnel and expansion into international markets amounted to 3% of
professional fees.
Due to the foregoing factors, among others, it is possible that in some
future quarter the Company's results of operations will be below the
expectations of the public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected. See "Risk Factors -- Variability of Quarterly Operating Results;
Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and investments in
property and equipment primarily through cash generated from operations, bank
borrowings and capital lease financing.
Net cash provided from operations was $1.2 million for the nine months ended
March 31, 1996, $231,000 for fiscal 1995, $730,000 for fiscal 1994 and $1.6
million for fiscal 1993. The increase in cash from operations in the most recent
nine-month period reported was due primarily to an increase in deferred revenue.
The decline in cash provided from operations in earlier periods reflects the
Company's investment in growth and fluctuations in deferred revenue.
The Company has a revolving line of credit with Bank of America Oregon, a
subsidiary of BankAmerica Corporation, providing for borrowings of up to $4.0
million. As of March 31, 1996 there were no borrowings against this line, though
$125,000 has been used for purposes of a standby letter of credit. As of May 20,
1996, there were $3.0 million in borrowings against this line, all of which the
Company expects to repay with a portion of the net proceeds of this offering.
Advances under the line of credit bear interest at Bank of America's NT&SA
Reference Rate, plus one quarter of a percentage point; the effective rate at
March 31, 1996 was 8.50%. This revolving line of credit expires on August 1,
1997.
The Company has certain non-revolving lines of credit with Bank of America
Oregon providing for borrowings of up to $3.0 million, primarily to finance
equipment purchases. As of March 31, 1996 there was $2.8 million of related debt
outstanding against these lines. Debt service under these lines is payable over
36 months, including principal and interest. There are three separate borrowings
under this facility at interest rates ranging from 7.59% and 8.05%.
21
The Company is a guarantor on a non-revolving line of credit with Bank of
America Oregon which provided for borrowings of up to $2.0 million, for purposes
of facilitating the purchase of Claremont Common Stock by Company executives in
July 1995. As of March 31, 1996 there was $1.7 million of related debt
outstanding against the line. Advances under the line of credit were made
directly to the Company executive with full recourse and bear interest at Bank
of America's NT&SA Reference Rate, plus one percentage point. Claremont's
guaranty is secured by a pledge of each borrower's shares of the Company's
Common Stock. Advances under the line of credit are for 36 months and include
monthly interest payments, made by each Company executive, with principal
repayment by each Company executive due on or before July 31, 1998. See "Certain
Transactions."
The various lines of credit with Bank of America Oregon are contained in a
master Business Loan Agreement which includes covenants relating to the
maintenance of certain financial ratios and minimum net worth.
For fiscal 1995, 1994 and 1993 the Company had capital expenditures of $1.5
million, $247,000 and $207,000, respectively. These expenditures were primarily
for workstations, personal computers and furniture. For the nine month period
ended on March 31, 1996 the Company had $3.0 million in capital expenditures
primarily related to furniture and personal computers, and $1.2 million
associated with the capitalization of software development costs.
At March 31, 1996 the Company had working capital of approximately $3.0
million. The Company believes that the cash provided from operations, borrowings
available under its revolving line of credit and expected net proceeds of this
offering will be sufficient to meet the Company's working capital and capital
expenditure requirements for at least the next 24 months.
NEW ACCOUNTING PRONOUNCEMENTS
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), which establishes a fair value based method of
accounting for stock-based compensation plans. While the Company is studying the
impact of the pronouncement, it continues to account for employee stock options
under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS 123
will be effective for fiscal years beginning after December 15, 1995.
22
BUSINESS
Claremont Technology Group, Inc. ("Claremont" or the "Company"), provides
enterprise-wide informa-
tion technology ("IT") solutions that re-engineer mission-critical business
processes such as customer service, order processing, billing and logistics.
Claremont delivers its services, including IT planning, systems integration and
development and outsourcing, through a project management methodology that can
employ reusable object oriented software modules and transferable design
frameworks on a fixed-price basis or a time and materials basis. Claremont
provides solutions to large organizations in select high demand, vertical
markets, including communications, financial services and pension/retirement
services. Claremont's clients consist of large corporations and government
organizations in the United States and foreign markets including Canada, the
United Kingdom, Saudi Arabia, New Zealand and Australia.
Claremont provides its services to organizations within industries where
technology-enabled change and re-engineering of business processes can have a
significant competitive impact. The Company's focus on opportunities within
select vertical markets is facilitated by its expertise with the particular
customer interface within these markets and its dedication to partner with
clients to co-develop large scale business solutions. Claremont's industry
specific expertise and its partnership approach to its client relationships
gives Claremont a competitive advantage in marketing additional services to its
clients and results in high customer retention levels. Clients representing 94%
of Claremont's fiscal 1995 revenue continue as clients today. The Company's
clients include: AT&T and its subsidiaries, Fred Meyer, Inc., Lucent
Technologies, Ohio State Teachers Retirement System and PacificCorp.
INDUSTRY BACKGROUND
Organizations today face constant pressure to improve the quality of
products and services, reduce cost and time to market and improve operating
efficiency while strengthening customer relationships. To compete effectively,
organizations must improve business processes to empower the end user and must
develop internal decision-making processes and methods of exchanging information
that are more efficient and effective. Such broad ranging changes mean that IT
deployment decisions are increasingly made at the senior executive level rather
than at the departmental level and are implemented across the entire
organization. Information systems and their rapid development and deployment
have become a source of strategic advantage and are increasingly
mission-critical.
As IT systems have evolved to a value-added component of an organization's
strategy, the need has grown to design, develop and deploy business applications
solutions rapidly, flexibly and in a technological framework that supports
today's geographically distributed business environment. Consequently, there has
been a shift in the past few years in the computing platforms favored by large
organizations, from single-vendor legacy mainframe-based systems to open,
multi-vendor client/server computing systems, and most recently to corporate
intranets. However, the benefits of client/server and other advanced
technologies can be difficult to obtain, because designing, developing,
deploying and managing client/server systems is complex, time consuming and
costly. In addition, organizations often lack the range and depth of skills
necessary to develop these systems internally and often cannot effectively
attract personnel with the required technological expertise.
Organizations increasingly wish to use their information systems to address
these mission-critical business processes faster and more effectively at a lower
cost. Computer information systems now often serve as the primary information
resource through which organizations serve their customers, and increasingly
serve as the organization's primary interface to its customers. Many
organizations have found that among the most compelling applications that employ
client/server technology are solutions that effectively distribute information
directly to the business end user who services customers, or directly to the
customers themselves. Applications such as customer service, order processing,
billing, distribution and logistics directly influence an organization's ability
to generate customer satisfaction and revenue, and therefore tend to be
priorities for allocation of any organization's capital budgets in both strong
and slow economic climates.
The complexity of current technologies, the lack of sufficient in-house
resources, and the competitive pressures requiring rapid implementation of new
mission-critical systems in client/server and distributed technologies, have led
to increasing demand for third-party solution providers. To meet that demand
effectively,
23
providers of applications and systems solutions require global reach, a full
range of technical skill, ability to provide the best available technologies,
in-depth knowledge of the customer interface in particular industries and the
ability to manage complex technological projects to completion on time and
within budget.
THE CLAREMONT SOLUTION
Claremont combines its expertise in IT consulting and large scale systems
integration to provide its clients business solutions that allow them to better
serve their customers. The following are key attributes of the Claremont
solution:
MISSION-CRITICAL BUSINESS SOLUTIONS. The Company focuses on providing
enterprise-wide IT solutions that re-engineer core business processes such as
customer service, order processing, billing and logistics. Claremont's approach
minimizes project risk through use of a methodology that emphasizes problem
definition and solution design and can employ proven software modules and design
frameworks, and through use of experienced personnel with applicable project
management and industry expertise.
VERTICAL MARKET EXPERTISE AND CLIENT PARTNERSHIP. Claremont's vertical
market orientation offers application solutions that are based on in-depth
knowledge of particular industries and a detailed understanding of the client's
business. By targeting specific industries and developing long-term client
relationships, the Company is able to provide enterprise-wide business solutions
based on a detailed and thorough understanding of the industry in which the
client operates as well as the client's own business processes.
TISE DEVELOPMENT METHODOLOGY -- REUSABLE SOFTWARE MODULES AND TRANSFERABLE
DESIGN FRAMEWORKS. Claremont's Total Information Systems Engagement (TISE-TM-)
development methodology provides a structure through which the Company's skills
and knowledge can be effectively deployed. Claremont's approach emphasizes the
replacement of outdated and inflexible legacy code as part of the re-engineering
processs rather than the mere addition of new interfaces. The ability to employ
previously constructed software modules and design frameworks provides Claremont
leverage during the design and integration phases, minimizes business risk,
reduces time to solution and project costs.
STRATEGY
Claremont's objective is to be a leader in providing enterprise-wide
business solutions using the best available technologies that deliver
significant performance improvements in a focused group of industries. The
Company's strategy to achieve this objective includes the following critical
elements:
EXPAND CLIENT BASE BY LEVERAGING VERTICAL MARKET EXPERTISE. The Company
seeks to increase its domestic and international client base by further
penetrating the markets it currently serves. The Company believes that its
vertical industry organization results in a more thorough understanding of each
of its clients' businesses. In addition, the ability to employ reusable software
modules and transferable design frameworks reduces the time and cost required to
implement solutions. Proven software solutions and industry expertise give the
Company a competitive advantage as it pursues larger and more complex projects
with new clients.
INCREASE PENETRATION AND RETENTION OF EXISTING CLIENTS. Claremont seeks to
expand the nature and scope of existing relationships by strengthening its
partnerships with those clients. Combining the Company's industry expertise with
an in-depth knowledge of the client's systems and business processes provides
the Company with a competitive advantage when marketing additional services and
solutions to existing clients. The effectiveness of this strategy is evidenced
by the fact that clients representing 94% of Claremont's fiscal 1995 revenue
continue as clients today.
CAPITALIZE ON BENEFITS FROM TISE METHODOLOGY. Claremont's TISE methodology
is designed to allow the Company's consultants to efficiently develop custom
applications solutions. The Company plans to continue to apply and refine the
TISE methodology in order to provide margin enhancement through the application
of previously developed, reusable software modules and transferable design
frameworks, VALUE SERVERS, that are transferable within and across Claremont's
target industries. The Company can often leverage the existence of tested and
proven VALUE SERVER solutions when pursuing new business opportunities.
PROVIDE EXPERTISE IN HIGH DEMAND LEADING EDGE TECHNOLOGIES. Claremont
maintains and continues to build expertise in high demand advanced technologies
expected to be the most useful and well-supported in the
24
future, such as internet/intranet applications, open computing systems, object
oriented solutions, and relational database management systems. In support of
this strategy, Claremont works with companies such as Arbor Software
Corporation, Forte Software, Inc., Hewlett Packard Company, Microsoft
Corporation, Netscape Communications Corporation, Oracle Technology, Inc.,
Silicon Graphics, Inc. and Sybase, Inc. These relationships enable the Company
to stay on the leading edge of technological development and also help to
attract business opportunities, while still allowing Claremont the freedom to
provide technologies to its clients that best suit the client's business needs
without bias towards any single vendor.
ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES. Attracting and retaining
superior, highly innovative IT professionals is a critical element in
Claremont's ability to deliver high quality services to its clients. Claremont
seeks to achieve this goal by providing a motivational and interactive work
environment that features continuous and extensive professional development
opportunities, balanced perspective and employee ownership incentives, as well
as frequent and open communication at all levels of the organization.
PURSUE STRATEGIC ACQUISITIONS. The Company expects to expand its geographic
presence, industry expertise and technical scope through strategic acquisitions
that provide complementary software services or skills, have strategic client
relationships or bring specific expertise in target industries.
CLAREMONT SERVICES
Claremont provides IT applications solutions encompassing IT planning, IT
systems integration and development, and IT outsourcing of IT
maintenance/enhancement services for large corporations and government
organizations in the United States and foreign markets including Canada, the
United Kingdom, Saudi Arabia, New Zealand and Australia. Through its TISE
methodology, the Company seeks to deliver, in a timely fashion, cost effective
systems that meet the clients' needs and provide the flexiblity to meet future
application processing requirements. The Company's TISE methodology for
delivering its services is typically divided into the three phases illustrated
below:
[THE CHART WILL GRAPHICALLY DEPICT THE THREE PHASES
OF THE TISE METHODOLOGY DESCRIBED BELOW.]
25
The following is a brief description of each phase and task of the TISE
methodology:
PHASE I: IT CONSULTING. Generally, IT Consulting precedes the actual
systems integration project and is completed in a timeframe of one to two
months. IT Consulting typically concludes with a return-on-investment analysis
and a proposal including budgets and anticipated timeframe for implementation of
the proposed solution. The purpose of this phase is to allow executives,
managers and end users from the client work in partnership with Claremont
consultants to develop recommendations for strategic business process changes.
Claremont's preference is to also develop a high-level architectural
infrastructure design in this phase which provides Claremont and the client with
a structural roadmap for approaching Phase II, the Systems
Development/Integration phase.
PHASE II: SYSTEMS DEVELOPMENT/INTEGRATION. Systems Development/Integration
generally results in delivery of a fully implemented solution in three to 12
months. Appropriate application of the TISE methodology during this phase
results in the development of the IT solution, as well as the effective
implementation of that solution and meaningful change in the client's business
processes. Systems Development/Integration involves these stages:
PROCESS DESIGN. A key to Phase II of the TISE methodology is an
assessment of the operational impact of a new system, and designing
re-engineered business processes for the client to insure that the solution
developed will provide the desired results. This process begins at the
earliest stages of the design of the application itself, and continues
throughout the Systems Development/Integration process. These processes lead
to the client's acceptance of the high-level object oriented business model
and the development of an architected system infrastructure, and can often
draw on VALUE SERVER design frameworks already developed by Claremont as
central design elements.
SYSTEM DEVELOPMENT. Once the high-level system infrastructure is in
place, the TISE methodology places an emphasis on solving detail-level
system logic and design problems before coding begins, and results in
sufficiently detailed specifications that enable Claremont to complete the
actual coding and testing of the application's software objects in a highly
controlled, factory-like manufacturing process. In this process, where
appropriate, Claremont can incorporate previously developed and reusable
software modules. Because Claremont's solutions replace, rather than simply
surround, the client's old and inflexible legacy code, system development
also includes the development of a significant number of interfaces to other
client systems. Claremont assembles all the code from the previously
completed tasks and conducts a functional test of the new system.
SYSTEM DEPLOYMENT. Complete implementation of the solution requires two
final steps. The first is developing the new job descriptions and
operational procedures and training people in how to take maximum advantage
of the new system. The second step is to put the entire system through a
complete test from the user's perspective, including testing the software,
as well as the new procedures and the interfaces with existing systems.
PHASE III: OUTSOURCING. Outsourcing of the ongoing support and enhancement
for the client's new system and/or total system environment is an area of
services that has been growing for Claremont over the past few years. The
outsourcing phase of the TISE methodology provides opportunities for the Company
to enhance client partnerships and broaden the scope of its engagements.
While individual Phase I projects are small -- typically $25,000 to $100,000
- -- total client engagements regularly involve multiple projects over several
years and can generate revenue in excess of $20 million. Claremont has been
successful in negotiating resale rights for several of its software solutions.
Claremont provides its services on both a time and materials and fixed-price
basis. Invoices for time and materials work are presented on a bi-weekly or
monthly basis. Invoices for fixed-price engagements are presented in accordance
with achievement of negotiated milestones or dates during the development
process.
TECHNOLOGICAL EXPERTISE
Claremont's Advanced Technology/Internet Practice provides technological
resources across all of Claremont's industry practice areas and seeks to build
and maintain the Company's expertise in leading edge
26
technologies. Advanced Technology/Internet Practice personnel are located in
Montreal, Canada; Basking Ridge, New Jersey; Columbus and Cleveland, Ohio;
Beaverton, Oregon; Sacramento, California; Seattle, Washington and North Sydney,
Australia. The Advanced Technology/Internet Practice is managed on a world-wide
basis ensuring that every client, regardless of location, has access to
Claremont's technical expertise.
At present, Claremont focuses its advanced technology skills in four main
areas: object oriented systems development; electronic commerce
(internet/intranet and groupware solutions); client/server enterprise
architectures (complex network management); and on-line analytical processing
(executive support systems/data warehousing). Claremont uses its relationships
with hardware and software providers such as Arbor Software Corporation, Forte
Software, Inc., Hewlett Packard Company, IBM, Netscape Communications
Corporation, Oracle Technology, Inc., Silicon Graphics, Inc., and SyBase, Inc.
to help ensure that it remains current with the latest technology and to serve
as a source of new business opportunities for the Company's industry practice
areas.
MARKETS AND CLIENTS
Claremont focuses its marketing efforts on clients in information-intensive
businesses, including communications, financial services, government services
and retail/commercial services. Within these vertical markets, the Company
targets clients for whom enterprise-wide IT solutions can provide a competitive
advantage. The Company intends to continue to pursue opportunities to provide
its services in other industry sectors with similar needs.
Claremont's most significant clients, in terms of revenue earned in the nine
months ended March 31, 1996, within its industry practice areas are listed
below:
COMMUNICATIONS FINANCIAL SERVICES
- ------------------------------------ ------------------------------------
AT&T Bank One
Lucent Technologies Colonial Pacific Leasing
Sprint Lloyds Bank
PENSION/RETIREMENT AND
OTHER GOVERNMENT SERVICE RETAIL/COMMERCIAL SERVICES
- ------------------------------------ ------------------------------------
California Public Employees Blue Cross/Blue Shield Oregon
Retirement Fred Meyer, Inc.
System ("CalPERS") Netscape Communications Corporation
Mississippi Public Employee PacifiCorp
Retirement Wacker Siltronic Corporation
System ("Mississippi PERS")
Ohio Public Employee Retirement
System ("Ohio STRs")
State of Oregon, Department of
Environmental Quality
The Company has in the past derived, and may in the future derive, a
significant portion of its revenue from a relatively small number of clients.
During the fiscal year ended June 30, 1995, the Company had two clients which
each represented in excess of 10% of the Company's revenues: Ohio STRS, 38%, and
AT&T Network Systems Group (now Lucent Technologies), 19%. In the nine months
ended March 31, 1996, the Company had three clients each of whom represented at
least 10% of the Company's revenue: Lucent Technologies, 24%; STRS, 14%; and
Mississippi PERS, 12%. See "Risk Factors -- Client and Industry Concentration;
Dependence on Large Projects."
27
The Company's IT consulting services focus on four key industry sectors:
communications, financial services, pension/retirement and other government
services and retail/commercial services which represented approximately 30%, 4%,
34% and 32%, respectively, of the Company's revenue for the nine months ended
March 31, 1996.
COMMUNICATIONS. The Company has rapidly expanded its presence in a variety
of communications clients. During fiscal 1995, the Company performed a number of
engagements, including assisting in developing the billing system architecture
for the new Saudi Arabian telephone network. The Company counts AT&T and Lucent
Technology among its clients and has recently added Sprint and the New Zealand
Telephone Company to its client list. The communications practice area has
developed a VALUE SERVER consisting of a reusable set of object oriented
software modules constructed to support communications clients in their billing
and customer care functions. Collectively, these modules represent a highly
flexible VALUE SERVER to support these critical billing and customer care
business functions. The Company believes that in suitable applications the
reusable software modules will enable Claremont to offer its clients reduced
development time and cost.
FINANCIAL SERVICES. As with the communications practice, the Company has
committed substantial resources to growing its financial services practice on a
global scale. Lloyd's Bank is the anchor account for the practice area, and is
served out of Claremont's London and Montreal offices. Substantial efforts in
this practice area are also underway in Ohio, where BancOne, Limited Credit
Services and Fifth Third Bank are clients of the Company, and in the Pacific
Northwest where Frank Russell and Colonial Pacific Leasing are clients of the
Company.
PENSION/RETIREMENT AND OTHER GOVERNMENT SERVICES. Claremont began its
pension/retirement systems practice as a result of a strategic partnership with
the Ohio STRS. The relationship has produced a VALUE SERVER consisting of
reusable software modules for the pension/retirement systems industry, which is
being marketed under the name CLARETY. The CLARETY product was created using the
Forte software development client/server tool set. Claremont is currently
implementing CLARETY software for Mississippi PERS, and CLARETY has just been
selected for implementation by the State of New Hampshire. To the Company's
knowledge, CLARETY software is the only object oriented client/server product of
its kind being marketed to the pension/retirement systems market.
Claremont has become the leading provider of IT consulting and custom
software development services to the State of Oregon -- Department of
Environmental Quality and the State of Washington -- Department of Ecology. For
the Oregon Department of Environmental Quality, Claremont developed a software
product called HWIMSY for tracking hazardous waste. Claremont now has marketing
rights for this software. Claremont established the health and human services
practice area in fiscal 1995 after the recruitment of a team of individuals with
in-depth knowledge of the business processes associated with administering the
enforcement of child support judgments. Claremont has begun work in the health
and human services area for the state governments of Missouri, Oregon and Ohio.
RETAIL/COMMERCIAL SERVICES. The retail/commercial services practice area
consists of services to the manufacturing, retail, public utility and health
insurance industries. Claremont provides IT consulting, custom software
development and application maintenance/enhancement services to clients in all
four industries. Projects in these industries include such applications as
systems support for new food distribution systems; an inventory management
system for a retail chain; an order processing system for a national wood
products company and a customer service system encompassing such functions as
meter management, work tracking and accounts receivable for a major utility.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent upon maintenance and protection of its
intellectual property rights. The Company relies on a combination of copyrights,
trade secrets and trademarks to protect its technology. The Company has
applications pending at the United States Patent and Trademark Office with
respect to the Company's CLARETY, NORTHERN DIAMOND, PREMOST and TISE trademarks.
The Company's practice has been to enter into confidentiality agreements with
its employees and signed agreements that include nondisclosure provisions with
clients. See "Risk Factors -- Intellectual Property Rights."
28
BUSINESS DEVELOPMENT
Claremont's business development efforts are based primarily upon personal
contacts, the reputations of its senior personnel, industry marketing programs
and attendance at appropriate industry forums. Claremont believes that business
development is an integral part of the responsibility of practice area leaders
and other senior project managers. Claremont also follows a practice of
marketing its services through strategic alliances with a select list of
hardware and software providers.
The Company employs an established selling methodology, the Miller-Heiman
process. The Miller-Heiman process is focused on sales that involve multiple
decisionmakers at different levels in large organizations. The process provides
an analytical approach to identifying the key decisionmakers, determining with
the client the value to be provided to the client and managing the sales process
through completion. Claremont maintains a corporate information database
referred to as the Opportunity Center to manage the selling process. The sale of
a new project generally involves a three to six month effort. At any given time
numerous Claremont professionals are active in the development of new business.
The coordination of their efforts and the tracking of their results is critical
to Claremont's ability to forecast and adequately staff future work. Claremont's
Opportunity Center is a critical management tool to assist the Company's senior
executives in managing this process.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that it currently competes principally with the internal information
systems groups of its prospective clients, as well as consulting and software
integration firms including Andersen Consulting, the "Big Six" accounting firms,
ISSC (an affiliate of IBM), Computer Sciences Corporation and with other
hardware and applications software vendors. In addition there are a number of
systems integrators who serve similar markets or provide similar services, such
as Cambridge Technology Partners, Renaissance Solutions, Inc., SHL Systemhouse
(a subsidiary of MCI), Sapient Corporation and Technology Solutions Company,
with whom the Company may compete in the future. Many of these companies have
significantly greater financial, technical and marketing resources than the
Company, generate greater revenue and have greater name recognition than the
Company. In addition, there are relatively low barriers to entry into the
Company's markets and the Company has faced and expects to continue to face
additional competition from new entrants into its markets.
The Company believes that the principle competitive factors in its markets
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise and ability to deliver on a
fixed-price as well as a time and materials basis. The Company believes it
competes favorably with respect to these factors and that the depth of
experience with its clients, their industries, and the technologies they
implement. The Company's TISE development methodology incorporating object
oriented techniques, its focus on the client's core business processes, and its
ability to offer fixed-price contracting practices distinguish it from its
competitors. See "Risk Factors -- Competition."
CLAREMONT PERSONNEL
The success of the Company is based on attracting and retaining talented,
creative and experienced people at all levels. The Company dedicates significant
senior resources to its recruiting effort, primarily recruiting professionals
with both IT consulting and industry experience. All of Claremont's managers and
senior managers have substantial expertise in designing and implementing
large-scale applications solutions, and many of them have relevant industry
experience. As a result, the Company's consultants provide industry knowledge
and line management expertise, in addition to technical expertise, to the
Company's clients.
29
As of May 1, 1996, the Company had a total of 495 employees of whom there
were 467 individuals in the professional staff and 28 in administrative roles.
The following table summarizes the experience, as of May 1, 1996, of the
Company's professional staff.
AVERAGE RELEVANT YEARS OF
EXPERIENCE
--------------------------------
TITLE NUMBER AVERAGE AGE CONSULTING INDUSTRY
- ----------------------------------------------------------------- ----------- ------------- --------------- ---------------
Officers and Practice Directors.................................. 40 40 11 6
Managers and Senior Managers..................................... 112 38 6 6
Senior Consultants............................................... 161 34 3 5
Consultants...................................................... 154 29 1 2
TITLE TOTAL
- ----------------------------------------------------------------- -----
Officers and Practice Directors.................................. 17
Managers and Senior Managers..................................... 12
Senior Consultants............................................... 8
Consultants...................................................... 3
The Company believes that its success in attracting and retaining
experienced, highly-qualified personnel is in part attributable to the Company's
stock incentive and employee stock ownership plans. These plans are designed to
motivate and encourage the loyalty and dedication of the Company's employees,
and include vesting provisions designed to encourage long-term employee
perspectives and retention of employees.
In order to accommodate typical project development lead time, the Company
has found that it must recruit and hire additional personnel on the basis of
anticipated demand for their services. Although this practice has contributed to
the Company's growth to date, there can be no assurance that demand for the
Company's services will materialize as anticipated, and this practice could
result in under-utilized employees and consequently have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company's employees maintain and continue to build expertise in
high-demand, advanced technologies by regular in-house training programs, which
may include vendor demonstrations. Claremont also keeps abreast of such advances
and developments by hiring professionals with expertise in technologies that are
needed or can be used by the Company and its clients.
FACILITIES
The Company's headquarters and principle administrative offices are located
in approximately 11,011 square feet of leased space located in Beaverton,
Oregon. In addition, Claremont has invested in three software development
centers, which Claremont refers to as "software factories." These centers are
located in Beaverton, Oregon; Montreal, Canada; and Columbus, Ohio.
The Company's west coast business development and technical development
personnel operate from the Beaverton, Oregon location. The Company occupies
these premises under a lease expiring in April 1999. In addition, the Company
leases 14,517 square feet in Columbus, Ohio for its retirement system national
practice, central region business development and technical lab. The lease
relating to these premises expires in November 2000. The Company also leases
office space in 11 other locations, including Basking Ridge, New Jersey;
Bellevue, Washington; Cleveland, Ohio; Jackson, Mississippi; Morristown, New
Jersey; Sacramento, California; New York, New York; White Plains, New York;
Montreal, Canada; London, United Kingdom; and North Sydney, Australia, from
which regional project management and business development is conducted. Leases
for these premises range from 2,050 to 4,395 square feet. The Company
anticipates that additional space may be required as the Company's business
operations expand and believes it will be able to obtain suitable space as
needed.
30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of May
20, 1996, are as follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Paul J. Cosgrave..................................... 45 President and Chief Executive Officer, Director
Dennis M. Goett...................................... 47 Chief Financial Officer, Director
Stephen D. Hawley.................................... 47 Senior Vice President, Pension and Retirement
Edward A. Fullman.................................... 34 Senior Vice President, Communications
Karen Fast........................................... 45 Senior Vice President, Market Development
Ross C. Kayuha....................................... 38 Senior Vice President, Advanced Technology
Jerry L. Stone (1)................................... 53 Director
Neil E. Goldschmidt (2).............................. 55 Director
Phillip W. Seeley (1)(2)............................. 49 Director
- ------------
(1) Member, Compensation Committee of the Board of Directors.
(2) Member, Audit Committee of the Board of Directors.
PAUL J. COSGRAVE has served as Chairman of the Board of Directors of the
Company since January 1996, and as President, Chief Executive Officer and a
member of the Board of Directors of the Company since July 1994. From January
1993 through June 1994, he served as Executive Vice President of Technology
Solutions Company. From February 1992 to December 1992, Mr. Cosgrave served as
President and Chief Executive Officer of AGS Computers, a subsidiary of NYNEX
Corporation. Prior to January 1992, he served as a Partner with Andersen
Consulting, in the Management Information Systems Consulting Practice.
DENNIS M. GOETT has served as Chief Financial Officer and Senior Vice
President, Finance of the Company since February 1996 and as a member of the
Board of Directors of the Company since April 1996. Since January 1988 he has
served as President of Gabriel Partners, Inc., a financial consulting firm.
STEPHEN D. HAWLEY has served as Senior Vice President, Pension and
Retirement of the Company since February 1993. From September 1988 through
February 1993 he served as a Partner in Andersen Consulting, the Management
Information Systems Consulting Practice of Arthur Andersen LLP.
EDWARD A. FULLMAN has served as Senior Vice President, Communications of the
Company since July 1994. From April 1992 through July 1994, he served as a Vice
President of NYNEX/DPI Company, a division of NYNEX Corporation. From June 1989,
through April 1992, he served as Vice President of AGS Information Services, a
division of NYNEX Corporation.
KAREN FAST has served as Senior Vice President, Market Development of the
Company since April 1994. From April 1993 through April 1994, she served as Vice
President, Portland Practice of the Company. From January 1991 through April
1993, she served as the Manager of the Open Systems Consulting Group, the
Systems Integration Practice of IBM.
ROSS C. KAYUHA has served as Senior Vice President, Advanced Technology of
the Company since January 1996. From January 1994 through January 1996, he
served as Senior Vice President, Central Region of the Company. From January
1993 through January 1994, he served as Vice President, Central Region of the
Company and from April 1992 through January 1993, he served as a Director of
Project Management of the Company. From September 1985 through April 1992, he
served as a Senior Manager in Andersen Consulting, the Management Information
Systems Consulting Practice of Arthur Andersen LLP.
JERRY L. STONE has served as a member of the Board of Directors of the
Company since November 1989. Mr. Stone has been active as a private investor
since 1989. From 1986 through January 1989, he served as Chairman and Chief
Executive Officer of Marketing One, Inc.
NEIL E. GOLDSCHMIDT has served as a member of the Board of Directors of the
Company since November 1993. Since January 1991, Mr. Goldschmidt has conducted a
private law practice focused primarily on
31
strategic planning for national and international business clients. From January
1987 to January 1991, Mr. Goldschmidt served as Governor of the State of Oregon.
Prior to his 1986 gubernatorial campaign, Mr. Goldschmidt was an executive of
Nike, Inc., serving as International Vice President from 1981 to 1985 and as
President of Nike Canada from 1986 to 1987. Furthermore, Mr. Goldschmidt served
as Secretary of Transportation in the Carter Administration from 1979 to 1981.
PHILLIP W. SEELEY has served as a member of the Board of Directors of the
Company since April 1994. Mr. Seeley has served as Executive Vice President of
Sales and Marketing of CF Motor Freight Trucking, Inc. since July 1994. From
January 1990 through July 1994, he served as Vice President of Administration
and Technology of Consolidated Freightways, Inc.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. All directors hold office until the
next annual meeting of the Company, or until their successors have been duly
elected and qualified. There are no family relationships between any of the
executive officers or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors maintains an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. Goldschmidt and Seeley,
oversees actions taken by the Company's independent auditors and reviews the
Company's internal audit controls. The Compensation Committee, consisting of
Messrs. Stone and Seeley, reviews the compensation levels of the Company's
employees and makes recommendations to the Board regarding changes in
compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Stone and Seeley, none of whom has been or is an officer or an employee of the
Company.
DIRECTOR COMPENSATION
The members of the Company's Board of Directors are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings. In
addition, non-employee members of the Board of Directors receive stock options
under the Company's 1996 Stock Option Plan for Nonemployee Directors. See "Stock
Option Plans."
EMPLOYMENT AGREEMENTS
On July 1, 1994, the Company entered into a three-year employment agreement
with Paul J. Cosgrave, its President, which provides for a minimum salary of
$400,000 per year and includes among other things provisions for a $150,000
loan, for which Mr. Cosgrave has signed a promissory note due July 1, 1997, or
if bonuses are earned earlier, $60,000 out of fiscal year 1995 bonus and $90,000
out of fiscal year 1996 bonus, and if Mr. Cosgrave leaves the Company, out of
termination pay due. The fiscal year 1995 bonus was earned and the $60,000
payment made. On February 1, 1996, the Company entered into an employment
agreement with Dennis M. Goett, its Chief Financial Officer, which provides for
a minimum salary of $295,000 per year. Each agreement provides that the
executive is entitled to a car allowance of $650 per month and certain medical
benefits. Each agreement further provides that if the executive's employment is
terminated at Claremont's election for reasons other than cause, the executive's
base salary will continue for the longer of three years from the start date or
six months from the termination date; provided, however, that Mr. Goett's salary
continuation shall cease if he competes with Claremont or solicits Claremont
customers. If termination is for cause or at the executive's choice, each
agreement also contains covenants of noncompetition and nonsolicitation of
clients. Regardless of the reason for termination, each agreement contains
commitments of nonsolicitation of Claremont personnel. In each agreement, the
noncompetition and nonsolicitation of clients and employees covenants continue
until the later of 18 months after termination of employment, or termination of
base salary payments. All other Named Executive Officers and all other Company
personnel have executed at-will employment agreements providing for protection
of proprietary information and assignment of intellectual property. In addition,
these agreements prohibit competition with the Company with respect to its
clients or active prospects for varying periods following termination.
32
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth certain information
concerning compensation earned by the Company's President and Chief Executive
Officer and each of the four other most highly compensated executive officers
for the year ended June 30, 1995 (collectively, the "Named Executive Officers")
(**):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- -------------------------------------------------------- ------------- ----------- ------------- ------------------
Paul J. Cosgrave ....................................... 415,000 100,000 650,000 8,724(1)
President and Chief Executive Officer
Steven L. Darrow(2) .................................... 300,000 -- -- 9,791(3)
Former Chairman of the Board
Stephen D. Hawley ...................................... 270,000 -- -- 2,145(4)
Senior Vice President,
Pension and Retirement
Edward A. Fullman ...................................... 207,500 -- 30,000 1,030(5)
Senior Vice President,
Communications
Ross C. Kayuha ......................................... 187,500 250,000 -- 1,374(6)
Senior Vice President,
Advanced Technology
- ------------
(1) Includes $7,800 attributable to automobile allowance paid to Named Executive
Officer and 401(k) matching payments of $924.
(2) Mr. Darrow resigned from the Company effective March 15, 1996, and resigned
from the Board of Directors effective April 29, 1996. See "Certain
Transactions" for a description of Mr. Darrow's severance agreement.
(3) Includes $5,652 attributable to use by Named Executive Officer of automobile
leased by the Company, $3,215 attributable to golf club membership dues paid
by the Company on behalf of the Named Executive Officer and 401(k) matching
payments of $924.
(4) Includes $1,586 attributable to golf club membership dues paid by the
Company on behalf of the Named Executive Officer and 401(k) matching
payments of $559.
(5) Represents 401(k) matching payments of $1,030.
(6) Includes $450 attributable to golf club membership dues paid by the Company
on behalf of the Named Executive Officer and 401(k) matching payments of
$924.
** Mr. Dennis Goett, the Company's Chief Financial Officer and a member of its
Board of Directors, joined the Company during fiscal 1996. During February
1996, the Company granted Mr. Goett options to purchase 100,000 shares of
the Company's Common Stock. See "Business -- Employment Agreements" for a
description of Mr. Goett's employment agreement.
33
OPTION GRANTS
The following table sets forth information concerning options granted to the
Named Executive Officers during the fiscal year ended June 30, 1995 under the
Company's 1992 Stock Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR SHARE ($) DATE 5% 10%
- ----------------------------------------- ----------- ------------- ----------- ----------- --------- ----------
Paul J. Cosgrave......................... 650,000 49.4% $ 1.73 (3) 707,192 1,792,163
Steven L. Darrow......................... -- -- -- -- -- --
Stephen D. Hawley........................ -- -- -- -- -- --
Edward A. Fullman........................ 30,000 2.3 2.21 1/27/05 41,696 105,665
Ross C. Kayuha........................... -- -- -- -- -- --
- ------------
(1) Options granted in the fiscal year ended June 30, 1995 become exercisable
commencing at the end of the 11th month after the grant date, with two
percent of the options becoming exercisable at that time and with an
additional two percent of the options vesting at the end of each month
thereafter for 49 additional months.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock compounded annually for a ten-year
period. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock and overall stock market conditions.
There can be no assurance that the Common Stock will appreciate at any
particular rate or at all in future years.
(3) Options representing 346,818 shares will expire on June 30, 2004, and
options representing 303,182 shares will expire on July 2, 2004.
The following table sets forth certain information regarding option
exercises during the fiscal year ended June 30, 1995 and the value of
unexercised options held as of June 30, 1995 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR END ($)(2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ------------- ----------- ------------- ----------- -------------
Paul J. Cosgrave............... -- $ -- 217,792 432,208 396,381 786,619
Steven L. Darrow............... -- -- 46,300 63,700 116,676 160,524
Stephen D. Hawley.............. -- -- 139,708 121,766 341,508 348,875
Edward A. Fullman.............. -- -- 4,200 95,800 7,644 159,956
Ross C. Kayuha................. 46,609 58,329 81,702 106,689 263,021 324,724
- ------------
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) The value of unexercised in-the-money options is calculated based on an
estimated fair market value at June 30, 1995 of $3.55 per share. Amounts
reflected are based on such estimated fair market value minus the aggregate
exercise price and do not necessarily reflect that the optionee sold such
stock.
34
STOCK OPTION PLANS
1992 STOCK INCENTIVE PLAN. The Company's 1992 Stock Incentive Plan (the
"1992 Plan") provides for grants of both "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and "non-qualified stock options" which are not qualified for treatment
under Section 422 of the Code, and for direct stock grants and sales to
employees or consultants of the Company. The purposes of the 1992 Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentives to the employees and
consultants of the Company and to promote business. The 1992 Plan is
administered by the Compensation Committee of the Board of Directors.
The term of each option granted under the 1992 Plan will be ten years from
the date of grant, or such shorter period as may be established at the time of
the grant. An option granted under the 1992 Plan may be exercised at such times
and under such conditions as determined by the Compensation Committee. If a
person who has been granted an option ceases to be an employee or consultant of
the Company, such person may exercise that option only during the three month
period after the date of termination, and only to the extent that the option was
exercisable on the date of termination. If a person who has been granted an
option ceases to be an employee or consultant as a result of such person's total
and permanent disability, such person may exercise that option at any time
within twelve months after the date of termination, but only to the extent that
the option was exercisable on the date of termination. No option granted under
the 1992 Plan is transferable other than at death, and each option is
exercisable during the life of the optionee only by the optionee. In the event
of the death of a person who has received an option, the option generally may be
exercised by a person who acquired the option by bequest or inheritance during
the twelve month period after the date of death to the extent that such option
was exercisable at the date of death.
The exercise price of incentive stock options granted under the 1992 Plan
may not be less than the fair market value of a share of Common Stock on the
date of grant of the option. The exercise price of non-qualified stock options
may not be less than 85% of the fair market value of a share of Common Stock on
the date of grant. The consideration to be paid upon exercise of an option,
including the method of payment, will be determined by the Compensation
Committee and may consist entirely of cash, check, shares of Common Stock or any
combination of such methods of payment as permitted by the Compensation
Committee.
The 1992 Plan will continue in effect until April 27, 2002, unless earlier
terminated by the Board of Directors, but such termination will not affect the
terms of any options outstanding at that time. The Board of Directors may amend,
terminate or suspend the 1992 Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made more than once every
six months other than to conform with changes in certain Securities Exchange Act
and Internal Revenue Code requirements. Amendments that would materially
increase the number of shares that may be issued, materially modify the
requirements as to eligibility for Plan participation, or materially increase
the benefits to Plan participants must be approved by shareholders.
At May 1, 1996, options to purchase 924,904 shares of the Company's Common
Stock were available for future grants under the 1992 Plan. During the first
nine months of fiscal 1996, the number of options granted under the 1992 Plan to
the Named Executive Officers, and all officers and directors as a group, was as
follows: Paul J. Cosgrave -- 0; Steven L. Darrow -- 0; Stephen D. Hawley -- 0;
Edward A. Fullman -- 0; Ross C. Kayuha -- 0; and all officers and directors as a
group -- 100,000 (all of which were granted in February 1996 to Dennis M.
Goett).
1996 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS. Nonemployee members of
the Board of Directors participate in the Company's 1996 Stock Option Plan for
Nonemployee Directors (the "1996 Nonemployee Director Plan"), which was adopted
to promote the interests of the Company and its shareholders by strengthening
the Company's ability to attract and retain experienced and knowledgeable
nonemployee directors and to encourage them to acquire an increased proprietary
interest in the Company. All options granted under the Plan are non-qualified --
not intended to qualify as incentive stock options under Section 422 of the
Code. Set forth below is a summary of the material terms of the 1996 Nonemployee
Director Plan.
Each option expires ten years from the date of its grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the ten year term. If an optionee terminates service as
35
a director for any reason other than retirement, total disability or death, the
option will automatically expire 90 days after the date of termination. If an
optionee dies or terminates service due to retirement or disability, the options
then outstanding will expire one year after the date of death or termination or
on the stated expiration date, whichever is earlier. Options are not assignable
during the lifetime of the optionee except by a qualified domestic relations
order.
The exercise price of options granted under the 1996 Nonemployee Director
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant of the option. Payment of the option exercise price may be in
cash or promissory note or, to the extent permitted by the Compensation
Committee, by delivery of previously owned Company stock having a fair market
value equal to the option exercise or a combination of cash and stock. The
Compensation Committee may also permit "cashless" option exercises by allowing
optionees to surrender portions of their options in payment for the stock to be
received.
The Plan continues in effect until terminated by the Board of Directors or
by shareholders but such termination will not affect the terms of any options
outstanding at that time. The Board of Directors may amend, terminate or suspend
the 1996 Nonemployee Director Plan at any time, provided that no amendment
regarding
amount, price or timing of the grants may be made more than once every six
months other than to comport with changes in certain Securities Exchange Act and
Internal Revenue Code requirements. Amendments that would materially increase
the number of shares that may be issued, materially modify the requirements as
to eligibility of Plan participation, or materially increase the benefits to
Plan participants must be approved by shareholders.
A total of 200,000 shares of Common Stock have been reserved for issuance
upon exercise of stock options granted under the 1996 Nonemployee Director Plan.
Upon election to the board of directors, each director is granted an option to
purchase 20,000 shares, which option will vest over a three-year period (each a
"Recruitment Grant"). Following the first annual meeting of shareholders after a
Recruitment Grant is fully-vested, the nonemployee director holding such
fully-vested Recruitment Grant will receive an option to purchase an additional
15,000 shares of Common Stock, which option will vest over a three-year period
(a "First Renewal Grant"). Furthermore, following the first annual meeting of
shareholders after a nonemployee director's First Renewal Grant is fully-vested,
and following every third annual meeting of shareholders thereafter, such
nonemployee director will be granted an option to purchase an additional 15,000
shares of Common Stock, which option will vest over a three-year period.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company's Employee Stock Ownership Plan (the "ESOP") is an employee
stock ownership plan qualified under Section 401(a) of the Code and defined
under Section 4975(e)(7) of the Code. The ESOP is designed to invest primarily
in Common Stock of the Company. Each nonunion employee of the Company or any
affiliated company automatically participates in the ESOP on the January 1 or
July 1 following such employee's date of hire. As of May 20, 1996, the ESOP had
382 participants and 25 former participants whose benefits have not been
distributed to them. All eligible employees participate in the ESOP and no
employee contributions are permitted to be made to the ESOP.
The general assets of the ESOP are held in trust under a Trust Agreement.
The Company has appointed the Hawaiian Trust Company, Ltd. as trustee of the
trust (the "Trustee"). The Trustee holds legal title to all assets of the ESOP
and, subject to applicable law and the terms of the ESOP, has the discretionary
power to buy Common Stock and to sell Common Stock held by the ESOP.
The ESOP is administered by a committee (the "ESOP Committee") appointed by
the Board of Directors. Currently the members of the ESOP Committee are Paul J.
Cosgrave, President and Chief Executive Officer of the Company and a member of
the Board of Directors and Terry D. Murphy, Vice President, Finance and
Secretary of the Company.
The voting rights with respect to Common Stock held by the ESOP are
exercised by the Trustee, as directed by the ESOP Committee. In the case of a
transaction such as a reorganization, recapitalization, merger, sale of
substantially all assets, liquidation, dissolution or similar transaction which
must be approved by the shareholders, the participants may direct the Trustee
how to vote the Common Stock allocated to their Company Stock Accounts.
36
Two separate accounts are maintained for each participant: (i) a "Company
Stock Account" kept in number of shares of Common Stock, and (ii) an "Other
Investments Account" kept in dollars. Allocations to such accounts are made once
each year on June 30. Each participant's Company Stock Account is credited with
shares of the Common Stock purchased by or contributed to the ESOP during the
year and allocated to such participant, as well as with any stock dividends on
the Common Stock declared during the year. Each participant's Other Investments
Account is credited with the ESOP's net income (or loss) for the year, as well
as with any cash dividends on the Common Stock declared during the year and with
contributions and forfeitures in cash, all as allocated to such participant.
Each allocation of the Company's contribution for a plan year is determined by
multiplying the total amount contributed by a fraction the numerator of which is
such participant's Covered Compensation (the aggregate cash compensation
received from the Company during the plan year up to a maximum of $150,000, as
adjusted for cost of living increases), and the denominator of which is the
aggregate Covered Compensation of all participants. A participant's account
becomes fully-vested and nonforfeitable after seven years of service with the
Company, or earlier if the participant attains age 65, becomes totally disabled
or dies. The participant's account vests at the rate of 10% per year for the
first four years of employment, and at the rate of 20% per year for each year
thereafter, until fully vested. The Company pays all administrative costs of the
ESOP.
When a participant's employment with the Company is terminated, the ESOP
Committee determines such participant's plan benefit as soon as possible after
participation in the ESOP terminates. At the discretion of the ESOP Committee, a
plan benefit may be distributed in cash, shares of Common Stock or a combination
of cash and shares of Common Stock. Distribution of a plan benefit will commence
not later than the sixth year after the plan year in which employment
terminates, and will be made, in the discretion of the ESOP Committee in a lump
sum or in substantially equal installments over a period not to exceed five
years. The participant's consent is generally required for any distribution if
such participant's aggregate plan benefit exceeds $3,500. In all events,
distribution of a terminated participant's plan benefit must begin no later than
April 1 of the calendar year immediately following the calendar year in which
such terminated participant attains age 70 1/2. Any nonvested amounts in a
terminated participant's accounts are forfeited and reallocated to the remaining
participants in the same manner as the Company's contributions to the ESOP.
Each participant who attains age 55 and who has completed ten years of
participation in the ESOP has the right to elect to diversify a portion of the
shares in his Company Stock Account. Upon receipt of a participant's election to
diversify, the ESOP Committee must either (i) offer such participant three
alternative investment options in accordance with regulations issued pursuant to
Section 401(a)(28)(B) of the Code, (ii) distribute to such participant that
portion of his Common Stock Account that he elected to diversify, or (iii)
transfer that portion of such participant's Common Stock Account that he elected
to diversify to another qualified employee benefit plan of the Company or an
affiliated company. Such election to diversify may be made over a six year
period, with diversification of up to 25% of the shares in the Company Stock
Account for the first five years of such election, and up to 50% of the shares
in the Company Stock Account during the sixth year.
The Company makes all contributions to the ESOP, which may be made in either
cash or shares of Common Stock. All contributions are made at the sole
discretion of the Board of Directors. Cash contributions to the ESOP expensed by
the Company during fiscal 1995 totalled $300,000. Future contributions to the
ESOP will be made in the Company's discretion in light of a number of factors,
including return on equity. Future Common Stock contributions to the ESOP will
dilute the investment interests and voting rights of existing shareholders and
purchasers of Common Stock in this offering.
37
CERTAIN TRANSACTIONS
The Company retained board member Jerry L. Stone as a consultant through his
consulting firm, Marketing Exchange Corporation, and also directly as a
part-time employee, for payments aggregating $113,000 in fiscal 1993, $113,000
in fiscal 1994, $113,000 in fiscal 1995, and $39,114 in the nine months ended
March 31, 1996. The consulting and employment arrangement with Mr. Stone
terminated effective April 26, 1996.
In July 1993, the Company entered into a severance agreement with Pamela
Jones, then an officer of the Company. Ms. Jones was paid a total of $101,250,
consisting of three months salary ($26,250), a bonus of $15,000, and a six month
consulting agreement totalling $60,000, for which she subsequently performed all
contracted-for work.
In January 1994, the Company entered into a separation agreement with Martin
Wright, then a Senior Vice President, under which the vesting of remaining
unvested options held by Mr. Wright were accelerated, Mr. Wright received a loan
for $85,000 at 4% per year, due originally in June 1994, and Mr. Wright entered
into a two year noncompetition agreement with the Company. The loan was
subsequently extended to July 1995, and repaid in that month. Mr. Wright
subsequently exercised all of his options.
In April 1994, the Company loaned Stephen Hawley $35,000 at 4% per year,
interest only is payable quarterly and the principal balance is due on or before
April 15, 1997. In March 1995, the Company loaned Mr. Hawley an additional
$40,000 at 7.01% interest per year. The principal balance is due on or before
April 15, 1997, and interest is payable quarterly. Both loans are secured by a
pledge of Mr. Hawley's rights to exercise certain of his options. Interest
payments on both loans are current.
In July 1994, the Company loaned then board member Brian Caldwell $75,000 at
5% interest. This loan was repaid on July 11, 1995, in full, and while
outstanding was secured by Mr. Caldwell's shares of the Company's Common Stock.
In July 1995, in pursuit of its policy of encouraging employee stock
ownership, the Company guaranteed to arrange loans from the Bank of America to
34 of its management employees to assist them with the purchase of shares of the
Company's Common Stock from Martin Wright, a former officer and employee of the
Company, Brian Caldwell, a director and 10% shareholder of the Company, and
Steven Darrow, an officer, director and 10% shareholder of the Company, at a
purchase price of $3.55 per share, and to exercise stock options that had become
vested. Claremont's guarantee of these loans can not be called before August
1998. Claremont's guarantee is secured by a pledge of the purchased stock to
Claremont. The employees participating in this program include Joel D. Bucklen,
17,373 shares and a $61,674 loan guaranteed; Paul J. Cosgrave, 49,804 shares and
a $176,804 loan guaranteed; Karen Fast, 23,164 shares and a $82,232 loan
guaranteed; Edward A. Fullman, 24,901 shares and a $88,399 loan guaranteed;
Stephen D. Hawley, 34,781 shares (including 10,000 options) and a $93,073 loan
guaranteed; Ross C. Kayuha, 23,164 shares and an $82,232 loan guaranteed; Colin
B. McKiernan, 24,001 shares and an $85,204 loan guaranteed; and Peter Moe,
28,955 shares and a $102,790 loan guaranteed. In February 1996, Mr. Moe repaid
all outstanding indebtedness under his loan from Bank of America.
In January 1996, the Company entered into a severance agreement with Peter
Moe, then an officer of the Company. Mr. Moe was paid six months salary plus
medical benefits totalling $141,865.
In March 1996, the Company entered into a Retirement and Severance Agreement
with its founder and largest shareholder, Steven L. Darrow. Under that
agreement, in exchange for his commitment not to compete with the Company for
five years, the Company agreed to pay an amount equal to one year's salary
($325,000), provide a continuation of medical benefits during his lifetime,
forgive certain loans by the Company to Mr. Darrow in the aggregate amount of
$410,000 and pay resulting withholding taxes in the amount of $159,444,
accelerate the vesting of stock options for 35,800 shares of the Company's
Common Stock with an exercise price of $1.03 per share, and grant him and
certain trusts and individuals to whom he had transferred stock certain
"piggyback" registration rights. The Company also agreed to guarantee a loan to
Mr. Darrow if the guarantee was required by the lender, provided that the
Company's guarantee was secured by a pledge of Company's Common Stock belonging
to Mr. Darrow, and to provide good faith cooperation if he wished to sell shares
of the Company's Common Stock in a transaction prior to the date of the
Company's initial public offering. In addition, in June 1994 the Company loaned
Mr. Darrow $250,000 at 5% interest, and in February 1995, another $160,000
38
at 6.5% interest, both in exchange for his promissory notes. Mr. Darrow paid
interest on these notes through October 1995. The principal balance of these
notes was cancelled under the terms of the Retirement and Severance Agreement.
In March 1996, Paul J. Cosgrave exercised certain options with an aggregate
exercise price of $337,350 (options for 190,000 shares at $1.73 per share) In
connection with such exercise, Mr. Cosgrave paid the Company an aggregate of
$502,230, including amounts for tax withholding payments the Company was
required to make on nonqualified options, by delivery of a promissory note. The
note bears interest at 5% per year, and is payable on demand and in any event on
or before June 30, 1996.
In May 1996, Paul Mardesich, then a Senior Vice President, entered into a
separation agreement with the Company to be effective mid-June, 1996, which
includes a three-year covenant not to compete in consideration of payment of
$85,000, and a twenty-seven month consulting agreement providing payment in the
aggregate amount of $13,500. Mr. Mardesich also intends to exercise options to
purchase up to 200,000 shares of the Company's Common Stock and to sell those
shares in this offering. See "Principal and Selling Shareholders."
On May 20, 1996, the Company issued to DLJ Capital Corporation five-year
warrants to purchase 400,000 shares of the Company's Common Stock at an exercise
price of $10.33 per share, to settle a dispute between the Company and the
Sprout Group regarding a "Summary Term Sheet" executed by the Company and the
Sprout Group on December 5, 1995. The Summary Term Sheet contemplated the
issuance and sale of 812,500 shares of a newly created series of preferred stock
and other securities. The warrants provide for certain demand and piggyback
registration rights.
On May 17, 1996, the Company entered into a Stock Purchase Agreement with
certain holders of the Company's Common Stock (including Steven L. Darrow, the
Company's largest shareholder) and certain investors (the "Investors"), pursuant
to which the Investors purchased an aggregate of 910,000 shares of the Company's
Common Stock at an average purchase price of $10.33. Under the terms of the
Stock Purchase Agreement, the Company granted the Investors "piggyback" and
demand registration rights.
The Company has entered into employment agreements with Paul J. Cosgrave,
its President and Chief Executive Officer, Dennis M. Goett, its Chief Financial
Officer, and Stephen D. Hawley, its Senior Vice President, Pension and
Retirement. See "Management -- Employment Agreements."
39
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of May 15, 1996, and as adjusted to
reflect the sale of Common Stock offered hereby, certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers, (iv) all officers and directors of the
Company as a group and (v) each of the Selling Shareholders. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below have
sole voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING (1)
----------------------- SHARES BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED (2) NUMBER PERCENT
- ------------------------------------------------------ ---------- ----------- --------------- ---------- -----------
Steven L. Darrow (3) ................................. 1,020,084 20.9% 434,783 585,301 8.6%
20514 127th Avenue, S.E.
Snohomish, WA 98290
Jerry L. and Nancy Stone ............................. 845,000 17.5 108,696 736,304 10.9
3024 Key Stone Dr
Cape Girardeau, MO 63701
Paul J. Cosgrave (4) ................................. 489,918 9.8 -- 489,918 7.1
3 Cole Drive
Armonk, NY 10504
Paul Mardesich ....................................... 401,485 7.7 173,913 227,572 3.3
15993 N.W. Ridgetop Lane
Beaverton, OR 97006
DLJ Capital Corporation (5) .......................... 400,000 7.6 -- 400,000 5.6
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, California 94025
Brian C. Caldwell .................................... 321,800 6.7 130,435 191,365 2.8
11018 N.E. Davis Street
Portland, OR 97220
S.A.S. Investment Trust .............................. 300,000 6.2 34,782 265,218 3.9
Technology Crossover Management, LLC (6) ............. 286,223 5.9 -- 286,223 4.2
101 Eisenhower Parkway
Roseland, NJ 07068
Terry D. Murphy (7) .................................. 248,078 5.1 -- 248,078 3.7
3447 S.W. Brentwood Dr.
Portland, OR 97201
Accel Partners (8) ................................... 243,934 5.0 -- 243,934 3.6
One Embarcadero Ctr., Ste. 3820
San Francisco, CA 94111
Hillman Entities (9) ................................. 243,663 5.0 -- 243,663 3.6
2000 Grant Building
Pittsburge, PA 15219
Stephen D. Hawley .................................... 204,425 4.1 -- 204,425 3.0
Ross C. Kayuha ....................................... 202,783 4.1 -- 202,783 2.9
Carol Anne Bennett ................................... 139,900 2.9 32,609 107,291 1.6
Judy L. Smith ........................................ 60,994 1.3 34,782 26,212 *
Edward A. Fullman .................................... 57,901 1.2 -- 57,901 *
Neil E. Goldschmidt .................................. 16,670 * -- 16,670 *
Phillip W. Seeley .................................... 15,005 * -- 15,005 *
All officers and directors as a group
(10 persons)......................................... 2,205,635 40.6 108,696 2,096,939 28.5
40
- ------------
* Less than one percent of the outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and investment
power with respect to shares. Shares issuable upon the exercise of
outstanding stock options that are currently exercisable or become
exercisable within 60 days from May 20, 1996 are considered outstanding for
the purpose of calculating the percentage of Common Stock owned by such
person but not for the purpose of calculating the percentage of Common Stock
owned by any other person. The number of shares subject to stock options
that are exercisable within 60 days of May 20, 1996 is as follows: Mr.
Caldwell -- 2,800; Mr. Cosgrave -- 158,409; Mr. Darrow -- 58,900; Mr.
Fullman -- 33,000; Mr. Goldschmidt -- 16,670; Mr. Kayuha -- 126,793; Mr.
Mardesich -- 389,567; Mr. Seeley -- 15,005; and all officers and directors
as a group -- 602,212.
(2) If the Underwriters' over-allotment option is exercised in full, the number
of shares being offered, the number of shares owned after the offering and
the percentage of shares owned after the offering for the following Selling
Shareholders would be: Steven L. Darrow -- 65,217; 520,084; 7.6%; Jerry L.
and Nancy Stone -- 16,304; 720,000; 10.7%; Paul Mardesich -- 26,087;
201,485; 2.8%; Brian C. Caldwell -- 19,565; 171,800; 2.5%; S.A.S. Investment
Trust -- 5,218; 260,000; 3.8%; Carol Anne Bennett -- 4,891; 102,400; 1.5%;
Judy L. Smith -- 5,218; 20,994; less than 1%.
(3) Includes 150,000 shares held in the Dorinda Darrow Children's Trust for the
benefit of the children of Dorinda Darrow. Mr. Darrow disclaims any
beneficial ownership interest in these shares.
(4) Includes 15,000 shares held by Theresa Cosgrave as custodian for Mr.
Cosgrave's three children under the Uniform Gift to Minors Act. Also
includes 150,000 shares held in trusts for Mr. Cosgrave's three children.
Mr. Cosgrave disclaims any beneficial ownership interest in the shares held
in these trusts.
(5) Includes a warrant to purchase 400,000 shares of Common Stock that is
immediately exercisable.
(6) Includes 265,219 shares held directly by Technology Crossover Ventures, L.P.
and 21,004 shares held directly by Technology Crossover Ventures, C.V.
(7) Includes 90,000 shares held by Lois N. Murphy as custodian for Mr. Murphy's
children under the Uniform Gifts Minors Act.
(8) Includes 26,316 shares held directly by Accel Internet/Strategic Technology
Fund L.P.; 11,696 shares held directly by Accel Investors '96 L.P.; 196,392
shares held directly by Accel Keiretsa V L.P.; and 5,361 shares held
directly by Accel V L.P. and Ellmore C. Patterson Partners.
(9) Includes 97,464 shares held by C.G. Grefenstrette & Thomas G. Bigley as
trustees for the Children of Andrey Hilman Fisher, Henry Lea Hillman, Jr.,
William Talbot Hillman and Juliet Lea Hillman Simonds. Also includes 73,099
shares held by Henry Hillman, C.G. Grefenstrette & Elsie Hilliard Hillman,
as trustees of the Henry L. Hillman Trust. In addition, includes 73,100
shares held by Howard B. Hillman, Tatnall L. Hillman and Joseph J. Hill
trustees V/A/T Dora B. Hillman F/B/S Howard B. Hillman and F/B/O Tatnall L.
Hillman.
41
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, no par value per
share, and 10,000,000 shares of Preferred Stock, no par value per share. The
following summary description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by the provisions of the Company's
Restated Articles and Restated Bylaws, which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock.
Holders of Common Stock are entitled to receive such dividends as may from time
to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding class or series of Preferred Stock.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered by the Company hereby when issued will be, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject to
any series of Preferred Stock which the Company may issue in the future as
described below.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could adversely effect the rights of holders of Common Stock. For
example, the issuance of shares of Preferred Stock could result in securities
outstanding that would have preference over the Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights of the Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy or consent solicitation or
otherwise by making such attempts more difficult to achieve or more costly. The
Board of Directors may issue Preferred Stock without shareholder approval and
with voting rights that could adversely affect the voting power of holders of
Common Stock. There are no agreements or understandings for the issuance of
Preferred Stock, and the Company has no plans to issue any shares of Preferred
Stock. See "Risk Factors -- Potential Issuance of Preferred Stock."
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES; CERTAIN PROVISIONS OF
RESTATED ARTICLES
Upon completion of this offering, the Company will become subject to the
Oregon Control Share Act (OBCA Sections 60.801-60.816) (the "Control Share
Act"). The Control Share Act generally provides that a person (the "Acquiring
Person") who acquires voting stock of an Oregon corporation in a transaction
which results in such Acquiring Person holding more than 20%, 33 1/3% or 50% of
the total voting power of such corporation (a "Control Share Acquisition")
cannot vote the shares it acquires in the Control Share Acquisition ("control
shares") unless voting rights are accorded to such control shares by the holders
of a majority of the outstanding voting shares, excluding the control shares
held by the Acquiring Person and shares held by the Company's officers and
inside directors ("interested shares"), and by the holders of a majority of the
outstanding voting shares, including interested shares. The foregoing vote would
be required at the time an Acquiring Person's holdings exceed 20% of the total
voting power of a company, and again at the time the Acquiring Person's holdings
exceed 33 1/3% and 50%. The term "Acquiring Person" is broadly defined to
include persons acting as a group. A transaction in which voting power is
acquired solely by receipt of an immediately revocable proxy does not constitute
a "Control Share Acquisition."
The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans for acquiring the Company's stock. The Acquiring
Person Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the Acquiring Person does not
42
request a special meeting of shareholders, the issue of voting rights of control
shares will be considered at the next annual meeting or special meeting of
shareholders that is held more than 60 days after the date of the Control Share
Acquisition. If the Acquiring Person's control shares are accorded voting rights
and represent a majority or more of all voting power, shareholders who do not
vote in favor of the restoration of such voting rights will have the right to
receive the appraised "fair value" of their shares, which may not be less than
the highest price paid per share by the Acquiring Person for the control shares.
See "Risk Factors -- Effect of Certain Anti-Takeover Provisions."
Upon completion of this offering, the Company also will become subject to
the Oregon Business Combination Act (OBCA Sections 60.825-60.845) (the "Business
Combination Act"). The Business Combination Act generally provides that in the
event a person or entity acquires 15% or more of the voting stock of an Oregon
corporation (an "Interested Shareholder"), the corporation and the Interested
Shareholder, or any affiliated entity, may not engage in certain business
combination transactions for a period of three years following the date the
person became an Interested Shareholder. Business combination transactions for
this purpose include (a) a merger or plan of share exchange, (b) any sale,
lease, mortgage or other disposition of the assets of the corporation where the
assets have an aggregate market value equal to 10% or more of the aggregate
market value of the corporation's assets or outstanding capital stock and (c)
certain transactions that result in the issuance of capital stock of the
corporation to the Interested Shareholder. These restrictions do not apply if
(i) the Interested Shareholder, as a result of the transaction in which such
person became an Interested Shareholder, owns at least 85% of the outstanding
voting stock of the corporation (disregarding shares owned by directors who are
also officers, and certain employee benefit plans), (ii) the Board of Directors
approves the share acquisition or business combination before the Interested
Shareholder acquired 15% or more of the corporation's voting stock, or (iii) the
Board of Directors and the holders of at least two-thirds of the outstanding
voting stock of the corporation (disregarding shares owned by the Interested
Shareholder) approve the transaction after the Interested Shareholder acquires
15% or more of the corporation's voting stock. The Control Share Act and the
Business Combination Act will have the effect of encouraging any potential
acquiror to negotiate with the Company's Board of Directors and will also
discourage certain potential acquirors unwilling to comply with its provisions.
See "Risk Factors -- Effect of Certain Anti-Takeover Provisions."
The Company's Restated Articles contain provisions which (i) when the
Company has six or more directors, classify the Board of Directors into three
classes as nearly equal in number as possible, each of which, after an interim
arrangement, will serve for three years with one class being elected each year
(the "Classified Board Provisions"), (ii) provide that directors may be removed
by shareholders only for cause and only upon the vote of 75% of the votes then
entitled to be cast for the election of directors and (iii) require the approval
of holders of 67% of the outstanding shares of the Company entitled to vote to
effect a merger or consolidation of the Company, the sale, lease or exchange of
all or substantially all of the Company's assets or the dissolution or
liquidation of the Company. The Classified Board Provisions, the availability of
Preferred Stock for issuance without shareholder approval and the supermajority
voting requirements with respect to significant corporate transactions may have
the effect of lengthening the time required for a person to acquire control of
the Company through a proxy contest or the election of a majority of the Board
of Directors and may deter any potential unfriendly offers or other efforts to
obtain control of the Company. This could deprive the Company's shareholders of
opportunities to realize a premium for their Common Stock and could make removal
of incumbent directors more difficult. At the same time, these provisions may
have the effect of inducing any persons seeking control of the Company to
negotiate terms acceptable to the Board of Directors. In addition, the
provisions of the Restated Articles regarding removal of directors will make the
removal of any director more difficult even if such removal is believed by the
shareholders to be in their best interests. Since these provisions make the
removal of directors more difficult, they increase the likelihood that incumbent
directors will retain their positions and, since the Board has the power to
retain and discharge management, could perpetuate incumbent management. See
"Risk Factors -- Effect of Certain Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Interstate
Bank of Oregon, N.A. ("First Interstate"). First Interstate's address is 999
Third Avenue, Seattle, Washington 98104, and its telephone number is (206)
292-3795.
43
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
6,755,611 shares of Common Stock (7,044,198 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,700,000
shares sold in this offering (or 3,105,000 shares if the over-allotment option
is exercised in full) will be available for resale in the public market by
persons other than "affiliates" of the Company without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In addition, approximately 556,500 shares will be eligible for immediate
sale in the public market without restriction pursuant to Rule 144(k) under the
Securities Act. Approximately 1,851,227 additional shares outstanding upon
completion of this offering will be "restricted securities" ("Restricted
Shares") within the meaning of Rule 144 and will be eligible for sale pursuant
to Rule 144 and approximately 130,217 shares will be eligible for sale under
Rule 701, in each case after the expiration of a 90-day period after the date of
this Prospectus. The holders of 2,359,227 shares of Common Stock and the holders
of a warrant and options to purchase 1,471,972 shares of Common Stock have
agreed not to sell or dispose of such shares for a period of 180 days after the
effective date of the Registration Statement. Sales of shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed "affiliates" of the Company, would be entitled to sell
within any three month period a number of shares that does not exceed the
greater of 1% of the number of shares of Common Stock then outstanding (which
will equal approximately 67,556 shares immediately after the offering) or the
average weekly trading volume of the Common Stock on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Such sales are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. In addition, a
person (or persons whose shares are aggregated) who is not and is not deemed to
have been an affiliate of the Company at any time during the 90 calendar days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to sell such shares under Rule 144
without regard to the volume limitations or other restrictions described above.
Any employee, director or officer of or consultant to the Company who
purchased shares pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701, which permit nonaffiliates to sell
Rule 701 shares without compliance with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permit affiliates to sell
Rule 701 shares without compliance with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus, but
subject to the lock-up agreements described below.
As soon as practicable following 180 days after the date of the Registration
Statement, the Company intends to file a registration statement under the
Securities Act to register approximately 5,200,000 shares of Common Stock
reserved for issuance under the Company's stock option plans. Such registration
statement is expected to be filed approximately 180 days after the date of this
Prospectus. Shares of Common Stock issuable after the effective date of such
registration statement upon exercise of stock options granted under the stock
option plans will generally be eligible for resale on the open market. See
"Management -- Stock Option Plans."
The number of Shares that will be sold under the foregoing rules will depend
in part on the market price for the Common Stock, the circumstances of the
sellers and other factors. In addition, following the closing of the offering,
the holders of 2,191,328 shares of Common Stock (including for this purpose
shares issued upon exercise of warrants) will be entitled to certain demand and
piggyback registration rights with respect to such shares.
The Company and the directors, executive officers, the Selling Shareholders
and certain other security holders of the Company have agreed that for a period
of 180 days after the effective date of the Registration Statement, without the
prior written consent of Robertson, Stephens & Company LLC, they will not sell,
dispose of any shares of Common Stock or any options to purchase Common Stock.
Prior to this offering, there has been no market for the Common Stock. See
"Risk Factors -- No Prior Public Market" and "Potential Volatility of Stock
Price." Sales of substantial amounts of Common Stock in the public market
(including shares issued upon the exercise of options that may be granted
pursuant to any employee stock option or other equity plan of the Company), or
the perception that such sales may occur, could adversely affect prevailing
market prices for the Common Stock.
44
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Donaldson, Lufkin & Jenrette Securities
Corporation and J.P. Morgan Securities, Inc (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company and the Selling Shareholders the number
of shares of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
NUMBER OF
UNDERWRITER SHARES
----------
Robertson, Stephens & Company LLC.....................................................................
Donaldson, Lufkin, Jenrette Securities Corporation....................................................
J.P. Morgan Securities, Inc...........................................................................
----------
Total............................................................................................. 2,700,000
----------
----------
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
of not more than $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company or the Selling
Shareholders as set forth on the cover page of this Prospectus.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase up to 262,500 and 142,500 additional shares of Common Stock,
respectively at the same price per share as the Company and the Selling
Shareholders receive for the 2,700,000 shares that the Underwriters have agreed
to purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number of shares of Common Stock to
be purchased by it shown in the above table represents as a percentage of the
2,700,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 2,700,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Selling Shareholders and the Company against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, the directors, officers and
certain shareholders of the Company have agreed with the Representatives that,
for a period commencing on the date of the lock-up agreement and ending 180 days
after the date of this Prospectus, subject to certain limited exceptions, they
will not offer to sell, contract to sell or otherwise sell or dispose of any
shares of Common Stock, any options or warrants to purchase shares of Common
Stock, or any securities convertible or exchangeable for shares of Common Stock
owned directly by such holders or with respect to which such holders have the
power of disposition without the prior written consent of Robertson, Stephens &
Company LLC. Following expiration of such 180 day period, such shares will be
eligible for immediate public sale without registration under the Securities
Act, subject to the provisions of Rule 144. In addition, the Company has agreed
that until 180 days after the date of this Prospectus, the Company will not,
without the prior written consent of Robertson, Stephens & Company LLC, subject
to certain limited exceptions, issue, sell, or otherwise dispose of, any shares
45
of Common Stock, any options or warrants to purchase any shares of Common Stock
or any securities convertible into or exercisable for shares of Common Stock
other than the Company's sale of shares in this Offering. Robertson, Stephens &
Company LLC, may, in its sole discretion, and at any time without notice, in
writing, release all or a portion of the securities subject to the lock-up
agreements from the restrictions contained therein. See "Shares Eligible For
Future Sale.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price has been
determined through negotiations among the Company, the Selling Shareholders and
the Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other publicly-traded companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Ater Wynne Hewitt Dodson & Skerritt, Portland, Oregon.
Certain legal matters with respect to this Offering are being passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1994 and
1995 and March 31, 1996 and for each of the years in the three-year period ended
June 30, 1995 and for the nine-month period ended March 31, 1996 have been
included in this Prospectus and elsewhere in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, NW, Judiciary Plaza, Washington D.C. 20549 and at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024 Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois, and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
46
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of KPMG Peat Marwick LLP............................................................................ F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Claremont Technology Group, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Claremont
Technology Group, Inc. and subsidiaries as of June 30, 1994 and 1995 and March
31, 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1995 and for the nine-month period ended March 31, 1996. 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 Claremont
Technology Group, Inc. and subsidiaries as of June 30, 1994 and 1995 and March
31, 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended June 30, 1995 and for the nine-month
period ended March 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Portland, OR
May 20, 1996
F-2
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
Current assets:
Cash and cash equivalents........................................................ $ 1,870 $ 340 $ 80
Receivables:
Accounts receivable, net....................................................... 2,119 5,546 7,120
Revenue earned in excess of billing............................................ -- 265 3,086
Other.......................................................................... 5 40 60
Prepaid expenses and other current assets........................................ 78 73 251
Deferred income taxes............................................................ 484 219 258
Notes receivable................................................................. 85 85 604
--------- --------- -----------
Total current assets......................................................... 4,641 6,568 11,459
Property and equipment, net........................................................ 485 1,522 3,743
Long-term notes receivable......................................................... 135 710 75
Other noncurrent assets, net....................................................... 231 778 3,001
--------- --------- -----------
Total assets................................................................. $ 5,492 $ 9,578 $ 18,278
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 187 $ 882 $ 2,104
Line of credit................................................... -- 200 --
Current installments of long-term debt........................... 27 290 1,063
Current installments of obligations under capital leases......... 83 3 --
Accrued expenses................................................. 1,230 2,068 3,372
Income taxes payable............................................. 102 419 375
Deferred revenue................................................. 256 253 956
Deferred income taxes............................................ 711 -- 523
--------- --------- -----------
Total current liabilities.................................... 2,596 4,115 8,393
Long-term debt, excluding current installments..................... 5 334 1,756
Obligations under capital leases, excluding current installments... 3 -- --
Deferred income taxes.............................................. 5 28 --
--------- --------- -----------
Total liabilities............................................ 2,609 4,477 10,149
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value. Authorized 2,000 shares; no shares
issued or outstanding........................................... -- -- --
Common stock, no par value. Authorized 10,000 shares; issued
5,000 shares; 3,949, 4,233 and 4,767 shares outstanding at June
30, 1994 and 1995 and March 31, 1996, respectively.............. 47 202 1,303
Retained earnings................................................ 2,836 4,898 6,831
Cumulative translation adjustment................................ -- 1 (5)
--------- --------- -----------
Total shareholders' equity................................... 2,883 5,101 8,129
--------- --------- -----------
Total liabilities and shareholders' equity................... $ 5,492 $ 9,578 $ 18,278
--------- --------- -----------
--------- --------- -----------
See accompanying notes to consolidated financial statements.
F-3
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Revenue:
Professional fees................................................. $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 31,711
Resold products and services...................................... -- -- -- -- 1,964
--------- --------- --------- --------- ---------
Total revenue................................................... 15,667 15,713 27,292 18,988 33,675
--------- --------- --------- --------- ---------
Costs and expenses:
Project costs and expenses........................................ 9,112 9,106 13,704 9,267 16,791
Resold products and services...................................... -- -- -- -- 1,874
Selling, general and administrative............................... 3,781 4,214 10,156 6,931 11,131
--------- --------- --------- --------- ---------
Total costs and expenses........................................ 12,893 13,320 23,860 16,198 29,796
--------- --------- --------- --------- ---------
Income from operations.......................................... 2,774 2,393 3,432 2,790 3,879
--------- --------- --------- --------- ---------
Other income (expense):
Interest income................................................... 53 44 83 67 38
Interest expense.................................................. (36) (30) (31) (17) (77)
Other............................................................. 4 (2) 15 -- (19)
--------- --------- --------- --------- ---------
Total other income (expense).................................... 21 12 67 50 (58)
--------- --------- --------- --------- ---------
Income before income taxes...................................... 2,795 2,405 3,499 2,840 3,821
Income tax expense.................................................. 1,204 953 1,352 1,097 1,616
--------- --------- --------- --------- ---------
Net income...................................................... $ 1,591 $ 1,452 $ 2,147 $ 1,743 $ 2,205
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per common share..................................... $ .28 $ .24 $ .31 $ .25 $ .29
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding........................................................ 5,796 6,269 7,319 7,215 7,662
See accompanying notes to consolidated financial statements.
F-4
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK RETAINED CUMULATIVE TOTAL
---------------------- EARNINGS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) ADJUSTMENT EQUITY
----------- --------- ----------- ----------- ------------
Balance at June 30, 1992.................................. 3,900 $ 33 $ (26) $ -- $ 7
Net income................................................ -- -- 1,591 -- 1,591
Stock options exercised................................... 66 11 -- -- 11
Purchase of common stock.................................. (25) (4) (22) -- (26)
----- --------- ----------- ----------- ------------
Balance at June 30, 1993.................................. 3,941 40 1,543 -- 1,583
Net income................................................ -- -- 1,452 -- 1,452
Stock options exercised................................... 142 33 -- -- 33
Purchase of common stock.................................. (134) (26) (159) -- (185)
----- --------- ----------- ----------- ------------
Balance at June 30, 1994.................................. 3,949 47 2,836 -- 2,883
Net income................................................ -- -- 2,147 -- 2,147
Tax benefit of stock options exercised.................... -- 83 -- -- 83
Stock options exercised................................... 339 102 -- -- 102
Purchase of common stock.................................. (55) (30) (85) -- (115)
Foreign currency translation adjustment................... -- -- -- 1 1
----- --------- ----------- ----------- ------------
Balance at June 30, 1995.................................. 4,233 202 4,898 1 5,101
Net income................................................ -- -- 2,205 -- 2,205
Tax benefit of stock options exercised.................... -- 525 -- -- 525
Stock options exercised................................... 603 472 -- -- 472
Stock compensation recognized............................. -- 107 -- -- 107
Purchase of common stock.................................. (69) (3) (272) -- (275)
Foreign currency translation adjustment................... -- -- -- (6) (6)
----- --------- ----------- ----------- ------------
Balance at March 31, 1996................................. 4,767 $ 1,303 $ 6,831 $ (5) $ 8,129
----- --------- ----------- ----------- ------------
----- --------- ----------- ----------- ------------
See accompanying notes to consolidated financial statements.
F-5
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Cash flows from operating activities:
Net income................................................. $ 1,591 $ 1,452 $ 2,147 $ 1,743 $ 2,205
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 176 227 467 284 966
Loss from sale of fixed assets........................... -- 2 -- -- --
Deferred income taxes.................................... 562 321 (423) -- 456
Non-cash stock compensation recognized................... -- -- -- -- 107
Changes in assets and liabilities:
Receivables............................................ (1,406) 137 (3,565) (2,166) (4,419)
Prepaid expenses and other current assets.............. 377 4 5 32 (178)
Other non-current assets............................... 12 (49) (90) (91) (1,058)
Accounts payable and accrued expenses.................. 575 (196) 1,451 666 2,516
Deferred revenue....................................... (551) (777) (3) (190) 661
Income taxes payable................................... 256 (391) 242 343 (42)
--------- --------- --------- --------- ---------
Net cash provided by operating activities............ 1,592 730 231 621 1,214
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired.......................... -- -- (204) (204) (130)
Proceeds from sale of long-term certificate of deposit..... -- 32 -- -- --
Purchase of property and equipment......................... (207) (247) (1,498) (1,077) (2,936)
Proceeds from sale of property and equipment............... -- 8 -- -- --
Capitalized software costs................................. -- -- (122) (42) (1,236)
--------- --------- --------- --------- ---------
Net cash used by investing activities................ (207) (207) (1,824) (1,323) (4,302)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payments on line of credit................................. -- -- 4,400 -- 9,325
Proceeds from line of credit............................... -- -- (4,200) -- (9,525)
Payments of long-term debt................................. (24) (29) (39) (22) (375)
Proceeds from issuance of long-term debt................... 19 -- 500 -- 2,570
Payments of obligations under capital leases............... (60) (70) (83) (61) (3)
Purchase of common stock................................... (26) (185) (115) (76) (275)
Proceeds from exercise of stock options.................... 11 33 185 71 997
Payments (issuance) of notes receivable, net............... -- (220) (575) (535) 116
--------- --------- --------- --------- ---------
Net cash provided (used) by financing activities..... (80) (471) 73 (623) 2,830
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash...................... -- -- (10) -- (2)
Net (decrease) increase in cash and cash equivalents....... 1,305 52 (1,530) (1,325) (260)
Cash and cash equivalents at beginning of year............... 513 1,818 1,870 1,870 340
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year..................... $ 1,818 $ 1,870 $ 340 $ 545 $ 80
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest..................................... $ 36 $ 30 $ 31 $ 17 $ 78
Cash paid for taxes........................................ 198 1,034 1,319 1,120 673
Supplemental disclosure of non-cash investing and financing
activities:
Net liabilities assumed in merger.......................... $ -- $ -- $ 151 $ 151 $ 57
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
F-6
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994 AND 1995 AND MARCH 31, 1996
(IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Claremont Technology Group, Inc. (the Company) provides enterprise-wide
information technology ("IT") solutions that re-engineer mission-critical
business processes such as customer service, order processing, billing and
logistics. Claremont services include IT planning, systems integration and
development and outsourcing, through a project management methodology that
employs reusable object oriented software modules and transferable design frame
works.
Claremont provides solutions to large organizations in select high demand,
vertical markets including communications, financial services and
pension/retirement services. Claremont's clients consist of large corporations
and government organizations in the United States and foreign markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Claremont Technology Group, Inc. and its wholly owned subsidiaries, Claremont
Retirement Technologies, Inc. (CRTI), Claremont Technology Group Ireland Ltd.
and Claremont Technology Group Canada, Inc. (CTGCI). All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of investments in highly liquid investment
instruments with original maturities of three months or less.
INVESTMENT IN PARTNERSHIP
Claremont Retirement Solutions, Ltd. is a limited partnership for which CRTI
is the general partner. The investment in the partnership is accounted for by
the cost method.
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade payables
and short term borrowings approximate fair value because of the short term
nature of these instruments. The fair value of long-term debt was estimated by
discounting the future cash flows using market interest rates and does not
differ significantly from that reflected in the financial statements.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
REVENUE AND COST RECOGNITION
Revenue from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to the estimated total cost at completion. This method is used because
management considers accumulated costs to be the best available measure of
progress on these contracts. The cumulative impact of any revision in estimates
of the percent complete is reflected in the year in which the changes become
known. Losses on projects in progress are recognized when known. Revenue earned
in excess of billings is comprised of earnings on certain contracts in excess of
contractual billings on such contracts. Billings in excess of earnings are
classified as deferred revenues.
Revenue from time and materials contracts are recognized during the period
in which the services are provided.
F-7
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$-0-, $98 and $98 at June 30, 1994 and 1995 and March 31, 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of future minimum lease payments at the inception of
the lease.
Depreciation of property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets ranging from three to five
years. Equipment held under capital leases and leasehold improvements are
amortized straight-line over the shorter of the lease term or estimated useful
lives of the assets.
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Statement 109
requires a change from the deferred method of accounting for income taxes of APB
Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, 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
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
There was no material cumulative effect of this change in the method of
accounting for income taxes.
FOREIGN CURRENCY TRANSLATION
The local currency is the functional currency in the Company's foreign
subsidiaries. Assets and liabilities of the foreign subsidiaries are translated
to U.S. dollars at current rates of exchange, and revenues and expenses are
translated using weighted average rates, in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation." Gains and
losses from foreign currency translation are included as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense.
INTANGIBLE ASSETS
Software development costs incurred subsequent to establishing a product's
technological feasibility are capitalized until such product is available for
general release to customers in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed". Capitalized software costs are amortized
on a product-by-product basis. Amortization will be recorded based on the
greater of (a) the estimated economic life of the software (generally three
years or less) or (b) the ratio of current gross revenues for each product to
the total of current and anticipated gross revenues for each product, commencing
when such product is available for general release.
Other intangibles include purchased technology and a covenant not to
compete, which are amortized over periods ranging from two to five years using
the straight-line method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
F-8
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares
of common and common equivalent shares outstanding. Common equivalent shares
from stock options and warrants are excluded from the computation if their
effect is antidilutive, except that pursuant to the Securities and Exchange
Staff Accounting Bulletins common and common equivalent shares issued at prices
below the public offering price during the twelve months immediately preceding
the initial filing date have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method and the
initial public offering price.
(2) ACQUISITIONS
In January 1995 the Company formed CTGCI by paying $5 in consideration for
4,999 shares of CTGCI common stock. Subsequently, under the terms of a Letter of
Agreement which was effective in January 1995, CTGCI purchased 100 percent of
the outstanding stock of Tony Martins & Associes, Inc. (TMAI) for $421. The
agreement provided for $290 to be delivered upon closing and a loan payable in
the amount of $131 due on January 31, 1996. The acquisition was accounted for
under the purchase method of accounting with CTGCI acquiring the net assets of
TMAI. Financial results subsequent to the acquisition date have been included in
the consolidated statements of operations and cash flows.
The fair value of assets and liabilities acquired at the date of acquisition
are presented below:
Cash......................................................................... $ 86
Accounts receivable.......................................................... 156
Furniture and computer equipment............................................. 4
Purchased technology......................................................... 326
Accounts payable and accrued expenses........................................ (151)
---------
Net assets acquired...................................................... $ 421
---------
---------
In January 1996, the Company purchased certain assets of The Node Connection
(TNC) for $130. The acquisition has been accounted for as a purchase, and the
financial results of TNC have been included in the accompanying consolidated
financial statements since the date of acquisition. The cost of the acquisition
has been allocated on the basis of the estimated fair value of the assets
acquired and the liabilities assumed.
The fair value of assets and liabilities acquired at the date of acquisition
are presented below:
Accounts receivable.......................................................... $ 3
Fixed assets................................................................. 65
Identifiable intangible assets............................................... 119
Accounts payable............................................................. (15)
Deferred revenue............................................................. (42)
---
Net assets acquired........................................................ $ 130
---
---
The separate operational results of these acquisitions were not material and
accordingly pro-forma financial results have been omitted.
F-9
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(3) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
Furniture and equipment.................................................. $ 171 $ 452 $ 985
Computer equipment and software.......................................... 563 1,788 4,195
Leased equipment......................................................... 216 216 216
Leasehold improvements................................................... 49 49 108
--------- --------- -----------
999 2,505 5,504
Less accumulated depreciation and amortization........................... (514) (983) (1,761)
--------- --------- -----------
Property and equipment, net............................................ $ 485 $ 1,522 $ 3,743
--------- --------- -----------
--------- --------- -----------
Depreciation expense for the years ended June 30, 1993, 1994, and 1995 and
for the nine month period ending March 31, 1996 was $176, $227, $469 and $778,
respectively.
ACCRUED EXPENSES
The Company's accrued expenses consist of the following:
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
Accrued payroll.......................................................... $ 521 $ 805 $ 1,238
Accrued vacation......................................................... 439 828 1,075
Accrued payroll taxes.................................................... 4 18 619
Accrued profit sharing................................................... 52 392 419
Accrued other............................................................ 214 25 21
--------- --------- -----------
$ 1,230 $ 2,068 $ 3,372
--------- --------- -----------
--------- --------- -----------
OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
Software development costs............................................... $ -- $ 122 $ 1,384
Purchased technology..................................................... -- 334 249
Covenant not to compete.................................................. -- -- 958
Other.................................................................... 231 322 410
--------- --------- -----------
$ 231 $ 778 $ 3,001
--------- --------- -----------
--------- --------- -----------
(4) INVESTMENT IN PARTNERSHIP
Claremont Retirement Solutions, Ltd. (the Partnership) was formed with one
of the Company's major customers to receive royalties from CRTI for future sales
of a pension/retirement system template to other public and private pension
funds. CRTI has obtained licensing rights from the Partnership to remarket the
template. CRTI's initial equity contribution to the Partnership represents
approximately 1% of the Partnership's total capital.
F-10
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(5) LEASES
The Company was obligated under various capital leasing arrangements for
certain of its computer equipment and office furniture. The leases had expired
by March 31, 1996.
The Company also leases certain of its office space through noncancelable
operating lease arrangements. The leases expire April 30, 1996 through September
30, 2000, and are net leases with the Company paying all executory costs,
including insurance, utilities, and maintenance. Rental expense for operating
leases during the years ended June 30, 1993, 1994 and 1995 and for the
nine-month period ending March 31, 1996 was $93, $102, $404 and $532,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) are as follows:
OPERATING
LEASES
-----------
Year ending June 30:
1996 (for the three months ended June 30)........................................ $ 157
1997............................................................................. 617
1998............................................................................. 515
1999............................................................................. 435
2000............................................................................. 228
-----------
Total minimum lease payments................................................... $ 1,952
-----------
-----------
(6) LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
7.6% installment loan payable in monthly installments of $61, including interest,
with final payment due April 1999, secured by certain furniture and equipment.... $ -- $ -- $ 1,944
7.59% installment loan payable in monthly installments of $14 with final payment
due November 1998, secured by certain furniture and equipment.................... -- -- 431
8.05% installment loan payable in monthly installments of $16, including interest,
with final payment due May 1998, secured by certain furniture and equipment...... -- 488 374
Non-interest bearing loans payable to former shareholders of acquired companies,
due in 1996...................................................................... -- 131 70
Installment loans payable in monthly installments................................. 32 5 --
--- --------- -----------
32 624 2,819
Less current installments of long-term debt....................................... (27) (290) (1,063)
--- --------- -----------
Long-term debt, excluding current installments.................................. $ 5 $ 334 $ 1,756
--- --------- -----------
--- --------- -----------
F-11
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(6) LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt for years subsequent to March 31,
1996 are as follows:
Year ending June 30:
1996 (for the three months ended June 30)................................. $ 283
1997...................................................................... 944
1998...................................................................... 993
1999...................................................................... 599
---------
$ 2,819
---------
---------
During 1995, the Company entered into a $2 million line of credit with a
bank which was subsequently increased to $4 million in March of 1996, with an
interest rate of .25 percentage points above the bank's reference rate (8.5% at
March 31, 1996), available through August 1, 1997. This line of credit is
secured by furniture, equipment, and accounts receivable. At March 31, 1996,
$-0- was outstanding on this line of credit.
The Company is a guarantor on a nonrevolving line of credit with a bank
which provided for borrowings of up to $2.0 million for purposes of facilitating
the purchase of Company common stock by Company executives. As of March 31,
1996, there was $1.7 million of related debt outstanding against the line.
Advances under the line of credit were made directly to the Company executive
with full recourse and bear interest. Advances under the line of credit were for
thirty-six months and include monthly interest payments, made by each Company
executive, with principal repayment by each Company executive on or before July
31, 1998.
The Company has available a standby letter of credit for up to $125. As of
March 31, 1996 there were no amounts outstanding under the line of credit.
F-12
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(7) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109, effective July 1,
1993. Prior year financial statements have not been restated to apply the
provision of Statement 109. There was no cumulative effect with the adoption of
Statement 109.
The components of income tax expense are as follows:
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -------------
Current:
Federal.................................................... $ 490 $ 468 $ 1,351 $ 831
State and local............................................ 152 164 398 217
Foreign.................................................... -- -- 26 112
--------- --------- --------- ------
642 632 1,775 1,160
--------- --------- --------- ------
Deferred:
Federal.................................................... 429 253 (314) 359
State and local............................................ 133 68 (109) 97
--------- --------- --------- ------
562 321 (423) 456
--------- --------- --------- ------
Total.................................................... $ 1,204 $ 953 $ 1,352 $ 1,616
--------- --------- --------- ------
--------- --------- --------- ------
The actual income tax expense differs from the expected tax expense
(computed by applying the U.S. federal and corporate income tax rate of 34% to
net income before income taxes) as follows:
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -------------
Computed expected income tax expense......................... $ 950 $ 818 $ 1,190 $ 1,299
Increase (reduction) in income tax expense resulting from:
State income tax expense................................... 189 147 214 210
Foreign taxes.............................................. -- -- -- (10)
Other...................................................... 65 (12) (52) 117
--------- --------- --------- ------
Income tax expense....................................... $ 1,204 $ 953 $ 1,352 $ 1,616
--------- --------- --------- ------
--------- --------- --------- ------
F-13
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
JUNE 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
Deferred tax assets:
Accrued expenses......................................................... $ -- $ 176 $ 219
Expenses deductible in future periods.................................... 484 -- --
Other.................................................................... -- 43 39
--------- --------- -----
Total gross deferred tax assets........................................ 484 219 258
--------- --------- -----
Deferred tax liabilities:
Capitalized cost......................................................... -- (27) (513)
Income taxable in future periods......................................... (711) -- --
Property and equipment, due to differences in depreciation............... (5) (1) (10)
--------- --------- -----
Total gross deferred tax liabilities................................... (716) (28) (523)
--------- --------- -----
Net deferred tax assets (liabilities).................................. $ (232) $ 191 $ (265)
--------- --------- -----
--------- --------- -----
The Company reported income and expense items on the cash basis for income
tax purposes and the accrual method for financial reporting purposes during the
years ended June 30, 1993 and 1994.
(8) STOCK INCENTIVE PLANS
During fiscal 1992, the Company adopted, and the Board of Directors
approved, a stock incentive plan for eligible employees, directors and outside
consultants of the Company (the 1992 Plan). Either non-qualified or incentive
stock options may be issued under this plan and are exercisable for a period of
up to ten years from the date of grant. Certain of these options are subject to
acceleration clauses. The Company has authorized issuance of such options to
purchase up to an aggregate of 4,100,000 shares of its common stock. The options
vest and are exercisable over various periods from the initial grant date.
During 1996, the Company also adopted and the Board of Directors approved
the 1996 Nonemployee Director Stock Option Plan (the 1996 Nonemployee Director
Plan). Under the terms of the 1996 Nonemployee Director Plan, directors of the
Company who are not employees of the Company or any subsidiary of the Company
are eligible to receive non-qualified options to purchase shares of common
stock. A total of 200,000 shares of common stock have been reserved for issuance
upon exercise of stock options granted under the 1996 Nonemployee Director Plan.
Upon election to the board of directors, each director is granted an option to
purchase 20,000 shares, which option will vest over a three-year period (each a
"Recruitment Grant"). Following the first annual meeting of shareholders after a
Recruitment Grant is fully-vested, the nonemployee director holding such
fully-vested Recruitment Grant will receive an option to purchase an additional
15,000 shares of Common Stock, which option will vest over a three-year period
(a "First Renewal Grant"). Furthermore, following the first annual meeting of
shareholders after a nonemployee director's First Renewal Grant is fully-vested,
and following every third annual meeting of shareholders thereafter, such
nonemployee director will be granted an option to purchase an additional 15,000
shares of Common Stock, which option will vest over a three-year period. The
exercise price of options granted under the 1996 Nonemployee Director Plan may
not be less than fair market of a share of common stock on the date of the grant
of the option.
F-14
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(8) STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes stock option activity through March 31, 1996:
PRICE
SHARES SHARES
---------- --------------
Outstanding options at June 30, 1992....................................... 1,423,334 $ .136 - 0.16
Granted.................................................................... 1,254,425 .160 - 1.03
Exercised.................................................................. (66,250) 0.16
Canceled................................................................... (381,250) .160 - 0.51
---------- --------------
Outstanding options at June 30, 1993....................................... 2,230,259 .136 - 1.03
Granted.................................................................... 1,333,724 .030 - 1.73
Exercised.................................................................. (141,758) .160 - 1.43
Canceled................................................................... (269,808) .160 - 1.73
---------- --------------
Outstanding options at June 30, 1994....................................... 3,152,417 .136 - 1.73
Granted.................................................................... 664,635 1.730 - 3.55
Exercised.................................................................. (338,546) .136 - 2.21
Canceled................................................................... (107,351) .160 - 3.55
---------- --------------
Outstanding options at June 30, 1995....................................... 3,371,155 .136 - 3.55
Granted.................................................................... 546,000 3.550 - 4.02
Exercised.................................................................. (603,652) .136 - 4.02
Canceled................................................................... (124,407) .160 - 4.02
---------- --------------
Outstanding options at March 31, 1996...................................... 3,189,096 $ .136 - 4.02
---------- --------------
---------- --------------
At March 31, 1996, 1,419,080 of the outstanding options were exercisable.
(9) PROFIT SHARING PLAN
In January 1990, the Company adopted a qualified profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. The plan requires
participants to be at least 21 years of age and have completed at least one hour
of service. Employees can make voluntary contributions up to limitations
prescribed by the Internal Revenue Code. Company matching contributions are
discretionary. For the years ended June 30, 1993, 1994 and 1995 and the
nine-month period ending March 31, 1996, the Company recognized discretionary
matching contributions of $82, $45, $75 and $101, respectively.
(10) EMPLOYEE STOCK OWNERSHIP PLAN
In June 1995, the Company established an Employee Stock Ownership Plan
(ESOP) for eligible U.S. employees. The ESOP is designed to invest primarily in
common stock of the Company. Each nonunion employee of the Company or any
affiliated company automatically participates in the ESOP on the January 1 or
July 1 following such employee's date of hire.
The general assets of the ESOP are held in trust under a Trust Agreement.
The Company has appointed the Hawaiian Trust Company, Ltd. as the trustee
("Trustee"). The Trustee holds legal title to all assets of the ESOP and subject
to applicable laws and the terms of the ESOP has the discretionary power to buy
common stock and to sell common stock held by the ESOP.
F-15
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(10) EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The voting rights with respect to common stock held by the ESOP are
exercised by the Trustee, as directed by the ESOP committee. In the case of a
transaction such as a reorganization, recapitalization, merger, sale of
substantially all assets, liquidation, dissolution or similar transaction which
must be approved by the shareholders, the participants may direct the Trustee
how to vote the common stock allocated to their Company stock accounts.
A participant's account becomes fully vested and nonforfeitable after seven
years of service with the Company, or earlier if the participant attains age 65,
becomes totally disabled or dies. The participant's account vests at the rate of
10% per year for the first four years of employment, and at the rate of 20% per
year for each year thereafter, until fully vested. The Company pays all
administrative costs of the ESOP.
The Company makes all contributions to the ESOP, which may be made in either
cash or shares of common stock. The contributions to the ESOP for the year
ending June 30, 1995 and the nine-month period ended March 31, 1996 consisted of
cash of $300 and $318, respectively. Future contributions to the ESOP will be
made at the Company's discretion.
(11) BUSINESS AND CREDIT CONCENTRATION
Revenues from certain of the Company's largest customers individually
exceeded 10% of revenues in the years ended June 30, 1993, 1994 and 1995 and for
the nine month period ending March 31, 1996 as follows:
1993 1994 1995 1996
---------- ---------- ---------- ----------
Ohio State Teachers Retirement System....................... 78% 72% 38% 14%
AT&T Network Systems........................................ --% --% 19% 2%
Lucent Technologies......................................... --% --% --% 24%
Mississippi Public Employee Retirement System............... --% --% --% 12%
At June 30, 1994 and 1995 and March 31, 1996, the trade accounts receivable
balances from these customers were $964, $2,014 and $1,956, respectively.
(12) RELATED PARTY TRANSACTIONS
The Company issued notes receivable to its majority shareholder during
fiscal years ended June 30, 1994 and 1995. The notes were forgiven during 1996.
The amount of the notes and interest receivable at June 30, 1994 and 1995 and
the nine-months ending March 31, 1996 were $100 and $-0-, $410 and $13 and $-0-
and $10, respectively.
The Company also issued notes receivable totaling $120, $385 and $514 to
certain employees during the fiscal years ended June 30, 1994 and 1995, and the
nine-month period ending March 31, 1996, respectively. The notes are due at
varying dates through July 31, 1997 and bear interest at rates ranging from 4%
to 7.1%. Interest receivable on these notes was $2, $6 and $2 at June 30, 1994
and 1995, and March 31, 1996, respectively. During fiscal 1995, a note
receivable totaling $85 was extended to July 1995 and paid in full at that time.
The Company has entered into a retirement and severance agreement with its
founder and (as of the date of the agreement, March 15, 1996) largest
shareholder. Under that agreement, in exchange for his commitment not to compete
with the Company for five years, the Company agreed to pay an amount equal to
one year's salary, provide a continuation of medical benefits during his
lifetime, forgive certain loans from the Company and pay resulting withholding
taxes, accelerate the exercisability of otherwise not yet exercisable stock
options for 35,800 shares of Claremont stock with an exercise price of $1.03
each, and grant him and certain trusts and individuals to whom he had
transferred stock certain "piggyback" registration rights. The Company also
agreed to guarantee a loan for him if the guarantee was required by the lender,
provided that the Company's guarantee was
F-16
CLAREMONT TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
secured by a pledge of Company stock belonging to the founder, and to provide
good faith cooperation if he wished to sell some of his stock in a transaction
before any public offering in which the Company might wish to participate.
The Company retained a board member as a consultant through his consulting
firm, and also directly as a part-time employee, for payments aggregating
$113,000 in fiscal year 1993, $113,000 in fiscal year 1994, $113,000 in fiscal
year 1995, and $39,114 in the nine months ended March 31, 1996. The consulting
and employment arrangement with the board member ended effective April 26, 1996.
(13) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
The Company has approximately $500 of performance bonds outstanding as of
March 31, 1996.
The Company has entered into three year employment agreements with its
president and chief financial officer. These agreements became effective upon
retaining these individuals and provide for an initial base salary of $400 and
$295, respectively. Each agreement states that if the executive's employment is
terminated by the Company for reasons other than cause, the executive's base
salary will continue for the longer of three years from the start date or six
months from the termination date. Regardless of the reason for termination, each
agreement contains commitments of noncompetition and nonsolicitation of the
companies personnel. These commitments last the longer of 18 months after
departure from the Company, or for as long as base salary continues to be paid.
(14) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment, providing systems
integration services. The Company's subsidiary in Canada accounted for $1,703 of
total revenue and $179 of net income for the nine months ended March 31, 1996.
Identifiable assets of this subsidiary were $1,623 at March 31, 1996.
Revenue by geographical area is provided below:
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
United States.................................... $ 15,667 $ 15,713 $ 26,730 $ 18,791 $ 31,972
Canada........................................... -- -- 562 197 1,703
--------- --------- --------- --------- ---------
Total........................................ $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 33,675
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(15) SUBSEQUENT EVENTS
On April 29, 1996, the Company's Board of Directors approved an increase in
the authorized number of common and preferred stock to 25,000,000 and 10,000,000
shares, respectively. In addition, the Company's Board of Directors approved an
increase of Common Stock reserved for issuance under the 1992 Plan to 5,000,000,
subject to shareholder approval.
On May 20, 1996, the Company issued a five year warrant to purchase 400,000
shares of Common Stock at an exercise price of $10.33 per share. The warrant is
subject to certain antidilution rights.
F-17
[INSIDE BACK COVER GRAPHICS--Icon representations of the Company's industry
sector focus]
Captions: Financial Services
Communications
Retirement/Pension Services
Retail/Commercial Services
[CLAREMONT LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant in connection with the offering described in this Registration
Statement. All amounts, except the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee are estimates. [Add description re Selling Shareholders'
fees]
SEC Registration Fee.............................................. $ 20,343
NASD Filing Fee................................................... 6,400
Nasdaq Listing Fee................................................ 35,110
Printing and Engraving Expenses................................... 130,000
Accounting Fees and Expenses...................................... 125,000
Legal Fees and Expenses........................................... 300,000
Blue Sky Fees and Expenses (including fees of counsel)............ 15,000
Transfer Agent and Registrar Fees................................. 7,000
Director and Officer Insurance.................................... 50,000
Miscellaneous Expenses............................................ 111,147
---------
Total......................................................... $ 800,000
---------
---------
- ------------
* Estimate.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As an Oregon corporation the Company is subject to the Oregon Business
Corporation Act ("OBCA") and the exculpation from liability and indemnification
provisions contained therein. Pursuant to Section 60.047(2)(d) of the OBCA,
Article IV of the Company's Second Restated Articles of Incorporation (the
"Restated Articles") eliminates the liability of the Company's directors to the
Company or its shareholders, except for any liability related to breach of the
duty of loyalty, actions not in good faith and certain other liabilities.
Article IV of the Restated Articles requires the Company to indemnify its
directors and officers to the fullest extent not prohibited by law.
Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with such claims. Corporations may not indemnify against
breaches of the duty of loyalty. The OBCA provides for mandatory indemnification
of directors against all reasonable expenses incurred in the successful defense
of any claim made or threatened whether or not such claim was by or in the right
of the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute.
The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.
Effective upon consummation of the offering, the Company will have entered
into indemnity agreements with each executive officer of the Company and each
member of the Company's Board of Directors. These indemnity agreements provide
for indemnification of the indemnitee to the fullest extent allowed by law.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1, 1993, the Company has sold securities without registration
under the Securities Act of 1933, as amended (the "Act") in the transactions and
in reliance on the exemptions from registration described below.
During the period from May 1, 1993 through May 15, 1996, the Company sold an
aggregate of 1,112,472 shares of Common Stock for an aggregate purchase price of
$626,633.39 to various employees pursuant to exercise of options granted under
the 1992 Stock Incentive Plan in reliance on Rule 701 promulgated under the Act.
During the period from May 1, 1993 through May 15, 1996, the Company issued
options to purchase an aggregate of 2,993,959 shares of Common Stock pursuant to
the 1992 Stock Incentive Plan in reliance on Rule 701 promulgated under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
1.0 Form of Underwriting Agreement
3.1 Second Restated Articles of Incorporation of Claremont Technology Group, Inc.
3.2 Second Amended and Restated Bylaws of Claremont Technology Group, Inc.
4.1 Retirement and Severance Agreement by and between Claremont Technology Group, Inc. and Steven
L. Darrow dated March 15, 1996
4.2 Form of Shareholder Agreement under 1992 Stock Incentive Plan
4.3 Specimen Stock Certificate*
5.0 Opinion of Ater Wynne Hewitt Dodson & Skerritt as to the legality of the securities being
registered
10.1 Form of Indemnity Agreement between Claremont Technology Group, Inc. and each of its executive
officers and directors
10.2 1992 Stock Incentive Plan
10.3 Form of Stock Option Agreement Under 1992 Stock Incentive Plan
10.4 1996 Stock Option Plan for Nonemployee Directors
10.5 Letter of Agreement by and among Mr. Tony Martins, Ms. Anna Mara, Ms. Claude Gareau, Mr.
Ronald Bastien, Tony Martins & Associs, Inc. and Claremont Technology Group, Inc. dated as of
January 23, 1995
10.6 Employment Agreement by and between Claremont Technology Group, Inc. and Paul J. Cosgrave
dated July 1, 1994
10.7 Employment Agreement by and between Claremont Consulting Group, Inc. (k/n/a Claremont
Technology Group, Inc.) and Dennis M. Goett dated February 1, 1996*
10.8 Employment Agreement by and between Claremont Technology Group, Inc. and Stephen Hawley dated
February 5, 1993*
10.9 Lease by and between Amberjack, Ltd. and Claremont Technology Group, Inc. dated January 13,
1995, as amended*
10.10 Lease by and between Birtcher Properties, Inc., Manager for Amberjack, Ltd., and Claremont
Technology Group, Inc. dated November 27, 1991, as amended*
10.11 Lease Agreement by and between TOW Ltd. and Claremont Technology Group, Inc. dated October
1995*
10.12 Claremont Technology Group, Inc. 401(k) Plan and Trust*
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NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
10.13 Claremont Technology Group, Inc. Executive Bonus Participation Agreement
10.14 Claremont Technology Group, Inc. Employee Stock Ownership Plan*
10.15 Business Loan Agreement between Bank of America Oregon and Claremont Technology Group, Inc.
dated April 24, 1995, as amended*
10.16 Common Stock Purchase Warrant issued by Claremont Technology Group, Inc. to DLJ Capital
Corporation dated May 20, 1996*
10.17 Settlement Agreement and Release dated May 20, 1996 by and between Claremont Technology Group,
Inc. and DLJ Capital Corporation and associated funds*
11.0 Computation of Earnings Per Share
21.0 Subsidiaries of the Registrant
23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt (included in legal opinion filed as Exhibit
5.0)
23.2 Consent of KPMG Peat Marwick LLP
24.0 Powers of Attorney (included in signature page in Part II of the Registration Statement)
27.0 Financial Data Schedule
- ------------
* To be filed by amendment.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Beaverton,
State of Oregon, on May 24, 1996.
CLAREMONT TECHNOLOGY GROUP, INC.
By /s/ PAUL J. COSGRAVE
------------------------------------
Paul J. Cosgrave
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul J. Cosgrave and Dennis M. Goett and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement filed herewith and any
or all further amendments to said Registration Statement (including
post-effective amendments and new registration statements pursuant to Rule 462
or otherwise), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as full to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been duly signed by the following persons in the
capacities indicated on May 24, 1996.
SIGNATURE TITLE
- --------------------------------------------- ------------------------------------------------------------------
/s/ PAUL J. COSGRAVE
------------------------------------ President, Chief Executive Officer and Director (Principal
Paul J. Cosgrave Executive Officer)
/s/ DENNIS M. GOETT
------------------------------------ Chief Financial Officer and Director (Principal Financial and
Dennis M. Goett Accounting Officer)
/s/ NEIL E. GOLDSCHMIDT
------------------------------------ Director
Neil E. Goldschmidt
/s/ PHILLIP W. SEELEY
------------------------------------ Director
Phillip W. Seeley
/s/ JERRY L. STONE
------------------------------------ Director
Jerry L. Stone
II-4