<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
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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PARANET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 TO BE APPLIED FOR
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1776 YORKTOWN ST., SUITE 300
HOUSTON, TEXAS 77056
(713) 626-4800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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MICHAEL H. HOLTHOUSE
PRESIDENT
PARANET, INC.
1776 YORKTOWN ST., SUITE 300
HOUSTON, TEXAS 77056
(713) 626-4800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
<TABLE>
<S> <C>
LOUISE A. SHEARER CARMELO M. GORDIAN, P.C.
BAKER & BOTTS, L.L.P. S. MICHAEL DUNN, P.C.
3000 ONE SHELL PLAZA BROBECK, PHLEGER & HARRISON LLP
HOUSTON, TEXAS 77002-4995 301 CONGRESS AVENUE, SUITE 1200
(713) 229-1234 AUSTIN, TEXAS 78701
(512) 477-5495
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(2)(3) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share........ -- -- $86,250,000 $26,136.36
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</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes shares subject to the underwriters' over-allotment option.
---------------------
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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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
SHARES
PARANET, INC.
[LOGO]
Common Stock
(par value $.01 per share)
----------------------
Of the shares of Common Stock offered hereby, shares
are being sold by the Company and shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
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 per share will be between $ and $ . For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "PARI".
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ----------- ---------- -------------------
<S> <C> <C> <C> <C>
Per Share(3)............ $ $ $ $
Total(3)................ $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Selling Stockholders have granted the Underwriters an option for 30 days
to purchase up to an additional shares at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to selling
stockholders will be , and , respectively. The
Company will not receive any proceeds from the exercise of such option. See
"Underwriting" and "Principal and Selling Stockholders".
----------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
----------------------
The date of this Prospectus is , 1997
<PAGE> 3
[SCHEMATIC OF NOMAN(R) FRAMEWORK IDENTIFYING EACH DOMAIN: USER SERVICES,
BUSINESS MAPPING, TECHNOLOGY MANAGEMENT, POLICIES/PROCEDURES, ACCOUNTING
MANAGEMENT, EDUCATION, CONFIGURATION MANAGEMENT, SYSTEM/NETWORK MANAGEMENT,
SECURITY MANAGEMENT, DATA MANAGEMENT, FAULT MANAGEMENT AND PERFORMANCE
MANAGEMENT (AND THE SUBDOMAINS OF EACH OF THE FOREGOING DOMAINS)]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted herein, all information
in this Prospectus (i) gives effect to the Company's expected reorganization as
a Delaware holding company prior to the consummation of this Offering, which
will have the effect of a -for- stock split and (ii) assumes no exercise of
the Underwriters' over-allotment option. See "Underwriting". Unless otherwise
indicated, all references to "Paranet" or the "Company" include the Company, its
subsidiary and its predecessor. Certain technical terms used in this Prospectus
are defined in the Glossary.
THE COMPANY
Paranet designs, integrates, manages and supports complex distributed
computing environments, principally for major commercial organizations. The
Company believes that it is uniquely responsive to its customers' needs as a
result of its exclusive focus on distributed computing environments, its
commitment to vendor independence, its franchise-like organizational structure
and its flexibility in services and contract terms. Paranet focuses on a broad
range of information technology ("IT") challenges inherent in distributed
computing environments, such as system and network management, security
management, technology management and business mapping. These technical areas
are outlined in the Company's NOMAN(R) framework (see chart on inside front
cover). The Company's service offerings in each of these technical areas
include, among others, problem assessment, system design, implementation and/or
operation of a chosen solution (see chart on inside back cover). Company
projects include LAN/WAN design and upgrades, intranet implementation, disaster
recovery planning, help desk support, day-to-day facilities management of large
networks and many other support services. The Company's expertise encompasses
the latest networking and computing technologies, including Internet firewalls,
ATM, Fast Ethernet, Frame Relay, FDDI, Unix and Windows NT.
Today's rapidly changing business environment is characterized by increased
competition, globalization and technological innovation. At the same time,
companies face increased pressure to improve customer service and profitability.
In order to compete more effectively, businesses are increasing their reliance
on IT as a means of achieving faster response times, shorter product cycles and
reduced costs. To realize these benefits, many companies are migrating to
distributed computing environments. As a result, distributed applications have
become mission critical, necessitating the implementation and continuous
enhancement of an efficient, reliable and flexible computing infrastructure. The
need for greater network speed and capacity drives the demand for installation
and operation services. In addition, new information-intensive applications and
Internet-based protocols further increase the burdens placed on networks.
Effective in-house management and support of these increasingly decentralized
computing resources and complex networks are technically challenging,
time-consuming and costly.
Paranet delivers enterprise-wide IT solutions for distributed computing
environments through its nationwide branch network. The Company's franchise-like
organizational structure enables it to offer customers the advantages of local
or regional external service providers, such as increased focus and
responsiveness, while providing the comprehensive range of services and support
generally available from large, centralized national organizations. In order to
provide consistent, comprehensive and high-quality services to its customers
throughout the nation, the Company has developed NOMAN(R) (an acronym for
Network Operations Management). NOMAN(R) has many different components,
including a knowledge base of industry best practices, a detailed structural
framework, a maturity assessment model and a host of processes, metrics, tools
and procedures that provide a uniform methodology for the delivery of all
Paranet services. NOMAN(R) is organized to address every aspect of the design,
integration, management and support of distributed systems in a manner driven by
the customer's business needs mapped to the customer's computing infrastruc-
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ture. Paranet believes that NOMAN(R) increases the quality, consistency,
efficiency and scope of the Company's approach to resolving customers'
distributed computing problems.
Paranet believes that its independence from hardware and software vendors,
combined with the benefits provided by NOMAN(R), permits it to offer customers
"best-of-breed" solutions. By design, Paranet is flexible in customizing its
service offerings and the manner in which those services are delivered to
accommodate diverse customer needs, capabilities, time constraints and
knowledge. The Company strives to establish long-term relationships with
customers by delivering its services in a variety of manners, ranging from
consulting or integration to complete outsourced solutions. Paranet is also
flexible in designing the contractual terms of its engagements to meet
customers' preferences.
Paranet's customers include American Express, Amoco, Chevron, Motorola,
Siemens Medical, Texas Instruments and US Robotics, among others. The Company
also has a group of customers, currently including GTE, Hewlett-Packard, ISSC
(IBM) and Sun Microsystems, that resell the Company's services to their own
customer bases. No single customer in either group accounted for more than 8% of
Paranet's 1996 revenues. The Company serves customers across a wide range of
industries, including telecommunications, financial services, energy,
manufacturing, semiconductors and professional services. During 1996, Paranet
served over 200 customers through its growing nationwide branch network. At
December 31, 1996, Paranet operated 27 branches in 23 cities and had 818
full-time employees.
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors".
THE OFFERING
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<S> <C> <C>
Common Stock offered by the Company...................... shares
Common Stock offered by the Selling Stockholders......... shares
Common Stock to be outstanding after the Offering........ shares*
Proposed Nasdaq National Market symbol................... PARI
Use of proceeds.......................................... To finance a Network Operation
Center, to pay certain taxes,
to purchase equipment in
connection with potential
outsourcing engagements and for
working capital requirements
and other general corporate
purposes. See "Use of
Proceeds".
</TABLE>
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* Based on the number of shares outstanding as of December 31, 1996. Does not
include shares of Common Stock issuable upon exercise of stock
options outstanding as of December 31, 1996, at a weighted average exercise
price of $ per share.
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------------- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $3,587 $7,241 $14,823 $30,896 $66,225
Operating expenses:
Professional services............... 2,066 4,522 9,471 18,106 38,905
Selling and marketing............... 408 964 1,501 2,868 6,162
General and administrative.......... 585 1,226 2,603 5,937 12,198
------ ------ ------- ------- -------
Total operating expenses.... 3,059 6,712 13,575 26,911 57,265
------ ------ ------- ------- -------
Operating income...................... 528 529 1,248 3,985 8,960
Other income (expense)................ 15 (1) (13) 16 (105)
------ ------ ------- ------- -------
Net income............................ $ 543 $ 528 $ 1,235 $ 4,001 $ 8,855
====== ====== ======= ======= =======
PRO FORMA DATA (UNAUDITED):
Pro forma net income(1)............... $ 326 $ 317 $ 741 $ 2,400 $ 5,313
Pro forma net income per share(1)(2)..
Pro forma weighted average number of
common shares outstanding(2)........
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
----------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 817 $ 993 $ 2,066 $ 5,874 $13,871
Total assets......................... 1,048 2,111 4,231 9,916 23,235
Long-term debt, less current
portion............................ -- -- -- -- --
Total stockholders' equity........... 942 1,349 2,584 6,770 15,787
</TABLE>
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(1) Reflects federal and additional state income tax expense that would have
been required had the Company and its predecessor operated as a C
Corporation with an effective tax rate of 40%.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net income per share.
5
<PAGE> 7
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 the Common Stock offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues and earnings have fluctuated in the past and are
expected to continue to fluctuate from quarter to quarter in the future based on
such factors as the number, size and scope of projects in which the Company is
engaged, employee utilization rates, the accuracy of estimates of resources
required to complete ongoing projects, the contractual terms and degree of
completion of such projects, any delays incurred in connection with a project,
the timing and rate of the opening of new branches and the hiring of new
employees, the number of working days in each quarter and general economic
conditions. A high percentage of the Company's operating expenses, particularly
personnel and rent, are relatively fixed in advance of any particular quarter.
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 losses for such quarter. Furthermore, an unanticipated termination of
a major project, a customer's decision not to proceed to the stage of the
project anticipated by Paranet or the completion during a given quarter of
several major projects could require the Company to maintain underutilized
employees and could therefore have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company plans to continue to expand its operations by hiring additional
qualified technical personnel and other employees, and adding new offices,
systems and other infrastructure. The resulting increase in operating expenses
would have a material adverse effect on the Company's operating results if
revenues do not increase sufficiently to support such expenses. The Company has
historically experienced a decrease in net income as a percentage of revenues in
the first and fourth quarters of each year due to customer budget cycles and the
resulting customer preference to complete projects by year end. In addition, the
fourth quarter of each year is generally affected by certain holiday season
costs and a reduced number of working days in such quarter. Based upon all of
the foregoing, the Company believes that quarterly revenues and operating
results are likely to vary significantly in the future and that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied on as indications of future performance. Furthermore, as a result
of these and other factors, it is likely that in some future quarter the
Company's revenues or operating results will be below the expectations of public
market analysts or investors, in which case the price of the Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
The Company expects to incur approximately $8.2 million of nonrecurring
expenses in the first quarter of 1997, which are expected to result in a loss
for that quarter. These expenses will consist of tax expense of approximately
$7.2 million relating to the Company's conversion from an S Corporation to a C
Corporation and a noncash charge to compensation expense of approximately $1.0
million relating to the anticipated acceleration of the vesting of the
outstanding options under the Company's 1991 Nonqualified Stock Option Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Management -- Benefit Plans -- Predecessor Plan".
MANAGEMENT OF GROWTH
The Company's growth has placed, and is expected to continue to place,
significant demands on the Company's management, operations and other resources.
The Company's revenues were $14.8 million in 1994, $30.9 million in 1995 and
$66.2 million in 1996. During the same period, the Company's staff increased
from 243 full-time employees at December 31, 1994 to 463 at December 31, 1995
and to 818 at December 31, 1996, and further significant increases in staff are
expected
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during 1997. The Company has also expanded geographically by opening offices in
14 new cities during the same three-year period, and plans to continue to open
offices in new cities in 1997. The Company believes that these rates of growth
will not be sustainable over the long term. The Company's ability to manage its
growth effectively will depend upon continued development and improvement of its
managerial, operational, financial and other internal systems and its business
development capabilities, as well as its ability to train, motivate and manage
its employees. In order to help manage future growth, if any, the Company has
recently implemented certain managerial changes and added additional software
systems and personnel to facilitate management of accounts receivable, contract
administration, accounting, recruiting and other functions. However, there can
be no assurance that such systems will be adequate or that their integration
with the Company's existing systems will not result in potentially material
business disruptions. None of the Company's senior management has previously
managed a business of the Company's size or has any experience in managing a
public company. There can be no assurance that the Company will be able to
manage its growth and projects effectively, and any inability to do so could
have a material adverse effect on the quality of the Company's services and
products, the management of its accounts receivable and its ability to retain
key personnel and, consequently, on its business, financial condition and
results of operations. In addition, an increase in the Company's operating
expenses resulting from continued expansion would have a material adverse effect
on the Company's business, financial condition and results of operations if
revenues do not increase sufficiently to support such expansion.
In the past, the Company's growth has required the Company to change and to
adapt its organizational structure and management approach, and similar changes
are likely to be required in the future. Based on past experience, such changes,
or a failure to identify or implement needed changes, may disrupt the Company's
growth and sales cycle. For example, the increase in the number of branches has
placed increased supervisory demands on division managers. For a period of
several months in 1996, the Company sought to reduce these demands by increasing
the number of sales staff at certain branches, rather than by creating new
branches. This had a negative effect on the productivity of the affected branch
sales managers, who devoted substantial time to managing and training the
increased sales staff. In response, the Company abandoned its initial approach
and instead subdivided the affected branches to create more, rather than larger,
branches, while instituting new mechanisms and adding divisional resources to
coordinate efforts between branches and reduce the supervisory demands on
division managers. There can be no assurance that this change or future changes
in the Company's organizational structure or management approach in response to
growth or other circumstances will be effective, or that such changes will not
create potentially material business disruptions.
See "-- Risks Associated with Potential Domestic Expansion", "-- Risks
Associated with Potential International Expansion", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Organization" and "-- Human Resources".
RISKS ASSOCIATED WITH POTENTIAL DOMESTIC EXPANSION
A key element of the Company's growth strategy is domestic geographic
expansion. There can be no assurance that the Company will be able to
successfully market, sell and deliver its services in any new domestic markets
that the Company attempts to enter. Of the 26 geographic locations opened since
the Company's inception, the Company has closed three unsuccessful locations, in
each case relatively soon after the location's opening. The Company has refined
its model for the development of a branch from start-up to maturity; however,
there can be no assurance that this model is adequate to predict and manage
future geographic expansion or to accurately assess the likelihood of success of
new locations. The viability of such expansion depends in part on the Company's
ability to identify geographic markets with strong potential customer bases; to
identify, attract and retain sales and technical personnel with the professional
background, relationships and technical skills required to successfully operate
new offices; and to manage and provide adequate
7
<PAGE> 9
operational, financial and other internal systems to support such expansion. No
assurance can be given with respect to the Company's ability to achieve the
foregoing or the success of the Company's geographic expansion strategy. If the
Company opens additional domestic offices and the revenues generated by such
offices do not sufficiently support the expenses of establishing and maintaining
these offices, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "-- Management of
Growth", "-- Risks Associated with International Expansion" and "Business -- The
Paranet Solution".
NEED TO ATTRACT AND RETAIN QUALIFIED TECHNICAL AND OTHER KEY PERSONNEL
The Company's future success will depend in large part on its ability to
hire, train and retain highly skilled employees who have expertise in a wide
array of network and computer systems and technologies. Competition for
technical personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel or that the costs
of attracting and retaining such employees will not increase faster than
revenues. In particular, competition is intense for qualified project managers
and senior technical personnel and such personnel are in limited supply. As with
other companies in its industry, the Company is currently experiencing, and is
likely to continue to experience, high rates of turnover among its technical
personnel. The loss of technical personnel, or any inability of the Company to
hire, train and retain a sufficient number of qualified technical personnel to
support its operations, would impair the Company's ability to adequately manage
and complete its existing projects or to obtain new projects, which, in turn,
could have a material adverse effect on the Company's business, financial
condition and results of operation. In addition, any inability of the Company to
attract and retain a sufficient number of qualified technical personnel in the
future would impair the Company's planned expansion of its business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Human Resources".
DEPENDENCE ON KEY EMPLOYEES
The Company's future success is highly dependent on the continued services
of its executive officers and other key employees. Although these employees have
entered into employment agreements containing noncompetition, nondisclosure and
nonsolicitation covenants, there can be no assurance that any of these
individuals will continue their employment with the Company. The loss of the
services of one or more of the Company's key employees, or the loss of all or
substantially all of the employees associated with a particular branch of the
Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, if one or more key
employees, or a group consisting of all or substantially all of the employees
associated with a particular branch, joins a competitor or forms a competing
company, the loss of such employees and any resulting loss of existing or
potential customers could materially and adversely affect the Company's
business, financial condition and results of operations. In the event of loss of
any such employees, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of the Company's or its customers'
technical knowledge, practices or procedures or that such disclosure or use
would not materially and adversely affect the Company's business, financial
condition and results of operations. The Company maintains a key-man life
insurance policy on Michael H. Holthouse, the President and co-founder of the
Company, in the amount of $2.0 million. See "-- Intellectual Property Rights"
and "Business -- Human Resources".
The Company, since the inception of its 1991 Nonqualified Stock Option
Plan, has granted options thereunder to approximately 510 current employees for
the purchase of an aggregate of shares of Common Stock at a
weighted average exercise price of $ per share. The options provide that
they vest over 50 months and cannot be exercised prior to the earlier of (i) the
registration of the Common Stock with the Securities and Exchange Commission
(the "Commission") and the listing of the Common Stock on any applicable
national securities exchange
8
<PAGE> 10
(unless these conditions are waived by the Board of Directors of the Company) or
(ii) eight years from the date of grant. The Company intends to accelerate the
vesting of all options outstanding under the 1991 Nonqualified Stock Option Plan
at the consummation of this Offering. As a result, all of such options are
expected to be fully vested and exercisable upon consummation of this Offering.
There can be no assurance that the Company will not experience the loss of
certain personnel following the completion of this Offering, as it is expected
to enable employees to exercise their stock options. See "-- Shares Eligible for
Future Sale" and "Management -- Benefit Plans".
RISKS OF DECENTRALIZED ORGANIZATION
As a result of the Company's decentralized branch style organization, a
significant level of authority and responsibility is delegated to the individual
branches. Branch responsibilities include service delivery, customer sales,
limited capital decisions, personnel and compensation decisions and coordination
with other branches in serving major customers. The Company's future success
will depend in part on the successful implementation, operation and management
of this organizational approach. There can be no assurance that branch personnel
will exercise their authority appropriately or that the Company's management
will be able to adequately supervise and monitor the decisions of branch
personnel within this organizational framework. Inappropriate actions by branch
personnel or failures in the supervision of such personnel could have a material
adverse effect on the business, financial condition and results of operations of
the Company. In addition, the failure of two or more branches to coordinate
their delivery of services to a single customer could result in the cancellation
of a project or the loss of the customer. The Company is implementing a Major
Accounts Program to coordinate delivery of services by multiple branches to
certain of the Company's largest customers. Failure to effectively implement the
Major Accounts Program or otherwise to coordinate multi-branch service delivery
could have a material adverse effect on the business, financial condition and
results of operations of the Company. See "-- Dependence on Key Employees",
"Business -- Organization" and "-- Sales and Marketing".
PACE OF TECHNOLOGICAL CHANGE
The Company has derived, and expects to continue to derive, a substantial
portion of its revenue from professional services related to complex distributed
computing environments. The markets for advanced networking systems and network
management services are continuing to develop and are subject to rapid change.
The Company's success will depend in part on its ability to offer services that
keep pace with continuing changes in technology, evolving industry standards and
changing customer preferences and to hire, train and retain qualified technical
employees who can fulfill the increasingly sophisticated needs of its customers.
There can be no assurance that the Company will be successful in addressing
these developments in a timely manner. Any delay or failure by the Company to
address these developments would 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 certain of the Company's services uncompetitive or obsolete. See
"Business -- Services".
The Company's business depends in large part on the continued growth and
acceptance of complex distributed computing environments and the continued trend
among businesses with such environments to use external network service
providers. Demand for the Company's services is created, in part, by the rapid
pace of technological change and innovation and the resultant diversity of
computing hardware and software, a combination that has increasingly challenged
the capacity and resources of internal IT departments, thereby increasing the
demand for external service providers. Any trend toward a standardized or
universal technology or network platform, which the Company believes would
result in increased usage of internal IT department resources and a
corresponding decrease in the use of external service providers, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Intense Competition" and "Business -- Services".
9
<PAGE> 11
ABSENCE OF LONG-TERM CONTRACTS
The Company has in the past provided, and is likely in the future to
provide, its services without the benefit of a long-term agreement. Furthermore,
the Company's customers are generally able to reduce or cancel their use of the
Company's professional services without penalty upon 30 days' notice to the
Company. From time to time, customers have canceled contracts or reduced their
usage of the Company's services under a contract, and there can be no assurance
that this will not occur in the future. As a result, the Company believes that
the number and size of its existing projects are not reliable indicators or
measures of future revenues. When a customer defers, modifies or cancels a
project, the Company must be able to rapidly redeploy its professional staff to
other projects in order to minimize the underutilization of employees and the
resulting adverse impact on operating results. In addition, the Company's
operating expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of projects in
progress. As a result, any termination, significant reduction or modification of
the Company's business relationships with any of its significant customers, or
with a number of smaller customers, 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" and "Business -- Sales and Marketing".
PROJECT RISKS; FIXED-PRICE PROJECTS
Many of the Company's engagements involve projects which are critical to
the operations of its customers' businesses. The Company's failure or inability
to meet a customer's expectations in the performance of its services could
result in the incurrence by the Company of a financial loss and unanticipated
additional expenses to correct such failure, and could damage the Company's
reputation with customers, as well as with hardware and software vendors and
industry participants, thereby adversely affecting its ability to attract new
business. Although the Company maintains errors and omissions insurance, and to
date has not submitted any claims thereunder, there can be no assurance that
such insurance will be adequate to prevent any such loss or liability from
having a material adverse effect on the Company's business, financial condition
or results of operations. The Company from time to time undertakes projects
billed on either a fixed-price or a level-of-service basis or a time and
materials basis subject to a cap, each of which is distinguishable from the
Company's current principal method of billing on a time and materials basis. The
Company believes that the number and size of its fixed-price and
level-of-service contracts will increase in the foreseeable future. The failure
of the Company to complete a fixed-price, level-of-service or capped project
within budget would expose the Company to risks associated with cost overruns,
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".
INTENSE COMPETITION
The market for the design, management, integration and support of complex
distributed computing environments is characterized by high growth, intense
competition and rapid technological change. The market is highly fragmented,
with no one company or small group of companies having a majority share of the
market. The Company faces competition from system integrators, value-added
resellers ("VARs"), local and regional network services firms,
telecommunications providers, consulting and accounting firms, independent
consultants, software vendors, network equipment vendors, computer systems
vendors, large outsourcing companies and temporary staffing companies. Many of
these competitors have significantly greater financial, technical and marketing
resources and/or name recognition and generate greater revenue than the Company.
Further, the Company has faced, and expects to continue to face, additional
competition from new entrants into its markets. Increased competition could
result in price reductions, fewer projects, underutilization of resources,
reduced operating margins and loss of market share, any of which
10
<PAGE> 12
could materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current or future competitors. The
failure of the Company to compete successfully would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's customers and prospective customers have
internal IT departments and could choose to satisfy their needs through internal
resources rather than through external service providers. As a result, any
decision by a significant number of the Company's customers or potential
customers to perform network design, integration, management and support
services internally could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Competition".
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its intellectual property,
including without limitation the NOMAN(R) framework. The Company relies upon a
combination of trade secret, nondisclosure and other contractual arrangements,
technical measures, copyright laws and trademark laws to protect its proprietary
rights. Although the Company enters into confidentiality agreements with its
employees, subcontractors and customers, and attempts to limit access to and
distribution of its proprietary information, there can be no assurance that the
steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use of its proprietary information or take appropriate
steps to enforce its intellectual property rights. The Company has in the past
entered into service contracts with customers that assign to the customers
rights to certain aspects of the work performed under those contracts. The
Company does not believe that such contracts limit the Company's ability to
render its services to other customers. However, there can be no assurance that
the Company will not receive communications in the future from third parties or
customers asserting that the Company has infringed or misappropriated the
proprietary rights granted under such contracts. See "Business -- Intellectual
Property Rights".
RISKS ASSOCIATED WITH POTENTIAL INTERNATIONAL EXPANSION
A component of the Company's strategy is to expand into international
markets. If the Company opens international offices and the revenues generated
by such offices do not sufficiently support the expense of establishing and
maintaining such offices, the Company's business, financial condition and
results of operations would be materially and adversely affected. To date, the
Company has provided limited professional services to certain of its U.S.-based
customers in foreign locations, but the Company has no direct international
experience. There can be no assurance that the Company will be able to market,
sell and deliver its services successfully in foreign countries. In addition to
the uncertainty as to the Company's ability to expand into international
markets, there are certain risks inherent in conducting business on an
international level, such as unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, difficulties in staffing
and managing foreign operations, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world and potentially
adverse tax consequences, any of which could adversely affect the Company's
international operations. There can be no assurance that one or more of these
factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing".
11
<PAGE> 13
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
As part of its business operations, the Company may make acquisitions of,
or significant investments in, complementary companies or related products or
technologies, although no such acquisitions or investments have occurred or are
currently being considered. Any such future transactions would be accompanied by
the risks commonly encountered in making acquisitions of companies, products and
technologies. These risks include, among others, the difficulty associated with
assimilating the personnel and operations of acquired companies, the potential
disruption of the Company's ongoing business, the distraction of management, the
inability of management to maximize the financial and strategic position of the
Company through the successful integration of acquired personnel, products and
technologies, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers as a
result of the integration of new personnel. In addition, the Company's
franchise-like organizational model may be particularly unsuited for the
integration that would typically be involved in any sizable acquisition. There
can be no assurance that the Company will be successful in overcoming these
risks or any other problems encountered in connection with any acquisitions. In
addition, future acquisitions by the Company could result in the issuance of
dilutive equity securities or the incurrence of debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, which
could have a material adverse effect on the Company's business, financial
condition or results of operations or on the market price of the Common Stock.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of this Offering, Michael H. Holthouse, the President and
co-founder of the Company, will beneficially own approximately % of the
outstanding Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). As a result, Mr. Holthouse will continue to be able to
control the outcome of matters requiring a stockholder vote, including the
election of directors and approval of significant corporate transactions. This
control could adversely affect the market price of the Common Stock or delay or
prevent a change in control of the Company. Also, certain provisions of the
Company's Certificate of Incorporation (the "Certificate of Incorporation") and
Bylaws (the "Bylaws") may have the effect of deterring hostile takeovers or
delaying or preventing changes in the control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then-current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests. See "Principal and Selling Stockholders".
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or continue after this 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 negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters,
and may not be indicative of future market prices. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Investors should be aware that trading prices for securities of
companies such as Paranet are highly volatile. The trading price of the Common
Stock likely will be subject to wide fluctuations in response to quarterly
variations in operating results, changes in earnings estimates by analysts,
announcements of new contracts or service offerings by the Company or its
competitors, general economic or stock market conditions unrelated to the
Company's operating performance and other events or factors. See
"-- Fluctuations in Quarterly Operating Results".
12
<PAGE> 14
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share of the Common Stock in this
Offering is expected to be substantially higher than the book value per share of
the Common Stock outstanding immediately prior to consummation of the Offering.
As a result, purchasers of shares of Common Stock in this Offering will incur
immediate and substantial dilution of $ in the net tangible book value per
share of the Common Stock from the assumed initial public offering price. In
addition, the Company has issued options to acquire Common Stock at prices
significantly below the assumed initial offering price. To the extent such
options are exercised, there will be further dilution. See "Dilution" and
"Shares Eligible for Future Sale".
SIGNIFICANT UNALLOCATED NET PROCEEDS
The only specific allocations of the net proceeds of this Offering are (i)
to finance the establishment of a Network Operation Center, (ii) to pay certain
taxes relating to the termination of the Company's S Corporation status for
federal and state income tax purposes (which will be paid over a four-year
period), (iii) to purchase equipment in connection with potential outsourcing
engagements and (iv) for increased working capital requirements. Such uses are
currently estimated to total approximately $ million. Accordingly, a
substantial portion of the anticipated net proceeds of this Offering has not
been designated for specific uses. Therefore, the Board of Directors of the
Company will have broad discretion with respect to the use of a substantial
portion of the net proceeds of this Offering. See "-- Control by Principal
Stockholder" and "Use of Proceeds".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. On the date of this Prospectus, in addition to the shares
offered hereby, approximately shares of Common Stock, which are
not subject to 180-day lock-up agreements with the Underwriters (the "Lock-up
Agreements"), will be eligible for immediate sale in the public market pursuant
to Rule 144(k) under the Securities Act of 1933, as amended (the "Securities
Act"). Approximately additional shares of Common Stock, which are
not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements, approximately additional shares of Common
Stock will become eligible for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. In addition, the Company
intends to register the shares of Common Stock issuable under its 1991
Nonqualified Stock Option Plan as soon as practicable after the date of this
Prospectus. At , 1997, shares of Common Stock were
issuable pursuant to options granted under this plan, of which
were subject to Lock-up Agreements. Of such options, options to purchase
shares are expected to become fully vested and immediately exercisable
in connection with the consummation of this Offering. See "-- Anti-Takeover
Effect of Certain Charter and Bylaw Provisions", "Shares Eligible for Future
Sale" and "Underwriting".
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Certificate of Incorporation and the Bylaws provide that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and require reasonable advance notice by
a stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of stockholders may be called only by the Chairman of the Board, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. The Certificate of Incorporation provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for
13
<PAGE> 15
cause upon the affirmative vote of holders of at least a majority of the shares
of capital stock of the Company entitled to vote thereon. In addition, the Board
of Directors will have the authority, without further action by the
stockholders, to fix the rights and preferences of, and issue shares of, the
Company's authorized Preferred Stock. These provisions, and other provisions of
the Certificate of Incorporation and the Bylaws, may have the effect of
deterring hostile takeovers or delaying or preventing changes in the control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices. In
addition, these provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. See "Description
of Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter
and Bylaw Provisions".
DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock in the
foreseeable future. See "Dividend Policy".
14
<PAGE> 16
THE COMPANY
Paranet, Inc., a Texas corporation ("Paranet Texas"), was organized in
October 1990 and began operations in January 1991. It was founded by Michael H.
Holthouse, its President, and Steven T. Ough, its Director of Technology.
Paranet, Inc., a Delaware corporation ("Paranet Delaware"), was recently formed
as a subsidiary of Paranet Texas. Prior to the consummation of this Offering,
Paranet Texas will merge into a newly formed Delaware subsidiary of Paranet
Delaware, as a result of which the Company will become a Delaware holding
company with operations conducted through the subsidiary Delaware operating
company. The Company's principal executive offices are located at 1776 Yorktown
St., Suite 300, Houston, Texas 77056, and its telephone number is (713)
626-4800.
Paranet has elected to be treated as an S Corporation for federal (and most
state) income tax purposes. As an S Corporation, Paranet has not been subject to
federal income tax, but its taxable income has been included in the taxable
income of its stockholders. The Company intends to terminate its status as an S
Corporation shortly before completion of this Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
USE OF PROCEEDS
Based on an assumed initial public offering price of $ per share,
the net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be $ , after deducting
the estimated underwriting discount and offering expenses payable by the
Company.
The Company currently plans to use the net proceeds from this Offering for
(i) the establishment of a Network Operation Center, which will serve as a
remote network management center, at an estimated cost of $5.0 million, (ii) the
payment of tax liabilities of approximately $7.2 million (which will be paid
over a four-year period) relating to the termination of the Company's status as
an S Corporation for federal and state income tax purposes (to the extent not
offset by any applicable tax benefits), which termination will subject the
Company to federal and state income taxation at a rate of approximately 40%,
(iii) the purchase of equipment in connection with potential outsourcing
engagements and (iv) working capital requirements and for other general
corporate purposes. The Company may also use a portion of the net proceeds of
this Offering to fund acquisitions of complementary businesses, although there
are currently no commitments or understandings with respect to any such
transactions. See "Risk Factors -- Risks Associated with Potential
Acquisitions", "-- Significant Unallocated Net Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
DIVIDEND POLICY
With the exception of a cash dividend of approximately $16,000, in the
aggregate, declared and paid in 1993, the Company has never declared or paid
cash dividends on the Common Stock. The Company does not intend to declare or
pay any cash dividends for the foreseeable future and intends to retain
earnings, if any, for the future operation and expansion of the Company's
business. Any determination to declare or pay dividends out of funds legally
available for that purpose will be at the discretion of the Company's Board of
Directors and will depend upon the Company's future earnings, results of
operations, financial condition, capital requirements, any future contractual
restrictions and other factors deemed relevant by the Board of Directors. The
Company's revolving line of credit facility (the "Facility") prohibits the
payment of dividends on the Common Stock, except distributions for the payment
of taxes on flow-through income resulting from the Company's S Corporation
status. See "Risk Factors -- Dividends" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
15
<PAGE> 17
DILUTION
Purchasers of shares of Common Stock in this Offering will incur immediate
and substantial dilution of $ in the net tangible book value per share
of the Common Stock from the assumed initial public offering price. At December
31, 1996, the net tangible book value of the Company was $15.8 million, or
$ per share of Common Stock. Net tangible book value per share is
determined by dividing the Company's net tangible book value (total tangible
assets less total liabilities) by the number of shares of Common Stock
outstanding as of December 31, 1996. After giving effect, as of such date, to
the sale of the shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $ per share, and after
deducting the estimated underwriting discount and offering expenses payable by
the Company from the proceeds of this Offering, the Company's pro forma net
tangible book value at December 31, 1996 would have been $ , or
$ per share of Common Stock. This amount represents an immediate
increase in net tangible book value of $ per share to the Company's
existing stockholders and an immediate dilution in net tangible book value of
$ per share to new investors purchasing shares of Common Stock in this
Offering. See "Risk Factors -- Immediate and Substantial Dilution". The
following table illustrates the per share dilution in net tangible book value to
new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of December 31,
1996................................................... $
Increase per share attributable to new investors..........
-------
Pro forma net tangible book value per share after the
Offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table sets forth on a pro forma basis, as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid to the Company by
existing stockholders and by new investors purchasing shares of Common Stock
offered hereby at an assumed initial public offering price of $ per
share, respectively, before deducting the estimated underwriting discount and
offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- ------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... % $ % $
New investors.............
--------- ----- -------- -----
Total................... 100.0% $ 100.0%
========= ===== ======== =====
</TABLE>
The foregoing calculations assume no exercise of options to purchase an
aggregate of shares for a weighted average exercise price of
$ per share that were outstanding at December 31, 1996. All of such
options are expected to be fully vested and immediately exercisable upon the
consummation of this Offering. To the extent that these options are exercised in
the future, there will be further dilution to new investors. See "Risk
Factors -- Immediate and Substantial Dilution", "Management -- Benefit Plans"
and "Shares Eligible for Future Sale".
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, (i) on an historical basis and (ii) as adjusted to give
effect to the issuance and sale of the shares of Common Stock offered
by the Company in this Offering at an assumed initial public offering price of
$ per share, after deducting the estimated underwriting discount and
offering expenses payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AS
ACTUAL ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion.... -- $
Common Stock, $.01 par value,
shares authorized;
shares issued and
outstanding; shares issued
and outstanding, as adjusted(1)....... $ 75
Additional paid-in capital.............. 1,394
Unearned compensation(2)................ (1,048)
Retained earnings....................... $15,366 $
------- -------
Total capitalization.......... $15,787 $
======= =======
</TABLE>
- ---------------
(1) Excludes shares of Common Stock issuable upon exercise of
options outstanding as of December 31, 1996 at a weighted average exercise
price of $ per share. See "Management -- Benefit Plans".
(2) Unearned compensation is the portion of the difference between the exercise
price and the fair value of employee stock options at the date of grant
that, as of the balance sheet date, remains to be amortized to expense based
on the vesting period of the options. See "Risk Factors -- Fluctuations in
Quarterly Operating Results".
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the Notes thereto, included
elsewhere in this Prospectus. The statement of income data for the years ended
December 31, 1994, 1995 and 1996 and the balance sheet data as of December 31,
1995 and 1996 are derived from financial statements of the Company that have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The statement of income data for the year ended
December 31, 1993 and the balance sheet data as of December 31, 1993 and 1994
are derived from financial statements of the Company that have been audited by
Ernst & Young LLP but are not included herein. The statement of income data for
the year ended December 31, 1992 and the balance sheet data as of December 31,
1992 are derived from unaudited financial statements of the Company that are not
included herein. The pro forma data are unaudited. The historical results are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................ $3,587 $7,241 $14,823 $30,896 $66,225
Operating expenses:
Professional services................. 2,066 4,522 9,471 18,106 38,905
Selling and marketing................. 408 964 1,501 2,868 6,162
General and administrative............ 585 1,226 2,603 5,937 12,198
------ ------ ------- ------- -------
Total operating expenses...... 3,059 6,712 13,575 26,911 57,265
------ ------ ------- ------- -------
Operating income........................ 528 529 1,248 3,985 8,960
Other income (expense).................. 15 (1) (13) 16 (105)
------ ------ ------- ------- -------
Net income.............................. $ 543 $ 528 $ 1,235 $ 4,001 $ 8,855
====== ====== ======= ======= =======
PRO FORMA DATA:
Pro forma net income(1)................. $ 326 $ 317 $ 741 $ 2,400 $ 5,313
Pro forma net income per share(1)(2)....
Pro forma weighted average number of
common shares outstanding(2)..........
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 817 $ 993 $ 2,066 $ 5,874 $13,871
Total assets............................ 1,048 2,111 4,231 9,916 23,235
Long-term debt, less current portion.... -- -- -- -- --
Total stockholders' equity.............. 942 1,349 2,584 6,770 15,787
</TABLE>
- ---------------
(1) Reflects federal and additional state income tax expense that would have
been required had the Company and its predecessor operated as a C
Corporation with an effective tax rate of 40%.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net income per share.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's financial condition and results of operations as of December 31, 1996
and for each year in the three-year period ended December 31, 1996. The
statements in this discussion and in "Business" regarding the Company's
expectations regarding future performance of its business and the other non-
historical statements in this discussion and in "Business" are forward-looking
statements. These forward-looking statements are subject to numerous risks and
uncertainties, including but not limited to the risks and uncertainties
described in "Risk Factors", particularly those under the captions "Management
of Growth", "Risks Associated with Potential Domestic Expansion", "Need to
Attract and Retain Qualified Technical and Other Key Personnel", "Pace of
Technological Change", "Risks Associated with Potential International Expansion"
and "Risks Associated with Potential Acquisitions". The following discussion
should be read in conjunction with "Selected Financial Data" and with the
Financial Statements of the Company, including the Notes thereto, included
elsewhere in this Prospectus.
OVERVIEW
The Company was founded in Houston in 1990 to design, integrate, manage and
support complex distributed computing environments. The Company has grown from
two employees at its inception to 818 at the end of 1996. Paranet opened its
Dallas office in June 1992, and has since expanded its branch network
nationwide, to a total of 27 branches in 23 cities at December 31, 1996. The
Company provides services in a broad range of technical areas that are delivered
using a flexible approach driven by the needs of each particular customer.
Paranet's customers principally consist of major commercial organizations with
large-scale distributed computing needs.
Substantially all of the Company's revenues are derived from professional
services, which are generally provided to clients on a time and materials basis.
Professional services revenues are recognized as services are performed. Any
payments received in advance of performance are recorded as deferred revenue.
The Company also performs a smaller number of shorter-term projects on a time
and materials basis subject to a negotiated cap. The Company recognizes revenues
from these engagements as services are provided. A limited number of the
Company's projects are contracted for on a fixed-price or a level-of-service
basis, and revenues under these contracts are recognized using the
percentage-of-completion method. The Company's clients are generally able to
reduce or cancel their use of the Company's professional services without
penalty upon 30 days' notice. The Company believes that the number and size of
its fixed-price and level-of-service contracts will increase in the foreseeable
future. See "Risk Factors -- Project Risks; Fixed-Price Projects".
During 1996, the Company served over 200 customers. Fees for the Company's
projects typically range from $75,000 to $1.0 million and engagements typically
last from six to 24 months.
Since the Company generally recognizes revenues only when its technical
personnel are engaged on customer projects, the utilization of the Company's
technical personnel is important in determining the Company's results of
operations. A high percentage of the Company's operating expenses, particularly
personnel and rent, are relatively fixed in advance of any particular quarter.
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 losses for such quarter. Unless the Company was able to promptly
replace the lost business, an unanticipated termination of a major project, a
customer's decision not to proceed to the stage of the project anticipated by
Paranet or the completion during a given quarter of several major projects could
require the Company to maintain underutilized employees and therefore could have
a material adverse effect on the Company's
19
<PAGE> 21
business, financial condition and results of operations. See "Risk
Factors -- Absence of Long-Term Contracts".
The Company's revenues and earnings have fluctuated in the past and are
expected to continue to fluctuate from quarter to quarter in the future based on
such factors as the number, size and scope of projects in which the Company is
engaged, employee utilization rates, the accuracy of estimates of resources
required to complete ongoing projects, the contractual terms and degree of
completion of such projects, any delays incurred in connection with a project,
the timing and rate of the opening of new branches and the hiring of new
employees, the number of working days in each quarter and general economic
conditions. In addition, the Company plans to continue to expand its operations
by hiring additional qualified technical personnel and other employees and
adding new offices, systems and other infrastructure. The resulting increase in
operating expenses would have a material adverse effect on the Company's
operating results if revenues do not increase sufficiently to support such
expenses. Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "Risk Factors -- Fluctuations in Quarterly Operating Results"
and "-- Management of Growth".
Paranet has elected to be treated as an S Corporation for federal (and most
state) income tax purposes. As an S Corporation, Paranet has not been subject to
federal income tax, but its taxable income has been included in the taxable
income of its stockholders. The Company intends to terminate its status as an S
Corporation shortly before completion of this Offering. See "-- Liquidity and
Capital Resources".
The Company expects to incur approximately $8.2 million of nonrecurring
expenses in the first quarter of 1997, which are expected to result in a loss
for that quarter. These expenses will consist of tax expense of approximately
$7.2 million relating to the Company's conversion from an S Corporation to a C
Corporation and a noncash charge to compensation expense of approximately $1.0
million relating to the anticipated acceleration of the vesting of the
outstanding options under the Company's 1991 Nonqualified Stock Option Plan. See
"Management -- Benefit Plans -- Predecessor Plan".
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to revenues of certain items in the Company's statements of income:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Professional services.................................... 63.9 58.6 58.7
Selling and marketing.................................... 10.1 9.3 9.3
General and administrative............................... 17.6 19.2 18.4
----- ----- -----
Total operating expenses......................... 91.6 87.1 86.4
----- ----- -----
Operating income........................................... 8.4 12.9 13.6
Other income (expense)..................................... (0.1) 0.1 (0.2)
----- ----- -----
Net income................................................. 8.3% 13.0% 13.4%
===== ===== =====
PRO FORMA DATA:
Pro forma income taxes(1).................................. 3.3% 5.2% 5.4%
----- ----- -----
Pro forma net income(1).................................... 5.0% 7.8% 8.0%
===== ===== =====
</TABLE>
- ---------------
(1) Reflects federal and additional state income tax expense that would have
been required had the Company and its predecessor operated as a C
Corporation, assuming a 40% effective tax rate.
1996 COMPARED TO 1995
REVENUES
Substantially all of the Company's revenues are derived from fees for
professional services. Revenues were $66.2 million and $30.9 million in 1996 and
1995, respectively, an increase of 114.3%. Revenues increased primarily due to
an increase in both the number and the size of the Company's projects. During
1996, the number of offices increased from 15 to 23 and the number of branches
increased from 22 to 27. In 1996, the Company had 15 customers that each
accounted for at least $1.0 million in revenues, as compared to nine such
customers in 1995. In each of 1996 and 1995, no customer accounted for 10% or
more of revenues. The Company's 15 largest customers accounted for 54.9% of
revenues in 1996, compared to 62.7% in 1995.
OPERATING EXPENSES
PROFESSIONAL SERVICES. Professional services expenses consist primarily of
compensation, benefits and training expenses of the Company's technical
personnel and project expenses that, pursuant to the terms of the applicable
service delivery agreements, are not reimbursable by customers. Professional
services expenses were $38.9 million and $18.1 million in 1996 and 1995,
respectively, representing an increase of 114.9%. Professional services expenses
increased in proportion to revenues, primarily due to an increase in the number
of technical personnel and increases in salaries, incentive compensation and
benefits of such personnel. The number of technical personnel increased to 690
at the end of 1996 from 389 at the end of 1995. Professional services expenses
represented 58.7% and 58.6% of revenues in 1996 and 1995, respectively.
Professional services expenses as a percentage of revenues were relatively
unchanged, as higher average billing rates were generally offset by increased
salaries, incentive compensation and benefits of technical personnel.
21
<PAGE> 23
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
compensation and benefits, including commissions, of sales and marketing
personnel, and also include outside marketing expenses. Selling and marketing
expenses were $6.2 million and $2.9 million in 1996 and 1995, respectively,
representing an increase of 114.9%. Selling and marketing expenses increased in
proportion to revenues, primarily due to the addition of sales staff and
increased commissions resulting from increased revenues and operating income.
Selling and marketing expenses represented 9.3% of revenues in each of 1996 and
1995. Selling and marketing expenses as a percentage of revenues were relatively
unchanged, as increased revenues per sales professional were largely offset by
increased commissions and higher outside marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
all facilities costs and expenses associated with executive staff, recruiting,
administrative staff, field services staff, the finance department, technical
services staff, the human resources department and information systems. General
and administrative expenses were $12.2 million and $5.9 million in 1996 and
1995, respectively, representing an increase of 105.5%. General and
administrative expenses increased primarily due to the addition of support
personnel, as well as the costs associated with opening eight new geographic
locations. General and administrative expenses represented 18.4% and 19.2% of
revenues in 1996 and 1995, respectively. The decrease in general and
administrative expenses as a percentage of revenues was due to the economies of
scale achieved as a result of increasing revenues, which were partially offset
by the costs associated with opening eight new geographic locations.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest and other income and interest
expense. Interest income consists primarily of interest earned on cash and cash
equivalents. Other income consists primarily of income generated from customers
other than in the ordinary course of providing services. Interest expense
consists of interest associated with bank and other borrowings.
1995 COMPARED TO 1994
REVENUES
Revenues were $30.9 million and $14.8 million in 1995 and 1994,
respectively, representing an increase of 108.4%. Revenues increased primarily
due to an increase in both the number and the size of projects. During 1995, the
number of geographic locations increased from nine to 15 and the number of
branches increased from 14 to 22. In 1994, Mobil Corporation accounted for
approximately 13.4% of revenues. No other customer accounted for 10% or more of
revenues in 1994, and no customer accounted for 10% or more of revenues in 1995.
In 1995, the Company had nine customers who each accounted for $1.0 million or
more in revenues, as compared to four such customers in 1994. The Company's 15
largest customers accounted for 62.7% of revenues in 1995, compared to 66.3% in
1994.
OPERATING EXPENSES
PROFESSIONAL SERVICES. Professional services expenses were $18.1 million
and $9.5 million in 1995 and 1994, respectively, representing an increase of
91.2%. Professional services expenses increased primarily due to the increase in
the number of technical personnel and increases in salaries, incentive
compensation and benefits of such personnel. The number of technical personnel
increased to 389 at the end of 1995 from 204 at the end of 1994. Professional
services expenses represented 58.6% and 63.9% of revenues in 1995 and 1994,
respectively. The decrease in professional services expenses as a percentage of
revenues was the result of higher average billing rates and increased
utilization of technical employees.
SELLING AND MARKETING. Selling and marketing expenses were $2.9 million and
$1.5 million in 1995 and 1994, respectively, representing an increase of 91.1%.
Selling and marketing expenses
22
<PAGE> 24
increased primarily due to the addition of sales staff and increased commissions
resulting from increased revenues and operating income. Selling and marketing
expenses represented 9.3% and 10.1% of revenues in 1995 and 1994, respectively.
Selling and marketing expenses as a percentage of revenues decreased in 1995, as
increased revenues per sales professional were partially offset by increased
commissions and additional outside marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.9
million and $2.6 million in 1995 and 1994, respectively, representing an
increase of 128.1%. General and administrative expenses increased primarily due
to the addition of support personnel, as well as the costs associated with
opening six new geographic locations. General and administrative expenses
represented 19.2% and 17.6% of revenues in 1995 and 1994, respectively. General
and administrative expenses as a percentage of revenues increased in 1995
primarily due to the costs associated with setting up division management and
field service operations, as well as costs associated with opening six new
geographic locations.
OTHER INCOME (EXPENSE)
Other income (expense) was income of $16,000 in 1995 and an expense of
$13,000 in 1994, representing no significant change.
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited statement of income data
of the Company for the eight quarters ended December 31, 1996, as well as such
data expressed as a percentage of revenues for the periods indicated. The
Company believes that this information has been prepared on the same basis as
the audited Financial Statements and that all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the amounts stated
below to present fairly the selected quarterly information when read in
conjunction with the audited Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The Company believes that quarterly revenues and
operating results are likely to vary significantly in the future and that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied on as indications of future performance. See
"Risk Factors -- Fluctuations in Quarterly Operating Results".
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $5,968 $7,028 $7,878 $10,022 $12,647 $15,680 $18,037 $19,861
Operating expenses:
Professional services............ 3,593 3,972 4,582 5,959 7,146 9,115 10,480 12,164
Selling and marketing............ 510 605 755 998 1,209 1,457 1,600 1,896
General and administrative....... 1,072 1,302 1,440 2,123 2,600 2,791 3,316 3,491
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 5,175 5,879 6,777 9,080 10,955 13,363 15,396 17,551
------ ------ ------ ------- ------- ------- ------- -------
Operating income................... 793 1,149 1,101 942 1,692 2,317 2,641 2,310
Other income (expense)............. (8) (18) (2) 44 (13) 2 (54) (40)
------ ------ ------ ------- ------- ------- ------- -------
Net income(1)...................... $ 785 $1,131 $1,099 $ 986 $ 1,679 $ 2,319 $ 2,587 $ 2,270
====== ====== ====== ======= ======= ======= ======= =======
Pro forma net income(2)............ $ 471 $ 678 $ 659 $ 592 $ 1,007 $ 1,391 $ 1,553 $ 1,362
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional services............ 60.2 56.5 58.2 59.5 56.5 58.1 58.1 61.3
Selling and marketing............ 8.5 8.6 9.6 10.0 9.6 9.3 8.9 9.5
General and administrative....... 18.0 18.5 18.3 21.1 20.5 17.8 18.4 17.6
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 86.7 83.6 86.1 90.6 86.6 85.2 85.4 88.4
------ ------ ------ ------- ------- ------- ------- -------
Operating income................... 13.3 16.4 13.9 9.4 13.4 14.8 14.6 11.6
Other income (expense)............. (0.1) (0.3) (0.0) 0.4 (0.1) 0.0 (0.3) (0.2)
------ ------ ------ ------- ------- ------- ------- -------
Net income(1)...................... 13.2% 16.1% 13.9% 9.8% 13.3% 14.8% 14.3% 11.4%
====== ====== ====== ======= ======= ======= ======= =======
Pro forma net income(2)............ 7.9% 9.7% 8.4% 5.9% 8.0% 8.9% 8.6% 6.9%
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) During each of the quarters presented, the Company's predecessor was an S
Corporation, and as such was not subject to income taxation at the corporate
level.
(2) Reflects federal and additional state income tax expense that would have
been required had the Company and its predecessor operated as a C
Corporation with an effective tax rate of 40%.
Although the Company has achieved significant quarter-to-quarter revenue
growth for the periods presented, the Company does not believe this growth rate
is sustainable. The Company has historically experienced a decrease in net
income as a percentage of revenues in the first and fourth quarters of each year
due to customer budget cycles and the resulting customer preference to complete
projects by year end. In addition, the fourth quarter of each year is generally
affected by certain holiday season costs and the reduced number of working days
in such quarter. See "Risk Factors -- Fluctuations in Quarterly Operating
Results". The fourth quarter of 1996 was also adversely affected by the
organizational matters discussed under "Risk Factors -- Management of Growth".
In addition, the Company expects the results for the first quarter of 1997 to be
adversely affected by certain nonrecurring expenses. See "-- Overview".
Throughout 1995 and 1996, the Company's total number of employees increased each
quarter, with the total number of employees increasing from 243 at December 31,
1994 to 818 at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $13.9 million at December 31, 1996 compared to
$5.9 million at December 31, 1995. These increases were primarily due to
increases in accounts receivable, prepaid expenses and other current assets. The
accounts receivable balance at December 31, 1996 was $20.3 million as compared
with $7.6 million at December 31, 1995, representing an increase of 167.1% (as
compared with a 98.2% increase in fourth quarter revenues from 1995 to 1996).
The Company has historically reinvested, and expects to continue to reinvest,
the vast majority of its income from operations into working capital in order to
finance the expansion of the Company's business. Historically, the Company has
incurred prepaid expenses at each year end in order to mitigate its
stockholders' current tax liabilities, consistent with its status as an S
corporation. The Company does not anticipate continuing this practice after its
conversion to a C Corporation in connection with the Offering.
The Company's investing activities used cash of approximately $1.4 million,
$553,000 and $276,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's capital expenditures generally reflect purchases of
furniture and equipment, computer systems and software. Increases in capital
expenditures were incurred in connection with the growth in the Company's
geographic locations and, in 1996, the implementation of a new applicant
tracking system, a new accounting system and a nationwide WAN.
Financing activities provided $1.8 million, $667,000 and $405,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
24
<PAGE> 26
The Company's accounts receivable balance has increased, and is expected to
continue to increase, as a result of increased revenues. For the fourth quarter
of 1996, the Company's average days' sales outstanding was 89 days. The Company
maintains a reserve for bad debts and currently believes that such reserve is
reasonably sufficient. The Company will continue to monitor its bad debt
reserves and make any increases therein that the Company may determine to be
appropriate; however, there can be no assurance that such reserve will be
adequate to cover future bad debt expense of the Company.
In January 1997, the Company entered into its $10.0 million secured
Facility, replacing a $3.0 million credit facility originally entered into in
June 1996. The Facility matures in June 1998 and borrowings thereunder may, at
the election of the Company, be subject to either the lender's prime rate minus
one-half of one percent (currently 7.75%) or LIBOR plus a margin of 2.0%.
Interest on prime rate loans is payable monthly and interest on LIBOR loans is
payable, at the election of the Company, every one, two, three or six months.
The Company may only draw under the Facility to the extent of its borrowing
base, which is generally 70% of its current accounts receivable. The Company is
required to pay a quarterly commitment fee of 0.125% per annum on the unused
portion of the Facility. The Facility is secured by the assets of the Company,
primarily its accounts receivable.
The Facility contains affirmative and negative covenants. The Company is
required to maintain tangible net worth of $10.0 million, a current ratio of 1.5
and a ratio of total indebtedness to tangible net worth of no greater than 1.0.
The Company also may not incur capital expenditures of greater than $3.5 million
during any fiscal year without the lender's consent. The negative covenants
include a prohibition on other indebtedness in excess of $200,000, the creation
of certain liens, mergers, the sale of all or any substantial part of the
Company's assets, the payment of dividends except for the purpose of the payment
of income taxes related to flow-through income arising from the Company's S
Corporation status and the creation or acquisition of any subsidiary.
As discussed above, Paranet intends to terminate its current S Corporation
status shortly prior to the completion of this Offering. The Company will incur
tax liabilities of approximately $7.2 million (payable over four years) as a
result of the conversion to C Corporation status, and thereafter will be subject
to federal and state income taxes, which could result in a reduction of future
cash flow. The Company is also expected to have future income tax benefits in
connection with the future exercise of stock options granted under its 1991
Nonqualified Stock Option Plan, all of which are expected to become fully vested
and immediately exercisable in connection with the consummation of this
Offering. See "Management -- Benefit Plans -- Predecessor Plan". Based on a fair
value equal to the assumed initial public offering price per share, the total
expected future tax benefits from the exercise of these stock options would be
approximately $ million. There can be no assurance as to whether or when the
nonqualified stock options will be exercised, or as to what the actual fair
value per share of Common Stock at the date of exercise will be. For periods
after the change to C Corporation status, income tax charges of 40% of net
income, if any, will be charged to income tax expense. The income tax benefits,
if any, related to the exercise of stock options will be recorded as additional
paid-in capital. The Company does not believe that the change in its tax status
will have a material adverse effect on the Company's liquidity and capital
resources. See Notes 1, 2 and 5 to Notes to Financial Statements.
The Company believes that the net proceeds from the sale of the Common
Stock offered by the Company hereby, together with existing cash balances, cash
generated from operations and amounts to be available under the Facility, will
provide adequate cash to fund its anticipated cash needs, including funding the
Company's growth strategy, constructing and implementing the Network Operation
Center and purchasing equipment in connection with potential outsourcing
engagements, at least through the next 12 months. See "Risk
Factors -- Management of Growth", " -- Risks Associated with Potential Domestic
Expansion", " -- Risks Associated with Potential International Expansion",
" -- Risks Associated with Potential Acquisitions" and "Use of Proceeds".
25
<PAGE> 27
BUSINESS
Paranet designs, integrates, manages and supports complex distributed
computing environments, principally for major commercial organizations. The
Company believes that it is uniquely responsive to its customers' needs as a
result of its exclusive focus on distributed computing environments, its
commitment to vendor independence, its franchise-like organizational structure
and its flexibility in services and contract terms. Paranet focuses on a broad
range of IT challenges inherent in distributed computing environments, such as
system and network management, security management, technology management and
business mapping. These technical areas are outlined in the Company's NOMAN(R)
framework (see chart on inside front cover). The Company's service offerings in
each of these technical areas include, among others, problem assessment, system
design, implementation and/or operation of a chosen solution (see chart on
inside back cover). Company projects include LAN/WAN design and upgrades,
intranet implementation, disaster recovery planning, help desk support,
day-to-day facilities management of large networks and many other support
services. The Company's expertise encompasses the latest networking and
computing technologies, including Internet firewalls, ATM, Fast Ethernet, Frame
Relay, FDDI, Unix and Windows NT.
Paranet's customers include American Express, Amoco, Chevron, Motorola,
Siemens Medical, Texas Instruments and US Robotics, among others. The Company
also has a group of customers, currently including GTE, Hewlett-Packard, ISSC
(IBM) and Sun Microsystems, that resell the Company's services to their own
customer bases. No single customer in either group accounted for more than 8% of
Paranet's 1996 revenues. The Company serves customers across a wide range of
industries, including telecommunications, financial services, energy,
manufacturing, semiconductors and professional services. During 1996, Paranet
served over 200 customers through its growing nationwide branch network. At
December 31, 1996, Paranet operated 27 branches in 23 cities and had 818
full-time employees.
MARKET BACKGROUND
Today's rapidly changing business environment is characterized by increased
competition, globalization and technological innovation. At the same time,
companies face increased pressure to improve customer service and profitability.
In order to compete more effectively, businesses are increasing their reliance
on IT as a means of achieving faster response times, shorter product cycles and
reduced costs. To realize these benefits, many companies are migrating to
distributed computing environments. As a result, distributed applications have
become mission critical, necessitating the implementation and continuous
enhancement of an efficient, reliable and flexible computing infrastructure. The
need for greater network speed and capacity drives the demand for installation
and operation services. In addition, new information-intensive applications and
Internet-based protocols further increase the burdens placed on networks.
Effective in-house management and support of these increasingly decentralized
computing resources and complex networks are technically challenging,
time-consuming and costly.
Companies faced with these problems generally have three options: (i) to
increase their IT staff, which increases fixed costs; (ii) to increase their
reliance on support services offered by hardware, software and
telecommunications providers, which may limit flexibility and access to best of
breed solutions; or (iii) to employ an external service provider such as
Paranet. The Company believes that the use of an external service provider
enables organizations to compete more effectively by allowing them to focus on
their core competencies, reduce costs and/or keep pace with technological
change. The market for external and internal network consulting, implementation
and operational services is large and growing rapidly. According to
International Data Corporation, the total domestic market for such services was
$7.2 billion in 1995, and is expected to grow to $17.7 billion by the year 2000.
26
<PAGE> 28
External service providers range from large, national organizations with
centralized information and management to smaller regional or local firms that
may be more responsive to customers, but which often lack the technical
sophistication or experience of national firms. Either of these alternatives can
create problems for large customers, which often deploy complex and
sophisticated information systems that are also highly distributed and
decentralized in nature. In many cases, national external service providers
cannot deliver services at the customer's various sites with the degree of
autonomy and flexibility desired by the customer, while local or regional
providers may lack the capabilities and geographic scope to serve large
organizations effectively. In addition, many external service providers are
allied with particular hardware or software vendors, which can limit their
objectivity in designing solutions appropriate to their customers' needs.
THE PARANET SOLUTION
Paranet delivers enterprise-wide IT solutions for distributed computing
environments through its nationwide branch network. The Company's franchise-like
organizational structure enables it to offer customers the advantages of local
or regional external service providers, such as increased focus and
responsiveness, while providing the comprehensive range of services and support
generally available from large, centralized national organizations. In order to
provide consistent, comprehensive and high-quality services to its customers
throughout the nation, the Company has developed NOMAN(R) (an acronym for
Network Operations Management). NOMAN(R) has many different components,
including a knowledge base of industry best practices, a detailed structural
framework, a maturity assessment model and a host of processes, metrics, tools
and procedures that provide a uniform methodology for the delivery of all
Paranet services. NOMAN(R) is organized to address every aspect of the design,
integration, management and support of distributed systems in a manner driven by
the customer's business needs mapped to the customer's computing infrastructure.
Paranet believes that NOMAN(R) increases the quality, consistency, efficiency
and scope of the Company's approach to resolving customers' distributed
computing problems.
Paranet believes that its independence from hardware and software vendors,
combined with the benefits provided by NOMAN(R), permits it to offer customers
best-of-breed solutions. By design, Paranet is flexible in customizing its
service offerings and the manner in which those services are delivered to
accommodate diverse customer needs, capabilities, time constraints and
knowledge. The Company strives to establish long-term relationships with
customers by delivering its services in a variety of manners, ranging from
consulting or integration to complete outsourced solutions. Paranet is also
flexible in designing the contractual terms of its engagements to meet
customers' preferences.
STRATEGY
The Company's objective is to become the global leader in the design,
integration, management and support of complex distributed computing
environments. To achieve this objective, the Company is pursuing the following
strategies:
EXPAND BRANCH NETWORK
In order to address the demand for its services, the Company expects to
open additional domestic branches. The Company's strategy also includes
international expansion, although the Company currently has no specific plans
for such expansion. The Company has refined a model for the development of a
branch from start-up to maturity, which embodies the knowledge Paranet has
gained from its experience with all of its previous branches. Paranet believes
that its process orientation, decentralized organizational structure and
entrepreneurial culture will enable it to execute its currently planned
expansion effectively; however, there can be no assurance that such expansion
will be successful. See "Risk Factors -- Management of Growth", " -- Risks
Associated with Potential Domestic Expansion", " -- Risks of Decentralized
Organization" and " -- Risks Associated with Potential International Expansion".
27
<PAGE> 29
EXPAND INDIRECT SALES RELATIONSHIPS
In order to increase market penetration and market exposure, the Company
currently has, and intends to expand, indirect sales relationships with
companies that offer Paranet's services under their own names to their own
customer bases. The Company currently has such indirect sales relationships with
GTE, Hewlett-Packard, ISSC (IBM) and Sun Microsystems, among others. The Company
continually explores potential relationships of this nature with other major
firms and believes that these relationships will allow it to achieve broader
market recognition more quickly and to compete for larger, longer-term
contracts. The Company is not obligated to sell or otherwise prefer the products
of the companies with which it currently has such relationships, and plans to
avoid any relationship that would jeopardize its vendor independence.
CONTINUE TO LEVERAGE AND ENHANCE NOMAN(R)
NOMAN(R) enables Paranet to provide consistent, comprehensive, high-quality
services to its customers while taking advantage of the benefits offered by the
Company's decentralized branch network. Paranet intends to continue to leverage
NOMAN(R) to efficiently and effectively provide services that are tailored to
customers' individual needs. Paranet plans to focus on the enhancement of
NOMAN(R) to ensure that it serves as a leading-edge repository of industry best
practices.
DEVELOP AND MARKET STANDARDIZED SERVICES
The Company intends to use its customer contacts, project experience and
market knowledge to identify selected technical areas where market demand exists
for more standardized services that can be customized and implemented rapidly
(for example, disaster recovery plans or Internet firewalls), generally on a
fixed-price basis. The Company believes that the standardization of services
will provide higher quality deliverables, reduce disruption to the customer's
business during the delivery process and potentially reduce the Company's costs.
The Company anticipates that the particular types of standardized services
demanded by the market will be subject to rapid change, thus requiring
continuous monitoring and frequent development of new standardized services. See
"Services -- Styles of Delivery".
ESTABLISH NETWORK OPERATION CENTER
In order to continue expanding the range of services offered to its current
and future customers, the Company intends to establish a Network Operation
Center (a "NOC"). The NOC will enable the Company to provide offsite monitoring
of customers' network activity, security issues, faults and performance, and
allow the Company to make changes and corrections as necessary, 24 hours a day,
seven days a week. The NOC will significantly enhance the Company's ability to
compete for certain outsourcing opportunities and enable the Company to provide
services remotely that it now provides on site.
BUILD LONG-TERM CUSTOMER RELATIONSHIPS
The Company considers superior execution and resulting customer
satisfaction key elements of selling to existing customers and generating
referrals for new customers. By focusing on the flexible delivery of consistent
high-quality services, Paranet believes it can continue to earn significant
repeat and referral business and multi-departmental projects within existing
customers. The Company seeks to develop long-term relationships with its
customers through superior execution, which in many cases enables Paranet to
become an integral part of the customers' technology planning, implementation
and infrastructure.
CONTINUE TO FOSTER THE PARANET CULTURE
The Company believes that the entrepreneurial orientation of its employees,
fostered by its decentralized organizational model and its employee compensation
practices, has been and will
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continue to be important to the Company's success. By providing an environment
in which employees are given high levels of empowerment and responsibility, the
Company encourages them to be responsive to their customers, fellow employees,
families, shareholders and the communities they live in. The Company seeks to
promote a core set of values that includes "excellence in everything it does",
"growth and development of its people" and "doing the right thing every time".
The Company intends to continue its emphasis on entrepreneurship at all levels
of the Company.
No assurance can be given that the Company will be able to implement its
strategy or achieve its objectives. See "Risk Factors".
NOMAN(R)
NOMAN(R) has many different components, including a knowledge base of
industry best practices, a detailed structural framework, a maturity assessment
model and a host of processes, metrics, tools and procedures that provide a
uniform methodology for the delivery of all Paranet services. NOMAN(R) is
organized to address every aspect of the design, integration, management and
support of distributed systems in a manner driven by the customer's business
needs mapped to its computing infrastructure.
NOMAN(R)'s dynamic knowledge base of methodologies, information and
processes is drawn from the collective knowledge and expertise of all current
and prior Paranet employees and many other industry sources. NOMAN(R) provides a
framework and sophisticated tools that assist the Company's employees in
understanding the needs of a customer, in clarifying a customer's goals, in
organizing resources to achieve those goals and in measuring progress through
established metrics. In addition, the Company believes that NOMAN(R) improves
internal communication by providing a framework in which to discuss and resolve
technical and organizational issues; provides a standardized method of capturing
knowledge so that it can be quantified and compared; and promotes teamwork and
more effective training by facilitating consistent work practices.
The NOMAN(R) knowledge base is organized around 12 technical domains that
contain the disciplines and elements (or tasks) associated with the design,
integration, management and support of distributed computing environments. (See
inside front cover for an illustration of the organization of the NOMAN(R)
knowledge base.) It is available on the Company's intranet for use by all
employees, who, in turn, contribute to it from their most recent project
experiences. For example, if a particular customer is interested in developing a
data security policy, a Paranet employee would access the NOMAN(R) knowledge
base under the domain entitled "Security Management", in which there are three
disciplines, one of which is "Security Policy Development". There (and in
further subdivisions of that discipline), the employee would find policies,
processes, methods, proposals, scoping guides, tools, resources, research,
industry reports and other references relevant to the topic.
The Company believes that NOMAN(R) provides a highly effective analytical
methodology for addressing the IT challenges inherent in distributed computing
environments. Several of the Company's competitors employ analytical
problem-solving methodologies; however, the Company believes these methodologies
lack NOMAN(R)'s scope, flexibility and specific industry focus. NOMAN(R) is
organized to begin the analysis with the objectives of the customer's business,
rather than beginning from an IT perspective.
A description of each domain in the NOMAN(R) knowledge base follows:
BUSINESS MAPPING. The Business Mapping Domain identifies the processes and
practices needed to map IT to the end user's business requirements. This domain
concerns all aspects of the computing environment, including communications,
network access, application access, host access, security and peripherals.
Business Mapping takes a long-term, proactive view, focusing on how the
customer's IT organization works with the end user rather than being driven by
the end user
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in a reactive manner. This domain is designed to help the customer use IT as a
competitive advantage in its business.
TECHNOLOGY MANAGEMENT. The Technology Management Domain focuses on those
processes and activities needed to establish standards and monitor industry
directions in all areas of the distributed computing industry, including
operating systems, network cabling, LAN/WAN topologies, hardware, applications
and networking protocols.
POLICIES/PROCEDURES. The Policies/Procedures Domain is concerned with the
process of developing and maintaining the policies and procedures used in the
management of distributed computing environments. This domain establishes
standards and processes in all facets of the distributed computing environment,
including security, peripherals, backup and restoration, purchasing, software
licensing, administration, network access, application access and help desk
support, among others. Although policies and procedures are an integral part of
each domain, this domain exists to ensure that the various policies and
procedures associated with the other domains are consistent, usable and
accessible.
EDUCATION. The Education Domain focuses on the processes and activities
involved in the development and coordination of training programs for end users
and support staff. This domain covers, among other areas, applications,
hardware, operating systems, project management and networks.
SYSTEM/NETWORK MANAGEMENT. The System/Network Management Domain
concentrates on the day-to-day operations necessary to maintain a high degree of
reliability and availability of the resources used in the distributed computing
environment. Activities within this domain include managing queues, hardware
support, changing user accounts, e-mail administration and network
administration. This domain tends to focus on "behind the scenes" processes or
utility services, such as network access, application access and peripheral
access.
DATA MANAGEMENT. The Data Management Domain identifies the processes and
practices involved in maintaining the integrity of data over its life cycle.
This domain includes both protecting data from loss and managing data and data
storage devices effectively.
SECURITY MANAGEMENT. The Security Management Domain addresses the
prevention and detection of security violations, access controls, the prevention
of service interruption, protection of sensitive data and the restoration of
services in the event of service interruption.
FAULT MANAGEMENT. The Fault Management Domain describes the processes and
activities involved in monitoring systems and networks on a real-time basis to
isolate, diagnose, log, resolve and prevent network and system problems.
PERFORMANCE MANAGEMENT. The Performance Management Domain consists of the
processes and activities involved in gathering, storing and analyzing statistics
on the factors that affect network and system performance. This domain includes
system and network performance monitoring, tuning and capacity planning
activities.
CONFIGURATION MANAGEMENT. The Configuration Management Domain identifies
the processes and practices involved in controlling, configuring and accounting
for resources in the distributed computing environment. This domain includes
tasks such as hardware/software inventory tracking, software distribution and
change control. Configuration Management tends to be somewhat reactive in nature
as it involves managing the dynamic, day-to-day configuration of the distributed
computing environment.
ACCOUNTING MANAGEMENT. The Accounting Management Domain designates the
processes and practices necessary for purchasing, managing contracts for and
tracking costs of hardware, software and services.
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USER SERVICES. The User Services Domain focuses on the processes and
activities involved in providing help to end users of the distributed computing
environment, including problem tracking, problem resolution, bug testing and
support of groupware. This domain facilitates the day-to-day contact between end
users and the customer's IT organization. This contact is usually initiated by
the end user, which causes this domain to be rather reactive.
FLEXIBLE SERVICE APPROACH
The Company utilizes a flexible service delivery approach in which a range
of services can be mapped to a spectrum of technical areas and delivered in a
variety of manners, as illustrated in the following chart:
FLEXIBLE SERVICE CHART
<TABLE>
<S> <C> <C> <C>
Service Offerings Technical Areas Styles of Delivery Contract Terms
/Domains
Assessments Accounting Management Help Fixed Price
Benchmarking Business Mapping Teach Price by Task
Consulting Configuration Management Do Level of Service
Design Data Management Level of Effort
Implementation Education Retainer
Integration Fault Management Hourly
Operations Performance Management
Product Selections Policies and Procedures
Reengineering Security Management
Training Systems/Network Management
Technology Management
User Services
</TABLE>
The Company offers its services in a "mix-and-match" fashion, allowing
customers to choose from any combination possible using one item from each
column in the chart. The specific combination for a given project is jointly
developed by the customer and the Company to meet the customer's needs and
preferences. For example, a customer seeking to implement (the Service Offering)
an intranet firewall to protect access to internal information (the Security
Management Domain) could request the Company to take complete responsibility for
the implementation (the "Do" style of delivery) on a fixed-price basis (the
Contract Terms).
SERVICE OFFERINGS
As indicated in the chart above, the Company offers a broad range of
network and IT services based on the needs of each particular customer. The
Company's service offerings encompass all phases of the development and
operation of a distributed computing environment. The Company's flexibility and
expertise allow it to provide the precise services, whether comprehensive or
narrowly focused, required by a particular customer at any given point in time.
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TECHNICAL AREAS (DOMAINS)
The Company has identified 12 technical domains incorporating the hundreds
of disciplines and elements (or tasks) associated with the design, integration,
management and support of distributed computing environments. The Company has
organized the NOMAN(R) knowledge base (as illustrated on the inside cover of
this Prospectus) around these domains. For a description of these domains, see
"-- NOMAN(R)".
STYLES OF DELIVERY
Paranet uses its technical resources to provide the services each customer
seeks and delivers these services in the manner each customer prefers, thereby
addressing each customer's unique objectives. Paranet serves its customers in
many roles, including as consultant, system integrator, selective outsourcer,
mentor, trainer or contractor. The Company strives to match its style of service
delivery with the customer's specific objectives, knowledge and time
constraints.
As indicated in the preceding chart, Paranet's styles of service delivery
can be broken down into three broad categories: help, teach and do. Customers
who hire Paranet to "help" them generally have employees with the skills to
accomplish their goals and objectives; however, the extensive existing workload
of these employees frequently does not allow them to undertake new initiatives.
Paranet is able to provide the necessary expertise to supplement customers'
efforts. Those customers who hire Paranet to "teach" them usually have the
resources available to devote to a project, but lack the expertise to resolve
the technical issues, such as the implementation of an unfamiliar technology or
the mapping of the organization's business objectives to its IT services.
Paranet can accelerate the learning process for those customers through
customized training, consulting or mentoring. Finally, customers generally hire
Paranet to "do" particular projects because they either lack the resources and
expertise to address particular issues or choose to allocate their IT resources
elsewhere. Projects in this category can range from the day-to-day operation of
distributed computing environments to a large-scale integration project that
requires focused attention until completion, such as an operating system
migration.
Paranet currently performs virtually all of its services at the customer's
site. However, in response to requests from certain customers for remote
delivery of services, the Company intends to use approximately $5.0 million of
the net proceeds of the Offering to establish a Network Operation Center, which
will allow Paranet to provide remote services to its customers. These services
will include, among others, software distribution; asset management; data
management; desktop and server management; and the monitoring of networks,
system faults, performance and security. Although these are all services that
are delivered by Paranet today at the customer's site, the Company believes that
customers are growing increasingly comfortable with remote delivery as available
security measures improve. In addition, the NOC will allow the Company to
provide services 24 hours a day, seven days a week to certain of its customers
who do not have adequate resources to internally provide such services.
Following completion of the NOC, Paranet will be able to offer its customers the
choice of on-site, remote or a combination of on-site and remote service
delivery, whichever is preferable to the customer.
CONTRACT TERMS
Paranet generally seeks to make an equitable return while arriving at
contractual arrangements that satisfy each customer's preferences. This may
involve matching the contract terms with the customer's budget cycles, goals or
any variety of other factors. As an example, the Company could replace a
fixed-price/fixed-time contract with a fixed-price/level of effort contract that
employs risk-sharing arrangements. The objective of this form of contractual
arrangement is to establish a partnership with the customer by aligning the
motives and risk profiles of the customer and the Company, resulting in a more
cost-effective and time-efficient service delivery process. The
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Company believes that its flexible approach to contractual arrangements is an
effective differentiating factor in its industry. See "Risk Factors -- Project
Risks; Fixed-Price Projects".
CUSTOMERS
Paranet targets its marketing efforts at major commercial organizations
with large-scale distributed computing needs and increasingly complex networks.
The Company serves customers across a wide range of industries, including
telecommunications, financial services, energy, manufacturing, semiconductors
and professional services. During 1996, the Company provided services to over
200 customers. Paranet is not dependent on any single customer, as no single
customer accounted for more than 8% of revenues in 1996. The Company's top 15
customers in 1996 accounted for $36.4 million of revenues, representing 54.9% of
total revenues. The following is a list of the customers of Paranet that each
accounted for at least $500,000 of revenues in 1996:
American Express
American Portable Telecom
Ameritech Communications
Amoco
Beneficial Technology Group
Chevron
Conoco
Convex Computer
Data Times
Exxon
GTE
Houston Cellular
ISSC (IBM)
Landmark Graphics
Lanier Worldwide
Lehman Brothers
Lucent Technologies
MCI
Medaphis
Mobil
Motorola
Natural Gas Clearinghouse
Shell Oil
Siemens Medical
Star Enterprise
Sun Microsystems
Texas Commerce Bank/Chase
Manhattan Bank
Texas Instruments
US Robotics
Vastar Resources
Williams Cos.
Worldcom
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ORGANIZATION
The Company believes that its decentralized organizational structure has
been a key factor in its success to date. This structure is designed to maximize
responsiveness to customers by pushing responsibility and authority as close to
the customer as possible. It is also designed to maintain the Company's
entrepreneurial culture by optimizing the size of the organizational units at
all levels. As particular units grow beyond the size at which they can provide
highly focused service, they are subdivided.
[Map of the continental United States showing the location of the Company's 27
branches in 23 cities at December 31, 1996 appears here.]
The branch is the basic building block of the Company's organizational
structure. Each branch operates as a self-contained business unit. Specific
responsibilities of a branch include service delivery, customer sales, limited
capital decisions, personnel and compensation decisions and coordination with
other branches in serving major customers. The Company believes a significant
aspect of its future growth will continue to come from increasing the number of
branches and geographic locations. At December 31, 1996, the Company had 27
branches in 23 cities, at the geographic locations shown above.
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The branches within a geographical area are managed by a division, which
guides its branches in strategic decisionmaking and provides limited pooled
resources during the start-up phase of new branches. A division is also
responsible for monitoring and supporting its branches, disseminating corporate
culture and implementing Company-wide standards, guidelines and processes.
Field Services and Corporate each operate on a Company-wide level to
support the divisions and branches. Field Services is responsible for
collecting, distilling, packaging and supporting the tools, processes, methods
and technologies used throughout the Company. An important aspect of the work of
Field Services is orchestrating the continual advancement and refinement of
NOMAN(R). The Company believes that the work of Field Services is essential to
enable the Company to provide consistent, high-quality and cost-effective
services. By design, Field Services consists of a relatively small group of
people, in order to put the needed resources in the field as close to the
customer as possible. Corporate provides centralized accounting, finance and
strategic management functions.
Every Paranet employee has two consistent but distinctly different roles.
One role is as a member of the team or business unit to which he or she belongs
and the other relates to his or her specific function within the team. These
functional roles are classified into 18 functional domains (for example, sales,
recruiting, technical management, human resources or legal), each of which has a
complete set of associated policies, processes, critical success factors, tools
and metrics. The Field Services organization has a leader for each functional
domain, who is responsible for the advancement and continuous improvement of his
or her functional domain. These leaders have no direct management authority but
strongly influence the members of their functional domains throughout the
Company to ensure best practices and consistent delivery of functional domain
services. As the dynamics of managing the Company evolve, it is the
responsibility of the functional domain leaders to distill and replicate these
new practices throughout their functional domains. This dual focus on business
unit success and personal success as a team member is intended to provide each
employee with appropriate incentives to contribute to Company-wide consistency
and business unit success.
In the past, the Company's growth has required the Company to change and to
adapt its organizational structure and management approach, and similar changes
are likely to be required in the future. There can be no assurance that future
changes in organizational structure or management approach in response to growth
or other circumstances will be effective, or that such changes will not create
potentially material business disruptions. See "Risk Factors -- Management of
Growth".
SALES AND MARKETING
SALES APPROACH
Paranet strives to develop its customer base by pursuing new customers,
increasing penetration within existing customers and expanding its indirect
sales relationships. The Company's direct marketing is conducted primarily at
the branch level. The branches generally initiate the new customer development
process by identifying sales opportunities and making initial contact with the
prospective customers' senior management, IT department or business unit. The
Company also seeks to gain additional business from existing customers by
increasing the number of projects within the same department and/or expanding
across multiple departments and/or locations within the same customer.
Paranet also markets its services through indirect sales relationships. In
order to increase market penetration and market exposure, the Company is
currently working, and intends to expand its work, with companies that offer
Paranet's services under their own names to their own customer bases. The
Company currently has such indirect sales relationships with GTE,
Hewlett-Packard, ISSC (IBM) and Sun Microsystems, among others.
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In addition to the Company's direct sales efforts and indirect sales
relationships described above, the Company also benefits from customer
referrals; business and industry rankings, such as the Inc. 500 and LAN 100
rankings; published articles in major industry publications, such as LAN
Magazine, LAN Times, InfoWorld and Network World; and Paranet's site on the
World Wide Web, at which certain marketing information is available. The Company
encourages its employees to publish technical articles in industry publications
such as those listed above, which the Company believes increases market
awareness of the Company and its expertise.
ACCOUNT SERVICE PLAN
The Company has developed a process called the Account Service Plan, which
is implemented by a team consisting of sales professionals and technical
personnel working together to serve the customer's objectives throughout the
different phases of the customer relationship. This process is initially driven
by sales considerations but becomes more technically focused over time. The
Account Service Plan defines the responsibilities and expectations of sales
professionals and technical personnel, so that both can work efficiently in
winning the business and successfully executing the assignment with the ultimate
goal of achieving high levels of customer satisfaction.
MAJOR ACCOUNTS PROGRAM
Paranet is currently implementing a Major Accounts Program, which is
intended to serve the Company's largest accounts more efficiently by better
coordinating the efforts of branches throughout the Company. Under the Major
Accounts Program, one branch sales manager will be assigned primary
responsibility for handling the account, including coordination with other
branches in serving the customer. Currently, Paranet has identified five major
accounts for this program -- Amoco, GTE, Motorola, Sun Microsystems and US
Robotics -- that collectively accounted for 24.6% of the Company's revenues in
1996.
CUSTOMER SATISFACTION SURVEYS
In order to monitor customer satisfaction, the Company employs an
independent research firm to conduct quarterly customer satisfaction surveys of
a random selection of Paranet's customers. The Company uses the survey results
as a tool to identify and address potential areas for improvement. In addition,
customer satisfaction (as measured by the surveys) is a component of the
incentive compensation goals of every member of the Company's management (which
includes branch sales managers, technical managers, recruiters, administrators,
Field Services employees and executive officers). The Company believes this
practice reinforces management's commitment to customers.
HUMAN RESOURCES
As of December 31, 1996, the Company had 818 full-time employees,
consisting of 690 technical personnel, 79 employees in administration and
support services and 49 employees in sales and marketing. During 1996, the
number of employees increased by 77%.
RECRUITING
A key part of the Company's growth strategy is to recruit employees with
outstanding customer service abilities, independence, leadership aptitude, broad
and deep technical knowledge, goal orientation and an entrepreneurial spirit. In
order to assess candidates and to hire the optimal Paranet employee in a
cost-effective manner, Paranet has created a sophisticated recruiting process
that combines in-house professional recruiters (of which Paranet had 21 at
December 31, 1996), management, sales professionals and technical employees.
Paranet generates a steady flow of applicants through multiple sourcing
techniques, including employee referrals, advertisements on the World Wide Web
(including the Company's own Web site), job fairs, classified advertisements in
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local newspapers and direct recruiting. The Company generally hires
professionals with a minimum of three years of technical experience who the
Company believes can add immediate value. Paranet recently implemented a
nationwide applicant tracking system that matches a candidate's abilities and
interests with the requirements of a particular branch or customer.
EMPLOYEE DEVELOPMENT
The Company seeks to foster the personal and professional advancement of
its employees through a culture that promotes continuous learning. The Company
develops an individually tailored educational curriculum for each employee that
includes training in management and leadership skills, in addition to technical
education designed around the employee's functional domain. The Company also has
a tuition reimbursement plan and the Paranet Certified Analyst Program (an
internal technical certification program), which are designed to produce
well-rounded technical professionals who excel in multi-vendor environments.
Business unit leaders' incentive compensation depends in part on whether the
members of their business unit devote specified levels of time to personal and
professional development.
COMPENSATION AND INCENTIVES
The Company's compensation structure is designed to consistently promote
desired behavior and to encourage teamwork by ensuring that compensation
incentives do not create conflicts among individuals, functional domains or
business units. Incentive compensation is based on each employee's performance
in two distinct dimensions -- as a member of a business unit and as a member of
a functional domain. All individual goals are consistent with the Company's
goals (including that of customer satisfaction), which is intended to align
compensation packages with the Company's critical success factors. The
compensation structure is reviewed annually and adjusted as appropriate to
ensure that the incentives are effective to promote the Company's and its
customers' objectives.
CORPORATE CULTURE AND VALUES
The Company fosters an entrepreneurial culture based on individual
contributions, communications, growth and development, and a commitment to
having fun. Paranet believes that its ability to continue to grow is dependent
upon retaining the unique organization, values and culture it has created.
Hence, communicating its culture and providing constant support to its employees
are critical elements of success. Paranet uses multiple channels to provide
consistent communications among its employees, including new hire orientation;
an audiotaped talk show (produced every six weeks); frequent Company-wide
meetings; a monthly newsletter; Company-wide e-mail; and an extensive intranet.
The intranet contains information concerning the Company's goals, critical
success factors, forms, processes, tools, news, updates and other information
covering every aspect of the Company's business.
In order to recognize and encourage superior achievement and performance by
employees in all functional domains (including technical, sales, recruiting and
administration), Paranet has established a variety of awards. These awards
include (i) the "Golden Wing Award", given annually to the Company's highest
achievers in each functional domain, which includes an all-expenses-paid trip to
an exotic location for the winners and their spouses; (ii) the "Para 100 Award",
given annually to employees who achieve their individual goals for the year,
which includes a mini-vacation for the winners and their spouses; (iii) the
"Golden Eagle Award", given bi-monthly to recognize superior performance and
contributions by branch employees; (iv) the "Silver Eagle Award", presented to
employees who receive commendation letters from customers; and (v) the
"Quarterly Division Awards", given quarterly by each division to recognize
superior performance in each functional domain. The Company also seeks to
increase its employees' sense of community and to foster family involvement with
the Company through regular Company-wide social events, and
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encourages community involvement by sponsoring charity events and contributing
to charities in which its employees are involved.
See "Risk Factors -- Management of Growth", "-- Need to Attract and Retain
Qualified Technical and Other Key Personnel" and "-- Dependence on Key
Employees".
COMPETITION
The Company believes that the principal competitive factors in its industry
include quality of service, responsiveness to customer objectives, speed of
service delivery, technical and business expertise and price. The Company
believes it competes favorably with respect to these factors, in part because
its process-driven approach is designed to provide delivery of solutions in a
cost-effective manner and its branch-style organization and commitment to
flexibility facilitate responsiveness and speed of service delivery.
The market for the design, management, integration and support of complex
distributed computing environments is characterized by high growth, intense
competition and rapid technological change. The market is highly fragmented,
with no one company or small group of companies having a majority share of the
market. The Company faces competition from system integrators, VARs, local and
regional network services firms, telecommunications providers, consulting and
accounting firms, independent consultants, software vendors, network equipment
vendors, computer systems vendors, large outsourcing companies and temporary
staffing companies. Many of these competitors have significantly greater
financial, technical and marketing resources and/or name recognition and
generate greater revenue than does the Company. Further, the Company has faced,
and expects to continue to face, additional competition from new entrants into
its markets. Increased competition could result in price reductions, fewer
projects, underutilization of resources, reduced operating margins and loss of
market share, any of which could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors. The failure of the Company to compete successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the Company's customers and prospective customers have
internal IT departments and could choose to satisfy their needs through internal
resources rather than through external service providers. As a result, any
decision by a significant number of the Company's customers or potential
customers to perform network management services internally could have a
material adverse effect on the Company's business, financial condition and
results of operations.
See "Risk Factors -- Intense Competition".
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its intellectual property,
including without limitation the NOMAN(R) framework. The Company relies upon a
combination of trade secret, nondisclosure and other contractual arrangements,
technical measures, copyright laws and trademark laws to protect its proprietary
rights. Although the Company enters into confidentiality agreements with its
employees, subcontractors and customers, and attempts to limit access to and
distribution of its proprietary information, there can be no assurance that the
steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use or take appropriate steps to enforce its intellectual
property rights. The Company has in the past entered into service contracts with
customers that assign rights to certain aspects of the work performed under
those contracts to the customers. The Company does not believe that such
contracts limit the Company's ability to render its services to other customers.
However, there can be no assurance that the Company will not receive
communications in the future from third parties or customers asserting that the
Company
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has infringed or misappropriated the proprietary rights granted under such
contracts. See "Risk Factors -- Dependence on Key Employees" and
"-- Intellectual Property Rights".
FACILITIES
The Company's principal executive offices are located in an approximately
20,000 square foot facility in Houston, Texas, pursuant to a lease which expires
in December 1998. In addition, the Company leases office space in other cities,
generally on a short-term basis. Because the Company's professional services
currently are typically performed at the customer site, such other facilities
are generally small. The Company is continually evaluating the adequacy of
existing facilities and the appropriateness of facilities in new cities, and it
believes that suitable additional space will be available in the future on
commercially reasonable terms as needed. See "-- Organization".
The Company intends to use approximately $5.0 million of the net proceeds
of the Offering to establish a NOC. See "-- Services -- Styles of Delivery".
LEGAL PROCEEDINGS
The Company is occasionally involved in litigation relating to personnel
and other claims arising in the ordinary course of business. Paranet is not
currently engaged in any legal proceedings which are expected, individually or
in the aggregate, to have a material adverse effect on the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table and descriptions set forth information regarding the
directors, executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Michael H. Holthouse.................. 39 Chairman of the Board and President
Steven T. Ough........................ 38 Director and Director of Technology
EXECUTIVE OFFICERS
Jeffrey G. Warren..................... 33 Director of Finance
Kenneth Wolverton..................... 32 Director of Field Services
KEY EMPLOYEES
Gordon B. Brown....................... 40 New Territories Division Manager
Steven P. McDermott................... 38 Central Division Manager
Michael J. Rigert..................... 37 Midwestern Division Manager
Tari Schreider........................ 39 Southeastern Division Manager
William H. Stockwell.................. 38 Western Division Manager
John Stopper.......................... 43 Eastern Division Manager
</TABLE>
The Company's Board of Directors is divided into three classes with
staggered terms of office, initially ending in 1998, 1999 and 2000. Thereafter,
the term for each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. The Company's Board of Directors is
currently composed of two members. Mr. Ough is a Class II Director, whose term
will expire at the 1999 annual meeting of stockholders, and Mr. Holthouse is a
Class III Director, whose term will expire at the 2000 annual meeting of
stockholders. Following completion of the Offering, the Board of Directors plans
to appoint three additional directors who are not employees of the Company (each
a "Nonemployee Director") and two additional directors who are employees of the
Company. Officers of the Company are appointed by the Board of Directors and
serve until their successors are chosen or until their resignation or removal.
DIRECTORS AND EXECUTIVE OFFICERS
Michael H. Holthouse has served as President and Chairman of the Board of
the Company since he co-founded the Company in October 1990. From December 1984
to October 1990, Mr. Holthouse was employed as a Major Account Manager by Apollo
Computer Inc./Hewlett-Packard ("Apollo"), a company engaged in the production of
commercial engineering and desktop workstations and applications software.
Steven T. Ough, a co-founder of the Company, has served as a director of
the Company and as the Company's Director of Technology since January 1991. From
January 1988 to October 1990, Mr. Ough was employed as a technical consultant
for Apollo.
Jeffrey G. Warren has served as the Company's Director of Finance since
January 1993. Prior to joining the Company, Mr. Warren was employed by Ernst &
Young LLP, serving as an Audit Manager from September 1991 to December 1992. Mr.
Warren is a Certified Public Accountant.
Kenneth Wolverton has served as the Company's Director of Field Services
since May 1995. Prior thereto, he was employed by Compaq Computer Corporation in
a variety of information technology management positions, most recently as
Enterprise Customer Service Systems Manager from February 1995 to May 1995 and
as North America Customer Service Systems Manager from July 1993 to February
1995.
40
<PAGE> 42
KEY EMPLOYEES
Gordon B. Brown has held the position of New Territories Division Manager
since January 1997. Previously, he served as the Company's Director of Business
Development from January 1996 to January 1997, as a Division Manager from
January 1994 to January 1996 and as a Branch Manager from May 1992 to January
1994. From May 1989 to May 1992, Mr. Brown was a District Manager for Apollo.
Steven P. McDermott has served as Central Division Manager since joining
the Company in March 1995. From February 1991 to March 1995, he held the
position of Regional Manager for Anatec Inc., a custom applications software
development company. From September 1986 to January 1991, Mr. McDermott was a
National Account Manager for Wright Line, a manufacturer of computer-related
products.
Michael J. Rigert has held the position of Midwestern Division Manager
since October 1994. From June 1994 to October 1994, Mr. Rigert served as
Corporate Accounts Manager for OpenVision Technologies, a developer of
client/server management software. Prior thereto, he was employed as a Senior
Regional Manager of Legent Corporation, a software and computer services
provider.
Tari Schreider has served as Southeastern Division Manager since joining
the Company in July 1996. For eight years prior to joining the Company, Mr.
Schreider served as a director and partner of Contingency Planning Research,
Inc., a management consulting firm concentrating on sales, recruiting and
consulting resources.
William H. Stockwell has been the Company's Western Division Manager since
joining the Company in November 1994. Prior to joining the Company, he was
employed by IBM in a variety of sales management positions from 1981 to November
1994.
John Stopper has served as Eastern Division Manager since August 1995. From
1989 to August 1995, Mr. Stopper served as Senior Regional Manager for Legent
Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the appointment of additional directors after the Offering, the
Company will establish an Audit Committee and a Compensation Committee. The
Audit Committee, which will be composed entirely of Nonemployee Directors, will
review the functions of the Company's management and independent auditors
pertaining to the Company's financial statements and perform such other related
duties and functions as are deemed appropriate by the Audit Committee or the
Board of Directors. The Compensation Committee, a majority of the members of
which will be Nonemployee Directors, will recommend to the Board of Directors
the compensation and benefits for the officers of the Company and will
administer and grant stock options and make other awards under the Company's
Incentive Plan.
DIRECTOR COMPENSATION
The Company's current directors receive no compensation for such service.
INDEMNIFICATION ARRANGEMENTS
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Delaware General
Corporation Law. The Bylaws include related provisions meant to facilitate the
indemnitee's receipt of such benefits. These provisions cover, among other
things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some cases
make such determination, (ii) specification of certain time periods by which
certain payments or determinations must be made and actions must be taken
41
<PAGE> 43
and (iii) the establishment of certain presumptions in favor of an indemnitee.
The benefits of certain of these provisions are available to an indemnitee only
if there has been a "change in control" (as defined) of the Company. The Company
has entered or will enter into indemnification agreements with each of its
directors that provide for similar protections. In addition, the Company expects
to purchase directors' and officers' liability insurance policies for its
directors and officers that will take effect upon consummation of this Offering.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by the Company to its President and each of the other
executive officers of the Company who earned more than $100,000 in combined
salary and bonus from the Company for the year ended December 31, 1996
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
ANNUAL COMPENSATION(1) OPTIONS
----------------------- (NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS SHARES) COMPENSATION(2)
--------------------------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Michael H. Holthouse............. $150,000 $349,549 -- $2,625
President
Steven T. Ough................... 110,000 42,089 -- 571
Director of Technology
Kenneth Wolverton................ 105,000 36,329 890
Director of Field Services
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other annual compensation in the form of perquisites and other personal
benefits for the Named Executive Officers for 1996 has been omitted because
the aggregate amount of such compensation constituted less than the lesser
of $50,000 or 10% of the annual compensation earned by such individual for
such year.
(2) The amounts shown represent (i) contributions by the Company under its
401(k) Plan and (ii) premiums paid by the Company under life insurance
policies for the Named Executive Officers.
42
<PAGE> 44
The following table contains certain information concerning options granted
to the Named Executive Officers in 1996.
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL EXERCISE ANNUAL RATES OF
SECURITIES OPTIONS OR BASE STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PER EXPIRATION ------------------------
NAME GRANTED IN 1996 SHARE DATE 5% 10%
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Holthouse..... --
Steven T. Ough........... --
Kenneth Wolverton........ % $ $ $
</TABLE>
- ---------------
(1) Calculated based upon the indicated rates of appreciation, compounded
annually, from the date of grant to the end of each option term. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be achieved. The calculation does not take into account the
effects, if any, of provisions of the Company's 1991 Nonqualified Stock
Option Plan governing termination of options upon employment termination,
transferability or vesting.
The following table summarizes the value of the outstanding options with
respect to the Named Executive Officers. None of the Named Executive Officers
exercised any stock options during 1996. There are no outstanding stock
appreciation rights with respect to the Company.
1996 YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael H. Holthouse................. -- -- -- --
Steven T. Ough....................... -- -- $
Kenneth Wolverton.................... -- --
</TABLE>
- ---------------
(1) Prior to this Offering, there was no public market for the Common Stock and,
therefore, the value of each unexercised in-the-money stock option is
calculated as the difference between an estimated initial public offering
price of $ per share and the exercise price of the stock option.
EMPLOYMENT AGREEMENTS
Each of the Named Executive Officers has entered into an identical at-will
employment agreement with the Company (the "Employment Agreement"). The
Employment Agreement contains provisions obligating each employee to preserve
the confidential information of the Company and its customers. The Employment
Agreement also provides that any intellectual property conceived during the term
of employment must be disclosed and assigned to the Company. In addition, the
Employment Agreement contains a covenant limiting competition with the Company
during the period of employment and for a period of one year following
termination of employment.
43
<PAGE> 45
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its fiscal year ended December 31, 1996, the Company had no
Compensation Committee or other committee of the Board of Directors performing
similar functions. Decisions concerning compensation of executive officers were
made during such year by the President of the Company, Michael H. Holthouse.
Following the completion of the Offering, the Board of Directors will establish
a Compensation Committee, a majority of the members of which will be Nonemployee
Directors. See " -- Committees of the Board of Directors".
BENEFIT PLANS
INCENTIVE PLAN
Prior to the completion of this Offering, the Company expects to adopt the
Paranet, Inc. Long-Term Incentive Plan (the "Incentive Plan"). The objectives of
the Incentive Plan are to (i) attract and retain the services of key employees,
qualified independent directors and qualified consultants and other independent
contractors and (ii) encourage the sense of proprietorship in and stimulate the
active interest of those persons in the development and financial success of the
Company by making awards ("Awards") designed to provide participants in the
Incentive Plan with proprietary interest in the growth and performance of the
Company.
The Company plans to reserve shares of Common Stock for use in
connection with the Incentive Plan. Persons eligible for Awards are (i)
employees holding positions of responsibility with the Company or any of its
subsidiaries and whose performance can have a significant effect on the success
of the Company, (ii) Nonemployee Directors and (iii) certain nonemployee
consultants and other independent contractors providing, or who will provide,
services to the Company or any of its subsidiaries.
The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the Incentive Plan. With respect to Awards to
employees and independent contractors, the Committee has the exclusive power to
administer the Incentive Plan, to take all actions specifically contemplated
thereby or necessary or appropriate in connection with the administration
thereof, to interpret the Incentive Plan and to adopt such rules, regulations
and guidelines for carrying out its purposes as the Committee may deem necessary
or proper in keeping with the objectives of such plan. With respect to Awards to
employees and independent contractors, the Committee may, in its discretion,
among other things, extend or accelerate the exercisability of, accelerate the
vesting of or eliminate or make less restrictive any restrictions contained in
any Award, waive any restriction or other provision of the Incentive Plan or in
any Award or otherwise amend or modify any Award in any manner that is either
(i) not adverse to that participant holding the Award or (ii) consented to by
that participant. The Committee also may delegate to the chief executive officer
and other senior officers of the Company its duties under the Incentive Plan.
The Board of Directors may amend, modify, suspend or terminate the
Incentive Plan for the purpose of addressing any changes in legal requirements
or for any other lawful purpose, except that (i) no amendment or alteration that
would adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant and (ii) no amendment or alteration shall be effective prior to its
approval by the stockholders of the Company to the extent such approval is then
required pursuant to Rule 16b-3 in order to preserve the applicability of any
exemption provided by such rule to any Award then outstanding (unless the holder
of such Award consents) or to the extent stockholder approval is otherwise
required by applicable legal requirements. The Board of Directors may make
certain adjustments in the event of any subdivision, split or consolidation of
outstanding shares of Common Stock, any declaration of a stock dividend payable
in shares of Common Stock, any recapitalization or capital reorganization of the
Company, any consolidation or merger of the Company with another corporation or
entity, any adoption by the Company of any plan of exchange affecting the Common
44
<PAGE> 46
Stock or any distribution to holders of Common Stock of securities or property
(other than normal cash dividends).
Awards to employees and independent contractors may be in the form of (i)
rights to purchase a specified number of shares of Common Stock at a specified
price ("Options"), (ii) rights to receive a payment, in cash or Common Stock,
equal to the fair market value or other specified value of a number of shares of
Common Stock on the rights' exercise date over a specified strike price, (iii)
grants of restricted or unrestricted Common Stock or units denominated in Common
Stock, (iv) grants denominated in cash and (v) grants denominated in cash,
Common Stock, units denominated in Common Stock or any other property which are
made subject to the attainment of one or more performance goals ("Performance
Awards"). An Option may be either an incentive stock option ("ISO") that
qualifies, or a nonqualified stock option ("NSO") that does not qualify, with
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"); provided, that Nonemployee Directors and independent contractors
cannot be awarded ISOs. The Committee will determine the employees and
independent contractors to receive Awards and the terms, conditions and
limitations applicable to each such Award, which conditions may, but need not,
include continuous service with the Company, achievement of specific business
objectives, attainment of specified growth rates, increases in specified indices
or other comparable measures of performance. Performance Awards may include more
than one performance goal, and a performance goal may be based on one or more
business criteria applicable to the grantee, the Company as a whole or one or
more of the Company's business units and may include any of the following:
increased revenue, net income, stock price, market share, earnings per share,
return on equity or assets or decrease in costs.
On or before the date this Offering closes, Options under the Incentive
Plan will be granted to approximately employees of the Company to
purchase a total of approximately shares of Common Stock at an
exercise price per share equal to the initial public offering price per share to
be set forth on the cover page of this Prospectus. These awards include Options
to be granted to , , and to purchase
, , and shares of Common Stock,
respectively. All such Options will have a term of years and become
exercisable in cumulative annual increments of of the total number of
shares of Common Stock subject thereto, beginning on the first anniversary of
the date of grant.
On the first business day following the date on which each annual meeting
of the Company's stockholders is held, each Nonemployee Director then serving on
the Board of Directors will automatically be granted NSOs to purchase
shares of Common Stock. Any person who first becomes a
Nonemployee Director on or after the date this Offering closes automatically
will be granted, on the date of his or her election, NSOs to purchase
shares of Common Stock. Each NSO granted to Nonemployee Directors
will (i) have a year term, (ii) have an exercise price per share equal to
the fair market value of a Common Stock share on the date of grant (the initial
public offering price in the case of NSOs granted on the closing of this
Offering) and (iii) become exercisable in cumulative annual increments of
of the total number of shares of Common Stock subject thereto,
beginning on the first anniversary of the date of grant. If a Nonemployee
Director resigns from the Board of Directors without the consent of a majority
of the other directors, such director's NSOs may be exercised only to the extent
they were exercisable on the resignation date.
The foregoing description summarizes the principal terms and conditions of
the Incentive Plan, does not purport to be complete and is qualified in its
entirety by reference to the Incentive Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
45
<PAGE> 47
STOCK OPTION PLAN
Prior to the completion of this Offering, the Company expects to adopt the
Paranet, Inc. 1997 Nonqualified Stock Option Plan (the "Stock Option Plan"),
which will provide for broad-based stock option grants to employees of the
Company. The Company plans to reserve shares of Common Stock in
connection therewith and expects to grant options for the purchase of
shares of Common Stock prior to the completion of this Offering.
Awards under the Stock Option Plan will consist of NSOs, which will have a term
of years and become exercisable .
The foregoing description summarizes the principal terms and conditions of
the Stock Option Plan, does not purport to be complete and is qualified in its
entirety by reference to the Stock Option Plan, a copy of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
PREDECESSOR PLAN
Pursuant to the Company's 1991 Nonqualified Stock Option Plan (the
"Predecessor Plan"), options for the purchase of shares of Common
Stock are currently outstanding, at a weighted average option exercise price of
. All of such options provide that they vest over 50 months and cannot
be exercised prior to the earlier of (i) the registration of the Common Stock
with the Commission and the listing of the Common Stock on any applicable
national securities exchange (unless these conditions are waived by the Board of
Directors) or (ii) eight years from the date of grant. The Company intends to
accelerate the vesting of all options outstanding under the Predecessor Plan in
connection with the consummation of this Offering. As a result, all of such
options are expected to be fully vested and immediately exercisable upon the
consummation of this Offering. All of such options terminate automatically upon
an employee's termination of employment, whether before or after vesting. The
Predecessor Plan contains certain anti-dilution provisions. No additional option
grants will be made under the Predecessor Plan.
The foregoing description summarizes the principal terms and conditions of
the Predecessor Plan, does not purport to be complete and is qualified in its
entirety by reference to the Predecessor Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
401(K) PLAN
The Company adopted the Paranet, Inc. 401(k) Plan (the "401(k) Plan") for
its employees effective April 1, 1992. Under the 401(k) Plan, eligible employees
can defer receipt of up to 25% of their compensation (subject to certain
limitations imposed under the Code). In 1996 and from July 1, 1995 through
December 31, 1995, the Company made a discretionary match of 20% or 30% of each
participant's contribution, depending upon certain length of service
requirements. Participants vest in these matching contributions after three
years of service. The amounts held under the 401(k) Plan are invested among
various investment funds maintained under the 401(k) Plan in accordance with the
directions of each participant. Participants or their beneficiaries are entitled
to payment of vested benefits upon termination of employment.
46
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
current beneficial ownership of shares of Common Stock, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Common Stock, (ii)
each of the Company's directors and Named Executive Officers, (iii) all current
executive officers and directors as a group and (iv) each of the Selling
Stockholders. See "Risk Factors -- Control by Principal Stockholder".
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) NUMBER OFFERING(1)(2)
-------------------- OF SHARES --------------------
NAME OF BENEFICIAL OWNER(3) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
--------------------------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Michael H. Holthouse(4).............. 80.2% %
c/o Paranet, Inc.
1776 Yorktown St., Suite 300
Houston, TX 77056
Steven T. Ough(5).................... 12.5
c/o Paranet, Inc.
1776 Yorktown St., Suite 300
Houston, TX 77056
J.D. Young........................... 6.7 --
2300 Castle Rock
Carrollton, TX 75007
Mark C. Milgrom...................... 5.4 --
28960 Lake Park Drive
Farmington Hills, MI 48331
Kenneth Wolverton(6)................. * -- *
All directors and executive officers
as a group (4 persons)(7).......... 88.0
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) No options for the purchase of Common Stock are exercisable prior to the
consummation of this Offering. Shares of Common Stock subject to options
that are expected to become exercisable upon the consummation of this
Offering are deemed outstanding for computing the percentage ownership of
the person holding such options, but are not deemed outstanding for
computing the percentage ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(4) Consists of shares owned by a limited partnership of which Mr.
Holthouse is the managing general partner and the other partners are members
of his family and shares owned by a trust for the benefit of Mr.
Holthouse's children of which Mr. Holthouse is the sole trustee. The limited
partnership will be the Selling Stockholder.
(5) Includes shares of Common Stock that could be acquired through the
exercise of stock options that are expected to become exercisable upon the
completion of this Offering.
(6) Includes shares of Common Stock that could be acquired through the
exercise of stock options that are expected to become exercisable upon the
completion of this Offering.
(7) Includes shares of Common Stock that could be acquired through the
exercise of stock options that are expected to become exercisable upon the
completion of this Offering.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of shares of
Common Stock, par value $.01 per share, and shares of Preferred Stock,
par value $.01 per share. As of , 1997, there were shares
of Common Stock outstanding and held of record by 12 stockholders, and no shares
of Preferred Stock were outstanding. The following summary does not purport to
be complete, and reference is made to the more detailed provisions of the
Company's Certificate of Incorporation and Bylaws, which are filed as exhibits
to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders of
a majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive rights
and is not convertible, redeemable, assessable or entitled to the benefits of
any sinking fund. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy" for information
regarding dividend policy.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers, designations,
preferences, and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any Series or other securities, redemption
provisions and sinking fund provisions) between series and between the Preferred
Stock or any series thereof and the Common Stock, and the qualifications,
limitations or restrictions of such rights.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction
that some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then-current market price of such stock. The Board of Directors does not at
present intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the rules of any market on
which the Company's securities are traded. See "Risk Factors -- Anti-Takeover
Effects of Certain Charter and Bylaw Provisions".
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of
48
<PAGE> 50
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
Delaware law, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the exercise
of their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors of the Company to the Company
or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its directors
providing for indemnification with respect to certain matters. See
"Management -- Indemnification Arrangements".
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board, the Chief Executive Officer, the President or the
Board of Directors of the Company.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms. As
a result, approximately one-third of the Company's Board of Directors will be
elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of the Company
from obtaining control of the Board of Directors until the second annual
stockholders meeting following the date the acquiror obtains the controlling
interest. See "Management".
The Certificate of Incorporation provides that the number of directors will
be no greater than 12 and no less than two. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in the
Certificate of Incorporation), and then only by the affirmative vote of the
holders of at least a majority of all outstanding voting stock entitled to vote.
This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
49
<PAGE> 51
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
For purposes of Section 203, Michael H. Holthouse is an interested stockholder
who became an interested stockholder with the approval of a majority of the
Company's Board of Directors. See "Risk Factors -- Anti-Takeover Effects of
Certain Charter and Bylaw Provisions".
The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide that
written notice must be given to the Secretary of the Company by a stockholder
(i) in the event of business to be brought by a stockholder before an annual
meeting, not less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders of the Company (with certain exceptions
if the date of the annual meeting is different by more than specified amounts
from the anniversary date), and (ii) in the event of nominations of persons for
election to the Board of Directors by any stockholder, (a) with respect to an
election to be held at the annual meeting of stockholders, not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders of the Company (with certain exceptions if the date of the annual
meeting is different by more than specified amounts from the anniversary date),
and (b) with respect to an election be held at a special meeting of stockholders
for the election of directors, not later than the close of business on the tenth
day following the day on which notice of the date of the special meeting was
mailed to stockholders or public disclosure of the date of the special meeting
was made, whichever first occurs. Such notice must set forth specific
information regarding such stockholder and such business or director nominee, as
described in the Company's Bylaws. See "Risk Factors -- Anti-Takeover Effects of
Certain Charter and Bylaw Provisions".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have
shares of Common Stock outstanding. Of these shares, the shares
sold in the Offering will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined for purposes of Rule 144
under the Securities Act ("Affiliates"), may generally be sold only in
compliance with the limitations of Rule 144 described below. See "Risk
Factors -- Shares Eligible for Future Sale".
50
<PAGE> 52
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock that will be
outstanding after this Offering will be deemed to be "restricted securities"
under Rule 144 ("Restricted Shares"). Of the Restricted Shares, approximately
shares may be eligible for sale in the public market immediately
after this Offering pursuant to Rule 144(k) under the Securities Act. Of these
Restricted Shares, are subject to 180-day Lock-up Agreements.
Approximately additional Restricted Shares may be eligible for
sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus. Of these
Restricted Shares, are subject to Lock-up Agreements. Upon
expiration of the Lock-up Agreements 180 days after the date of the Prospectus,
approximately shares of Common Stock will become available for
sale in the public market, subject to the provisions of Rule 144 under the
Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
shares immediately after this Offering) or (ii) the average
weekly trading volume in the Common Stock in the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of such sale is
filed. In addition, under Rule 144(k), a person who is not an Affiliate and has
not been an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least three years may resell such
shares without compliance with the foregoing requirement. In meeting the two-
and three-year holding periods described above, a holder of Restricted Shares
can include the holding periods of a prior owner who was not an Affiliate.
OPTIONS
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of employee stock options may be resold by persons
other than Affiliates beginning 90 days after the date of this Prospectus,
subject only to the manner of sale provisions of Rule 144, and by Affiliates
under Rule 144 without compliance with its two-year minimum holding period,
subject to certain limitations.
As of , 1997, options to purchase a total of
shares of Common Stock were outstanding (all of which are expected to become
exercisable upon the completion of this Offering). Of the total shares issuable
pursuant to such options, shares are subject to Lock-up
Agreements. See "Management -- Benefit Plans".
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register the shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to Awards and stock
options granted under the Incentive Plan and the Stock Option Plan. The Company
presently intends to file these registration statements as soon as practicable
after the closing of this Offering, and such registration statements are
expected to become effective upon the filing thereof. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject only to the Lock-up Agreements.
LOCK-UP AGREEMENTS
Certain security holders and all executive officers and directors of the
Company, who in the aggregate will hold following the Offering
shares of Common Stock and options to purchase shares of Common
Stock ( and , respectively, if the Underwriters'
over-allotment option is exercised in full), have agreed, pursuant to the
Lock-up Agreements, that they will not, without the prior written consent of
Goldman, Sachs & Co., offer, sell,
51
<PAGE> 53
contract to sell or otherwise dispose of any shares of Common Stock beneficially
owned by them for a period of 180 days after the date of this Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Baker & Botts, L.L.P., Houston,
Texas, and for the Underwriters by Brobeck, Phleger & Harrison LLP, Austin,
Texas.
EXPERTS
The Financial Statements of the Company at December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus and in the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules filed therewith. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules. Statements made in this Prospectus regarding the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each contract, agreement or other document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for
further information regarding the contents thereof, and each such statement is
qualified in its entirety by such reference. The Registration Statement,
including the exhibits and schedules thereto, is available for inspection at,
and copies of such materials may be obtained at prescribed rates from, the
public reference facilities maintained by the Commission at its principal
offices located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of the Registration Statement are also available for inspection at
the regional offices of the Commission located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. The Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission
(http://www.sec.gov).
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by the Company's independent auditors and quarterly reports containing
unaudited financial information for the first three quarters of each year.
52
<PAGE> 54
GLOSSARY
<TABLE>
<S> <C>
ATM............................. Asynchronous Transfer Mode. ATM is a network communication technology
based on packet switching. Data is broken into fixed-length cells and
transmitted using packet communications. ATM is designed to operate at
speeds ranging from 1.5 megabits/second to 2 gigabits/second. The
information transmitted via ATM can be data, voice, video and other
traffic. Standards for ATM are governed by the ATM Forum, an
independent standards-setting body made up of ATM vendors and users.
Ethernet........................ Ethernet is a network protocol that transfers data at 10
megabits/second across a linear bus topology.
Fast Ethernet................... Fast Ethernet is an enhancement to the Ethernet standard that supports
data transfers at 100 megabits/second.
FDDI............................ Fiber Distributed Data Interface. FDDI is a high-speed, fault-tolerant
network transport standard that transfers data at 100 megabits/second
over fiber-optic cabling.
Firewall........................ A system (hardware and software) that controls the flow of data
between an internal network and the Internet or between internal
network segments.
Frame Relay..................... Frame relay is a wide-area packet communication technology commonly
used to interconnect multiple LANs. Data is broken into packets or
frames and transmitted at high speeds using packet communications.
Internet........................ An open global network of interconnected commercial, educational and
governmental computer networks which utilize a common communications
protocol, TCP/IP.
Internet-based protocols........ Internet-based protocols ("IP") connect networks to other networks and
are a set of rules and procedures that govern the exchange of data. IP
is responsible for routing data between locations, controlling the
flow of data and assembling and segmenting blocks or packets of data
for transmission.
Intranet........................ An organization's private network of its local area networks which
utilizes Internet data formats and communications protocols, and that
may use the Internet's facilities as the backbone for network
communications.
LAN............................. Local Area Network. A network of computers and peripherals that spans
a small physical area, usually one building or a small campus. A LAN
offers peripheral sharing, data sharing and data exchange by using
interconnection devices such as bridges, routers and repeaters.
Transmission Control
Protocol/Internet Protocol
(TCP/IP)...................... A compilation of network- and transport-level protocols that allows
computers with different architectures and operating system software
to communicate with other computers on the Internet.
Unix............................ Portable multi-tasking operating system originally developed by Bell
Laboratories. Common versions of Unix include Hewlett-Packard's HPUX,
Sun Microsystems' Solaris and IBM's AIX.
</TABLE>
53
<PAGE> 55
<TABLE>
<S> <C>
WAN............................. Wide Area Network. A network that covers a wide area and requires
special communication devices. The most significant difference between
WANs and LANs is the need to make connections over long distances and
the need for telephone, satellite or microwave equipment to facilitate
the connection.
Windows NT...................... A 32-bit, preemptive multi-tasking network operating system developed
by Microsoft. The operating system controls the sharing of computer
resources such as the central processing unit (CPU), memory and disk
space.
</TABLE>
54
<PAGE> 56
PARANET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.......... F-2
Balance Sheets at December 31, 1995 and
1996.................................. F-3
Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996...... F-4
Statements of Cash Flows for the Years
Ended December 31, 1994, 1995 and
1996.................................. F-5
Statements of Changes in Stockholders'
Equity for the Years Ended December
31, 1994, 1995 and 1996............... F-6
Notes to Financial Statements........... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Paranet, Inc.
We have audited the accompanying balance sheets of Paranet, Inc., as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paranet, Inc., at December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period then ended, in conformity with generally
accepted accounting principles.
Houston, Texas
February 3, 1997, except Note 8
as to which the date is , 1997
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the reorganization described in Note 8 to the Financial Statements.
ERNST & YOUNG LLP
Houston, Texas
February 10, 1997
F-2
<PAGE> 58
PARANET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 34,942 $ 48,976
Accounts receivable -- trade, net of
allowance for doubtful accounts of
$119,237 and $709,230 at December
31, 1995 and 1996, respectively.... 7,595,156 20,288,086
Prepaid expenses and other current
assets............................. 1,389,589 981,587
---------- -----------
Total current assets.......... 9,019,687 21,318,649
Furniture and equipment, net of
accumulated depreciation of $372,409
and $743,217 at December 31, 1995 and
1996, respectively.................... 896,525 1,916,240
---------- -----------
Total assets.................. $9,916,212 $23,234,889
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable -- trade............. $ 443,641 $ 1,295,125
Accrued payroll....................... 1,316,538 2,419,573
Other accrued liabilities............. 185,930 732,946
Line of credit........................ 1,200,000 3,000,000
---------- -----------
Total current liabilities and
total liabilities.......... 3,146,109 7,447,644
Stockholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized,
7,480,000 shares issued and
outstanding at December 31, 1995
and 1996........................... 74,800 74,800
Additional paid-in-capital............ 294,720 1,394,600
Unearned compensation................. (110,000) (1,047,930)
Retained earnings..................... 6,510,583 15,365,775
---------- -----------
Total stockholders' equity......... 6,770,103 15,787,245
---------- -----------
Total liabilities and stockholders'
equity............................ $9,916,212 $23,234,889
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 59
PARANET, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues........................................ $14,823,285 $30,896,520 $66,224,761
Operating expenses:
Professional services......................... 9,470,734 18,106,585 38,905,292
Selling and marketing......................... 1,501,070 2,867,874 6,161,935
General and administrative.................... 2,603,254 5,936,910 12,197,664
----------- ----------- -----------
Total operating expenses.............. 13,575,058 26,911,369 57,264,891
----------- ----------- -----------
Operating income.............................. 1,248,227 3,985,151 8,959,870
Other income (expense).......................... (13,600) 15,658 (104,678)
----------- ----------- -----------
Net income............................ $ 1,234,627 $ 4,000,809 $ 8,855,192
=========== =========== ===========
Unaudited pro forma information (Note 2)
Pro forma adjustment for taxes................ 493,850 1,600,322 3,542,077
----------- ----------- -----------
Pro forma net income.......................... $ 740,777 $ 2,400,487 $ 5,313,115
=========== =========== ===========
Pro forma net income per share................ $ .09 $ .29 $ .63
=========== =========== ===========
Shares used to compute pro forma net income
per share.................................. 8,219,551 8,417,383 8,437,938
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 60
PARANET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from:
Operating activities:
Net income.................................... $ 1,234,627 $ 4,000,809 $ 8,855,192
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Bad debt expense............................ 137,500 482,288 882,900
Depreciation expense........................ 114,163 173,809 370,808
Compensation -- stock issuance.............. -- 143,333 --
Amortization of unearned compensation....... -- 50,000 161,950
Changes in assets and liabilities:
Accounts receivable -- trade............. (2,022,388) (4,519,646) (13,575,830)
Prepaid expenses and other current
assets................................. (72,276) (1,235,990) 408,002
Accounts payable......................... 268,874 74,426 851,484
Accrued payroll.......................... 318,870 730,842 1,103,035
Other accrued liabilities................ (107,440) 18,443 547,016
----------- ----------- ------------
Net cash used in operating activities....... (128,070) (81,686) (395,443)
Investing activities:
Capital expenditures.......................... (275,521) (552,591) (1,390,523)
----------- ----------- ------------
Net cash used in investing activities....... (275,521) (552,591) (1,390,523)
Financing activities:
Net borrowings on line-of-credit.............. 405,000 675,000 1,800,000
Stock issuance................................ -- 9,000 --
Stock repurchase.............................. -- (16,813) --
----------- ----------- ------------
Net cash provided by financing activities... 405,000 667,187 1,800,000
Net increase in cash and cash equivalents.......... 1,409 32,910 14,034
Cash and cash equivalents at beginning of year..... 623 2,032 34,942
----------- ----------- ------------
Cash and cash equivalents at end of year........... $ 2,032 $ 34,942 $ 48,976
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 61
PARANET, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
OUTSTANDING ADDITIONAL TOTAL
------------------- PAID-IN UNEARNED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
--------- ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993.... 7,400,000 $74,000 $ -- $ -- $ 1,275,147 $ 1,349,147
Net income..................... -- -- -- -- 1,234,627 1,234,627
--------- ------- ---------- ----------- ----------- -----------
Balances at December 31, 1994.... 7,400,000 $74,000 $ -- $ -- $ 2,509,774 $ 2,583,774
Stock options granted under the
stock option plan............ -- -- 160,000 (160,000) -- --
Amortization of unearned
compensation................. -- -- -- 50,000 -- 50,000
Stock issuance................. 90,000 900 151,433 -- -- 152,333
Stock repurchase at $1.68 per
share........................ (10,000) (100) (16,713) -- -- (16,813)
Net income..................... -- -- -- -- 4,000,809 4,000,809
--------- ------- ---------- ----------- ----------- -----------
Balances at December 31, 1995.... 7,480,000 $74,800 $ 294,720 $ (110,000) $ 6,510,583 $ 6,770,103
Stock options granted under the
stock option plan............ -- -- 1,099,880 (1,099,880) -- --
Amortization of unearned
compensation................. -- -- -- 161,950 -- 161,950
Net income..................... -- -- -- -- 8,855,192 8,855,192
--------- ------- ---------- ----------- ----------- -----------
Balances at December 31, 1996.... 7,480,000 $74,800 $1,394,600 $(1,047,930) $15,365,775 $15,787,245
========= ======= ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 62
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
Paranet, Inc. (the Company), began operations on January 1, 1991 and is
engaged in providing services for design, integration, management and support of
complex distributed computing environments. The Company provides its services
throughout the continental United States in 23 major metropolitan cities via its
decentralized branch network.
Revenue recognition
Substantially all of the Company's revenues are derived from professional
services, which are generally provided to customers on a time and materials
basis. Professional services revenues are recognized as services are performed.
Any payments received in advance of performance are recorded as deferred
revenue. The Company also performs a smaller number of shorter-term projects on
a time and materials basis subject to a negotiated cap. The Company recognizes
revenues from these engagements as services are provided. A limited number of
the Company's projects are contracted for on a fixed-price or level of service
basis, and revenues under these contracts are recognized using the
percentage-of-completion method. Provision for estimated losses on engagements
is made during the period in which the loss becomes known. To date, such losses
have been insignificant.
Professional services
Professional services expenses consist primarily of compensation, benefits
and training expenses of the Company's technical personnel and project expenses
that, pursuant to the terms of the applicable service delivery agreements, are
not reimbursable by customers.
Furniture and equipment
Furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of five years. Maintenance
and repairs are charged to operating expense as incurred.
Income taxes
The Company is a Subchapter S Corporation under the rules and regulations
of the Internal Revenue Service, and as a result, the income or loss of the
Company for federal and state income tax purposes is included in the tax returns
of the individual owners. Accordingly, no recognition has been given to income
taxes in the accompanying financial statements. See Note 2.
Cash and cash equivalents
The Company considers all cash accounts and money market accounts to be
cash and cash equivalents.
Fair value of financial instruments
The carrying amounts of cash, prepaid expenses and other current assets and
accounts payable approximate fair values due to the short-term maturities of
these instruments. The carrying value of the Company's revolving line of credit
approximates fair value because the rate on such line is variable, based on
current market.
F-7
<PAGE> 63
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company accounts for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and intends to continue to do so.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continuously
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists primarily of major commercial
organizations. In 1996, the Company provided services for over 200 customers, of
which 15 customers accounted for 54.9% of revenues. In 1994 and 1995, the 15
largest customers accounted for 66.3% and 62.7% of revenues, respectively. In
1994, one customer accounted for 13.4% of revenues. No other customer accounted
for 10% or more of revenues in 1994 and no customer accounted for 10% or more of
revenues in 1995 or 1996.
Reclassification
Certain 1994 and 1995 balances have been reclassified to conform with the
1996 presentation.
NOTE 2 -- PRO FORMA INFORMATION (UNAUDITED)
As described in Note 1, the Company is a Subchapter S Corporation under the
rules and regulations of the Internal Revenue Service. Prior to the initial
public offering, as discussed in Note 8, the Company plans to terminate its
status as an S Corporation. The pro forma tax provision has been calculated as
if the Company's taxable results were taxable as a C Corporation (the Company's
expected tax status) under the Internal Revenue Code for all periods presented
in conformity with Financial Accounting Standards Board (FASB) Statement No.
109, "Accounting for Income Taxes" (FAS 109), at an effective tax rate of 40%.
Under the provisions of FAS 109, deferred tax assets or liabilities are recorded
for the estimated future tax effects attributable to temporary differences
between the bases of assets and liabilities recorded for financial and tax
reporting purposes. Assuming the change in its tax status had occurred on
January 1, 1996, the Company would have recorded income tax expense of
$6,154,310 for the year ended December 31, 1996, including the cumulative effect
of the change in tax status for deferred taxes of $2,612,233.
F-8
<PAGE> 64
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's pro forma deferred tax liabilities and assets as if
the Company had terminated its S Corporation status at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $ 73,445
Cash to accrual........................................... 6,364,557
----------
Total deferred tax liabilities.................... 6,438,002
Deferred tax assets:
Bad debt reserves......................................... 283,692
----------
Total deferred tax assets................................... 283,692
----------
Net deferred tax liabilities...................... $6,154,310
==========
</TABLE>
Pro forma net income per share has been computed based on the weighted
average number of common shares and common stock equivalents outstanding during
the respective periods. Common stock equivalents consist of incremental shares
issuable upon the exercise of stock options (using the treasury stock method).
Shares for which stock options were granted within a 12-month period prior to an
initial public offering are treated as outstanding for all periods presented
(using the treasury stock method with the offering price used for fair market
value).
NOTE 3 -- LINE OF CREDIT
In December 1995, the Company entered into a $2.0 million revolving line of
credit with a commercial bank with a maturity of May 2, 1996, bearing interest
at prime plus 1.25%. Indebtedness under the line of credit was subject to
certain borrowing base limitations and was secured by accounts receivable. The
borrowing base exceeded $2.0 million at December 31, 1995. The line of credit
required a maximum debt-to-equity ratio of .75, a minimum current ratio of 2.00
and had certain restrictions on distributions of dividends. As of December 31,
1995, $1,200,000 was outstanding under the line of credit. The Company entered
into a one-month extension in May 1996. The outstanding balance was repaid and
the line of credit was terminated in June 1996.
In June 1996, the Company entered into a $3.0 million revolving line of
credit with a commercial bank with a maturity of June 2, 1997, bearing interest
at prime plus 1% (9.25% at December 31, 1996). Indebtedness under the line of
credit was subject to certain borrowing base limitations and was secured by
accounts receivable. The borrowing base exceeded $3.0 million at December 31,
1996. The line of credit required a maximum debt-to-equity ratio of .75 and a
minimum current ratio of 2.0, had certain restrictions on distributions of
dividends, and had limits on capital expenditures. As of December 31, 1996, $3.0
million was outstanding under the line of credit.
Interest expense related to the revolving line of credit was $18,455 in
1994, $31,538 in 1995 and $165,333 in 1996.
In January 1997, the Company entered into a $10.0 million revolving line of
credit with a commercial bank with a maturity of June 30, 1998, bearing interest
at prime less 0.5% or LIBOR plus 2.0%, and a quarterly commitment fee of 0.125%
per annum on the unused portion of the line of credit. Indebtedness under the
line of credit is subject to certain borrowing base limitations and is secured
by accounts receivable. The line of credit requires a maximum debt to equity
ratio of 1.0, a minimum current ratio of 1.5 and a minimum tangible net worth of
$10.0 million, has certain
F-9
<PAGE> 65
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
restrictions on distributions of dividends and has limits on capital
expenditures. Proceeds from this line of credit were used to repay the balance
outstanding under the $3.0 million revolving line of credit, which was then
terminated.
NOTE 4 -- COMMON STOCK
In September 1995, the Company effected a 10-for-1 stock split. All
stockholders' equity balances and disclosures have been retroactively restated
for the stock split. The effect of the stock split was to transfer an amount
equal to the par value of the new shares issued from additional paid-in capital
and retained earnings to common stock.
In February through April 1995, the Company issued 90,000 shares of Company
stock to certain employees for $.10 per share for a total purchase price of
$9,000. Compensation expense of $143,333 was recognized under this transaction.
NOTE 5 -- STOCK OPTIONS
In January 1991, the Company established the Paranet, Inc. 1991
Nonqualified Stock Option Plan (the 1991 Plan), pursuant to which options to
purchase up to an aggregate of 1,600,000 shares of Common Stock may be granted
by the Board of Directors (the Board) of the Company. The 1991 Plan is designed
to provide employees, including officers and directors of the Company, with
additional incentives to promote the success of the Company's business and to
enhance the Company's ability to attract and retain the services of qualified
persons.
The 1991 Plan is administered by the Board. The Board has the power to
determine which eligible employees will receive stock options, the timing and
manner of the grant of such rights, the exercise price, and the number of shares
to be covered by, and other terms of, the options. The Board may at any time
terminate or amend the 1991 Plan, provided that no such amendment may adversely
affect the rights of optionees with regard to outstanding options.
All options granted have 10-year terms, are nontransferable and vest over
50 months from the date of grant. The weighted average remaining contractual
life at December 31, 1996 was 6.25 years. Vested options are not exercisable
prior to the earlier of (i) the registration of the common stock with the
Securities and Exchange Commission and the listing of the common stock on any
applicable national securities exchange (unless these conditions are waived by
the Board) or (ii) eight years from the date of grant. The difference between
the exercise price and the fair value of the stock options at the date of grant
is accounted for as unearned compensation and amortized to expense over the
vesting period. During 1994, 1995 and 1996, unearned compensation charged to
expense was $0, $50,000 and $161,950, respectively. All rights under the
options, including vested options, cease at termination of employment, unless
this condition is waived by the Board. The weighted average grant date fair
value per option granted in 1994, 1995 and 1996 was $0.48, $1.02 and $5.23,
respectively.
F-10
<PAGE> 66
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information
for the years ended December 31, 1994, 1995 and 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1994 EXERCISE 1995 EXERCISE 1996 EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................... 1,020,940 $.13 1,156,440 $.14 1,260,257 $ .20
Granted........................ 172,000 .20 273,887 .45 371,123 2.00
Exercised...................... -- -- -- -- -- --
Canceled....................... (36,500) .19 (170,070) .17 (35,039) 1.32
--------- ---- --------- ---- --------- -----
Outstanding -- end of year....... 1,156,440 $.14 1,260,257 $.20 1,596,341 $ .60
========= ==== ========= ==== ========= =====
Vested at end of year............ 772,756 927,590 1,125,268
Exercisable at end of year....... -- -- --
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of FAS 123. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model. The minimum value method calculated a fair value that is
approximately the same as recorded by the Company according to APB 25;
therefore, pro forma presentation has not been included.
NOTE 6 -- LEASES
The Company leases office space in locations throughout the United States
under operating leases. The minimum rental payments under the terms of the
leases are $585,264 in 1997, $556,980 in 1998, $91,886 in 1999, and $10,587 in
2000 and thereafter.
Rental expenses related to these leases were $219,509 in 1994, $386,447 in
1995 and $906,138 in 1996.
NOTE 7 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan which is open to all employees. A
participant can contribute up to 15% of his or her eligible compensation,
subject to certain limitations established by tax laws. Participants have full
and immediate vesting in their contributions and related income credited to
their accounts. In 1996 and from July 1, 1995 through December 31, 1995, the
Company made a discretionary match of 20% or 30% of each participant's eligible
contributions, depending upon certain length of service requirements.
Participants become vested in the matching contributions after three years of
service. The Company contributed $48,190 and $219,789 in matching funds to the
plan in 1995 and 1996, respectively.
NOTE 8 -- INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission (SEC) in February 1997 to register the sale of shares of
its common stock (the Offering). The Company intends to use the net proceeds to
finance a Network Operation Center; to pay tax
F-11
<PAGE> 67
PARANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
liabilities in connection with the termination of the Company's S Corporation
status, as they become due over the next four years; to purchase equipment in
connection with potential outsourcing engagements; and for working capital
requirements and other general corporate purposes. The Company plans to
terminate its S Corporation status shortly before the consummation of the
Offering. The Company intends to accelerate the vesting of all options
outstanding under the 1991 Plan in connection with the consummation of the
Offering.
Before the consummation of the Offering, the existing corporation, Paranet,
Inc., a Texas corporation (Paranet-Texas), will merge (the Merger) into a
newly-formed Delaware corporation, which will be a wholly owned subsidiary of
Paranet, Inc., a Delaware corporation (Paranet-Delaware) formed by Paranet-Texas
in February 1997. The Merger will result in the Company's reincorporation from
Texas to Delaware and the formation of a holding company structure. In the
Merger, each outstanding share of Paranet-Texas common stock will be converted
into shares of Paranet-Delaware common stock. The authorized capital
stock of Paranet-Delaware consists of five million shares of Common Stock with a
par value of $.01 per share and one million shares of Preferred Stock with a par
value of $.01 per share. There are 1,000 shares of Common Stock and no shares of
Preferred Stock issued and outstanding.
In addition, prior to the consummation of the Offering, the Company will
adopt the Paranet, Inc. 1997 Nonqualified Stock Option Plan (the 1997 Plan).
Under the 1997 Plan, options to purchase up to an aggregate of shares
of Common Stock may be granted by the Board. To date, no options have been
granted under the 1997 Plan.
Prior to the completion of the Offering, the Company expects to adopt the
Paranet, Inc. Long-Term Incentive Plan (the Incentive Plan). The Company plans
to reserve shares of Common Stock for use in connection with the
Incentive Plan. Persons eligible for awards under the Incentive Plan are (i)
employees holding positions of responsibility with the Company or any of its
subsidiaries and whose performance can have a significant effect on the success
of the Company, (ii) nonemployee directors and (iii) certain nonemployee
consultants and other independent contractors providing, or who will provide,
services to the Company or any of its subsidiaries. To date, no awards have been
made under the Incentive Plan.
F-12
<PAGE> 68
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Alex. Brown & Sons Incorporated and Hambrecht & Quist LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.........................................
Alex. Brown & Sons Incorporated.............................
Hambrecht & Quist LLC.......................................
------------
Total.............................................
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Selling Stockholders have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered hereby. See "Principal and Selling
Stockholders".
The Company and the Selling Stockholders have agreed that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, not to offer,
sell, contract to sell or otherwise dispose of any securities of the Company
(other than pursuant to employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding, on
the date of this Prospectus) which are substantially similar to the shares of
Common Stock or which are convertible or exchangeable into securities which are
substantially similar to the shares of Common Stock, without the prior written
consent of Goldman, Sachs & Co., except for the shares of Common Stock offered
in connection with the Offering. The Company's executive officers and directors
and certain other holders of Common Stock, who will hold in the aggregate
shares of Common Stock following this Offering, have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of or agree to dispose of any shares of Common Stock or substantially similar
securities owned beneficially by them during the period beginning from the date
of this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, without the prior written consent of Goldman, Sachs &
Co. See "Shares Eligible for Future Sale".
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
U-1
<PAGE> 69
Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the Selling
Stockholders and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Company intends to make application for inclusion of the Common Stock
on the Nasdaq National Market under the symbol "PARI".
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<PAGE> 70
- ------------------------------------------------------------
- ------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
The Company................................. 15
Use of Proceeds............................. 15
Dividend Policy............................. 15
Dilution.................................... 16
Capitalization.............................. 17
Selected Financial Data..................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 19
Business.................................... 26
Management.................................. 40
Principal and Selling Stockholders.......... 47
Description of Capital Stock................ 48
Shares Eligible for Future Sale............. 50
Legal Matters............................... 52
Experts..................................... 52
Additional Information...................... 52
Glossary.................................... 53
Index to Financial Statements............... F-1
Underwriting................................ U-1
</TABLE>
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
SHARES
PARANET, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
[LOGO]
---------------------
GOLDMAN, SACHS & CO.
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All expenses in connection with the Offering described in this Registration
Statement will be paid by the Company. The estimated expenses are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $26,136.36
Printing expenses........................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Transfer Agent fees......................................... *
NASD fees................................................... 9,125.00
NASDAQ National Market System fees.......................... *
Miscellaneous............................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all
II-1
<PAGE> 72
the circumstances of the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation of the Company provides that a director of
the Company shall not be personally liable to the Company or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is
II-2
<PAGE> 73
amended to authorize the further elimination or limitation of the personal
liability of directors, then the liability of a director of the Company, in
addition to the limitation on personal liability described above, shall be
limited to the fullest extent permitted by the amended DGCL. Further, any repeal
or modification of such provision of the Certificate of Incorporation by the
stockholders of the Company shall be prospective only, and shall not adversely
affect any limitation on the personal liability of a director of the Company
existing at the time of such repeal or modification.
Bylaws
The Bylaws of the Company provide that each person who is made a party or
is threatened to be made a party to or is involved in any action, suit,
arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of the Company or is or was serving at the request of the
Company as a director, officer, employee, agent or fiduciary of another
corporation or of a partnership, limited liability company, association, joint
venture, trust, employee benefit plan or other enterprise, shall be indemnified
and held harmless by the Company to the fullest extent authorized by the DGCL on
the date of the effectiveness of the Bylaws (and to such greater extent as the
DGCL may thereafter permit), against all losses, liabilities, claims, damages
and expenses (as defined) in connection therewith and such indemnification shall
continue as to a person who has ceased to serve in the capacity which initially
entitled such person to indemnity thereunder and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that the
Company shall not indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) brought or made by such person
against the Company. The Bylaws further provide that the right to
indemnification and to the advancement or reimbursement of expenses conferred
thereby shall be a contract right; provided, however, that, if payment of such
expenses is requested in advance of the final disposition of a proceeding, such
payment shall be made only upon receipt by the Company of (i) a written
undertaking, by or on behalf of such indemnified person, to repay all amounts so
advanced if it shall ultimately be determined that such person is not entitled
to be indemnified under the Bylaws and (ii) satisfactory evidence as to the
amount of such expenses. In addition, the Bylaws provide that the Company may,
by resolution of its board of directors, provide indemnification or the
advancement or reimbursement of expenses to employees, agents or fiduciaries of
the Company, to the same extent and subject to the same conditions under which
it may indemnify and advance expenses to an officer or director under the
Bylaws.
Indemnification Agreements
The Company expects to enter into Indemnification Agreements with each of
its directors. The Indemnification Agreements provide that the Company shall
indemnify the director and hold him harmless from any losses and expenses which,
in type or amount, are not insured under the directors and officers' liability
insurance maintained by the Company, and generally indemnifies the director
against losses and expenses as a result of a claim or claims made against him
for any breach of duty, neglect, error, misstatement, misleading statement,
omission or other act done or wrongfully attempted by the director or any of the
foregoing alleged by any claimant or any claim against the director solely by
reason of him being a director or officer of the Company, subject to certain
exclusions. The Indemnification Agreements also provide certain procedures
regarding the right to indemnification and for the advancement of expenses.
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
II-3
<PAGE> 74
Insurance
The Company expects to obtain a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company, including
certain liabilities under the securities laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities, registered or otherwise, within
the past three years. Concurrently with the closing of the merger (the "Merger")
of Paranet, Inc., a Texas corporation ("Paranet Texas"), into a subsidiary of
the Company shortly before the consummation of this Offering, the Company
anticipates selling securities that are not registered with the Commission as
described below.
Pursuant to the Agreement and Plan of Merger, (i) options to purchase an
aggregate of shares of Paranet Texas Common Stock granted under
the Predecessor Plan will be converted into options for the purchase of
shares of Common Stock and (ii) shares of common
stock of Paranet Texas will be converted into shares of Common
Stock. Such transactions are exempt from the registration requirements of the
Securities Act because they do not involve a sale under Section 2(3) thereof and
by virtue of Section 4(2) thereof as transactions not involving any public
offering. Such transactions will occur only if the Merger is consummated.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <C> <S>
+1 -- Form of Underwriting Agreement.
2 -- Form of Agreement and Plan of Merger by and among the
Company, Paranet, Inc., a Texas corporation, and Paranet
Systems, Inc., a Delaware corporation.
3.1 -- Certificate of Incorporation of the Company.
+3.2 -- Bylaws of the Company.
+4.1 -- Form of certificate representing Common Stock.
4.2 -- Revolving Promissory Note of the Company in favor of Texas
Commerce Bank National Association dated December 31, 1996
and related Security Agreement.
+5.1 -- Opinion of Baker & Botts, L.L.P.
+10.1 -- Paranet, Inc. Long-Term Incentive Plan.
+10.2 -- Paranet, Inc. 1997 Nonqualified Stock Option Plan.
10.3 -- Paranet, Inc. 1991 Nonqualified Stock Option Plan, as
amended and supplemented.
10.4 -- Form of Employment Agreement.
+21 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
+23.2 -- Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1).
24 -- Powers of Attorney (included on the signature page of the
Registration Statement).
</TABLE>
- ---------------
+ To be filed by amendment.
II-4
<PAGE> 75
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the financial statements or notes thereto
included in this Registration Statement.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Company 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 Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 15 above, or otherwise,
the Company has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company 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 of 1933 and will be
governed by the final adjudication of such issue.
II-5
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, the State of Texas, on February 10, 1997.
PARANET, INC.
By: /s/ MICHAEL H. HOLTHOUSE
------------------------------------
Michael H. Holthouse
President
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael H. Holthouse and
Jeffrey G. Warren, and each of them, each of whom may act without the joinder of
the others, as his 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 any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and all other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully and for 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 their substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 10, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MICHAEL H. HOLTHOUSE President and Director
- -----------------------------------------------------
Michael H. Holthouse
(Principal Executive Officer)
/s/ JEFFREY G. WARREN Chief Financial Officer
- -----------------------------------------------------
Jeffrey G. Warren
(Principal Financial and Accounting Officer)
/s/ STEVEN T. OUGH Director
- -----------------------------------------------------
Steven T. Ough
</TABLE>
II-6
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <C> <S>
+1 -- Form of Underwriting Agreement.
2 -- Form of Agreement and Plan of Merger by and among the
Company, Paranet, Inc., a Texas corporation, and Paranet
Systems, Inc., a Delaware corporation.
3.1 -- Certificate of Incorporation of the Company.
+3.2 -- Bylaws of the Company.
+4.1 -- Form of certificate representing Common Stock.
4.2 -- Revolving Promissory Note of the Company in favor of Texas
Commerce Bank National Association dated December 31, 1996
and related Security Agreement.
+5.1 -- Opinion of Baker & Botts, L.L.P.
+10.1 -- Paranet, Inc. Long-Term Incentive Plan.
+10.2 -- Paranet, Inc. 1997 Nonqualified Stock Option Plan.
10.3 -- Paranet, Inc. 1991 Nonqualified Stock Option Plan, as
amended and supplemented.
10.4 -- Form of Employment Agreement.
+21 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
+23.2 -- Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1).
24 -- Powers of Attorney (included on the signature page of the
Registration Statement).
</TABLE>
- ---------------
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 2
FORM OF
AGREEMENT AND PLAN OF MERGER
MERGING
PARANET, INC.
(A TEXAS CORPORATION)
WITH AND INTO
PARANET SYSTEMS, INC.
(A DELAWARE CORPORATION)
DATED: FEBRUARY ___, 1997
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is executed as of February ___, 1997 by and
between Paranet, Inc., a Texas corporation (the "Merging Corporation"), Paranet
Systems, Inc., a Delaware corporation (the "Surviving Corporation"), and
Paranet, Inc., a Delaware corporation ("New Paranet"), which corporations are
hereinafter sometimes referred to collectively as the "Constituent
Corporations."
ARTICLE 1
RECITALS
Section 1.1. Organization of the Parties. The Merging
Corporation is a corporation duly organized and existing under the laws of
Texas. The Surviving Corporation is a corporation duly organized and existing
under the laws of Delaware. New Paranet is a corporation duly organized and
existing under the laws of Delaware.
Section 1.2. Merging Corporation's Capital Stock. The Merging
Corporation has authorized capital stock consisting of 10,000,000 shares of
common stock, $0.01 par value per share, of which 7,480,000 shares are now duly
issued and outstanding.
Section 1.3. Surviving Corporation's Capital Stock. The
Surviving Corporation has authorized capital stock consisting of 1,000 shares
of common stock, $0.01 par value per share, of which 1,000 shares are now duly
issued and outstanding. All issued and outstanding shares of capital stock of
the Surviving Corporation are owned by New Paranet.
Section 1.4. Desire to Merge. The Merging Corporation, the
Surviving Corporation and New Paranet desire to effect a statutory merger of
the Merging Corporation with and into the Surviving Corporation in the manner
herein set forth, and the Board of Directors of the signatories hereto have
duly adopted resolutions by written consent approving this Agreement and Plan
of Merger (this "Agreement").
In consideration of the premises, and the mutual covenants and
agreements herein contained, it is hereby agreed by and among the parties
hereto that the Merging Corporation shall be merged with and into the Surviving
Corporation in accordance with the applicable provisions of the Delaware
General Corporation Law, as amended (the "DGCL") and the Texas Business
Corporation Act, as amended (the "TBCA") and upon the following terms and
conditions:
<PAGE> 3
ARTICLE 2
PARTIES TO PROPOSED MERGER
Section 2.1. The Merging Corporation. The name of the
corporation proposing to merge into the Surviving Corporation is Paranet, Inc.
Section 2.2. The Surviving Corporation. The name of the
corporation into which the Merging Corporation proposes to merge is Paranet
Systems, Inc.
ARTICLE 3
TERMS AND CONDITIONS OF PROPOSED MERGER
AND MODE OF CARRYING IT INTO EFFECT
Section 3.1. General. Upon the Effective Date of the Merger (as
hereinafter defined and subject to the satisfaction of the conditions and
agreements set forth in Articles 5 and 6 hereto): (a) the Merging Corporation
shall merge into the Surviving Corporation, which shall survive the merger and
continue to be a Delaware corporation; (b) the Common Stock of the Surviving
Corporation outstanding upon the Effective Date of the Merger shall be and
remain Common Stock of the Surviving Corporation in accordance with its terms;
and (c) the separate existence of the Merging Corporation shall cease.
Section 3.2. Effective Date of the Merger. The "Effective Date
of the Merger" with respect to the merger contemplated by this Agreement shall
be February ___, 1997.
Section 3.3. Certificate of Incorporation. The certificate of
incorporation of the Surviving Corporation will continue in full force until
amended as provided in that certificate or as provided by law.
ARTICLE 4
MANNER AND BASIS OF CONVERTING
THE MERGING CORPORATION'S SHARES
Section 4.1. Conversion of Shares. Upon the Effective Date of
the Merger, by virtue of the Merger and without any action on the part of the
holder of the stock:
(a) each share of the capital stock of the Merging
Corporation that is held by the Merging Corporation or any subsidiary
thereof as treasury stock immediately prior to the Effective Date shall
be canceled, and no payment shall be made with respect thereto;
(b) subject to Section 4.3, each share of common stock
of the Merging Corporation outstanding immediately prior to the
Effective Date (other than shares referred to in clause (a)) shall be
converted into the right to receive __________ shares of the common
stock, par value $0.01 per share, of New Paranet (the "Merger
Consideration");
-2-
<PAGE> 4
(c) each share of common stock of New Paranet
outstanding immediately prior to the Effective Date (all of which are
owned by the Merging Corporation) shall be canceled, and no payment
shall be made with respect thereto; and
(d) subject to and as more fully provided in Section
6.1, each unexpired option to purchase common stock of the Merging
Corporation that is outstanding at the Effective Date, whether or not
exercisable, shall automatically and without any action on the part of
the holder thereof be converted into an option to purchase a number of
shares of common stock of New Paranet equal to the number of shares of
common stock of the Merging Corporation that could be purchased under
such option multiplied by the "Old Paranet Exchange Ratio" at a price
per share of common stock of New Paranet equal to the per share exercise
price of such option divided by the Old Paranet Exchange Ratio. The Old
Paranet Exchange Ratio, as used herein, shall mean _____________, which
is the number of shares of common stock of New Paranet that is received
for each share of common stock of the Merging Corporation pursuant to
Section 4.1(b).
Section 4.2. Surrender and Exchange of Shares.
(a) Promptly after the Effective Date, the Surviving
Corporation will send to each recordholder of shares of common stock of
the Merging Corporation immediately prior to the Effective Date, other
than Dissenting Shareholders (as defined in Section 4.3), (i) a letter
of transmittal for use in exchanging certificates representing shares of
common stock of the Merging Corporation for the Merger Consideration and
(ii) instructions for use in effecting the surrender of the certificates
representing shares of common stock of the Merging Corporation in
exchange for certificates representing shares of common stock of New
Paranet. Upon surrender of certificates for common stock of the Merging
Corporation for cancellation to the Surviving Corporation, together with
a duly executed letter of transmittal and such other documents as the
Surviving Corporation shall reasonably require, the holder of such
certificates shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of common stock of
New Paranet into which the shares of common stock of the Merging
Corporation theretofore represented by the certificates for common stock
of the Merging Corporation so surrendered shall have been converted
pursuant to the provisions of Section 4.1, and the certificates for
common stock of the Merging Corporation so surrendered shall be
canceled. The letter of transmittal shall (i) specify, among other
things, that delivery shall be effected, and risk of loss and title to
the common stock of the Merging Corporation shall pass, only upon actual
delivery of the certificates for shares of common stock of the Merging
Corporation to the Surviving Corporation and (ii) include provisions
ensuring the rights of each party hereunder including customary
provisions and a statement that satisfies the requirements of Treas.
Reg. Section 1.1445-2(b)(2) certifying that the holder submitting such
letter of transmittal is not a "foreign person" and provide that if such
statement is not made, appropriate tax withholding will be made from the
Merger Consideration.
-3-
<PAGE> 5
(b) Until surrendered in accordance with the terms
hereof, each certificate for shares of common stock of the Merging
Corporation shall after the Effective Date represent for all purposes
only the right to receive the Merger Consideration. Unless and until so
surrendered, no dividends or other distributions payable to the holders
of common stock of New Paranet, as to any time on or after the Effective
Date, will be paid to the holder of such outstanding certificates.
(c) If any portion of the Merger Consideration is to be
issued to a person other than the registered holder of the shares of the
common stock of the Merging Corporation represented by the certificate
or certificates surrendered in exchange therefor, it shall be a
condition to such issuance that any certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form
for transfer and that the person requesting such issuance shall pay to
the Surviving Corporation any transfer or other taxes required as a
result of such issuance to a person other than the registered holder of
such shares of the common stock of the Merging Corporation or establish
to the satisfaction of the Surviving Corporation that such tax has been
paid or is not payable.
(d) From and after the Effective Date, there shall be
no further registration of transfers on the books of the Merging
Corporation of shares of common stock of the Merging Corporation that
were outstanding immediately prior to the Effective Date.
(e) Notwithstanding the foregoing, neither New Paranet
nor the Surviving Corporation shall be liable to any holder of shares of
common stock of the Merging Corporation for any amount paid to a public
official pursuant to applicable abandoned property laws. Any amounts
remaining unclaimed by holders of shares of common stock of the Merging
Corporation three years after the Effective Date (or such earlier date
immediately prior to such time as such amounts would otherwise escheat
to or become property of any governmental entity) shall, to the extent
permitted by applicable law, become the property of the Surviving
Corporation free and clear of any claims or interests of any person
previously entitled thereto.
Section 4.3. Dissenting Shares. Notwithstanding Section 4.1,
shares of the common stock of the Merging Corporation outstanding immediately
prior to the Effective Date and held by a holder who makes a written demand for
the payment of the fair value of such holder's shares in the manner provided
under the DGCL or TBCA (a "Dissenting Shareholder") shall not be converted into
the right to receive the Merger Consideration, unless such holder shall have
failed to perfect or shall have effectively withdrawn or lost his right to
payment of the fair value of his shares of the common stock of the Merging
Corporation under the DGCL or TBCA. If after the Effective Date such holder
shall have failed to perfect or shall have effectively withdrawn or lost his
right to payment of the fair value of his shares of the common stock of the
Merging Corporation under the DGCL or TBCA, such shares of the common stock of
the Merging Corporation shall be treated as if they had been converted as of
the Effective Date into the right to receive the Merger Consideration. The
Merging Corporation shall give New Paranet prompt notice of any objections
-4-
<PAGE> 6
or demands received by the Merging Corporation from any shareholder exercising
his right to dissent, and, prior to the Effective Date, New Paranet shall have
the right to participate in all negotiations and proceedings with respect
thereto. Prior to the Effective Date, the Merging Corporation shall not,
except with the prior written consent of New Paranet, make any payment with
respect to, or settle or offer or agree to settle, any such demands.
Section 4.4. No Fractional Shares. No fractional shares of
common stock of New Paranet shall be issued in the Merger. Each holder of the
common stock of the Merging Corporation will be issued a whole share of common
stock of New Paranet in lieu of any fractional share interest to which such
holder would otherwise be entitled. For purposes of determining the number of
shares of common stock of New Paranet to be issued in the Merger, the common
stock of the Merging Corporation held by one person in multiple accounts shall
be aggregated.
ARTICLE 5
APPROVALS AND TERMINATION
Section 5.1. Corporate Approvals. Pursuant to Article 5.03 of
the TBCA, this Agreement and related matters shall be submitted to the
shareholders of the Merging Corporation to vote or consent with respect
thereto.
Section 5.2. Approvals of Surviving Corporation. Pursuant to
Section 252 of the DGCL, this Agreement and related matters shall be submitted
to the shareholders of the Surviving Corporation to vote or consent with
respect thereto.
Section 5.3. Termination. At any time prior to the Effective
Date of the Merger, this Agreement may be terminated and abandoned by the
Merging Corporation by appropriate resolution of its Board of Directors. In
the event of such termination and abandonment, this Agreement shall become void
and neither the Merging Corporation nor the Surviving Corporation or their
respective shareholders, directors or officers may be held liable in respect to
such termination or abandonment.
ARTICLE 6
MISCELLANEOUS
Section 6.1. Option Plans. Prior to the Effective Date, New
Paranet and the Merging Corporation shall take such action as may be necessary
to cause each unexpired and unexercised option to purchase shares of common
stock of the Merging Corporation (each an "Old Paranet Option") to be
automatically converted at the Effective Date into an option (each a "New
Paranet Option") to purchase a number of shares of common stock of New Paranet
equal to the number of shares of common stock of the Merging Corporation that
could have been purchased under the Old Paranet Option multiplied by the Old
Paranet Exchange Ratio, at a price per share of common stock of New Paranet
equal to the option exercise price determined pursuant to the Old
-5-
<PAGE> 7
Paranet Option divided by the Old Paranet Exchange Ratio and otherwise subject
to all of the same terms and conditions as the Old Paranet Option. The date of
grant of a substituted Option shall be the date on which the corresponding Old
Paranet Option was granted. At the Effective Date, all references in the stock
option agreement to Old Paranet shall be deemed to refer to New Paranet. New
Paranet shall assume all of the Merging Corporation's obligations with respect
to Old Paranet Options as so amended and shall, from and after the Effective
Date, make available for issuance upon exercise of New Paranet Options all
shares of common stock of New Paranet covered thereby.
Section 6.2. Further Assurances. If at any time the Surviving
Corporation shall consider or be advised that any further assignment, assurance
or other action is necessary or desirable to vest in the Surviving Corporation
the title to any property or right of the Merging Corporation or otherwise to
carry out the purposes of this Agreement, the proper officers, directors or
representatives of the Merging Corporation shall execute and make all such
proper assignments or assurances and take such other actions. The proper
officers, directors or representatives of the Surviving Corporation are hereby
authorized in the name of the Merging Corporation, or otherwise, to take any
and all such action.
-6-
<PAGE> 8
EXECUTED as of the date first above written.
Paranet, Inc.
(a Texas corporation)
By:
------------------------------------
Michael H. Holthouse
President
Paranet Systems, Inc.
(a Delaware corporation)
By:
------------------------------------
Michael H. Holthouse
President
Paranet, Inc.
(a Delaware corporation)
By:
------------------------------------
Michael H. Holthouse
President
-7-
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
PARANET, INC.
FIRST: The name of the Corporation is Paranet, Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware or any successor statute (the "DGCL").
FOURTH: The aggregate number of shares of capital stock
that the Corporation shall have authority to issue is Six million (6,000,000),
divided into Five million (5,000,000) shares of common stock, par value $0.01
per share ("Common Stock"), and One million (1,000,000) shares of preferred
stock, par value $0.01 per share ("Preferred Stock"). Shares of any class of
capital stock of the Corporation may be issued for such consideration and for
such corporate purposes as the Board of Directors of the Corporation (the
"Board of Directors") may from time to time determine. Each share of Common
Stock shall be entitled to one vote.
The Preferred Stock may be divided into and issued from time to
time in one or more series as may be fixed and determined by the Board of
Directors. The relative rights and preferences of the Preferred Stock of each
series shall be such as shall be stated in any resolution or resolutions
adopted by the Board of Directors setting forth the designation of the series
and fixing and determining the relative rights and preferences thereof, any
such resolution or resolutions being herein called a "Directors' Resolution."
The Board of Directors is hereby authorized to fix and determine the powers,
designations, preferences, and relative, participating, optional or other
rights (including, without limitation, voting powers, full or limited,
preferential rights to receive dividends or assets upon liquidation, rights of
conversion or exchange into Common Stock, Preferred Stock of any series or
other securities, any right of the Corporation to exchange or convert shares
into Common Stock, Preferred Stock of any series or other securities, or
redemption provisions or sinking fund provisions) as between series and as
between the Preferred Stock or any series thereof and the Common Stock, and the
qualifications, limitations or restrictions thereof, if any, all as shall be
stated in a Directors' Resolution, and the shares of Preferred Stock or any
series thereof may have full or limited voting powers, or be without voting
powers, all as shall be stated in a Directors' Resolution.
-1-
<PAGE> 2
No stockholder shall, by reason of the holding of shares of any
class or series of capital stock of the Corporation, have a preemptive or
preferential right to acquire or subscribe for any shares or securities of any
class, whether now or hereafter authorized, which may at any time be issued,
sold or offered for sale by the Corporation, unless specifically provided for
in a Directors' Resolution with respect to a series of Preferred Stock.
Furthermore, Common Stock is not convertible, redeemable or assessable, or
entitled to the benefits of any sinking fund.
Cumulative voting of shares of any class or series of capital
stock having voting rights is prohibited unless specifically provided for in a
Directors' Resolution with respect to a series of Preferred Stock.
FIFTH: The name and mailing address of the incorporator is:
Jeffrey G. Warren
Paranet, Inc.
1776 Yorktown, Suite 300
Houston, Texas 77056
SIXTH: The powers of the incorporator are to terminate
upon the filing of the Certificate of Incorporation with the office of the
Secretary of State of the State of Delaware.
(a) Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the authority and powers conferred upon the Board of Directors by
the DGCL or by the other provisions of this Certificate of Incorporation, the
Board of Directors is hereby authorized and empowered to exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject to the provisions of the DGCL, this Certificate of
Incorporation and any Bylaws adopted by the stockholders of the Corporation;
provided, however, that no Bylaws hereafter adopted by the stockholders of the
Corporation, or any amendments thereto, shall invalidate any prior act of the
Board of Directors that would have been valid if such Bylaws or amendment had
not been adopted.
(b) Number, Election and Terms of Directors. The number of
directors that shall constitute the whole Board of Directors shall be fixed
from time to time by a majority of the directors then in office, but shall not
be less than two nor more than twelve, except in the case of an increase in the
number of directors by reason of any provisions contained in any series of
Preferred Stock issued pursuant to Article FOURTH. The directors, other than
those who may be elected by the holders of any series of Preferred Stock, shall
be divided as nearly as possible into three classes, Class I, Class II and
Class III. Each director shall serve for a term ending on the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first appointed to Class I shall serve
for a term expiring at the annual meeting next following the end of the
calendar year 1997, the directors first appointed to Class II shall serve for a
term expiring at the annual meeting next following the end of the calendar year
1998, and the directors first appointed to Class III shall serve for a term
expiring at the annual
-2-
<PAGE> 3
meeting next following the end of the calendar year 1999. Each director shall
hold office until the annual meeting at which such director's term expires and,
the foregoing notwithstanding, shall serve until his successor shall have been
duly elected and qualified or until his earlier death, resignation or removal.
At each annual election, the directors chosen to succeed those
whose terms then expire shall be of the same class as the directors they
succeed, unless, by reason of any intervening changes in the authorized number
of directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.
In the event of any change in the authorized number of directors,
each director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of
Directors shall specify the class to which a newly created directorship shall
be allocated.
Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
(c) Removal of Directors. No director of the Corporation
shall be removed from office as a director by vote or other action of the
stockholders or otherwise except for cause, and then only by the affirmative
vote of the holders of at least a majority of the voting power of all
outstanding shares of capital stock of the Corporation generally entitled to
vote in the election of directors, voting together as a single class. Except
as may otherwise be provided by law, cause for removal of a director shall be
deemed to exist only if: (i) the director whose removal is proposed has been
convicted, or when a director is granted immunity to testify when another has
been convicted, of a felony by a court of competent jurisdiction and such
conviction is no longer subject to direct appeal; (ii) such director has been
found by the affirmative vote of a majority of the entire Board of Directors at
any regular or special meeting of the Board of Directors called for that
purpose or by a court of competent jurisdiction to have been grossly negligent
or guilty of misconduct in the performance of his duties to the Corporation in
a matter of substantial importance to the Corporation; or (iii) such director
has been adjudicated by a court of competent jurisdiction to be mentally
incompetent, which mental incompetency directly affects his ability as a
director of the Corporation.
(d) Vacancies. Except as provided in Article FOURTH hereof,
newly created directorships resulting from any increase in the number of
directors and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of
a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified or until his earlier death, resignation or removal. No decrease in
the
-3-
<PAGE> 4
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
(e) Initial Directors. Each person whose name and mailing
address are set out immediately below is to serve as a director of the
Corporation in accordance with the provisions of this Certificate of
Incorporation:
<TABLE>
<CAPTION>
Name Address Class
---- ------- -----
<S> <C> <C>
Steven Ough Paranet, Inc. II
1776 Yorktown, Suite 300
Houston, Texas 77056
Michael H. Holthouse Paranet, Inc. III
1776 Yorktown, Suite 300
Houston, Texas 77056
</TABLE>
SEVENTH: From and after the first date of the closing of the
initial public offering of the Common Stock to the public that has been
registered on a registration statement that has been filed with and declared
effective by the Securities and Exchange Commission, any action required or
permitted to be taken by the stockholders of the Corporation must be effected
at an annual or special meeting of stockholders of the Corporation and may not
be effected by any consent in writing by such stockholders. Except as
otherwise required by law, or as may be prescribed in a Directors' Resolution,
special meetings of stockholders of the Corporation may be called only by the
Chairman of the Board of Directors, the Chief Executive Officer of the
Corporation, the President of the Corporation or the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
entire Board of Directors.
EIGHTH: No director of the Corporation shall be personally
liable to the Corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a director; provided, however, that the foregoing
provisions shall not eliminate or limit the liability of a director (i) for any
breach of such director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, as the same exists or as such provision may hereafter be amended,
supplemented or replaced, or (iv) for any transactions from which such director
derived an improper personal benefit. If the DGCL is amended after the filing
of this Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation, in addition to the limitation on personal
liability provided herein, shall be limited to the fullest extent permitted by
such law, as so amended. Any repeal or modification of this Article EIGHTH by
the stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation existing at the time of such repeal or modification.
-4-
<PAGE> 5
NINTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders, except as may be otherwise provided by
applicable law or the Bylaws of the Corporation.
TENTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code, or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
I, THE UNDERSIGNED, being the incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation
Law of the State of Delaware, do make this certificate, hereby declaring that
this is my act and deed and that the facts herein stated are true and
accordingly have hereunto set my hand this 4th day of February, 1997.
/s/ JEFFREY G. WARREN
-------------------------------
Jeffrey G. Warren
-5-
<PAGE> 1
EXHIBIT 4.2
REVOLVING PROMISSORY NOTE
WITH BORROWING BASE AND AGREEMENT
(this "Note")
I. PROMISSORY NOTE
U.S. $10,000,000.00 December 31, 1996 (the "Date")
Promise to Pay
FOR VALUE RECEIVED, PARANET, INC. ("Borrower"), a Texas corporation, promises to
pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("Bank") on or
before June 30, 1998, (the "Termination Date"), at its banking house at 712 Main
Street, Houston, Harris County, Texas, or at such other location in Houston,
Texas as Bank may designate, in lawful money of the United States of America,
the lesser of: (i) the principal sum of TEN MILLION AND NO/100 UNITED STATES
DOLLARS (U.S. $10,000,000.00)(the "Maximum Loan Total"); or (ii) the aggregate
unpaid principal amount of all loans made by Bank (each such loan being a
"Loan"), which may be outstanding on the Termination Date. Subject to the terms
and conditions of this Note and the Loan Documents, Borrower may borrow, repay
and reborrow all or any part of the credit provided for herein at any time
before the Termination Date, there being no limitation on the number of Loans
made so long as the total unpaid principal amount at any time outstanding does
not exceed the Maximum Amount of Note.
Payments
The unpaid principal balance of this Note at any time will be the total amounts
advanced by Bank, less the amount of all payments or prepayments of principal.
Absent manifest error, the records of Bank will be conclusive as to amounts
owed.
Each Loan will be due and payable on the maturity date agreed to by Bank and
Borrower with respect to such Loan (the "Maturity Date"). In no event will any
Maturity Date fall on a date after the Termination Date.
Accrued and unpaid interest on each Prime Rate Loan is due and payable on the
last day of each month and at the Maturity Date.
Accrued and unpaid interest on each LIBOR Loan is due on the last day of each
Interest Period, and in the case of an Interest Period in excess of three
months, on each day which occurs every three months after the initial date of
such Interest Period, and on any prepayment (on the amount prepaid).
Loan Options
Loans may be either Prime Rate Loans or LIBOR Loans. Borrower will pay interest
on the unpaid principal amount of each Prime Rate Loan at a rate per annum equal
to the lessor of: (i) the Prime Rate in effect from time to time minus one-half
of one percent (-.50%)(the "Effective Prime Rate"); or (ii) the Highest Lawful
Rate. Borrower will pay interest on the unpaid principal amount of each LIBOR
Loan for the applicable Interest Period with respect thereto at a rate per
annum equal to the lesser of: (i) the LIBOR Rate plus two percent (2.00%)(the
"Effective LIBOR Rate"); or (ii) the Highest Lawful Rate.
Interest Recapture
If at any time the effective rate of interest which would otherwise be payable
on any Loan exceeds the Highest Lawful Rate, the rate of interest to accrue on
the unpaid principal balance of that Loan during all times will be limited to
the Highest Lawful Rate, but any subsequent reductions in the interest rate
will not reduce the interest rate below the Highest Lawful Rate until the total
amount of interest accrued on the unpaid principal balance of that Loan equals
the total amount of interest which would have accrued if the applicable
Effective Prime Rate, or Effective LIBOR Rate as the case may be, had at all
times been in effect.
Minimum Loan Amounts
Each LIBOR loan will be in an amount not less than $250,000.00 and an integral
multiple of $50,000.00 ("Minimum LIBOR Loan"). Each Prime Rate Loan will be in
an amount not less than $250,000.00 and an integral multiple of $50,000.00.
Interest Calculation Basis
Interest will be computed on the basis of a 360 day year for the actual number
of days elapsed, unless such calculation would result in a usurious interest
rate, in which case such interest will be calculated on the basis of a 365 or
366 day year, as the case may be.
Borrowing Notice
Loans will be made on borrower's irrevocable notice to Bank, given not later
than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans, the third
Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate
Loans, the first Business Day prior to the proposed Borrowing Date. Each notice
of a requested borrowing (a "Notice of Requested Borrowing") under this
paragraph may be oral or written, and will specify: (i) the requested amount;
(ii) proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime
Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan. Any oral
Notice of Requested Borrowing will be confirmed in writing prior to the
Borrowing Date.
Prepayments
Borrowers may on any Business Day prepay the outstanding principal amount of any
Prime Rate Loan, in whole or in part. Partial prepayments will be in an
aggregate principal amount of $50,000.00 or a greater integral multiple of
$50,000.00. Borrower may prepay any LIBOR Loan provided any Breakage Charges
incurred by Bank are reimbursed by Borrower within 30 days of notice by Bank.
Interest Period Options
Provided that no Event of Default has occurred and is continuing, Borrower may
elect to continue all or any part of any LIBOR Loan beyond the expiration of
the then current Interest Period relating thereto by providing Bank at least
three Business Days' written election, specifying the Loan or portion thereof
to be continued and the requested Interest Period and whether it is to be a
Prime Rate Loan or LIBOR Loan; provided that any continuation as a LIBOR Loan
will not be the Minimum LIBOR Loan amount. Provided that no Event of Default
has occurred and is continuing, Borrower may elect to convert any Prime Rate
Loan to a LIBOR Loan by providing a Notice or Requested Borrowing and the
converted Prime Rate Loan will be the Minimum LIBOR Loan.
Commitment Fee
Borrower will pay a commitment fee (computed on the basis of the actual number
of days elapsed in a year comprised of 360 days) of 0.125% per annum on the
daily average difference between the Maximum Loan Total and the principal
balance of the Note. The Commitment fee is due and payable quarterly in arrears.
Definitions
"Board" means the Board of Governors of the Federal Reserve System of the
United States.
"Borrowing Base" means that amount shown as the BORROWING BASE on the most
recent Borrowing Base Report in the form of Exhibit A attached hereto, subject
to verification by the Bank. The calculation of the Borrowing Base will utilize
the eligibility criteria, borrowing base factors and dollar ceilings for
various components specified in the attached Exhibit A.
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"Borrowing Date" means any Business Day on which Bank makes a Loan under this
Note.
"Business Day" means a day: (i) on which Bank and commercial banks in New York
City are generally open for business; and (ii) with respect to LIBOR Loans, on
which dealings in United States Dollar deposits are carried out in the
Interbank markets.
"Highest Lawful Rate" means the maximum nonusurious rate of interest from time
to time permitted by applicable law. If Texas law determines the Highest Lawful
Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas
Credit Code or any successor statute (the "Code"). Bank may from time to time,
as to current and future balances, elect and implement any other ceiling under
the Code and/or revise the index, formula or provisions of law used to compute
the rate on this open-end account by notice to Borrower, if and to the extent
permitted by, and in the manner provided in the Code.
"Indebtedness" means and includes (a) all items which in accordance with GAAP
would be included on the liability side of a balance sheet on the date as of
which indebtedness is to be determined (excluding capital stock, surplus,
surplus reserves and deferred credits); (b) all guaranties, endorsements and
other contingent obligations in respect of, or any obligations to purchase or
otherwise acquire, Indebtedness of others, other than endorsements in the
ordinary course of business, and (c) all indebtedness secured by any Lien
existing on any interest of the person with respect to which indebtedness is
being determined, in property owned subject to such Lien, whether or not the
Indebtedness secured thereby has been assumed.
"Interest Period" means the period commencing on the Borrowing Date and ending
on the Maturity Date, consistent with the following provisions. The duration of
each Interest Period will be: (a) in the case of a Prime Rate Loan, a period of
up to the Termination Date unless any portion thereof is converted to a LIBOR
Loan; and (b) in the case of a LIBOR Loan, a period of one, two, three or six
months; in each case as selected by Borrower and agreed to by Bank. Borrower's
choice of Interest Period is subject to the following limitations: (i) No
Interest Period will end on a date after the Termination Date; (ii) If the last
day of an Interest Period would be a day other than a Business Day, the
Interest Period will end on the next succeeding Business Day (unless the
Interest Period relates to a LIBOR Loan and the next succeeding Business Day is
in a different calendar month than the day on which the Interest Period would
otherwise end, in which case the Interest Period will end on the next preceding
Business Day); and (iii) Borrower understands and agrees that it shall be
responsible for electing Loans to be Prime Rate Loans or LIBOR Loans, with
appropriate Interest Periods, so as to avoid Breakage Charges; such charges
being payable as provided herein if prepayment of a Loan is required to effect
an agreed principal installment payment.
"LIBOR Loan" means a Loan which bears interest at the Effective LIBOR Rate.
"LIBOR Rate" means a per annum interest rate determined by Bank by dividing:
(i) the average rate per annum (rounded upwards, if necessary, to the next 1/16
of 1%) of the rates per annum at which United States dollar deposits in an
amount comparable to the principal amount of the LIBOR Loan to which such LIBOR
Rate is applicable for a term equal to or substantially equal to the Interest
Period are offered by Bank to prominent banks in the London interbank market at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of the applicable Interest Period; by (ii) Statutory Reserves.
"Lien" means any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based
on common law, constitutional provision, statute or contract.
"Loan Documents" means this Note and any document or instrument evidencing,
securing, guaranteeing or given in connection with this Note.
"Maximum Amount of Note" means the lesser of: (i) the Maximum Loan Total; or
(ii) the Borrowing Base.
"Obligations" means all principal, interest and other amounts which are or
become owing under this Note or any other Loan Document.
"Obligor" means Borrower and any guarantor, surety, co-signer, general partner
or other person who may now or hereafter be obligated to pay all or any part of
the Obligations.
"Prime Rate" means the rate determined from time to time by Bank as its prime
rate. The Prime Rate will change automatically from time to time without
notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND
MAY NOT BE BANK'S LOWEST RATE.
"Prime Rate Loan" means a Loan which bears interest at the Effective Prime
Rate.
"Statutory Reserves" means the difference (expressed as a decimal) of the
number one minus the aggregate of the maximum reserve percentages (including,
without limitation, any marginal, special, emergency, or supplemental reserves)
expressed as a decimal established by the Board and any other banking authority
to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency
Liabilities (as defined in Regulation D of the Board). Such reserve
percentages will include, without limitation, those imposed under such
Regulation D. LIBOR Loans will be deemed to constitute Eurocurrency
Liabilities and as such will be deemed to be subject to such reserve
requirements without benefit of or credit for proration, exceptions or offsets
which may be available from time to time to any bank under such Regulation D.
Statutory Reserves will be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
"Writing" means a written document, telecopy or facsimile message.
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<PAGE> 3
LIBOR Event
If at any time Bank determines in good faith (which determination will be
conclusive) that any change in any applicable law, rule or regulation or in the
interpretation, application or administration thereof makes it unlawful, or any
central bank or other governmental authority asserts that it is unlawful, for
Bank or its foreign branch or branches to maintain any LIBOR Loan by means of
dollar deposits obtained in the London interbank market (any of the above being
described as a "LIBOR Event"), then, at the option of Bank, the aggregate
principal amount of all LIBOR Loans outstanding will be prepaid; however the
prepayment may be made at the sole option of the Bank with a Prime Rate Loan.
Upon the occurrence of any LIBOR Event, and at any time thereafter so long as
such LIBOR Event will continue, the Bank may exercise its aforesaid option by
giving written notice to Borrower.
Capital Adequacy
If Bank determines after the date of this Note that any change in applicable
laws, rules or regulations regarding capital adequacy, or any change in the
interpretation or administration thereof by any appropriate governmental
agency, or compliance with any request or directive to Bank regarding capital
adequacy (whether or not having the force of law) of any such agency, increases
the capital required to be maintained with respect to any Loan and therefore
reduces the rate of return on Bank's capital below the level Bank could have
achieved but for such change or compliance (taking into consideration Bank's
policies with respect to capital adequacy), then Borrower will pay to Bank from
time to time, within 15 days of Bank's request, any additional amount required
to compensate Bank for such reduction. Bank will request any additional amount
by delivering to Borrower a certificate of Bank setting forth the amount
necessary to compensate Bank. The certificate will be conclusive and binding,
absent manifest error. Bank may make any assumptions, and may use any
allocations of costs and expenses and any averaging and attribution methods,
which Bank in good faith finds reasonable. Unless such certificate is presented
to Borrower within 180 days of the date Bank incurs any amount compensable
under this section, Bank shall have been deemed to have waived its right to
such compensation.
Changes in Law Affecting LIBOR Loans
If any domestic or foreign law, treaty, rule or regulation (whether now in
effect or hereinafter enacted or promulgated, including Regulation D of the
Board) or any interpretation or administration thereof by any governmental
authority charged with the interpretation or administration thereof (whether or
not having the force of law): (a) changes, imposes, modifies, applies or deems
applicable any reserve, special deposit or similar requirements in respect of
any LIBOR Loan or against assets of, deposits with or for the account of, or
credit extended or committed by, Bank; or (b) imposes on Bank or the interbank
eurocurrency deposit and transfer market or the market for domestic bank
certificates or deposit any other condition affecting any such LIBOR Loan; and
the result of any of the foregoing is to impose a cost to Bank of agreeing to
make, funding or maintaining any such LIBOR Loan or to reduce the amount of any
sum receivable by Bank in respect of any such LIBOR Loan, then Bank may notify
Borrower in writing of the happening of the event and Borrower will upon demand
pay to Bank such additional amounts as will compensate Bank for such costs as
determined by Bank. Unless such certificate is presented to Borrower within 180
days of the date Bank incurs any amount compensable under this section, Bank
shall have been deemed to have waived its right to such compensation.
Indemnification for Funding LIBOR Loans
Borrower will indemnify Bank against, and reimburse Bank on demand for, any
loss, cost or expense incurred or sustained by Bank (including without
limitation any loss, cost or expense other than loss of profit or other
consequential damages incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by Bank to fund or maintain LIBOR Loans,
"Breakage Charges") as a result of: (a) any payment or prepayment (whether
permitted by Bank or required hereunder or otherwise) of all or a portion of
any LIBOR Loan on a day other than the Maturity Date of the LIBOR Loan; (b) any
payment or repayment, whether required hereunder or otherwise, of any LIBOR
Loan made after the delivery of a Notice of Requested Borrowing but before the
applicable Borrowing Date if the payment prevents the proposed Loan from
becoming fully effective; or (c) the failure of any LIBOR Loan to be made by
Bank due to any action or inaction of Borrower. Such funding losses and other
costs and expenses will be calculated and billed by Bank and the bill will, as
to the costs incurred, be conclusive absent manifest error. Unless such
certificate is presented to Borrower within 180 days of the date Bank incurs
any amount compensable under this section, Bank shall have been deemed to have
waived its right to such compensation.
Past Due Rate
All past-due principal and interest on this Note, will, at Bank's option, bear
interest at the Highest Lawful Rate, or if applicable law does not provide for a
maximum nonusurious rate of interest, at a rate per annum equal to the Prime
Rate plus five percent (5%).
Usury Savings
Borrower and Bank intend to conform strictly to applicable usury laws.
Therefore, the total amount of interest (as defined under applicable law)
contracted for, charged or collected under this Note will never exceed the
Highest Lawful Rate. If Bank contracts for, charges or receives any excess
interest, it will be deemed a mistake. Bank will automatically reform the
contract or charge to conform to applicable law, and if excess interest has
been received, Bank will either refund the excess to Borrower or credit the
excess to Borrower or credit the excess on the unpaid principal amount of this
Note. All amounts constituting interest will be spread throughout the full
term of this Note in determining whether interest exceeds lawful amounts.
Collateral
This Note is secured by, among other collateral, a first priority and
continuing security interest in all the accounts and other property described
in a Security Agreement - Accounts and General Intangibles executed by Borrower
(each and all of said security agreements "Security Agreements"), subject to
permitted liens.
II. AGREEMENT
Conditions Precedent
A. Before making any Loan Bank may require satisfaction of the following
conditions precedent: (1) Bank has received the following, each duly executed
and in form acceptable to Bank: (a) if requested by Bank, a Notice of Requested
Borrowing, substantially in the form of Exhibit B, not later than one (1)
Business Day before the date (which will also be a Business Day) of the
proposed Prime Rate Loan, or three (3) Business Day(s) before the date (which
will also be a Business Day) of the proposed LIBOR Loan; (b) such other
documents as Bank requires; and (2) no Event of Default has occurred and is
continuing; and (3) making the Loan is not prohibited by, and will not subject
the Bank to any penalty or onerous condition under any legal requirement.
Representations & Warranties
B. To induce Bank to make Loans, Borrower makes the following representations
and warranties as of the Date of this Note and as of the date of each request
for a Loan: (1) All financial statements delivered to Bank are complete,
correct and fairly present, in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), the financial condition and the
results of operations of Borrower as at the dates and for the periods indicated.
(2) No material adverse change has occurred in the assets, liabilities,
financial condition, business or affairs of Borrower since the dates of such
financial statements. (3) Borrower is not subject to any instrument or
agreement materially and adversely affecting its financial condition, business
or affairs. (4) All Loans are for business, commercial, investment or other
similar purpose and not primarily for personal, family, household or
agricultural use, as such terms are used in Chapter One of the Texas Credit
Code and will be for the purpose of financing accounts receivable for working
capital. (5) No Loan will be used for the purchase or carrying of any "margin
stock" as that term is defined in Regulation "U" of the Board of Governors of
the Federal Reserve System. (6) The Loan Documents (i) are legal, valid and
binding obligations of Borrower enforceable in
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<PAGE> 4
accordance with their respective terms except as may be limited by bankruptcy,
insolvency and other similar laws affecting creditor's rights generally; (ii)
have been duly authorized for execution, delivery and performance by all
necessary action; (iii) are within the power and authority of Borrower; (iv) do
not and will not contravene or violate any legal requirement affecting
Borrower, or Borrower's organizational documents; and (v) will not result in
the breach of, or constitute a default under, any agreement or instrument by
which Borrower or any of its respective property may be bound or affected. (7)
Borrower has not generated, handled, used, stored or disposed of any hazardous
or toxic waste or substance, on or off its premises (whether or not owned by
it), except in accordance with applicable legal requirements, or which would not
reasonably be expected to have a material adverse effect on the Borrower or its
financial condition. (8) Borrower does not have any material contingent
liability with respect to non-compliance with environmental, hazardous waste,
or other laws and has not received any notice that it or any of its property or
operations is not in compliance with, or that any governmental authority is
investigating its compliance with, any environmental, hazardous waste, or other
laws or which would not reasonably be expected to have a material adverse
effect on the Borrower or its financial condition.
Covenants Information & Reporting; Financial Covenants (Exhibit A)
C.1. Until the later of the Termination Date and the date on which Obligations
are paid in full: (1) Borrower agrees to provide to Bank (i) the financial
statements prepared in conformity with GAAP on consolidated and consolidating
bases and the other information described in, and within the times required by,
Exhibit A, Borrowing Base Report, Financial Covenants and Compliance
Certificate attached hereto and incorporated herein by reference along with the
other information required by Exhibit A to be submitted; (ii) within the time
required by Exhibit A, Exhibit A signed and certified by Borrower, (2) and such
other information relating to the financial condition and affairs of Borrower
or any Guarantor as Bank requests from time to time.
Affirmative Covenants
2. Borrower agrees to: (a) notify Bank immediately upon acquiring knowledge of:
(i) the filing or threatened filing of any lawsuit or administrative proceeding
that might materially and adversely affect Borrower; (ii) the occurrence of any
Event of Default; or (iii) any reportable event or any prohibited transaction
in connection with any employee benefit plan; (b) permit Bank and its
affiliates to inspect and photograph its property, to examine its files, books
and records and make and take away copies thereof, and to discuss its affairs
with its officers and accountants, all at such times and intervals and to such
extent as Bank may reasonably desire that would not unreasonably disturb the
operation of the Borrower's business; provided that, in any event, the Bank
shall hold all non-public information obtained pursuant to the foregoing or
otherwise confidential, unless such information is required by a governmental
authority; and (c) comply with and maintain the financial covenants set forth
on Exhibit A attached hereto and incorporated herein by reference.
Negative Covenants
3. Borrower agrees that Borrower WILL NOT: (a) create, incur, suffer or permit
to exist, or assume or guarantee, directly or indirectly, or become or remain
liable for, any indebtedness, contingent or otherwise, except: (i) indebtedness
to Bank, or secured by liens permitted by this Note, or otherwise approved in
writing by Bank, and renewals and extensions (but not increases) thereof; and
(ii) current accounts payable and unsecured current liabilities, not the result
of borrowing, to vendors, suppliers and persons providing services, for goods
and services normally required by it in the ordinary course of business and on
ordinary trade terms; and (iii) other indebtedness not to exceed $200,000 in the
aggregate (b) create or allow to exist any lien upon any of its property now
owned or hereafter acquired, or acquire any property upon any conditional sale
or other title retention device or arrangement or any purchase money security
agreement; or in any manner directly or indirectly sell, assign, pledge or
otherwise transfer any of its accounts or other property, EXCEPT: (i) liens,
not for borrowed money, arising in the ordinary course of business; (ii) liens
for taxes not delinquent or being contested in good faith, by appropriate
proceedings; (iii) liens disclosed to the Bank in writing prior to the date of
this Note, PROVIDED that neither the indebtedness secured nor the property
covered will increase; (iv) liens in favor of the Bank; and (v) liens securing
other indebtedness, not to exceed $200,000 in the aggregate, outstanding at any
time (c) in any single transaction or series of transactions, directly or
indirectly: (i) liquidate or dissolve; (ii) be a party to any merger or
consolidation; or (iii) sell, convey or lease all or any substantial part of
its assets, EXCEPT for sale of inventory in the ordinary course of business;
(d) redeem, retire or otherwise acquire, directly or indirectly, any shares of
its capital stock or other equity interest; declare or pay any dividend; or
make any other distribution of any property or cash to owners of an equity
interest in their capacity as such, EXCEPT as a Subchapter S corporation, to
pay shareholder's personal taxes and as advised to Bank prior to such action;
(e) substantially change the nature of its business or enter into any business
substantially different from the business in which it is presently engaged, or
permit any material change in its management; (f) enter into any transaction or
agreement with or make any loan to any officer, director of or shareholder of
Borrower (or any member of the family of any such person, or any person
controlling, controlled by or under common control with Borrower) unless the
same is upon terms substantially similar to those obtainable from wholly
unrelated sources; or (g) form, create or acquire any subsidiary.
Other Agreements; Nonexclusive Remedies; Waivers; Headings; Expenses;
Applicable Law; Indemnification; Venue, Service of Process
4. Other Agreements: (a) No remedy, right or power of Bank is exclusive of any
other remedy, right or power and all such remedies, rights and powers are
cumulative. (b) No waiver of any default is a waiver of any other default. No
failure to exercise or delay in exercising any right or power under any Loan
Document will operate as a waiver thereof. No single or partial exercise of
any right or power will preclude any further or other exercise thereof or the
exercise of any other right or power. The making of any Loan during the
existence of any Event of Default or subsequent to the occurrence of an Event
of Default will not constitute a waiver of the Event of Default. No amendment,
modification or waiver of any Loan Document will be effective unless the same
is in writing and signed by the person against whom such amendment,
modification or waiver is sought to be enforced. No notice to or demand on any
person will entitle any person to any other or further notice or demand in
similar or other circumstances. (c) Each Obligor severally waives grace,
notice, demand, presentment for payment, notice of intent to accelerate, notice
of acceleration, protest, notice of protest, and suit on the Note to fix
liability and each Obligor that is subject to the Texas Revised Partnership Act
(TRPA) waives compliance by Bank with Section 3.05(d) of TRPA and agrees that
Bank may proceed directly against one or more partners or their property without
first seeking satisfaction from partnership property. (d) Any release or
change in any security interest or any failure to perfect or maintain
perfection of any security interest will not affect any Obligor's obligations
under any Loan Document. (e) Headings are for reference purposes only. (f)
Borrower will pay on demand all reasonable expenses (including, without
limitation, the reasonable fees and expenses of counsel for the Bank, and
standard Bank documentation preparation including in-house counsel and
processing fees) in connection with the negotiation, preparation, execution,
filing, recording, modification, supplementing and waiver of the Loan Documents
and the making, servicing and collection of the Loans and other amounts owing
under the Loan Documents. (g) This Note is governed by Texas laws and
applicable laws of the United States of America. (h) This Note and the Loans
are not subject to the provisions of Chapter 15 of the Texas Credit Code. (i)
Borrower agrees to indemnify, defend and hold the Bank harmless from and
against any and all loss, liability, obligation, damage, penalty, judgment,
claim, deficiency and expense (including interest, penalties, attorneys' fees
and amounts paid in settlement) to which Bank may become subject arising out of
or based upon the Loan Documents or any Loan, including resulting from Bank's
own negligence, except and to the extent caused by Bank's gross negligence or
willful misconduct. (j) The county in which Bank's principal office is located
in Texas is proper venue for any action or proceeding brought by Borrower or
Bank, whether in contract, tort, or otherwise. Any action or proceeding
against the Borrower may be brought in any state or federal court in such
county. To the extent permitted by applicable law, Borrower hereby irrevocably
(i) submits to the nonexclusive jurisdiction of such courts, and (ii) waives
any objection it may now or
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<PAGE> 5
hereafter have as to the venue of any such action or proceeding brought in any
such court or that any such court is an inconvenient forum. Borrower agrees
that service of process upon it may be made by certified or registered mail,
return receipt requested, at its address specified below. Bank may also serve
process in any other manner permitted by law and may bring any action or
proceeding against the Borrower or with respect to any of its property in
courts in other jurisdictions or venues.
Events of Default & Remedies
D. Each of the following events or conditions is an "Event of Default": (1)
any Obligor fails to pay any of the Obligations when due; (2) any warranty,
representation or statement now or hereafter contained in or made in connection
with any Loan Document was false or misleading in any material respect when
made; (3) any Obligor violates any covenant, condition or agreement contained in
this Note or any other Loan Document; (4) any event of default occurs under any
other Loan document; (5) any individual Obligor dies, or any Obligor that is an
entity dissolves; (6) a receiver, conservator or similar official is appointed
for any Obligor, any subsidiary of Borrower, any Obligor's subsidiary or
Borrower's assets; (7) any petition is filed by or against any Obligor or any
subsidiary of Borrower under any bankruptcy, insolvency or similar law which if
filed against, is not discharged within 60 days of such filing; (8) any Obligor
or any subsidiary of Borrower makes an assignment for the benefit of creditors;
(9) a final judgment for payment of money in excess of $100,000 individually,
or $250,000 in the aggregate, is entered against any Obligor or any subsidiary
of Borrower and remains unsatisfied for 30 days after entry, or any property of
any Obligor or any subsidiary of Borrower is attached, garnished or otherwise
made subject to legal process; (10) any material adverse change occurs in the
business, assets, affairs or financial condition of any Obligor; (11) any change
occurs in the ownership of Borrower; and (12) Borrower is in default of any
other obligation owing to or any other agreement with Bank; (13) any Obligor
fails or refuses to submit financial information reasonably requested by Bank or
to permit Bank to inspect its books and records on request. IF ANY EVENT OF
DEFAULT OCCURS, THEN BANK MAY DO ANY OR ALL OF THE FOLLOWING: (1) cease to make
Loans hereunder; (2) declare any Obligation to be immediately due and payable,
without notice of acceleration or of intention to accelerate, presentment and
demand or protest, or notice of any kind, all of which are hereby expressly
waived; (3) set off, in any order, against the Obligations any debt owing by
Bank to Borrower, including, but not limited to, any deposit account, which
right is hereby granted by Borrower to Bank; and (4) exercise any and all other
rights under the Loan Documents, at law, in equity or otherwise.
No Course of Dealing
NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO
TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO
CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT.
No Oral Agreements
THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
This Note is executed this 31st day of January, 1997 but effective as of the
Date.
BORROWER: PARANET, INC.
By: /s/ MICHAEL H. HOLTHOUSE
-----------------------------------------------------------------------------
Name: Michael H. Holthouse Title: President
-------------------------- ------------------------------------------
Address: 1776 Yorktown #300, Houston, TX 77056
------------------------------------------------------------------------
Acknowledged for purposes of notice pursuant to Section 26.02(a) of the Texas
Business and Commerce Code and for the agreement that Bank is not required to
comply with Section 3.05(d) of TRPA:
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
-----------------------------------------------------------------------------
Name: Title:
---------------- ----------------------------------------------------
Page 5 of 5 Pages
<PAGE> 6
EXHIBIT A TO REVOLVING PROMISSORY NOTE WITH BORROWING BASE AND AGREEMENT
EXECUTED BY PARANET, INC. ("BORROWER")
AND DELIVERED TO TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("BANK")
DATED DECEMBER 31, 1996 (AS SAME MAY BE AMENDED, RESTATED AND SUPPLEMENTED IN
WRITING, THE "NOTE").
BORROWING BASE REPORT,
REPORTING REQUIREMENTS, FINANCIAL COVENANTS
AND
COMPLIANCE CERTIFICATE FOR CURRENT REPORTING PERIOD ENDING , 19
("END DATE")
A. REPORTING PERIOD. THIS EXHIBIT MUST BE SUBMITTED WITHIN 30 DAYS OF THE
END OF EACH CALENDAR QUARTER INCLUDING THE LAST REPORTING PERIOD OF
THE FISCAL YEAR AND WITH THE FISCAL YEAR END FINANCIAL STATEMENT.
BORROWER'S FISCAL YEAR ENDS ON , 19 .
B. BORROWING BASE REPORT
ACCOUNTS RECEIVABLE
<TABLE>
<S> <C> <C> <C>
Line 1. Total Accounts as of the end of the Current Period: $_____
INELIGIBLE ACCOUNTS AS OF THE END OF THE CURRENT PERIOD:
2. That portion (e.g., invoice) of all of the Accounts
of any Account Debtor where the Account is more than
90 days from invoice date $_____
3. That portion of all of the Accounts of any Account
Debtor which exceeds 15% of the dollar amount of the
total of all Accounts for all Account Debtors for
the Current Period (Line 1) $_____
4. Intercompany and Affiliate Accounts $_____
5. Government Accounts [Government Accounts] means
receivables owed by the U.S. government or by the
government of any state, county, municipality, or
other political subdivision as to which Bank's
security interest or ability to obtain direct payment
of the proceeds is governed by any federal or state
statutory requirements other than those of the Uniform
Commercial Code, including, without limitation,
the Federal Assignment of Claims Act of 1940,
as amended.] $_____
6. Foreign accounts (unless secured by a letter
of credit issued by a bank satisfactory to
the Bank) $_____
7. Accounts subject to any dispute or setoff or contra account $_____
8. Other Ineligible Accounts $_____
9. Total Ineligible Accounts for the Current Period $_____
(Add Lines 2 through 8)
10. Total Eligible Accounts for the Current Period $_____
(Line 1 - Line 9)
11. Multiplied by: Borrowing Base Factor 70%
12. Equals: BORROWING BASE as of the end of the Current Period $_____
13. Less: Aggregate principal amount outstanding under the Note as
of the end of the Current Period: $_____
14. Equals: amount available for borrowing subject to the terms of
the Agreement, if positive; or amount due, if negative: $_____
Maximum Amount of Note = the lesser of the Maximum Loan Total or the Borrowing Base.
</TABLE>
The term "Accounts" will have the meaning as set forth in the Texas Business and
Commerce Code in effect as of the date of the Note. "Other Ineligible Accounts"
will mean all such Accounts of Borrower that are not subject to a first and
prior Lien in favor of Bank, all Accounts that are subject to any Lien not in
favor of Bank and those Accounts of Borrower as will be deemed from time to
time to be, in the sole judgment of the Bank, ineligible for purposes of
determining the Borrowing Base. All other terms not defined herein will have
the respective meanings as in the Note.
Borrower certifies that the above information and computations are true,
correct, complete and not misleading as of the date hereof.
<TABLE>
<CAPTION>
====================================================================================================================================
C. REPORTING Financial Reporting. Borrower will provide the following financial Compliance
information within the times indicated: Certificate
====================================================================================================================================
<S> <C> <C> <C>
WHO WHEN DUE WHAT Compliance
(Circle)
Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWER (i) Within 90 days of fiscal year end Financial Statements (balance sheet, Yes No
income statement, cash flow statement)
Audited (with unqualified opinion) by
independent certified public accountants
satisfactory to Bank, accompanied by
this Exhibit.
- ------------------------------------------------------------------------------------------------------------------------------------
(ii) Within 45 days of each Reporting Unaudited Financial Statements Yes No
Period End Date, (including) final accompanied by this Exhibit
period of fiscal year
- ------------------------------------------------------------------------------------------------------------------------------------
(iii) Within 30 days of each month end This Exhibit A, along with accounts Yes No
receivable aging summary (with full
listing supplied upon request of Bank.)
====================================================================================================================================
</TABLE>
EXHIBIT A Page 1 of 2 Pages
<PAGE> 7
<TABLE>
====================================================================================================================================
<S> <C>
D. FINANCIAL COVENANTS. Borrower will comply with COMPLIANCE CERTIFICATE
the following financial covenants, defined in accordance
with GAAP (including any prior period adjustments resulting
from audits) and the definitions in Section 8, and incorporating
the calculation adjustments indicated on the Compliance Certificate:
====================================================================================================================================
REQUIRED ACTUAL REPORTED Compliance
For Current Reporting Period/as of the End Date (Circle)
Except as specified otherwise, each covenant will be maintained Yes No
at all times and reported for each Reporting Period or as of
each Reporting Period End Date, as appropriate:
- ------------------------------------------------------------------------------------------------------------------------------------
1. Maintain a Tangible Net Worth as adjusted of at least Stockholders' Equity $___________ Yes No
$10,000,000.00 Minus: Goodwill $___________
------- Other Intangible Assets $___________
Loans/Advances to
------- Equity holders $___________
Loans to Affiliates $___________
= Tangible Net Worth as adjusted $___________
- ------------------------------------------------------------------------------------------------------------------------------------
2. Maintain a Current Ratio of at least 1.5 to 1.0. $__________/$__________ $___________ Yes No
(Current Assets shall include Loans under this Note) Current Assets Current Liabilities Current Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
3. Maintain a ratio of total indebtedness as adjusted to Tangible Liabilities (GAAP) $___________ Yes No
Net Worth as adjusted no greater than 1.0 to 1.0. Plus: Contingent obligations $___________
Liens Borrower's Property
not included in Borrower's
liabilities $___________
Minus: Subordinated Debt $___________
Equals: Indebtedness as adjusted $___________
Stockholders' Equity $___________
Minus: Goodwill $___________
Other Intangible Assets $___________
Loans/Advances to
Equity holders $___________
Loans to Affiliates $___________
= Tangible Net Worth as adjusted $___________
[Insert Indebtedness as adjusted and Tangible Net
Worth as adjusted]
$___________ /$___________ = __________
Indebtedness TNW Ratio
(adjusted) (adjusted)
====================================================================================================================================
E. Other Required Covenants to be Maintained and to be certified. COMPLIANCE CERTIFICATE
====================================================================================================================================
REQUIRED ACTUAL REPORTED Compliance
(Circle)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures may not exceed $3,500,000.00 in the aggregate Yes No
for the fiscal year.
====================================================================================================================================
</TABLE>
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN
THE NOTE AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND CONDITIONS OF
THE NOTE. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT A AND THE NOTE, THE NOTE
SHALL CONTROL.
The undersigned hereby certifies that the above information and computations are
true and correct and not misleading as of the date hereof, and that since the
date of the Borrower's most recent Compliance Certificate (if any):
[ ] No default or Event of Default has occurred under the Note during the
current Reporting Period, or been discovered from a prior period, and not
reported.
[ ] A default or Event of Default (as described below) has occurred during the
current Reporting Period or has been discovered from a prior period and is
being reported for the first time and:
[ ] was cured on ________________________.
[ ] was waived by Bank in writing on ________________.
[ ] is continuing.
Description of Event of Default:
-----------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Executed this day of , 19 .
------- ---------- ---
BORROWER: PARANET, INC.
SIGNATURE: /s/ MICHAEL H. HOLTHOUSE
----------------------------------------------------------------------
NAME: MICHAEL H. HOLTHOUSE
----------------------------------------------------------------------
TITLE: PRESIDENT
----------------------------------------------------------------------
ADDRESS: 1776 YORKTOWN #300
----------------------------------------------------------------------
HOUSTON, TX 77056
----------------------------------------------------------------------
----------------------------------------------------------------------
Exhibit A Page 2 of 2 Pages
<PAGE> 8
EXHIBIT B
NOTICE OF REQUESTED BORROWING
LETTERHEAD OF BORROWER
Texas Commerce Bank National Association
712 Main Street
P.O. Box 2558
Houston, TX 77252-2558
Attention: W. Miles Marks
Gentlemen:
This letter confirms our oral or telephonic request of ________, 19__,
for a Loan in accordance with that Revolving Promissory Note With Borrowing
Base and Agreement dated December 31, 1996 (including any renewal, extension or
modification, the "Note"), executed by the undersigned and delivered to you,
Texas Commerce Bank National Association ("Bank"). Any term defined in the
Note and used in this letter has the same meaning as in the Note.
The proposed Loan is to be in the amount of $_______ and is to be made
on _______, 19__ and will be a [ ] Prime Rate Loan [ ] LIBOR Loan with an
Interest Period of 1 2 3 6 months, which is a Business Day at least ___
Business Days after the date of this letter. The proceeds of the proposed Loan
should be (check one:) [ ] deposited into account number ___________ with the
Bank; or [ ] __________________________________________________________________
________________________________________.
The undersigned hereby certifies that:
(1) The representations and warranties made by the Borrower in the
Note and the other Loan Documents are true and correct on and as
of this date.
(2) The proposed Loan complies with all applicable provisions of the
Note.
(3) No Event of Default has occurred and is continuing.
Very truly yours,
PARANET, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
REQUEST FOR LOAN EXHIBIT B Page 1 of 1
<PAGE> 9
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
SECURITY AGREEMENT - ACCOUNTS AND GENERAL INTANGIBLES ("this Agreement")
PARANET, INC.
1776 YORKTOWN, SUITE 300 HOUSTON HARRIS COUNTY TX 77056-0000
hereinafter called "Debtor," and TEXAS COMMERCE BANK NATIONAL ASSOCIATION
712 MAIN P. O. BOX 2558
HOUSTON, HARRIS COUNTY, TEXAS 77252-2558
hereinafter called "Secured Party," agree as follows:
SECTION I. CREATION OF SECURITY INTEREST
In order to secure the prompt and unconditional payment of the
Indebtedness herein referred to and the performance of the obligation,
covenants, agreements and undertakings of Debtor herein described, Debtor hereby
grants to Secured Party a security interest in and assigns to Secured Party: (a)
all accounts, receivables, accounts receivable, general intangibles, book debts,
contract rights (including, without limitation, those listed on any schedule or
schedules from time to time attached hereto), instruments and documents
(including, without limitation, all documents of title); (b) all chattel paper,
notes, drafts, acceptances, other evidences and forms of payment under leases of
equipment or contracts for the sale of inventory or the performance of services,
and other forms of obligations received by or belonging to Debtor for goods sold
or leased and/or services rendered by Debtor; (c) all of Debtor's rights in, to
and under all purchase orders, sales contracts, instruments and other documents
evidencing obligations for or representing payment for goods sold or leased
and/or services rendered by Debtor; and (d) all monies due or to become due to
Debtor under all contracts for the sale or lease of goods and/or the performance
of services by Debtor; in each case of whatever nature, now owned by Debtor or
existing or hereafter acquired, created or arising (hereinafter sometimes
collectively called "the Accounts," or singly "the Account") and the rights and
interests of Debtor in goods, the sale and delivery of which give rise to any
such Account (hereinafter collectively called "the Collateral") and all proceeds
of the Collateral (including but not limited to all insurance and claims for
insurance in respect of the Collateral) to the extent such grant does not
conflict with or cause a default under any such agreement or rights. Anything
to the contrary foregoing notwithstanding, if and only if this box [N/A] is
checked by the Secured Party, the Collateral shall be solely types of property
described in (a), (b), (c), and (d) above, insofar and insofar only as the same
relates to the accounts described on the schedule or schedules attached hereto,
together with all proceeds thereof. The inclusion of proceeds does not
authorize Debtor to sell, dispose of or otherwise use the Collateral in any
manner not authorized herein.
SECTION II. SECURED INDEBTEDNESS
This Agreement is made to secure and enforce the payment and
performance of all debts, obligations and liabilities of every kind and
character of Debtor now or hereafter existing in favor of Secured Party under
the Note whether such debts, obligations or liabilities be direct or indirect,
primary or secondary, joint or several, fixed or contingent, and whether
originally payable to Secured Party or to a third party and subsequently
acquired by Secured Party and whether such debts, obligations or liabilities
are evidenced by note, open account, overdraft, application for letter of
credit, endorsement, surety agreement, guaranty or otherwise, it being
contemplated that Debtor may hereafter become indebted to Secured Party in
further sum or sums, and all modifications, renewals or extensions of or
substitutions for, any of the foregoing. All such indebtedness is hereinafter
sometimes called "the secured indebtedness" or "the indebtedness secured
hereby."
SECTION III. DEBTOR'S REPRESENTATIONS AND WARRANTIES
Debtor represents, warrants and covenants that Debtor's location is the
address stated at the beginning of this Agreement; that Debtor is now in a
solvent condition; that no bankruptcy or insolvency proceedings are pending or
contemplated by or against Debtor; that all information, reports, statements
and other data furnished by Debtor to Secured Party prior to, contemporaneously
with or subsequent to the execution of this Agreement or in connection with the
indebtedness secured hereby are and shall be true, correct and complete and do
not and will not omit to state any fact or circumstance necessary to make the
statements contained therein not misleading; that Debtor is the lawful owner
of good and marketable title to the Collateral and has good right and authority
to grant a security interest in the Collateral; that the Collateral is free and
clear from all security interests and encumbrances except the security interest
evidenced hereby; that there is no financing statement covering the Collateral
or its proceeds on file in any public office; that this Agreement constitutes
the legal, valid and binding obligation of Debtor enforceable against Debtor in
accordance with its terms; that the execution, delivery and performance of
this Agreement do not and will not contravene or violate any provision of any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award presently in effect and applicable to Debtor or result in a breach of
or constitute a default (with or without the giving of notice or the lapse of
time or both) under any indenture or any loan, credit or other agreement to
which Debtor is a party or by which Debtor may be bound or affected; that the
execution, delivery and performance of this Agreement do not require the consent
or approval of any person, including, without limitation, any regulatory body
or governmental authority; that Debtor will warrant and forever defend the
title to the Collateral and its proceeds against the claims and demands of all
persons whomsoever claiming or to claim the same or any part thereof; and that
Debtor has never changed its name.
If and only if this box [X] is checked, in addition, the Debtor
represents, warrants and covenants that to the extent included in the Borrowing
Base the Collateral will meet the following requirements continuously from the
time each part of the Collateral comes into existence until it is collected in
full: (a) the Account shall be due and payable not more than 60 days from the
date of the invoice or agreement evidencing same; (b) the Account arose from
the performance of services by Debtor which have been fully and satisfactorily
performed or from the absolute sale of goods by Debtor in which Debtor had the
sole and complete ownership, and the goods have been shipped or delivered to
the Account Debtor, evidencing which Debtor or Secured Party has possession of
shipping and delivery receipts; (c) the Account is not subject to setoff,
counterclaim, defense, allowance or adjustment other than discounts for prompt
payment shown on the invoice or to dispute, objection or complaint by the
Account Debtor concerning his liability on the Account, and the goods, the sale
of which gives rise to the Account, have not been returned, rejected, lost or
damaged; (d) the Account arose in the ordinary course of Debtor's business, and
no notice of bankruptcy, insolvency or financial embarrassment of Account Debtor
has been received by Debtor; (e) in the event any goods, the sale or other
disposition of which creates any Account which is included in the Collateral,
are returned to Debtor for credit if out of compliance with Borrowing Base,
Debtor will promptly pay to Secured Party the full amount of the invoice price
of such goods, and until such payment has been made, will hold such goods
separate and apart from Debtor's own property in trust for Secured Party and
will immediately notify Secured Party of such return; (f) Debtor hereby grants
unto Secured Party a security interest in such goods; (g) Debtor shall
not submit or represent to Secured Party any Account as one against which loans
may be made which does not meet every requirement in every respect prescribed
by this Agreement; and (h) Debtor shall notify Secured Party promptly in
writing when any Account against which a loan was or may be made under this
Agreement ceases to meet any of the requirements of this Agreement. Nothing in
this paragraph shall be construed to limit or release any right of Secured
Party to any Collateral arising pursuant to Section I of this Agreement.
SECTION IV. COVENANTS
4.1 Debtor covenants and agrees with Secured Party as follows:
(a) Debtor shall make prompt payment, as the same becomes due,
of all indebtedness secured hereby in accordance with the terms and
provisions of the agreements evidencing such indebtedness.
(b) If Debtor is a corporation, Debtor will continuously
maintain Debtor's corporate existence.
(c) Debtor shall, as the agent of Secured Party, receive all cash,
checks, notes, drafts and other instruments representing the proceeds
of the Accounts. Debtor shall at Debtor's own expense take all
reasonable and appropriate steps when necessary to enforce the
collection of the Accounts and items representing proceeds thereof.
(d) Debtor shall from time to time at the request of Secured Party
furnish Secured Party with a schedule of each Account constituting the
Collateral and a list of all those liable on checks, notes, drafts and
other instruments representing the proceeds of the Accounts. Secured
Party shall have the right to make test verifications of the
Collateral.
(e) Debtor shall at all times keep accurate books and records
reflecting all facts concerning each Account including those pertaining
to Debtor's warranties, representations and agreements under this
Agreement. Debtor will allow Secured Party or its authorized
representative to inspect said books and records and Debtor will assist
Secured Party or said representative in whatever way necessary to make
such inspection. Immediately upon the execution of this Agreement,
Debtor will make or allow Secured Party to make written designation on
Debtor's books and records to reflect thereon the assignment to Secured
Party of each Account covered by this Agreement.
(f) If any part of the Collateral to the extent included in the
Borrowing Base is or becomes subject to the Federal Assignment of Claims
Act, Debtor will execute all instruments and take all steps required by
Secured Party to comply with that act.
(g) Debtor will not agree to a material modification of any of the
terms of any Account without the written consent of Secured Party.
(h) If any part of the Collateral is evidenced by promissory notes,
trade acceptances or other instruments for the payment of money, Debtor
will, at the request of Secured Party, immediately deliver them to
Secured Party, appropriately endorsed to Secured Party's order, and
regardless of the form of endorsement, Debtor waives presentment,
demand, notice of dishonor, protest and notice of protest.
Page 1 of 4
<PAGE> 10
observe or perform any term, covenant or agreement contained in any
agreement or obligation by which Debtor is bound for such a period of
time as would accelerate, or would permit the holder thereof, or of any
obligation issued thereunder, to accelerate, the maturity thereof, or of
any such obligation; or
(e) loss, theft, substantial damage, destruction, abandonment, sale or
encumbrance of or to any of the Collateral, or the making of any levy,
seizure or attachment thereof or thereon; or
(f) Debtor's death, dissolution, termination of existence, insolvency
or business failure; the failure of Debtor or of any guarantor or surety
for Debtor generally to pay its debts as they come due; the appointment
of a receiver, trustee, custodian or liquidator of all or any part of
the property of Debtor; an assignment for the benefit of creditors of
Debtor; the calling of a meeting of creditors of Debtor; or the
commencement of any proceeding under any bankruptcy, insolvency or
reorganization laws by or against Debtor or any guarantor or surety for
Debtor; or
(g) any statement of the financial condition of Debtor or of any
guarantor, comaker, surety or endorser of any liability of Debtor
submitted to Secured Party by Debtor or any such guarantor, comaker,
surety or endorser shall prove to be false or misleading in any respect;
or
(h) any guarantor, comaker, surety or endorser for Debtor defaults in
any obligation or liability; or
(i) any material adverse change shall occur in the assets, liabilities,
financial condition, business operations, affairs or circumstances of
Debtor.
SECTION VI. REMEDIES IN EVENT OF DEFAULT.
6.1 Upon the occurrence of an Event of Default, or if Secured Party shall
deem payment of Debtor's obligations to be insecure, and at any time
thereafter, Secured Party shall have the option of declaring, without
notice to any person, including, but not limited to, notice of intention
to accelerate and notice of acceleration, all of which are WAIVED, all
indebtedness secured hereby, principal and accrued interest, to be
immediately due and payable.
6.2 Upon the occurrence of an Event of Default, or if Secured Party shall
deem payment of Debtor's obligations to be insecure, and at any time
thereafter, Secured Party is authorized peaceably to take possession of
the Collateral and of all books, records and accounts relating thereto,
and to exercise without interference from Debtor any and all rights
which Debtor has with respect to the management, possession, protection
or preservation of the Collateral, including the right to sell the same
for the account of Debtor and to deduct from such sales proceeds all
costs, expenses and liabilities of every character incurred by Secured
Party in collecting such sales proceeds and in managing, selling,
maintaining, protecting or preserving the Collateral, and to apply the
remainder of such rents on the indebtedness secured hereby in such
manner as Secured Party may elect. All such costs, expenses and
liabilities incurred by Secured Party in collecting such sales proceeds
or in managing, maintaining, protecting or preserving such properties,
if not paid out of such sales proceeds as hereinabove provided, shall
constitute a demand obligation owing by Debtor and shall bear interest
from the date of expenditure until paid at the Past Due Rate, all of
which shall constitute a portion of the secured indebtedness. If
necessary to obtain the possession provided for above, Secured Party may
invoke any and all legal remedies to dispossess Debtor, including
specifically one or more actions for forcible entry and detainer. In
connection with any action taken by Secured Party
Page 2 of 4
<PAGE> 11
pursuant to this paragraph 6.2, Secured Party shall not be liable for any
loss sustained by Debtor resulting from any failure to sell the
Collateral, or any part thereof, or from other act or omission of Secured
Party in managing the Collateral unless such loss is caused by the willful
misconduct and bad faith of Secured Party, nor shall Secured Party be
obligated to perform or discharge any obligation, duty or liability under
any sale agreement covering the Collateral or any part thereof, or under
or by reason of this instrument or exercise of rights or remedies
hereunder.
6.3 Upon the occurrence of an Event of Default, or if Secured Party shall
deem payment of Debtor's obligations to be insecure, and at any time
thereafter, Secured Party shall have all the rights of a secured party
after default under the Uniform Commercial Code of Texas and in
conjunction with, in addition to or in substitution for those rights
and remedies provided for herein:
(a) Secured Party may require Debtor to make the Collateral available at
a place which is mutually convenient to allow Secured Party to take
possession of the Collateral; and
(b) Secured Party may notify or require each Account Debtor or other
obligor obligated on the Collateral or part of it to make payment
directly to Secured Party and Secured Party may take control of the
proceeds paid to Secured Party. Until Secured Party elects to exercise
these rights, Debtor is authorized as agent of Secured Party to collect
and enforce the Collateral. The cost of collection and enforcement,
including attorneys' fees and expenses, shall be borne solely by Debtor
whether incurred by Secured Party or Debtor; and
(c) Secured Party may require that Debtor will, upon receipt of checks,
drafts, cash and other remittances in payment or on account of the
Accounts, deposit all of them in a special bank account over which
Secured Party alone has power of withdrawal. The funds in the account
shall be held by Secured Party as security for all loans made under this
Agreement and all other indebtedness of Debtor to Secured Party secured
by this Agreement. The proceeds shall be deposited in precisely the form
received, except for the endorsement of Debtor where necessary to permit
collection of items. Debtor agrees to make the endorsement and
authorizes Secured Party to make it on Debtor's behalf. Pending
deposits, Debtor agrees that it will not commingle the checks, drafts,
cash and other remittances with Debtor's funds or property, but will hold
them separate and apart and upon an express trust for Secured Party until
deposit in the special account. Secured Party may apply or set off the
deposits against any liability of Debtor to Secured Party; and
(d) Written notice mailed to Debtor as provided herein ten (10) days
prior to the date of public sale of the Collateral or prior to the date
after which private sale of the Collateral will be made shall
constitute reasonable notice; and
(e) It shall not be necessary that the Collateral or any part thereof
be present at the location of such sale; and
(f) Prior to application of proceeds of disposition of the Collateral to
the secured indebtedness, such proceeds shall be applied to the
reasonable expenses of retaking, holding, preparing for sale, selling and
the like and the attorneys' fees and legal expenses incurred by Secured
Party, Debtor to remain liable for any deficiency; and
(g) The sale by Secured Party of less than the whole of the Collateral
shall not exhaust the rights of Secured Party hereunder, and Secured
Party is specifically empowered to make successive sale or sales
hereunder until the whole of the Collateral shall be sold; and, if the
proceeds of such sale of less than the whole of the Collateral shall be
less than the aggregate of the indebtedness secured hereby, this
Agreement and the security interest created hereby shall remain in full
force and effect as to the unsold portion of the Collateral just as
though no sale had been made; and
(h) In the event any sale hereunder is not completed or is defective in
the opinion of Secured Party, such sale shall not exhaust the rights of
Secured Party hereunder and Secured Party shall have the right to cause a
subsequent sale or sales to made hereunder; and
(i) Any and all statements of fact or other recitals made in any bill of
sale or assignment or other instrument evidencing any foreclosure sale
hereunder as to nonpayment of the indebtedness, or as to the occurrence
of any default, or as to Secured Party's having declared all of such
indebtedness to be due and payable, or as to notice of time, place and
terms of sale and the properties to be sold having been duly given, or as
to any other act or thing having been duly done by Secured Party, shall
be taken as prima facie evidence of the truth of the facts so
stated and recited; and
(j) Secured Party may appoint or delegate any one or more persons as
agent to perform any act or acts necessary or incident to any sale held by
Secured Party, including the sending of notices and the conduct of
sale, but in the name and on behalf of Secured Party.
6.4 All remedies herein expressly provided for are cumulative of any and
all other remedies existing at law or in equity and are cumulative of any
and all other remedies provided for in any other instrument securing the
payment of the secured indebtedness, or any part thereof, or otherwise
benefiting Secured Party, and the resort to any remedy provided for
hereunder or under any such other instrument or provided for by law shall
not prevent the concurrent or subsequent employment of any other
appropriate remedy or remedies.
6.5 Secured Party may resort to any security given by this Agreement or to
any other security now existing or hereafter given to secure the payment
of the secured indebtedness, in whole or in part, and in such portions
and in such order as may seem best to Secured Party in its sole and
uncontrolled discretion, and any such action shall not in anywise be
considered as a waiver of any of the rights, benefits or security
interests evidenced by this Agreement.
6.6 To the full extent Debtor may do so, Debtor agrees that Debtor will not
any time insist upon, plead, claim or take the benefit or advantage
of any law now or hereafter in force providing for any appraisement,
valuation, stay, extension or redemption, and Debtor, for Debtor,
Debtor's heirs, devisees, representatives, receivers, trustees,
successors and assigns, and for any and all persons ever claiming any
interest in the Collateral, to the extent permitted by law, hereby WAIVES
and RELEASES all rights of redemption, valuation, appraisement, stay of
execution, notice of intention to mature or declare due the whole of the
secured indebtedness, notice of election to mature or declare due the
whole of the secured indebtedness and all rights to a marshaling of the
assets of Debtor, including the Collateral, or to a sale in inverse order
of alienation in the event of foreclosure of the security interest
hereby created.
SECTION VII. ADDITIONAL AGREEMENTS.
7.1 If all of the secured indebtedness be paid as the same becomes due and
payable, and all obligations of Secured Party to advance money or extend
credit to Debtor have terminated, and if all of the covenants,
warranties, undertakings and agreements made in this Agreement are kept
and performed, then and in that event only, all rights under this
Agreement shall terminate and the Collateral shall become wholly clear of
the security interest evidenced hereby, and such security interest shall
be released by Secured Party in due form at Debtor's cost.
7.2. Secured Party may waive any default without waiving any other prior or
subsequent default. Secured Party may remedy any default without waiving
the default remedied. The failure by Secured Party to exercise any
right, power or remedy upon any default shall not be construed as a
waiver of such default or as a waiver of the right to exercise any such
right, power or remedy at a later date. No single or partial exercise by
Secured Party of any right, power or remedy hereunder shall exhaust the
same or shall preclude any other or further exercise thereof, and every
such right, power or remedy hereunder may be exercised at any time and
from time to time. No modification or waiver of any provision hereof nor
consent to any departure by Debtor therefrom shall in any event be
effective unless the same shall be in writing and signed by Secured Party
and then such waiver or consent shall be effective only in the specific
instances, for the purpose for which given and to the extent therein
specified. No notice to nor demand on Debtor in any case shall of itself
entitle Debtor to any other or further notice of demand in similar or
other circumstances. Acceptance by Secured Party of any payment in an
amount less than the amount then due on any secured indebtedness shall be
deemed an acceptance on account only and shall not in any way affect the
existence of a default hereunder.
7.3 Secured Party may at any time and from time to time in writing (a)
waive compliance by Debtor with any covenant herein made by Debtor to the
extent and in the manner specified in such writing; (b) consent to
Debtor's doing any act which hereunder Debtor is prohibited from doing,
or consent to Debtor's failing to do any act which hereunder Debtor is
required to do, to the extent and in the manner specified in such
writing; or (c) release any part of the Collateral, or any interest
therein, from the security interest of this Agreement; or (d) release any
party liable, either directly or indirectly, for the secured indebtedness
or for any covenant herein or in any other instrument now or hereafter
securing the payment of the secured indebtedness, without impairing or
releasing the liability of any other party. No such act shall in any way
impair the rights of Secured Party hereunder except to the extent
specifically agreed by Secured Party in such writing.
7.4. The security interest and other rights of Secured Party hereunder shall
not be impaired by any indulgence, moratorium or release granted by
Secured Party, including but not limited to (a) any renewal, extension or
modification which Secured Party may grant with respect to any secured
indebtedness; (b) any surrender, compromise, release, renewal, extension,
exchange or substitution which Secured Party may grant in respect of any
item of the collateral or any part thereof or any interest therein; or
(c) any release or indulgence granted to any endorser, guarantor, comaker
or surety of any secured indebtedness.
7.5. Secured Party may call at Debtor's place or places of business at
intervals to be determined by Secured Party and, without hindrance or
delay, inspect, audit, check and make extracts from and copies of the
books, records, journals, orders, receipts, correspondence and other data
relating to the Collateral or to any transaction between Debtor and
Secured Party, and Debtor shall assist Secured Party in making any such
inspection.
7.6. Secured Party may subrogate to all of Debtor's interests, rights and
remedies in respect to any Account.
7.7. Secured Party may render and send to Debtor a statement of account
showing loans made, all other charges, expenses and items chargeable to
Debtor, payment made by Debtor against the loans, proceeds collected and
applied to the loans, other appropriate debits and credits, and the total
of Debtor's indebtedness on the loans as of the date of the statement of
account, and the statement of account shall be considered correct in all
respects and accepted by and conclusively binding upon Debtor, except for
specified objections which Debtor makes in writing within five days from
the date upon which the statement of account is sent.
7.8 A carbon, photographic or other reproduction of this Agreement or of
any financing statement relating to this Agreement shall be sufficient as
a financing statement.
7.9 Debtor will cause all financing statements and continuation statements
relating hereto to be recorded, filed, re-recorded and refiled in such
manner and in such places as Secured Party shall reasonably request, and
will pay all such recording, filing, re-recording and refiling taxes,
fees and other charges.
Page 3 of 4
<PAGE> 12
7.10 In the event the ownership of the Collateral or any part thereof becomes
vested in a person other than Debtor, Secured Party may, without notice to
Debtor, deal with such successor or successors in interest with reference
to this Agreement and to the indebtedness secured hereby in the same
manner as with Debtor, without in any way vitiating or discharging
Debtor's liability hereunder or on the indebtedness secured herby. No sale
of the Collateral, and no forbearance on the part of Secured Party and no
extension of the time for the payment of the indebtedness secured hereby
given by Secured Party shall operate to release, discharge, modify, change
or affect, in whole or in part, the liability of Debtor hereunder or for
the payment of the indebtedness secured hereby or the liability of any
other person hereunder or for the payment of the indebtedness secured
hereby, except as agreed in writing by Secured Party.
7.11 To the extent that proceeds of the secured indebtedness are used to pay
indebtedness secured by any outstanding lien, security Interest, charge or
prior encumbrance against the Collateral, such proceeds have been advanced
by Secured Party at Debtor's request and Secured Party shall be
subrogated to any and all rights, security interests and liens owned by
any owner or holder of such outstanding liens, security interests, charges
or encumbrances, irrespective of whether said liens, security interests,
charges or encumbrances are released.
7.12 If any part of the secured indebtedness cannot be lawfully secured by this
Agreement, or if any part of the Collateral cannot be lawfully subject to
the security Interest hereof to the full extent of such indebtedness, then
all payments made shall be applied on said indebtedness first in discharge
of that portion thereof which is not secured by this Agreement.
7.13 Secured Party may assign this Agreement so that the assignee shall be
entitled to the rights and remedies of Secured Party hereunder and in the
event of such assignment, Debtor will assert no claims or defenses it may
have against the assignee except those granted in this Agreement.
7.14 Any notice, request, demand or other communication required or permitted
hereunder, or under any note, guaranty, loan or agreement or other
instrument securing the payment of the secured indebtedness (unless
otherwise expressly provided herein), shall be given in writing by
delivering same in person to the intended addressee, or by United States
Postal Service, postage prepaid, registered or certified mail, return
receipt requested, or by prepaid telegram (provided that such telegram is
confirmed by mail in the manner previously described), sent to the
intended addressee at the address shown herein, or to such different
address as the addressee shall have designated by written notice sent in
accordance herewith and actually received by the other party at least ten
(10) days in advance of the date upon which such change of address shall
be effective.
7.15 After the occurrence and during the continuation of an Event of Default,
this Agreement shall be binding upon Debtor, and the heirs, devisees,
representatives, receivers, trustees, successors and assigns of Debtor,
including all successors in interest of Debtor in and to all or any part
of the Collateral, and shall inure to the benefit of Secured Party and the
successors and assigns of Secured Party. All references in this Agreement
to Debtor or Secured Party shall be deemed to include all such other
persons and entities.
7.16 Secured Party in its discretion may, whether or not any of the indebtedness
secured hereby be due, in its name or in the name of Debtor or otherwise,
demand, sue for, collect or receive any money or other property at any
time payable or receivable on account of or in exchange for, or make any
compromise settlement deemed desirable with respect to, any of the
Collateral, but Secured Party shall be under no obligation so to do.
7.17 Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law. A
determination that any provision of this Agreement is unenforceable or
invalid shall not affect the enforceability or validity of any other
provision, and any determination that the application of any provision of
this Agreement to any person or circumstance is illegal or unenforceable
shall not affect the enforceability or validity of such provision as it
may apply to any other persons or circumstances.
7.18 Secured Party may, by any employee or employees it designates, execute,
sign, endorse, transfer or deliver in the name of Debtor, notes,
checks,drafts or other instruments for the payment of money and receipts
or any other documents necessary to evidence, perfect and realize upon the
security interests and obligations of this Agreement.
7.19 Notwithstanding anything to the contrary contained herein, if any secured
indebtedness shall be indebtedness resulting from an extension of credit
to a consumer (as such terms are defined or described in 12 C.F.R. 227,
Regulation AA of the Federal Reserve Board) hereinafter referred to as
"consumer credit obligation," then the collateral securing any such
consumer credit obligation shall not extend to any nonpossessory security
interest in household goods which is not a purchase money security
interest (as defined in said Regulation AA), and no waiver of any notice
herein shall be construed under any circumstances to extend to any waiver
of notice which is prohibited by Regulation AA.
7.20 The term "Debtor" as used in this Agreement shall be construed as singular
or plural to correspond with the number of persons executing this
Agreement as Debtor. The pronouns used in this Agreement are in the neuter
gender but shall be construed as feminine or masculine as occasion may
require.
7.21 If more than one person executes this Agreement as Debtor, their
obligations under this Agreement shall be joint and several.
7.22 The section headings appearing in this Agreement have been inserted for
convenience only and shall be given no substantive meaning or significance
whatever in construing the terms and provisions of this Agreement. Unless
otherwise defined herein, terms used in this Agreement which are defined
in the Texas Uniform Commercial Code are used with the meanings as therein
defined.
7.23 This Agreement shall be governed by and construed in accordance with the
laws of the state of Texas and the United States of America.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
SIGNATURE(S) OF DEBTOR:
PARANET, INC. /s/ MICHAEL H. HOLTHOUSE DATE 1/31/97
- ------------------------------------------------------- -------------------
MICHAEL H. HOLTHOUSE PRESIDENT
DATE
- ------------------------------------------------------- -------------------
BY: TITLE:
DATE
- ------------------------------------------------------- -------------------
DATE
- ------------------------------------------------------- -------------------
DATE
- ------------------------------------------------------- -------------------
DATE
- ------------------------------------------------------- -------------------
SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
BY:
-----------------------------------------------------------------------------
TITLE:
--------------------------------------------------------------------------
Page 4 of 4
<PAGE> 1
PARANET,INC.
1991 NONQUALIFIED STOCK OPTION PLAN
Amended as of March 3, 1994
1. Purpose of the Plan. The purpose of the Paranet, Inc. 1991
Nonqualified Stock Option Plan ("Plan") is to provide an opportunity for
increased ownership of the common stock, $.01 par value ("Common Stock"), of
Paranet, Inc., a Texas corporation (the "Company"), by directors, officers and
employees of the Company and its subsidiaries (as defined in Section 425(f) of
the Internal Revenue Code of 1986, as amended) designated by the Board of
Directors of the Company ("Board").
2. Administration of the Plan. The Board shall designate
participants, award options and interpret the provisions and supervise the
administration of the Plan. All decisions and selections made by the Board
pursuant to the provisions of the Plan shall be made by a majority of its
members at a duly held regular or special meeting or by unanimous written
consent in lieu of any such meeting.
3. Stock Reserved for the Plan. The shares subject to the Plan
shall consist of 1,500,000 unissued shares of Common Stock or previously issued
shares reacquired and held by the Company, and such amount of shares shall be
and is hereby reserved for issuance pursuant to this Plan. Any of such shares
that may remain unsold and that are not subject to outstanding options at the
termination of the Plan shall cease to be reserved for the purpose of the Plan,
but until termination of the Plan the Company shall at all times reserve a
sufficient number of shares to meet the requirements of the Plan. Should any
option expire or be cancelled prior to its exercise in full, the shares
theretofore subject to such option may again be made subject to an option under
the Plan.
4. Grant of Options. The Board shall, from time to time,
determine and designate those persons who are to receive options under the
Plan, the number of shares to be covered by such options and the terms thereof.
The Board shall thereupon grant options in accordance with such determination
as evidenced by a written option agreement.
5. Terms and Conditions. Each option granted under the Plan shall
be evidenced by an agreement, in a form approved by the Board, which shall be
subject to (a) the following express terms and conditions and (b) such other
terms and conditions as the Board may deem appropriate:
(a) Option Period. Each option agreement shall specify
the period for which the option thereunder is granted (which in no
event shall exceed ten years from the date of grant) and shall provide
that the option shall expire at the end of such period.
(b) Option Price. The purchase price of each share of
Common Stock subject to each option granted pursuant to the Plan shall
be determined by the Board at the time the option is granted.
(c) Exercise Period. The Board may provide in the option
agreement that an option may be exercised in whole immediately or is
to be exercisable in increments.
(d) Procedure for Exercise. Options shall be exercised by
written notice to the Company setting forth the number of shares with
respect to which the option is to be exercised and specifying the
address to which the certificates for such shares are to be mailed.
Such notice shall be accompanied by (i) payment in full in the amount
of the option price for the number of shares of the Common Stock with
respect to which the option is then being exercised and (ii) payment
(or adequate provision for the payment) of an amount equal to the
Company's withholding obligation for taxes resulting from the exercise
of the option. The payment of the option price shall be in cash. As
promptly as practicable after receipt of such written notification and
payment, the Company shall deliver to the optionee certificates for
the number of shares with respect to which such option has been so
exercised, issued in the optionee's name; provided, however, that such
delivery shall be deemed effected for all purposes when a stock
transfer agent of the Company shall have deposited such certificates
in the United States mail, addressed to the optionee, at the address
specified pursuant to this paragraph 5(d).
(e) Effect of Termination. If an optionee's employment by
or association with the Company and its subsidiaries shall be
terminated for any reason whatsoever, whether by the Company or an
optionee and whether with or without cause, the optionee's right to
exercise any option granted under the Plan shall terminate on the
optionee's last day of his employment and all his rights under the
Plan shall cease; provided, that the Board may, in its sole discretion
and on a case by case basis, waive the foregoing provision, in which
case in the event of the employee's termination of employment for any
reason, the option may be exercised following such termination but
only with respect to the number of shares purchasable at the time of
such termination of employment.
(f) Assignability. An option shall not be assignable or
otherwise transferable and no transfer of an option by an optionee by
will or by the laws or descent and distribution shall be effective to
bind the Company.
(g) No Rights as Stockholder. No optionee shall have any
rights as a stockholder with respect to shares covered by an option
until the date of issuance of a stock certificate for such shares;
except as provided in paragraph 5(h), no adjustment for dividends, or
otherwise, shall be made if the record date therefor is prior to the
date of issuance of such certificate.
<PAGE> 2
(h) Adjustments.
(i) In the event the outstanding shares of the
Common Stock are hereinafter increased or decreased or changed
into or changed for a definite number or kind of shares or
other securities of the Company or of another corporation
(whether in a merger, consolidation or other reorganization,
recapitalization, reclassification, combination of shares,
stock split up, stock dividend, or other distribution payable
in capital stock), appropriate adjustment shall be made by the
Board in the number and kind of shares for the purpose of
which options may be granted under the Plan. In addition, the
Board shall make appropriate adjustment in the number and kind
of shares as to which outstanding options, or portions thereof
then unexercised, shall be exercisable, to the end that the
proportionate interest of the holder of the option shall, to
the extent practicable, be maintained as before the occurrence
of such event. Such adjustment in outstanding options shall be
made without change in the total price applicable to the
unexercised portion of the option but with a corresponding
adjustment in the option price per share.
(ii) In the event of the dissolution or
liquidation of the Company, any option shall terminate as of a
date to be fixed by the Board at or prior to the date of such
dissolution or liquidation, provided that not less than thirty
days' written notice of the date so fixed shall be given to
each optionee, and each such optionee shall have the right
during such period to exercise his options as to all or part
of the shares covered thereby including shares as to which
such option would otherwise not be exercisable because of an
insufficient lapse of time.
(iii) In the event of a reorganization (as herein
defined) in which the Company is not the surviving or
acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective
date of the reorganization, then any option shall terminate as
of a date to be fixed by the Board at or prior to the
effective date of such reorganization, provided that not less
than thirty days' written notice of the date so fixed shall be
given to each optionee and each such optionee shall have the
right during such period to exercise his options as to all or
part of the shares covered thereby, including shares as to
which such option would otherwise not be exercisable because
of an insufficient lapse of time. The term "reorganization" as
used in this paragraph shall mean any statutory merger,
statutory consolidation, sale of all or substantially all of
the assets of the Company, or transaction, pursuant to an
agreement with the Company, pursuant to which the Company is
or becomes a wholly-owned subsidiary of another company after
the effective date of the reorganization.
(iv) Adjustments and determinations under this
paragraph (h) shall be made by the Board whose decisions as to
what adjustments or determinations shall be made, and the
extent thereof, shall be final, binding and conclusive.
(i) Investment Representation. Each option agreement
shall contain an agreement that the optionee shall deliver to the
Company at the time of any exercise of an option such written
representations, warranties and agreements as the Company may
reasonably request in order to comply with applicable securities laws
or with this Agreement. The delivery of such representations,
warranties and agreements prior to the expiration of the option period
shall be a condition precedent to the right of the optionee or such
other person to purchase any shares.
6. Changes in Company's Capital Structure. The existence of
outstanding options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issuance of bonds, debentures, preferred or prior preference stock ahead of
or affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sales or transfer of all or any part of its
assets or business, or any reorganization or other corporate act or proceeding,
whether of a similar character or otherwise.
7. Compliance with Other Laws and Regulations. The Plan, the
grant and exercise of options thereunder, and the obligation of the Company to
sell and deliver shares under such options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
governmental or regulatory agency or national securities exchange as may be
required. The Company shall not be required to issue or deliver any
certificates for shares of Common Stock prior to the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body or national securities exchange
which the Company shall, in its sole discretion, determine to be necessary or
advisable.
8. Effectiveness of the Plan. The Plan shall become effective
upon adoption by the Board.
9. Termination and Amendment of the Plan. The Plan shall
terminate when all of the Company's obligations with respect to all of the
outstanding Options have been discharged; provided, however, that no Option
shall be issued after the tenth anniversary of the Board of Directors' adoption
of the Plan, and no options shall be granted under the Plan after that date.
The Plan (including any form of option agreement entered into by the Company
and an optionee pursuant thereto) may at any time or from time to time be
terminated, modified or amended by the stockholders of the Company, by the
affirmative vote of a majority in interest of the shares of Common Stock
present and voting at a meeting. The Board may at any time and from time to
time, without the approval of the stockholders, terminate, modify or amend the
Plan (including any form of option agreement) in any respect which it shall be
deemed advisable. The termination or any modification or amendment of the Plan
shall not, without the consent of any optionee, affect his rights under an
option granted to him.
<PAGE> 3
PARANET, INC.
NOTICE PURSUANT TO THE
1991 NONQUALIFIED STOCK OPTION PLAN
1. You are the holder of nonqualified stock options granted to
you by Paranet, Inc. ("Paranet") under its 1991 Nonqualified Stock Option
Plan (the "Plan").
2. Under the Plan and under section 2(e) of your Nonqualified
Stock Option Agreement (the "Agreement"), the option cannot be exercised prior
to the registration of Paranet Common Stock with the appropriate securities
regulators and the listing of the stock on a securities exchange. Under the
terms of the Agreement, if these conditions are not met prior to the expiration
of the option, you would never be able to exercise the option.
3. You are hereby notified that the Board of Directors of Paranet
(the "Board") has decided that no options should expire unexercised solely due
to those restrictions. Therefore, the Board has committed that, by the 8th
anniversary of the date of your Agreement, Paranet will either (i) complete the
registrations and listings that are necessary in order to issue legally the
shares of Common Stock to you or (ii) determine that such registrations and
listings are not necessary.
4. You do not need to take any action at this time. Paranet will
notify you when the registrations and listings have been completed or found to
be unnecessary.
5. Please retain this Notice with your Option Agreement.
<PAGE> 4
PARANET, INC.
Unanimous Written Consent of the Board of Directors
The undersigned, being all of the members of the Board of Directors of
Paranet, Inc., a Texas corporation (the "Company"), waiving all notice, hereby
consent pursuant to the provisions of Article 9.10B of the Texas Business
Corporation Act, to the adoption of the resolutions attached hereto as Exhibit
A without the holding of a meeting, such resolutions to be of full force and
effect as of the date hereof as if adopted at a duly called and held meeting of
the Board of Directors of the Company.
IN WITNESS WHEREOF, the undersigned have executed this written consent
effective as of April 12, 1996.
/s/ MICHAEL H. HOLTHOUSE
---------------------------
Michael H. Holthouse
/s/ STEVEN T. OUGH
---------------------------
Steven T. Ough
<PAGE> 5
Exhibit A
Resolutions of the Board of Directors
WHEREAS, the Board of Directors of the Company approved and adopted
the Paranet, Inc. 1991 Nonqualified Stock Option Plan (the "Plan") on January
11, 1991 (the "Effective Date"); and
WHEREAS, on the Effective Date it was, and at all times since then it
has been, the intention of the Company that each option (an "Option") for the
purchase of shares of the Company's common stock granted pursuant to the Plan
first become exercisable (subject to the satisfaction of the vesting conditions
of the Option) as of the earlier of (a) the closing of a public offering of the
Common Stock (subject to certain exceptions) or (b) the eighth anniversary of
the date of grant of such Option; and
WHEREAS, it has been drawn to the Company's attention that,
notwithstanding such intention and due to an apparent drafting error, the
Nonqualified Stock Option Agreements entered into between the Company and the
holders of the Options in connection with the issuance of Options
(collectively, the "Agreements") omit to state that the Options will in any
event be exercisable on the eighth anniversary of their date of grant (subject
to the vesting conditions); and
WHEREAS, the Company wishes to take such action as may be necessary or
desirable to evidence and effect the original intention of the Company that,
notwithstanding the aforementioned drafting error in the Agreements, each
Option shall in any event become exercisable on the eighth anniversary of the
date of grant thereof (subject to the vesting conditions); and
WHEREAS, such corrective action is not adverse to the interests of any
holder of Options and is consistent with the representations regarding the Plan
that have been made by the Company to such holders;
NOW, THEREFORE, BE IT RESOLVED, that, in accordance with the intent
the Company has had since the Effective Date, each Option granted under the
Plan, whether granted before or after the date hereof, shall become exercisable
on the eighth anniversary of the date of grant thereof (subject to the vesting
conditions), such event of exercisability to be in addition to the events of
exercisability currently set forth in the Plan and the Agreements; and further
RESOLVED, that the officers of the Company be and each of them hereby
is authorized and empowered, for and on behalf of the Company, to take any
action such officer may deem necessary, advisable or appropriate to evidence
and effect the correction of the drafting error that led to the omission of
such event of exercisability from the Plan and the Agreements, which action
shall include but not be limited to providing notice thereof to the holders of
Options.
<PAGE> 6
PARANET, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement is between Paranet, Inc., a Texas
Corporation (the "Company") and ("Optionee").
WITNESSETH:
WHEREAS, the Company has adopted the Paranet, Inc. 1991 Nonqualified
Stock Option Plan, (the "Plan") which Plan is incorporated herein by reference
and made a part of this Agreement;
WHEREAS, the Company has determined that it would be in the best
interests of the Company, and its stockholders to grant the option provided for
herein ("Option") to Optionee pursuant to the Plan and the terms set forth
herein as an inducement to remain in the service of the Company and as an
incentive for increased efforts during such service;
NOW, THEREFORE, for and in consideration of these premises it is agreed
as follows:
1. Option. Subject to the terms and conditions herein and in the
Plan, the Company hereby grants to Optionee an option to purchase from the
Company shares of the Company's common stock, $.01 par value ("Common
Stock"), at a price of per share.
2. Exercise of Option.
(a) Providing the conditions of this paragraph 2 have been
satisfied, Optionee may exercise this Option to purchase shares of Common Stock
during the periods and in the amounts set forth below:
<TABLE>
<CAPTION>
<S> <C>
No. of Shares
Available for
Period Purchase
------ -------------
From and after the date of this Agreement
through 0
On and after
Continuing to vest at the rate of 2% per month for a total of 50 months.
</TABLE>
(b) Optionee shall have been a full time employee or director of
the Company for a period of one (1) year following the date of this Agreement
before the Optionee may exercise any portion of this Option.
(c) This Option may be exercised in whole or in part at any time
during the period beginning on the date specified in this Agreement and ending
ten years from the date of this Agreement, provided that Optionee may not
exercise this option more often than twice during any calendar year. The Option
is not transferable or assignable by the Optionee.
(d) Options may be exercised in whole or in part with respect to
whole shares only within the period permitted for exercise thereof, and shall
be exercised by written notice of intent to exercise the Option with respect to
a specified number of shares delivered to the Company at its principal office
and payment in full to the Company at its principal office in the amount of the
option price for the number of shares of the Common Stock with respect to which
the Option is then being exercised. The payment of the option price shall be
made in cash.
(e) This Option may not be exercised prior to the registration of
the Common Stock
<PAGE> 7
issuable upon the exercise thereof with the Securities and Exchange Commission
and any applicable state agencies and listing of such Common Stock on any
applicable national securities exchange. However, either of these conditions
may be waived by the Board if it determines that such registration or listing
is not necessary in order to issue legally shares of Common Stock to Optionee.
(f) The Optionee recognizes that for federal income tax purposes
the Company must incur a withholding obligation for taxes on the exercise of
this Option. Therefore, the Optionee agrees that, as a condition to the
exercise of this Option, the Optionee will remit to the Company an amount of
cash equal to the Company's withholding obligations with respect to any
exercise of this Option. However, in the event the Optionee continues his
employment with the company following any exercise of this Option, then, in
lieu of remitting cash to the Company as required in the preceding sentence,
the Optionee may instruct the Company to withhold an amount equal to the
Company's withholding obligation from the Optionee's other cash payments made
or be made by the Company to the Optionee. In all events an Optionee agrees and
acknowledges that the Company's withholding obligation with respect to the
exercise of this Option will be borne by the Optionee.
(g) Upon the Company's determination that the Option has been
validly exercised as to any of the shares of Common Stock covered thereby, the
Secretary of the Company shall issue, or cause to be issued, certificates in
the Optionee's name for the number of shares set forth in his written notice.
However, the Company shall not be liable to the Optionee for damages relating
to any delays in issuing the certificates to him, any loss of the certificates,
or any mistakes or errors in the issuance of the certificates or in the
certificates themselves.
3. Employment of Optionee. Subject to the terms of any applicable
employment contract to the contrary, the Company shall have the right to
terminate or change the terms of employment of Optionee at any time and for any
reason whatsoever.
4. Termination of Employment. If the Optionee's employment by or
association with the Company and its subsidiaries shall be terminated for any
reason whatsoever, whether with or without cause, Optionee's right to exercise
the Option shall terminate on the Optionee's last day of his employment and all
of Optionee's rights hereunder shall cease.
5. Transferability of Option. This option shall not be
transferable by Optionee, whether by Optionee's will or by the laws of descent
and distribution or otherwise.
6. Stockholder Rights. Optionee shall have no rights as a
stockholder with respect to any shares of Common Stock covered by this
Agreement until the date of issuance of a certificate for shares of Common
Stock purchased pursuant to this Agreement. Until such time, Optionee shall not
be entitled to dividends or to vote at meetings of the stockholders of the
Company. Except as provided in paragraph 7 hereof, no adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash or securities or
other property) paid or distributions or other rights granted in respect of any
share of Common Stock for which the record data for such payment, distribution
or grant is prior to the date upon which the Optionee shall have been issued
share certificates, as provided hereinabove.
7. Changes in Capital Structure. The existence of outstanding
options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issuance of
bonds, debentures, preferred or prior preference stock ahead of or affecting
the Common Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceedings, whether of a similar
character or otherwise. Provided, however, that if the outstanding shares of
Common Stock of the Company shall at any time be changed or exchanged by
declaration of a stock dividend, stock split, combination of shares, or
recapitalization, the number and kind of shares subject to the Plan or subject
to any options theretofore granted, and the option prices, shall be
appropriately and equitably adjusted by the Board so as to maintain the
proportionate number of shares without changing the aggregate option price.
8. Compliance with Securities Laws. Prior to the acquisition of
any shares pursuant to the exercise of the option herein granted, Optionee will
enter into such written representations, warranties
<PAGE> 8
and agreements as the Company may reasonably request in order to comply with
applicable securities laws or with this Agreement.
9. Resolution of Disputes. As a condition of the granting of the
option hereby, the Optionee and his heirs and successors agree that any dispute
or disagreement which may arise hereunder shall be determined by the Board in
its sole discretion and judgment, and that any such determination and any
interpretation by the Board of the terms of this Agreement shall be final and
shall be binding and conclusive, for all purposes, upon the Company and
Optionee.
10. Legend on Certificates. The certificates representing the
shares of Common Stock purchased by exercise of an option will be stamped or
otherwise imprinted with a legend in such form as the Company or its counsel
may require with respect to any applicable statutory, contractual or other
restrictions on sale or transfer and the stock transfer records of the Company
will reflect stop-transfer instructions with respect to such shares.
11. Notices. Every notice hereunder shall be in writing and shall
be given by registered or certified mail. All notices of the exercise of any
option hereunder shall be directed to the Company's then principal executive
offices, Attention: President. Any notice given by the Company to Optionee
shall be directed to him at his address on file with the Company. The Company
shall be under no obligation whatsoever to advise Optionee of the existence,
maturity or termination of any of Optionee's rights hereunder and Optionee
shall be deemed to have familiarized himself with all matters contained herein
and in the Plan which may affect any of Optionee's rights or privileges
hereunder.
12. Interpretation. Whenever the term "Optionee" is used herein,
references to the masculine gender herein also include the feminine gender for
all purposes.
13. Other Restrictions. Notwithstanding any of the other
provisions hereof, Optionee agrees that he will not exercise the option(s)
granted hereby, and that the Company will not be obligated to issue any shares
of Common Stock pursuant to this Agreement, if the exercise of the option(s) or
the issuance of such shares of Common Stock would constitute a violation by the
Optionee or by the Company of any provision of any law or regulation of any
governmental authority or national securities exchange.
14. Agreement Subject to Plan. This Agreement is subject to the
Plan. The terms and provisions of the Plan (including any subsequent amendments
thereto) are hereby incorporated herein by reference thereto. In the event of a
conflict between any terms or provisions contained herein and a term or
provision of the Plan, that applicable terms and provisions of the Plan shall
govern and prevail. All capitalized terms that are not defined herein shall
have the meanings ascribed to them in the Plan, and all definitions of words
and terms contained in the Plan shall be applicable to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed as of
Attested By:
PARANET, INC. OPTIONEE
By: By:
----------------------------------- -------------------------------
Michael H. Holthouse, President
<PAGE> 1
PARANET
EMPLOYMENT AGREEMENT
In consideration of my employment with Paranet, Inc., a Texas
corporation ( "Company"), the compensation paid to me as an employee, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, I, the undersigned employee of the Company, hereby agree
as follows:
1. Employment Status. I agree that my employment relationship with the Company
is an at-will relationship. Accordingly, either I or the Company may end the
employment relationship at any time, with or without cause or reason.
2. Intellectual Property Rights.
2.01. Assignment. I hereby assign, transfer, and convey to the Company
my entire right, title and interest in any and all intellectual property which
I have made or conceived or may make or conceive, whether as a sole inventor or
originator or as a joint inventor or originator with another or others, whether
made during or outside of usual working hours or upon the premises of the
Company or elsewhere, during my employment with the Company and during my
employment with any predecessor of the Company prior to the date of this
Agreement. I understand that intellectual property includes information of a
technical and a business nature such as ideas, discoveries, inventions,
improvements, trade secrets, know-how, machines, processes, methodologies,
practices, product designs, formulae, writings, proposals and other works of
authorship, theses, books, computer programs, lectures, illustrations,
photographs, sales, profits, financial figures, marketing plans, business
methods and the like, which relate in any manner to the actual or anticipated
business of the Company, affiliates or subsidiaries thereof, or relate to its
actual or anticipated areas of research and development.
2.02. Other Documents. Either during or subsequent to my employment,
upon the request and at the expense of the Company or its nominee, and for no
remuneration in addition to that due me pursuant to my employment by the
Company, (or, if subsequent to the termination of my employment with the
Company, for an hourly fee for time actually spent by me at an hourly rate
equal to my annualized monthly salary immediately prior to termination of my
employment divided by 180) but at no expense to me, I agree to execute,
acknowledge, make and deliver to the Company or its attorneys any and all
instruments which in the judgment of the Company or its attorneys may be
necessary or desirable to secure or maintain for the benefit of the Company
adequate patent, copyright and other property rights in the United States and
all foreign countries with respect to any intellectual property embraced within
this Agreement and further agree to assist the Company or its attorneys as
required to draft said documents, to obtain said rights, and to enforce said
rights.
2.03. Disclosure. I further agree in connection with paragraph 2.01
hereof to disclose promptly to the Company or its attorneys, any and all ideas,
designs, inventions, improvements, discoveries, developments, when conceived or
made, in whole or in part, by me and to make and maintain adequate and current
records thereof.
2.04. Limitation of Period. Any idea, designs, inventions,
improvements, discoveries, and developments disclosed by me within one year
following termination of my employment shall be deemed to be owned by the
Company under the terms of paragraphs 2.01 and 2.02 hereof, unless proved by me
to have been conceived after such termination.
3. Certain Restrictive Covenants.
3.01 Introduction. In consideration that my employment with the
Company has been and will be special, unique and of an extraordinary character
and not involving the practice of any common calling. I acknowledge that, in
the course of performance of my obligations to the Company and its affiliates,
I have obtained and will obtain certain valuable confidential and/or
proprietary information and/or trade secrets of the Company and/or its
affiliates and/or their customers, including by way of example and without
limitation, specifications, performance criteria, software and systems
architecture, methodologies, processes, best practices that relate to the
support and management of distributed computing environments as they relate to
Paranet's proprietary information, computer programs, programming aids, flow
charts, algorithms, schematics, business plans, marketing plans, patents,
license agreements, product designs, formulae, and other plans, products,
proposals and agreements of the Company and/or its affiliates ("Confidential
Information"), which Confidential Information has been and/or will be uniquely
developed by the Company and cannot be readily obtained by third parties from
outside sources. I also understand and acknowledge that, due to the unique
nature of the products and services covered by this Agreement and the need for
sales and support personnel to have a high degree of technical knowledge
concerning the products and services, employment by the Company for technical
services, including the special training, knowledge, and confidential
information which will be acquired in the course of such employment, will give
me distinct and substantial advantages for potential promotional and/or sales
activities concerning such products. I further understand and acknowledge that
due to the narrow definition of the products, Confidential Information and
services set forth in this Agreement, the highly specialized nature of these
products and services, the limited size and number of business entities in the
business of developing and/or selling those products, and the much more
numerous opportunities for me to work in this trade with respect to products
and services not covered by this Agreement, the limitations as to time and
geographic area contained in this covenant are reasonable and do not present an
undue hardship for me. I therefore agree that the limitations as to time,
geographic area, and scope of activity contained in this covenant do not impose
a greater restraint than is necessary to protect the goodwill, Confidential
Information and other business interests of the Company. The Company also
agrees that in light of the facts acknowledged above, the substantial
investment of the Company in developing its business and providing training to
me and the certain and substantial harm the Company would suffer if I were to
engage in any of the activities described below, the Company's need for the
protection afforded by this Section is greater than any hardship I might
experience by complying with its terms. I, accordingly agree as follows:
3.01.1 Non-Solicitation. As an ancillary covenant to the terms and
conditions set forth in this Agreement, and in consideration of my employment
with the Company, the mutual promises set forth in this Agreement and other
good and valuable consideration received and to be received, including without
limitation, the aforesaid consideration for my agreement to comply with this
Clause 3.01.1, the receipt and sufficiency of which is hereby acknowledged by
me, I have agreed and do hereby agree that, during my employment with the
Company, and for a period of one (1) year following termination of my
employment with the Company and this Agreement, I will not, for myself, or on
behalf of any other person, persons, firms, partnerships, companies or
corporations in which I have had any direct or indirect contact through the
Company: (i) accept employment from, solicit, divert or take away from the
Company, the business of any person or business which is or was a customer of
the Company (or any affiliate thereof) during the term of my employment with
the Company or of any person or business to
<PAGE> 2
which the Company (or any affiliate thereof) has made proposals during the
twelve months immediately preceding the day of my termination of employment
with the Company, whether or not such termination is voluntary or involuntary,
(ii) own or participate in the creation of any entity engaged or planning to
become engaged in the business of managing or supporting computer environments
including help desk, systems support, network support, integration, training,
consulting, servicing, supporting, or services competitive with those sold and
furnished by the Company (the "Company's Business"), (iii) accept employment
from a direct competitor, solicit for employment of business or accept any
offer to act as agent, independent contractor or as partner with any person or
business that engages in activity competitive to the Company's Business, of
(iv) directly or indirectly induce or attempt to influence any full or part
time employee of the Company (or any affiliate thereof) to terminate his or her
employment with the Company. Throughout this Agreement an "affiliate" of the
Company shall mean any person or entity directly or indirectly controlling,
controlled by, or under common control with the Company. In the event of a
violation of this covenant, Employer shall be entitled, in addition to any
other remedies in law or equity, to obtain the specific performance of this
covenant without expressed written consent of the Company management.
3.01.2 Confidential Information of the Company. I agree not to make any
unauthorized use, publication, or public disclosure, during or subsequent to my
employment by the Company, of any intellectual property, Confidential
Information or trade secrets, generated or acquired by me during the course of
my employment by the Company, except to the extent that the disclosure of such
intellectual property information is necessary to fulfill my responsibilities
as an employee of the Company. I understand that confidential matters and
trade secrets include information not generally known by or available to the
public about or belonging to the Company, or belonging to other companies to
whom the Company may have an obligation to maintain information in confidence,
and that authorization for public disclosure may only be obtained through the
Company's written consent.
3.02.3 Confidential Information of Others. I further agree not to
disclose to the Company, nor induce the Company to use, any confidential or
trade secret information or material belonging to others.
4. Return of Materials.
Upon the termination of my employment, I will promptly turn over to the
Company all models, prototypes, memorandums, notebooks, drawings, records,
documents, and the like in my possession or under my control, whether prepared
by me or others, relating to intellectual property, and any work done for the
Company related thereto, it being acknowledged that all such items are the sole
property of the Company. Further, I will return keys, passcards, credit cards,
company owned property, books, computers, tapes, software, documentation,
materials, etc.
5. Miscellaneous Provisions.
5.01. Excluded Property. Set for in Exhibit A to this Agreement is a
list of all inventions, discoveries, improvements and developments patented or
unpatented, copyrighted or uncopyrighted, if any, which I made before entering
the employ of the Company or any predecessor, and which are excluded from the
operation of this Agreement, and I agree that said list is complete.
5.02. Governing Law. The law of the State of Texas shall govern this
Agreement and I agree that exclusive jurisdiction with respect to any legal
proceeding regarding any subject matter contained in this Agreement shall rest
in the State of Texas.
5.03. Entire Agreement. This Agreement supersedes any agreement or
understanding previously existing between me and the Company relating to the
subject matters contained herein. This instrument is the whole agreement, and
no modification or variation shall be deemed valid, unless provided for in a
subsequent written agreement signed by the Company.
5.04. Binding Effect. I further agree that this Agreement shall be
binding upon me, my heirs, executors, administrators, and legal
representatives, irrespective of the duration of my employment by the Company,
the reasons for the cease of my employment by the Company, or the amount of my
wages or salary.
5.05. Separability. Should any part or provision of this Agreement be
held to be unenforceable, such provision shall be enforced to the fullest
extent permitted by law and the validity of the remaining parts or provisions
shall not be affected by such holding.
5.06. Representation and Warranty. I represent and warrant to the
Company that I am not now under any obligation to any person, firm or
corporation, or have no other interest which is inconsistent or in conflict
with this Agreement, or which would prevent, limit or impair in any way, the
performance by me of any of the covenants hereunder or my duties in my
employment by the Company.
5.07. Remedies. I acknowledge that a violation or attempted violation
on my part of Section 2 will cause irreparable damage to the Company and its
affiliates, and accordingly, I agree that the Company shall be entitled as a
matter of right to an injunction, out of any court or competent jurisdiction,
restraining any violation or further violation of such agreements by me, my
partners or agents; such right to an injunction, however, shall be cumulative
and in addition to whatever other remedies the Company may have.
ACCEPTED BY: PARANET, INC.
By:
- ------------------------------------ ------------------------------
(EMPLOYEE Signature)
- ------------------------------------ ------------------------------
(Print Name) (Print Name)
- ------------------------------------ ------------------------------
(Title) (Date)
- ------------------------------------
(Date)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 3,
1997 (except Note 8 as to which the date is , 1997), in the
Registration Statement (Form S-1 No. 333-00000) and related Prospectus of
Paranet, Inc. for the registration of 000,000 shares of its common stock.
Houston, Texas
The foregoing consent is in the form that will be signed upon the
completion of the Company's reorganization and termination of its subchapter S
status as described in Note 8 to the financial statements.
ERNST & YOUNG LLP
Houston, Texas
February 10, 1997
