<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
PRT GROUP INC.
(Exact Name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7371 13-3914972
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
</TABLE>
342 MADISON AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10173
(212) 922-0800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
GREG D. ADAMS
PRT GROUP INC.
342 MADISON AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10173
(212) 922-0800
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
-----------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
VINCENT J. PISANO, ESQ. CLAUDE S. SERFILIPPI, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CHADBOURNE & PARKE LLP
919 THIRD AVENUE 30 ROCKEFELLER CENTER
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10112
(212) 735-3000 (212) 408-5100
</TABLE>
------------------------
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 basis 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, please 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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE
TITLE OF EACH CLASS OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ------------------------------ ---------------- ----------------
<S> <C> <C>
Common Stock, $.001 par value $69,000,000 $20,909
- ------------------------------ ---------------- ----------------
</TABLE>
(1) Estimated in accordance with Rule 457(c) of the Securities Act, solely
for the purpose of calculating the registration fee.
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
SHARES
[LOGO] PRT GROUP INC.
Common Stock
Of the shares of common stock, $.001 par value per share ("Common
Stock"), offered hereby, shares are being issued and sold by PRT Group
Inc. ("PRT" or the "Company") and shares are being sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders." Prior to this
Offering (the "Offering"), there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of
the Common Stock will be between $ and $ per share. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. Application will be made to
approve the shares of Common Stock for quotation on The Nasdaq National
Market under the symbol "PRTG."
----------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
===============================================================================
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Per Share $ $ $ $
- -------------------------------------------------------------------------------
Total (3) $ $ $ $
===============================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $ , all of which will be
paid by the Company.
(3) The Selling Stockholders have granted to the Underwriters a 30-day
option to purchase an additional shares of Common Stock on the
same terms as set forth above solely to cover over-allotments, if any.
See "Underwriting." If all such shares are purchased, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
--------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if received and accepted by
them and subject to certain conditions. It is expected that certificates for
shares of Common Stock will be available for delivery on or about ,
1997 at the offices of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013.
-----------------------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
PUNK, ZIEGEL & COMPANY
, 1997
<PAGE>
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors."
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-------------------------
PRT, PRT's logo, the combination of PRT and PRT's logo and QA2000 are
trademarks of the Company. All trademarks, service marks and trade names
referred to in this Prospectus are the property of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised and gives effect to the acquisition of Computer
Management Resources, Inc. ("CMR") on July 1, 1997. Unless otherwise
indicated, the terms "Company" and "PRT" refer collectively to PRT Group Inc.
and its subsidiaries.
THE COMPANY
PRT was founded in 1989 to provide information technology ("IT") solutions
and services internationally, primarily to Fortune 500-sized companies. PRT
provides a number of services including Strategic Consulting, Project
Solutions and Staff Augmentation. PRT offers full life cycle solutions,
beginning with the understanding of the client's business issues and
continuing through: (i) problem analysis, (ii) solution architecture and
design, (iii) coding, (iv) testing and (v) ongoing maintenance. This life
cycle approach, supported by strict software engineering principles embodied
in the Company's Process Asset Library ("PAL") framework, as well as an
internal, independent software quality assurance function allows the Company
to provide high-quality, effective solutions.
Strategic Consulting services include management consulting, strategic IT
planning, emerging technology research, knowledge transfer and "Quality
Journey" strategies and implementations. Project Solutions services consist
of: (i) full life cycle software development, (ii) hardware and software
platform migrations, (iii) maintenance outsourcing, (iv) Year 2000 and other
mass change renovation and (v) testing services for both mainframe and
client/server environments. Staff Augmentation offers team or individual
staffing for a full spectrum of IT services, ranging from traditional systems
analysis through testing to high value-added IT consulting and project
management.
PRT offers its services to clients at their site or off-site. The Company
has offices in Connecticut, Illinois, New Jersey, New York and Virginia. In
addition, the Company has Software Development Centers ("SDCs") in Barbados,
West Indies, and the Hartford, Connecticut area and a recruitment center in
Mumbai, formerly Bombay, India. The Company anticipates opening a third SDC
in Chennai, formerly Madras, India in 1998. SDCs are the key sites where
PRT's Project Solutions are designed, engineered, constructed, tested and
supported in accordance with the PAL framework. Each SDC has a number of
project teams dedicated to clients and separate quality assurance groups to
ensure high-quality, cost-effective solutions. The SDCs have common
infrastructure, organizational units and human resource practices that allow
projects and personnel to be shifted among the SDCs to maximize utilization
rates while meeting client requirements.
PRT focuses its marketing efforts on large businesses, primarily Fortune
500-sized companies, with significant IT budgets and recurring software
development and maintenance needs. PRT's client base includes companies
primarily in the financial services, consumer products, communications and
healthcare industries. The Company's five largest clients in the first six
months of 1997, in alphabetical order, were Chase Manhattan Bank, N.A., J.P.
Morgan & Co. Inc., Mitsubishi International Corp., Philip Morris Companies
Inc. and The Prudential Insurance Company of America.
Faced with an increased strategic reliance on IT, escalating costs of
maintaining in-house IT departments, a shortage of skilled IT personnel and
an inability to effectively handle mass change issues, such as the Year 2000
problem, organizations are increasingly outsourcing IT functions to
third-party vendors. The Company believes that the following key industry
trends will continue to have a major influence on the worldwide IT services
market: (i) shortage of IT professionals, (ii) mass change problems, (iii)
offshore software development and (iv) software development challenges.
The PRT Global Solution enables the Company's clients to outsource a broad
range of business and technology needs. PRT's international fulfillment
capacity offers a high quality strategic alternative to traditional onsite
consulting. The Company reliably and predictably provides flexible technical
solutions
3
<PAGE>
to a wide range of issues encountered by Fortune 500-sized companies. In this
highly competitive and rapidly changing business environment, the Company
offers a cost-effective, reliable solution. The following are key attributes
of PRT's global solution: (i) emphasis on recruitment and training of IT
professionals, (ii) expansion of strategic solutions offerings, (iii)
replication of Sofware Development Centers and (iv) utilization of a
disciplined software engineering approach based on the Company's PAL
framework.
PRT has established four primary growth strategies in order to expand
revenues and enhance profitability. These growth strategies include: (i)
expanding client relationships, (ii) building and expanding SDCs, (iii)
capitalizing on investments in infrastructure and personnel and (iv)
continuing to pursue strategic acquisitions. The Company's sales have
increased to $23.8 million in 1996 from $5.3 million in 1992 representing a
compound annual growth rate ("CAGR") of approximately 45%. For the six month
periods ended June 30, 1997 and June 30, 1996, the Company's revenues were
$21.3 million and $9.8 million, respectively, representing an increase of
approximately 118%. During the same time periods, the Company's gross margin
improved to approximately 29% from approximately 25%.
THE OFFERING
Common Stock offered by
the Company .................. shares
Common Stock offered by the
Selling Stockholders ......... shares
Common Stock to be outstanding
after the Offering ........... shares
Use of proceeds ............... Expansion of existing operations, including
the Company's SDCs, development of new
service capabilities, payment of cumulative
4% dividends on the Company's Convertible
Preferred Stock and distributions on the
Company's Unit Warrants (as defined herein),
general corporate purposes, including
working capital and possible acquisitions of
related businesses.
Proposed Nasdaq National Market
Symbol ....................... PRTG
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following Summary Financial Data is qualified in its entirety by
reference to the Company's financial statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 FOR THE SIX MONTHS ENDED JUNE 30
------------------------------------------ ---------------------------------
PRO
FORMA (1) PRO FORMA
1992 1993 1994 1995 1996 1996 1996 1997 1997 (1)
------ ------ ------ ------ ------ ------ ------ ------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ...................... $5,323 $8,181 $13,876 $20,346 $23,801 $31,304 $ 9,772 $21,314 $25,579
Gross profit .................. 1,210 1,839 3,025 4,752 5,836 7,857 2,462 6,097 7,177
Income (loss) from operations 180 309 453 642 (3,399) (3,526) (702) (2,113) (2,535)
Net income (loss).............. $ 105 $ 172 $ 251 $ 115 $(3,269) $(3,583) $ (709) $(1,910) $(2,282)
Pro forma net income (loss)
per share (2):
Weighted average common and
common equivalent shares:
JUNE 30, 1997
-------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED (3)
-------------------------------
(In thousands)
BALANCE SHEET DATA:
Cash .......................... $ 7,898 $
Working capital ............... 9,028
Total assets .................. 25,015
Total debt (4) ................ 5,002
Stockholders' equity (deficit) (4,580)
</TABLE>
- ------------
(1) Gives effect to the CMR acquisition as if it occurred at the beginning
of the respective period.
(2) Computed on the basis described in Note 2 to the Consolidated Financial
Statements.
(3) Pro forma as adjusted to give effect to: (i) the acquisition of CMR,
(ii) the conversion of the Convertible Preferred Stock into 2,759,610
shares of Common Stock, (iii) the exchange of the PRT Barbados Warrants
for the JPMVC PRT Warrants (each as defined herein), the elimination of
minority interest and recording of related goodwill, (iv) the issuance
of 936,365 shares of Common Stock in connection with the exercise of
the JPMVC PRT Warrants, (v) the reclassification of the 119,181 shares
of Common Stock issued in connection with the CMR acquisition which
were subject to redemption and (vi) the sale of shares of Common
Stock offered hereby at an assumed initial public offering price of $
per share, and the application of the estimated net proceeds therefrom,
as described in "Use of Proceeds".
(4) Includes both the current and long-term portion of capital lease
obligations, borrowing under PRT's line of credit and advances payable
to a client. See "Certain Transactions--Certain Financing
Transactions."
5
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below.
RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business is labor-intensive. The Company's success depends
upon its ability to attract, develop, motivate and retain IT professionals
who possess the necessary technical skills and experience or can be trained
to deliver the Company's services. Qualified IT professionals are in high
demand worldwide and are likely to remain a limited resource for the
foreseeable future. There can be no assurance that PRT will continue to have
access to qualified IT professionals, will be successful in retaining current
or future IT professionals, or that the cost of employing and subcontracting
such IT professionals will not increase due to shortages. Failure to attract
or retain qualified IT professionals in sufficient numbers could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--The IT Services Industry,"
"Business--Recruiting and Training" and "Business--Competition."
INCREASING SIGNIFICANCE OF AND RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company will increase its investment in international operations over
the next several years with an increasing percentage of its revenues
generated by operations in countries outside of the United States. The
Company's international operations depend greatly upon business, immigration
and technology transfer laws in those countries and upon the continued
development of the local technology infrastructure. As a result, the
Company's business is subject to the risks generally associated with
non-United States operations including, among other things: (i) unexpected
changes in regulatory environments; (ii) difficulties in managing
international operations; (iii) fluctuations in currency exchange rates; (iv)
potential adverse foreign tax consequences, including impact upon
repatriation of earnings; (v) tariffs and other trade barriers and (vi)
political unrest and changing conditions in countries in which the Company's
services are provided or facilities are located. If any such factors were to
render the conduct of business in a particular country undesirable or
impracticable, there could be a material adverse effect on the Company's
business, operating results and financial condition.
PRT has operated its Barbados SDC for approximately two years. PRT
believes Barbados is one of the most stable countries in the Caribbean, has a
long tradition of democracy and that the Company currently has good relations
with the government of Barbados. While PRT (Barbados) Ltd. ("PRT Barbados")
is an international business company under Barbadian law, PRT has negotiated
special incentives with the Barbadian government including, among other
things, certain advantageous tax rates, an exclusivity and non-compete
agreement (which expires in 2000), and the ability to secure an unlimited
number of employee work permits and visas. There is no guarantee that this
relationship will continue or that these special incentives will not be
curbed or eliminated. While the Company believes that the expiration of the
non-compete agreement will not have a material adverse effect on PRT's
business, operating results or financial condition, there can be no assurance
that this will be the case. If the Barbadian government were to take any such
action in the future, it could have a material adverse effect on the
Company's business, operating results and financial condition.
A significant element of the Company's business strategy is to continue to
open and develop SDCs, sales and account management offices and training and
recruiting centers. PRT currently has a recruiting center in Mumbai, India
and has plans to open an SDC in Chennai, India in 1998. The Indian government
exerts significant influence over its economy. In the recent past, the Indian
government has provided significant tax incentives and relaxed certain
regulatory restrictions in order to encourage foreign investment in certain
sectors of the economy, including the IT industry. Certain of these benefits
that
6
<PAGE>
could directly affect the Company include, among others: (i) tax holidays,
(ii) liberalized import and export duties and (iii) preferential rules with
respect to foreign investment and repatriation of earnings. Changes in the
business, political or regulatory climate of India could have a material
adverse effect on the Company's business, operating results and financial
condition. Additionally, although wage costs in India are significantly lower
than in the United States and elsewhere for comparably skilled IT
professionals, wages in India are increasing at a faster rate than in the
United States. In the past, India has experienced significant inflation and
shortages of foreign exchange, and has been subject to political unrest.
Changes in inflation, interest rates, taxation or other social, political,
economic or diplomatic developments affecting India in the future could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--PRT Growth Strategies."
LIMITED OPERATING HISTORY; LOSSES
The Company has a limited operating history, has incurred losses since the
quarter ended December 31, 1995 and as of June 30, 1997 had an accumulated
deficit. To operate profitably, the Company must accomplish some of the
following objectives: (i) increase the amount of services rendered to
existing clients and develop new clients, (ii) develop and realize additional
revenue sources and (iii) reduce costs of providing services. There can be no
assurance that the Company will be successful in meeting these objectives or
that the Company will be able to achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors,
including: (i) the timing and number of client projects commenced and
completed during the quarter, (ii) the number of working days in a quarter
and (iii) employee hiring, attrition and utilization rates. Because a high
percentage of the Company's expenses, in particular personnel and facilities
costs, is relatively fixed, variations in revenues may cause significant
variations in operating results. Additionally, the Company periodically
incurs cost increases due to both the hiring of new employees and strategic
investments in its infrastructure in anticipation of future opportunities for
revenue growth. Quarterly results are likely to fluctuate, which may cause a
material adverse effect on the market price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
ABILITY TO SUSTAIN AND MANAGE GROWTH
The Company's business has grown rapidly during the past several years due
to the increased demand for its services from existing clients, the addition
of new clients and the increased number of Company sales and account
management offices and SDCs. The Company's continued growth is dependent upon
a number of factors, including, but not limited to: (i) the continued growth
of the Barbados and Hartford area SDCs; (ii) the ability to continue to
replicate SDCs in the future; (iii) the ability to cultivate additional
business from existing clients; (iv) the ability to obtain new clients; (v)
the ability to locate and hire IT professionals within new and existing
markets; (vi) the continued identification and training of corporate
personnel to staff new and recently opened or acquired sales and account
management offices and SDCs; (vii) the successful performance of recently
opened or acquired offices and (viii) the ability to anticipate, acquire,
master and exploit new technologies as they develop. There can be no
assurance that recently opened or acquired offices will achieve and sustain
any level of profitability or that the Company's historical revenue growth
will continue. Further, the Company's rapid growth and expansion has placed
and could continue to place a significant strain on the Company's management,
personnel and resources. The Company's ability to continue to manage its
growth successfully will require it to further enhance its management,
financial and information systems and controls. Finally, the Company's
management has no demonstrated experience in managing the Company during
times of economic downturn, and there can be no assurance that management can
maintain profitability or growth levels at such times. The failure to manage
growth effectively would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--PRT
Growth Strategies."
7
<PAGE>
CONCENTRATION OF REVENUES
In 1996, approximately 72% of the Company's revenues was derived from five
clients, with one client, Philip Morris Companies Inc., accounting for
approximately 28%; during the first six months of 1997, approximately 79% of
the Company's revenues was derived from its largest five clients, with one
client, Prudential Insurance Company of America, accounting for approximately
25% of revenues. Most of PRT's larger clients are comprised of a number of
subsidiaries or divisions, each of which PRT considers to be a separate
client because they make their own purchasing decisions. As of July 1, 1997,
the Company acquired CMR. See "Certain Transactions--Acquisition of Computer
Management Resources, Inc." If CMR had been acquired on January 1, 1997, on a
pro forma basis during the first six months of 1997, approximately 66% of the
Company's revenues would have been derived from its largest five clients and
20% would have been derived from the Company's largest client, Prudential
Insurance Company of America. The loss of a significant client could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Clients."
Certain stockholders of the Company are significant PRT clients. Although
the Company has no reason to expect it, a client-stockholder could be less
inclined to maintain the same volume of business with the Company in the
future if such client-stockholder were to sell most or all of its shares of
PRT Common Stock. See "Certain Transactions."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements, including Year 2000 projects, involve
services that are critical to the operations of its clients' businesses and
provide benefits that may be difficult to quantify. Although the Company
attempts to contractually limit its liability for damages arising from
errors, mistakes, omissions or negligent acts in rendering its services,
there can be no assurance that its attempts to limit liability will be
successful. The Company's failure or inability to meet a client's
expectations in the performance of its services could result in a material
adverse effect on the client's operations and, therefore, could give rise to
claims against the Company or damage the Company's reputation, which could
have a material adverse effect on the Company's business, operating results
and financial condition.
RELIANCE ON KEY PERSONNEL
The Company's future success depends on the continued services of certain
key management personnel, in particular, Douglas K. Mellinger, Chief
Executive Officer, and Srinivasan Viswanathan, President of PRT Barbados,
each of whom has entered into an employment agreement with PRT. While the
Company retains a "key man" life insurance policy in the amount of $2.5
million on Mr. Mellinger, there can be no assurance that such amount would
adequately compensate the Company for a loss of his services. In addition,
the Company's continued growth depends on its ability to attract and retain
capable management personnel. Failure to do so or the loss of either of
Messrs. Mellinger or Viswanathan could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management -- Executive Officers and Directors."
POTENTIAL DECREASES IN DEMAND FOR YEAR 2000 SERVICES
The Company realized less than 10% of its total revenues from Year 2000
solutions in each of fiscal years 1995 and 1996 and in the first six months
of 1997. The Company expects that it will receive increased revenues for Year
2000 solutions. After the year 2000, the Company believes that demand for
Year 2000 solutions will continue; however, such demand is expected to begin
to diminish as many Year 2000 solutions are implemented and tested. A core
element of the Company's growth strategy is to use the business relationships
and the knowledge of clients' computer systems obtained in providing Year
2000 solutions to generate additional IT projects with such clients. There
can be no assurance, however, that the Company will be successful in
generating additional business from its Year 2000 clients. In addition, by
utilizing significant resources during the next several years to solve its
clients' Year 2000 problems, the Company's ability to deliver other IT
services could be adversely affected. Finally, the Company relies on licenses
from outside parties for certain of its Year 2000 software tools; any
disruption of the relationship
8
<PAGE>
with such parties could adversely affect the Company's ability to provide
Year 2000 solutions and thereby have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--PRT Services Offered," "Intellectual Property Rights" and
"Business--PRT Growth Strategies."
CONTRACT RISK
Most of the Company's contracts are terminable by the client following
limited notice and without significant penalty. In addition, each stage of a
project often represents a separate contractual commitment at the end of
which the client may elect not to proceed to the next stage of the project.
There can be no assurance that one or more of the Company's clients will not
terminate a contract, reduce the scope of a large project or elect not to
proceed to the stage of a project anticipated by the Company. The
cancellation or significant reduction in the scope of a large project could
have a material adverse effect on the Company's business, operating results
and financial condition.
FIXED-PRICE ENGAGEMENTS
The Company principally bills for its services on a time and materials
basis; however, some of the Company's contracts contain a cap on the amount
of fees the Company can charge. The Company occasionally has entered into
fixed-price billing engagements and may in the future enter into additional
engagements billed on a fixed-price basis. The failure of the Company to
complete a fixed-price engagement within budget could expose the Company to
risks associated with cost overruns, which could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The IT services industry is characterized by rapid technological change,
shifting client preferences and new product developments. The introduction of
competitive IT solutions embodying new technologies and the emergence of new
industry standards may render the Company's existing IT solutions, skills
base or underlying technologies obsolete or unmarketable. As a result, the
Company will be dependent in large part upon its ability to develop new IT
solutions and capabilities that address the increasingly sophisticated needs
of its clients and keep pace with new competitive service and product
offerings and emerging industry standards to achieve broad market acceptance.
There can be no assurance that: (i) the Company will be successful in
developing and marketing new IT solutions that respond to technological
changes, shifting client requirements or evolving industry standards; (ii)
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these new IT
solutions or (iii) its IT solutions will adequately meet the requirements of
the marketplace and achieve market acceptance. Any failure to respond to
technical change or evolving industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--PRT Services Offered."
COMPETITION
The Company experiences intense competition. The market for services such
as those PRT offers is very broad and such services are offered by a large
number of private and public companies, many of which are significantly
larger than, and have greater financial, technical and marketing resources
than, PRT. Additionally, in certain sectors of the Company's business,
particularly Staff Augmentation, there are few barriers to entry and new
competitors do and are expected to enter the market. As competitors enter the
market to provide services similar to the Company, PRT's ability to compete
effectively will increasingly depend upon the quality and price of its
services. Competition could have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business--Competition."
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company has expanded and expects to continue to expand its operations
through the acquisition of additional businesses. See "Certain
Transactions--Acquisition of Computer Management Resources,
9
<PAGE>
Inc." There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate
acquired businesses into the Company without substantial expenses, delays or
other operational or financial difficulty. Furthermore, acquisitions may
involve a number of special risks, including: (i) diversion of management's
attention, (ii) possible failure to retain key acquired personnel, (iii)
unanticipated events or circumstances, (iv) risks of entering markets in
which the Company has no or limited prior experience or (v) legal liabilities
and amortization of acquired intangible assets. Client satisfaction or
performance problems at a single acquired business could have a material
adverse effect on the reputation of the Company as a whole. In addition,
there can be no assurance that acquired businesses will achieve anticipated
financial performance. While the Company from time to time considers
acquisition opportunities, it has no existing agreements, understandings or
commitments to effect any material acquisition. The failure of the Company to
manage its acquisition strategy successfully could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--PRT Growth Strategies."
UNITED STATES GOVERNMENT REGULATION OF IMMIGRATION
The Company recruits employees from around the world. Some of these
employees work in the United States under H-1B temporary work permits. As of
September 1, 1997, approximately 4% of PRT's worldwide workforce was working
under H-1B temporary work permits in the United States. In the future the
Company may be unable to obtain H-1B visas to bring necessary employees to
the United States for any number of reasons including, without limitation,
limits set by the United States Immigration and Naturalization Service.
Continued compliance with existing United States immigration laws, or changes
in such laws making it more difficult to hire foreign nationals or limiting
the ability of the Company to retain H-1B employees in the United States,
could increase the Company's cost of recruiting and retaining the requisite
number of IT professionals which could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Recruiting and Training."
INTELLECTUAL PROPERTY RIGHTS
In order to protect its proprietary rights in its various intellectual
properties, the Company currently relies on copyrights, trade secrets and
unpatented proprietary know-how which may be duplicated by others. The
Company employs various methods, including nondisclosure agreements and other
contractual arrangements with employees and suppliers and technical
protective measures to protect its proprietary know-how. As a signatory to
the Berne Convention, an international treaty, the government of Barbados has
agreed to recognize protections on copyrighted materials conferred under the
laws of foreign countries, including the laws of the United States. The
Company believes that laws, rules, regulations and treaties in effect in the
United States and Barbados are adequate to protect it from misappropriation
or unauthorized use of its intellectual property. However, there can be no
assurance that such laws will not change and, in particular, that the laws of
Barbados will not change in ways that may prevent or restrict the transfer of
software components, libraries and toolsets from Barbados to the United
States. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of
its intellectual property, or that the Company will be able to deter
unauthorized use and take appropriate steps to enforce its rights. There can
be no assurance that other persons will not independently develop such
know-how or obtain access to it, or independently develop technologies that
are substantially equivalent or superior to PRT's technology. In the event
that protective measures are not successful, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company presently holds no patents or registered copyrights. A
competitor of the Company recently announced the filing with the United
States Patent and Trademark Office of three patent applications relating to
Year 2000 processes. The Company does not know the proprietary features of
the processes covered by such patent applications since United States patent
applications are not publicly available until the patents, if any, are
issued. Although the Company believes that its intellectual property rights,
including intellectual property rights licensed from third parties by the
Company, do not infringe on the intellectual property rights of others, there
can be no assurance that: (i) such a claim will not be asserted against the
Company in the future, (ii) assertion of such claims will not result in
litigation or that the Company would prevail in such litigation or be able to
10
<PAGE>
obtain a license for the use of any infringed intellectual property from a
third party on commerically reasonable terms or (iii) any of PRT's software
could be redesigned on an economical basis or at all, or that any such
redesigned software would be competitive with the software of the Company's
competitors. The Company expects that the risk of infringement claims against
the Company will increase if more of PRT's competitors are able to
successfully obtain patents for software products and processes. Any such
claims, regardless of their outcome, could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Intellectual Property Rights."
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws and the Delaware General Corporation Law include
provisions that may be deemed to have anti-takeover effects and may delay,
deter or prevent a takeover attempt that stockholders might consider in their
best interests. These include provisions under which only the Board of
Directors, the Chairman of the Board or the President may call meetings of
stockholders and certain advance notice procedures for nominating candidates
for election to the Board of Directors. Directors of the Company are divided
into three classes and are elected to serve staggered three-year terms. The
Board of Directors of the Company is empowered to issue up to 10,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of such shares without any further stockholder action. The
existence of this "blank-check" preferred stock could render more difficult
or discourage an attempt to obtain control of the Company by means of a
tender offer, merger, proxy contest or otherwise. In addition, this
"blank-check" preferred stock, and any issuance thereof, may have an adverse
effect on the market price of the Company's Common Stock. See "Management"
and "Description of Capital Stock--Preferred Stock," "--Section 203 of the
Delaware General Corporation Law" and "--Certain Certificate and By-Law
Provisions."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon consummation of this Offering, the Mellinger family will own % of
the outstanding shares of Common Stock ( % of the outstanding shares of
Common Stock if the Underwriters' over-allotment is exercised in full) and
will continue to effectively control the vote on all matters submitted to a
vote of the Company's stockholders, including extraordinary transactions such
as mergers, sales of all or substantially all of the Company's assets or
going-private transactions. Such control may discourage certain types of
transactions involving an actual or potential change of control of the
Company, including transactions in which the holders of Common Stock might
receive a premium for their shares over prevailing market prices. See
"Principal and Selling Stockholders" and "Description of Capital Stock."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price per share of the
Common Stock will be determined by negotiations among management of the
Company, the Selling Stockholders and the representatives of the
Underwriters. There can be no assurance that an active public market in the
Company's Common Stock will develop or be sustained. The stock market has
from time to time experienced extreme price and volume fluctuations that have
often been unrelated to the operating performance of particular companies. In
addition, factors such as announcements of acquisitions of businesses,
technological innovations, new products or services or new client engagements
by the Company or its competitors or third parties, as well as market
conditions in the IT services industry, may have a significant impact on the
market price of the Company's Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Immediately after completion of this Offering, the Company will have
shares of Common Stock outstanding, of which will be freely tradeable
without restriction or further registration under the Securities Act of 1933
and the rules and regulations promulgated thereunder, as amended (the
11
<PAGE>
"Securities Act"), except those shares, if any, acquired by affiliates of the
Company. The remaining shares of Common Stock and 1,000,000 shares of
non-voting PRT common stock, par value $.001 per share (the "Non-Voting
Common Stock") (which shares are convertible at the holder's option into
shares of Common Stock), outstanding will be "restricted securities" within
the meaning of Rule 144 under the Securities Act. The Company and certain of
the Company's stockholders have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, any shares of Common Stock,
or any securities convertible into or exchangeable or exercisable for shares
of Common Stock, including shares of Non-Voting Common Stock, until 180 days
after the date of this Prospectus, without the prior consent of Smith Barney
Inc. Following this 180 day lock-up period, all of the restricted securities
become eligible for sale, subject to the manner of sale, volume, notice and
information requirements of Rule 144. Sales of substantial amounts of such
shares of Common Stock in the public market or the availability of additional
shares of Common Stock for future sale could adversely affect the market
price of the Common Stock and the Company's ability to raise additional
capital at a price favorable to the Company. Pursuant to agreements between
the Company and certain of the Company's stockholders, such stockholders are
entitled to certain registration rights with respect to their shares of
Common Stock or Non-Voting Common Stock. If such stockholders, by exercising
such registration rights upon expiration of their lock-up agreement described
above (if applicable), cause a large number of shares to be registered and
sold in the public market, such sales may have an adverse effect on the
market price of the Common Stock. Furthermore, approximately 90 days after
the date of this Prospectus, the Company expects to file a registration
statement on Form S-8 registering 4,302,000 shares of Common Stock reserved
for issuance pursuant to stock options granted, or to be granted, under the
Company's Amended and Restated 1996 Stock Option Plan. See "Description of
Capital Stock," "Shares Eligible for Future Sale," "Management--Executive
Compensation, Employment Contracts, Termination of Employment and
Change-in-Control Arrangements," "Certain Transactions," and "Underwriting."
BROAD DISCRETION IN USE OF PROCEEDS
A significant portion of the net proceeds to be received by the Company in
connection with this Offering will be allocated to, among other things,
working capital and general corporate purposes. Accordingly, the Company will
have broad discretion with respect to the expenditure of such proceeds. In
particular, the Company could use a portion of these funds for the
acquisition of complementary businesses, products and technologies, although
it has no present agreements or commitments with respect to any such material
transaction. There can be no assurance that the Company will deploy these
proceeds in a manner that enhances stockholder value. See "Use of Proceeds"
and "--Risks Related to Possible Acquisitions."
DILUTION
The purchasers of the Common Stock offered hereby will experience
immediate and significant dilution. See "Dilution."
12
<PAGE>
THE COMPANY
PRT Group Inc. was incorporated under the laws of the State of Delaware in
1996. The Company was founded as PRT Corp. of America, a New York
corporation, in 1989. The Company maintains its principal executive offices
at 342 Madison Avenue, 11th Floor, New York, New York 10173. The Company's
telephone number is (212) 922-0800. On September 1, 1997, PRT employed or had
subcontracting arrangements with over 700 personnel, including 636 IT
professionals, of whom 172 were subcontractors; of PRT's IT professionals,
54% worked in SDCs.
PRT currently operates in four types of facilities: (i) SDCs, (ii) sales
and account management offices, (iii) training and recruiting centers and
(iv) administration and operations offices. Currently, the Company operates
an SDC in each of Barbados, West Indies and the Hartford, Connecticut area
and plans to open a third SDC in Chennai, India during 1998. PRT has sales
and account management offices located in Connecticut, Illinois, New Jersey,
New York and Virginia. The Company also operates a training and recruiting
center in Mumbai, India and has administrative and operations offices in New
York, New York and Hawthorne, New York.
As of July 1, 1997, the Company acquired CMR, located in Wallingford,
Connecticut. CMR had revenues of $7.5 million during its fiscal year ended
February 28, 1997. As of July 1, 1997, CMR had over 75 IT professionals, 21
of whom were subcontractors.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company (after deduction of estimated underwriting
discounts and commissions and Offering expenses payable by the Company) are
estimated to be approximately $ million. The Company expects to use the
net proceeds from this Offering for: (i) payment of certain accrued dividends
and distributions on the Company's Series A Convertible Preferred Stock, par
value $.01 per share (the "Convertible Preferred Stock") and distributions on
the Unit Warrants (as defined herein) in an aggregate amount of $732,000 as
of September 30, 1997, which Convertible Preferred Stock upon consummation of
this Offering will convert into shares of Common Stock; (ii) expansion of
existing operations, including the Company's SDCs and development of new
service capabilities; (iii) general corporate purposes, including working
capital and (iv) possible acquisitions of related businesses. Although the
Company actively seeks the acquisition of related businesses, it currently
has no understandings, commitments or agreements with respect to any material
acquisitions. Pending their application as described above, such proceeds
will be invested in short-term, investment grade, interest-bearing
securities.
The principal purposes of this Offering are to increase the Company's
equity capital and financial flexibility, create a public market for the
Common Stock, facilitate future access by the Company to the public equity
markets, enhance the Company's ability to use Common Stock as a means of
attracting and retaining key employees and technical staff, and provide
working capital to fund the Company's growth strategies. See "Business--PRT
Growth Strategies."
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company intends to retain all of its future earnings to fund growth
and the operation of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. Future cash dividends, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, the Company's future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and such other factors as the Board of Directors may deem
relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as
of June 30, 1997, (ii) on a pro-forma basis to give effect to the CMR
acquisition: and (iii) on a pro forma as adjusted basis to give effect to the
items set forth in footnote (1) below, and the sale of shares of common
stock offered hereby at an assumed initial public offering price of $ , per
share, and application of the estimated net proceeds therefrom as described
in footnote (2) below:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED(1)(2)(3)
--------- ----------- ------------------
(DOLLARS IN THOUSANDS EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C>
Short-term borrowings:
Borrowing under line of credit ...................... $ 850 $ 850 $
Advance payable to client............................ 1,913 1,913
Capital lease obligations ........................... 399 399
Long-term borrowings:
Advance payable to client ........................... 1,531 1,531
Capital lease obligations ........................... 309 309
Minority interests ................................... 551 551
Redeemable preferred stock, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
2,759,610 shares--actual and pro forma (0 as
adjusted); .......................................... 17,407 17,407
Common stock subject to redemption ................... -- 1,430
Stockholders' equity (deficit):
Common stock; $.001 par value; authorized 50,000,000
shares; issued and outstanding 10,539,000
shares--actual and pro forma (as adjusted) ........ 11 11
Additional paid-in-capital ........................... 943 943
Accumulated deficit .................................. (5,059) (5,059)
Cumulative translation adjustment .................... (75) (75)
Treasury stock ....................................... (400) (400)
--------- ----------- -------------
Total stockholders' equity (deficit) ................. (4,580) (4,580)
--------- ----------- -------------
Total capitalization ................................. $18,380 $19,810 $
========= =========== =============
</TABLE>
- ------------
(1) Adjusted to give effect to: (i) the conversion of the Convertible
Preferred Stock into 2,759,610 shares of Common Stock, (ii) the
exchange of the PRT Barbados Warrants for the JPMVC PRT Warrants, the
elimination of minority interest and recording of related goodwill,
(iii) the exercise of the JPMVC PRT Warrants and the issuance of
936,365 shares of Common Stock thereby and (v) the reclassification of
the 119,181 shares of Common Stock issued in connection with the CMR
acquisition which were subject to redemption.
(2) Adjusted to reflect the payment of accrued dividends and distributions
relating to the Convertible Preferred Stock and Unit Warrants
aggregating $520,000 at June 30, 1997.
(3) Excludes shares of Common Stock issuable upon the exercise of stock
options outstanding as of June 30, 1997, at a weighted average exercise
price of $ per share.
15
<PAGE>
DILUTION
As of , 1997, the Company's net tangible deficiency was
approximately $4.6 million or $ per share. Net tangible book value
per share represents the Company's total tangible assets less the Company's
total liabilities, divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to: (i) the issuance of shares of Common
Stock in connection with the conversion of the Convertible Preferred Stock;
(ii) the issuance of shares of Common Stock in connection with the
exercise of the JPMVC PRT Warrants; (iii) the issuance of shares of
Common Stock as of July 1, 1997, in connection with the acquisition of CMR
and (iv) the sale of shares of Common Stock by the Company (at an
assumed initial public offering price of $ per share) and the application
of the estimated net proceeds therefrom as described in "Use of Proceeds,"
the pro forma net tangible book value of the Company at June 30, 1997, would
have been $ million or $ per share. This amount represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to purchasers of Common Stock in
this Offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Initial public offering price per share of Common Stock ........ $
Net tangible deficiency per share at June 30, 1997 ..............
Increase in net tangible book value per share attributable to
new investors ..................................................
Pro forma net tangible book value per share after giving effect
to this Offering ...............................................
---------
Dilution in net tangible book value per share to new investors .. $
=========
</TABLE>
The following table summarizes, on a pro forma basis as of ,
1997 and after giving effect to the conversion into Common Stock of the
Convertible Preferred Stock and the Warrants and the issuance of
shares of Common Stock in connection with the acquisition of CMR, the
differences in the number of shares of capital stock purchased from the
Company, the total consideration paid and the average price paid per share by
existing stockholders and new investors at the initial public offering price
of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders .... % $ % $
New investors .............
---------- ----------- ------------ ----------- -----------------
Total ..................... 100% $ 100% $
========== =========== ============ =========== =================
</TABLE>
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the three years in the period ended
December 31, 1996 and the balance sheet data at December 31, 1996 and 1995
are derived from the audited financial statements included elsewhere herein.
The selected financial data for the years ended December 31, 1992 and 1993
and as of December 31, 1992 and 1993 are derived from unaudited financial
statements. The financial data as of June 30, 1997 and for the six month
periods ended June 30, 1996 and 1997 are derived from unaudited financial
statements. The unaudited interim financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. The data should be
read in conjunction with the financial statements, related notes, and other
financial information included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ...................... $5,323 $8,181 $13,876 $20,346 $23,801
Cost of revenues .............. 4,113 6,342 10,851 15,594 17,965
Gross profit .................. 1,210 1,839 3,025 4,752 5,836
Selling, general and
administrative expenses ..... 1,030 1,530 2,572 4,110 9,235
Income (loss) from operations 180 309 453 642 (3,399)
Net income (loss) ............. 105 172 251 115 (3,269)
Accretion and dividends of
redeemable preferred stock
and warrants ................. -- -- -- -- (117)
Net income (loss) available to
common stockholders .......... $ 105 $ 172 $ 251 $ 115 $(3,386)
======== ======== ========= ========= ==========
Net income (loss) per
share(2)...................... $ $ $ $ $
======== ======== ========= ========= ==========
Weighted average common shares
and equivalents outstanding .
======== ======== ========= ========= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR SIX MONTHS ENDED SIX MONTHS
ENDED JUNE 30 ENDED
DECEMBER 31 ---------------- JUNE 30
1996(1) 1996 1997 1997(1)
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ...................... $31,304 $9,772 $21,314 $25,579
Cost of revenues .............. 23,447 7,310 15,217 18,402
Gross profit .................. 7,857 2,462 6,097 7,177
Selling, general and
administrative expenses ..... 11,383 3,164 8,210 9,712
Income (loss) from operations (3,526) (702) (2,113) (2,535)
Net income (loss) ............. (3,583) (709) (1,910) (2,282)
Accretion and dividends of
redeemable preferred stock
and warrants ................. (117) -- (532) (532)
Net income (loss) available to
common stockholders .......... $(3,700) $ (709) $(2,442) $(2,814)
============= ======== ========== ============
Net income (loss) per
share(2)...................... $ $ $ $
============= ======== ========== ============
Weighted average common shares
and equivalents outstanding .
============= ======== ========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ..................... $220 $ 395 $ 564 $1,277 $13,923
Total assets ........................ 905 1,937 3,595 4,860 23,960
Total stockholders' equity
(deficit)........................... 245 418 666 781 (2,081)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30 JUNE 30
1997 1997(3)
------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital ..................... $ 9,028 $ 6,358
Total assets ........................ 25,015 29,186
Total stockholders' equity
(deficit)........................... (4,580) (4,580)
</TABLE>
- ------------
(1) Gives effect to the CMR acquisition as if it occurred at the beginning
of the respective period.
(2) Computed on the basis as described in Note 2 to the Consolidated
Financial Statements.
(3) Gives effect to the CMR acquisition as of June 30, 1997.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar expressions
as they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, such forward-looking statements. Factors that could cause or
contribute to such differences include, without limitation, those discussed
in "Risk Factors."
OVERVIEW
PRT was founded in 1989 to provide IT solutions and services
internationally, primarily to Fortune 500-sized companies. PRT provides a
number of IT services including: (i) Strategic Consulting, (ii) Project
Solutions and (iii) Staff Augmentation. These services are performed either
at a client's location or at a PRT facility. The Company's revenues have
increased from $5.3 million in 1992 to $23.8 million in 1996 representing a
CAGR of approximately 45%. For the six month periods ended June 30, 1997 and
June 30, 1996, the Company's revenues were $21.3 million and $9.8 million,
respectively, representing an approximate increase of 118%.
To sustain its growth, the Company has made and continues to make
substantial investments in technological and physical infrastructure,
including: (i) SDCs in the United States and Barbados, (ii) international
training and recruiting centers, (iii) the Company's PAL framework and (iv)
expansion of its management team. Because a significant percentage of these
investments have already been made, the Company believes it will realize
improved operating margins to the extent future revenue growth exceeds
on-going costs associated with such growth. In September 1995, PRT commenced
operations at its SDC prototype in Barbados, West Indies. Following its
strategic plan to replicate the SDC model, the Company opened its Hartford,
Connecticut area SDC in 1997. PRT plans to continue international replication
of SDCs in the future, with an SDC expected to open in India in 1998.
With respect to Strategic Consulting and Project Solutions services, the
Company generally assumes responsibility for project management and bills the
client on a time and materials basis, although a small percentage of projects
are billed on a fixed-price basis. Staff Augmentation services are billed on
a time and materials basis and generally have lower gross profit margins than
PRT's other service offerings. Since 1994, the Company has been shifting its
business from its Staff Augmentation services toward higher-margin Strategic
Consulting and Project Solutions services.
Revenues are primarily recognized as services are rendered based on time
and materials charges or, to a lesser extent, using the percentage of
completion method for fixed-price projects.
Cost of revenues consists primarily of salaries (including non-billable
and training time), benefits and travel expenses for IT professionals and is
PRT's most significant expenditure item. The Company strives to maintain its
gross profit margins by offsetting increases in salaries and benefits with
increases in billing rates. PRT has realized higher gross profit margins by
shifting toward higher-margin Strategic Consulting and Project Solutions
services and delivering such services through its SDCs in Barbados and the
Hartford area. The Company intends to continue to take advantage of the
benefits of delivering its services through its SDCs by building and
expanding its SDCs. For the six-month periods ended June 30, 1997 and June
30, 1996, revenues earned through SDCs represented approximately 26% and 11%,
respectively, of total revenues.
Selling, general and administrative ("SG&A") expenses consist primarily of
costs associated with: (i) corporate overhead, (ii) sales and account
management, (iii) telecommunications, (iv) human resources, (v) recruiting
and training, (vi) depreciation and amortization of infrastructure and (vii)
other administrative expenditures.
PRT Barbados is eligible for certain favorable tax provisions under the
laws of Barbados and has obtained a license to conduct business in accordance
with the provisions of the International Business
18
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Companies Act 1991-24. PRT Barbados is taxed at an income tax rate of 1%. The
Company considers PRT Barbados' earnings to be permanently invested and does
not anticipate repatriating any of these earnings to the United States. If
the Company decides to repatriate any earnings of PRT Barbados, it will be
required to record a provision for United States income taxes on such amounts
and, upon repatriation of the funds, pay United States income taxes thereon.
Employees in Barbados also receive certain tax concessions for
transportation, housing and food allowances.
As part of the Company's expansion strategy, in July 1997, PRT completed
the acquisition of CMR for an aggregate of $6.3 million in cash, notes and
common stock. CMR provides the Company with additional Fortune 500-sized
clients, a consultant list in the northeastern United States and additional
trained IT professionals. See "Certain Transactions--Acquisition of Computer
Management Resources, Inc." Currently, the Company has no material
acquisitions pending.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30
-----------------------------------------------
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues ...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............. 78.2 76.6 75.5 74.8 71.4
Gross profit .................. 21.8 23.4 24.5 25.2 28.6
SG&A .......................... 18.5 20.2 38.8 32.4 38.5
-------- -------- --------- -------- --------
Income (loss) from operations 3.3% 3.2% (14.3)% (7.2)% (9.9)%
======== ======== ========= ======== ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased approximately 118% to $21.3 million in the
six month period ended June 30, 1997 from $9.8 million for the comparable
period in 1996. This growth in revenues is primarily attributable to
increases in the size of the Company's IT professional workforce, expansion
of the Company's SDC operations, additional services provided to existing
clients and, to a lesser extent, increases in billing rates. The number of IT
professionals (including subcontractors) increased to 432 on June 30, 1997
from 184 on June 30, 1996. Revenues from SDCs increased approximately 400% to
$5.5 million for the six month period ended June 30, 1997 from $1.1 million
for the comparable period in 1996.
Cost of Revenues. Cost of revenues increased approximately 108% to $15.2
million in the six month period ended June 30, 1997 from $7.3 million for the
comparable period in 1996. As a percentage of revenues, cost of revenues
decreased from approximately 75% for the six month period ended June 30, 1996
to approximately 71% for the comparable period in 1997. The increase in cost
of revenues is primarily attributable to increases in the number of the
Company's IT professionals. In 1997, the decrease in cost of revenues as a
percentage of revenues reflects: (i) the continued expansion of the Company's
SDCs, (ii) the continued strategic shift of its business toward higher-margin
service offerings and (iii) higher utilization rates at the Company's SDCs in
1997.
Gross Profit. For the reasons set forth above, gross profit increased
approximately 148% to $6.1 million for the six month period ended June 30,
1997 from $2.5 million for the comparable period in 1996. As a percentage of
revenues, gross profit increased to approximately 29% for the six-month
period ended June 30, 1997 from 25% for the comparable six month period in
1996.
SG&A Expenses. SG&A expenses increased approximately 159% to $8.2 million
for the six month period ended June 30, 1997 from $3.2 million for the
comparable period in 1996. As a percentage of revenues, SG&A expenses
increased to approximately 39% for the six month period ended June 30, 1997
from approximately 32% for the comparable period in 1996. This increase
resulted from: (i) the continued expansion of the Company's sales and account
management efforts, (ii) further enhancements of the Company's SDCs, (iii)
depreciation of infrastructure, (iv) increased telecommunications costs, (v)
19
<PAGE>
addition of management personnel and (vi) other corporate overhead cost
increases necessary to support the Company's continued and anticipated
revenue growth.
Income (Loss) from Operations. For the reasons set forth above, loss from
operations for the first six months of 1997 was $2.1 million compared to a
loss of $702,000 in the comparable period in 1996. As a percentage of
revenues, the loss from operations for the six months ended June 30, 1997
increased to approximately 10% compared to approximately 7% in the comparable
period in 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenues. Revenues increased approximately 17% to $23.8 million in fiscal
year 1996 from $20.3 million in fiscal year 1995. This growth in revenues is
primarily attributable to: (i) increases in the size of the Company's IT
professional workforce; (ii) expansion of the Company's SDC operations; (iii)
additional services provided to existing and new clients and (iv) to a lesser
extent, increases in billing rates. The number of IT professionals utilized
by the Company (including subcontractors) increased to 308 as of December 31,
1996 from 133 as of December 31, 1995. Revenues from SDCs increased to
approximately $3.5 million in fiscal year 1996 from $55,000 in fiscal year
1995.
Cost of Revenues. Cost of revenues increased approximately 15% to $18.0
million in fiscal year 1996 from $15.6 million in fiscal year 1995. As a
percentage of revenues, cost of revenues decreased to approximately 76% for
fiscal year 1996 from approximately 77% for fiscal year 1995. The increase in
cost of revenues is primarily attributable to increases in the number of the
Company's IT professionals. In 1996, the decrease in cost of revenues as a
percentage of revenues is primarily due to billing rate increases partially
offset by salary increases to IT professionals (particularly at the Company's
Barbados SDC) and the strategic shift of its business toward higher-margin
service offerings. Additionally, the Company achieved higher utilization
rates in its SDC in 1996.
Gross Profit. For the reasons set forth above, gross profit increased
approximately 23% to $5.8 million in fiscal year 1996 from $4.8 million in
fiscal year 1995. As a percentage of revenues, gross profit increased to
approximately 25% in fiscal year 1996 from approximately 23% in fiscal year
1995.
SG&A Expenses. SG&A expenses increased approximately 125% to $9.2 million
in 1996 from $4.1 million in fiscal year 1995. As a percentage of revenues,
SG&A expenses increased to approximately 39% for fiscal year 1996 from
approximately 20% for fiscal year 1995. This increase resulted from expenses
incurred to: (i) build and staff the near-shore SDC in Barbados, (ii) enhance
the Company's infrastructure, (iii) grow the management team necessary to
support the Company's continued and anticipated revenue growth and, to a
lesser extent and (iv) fund certain increases in selling costs incurred in
connection with obtaining preferred vendor status relating to the Company's
Staff Augmentation business.
Income (Loss) from Operations. For the reasons set forth above, loss from
operations was $3.4 million in fiscal year 1996 compared to income from
operations of $642,000 in fiscal year 1995.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Revenues. Revenues increased approximately 47% to $20.3 million in fiscal
year 1995 from $13.9 million in fiscal year 1994. This growth in revenues is
primarily attributable to increases in the size of the Company's IT
professional workforce. The number of IT professionals utilized by the
Company (including subcontractors) increased approximately 32% to 133 as of
December 31, 1995 from 101 as of December 31, 1994. The increase in revenues
resulted to a lesser extent from an increase in the average hourly billing
rates charged for the Company's IT professionals.
Cost of Revenues. Cost of revenues increased approximately 44% to $15.6
million in fiscal year 1995 from $10.9 million in fiscal year 1994. As a
percentage of revenues, cost of revenues decreased to approximately 77% for
fiscal year 1995 from approximately 78% for fiscal year 1994. The increase in
cost of revenues is primarily attributable to increases in the number of the
Company's IT professionals. In 1995, the decrease in cost of revenues as a
percentage of revenues is primarily due to billing rate increases.
20
<PAGE>
Gross Profit. For the reasons set forth above, gross profit increased
approximately 57% to $4.8 million in fiscal year 1995 from $3.0 million in
fiscal year 1994. As a percentage of revenues, gross profit increased to
approximately 23% in fiscal year 1995 from approximately 22% in fiscal year
1994.
SG&A Expenses. SG&A expenses increased approximately 60% to $4.1 million
in fiscal year 1995 from $2.6 million in fiscal year 1994. As a percentage of
revenues, SG&A expenses increased from approximately 19% for fiscal year 1994
to approximately 20%. This increase was attributable primarily to the opening
and staffing of three sales and account management offices and the near-shore
SDC in Barbados.
Income (Loss) from Operations. For the reasons set forth above, income
from operations was $642,000 in fiscal year 1995 compared to $453,000 in
fiscal year 1994. As a percentage of revenues, income from operations was
approximately 3% in both fiscal years 1995 and 1994.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for the most recent eight quarters ending with the quarter ended
June 30, 1997. This information has been prepared on the same basis as the
audited consolidated financial statements contained elsewhere in this
Prospectus and includes, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the information for the periods presented. This information
should be read in conjunction with the Company's Consolidated and Unaudited
Consolidated Financial Statements and related Notes thereto. Results of
operations for any previous fiscal quarter are not indicative of results for
the full year or any future quarter. See "Risk Factors--Fluctuations in
Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ..................... $5,441 $4,699 $4,615 $5,157 $6,352 $ 7,677 $ 9,039 $12,275
Cost of revenues ............. 4,222 3,485 3,525 3,785 4,742 5,913 6,621 8,596
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Gross profit ................. 1,219 1,214 1,090 1,372 1,610 1,764 2,418 3,679
SG&A ......................... 894 1,515 1,170 1,994 2,492 3,579 3,838 4,372
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Income (loss) from operations $ 325 $ (301) $ (80) $ (622) $ (882) $(1,815) $(1,420) $ (693)
=========== ========== =========== ========== =========== ========== =========== ==========
AS A PERCENTAGE OF REVENUE:
Revenues ..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............. 77.6 74.2 76.4 73.4 74.7 77.0 73.2 70.0
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Gross profit ................. 22.4 25.8 23.6 26.6 25.3 23.0 26.8 30.0
SG&A.......................... 16.4 32.2 25.4 38.7 39.2 46.6 42.5 35.6
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Income (loss) from operations 6.0% (6.4)% (1.8)% (12.1)% (13.9)% (23.6)% (15.7)% (5.6)%
=========== ========== =========== ========== =========== ========== =========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund working capital to
support its growth. In May 1997, the Company obtained a $7.0 million credit
facility with Chase Manhattan Bank, N.A. ("Chase"), which expires in June
1998 and bears interest at the Company's option at either the bank's prime
rate (8.5% at June 30, 1997) or LIBOR plus 2.25% (the "Line of Credit").
Borrowings under the Line of Credit, which are limited to 75% of PRT's
eligible U.S. accounts receivable, as defined therein, are collateralized by
a security interest in substantially all of the Company's assets. As of June
30, 1997, the Company had $850,000 outstanding under the Line of Credit. The
Company believes that its receivables collection practices and terms are
consistent with industry practices.
The Company's working capital decreased to $9.0 million at June 30, 1997
from $13.9 million at December 31, 1996. Cash and cash equivalents were $7.9
million at June 30, 1997 compared to $14.9
21
<PAGE>
million at December 31, 1996. The primary uses of cash during the six months
ended June 30, 1997 were to fund a net loss of $1.9 million, an increase of
accounts receivable of $4.6 million, offset by an increase in accrued
compensation, accounts payable and accrued expenses of $1.5 million. Cash and
cash equivalents of $2.9 million were used to purchase additional fixed
assets during the period ended June 30, 1997. Offsetting the use of cash were
borrowings from the Line of Credit totaling $850,000 and proceeds from a
client advance of $632,000 (included in the Advances described below).
The Company used $2.5 million of cash for operations for the year ended
December 31, 1996. The primary uses of cash for 1996 were to fund a net loss
of $3.3 million, an increase in accounts receivable of $2.3 million, offset
by an increase in accrued compensation, accounts payable and accrued expenses
of $2.7 million. In 1996 the Company used $2.1 million in cash, for the
purchase of fixed assets. For the year ended December 31, 1996, the Company
generated $18.8 million in cash from financing activities. The primary
sources of cash were $17.1 million from issuance of the Company's Convertible
Preferred Stock and the Warrants, and $2.0 million from an advance payable to
JPMVC. See "Certain Transactions--Certain Financing Transactions."
The Company and PRT Barbados entered into agreements providing for
advances to PRT Barbados of $3.7 million in the aggregate (the "Advances") by
J.P. Morgan Ventures Corporation ("JPMVC"). In consideration for the
Advances, PRT Barbados issued warrants to purchase up to 24% of the
authorized shares of PRT Barbados capital stock to JPMVC (the "PRT Barbados
Warrants"). In the first quarter of 1997, the Company and JPMVC agreed to,
among other things, the exchange of the PRT Barbados Warrants for warrants to
purchase 936,365 shares of PRT Common Stock (the "JPMVC PRT Warrants"). The
JPMVC PRT Warrants are only exercisable by forgiveness of the Advances. Upon
the consummation of this Offering, the JPMVC PRT Warrants will be exercised
for 936,365 shares of Common Stock and the Advances will be forgiven.
As of July 1, 1997, the Company completed the acquisition of CMR. The
Company paid $2.9 million in cash and issued $2.0 million in notes and $1.4
million in Common Stock for all of the common stock of CMR.
The Company anticipates incurring approximately $3.5 million and $2.0
million in capital expenditures in the next 12 months to complete the
infrastructure at its Hartford, Connecticut area and Chennai, India SDCs,
respectively. The Company does not believe that such expenditures will have a
material adverse impact on its liquidity, results of operations or capital
requirements. The Company anticipates that its primary uses of working
capital in the near term will be the establishment of additional SDCs, the
development of new facilities and funding growth through acquisitions and
otherwise, and the accounts receivable related thereto. The Company believes
that the proceeds from this Offering, together with cash from operations and
borrowings under the Line of Credit, will be sufficient to meet the Company's
presently anticipated working capital needs for the next 12 months.
In the normal course of business, various claims may be made against the
Company. At this time, in the opinion of management, there are no pending
claims, the outcome of which are expected to result in a material adverse
effect on the consolidated financial position or results of operations of the
Company.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard on December 31, 1997. Early adoption of this standard is not
permitted. The primary requirements of this standard are: (i) replacement of
primary earnings per share with basic earnings per share, which eliminates
the dilutive effect of options and warrants; (ii) use of an average share
price in applying the treasury method to compute dilution for options and
warrants for fully-diluted earnings per share and (iii) disclosure
reconciling the numerator and denominator of earnings per share calculations.
The Company's adoption of this statement is not expected to have a
significant impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997. The
Company will be required to adopt the new standard for the year ending
December 31, 1998. This statement requires specific disclosure regarding the
Company's
22
<PAGE>
capital structure, including descriptions of the securities comprising the
capital structure and the contractual rights of the holders of such
securities. The Company plans to adopt this statement in fiscal year 1998 and
does not anticipate that the statement will have a significant impact on its
financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997. The Company will be required
to adopt the new standard for the year ending December 31, 1998, although
early adoption is permitted. The primary objective of this statement is to
report and disclose a measure ("Comprehensive Income") of all changes in
equity of a company that result from transactions and other economic events
of the period other than transactions with owners. The Company will adopt
this statement in fiscal year 1998 and does not anticipate that the statement
will have a significant impact on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," was issued in June 1997.
The Company will be required to adopt the new standard for the year ending
December 31, 1998, although early adoption is permitted. This statement
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. The Company will adopt
this statement in fiscal year 1998 and does not anticipate that the adoption
of the statement will have a significant impact on its financial statements.
CHANGES IN ACCOUNTANTS
The Company engaged Ernst & Young LLP as its independent auditor in July
1997 to replace KPMG Peat Marwick LLP ("KPMG") as the Company's independent
auditor to avoid a potential lack of independence resulting from a KPMG
employee's ownership interest in PRT and family relation with certain PRT
stockholders. During the period between the date KPMG was engaged and the
date on which KPMG resigned, there was no: (i) disagreement between the
Company and KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure or (ii) adverse
opinions or a disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope or accounting principles in connection with its
report on the Company's financial statements.
In March 1995, the Company, with the approval of its Board of Directors,
hired KPMG to replace Shulman, Cohen, Furst, Kramer & Rosen, P.C. ("Shulman,
Cohen") as its independent auditors. During the period between January 1,
1993 and the date on which Shulman, Cohen was replaced, there was no: (i)
disagreement between the Company and Shulman, Cohen on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure or (ii) adverse opinions or a disclaimer of
opinion, or qualification or modification as to uncertainty, audit scope or
accounting principles in connection with its report on the Company's
financial statements.
23
<PAGE>
BUSINESS
The following description of the Company's business contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used in this section, the words "anticipate," "believe," "expect" and
similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, such forward-looking statements. Factors that
could cause or contribute to such differences include, without limitation,
those discussed in "Risk Factors."
INTRODUCTION
PRT was founded in 1989 to provide IT solutions and services
internationally, primarily to Fortune 500-sized companies. PRT provides a
number of services including Strategic Consulting, Project Solutions and
Staff Augmentation. PRT offers full life cycle solutions, beginning with the
understanding of the client's business issues and continuing through: (i)
problem analysis, (ii) solution architecture and design, (iii) coding, (iv)
testing and (v) ongoing maintenance. This life cycle approach, supported by
strict software engineering principles embodied in the Company's PAL
framework, as well as an internal, independent software quality assurance
function allows the Company to provide high-quality, effective solutions. As
of September 1, 1997, PRT employed or had subcontracting arrangements with
over 700 personnel, including 636 IT professionals, of whom 172 were
subcontractors; of PRT's IT professionals 54% worked in SDCs.
Strategic Consulting services include management consulting, strategic IT
planning, emerging technology research, knowledge transfer and "Quality
Journey" strategies and implementations. Project Solutions services consist
of: (i) full life cycle software development, (ii) hardware and software
platform migrations, (iii) maintenance outsourcing, (iv) Year 2000 and other
mass change renovation and (v) testing services for both mainframe and
client/server environments. Project solutions are rendered according to
rigorous software engineering principles and can be provided at a client
location or at one of PRT's SDCs. Staff Augmentation offers team or
individual staffing for a full spectrum of IT services, ranging from
traditional systems analysis through testing to high value-added IT
consulting and project management.
PRT focuses its marketing efforts on large businesses, primarily Fortune
500-sized companies, with significant IT budgets and recurring software and
maintenance development needs. PRT's client base includes companies primarily
in the financial services, consumer products, communications and healthcare
industries. The Company's five largest clients in the first six months of
1997, in alphabetical order, were Chase Manhattan Bank, N.A., J.P. Morgan &
Co. Inc., Mitsubishi International Corp., Philip Morris Companies Inc. and
Prudential Insurance Company of America.
The Company's sales have increased to $23.8 million in 1996 from $5.3
million in 1992 representing a CAGR of approximately 45%. For the six month
periods ended June 30, 1997 and June 30, 1996, the Company's revenues were
$21.3 million and $9.8 million, respectively, representing an increase of
approximately 118%.
THE IT SERVICES INDUSTRY
Overview
Worldwide competition, heightened by deregulation, globalization and rapid
technological advancement, is placing increasing demands on corporations to:
(i) improve the quality of products and services, (ii) reduce costs and time
to market of new products and services, (iii) improve operating efficiencies
and (iv) strengthen client relationships. The rapid rate of advancement in IT
capabilities, as well as the greater complexities and costs to an
organization of maintaining the IT function, is transforming the role of the
in-house IT department. The ability to integrate and deploy improved IT in a
cost-effective manner has become critical to an organization's success. As a
result, organizations are increasingly viewing the IT function as less of a
support center and more as an integral component of corporate strategy.
24
<PAGE>
Faced with: (i) an increased strategic reliance on IT, (ii) a shortage of
skilled IT personnel, (iii) escalating costs of maintaining in-house IT
departments and (iv) an inability to effectively handle mass change issues,
such as the Year 2000 problem, organizations are increasingly outsourcing IT
functions to third-party vendors. Forrester Research estimates that the
market for IT consulting, design, implementation, integration, management, or
full outsourcing to an external solutions provider or contract professional
was $124.0 billion in 1996 and will reach $303.1 billion by 2002,
representing an approximate CAGR of 16%.
Industry Trends
The Company believes that the following key industry trends will continue
to have a major influence on the worldwide IT services market.
Shortage of IT Professionals. There is a growing shortage of IT
professionals in the United States, Western Europe and Japan. This shortage
of IT professionals is rising due to the need for many organizations to
maintain legacy systems, the migration to new applications architectures and
the relatively small population of trained IT professionals. Additionally,
mass change issues, such as the Year 2000 problem, are accelerating this
increasing industry-wide shortage of IT professionals.
Mass Change Problems. Substantial growth opportunities for IT services
companies exist due to problems inherent in implementing mass changes to
application systems and their associated databases. Examples of mass change
problems include the Year 2000 problem, the European Union's expected
conversion to a single European currency and the extension of the number of
digits and other characters in zip codes, product codes and account numbers.
The Gartner Group has estimated that the worldwide cost to resolve the Year
2000 problem alone could range from $300 billion to $600 billion and that the
typical Fortune 100 company will spend between $50 million and $100 million
for Year 2000 services. Additionally, the Gartner Group projects that by the
end of 1997 only 20% of all systems in the world will be Year 2000 compliant
and that only 50% of such systems will be Year 2000 compliant by the end of
1999.
Offshore Software Development. Due to the increasing shortage of qualified
IT professionals in developed countries and the rising domestic costs of
applications development and support, an increasing number of organizations
are turning to offshore software development. Offshore software development
offers a number of benefits, including lower costs and access to a larger
pool of skilled IT professionals. India is widely acknowledged as the leader
in offshore software development due to its large numbers of highly educated,
lower cost, English-speaking IT professionals. The Gartner Group predicts
that over the next three years many organizations will spend up to 40% of
their legacy systems software budgets for offshore projects. The Company
believes that the demand for offshore software development will continue to
be exacerbated by mass change problems.
Software Development Challenges. Software development organizations face a
number of challenges in completing applications projects consistently,
on-time and on-budget. The Standish Group estimates approximately one-third
of software development projects will be cancelled before completion and over
one-half will have significant cost overruns. Because software development is
plagued with these problems, standards and benchmarks, such as the Capability
Maturity Model ("CMM") developed by the Software Engineering Institute at
Carnegie Mellon University have been established. This model serves as a base
to deliver, reliable, high-quality software solutions on-time and on-budget.
THE PRT GLOBAL SOLUTION
The PRT Global Solution enables the Company's clients to outsource a broad
range of business and technology needs. PRT's international fulfillment
capability offers a high-quality alternative to traditional onsite
consulting. The Company reliably and predictably provides flexible technical
solutions to a broad range of issues encountered by Fortune 500-sized
companies. In this highly competitive and rapidly changing business
environment, the Company offers a cost-effective, reliable solution. The
following are key attributes of PRT's Global Solution: (i) expansion of
strategic solutions offerings, (ii) replication of Software Development
Centers, (iii) utilization of a disciplined software engineering approach and
(iv) emphasis on recruitment and training of IT professionals.
25
<PAGE>
Expand Strategic Solutions Offerings. PRT maintains active communication
between its clients and its IT professionals to understand the issues facing
large scale, complex organizations. As trends are identified, PRT strives to
quickly develop new capabilities and then markets the resulting solutions to
the Company's existing and potential clients. These capabilities include: (i)
data mining, (ii) data visualization, (iii) data warehousing, (iv) emerging
client/server technologies, (v) intelligent agents, (vi) Internet/ intranet
technologies, (vii) object-oriented technologies and (viii) usability
engineering. PRT seeks to continuously add value to its offerings by applying
these techniques and technologies to projects as part of its solutions.
Replicate Software Development Centers. The Company intends to increase
its investment in an integrated network of onshore, near-shore and offshore
SDCs and offices to facilitate offsite development of high quality software
on a cost effective basis. PRT opened its first SDC in September 1995,
near-shore in Barbados, West Indies. A second SDC is located on shore in the
Hartford, Connecticut area. The Company intends to utilize its experience
gained in establishing and operating its SDCs to efficiently open and operate
additional SDCs, including an offshore facility in Chennai, India in 1998.
The SDCs will be strategically located based on: (i) accessibility to
resources and skill sets, (ii) cost considerations, (iii) political and
cultural stability, (iv) availability of necessary communications and
technical infrastructure, (v) proximity to clients, (vi) convenience of time
zone and (vii) employee quality of life. The Company's SDCs are directly
linked by high-speed dedicated lines to all other PRT locations and to many
clients. Management believes the SDCs will boost PRT's ability to leverage
the abilities of its workforce on behalf of its clients while maintaining the
common PAL approach, regardless of the location of the SDC.
Utilize Disciplined Software Engineering Approach. To address the industry
challenges inherent in developing high-quality, complex, mission-critical
software on time and within budget, PRT has developed proprietary software
tools and processes. These tools and processes are embodied within the PAL
framework based upon the CMM model. PAL is a knowledge bank of software
development life cycle processes, methodologies, tools and reusable work
product developed by PRT. As processes are refined, PAL is continuously
updated. PAL is available to all PRT Project Solutions and Strategic
Consulting personnel, wherever located, through the Company's computer
network. The PAL framework enables the Company to deliver consistent,
predictable, reliable, high-quality solutions to its clients on a flexible,
cost-effective basis.
Emphasize Recruitment and Training of IT Professionals. PRT maintains
active recruiting operations in Canada, the Caribbean, India, Ireland, Sri
Lanka, the United Kingdom and the United States. PRT continuously searches
for new sources of experienced professionals and qualified graduates of
educational institutions around the world. Many of PRT's non-U.S. employees
seek opportunities that provide competitive compensation, career growth
potential, intellectual challenge and diverse work locations. All newly
graduated PRT SDC employees are trained on the PAL framework through a 12
week training program. In addition, all employees undergo continuous training
as new technologies emerge and as PAL is enhanced. As PRT replicates the SDC
model in new locations, additional opportunities for geographic relocation
and career advancement for PRT employees will arise. The Company believes
this provides a competitive advantage in attracting and retaining IT
professionals.
PRT GROWTH STRATEGIES
PRT has established four primary growth strategies in order to expand
revenues and enhance profitability. These growth strategies include: (i)
expanding client relationships, (ii) building and expanding Software
Development Centers, (iii) capitalizing on investments in infrastructure and
personnel and (iv) continuing to pursue strategic acquisitions.
Expand Client Relationships. PRT will continue to emphasize its strategy
of building long-term, broad relationships with its clients. PRT is
integrally involved in the IT budgeting and planning process with many of its
clients, reflecting the depth of the Company's relationships. In the past
year, PRT has increased its average revenue per client by cross-selling
solutions and services to its existing client base. In the first six months
of 1997, approximately 70% of the Company's revenues was generated from
clients that have been PRT clients for more than two years. The Company will
continue to use its account management teams to identify client needs and
will create new capabilities to meet these needs internally or through
strategic acquisitions.
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Build and Expand Software Development Centers. On September 1, 1997, PRT
employed and subcontracted with 636 IT professionals, 54% of whom were
employed at SDCs. PRT has unutilized space to house approximately 300
additional IT professionals within its current SDC facilities. New locations
and expansion of current facilities are being considered on an on-going basis
as capacity, client, and geographic demands require. PRT has developed an SDC
prototype which should allow future sites to be opened cost effectively on a
shorter time frame than in the past. This replicable prototype also entails
the movement of select groups of management and technical personnel to new
sites to ensure the smooth implementation of, and adherence to, the Company's
PAL framework and work culture. PRT currently anticipates opening a SDC in
Chennai, India in 1998. PRT is currently assessing additional sites in India,
and new sites in Europe, Asia and South America.
Capitalize on Investments in Infrastructure and Personnel. Since 1995, the
Company has made significant investments in infrastructure to allow
engagements to be performed offsite with seamless integration of PRT systems
and client systems, while sensitive databases, programs, development and
support activities remain at the client's site. The primary purpose for
building and maintaining an international network and application
architecture is to enable PRT's employees and clients to work productively
without regard to the limitations presented by location, technical platform
or time zone. The Company believes it has also put a senior management team
in place that can leverage these infrastructure investments and continued to
effectively manage growth.
Continue to Pursue Strategic Acquisitions. As part of the Company's
expansion strategy PRT completed the acquisition of CMR in July 1997. CMR
provided the Company with additional Fortune 500-sized clients and additional
IT professionals in the northeastern United States. The Company will continue
to examine the possibility of acquiring complementary organizations. PRT's
target acquisition candidates generally consist of firms that provide
attractive service distribution outlets (by location or client) and/or mature
service capabilities in the form of IT products, practices or personnel.
PRT SERVICES OFFERED
Overview
PRT's understanding of the IT marketplace has resulted in its development
of capabilities in three primary categories: (i) Strategic Consulting, (ii)
Project Solutions and (iii) Staff Augmentation. The Company views its
long-term success as dependent upon its ability to maintain and expand its
relationships with its existing clients and attract new clients. PRT
transfers strategic knowledge to clients while building long-term
relationships through its service offerings, causing many clients to view PRT
as an extension of their in-house IT organizations.
Strategic Consulting
PRT works with its clients to develop a technical vision and IT services
strategy that helps its clients achieve corporate objectives and enhance
competitiveness. Because PRT is not limited to any particular product
platform, technology or vendor, the Company brings valued objectivity to its
clients when advising on technology assessment and selection.
PRT's Strategic Consulting practice includes services such as: (i)
management consulting, (ii) strategic IT planning, (iii) emerging technology
research and knowledge transfer and (iv) "Quality Journey" strategy and
implementation services which assist clients in developing a quality
management function, a software development life cycle and a continuous
improvement work culture. Before an IT decision is made, PRT reviews
alternative courses of action and works with the client's management to
select the best approach and technologies, outlining milestones and other
elements required to implement viable and effective solutions in a
coordinated, efficient, cost effective manner. PRT's consultants also
transfer expertise, practical experience and technological know-how directly
to its clients. New technologies on which PRT is focusing include: (i) data
mining, (ii) data visualization, (iii) data warehousing, (iv) emerging
client/server technologies, (v) intelligent agents, (vi) Internet/intranet
technologies, (vii) object-oriented technologies and (viii) usability
engineering.
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An example of the Company's Strategic Consulting practice involved the
establishment of a quality management function within a client's in-house IT
department. The client had worked with PRT's Barbados SDC and was interested
in the Company's PAL framework, quality management organization structure and
team-based work culture. The client engaged PRT to analyze the client's
software development life-cycle and the processes utilized within the
client's applications development organization. When the analysis was
complete and inefficiencies were discovered, the client asked PRT to
implement a "Quality Journey" strategy. This strategy implementation included
modifying PRT's PAL framework to fit the client's environment and goals, as
well as restructuring and training staff within this client's newly created
Software Engineering Process Group ("SEPG") and Software Quality Assurance
Group ("SQA"). The SEPG continuously refines the client's PAL while the SQA
implements the PAL processes by training and assisting client development
teams on quality solution delivery. Finally, PRT provided experts in each of
the new functions to guide the client's teams and perform selected quality
functions as the team learned to become self sufficient. This project has
differentiated PRT from other competitors and has led to a number of
additional assignments from this client involving SDCs, Year 2000 solutions
and Staff Augmentation.
Project Solutions
PRT's Project Solutions service involves the analysis, design,
implementation, testing and management of highly complex, large scale
software development projects. These projects include application
development, software and hardware platform migration, database design, user
interface design, maintenance outsourcing and mass change renovation and
testing. Such projects are performed using strict software engineering and
project management practices. Projects are developed under the PAL framework
onsite at a client's location or at one of PRT's SDCs located onshore
(Connecticut), near-shore (Barbados) or offshore (India, planned for 1998).
After understanding a client's project and business goals, the Company
begins by performing a project risk analysis and prepares an appropriate plan
to accomplish the desired objectives. PRT applies its PAL framework
throughout the full project life cycle from the planning phase through
design, coding, testing, quality assurance and implementation, regardless of
when PRT enters the cycle. Finally, PRT offers support and maintenance of
completed projects on an ongoing basis.
One example of a Project Solutions service that PRT has addressed is the
Year 2000 compliance issue. PRT assembled a team to develop an integrated
solution for a client's mainframe system. PRT determined the process
necessary to resolve the problem. The solution involved using third-party
software tools coupled with a PRT developed framework for assessment,
renovation and testing objectives which became the Company's QA2000
methodology. Subsequently, the Company modified the QA2000 mainframe
methodology to address client/server system issues. To ensure the solution's
effectiveness, PRT replicated the hardware, software and networking
environment of the client's trading floor at PRT's Barbados SDC to develop
appropriate testing solutions. This project exemplifies the cross-selling and
follow-on business opportunities that PRT has experienced.
Staff Augmentation
Due to the shortage of trained IT professionals, PRT's clients often lack
the in-house personnel or skills necessary to accomplish IT objectives. PRT
provides flexible Staff Augmentation services to fill short-and long-term or
specialized technology skill set needs, generally providing qualified
candidates within 48 to 72 hours of notification. For most of the Company's
clients, PRT assigns an account management team comprised of a senior account
manager, an account associate and a recruiting coordinator to provide quality
and timely service. In addition, in order to ensure consistency, quality and
cost effectiveness, many organizations are limiting the number of outside IT
consulting firms they work with to certain preferred vendors. PRT serves as a
preferred vendor to numerous clients including Chase Manhattan Bank, N.A.,
J.P. Morgan & Co. Inc., Philip Morris Companies Inc. and The Prudential
Insurance Company of America.
An example of a development of a preferred vendor relationship involved a
client which had over 600 IT consulting firms to provide IT personnel. The
client realized that having such a large number of IT
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providers created logistical, cost and quality issues, and decided to reduce
the number of outside IT consulting firms to a small preferred group of 17.
Because PRT was chosen as one of the preferred vendors, PRT experienced a
three-fold increase in the number of IT professionals placed at the client.
The Company has been able to leverage its preferred vendor relationship to
provide higher margin SDC business and Strategic Consulting assignments to
this Staff Augmentation client.
SOFTWARE DEVELOPMENT CENTERS
SDCs are the key sites where PRT project solutions are designed,
engineered, constructed, tested and supported in accordance with the
Company's PAL framework. Each SDC has a number of project teams dedicated to
clients and separate quality assurance groups to ensure high-quality,
cost-effective solutions. The SDCs have common infrastructure, organizational
units and human resource practices that allow projects and personnel to be
shifted among the SDCs to maximize utilization rates while meeting client
requirements.
In 1994, the Company sought a way to more efficiently and cost-effectively
provide high-quality project solutions. As a response to client demands, PRT
has opened two SDCs, and a third is planned to be opened in 1998. PRT
determined that opening an SDC near-shore in Barbados, West Indies met all of
its requirements, including: (i) access to trained IT professionals from
around the world with no governmental limitations on work visas, (ii) a
favorable wage structure, (iii) a low tax rate, (iv) a stable political and
economic system with a currency fixed to the U.S. dollar, (v) a modern
communications infrastructure, (vi) an English-speaking population, (vii) a
convenient location with direct flight access from major United States and
European cities (in the same time zone as many PRT clients) and (viii) an
exceptional educational system.
A second SDC was opened in the Hartford, Connecticut area in 1997 in
response to increasing client demands for mainframe programming skills and
Year 2000 services. The Hartford area affords the SDC access to a community
of mainframe programmers and insurance industry expertise catering to the
needs of the large corporations clustered in the northeast United States.
The Company anticipates opening an SDC in Chennai, India in 1998 to
provide services to PRT's European and Far Eastern clients. In addition, this
SDC will act as an emerging technology research and development unit for the
Company and will build proprietary software development tools and object code
for use by all PRT professionals. The Indian SDC will also function as an
additional recruitment and training center.
RECRUITING AND TRAINING
PRT employs 26 recruitment personnel, including 14 in the United States, 7
in India, 3 in Barbados and an additional 2 devoted to other international
recruiting. PRT makes use of a proprietary database to aid in recruiting
high-quality personnel to meet both Project Solutions and Staff Augmentation
needs in terms of skill set and geographic proximity. The Company selects
staff based on appropriate technical skill levels and an assessment of work
style compatibility with PRT and client management and staff.
The Human Resources Department recruits IT professionals globally through
traditional advertisements, the Internet, job fairs, networking through
seminars, user group meetings, expositions and other forums where technical
discussions and/or exhibitions take place. The group utilizes eight different
subcontractor firms and four finders to provide it with additional IT
professionals when necessary. Additionally, the Company has a referral
program providing rewards to PRT's internal staff for locating IT
professionals.
PRT evaluates and qualifies candidates prior to placing them with clients
through an automated technical assessment system. PRT also recognizes the
need to certify its IT professionals in various areas and sponsors
certification as needed. PRT uses its Barbados SDC to develop and test
procedures for assessing and hiring new technical personnel and is also
working with the University of the West Indies to improve its curriculum to
ensure that PRT has qualified local talent to hire.
PRT currently has employment agreements with all of its IT professionals
that are employees as well as with all of the firms it uses to subcontract
non-employee IT professionals. Each of the employment
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agreements contains covenants that the employee or subcontractor will not
compete with the Company at the accounts to which the employee or
subcontractor was introduced for a period of 12 months after termination of
employment with PRT. The employment agreements also contain provisions as to
the ownership by the Company of work product and confidentiality covenants
which apply during and after employment with the Company.
SALES AND MARKETING
The Company focuses its marketing efforts on large businesses, primarily
Fortune 500-sized companies, with significant IT budgets and recurring
software development needs. PRT's clients include companies primarily in the
financial services, consumer products, communications and healthcare
industries. The Company's five largest clients in the first six months of
1997, in alphabetical order, were Chase Manhattan Bank, N.A., J.P. Morgan &
Co. Inc., Mitsubishi International Corp., Philip Morris Companies Inc, and
Prudential Insurance Company of America.
PRT gathers market research by communicating with employees, clients and
consultants and by monitoring business and industry sources. Such resources
also serve as a prospecting and networking mechanism for locating key
decision makers, securing quality referrals and introductions for PRT's
account team and assessing the competitive circumstances and barriers to
entry at prospective or established clients.
PRT generally employs a top-down approach to account penetration and
development. The Company endeavors to establish contacts with Chief Executive
Officers, Chief Information Officers and other senior management through
professional contacts of PRT's senior management, referrals by the Company's
Board of Directors and existing clients, and through client contacts who move
to new employers. The Company has sales and account management locations in
Connecticut, Illinois, New Jersey, New York and Virginia, and employs 20
sales and marketing personnel. Salespeople are compensated on a salary plus
commission basis.
CLIENTS
The Company serves clients in diverse industries which helps to mitigate
cyclical effects in any one industry or market. The Company derives an
additional level of diversification by working with many different operating
divisions within a given client. As of September 1, 1997, the Company
provided services to approximately 50 clients in a range of industries
including, among others, financial services, consumer products,
telecommunications and healthcare. The following is a representative list of
the Company's clients and the year of first engagement:
<TABLE>
<CAPTION>
<S> <C>
AT&T Corp. (1993) J.P. Morgan & Co. Inc. (1992)
Boehringer Ingelheim (1993) Merrill Lynch & Co. Inc. (1993)
Chase Manhattan Bank, N.A. (1990) Mitsubishi International Corp. (1991)
Chesebrough-Pond's, Inc. (1992) Philip Morris Companies Inc. (1993)
Credit Lyonnais (1991) The Prudential Insurance Company of America (1996)
Credit Suisse (1994) Sanwa Bank, Ltd. (1990)
Industrial Bank of Japan, Ltd. (1991) Timex Products, Inc. (1993)
IBM Global Services (1994) Wheat First Butcher Singer (1995)
ITT Hartford Life and Annuity Insurance
Company (1992)
</TABLE>
The Company has historically derived, and expects in the future to derive,
a significant percentage of its revenues from a relatively small number of
clients. In 1996, approximately 72% of the Company's revenue was derived from
its five largest clients by dollar volume, with one client accounting for
approximately 28%; during the first six months of 1997, approximately 79% of
the Company's revenue was derived from its five largest clients, with one
client accounting for approximately 25% of revenues. However, this large
client is comprised of six subsidiaries or divisions with which PRT does
business, none
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of which comprises more than approximately 14% of PRT's revenues, and PRT
considers each subsidiary to be a separate client because the individual
subsidiaries and divisions make their own purchasing decisions. As of July 1,
1997, the Company acquired CMR. If CMR had been acquired on January 1, 1997,
on a pro-forma basis during the first six months of 1997, approximately 66%
of the Company's revenues would have been derived from its largest five
clients and approximately 20% would have been derived from the Company's
largest customer.
For the year ended December 31, 1996, Chase Manhattan Bank, N.A., J.P.
Morgan & Co. Inc. and Philip Morris Companies Inc., and for the six-month
period ended June 30, 1997, Chase Manhattan Bank, N.A., J.P. Morgan & Co.
Inc., Philip Morris Companies Inc. and The Prudential Insurance Company of
America each accounted for over 10% of PRT's revenues.
COMPETITION
The IT services industry is highly competitive and served by numerous
international, national, regional and local firms, all of which are either
existing or potential competitors of the Company. Primary competitors of PRT
include "Big Six" accounting firms, software consulting and implementation
firms, applications software firms, service groups of computer equipment
companies, general management consulting firms, programming companies and
temporary staffing firms as well as internal IT staff of PRT's clients. The
Company believes that the principal competitive factors in the IT services
industry include the range of services offered, cost, technical expertise,
responsiveness to client needs, speed in delivering IT solutions, quality of
service and perceived value. Based on the Company's experience in competitive
situations, the Company believes that it competes favorably with respect to
these factors.
INTELLECTUAL PROPERTY RIGHTS
The Company believes that its success and ability to compete is dependent
upon its proprietary systems and technology. The Company relies on a
combination of copyright, trademark and trade secret laws as well as
confidentiality agreements with its employees, key suppliers and customers
and other measures to establish and protect its technology and other
proprietary rights. The Company does not have any patents. The Company has
copyright protection with respect to certain of its proprietary software, its
Web site and certain marketing materials. In addition, the laws of some
foreign countries may not permit the protection of the Company's proprietary
rights to the same extent as the laws of the United States. While the Company
relies on trademark, trade secret and copyright laws to protect its
proprietary rights, the Company believes that the technical and creative
skills of its personnel, high-quality service standards, continued
development of its proprietary systems and technology, and brand name
recognition are more important to establish and maintain a leadership
position and strengthen its brand.
As part of its confidentiality procedures, the Company generally enters
into agreements with its employees, subcontractors and certain clients which
limit access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that steps taken by the
Company will be adequate to prevent misappropriation of its technology, that
agreements entered into for that purpose will be enforceable or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its intellectual property rights. Policing unauthorized use of the
Company's proprietary rights is difficult. Any misappropriation of the
Company's technology or development of competitive technologies could have a
material adverse effect on the Company's business, results of operations or
financial condition. The Company could incur substantial costs and
management's attention could be diverted from the Company's operations in
protecting and enforcing its intellectual property. Moreover, there can be no
assurance that claims asserting that its intellectual property rights
infringe on the intellectual property rights of others will not arise. There
can be no assurance that such a claim will not result in litigation or that
the Company would prevail in such litigation or be able to obtain a license
for the use of any infringing intellectual property from a third party on
commercially reasonable terms if at all in the event of an adverse
determination. The Company typically has agreed to indemnify its customers
and key suppliers for liability in connection with the infringement of a
third party's intellectual property. While the Company is not currently
subject to any such claims, any future claim, with or without merit, could
result in material adverse effect on the Company's business, results of
operations or financial condition.
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FACILITIES
The Company leases all of its facilities, consisting of over 108,000
square feet of space in nine locations. PRT currently operates in four types
of facilities: (i) SDCs, (ii) sales and account management offices, (iii)
training and recruiting centers and (iv) administration and operations
offices in New York, New York and Hawthorne, New York. PRT has sales and
account management offices located in Connecticut, Illinois, New Jersey, New
York and Virginia. Currently, the Company operates two SDCs, located in
Barbados, West Indies and in the Hartford, Connecticut area. PRT plans to
open its third SDC in Chennai, India during 1998. The Company currently
operates a recruiting and training center in Mumbai, India.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, no material legal
proceedings are pending to which the Company, or any of its property, is
subject.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the Company's executive officers and the
Board of Directors of PRT Group Inc. and their ages as of Sepember 1, 1997
(collectively, the "Management").
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------ ----- -----------------------------------------------
<S> <C> <C>
Douglas K. Mellinger 33 Chairman, President and Chief Executive Officer
Srinivasan Viswanathan 47 President, PRT Barbados
Gregory S. Mellinger (1) 30 Chief Operating Officer and Director
Greg D. Adams 36 Chief Financial Officer
Richard L. Koppel 47 Executive Vice President, Project Solutions
Stephen E. Michaelson 50 Senior Vice President, Marketing
Esther Dyson 45 Director
Michael Enthoven 46 Director
Robert P. Forlenza (1) 41 Director
Craig D. Goldman (2) 53 Director
Jack L. Rivkin (2) 57 Director
Isaac Shapiro (1) 66 Director
Irwin J. Sitkin (2) 67 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Douglas K. Mellinger is Chairman, Chief Executive Officer and President of
PRT. Mr. Mellinger founded PRT Corp. of America, PRT's predecessor company,
in August of 1989. Prior to starting PRT, Mr. Mellinger was the National and
International Director of the Association of Collegiate Entrepreneurs. Mr.
Mellinger is currently the International President of the Young
Entrepreneurs' Organization and serves on the International Board of the
Young Presidents' Organization. Mr. Mellinger graduated from Syracuse
University in 1988 with a B.S. in Entrepreneurial Science. Douglas Mellinger
is Gregory Mellinger's brother.
Srinivasan Viswanathan has been President of PRT Barbados since October
1995. Mr. Viswanathan is responsible for all of PRT's SDCs. From January 1986
to October 1995, Mr. Viswanathan held various positions at Citicorp Overseas
Software Limited, most recently as Chief Executive Officer. Mr. Viswanathan
spent over seven years from April 1979 to January 1986 working with Tata
Consulting Services in Mumbai, India. Mr. Viswanathan graduated from the
Indian Institute of Management in Ahmedabad in 1977 with an M.B.A. and
graduated from the Indian Institute of Technology in Madras in 1972 with a
Bachelor of Technology in Electrical Engineering.
Gregory S. Mellinger has been Chief Operating Officer of PRT since August
1992, responsible for day-to-day planning, operations, resources development
and sales and account management functions, and has been a Director of PRT
since 1995. Prior to working with PRT, Mr. Mellinger was a Combat Arms
Officer in the United States Army. Mr. Mellinger graduated from the United
States Military Academy at West Point in 1989 with a B.A. in History. Gregory
Mellinger is Douglas Mellinger's brother.
Greg D. Adams has been the Chief Financial Officer of PRT since May 1996.
Prior to joining PRT, Mr. Adams was the Chief Financial Officer of the
Blenheim Group Inc., a publicly held information technology exposition and
conference management company, from June 1994 to May 1996. Mr. Adams was with
KPMG Peat Marwick as a Senior Manager from August 1983 to May 1994 in New
York and Australia in the areas of audit and business advisory services. Mr.
Adams graduated from the College of William & Mary in 1983 with a B.B.A. in
Accounting. He is a member of the New York State Society of Certified Public
Accountants, and the American Institute of Certified Public Accountants.
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Richard L. Koppel has been Executive Vice President, Project Solutions of
PRT since March 1997 and is responsible for non-SDC projects and all Year
2000 solutions. Prior to joining PRT, Mr. Koppel was Chief Information
Officer and a Management Group Member (Partner) at McKinsey & Company from
1995 to 1997. Mr. Koppel was a Partner at Coopers & Lybrand from 1991 to
1995, having served as National Quality Assurance Partner, and as Managing
Partner, Technology, during this time. Mr. Koppel graduated from the
University of California, Berkeley in 1974 with a B.S. in Industrial
Engineering and Operations Research.
Stephen E. Michaelson has been the Senior Vice President of Marketing of
PRT since July 1997. Prior to joining PRT, Mr. Michaelson was the Chief
Executive Officer of USA Finance, Inc., a publicly held specialty finance
company, from May 1996 to June 1997. Mr. Michaelson was President of CMR from
October 1992 to April 1996 and was Vice President of CMR from June 1981 to
October 1992. Mr. Michaelson graduated from Clarion University in 1967 with a
B.S. in Mathematics.
Esther Dyson has been a Director of PRT since September 1997. Ms. Dyson
has been President and owner of EDventure Holdings Inc., a company focused on
worldwide information technology, since 1983. Ms. Dyson is the publisher of
Release 1.0, a technology industry publication, and is the author of the book
"Release 2.0: A Design for Living in the Digital Age." Ms. Dyson is a
Director of several publicly held IT companies in the United States and
Europe, including Thinking Tools, Inc. Ms. Dyson graduated from Harvard
University in 1972 with an A.B. in Economics.
Michael Enthoven has been a Director of PRT since July 1997. Since May
1997, he has served as the Chairman of J.P. Morgan's Plan Sponsor Group and
as J.P. Morgan's Chief of Global Technology and Operations from November 1992
to May 1997 and as Chairman of J.P. Morgan's Operating Risk Committee from
July 1995 to May 1997. From June 1991 to November 1992, he served as the
co-head of J.P. Morgan's Global Markets Group. Mr. Enthoven graduated from
Leyden University in The Netherlands in 1974 with a degree in Law.
Robert P. Forlenza has been a Director of PRT since September 1997. Since
1995, Mr. Forlenza has also served as Vice President of Tudor Investment
Corporation and Managing Director of the Tudor Private Equity Group. Prior to
joining Tudor, Mr. Forlenza was a Vice President at Carlisle Capital
Corporation from 1989 to 1994. Mr. Forlenza graduated from Harvard University
Graduate School of Business Administration in 1982 with an M.B.A. and from
Washington and Lee University in 1978 with a B.S. in Business Administration
and Accounting.
Craig D. Goldman has been a Director of PRT since October 1996. He is also
President and Chief Executive Officer of Cyber Consulting Services
Corporation ("Cyber"). Before starting Cyber, Mr. Goldman worked from 1985 to
1996 at Chase Manhattan Bank, N.A. where he was named Chief Information
Officer in 1991. Mr. Goldman also held senior technology and operations
positions supporting Chase's corporate finance, institutional leasing, real
estate and securities businesses. From 1983 to 1985, Mr. Goldman was Senior
Vice President of Data Systems and Communications at the American Plan
Insurance holding company. Mr. Goldman is a member of the technology advisory
boards of Lotus Development Corp., Compaq Computer Corporation and Intel
Corporation.
Jack L. Rivkin has been a Director of PRT since November 1996 and has been
a Senior Vice President of the Investment Division of Travelers Group
("Travelers"), since October 1995. He is also a director and member of the
Investment Committee of Greenwich Street Capital Partners, a merchant bank
which is affiliated with Travelers. He was Vice Chairman and Director of
Global Research at Smith Barney from March 1993 to October 1995. Prior to
joining Travelers in 1993, Mr. Rivkin was Director of the Equities Division
and Director of Research of Lehman Brothers from 1987 to 1992. From 1984 to
1987, Mr. Rivkin was President of PaineWebber Capital, Inc., the merchant
banking arm of PaineWebber Group, and Chairman of Mitchell Hutchins Asset
Management. He is a Director of a number of private venture companies in
which Travelers has an investment. He is also a Director of Humascan Inc., a
medical device company. Mr. Rivkin graduated with distinction from the
Harvard University Graduate School of Business Administration in 1968 with an
M.B.A. and the Colorado School of Mines in 1962 with a degree in
Metallurgical Engineering.
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Isaac Shapiro has been a Director of PRT since July 1991 and is a member
of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Shapiro has been with
Skadden, Arps since April 1986. Mr. Shapiro is also a director of The Bank of
Tokyo Trust Company--Mitsubishi Trust Company. Mr. Shapiro graduated from
Columbia University School of Law in 1956 with an LL.B. and Columbia College
in 1953 with an A.B.
Irwin J. Sitkin has been a Director of PRT since July 1990 and served as
Vice President of Corporate Administration of Aetna Life and Casualty from
1954 to 1989 when he retired. Since retiring, Mr. Sitkin has acted as a
consultant to, among others, Memorex Telex Corporation, AMDAHL Corporation,
Digital Equipment Corporation, Unitech Systems, Inc. and Northern Telecom
Inc. Mr. Sitkin graduated from Cornell University in 1952 with a B.S. in
Economics.
BOARD COMMITTEES
The Compensation Committee is responsible for the administration of all
salary, bonus and incentive compensation plans for the officers and key
employees of the Company. The Compensation Committee also administers the
Company's Amended and Restated 1996 Stock Option Plan (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 and is incorporated herein by
reference. As of the date hereof, there were 4,302,000 shares of Common Stock
reserved for issuance under the Stock Option Plan. The members of the
Compensation Committee are Craig D. Goldman, Jack L. Rivkin and Irwin J.
Sitkin, all of whom are independent directors.
The Audit Committee is responsible for reviewing with PRT's management the
financial controls and accounting, audit and reporting activities of the
Company. The Audit Committee reviews the qualifications of the Company's
independent auditors, makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the scope, fees and
results of any audit and reviews non-audit services provided by the
independent auditors. The members of the Audit Committee are Robert P.
Forlenza, Gregory S. Mellinger and Isaac Shapiro. Mr. Forlenza and Mr.
Shapiro are independent directors.
35
<PAGE>
EXECUTIVE COMPENSATION
Summary of Compensation
The following Summary Compensation Table sets forth information concerning
compensation earned in the fiscal year ended December 31, 1996, by the
Company's Chief Executive Officer and the remaining most highly compensated
executive officers (the "Named Executive Officers") as of the end of the last
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
OTHER NUMBER OF
ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#) ($)(2)
- --------------------------- ------ ---------- --------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Douglas K. Mellinger ....... 1996 168,000 10,000 7,785(1) 18,750 1,520
Chief Executive Officer
Gregory S. Mellinger ....... 1996 129,000 10,000 5,795(1) 18,750 1,520
Chief Operating Officer
Srinivasan Viswanathan .... 1996 129,000 10,000 34,800(3) 20,000 --
President, PRT Barbados
</TABLE>
- ------------
(1) The amount includes the personal use of an automobile provided by PRT.
(2) Represents employer matching contributions to the 401(k) Savings
Retirement Plan.
(3) The amount shown in this column includes the value of the use of a
furnished home and the personal use of an automobile, each provided by
PRT.
Option Grants in Last Fiscal Year
The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers during the last fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
ANNUAL RATES
OF STOCK PRICE ALTERNATIVE:
APPRECIATION GRANT DATE
INDIVIDUAL GRANTS FOR OPTION TERM VALUE
- ---------------------------------------------------------------------------------------- --------------- --------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR GRANT DATE
OPTIONS/GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) VALUE ($)
- ----------------------- ------------------ --------------- ------------- ------------ ------ ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas K. Mellinger .. 18,750 4.2 4.38 2006
Gregory S. Mellinger .. 18,750 4.2 4.38 2006
Srinivasan Viswanathan 20,000 4.5 4.38 2006
</TABLE>
- ------------
(1) All the options vest in cumulative installments at the rate of 33 1/3%
as of the first anniversary of the date of grant, 33 1/3% as of the
second anniversary of the date of grant and 33 1/3% as of the third
anniversary of the date of grant.
36
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information concerning the exercise of
stock options during the last fiscal year by each of the Named Executive
Officers and year-end values of unexercised options.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
ACQUIRED ON REALIZED(1) END (#) AT FISCAL YEAR-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- ------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas K. Mellinger .. 0 0 0/18,750 0/$23,438
Gregory S. Mellinger .. 0 0 0/18,750 0/$23,438
Srinivasan Viswanathan 0 0 0/20,000 0/$25,000
</TABLE>
- ------------
(1) Based on the difference between the exercise price of the options and
the fair market value of the Common Stock on December 31, 1996.
Director Compensation
Directors are not entitled to fees for serving on the Board of Directors
or committees thereof. All directors, however, are reimbursed for travel
expenses incurred in connection with attending board and committee meetings.
In addition, under the terms of the Stock Option Plan, directors who are not
executive officers of the Company are automatically granted annually options
to purchase up to 3,000 shares of Common Stock. Directors Robert Forlenza,
Michael Enthoven and Jack Rivkin have waived their right to such option
grants.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
PRT has entered into employment agreements with each of Douglas K.
Mellinger and Gregory S. Mellinger, and PRT Barbados has entered into an
employment agreement with Srinivasan Viswanathan (each employment agreement
is referred to as an "Employment Agreement," and all three employment
agreements are collectively referred to as the "Employment Agreements."
Messrs. Douglas K. Mellinger, Gregory S. Mellinger and Viswanathan are
referred to individually as an "Executive" and collectively as the
"Executives"). The Employment Agreements are each for a four-year term
commencing on October 1, 1996 for Messrs. Douglas Mellinger and Gregory
Mellinger, and April 1, 1996 for Mr. Viswanathan, and are automatically
renewed for successive one-year periods unless advance notice of termination
is given by either party.
Under their respective Employment Agreements, Mr. Douglas K. Mellinger
will serve as Chief Executive Officer, earning a base salary of $192,000; Mr.
Gregory S. Mellinger will serve as Chief Operating Officer, earning a base
salary of $156,000; and Mr. Viswanathan will serve as President of PRT
Barbados, earning a base salary of $129,000 (Mr. Viswanathan's Employment
Agreement provides for a salary of $100,000 on an after-tax basis), in each
case with future raises and other compensation to be determined by the Board
of Director's Compensation Committee.
Under the terms of the Employment Agreements, the Executives will
participate in a performance-based incentive compensation program developed
by the Board of Directors Compensation Committee, with performance goals
based on, among other factors, the financial growth of PRT (PRT Barbados,
with respect to Mr. Viswanathan), and on a basis no less favorable than the
program provides for other executives. The Executives will also be eligible
to receive stock options pursuant to compensation programs, and will be
entitled to the use of an automobile and reimbursement for business expenses.
The Employment Agreements also provide for the Executives' participation in
the Company's employee benefit plans and arrangements that are generally
offered to other employees.
In addition, pursuant to Mr. Viswanathan's Employment Agreement, PRT
Barbados will make available to him a furnished home, will pay certain costs
relating to the maintenance and upkeep of his home, and will provide him with
a food allowance.
37
<PAGE>
If an Executive's employment is terminated, other than for Cause (as
defined in the Employment Agreements) within 42 months of the effective date
of the Employment Agreements, the Executive will be entitled to receive
continuation of base salary for the shorter of two years and the remainder of
the term. If such termination occurs at any time after the 42nd month of the
term, the Executive will be entitled to receive continuation of base salary
for the shorter of six months and the remainder of the term. In either event,
all benefits that are tied to vesting will vest upon termination of
employment without Cause. If the Executive's employment is terminated by
reason of disability during the term, he will continue to receive base salary
for one year.
STOCK OPTION PLAN
The Stock Option Plan is designed to align the interests of directors,
officers, other employees and consultants with the interest of the
stockholders, to attract motivate and retain executive personnel and key
employees and to reward their performance. Under the Stock Option Plan,
4,302,000 shares of Common Stock have been reserved for the grant of
nonqualified stock options, incentive stock options and automatic grants of
nonqualified stock options to non-employee directors, in each case subject to
equitable adjustment in the event of extraordinary transactions or other
events or circumstances affecting the Common Stock. No plan participant may
receive an award of options to purchase in excess of 100,000 shares of Common
Stock in any fiscal year, subject to equitable adjustment.
The foregoing descriptions are qualified in their entirety by reference to
the full text of the Employment Agreements and the Stock Option Plan, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part and are incorporated herein by reference.
38
<PAGE>
CERTAIN TRANSACTIONS
CERTAIN FINANCING TRANSACTIONS
Pursuant to a preferred stock purchase agreement (the "Preferred Stock
Purchase Agreement") dated November 21, 1996, the Company completed a private
placement of 275,961 shares of its Convertible Preferred Stock for $65.62 per
share or $18.1 million in the aggregate. Immediately prior to the
consummation of this Offering, all of the shares of Convertible Preferred
Stock will be converted into 2,759,610 shares of Common Stock. The Company
will pay in cash to the holders of the Convertible Preferred Stock 4%
cumulative dividends accrued through the date of this Offering, or $622,000
in the aggregate as of September 30, 1997. Former holders of the Convertible
Preferred Stock have certain piggy-back and demand contractual rights to
require the Company to file up to two registration statements with respect to
the 2,759,610 shares of Common Stock which they received upon conversion of
their shares of Convertible Preferred Stock; the Company shall pay all fees
and expenses (other than underwriting discounts) incurred in connection with
such registration statements. Approximately 28% of the shares of the
Convertible Preferred Stock were purchased by the Travelers Insurance
Company, an affiliate of Smith Barney Inc., one of the underwriters.
Pursuant to a common stock and warrant purchase agreement (the "Unit
Purchase Agreement") dated November 21, 1996, the Company and a stockholder
of the Company who is not currently an employee or director of the Company
completed a private placement of 48,631 units (the "Units"), each comprised
of one share of Common Stock and one warrant convertible into shares of
Common Stock under certain circumstances (which circumstances have not
occurred and will not occur) (the "Unit Warrants"), for $65.62 per Unit or an
aggregate of $3.2 million. The Company received $292,000 of such amount for
the Unit Warrants. All of the 486,310 split-adjusted shares of Common Stock
comprising the Units were sold by a stockholder of the Company and the
Company received none of the proceeds thereof. Immediately prior to the
consummation of this Offering, all of the Unit Warrants will expire and will
not be converted into any shares of PRT Common Stock or other securities. The
Company will pay to the holder of the Units cumulative distributions
(equivalent per Unit to the dividends accrued per share of Convertible
Preferred Stock), in accordance with the terms of the Unit Warrants, accrued
through the date of this Offering, totaling $110,000 in the aggregate as of
September 30, 1997. Holders of the Units have certain piggy-back and demand
contractual rights to require the Company to file up to two registration
statements with respect to the 486,310 shares of Common Stock comprising such
Units.
The Company has entered into agreements with J.P. Morgan & Co. Inc. ("J.P.
Morgan") with respect to PRT and PRT Barbados. PRT is considered a preferred
vendor for software consulting engagements with J.P. Morgan in the United
States. PRT Barbados has been working with J.P. Morgan for nearly three years
as a core client to ensure that the design of the Company's Barbados SDC and
operational practices are in compliance with J.P. Morgan's security and
network architectural protocols. In 1996 and 1997, J.P. Morgan Ventures
Corporation ("JPMVC") made advances to PRT Barbados in the amount of $3.7
million in the aggregate (the "Advances"). In consideration for the Advances,
PRT Barbados issued to JPMVC warrants (the "PRT Barbados Warrants") to
purchase up to 24% of the shares of PRT Barbados capital stock. In the first
quarter of 1997, the Company and JPMVC agreed to, among other things, the
exchange of the PRT Barbados Warrants for warrants (the "JPMVC PRT Warrants")
to purchase 936,365 shares of PRT Common Stock (the "Warrant Exchange
Agreement"). The JPMVC PRT Warrants are only exercisable by forgiveness of
the Advances. Upon consummation of this Offering, the JPMVC PRT Warrants will
be exercised for 936,365 shares of Common Stock and the Advances will be
forgiven. JPMVC has certain piggy-back and demand contractual rights to
require the Company to file up to two registration statements with respect to
the 936,365 shares of Common Stock which it will receive upon exercise of the
JPMVC PRT Warrants; the Company shall pay all fees and expenses (other than
underwriting discounts) incurred in connection with such registration
statements.
The foregoing descriptions are qualified in their entirety by reference to
the full text of the Preferred Stock Purchase Agreement, the Unit Purchase
Agreement and the Warrant Exchange Agreement, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus is a part
and are incorporated herein by reference.
39
<PAGE>
ACQUISITION OF COMPUTER MANAGEMENT RESOURCES, INC.
As of July 1, 1997, the Company acquired CMR pursuant to a stock purchase
agreement ("Stock Purchase Agreement") for an aggregate purchase price of
$6.3 million in cash, a note, shares of Common Stock (valued at their then
fair market value) and certain warrants convertible into shares of Common
Stock under certain circumstances (which circumstances have not occurred and
will not occur) (the "CMR PRT Warrants," and, collectively with the Unit
Warrants and JPMVC PRT Warrants, the "Warrants"). Upon consummation of this
Offering, all of the CMR PRT Warrants will expire and will not be converted
into any shares of PRT Common Stock or other securities. The former
stockholders of CMR have certain piggy-back registration rights with respect
to the 119,181 shares of Common Stock which they received in the acquisition
of CMR.
The foregoing description is qualified in its entirety by reference to the
full text of the Stock Purchase Agreement, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part
and is incorporated herein by reference.
CERTAIN PRT STOCKHOLDERS
Certain clients of the Company (or their affiliates) are also stockholders
of the Company. JPMVC, a Company stockholder, is an affiliate of J.P. Morgan
& Co. Inc. (a client of the Company). In addition, the Travelers Insurance
Company, an affiliate of Smith Barney Inc., one of the underwriters and The
Prudential Insurance Company of America are both Company stockholders. See
"Principal and Selling Stockholders."
THE MELLINGER GROUP LLC REGISTRATION RIGHTS AGREEMENT
On September 16 , 1997, the Company entered into a registration rights
agreement (the "Registration Rights Agreement") with The Mellinger Group LLC
("TMG"). TMG is wholly owned by Douglas K. Mellinger, Chairman and Chief
Executive Officer of the Company, Gregory S. Mellinger, Chief Operating
Officer of the Company, and Paul Mellinger, brother of Douglas and Gregory
Mellinger. The Registration Rights Agreement provides that, subject to an
Underwriter's lock-up agreement, TMG may cause the Company to register, in up
to three separate registrations, all of the shares of Common Stock held by
TMG under the Securities Act. See "Risk Factors--Shares Eligible for Future
Sale; Registration Rights" and "Underwriting."
The foregoing description is qualified in its entirety by reference to the
full text of the Registration Rights Agreement, a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part and is incorporated herein by reference.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of September 23, 1997, and as adjusted to
reflect the sale of the shares offered hereby, by: (i) each person known by
the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers, and (iv) all Directors and executive officers of the
Company as a group. Except as noted, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO BENEFICIAL OWNERSHIP
OFFERING(1)(2) AFTER OFFERING(1)
---------------------- -------------- ----------------------
NUMBER NUMBER OF NUMBER
NAME OF SHARES PERCENT SHARES OFFERED OF SHARES PERCENT
- ----------------------------------------------- ----------- --------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
The Mellinger Group LLC (3) .................... 6,477,750 45.0%
Douglas K. Mellinger (3)(4)(5) ................. 7,250 *
Gregory S. Mellinger (3)(4)(5) ................. 7,250 *
Barbara Mellinger (3)(6) ....................... 896,870 6.2%
Isaac Shapiro (3)(7) ........................... 242,000 1.7%
Irwin J. Sitkin (3)(8) ......................... 242,000 1.7%
Craig D. Goldman (3)(9) ........................ 42,970 *
Esther Dyson (3)(10) ........................... 1,500 *
Srinivasan Viswanathan (3)(11) ................. 127,047 *
J.P. Morgan Ventures Corp. (12)................. 936,365 6.5%
60 Wall Street
New York, New York 10260
The Travelers Insurance Company ................ 761,960 5.3%
388 Greenwich Street
New York, New York 10013
Tudor Investment Corporation ...................
40 Rowes Wharf--2nd Floor 761,960 5.3%
Boston, Massachusetts 02110
Capital Research and Management Company .......
333 South Hope Street 761,960 5.3%
Los Angeles, California 90071
The Prudential Insurance Company of America ... 457,170 3.2%
80 Livingstone Avenue
Roseland, New Jersey 07068
Rho Management Co., Inc. ....................... 457,170 3.2%
767 Fifth Avenue--43rd Floor
New York, New York 10153 ......................
All directors and executive officers as a group
(8 persons) ................................... 8,044,637 60.0%
</TABLE>
- ------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable, or exercisable
within 60 days of the date hereof, are deemed outstanding for computing
the percentage of the person holding such options or warrants but are
not deemed outstanding for computing the percentage of any other
person.
(2) Gives effect to: (i) the conversion of the Convertible Preferred Stock
into shares of Common Stock, (ii) the exchange of the PRT Barbados
Warrants for the JPMVC PRT Warrants, (iii) the issuance of 936,365
shares of Common Stock in connection with the exercise of the JPMVC PRT
Warrants and (iv) the reclassification of the 119,181 shares of Common
Stock issued in connection with the CMR acquisition which were subject
to redemption.
(3) The business address for these persons is: c/o PRT Group Inc., 342
Madison Avenue, 11th Floor, New York, New York 10173.
(4) Does not include shares of The Mellinger Group LLC over which Messrs.
Mellinger have voting and investment power.
(5) Includes 1,000 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(6) Includes 6,250 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(7) Includes 3,000 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
<PAGE>
(8) Includes 4,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(9) Includes 12,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(10) Includes 1,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(11) Includes 21,667 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(12) Includes shares of Non-Voting Common Stock.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, 1,000,000 shares of Non-Voting Common Stock and 10,000,000
shares of preferred stock, $.001 par value per share (the "Preferred Stock").
The following description of the capital stock of the Company is a summary
and, as such, does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the more complete descriptions
contained in the form of Amended and Restated Certificate of Incorporation of
the Company (the "Certificate") and the form of Amended and Restated By-Laws
of the Company (the "By-Laws"), each as shall be in effect on the date of
this Offering, copies of which are incorporated herein by reference to the
Registration Statement of which this Prospectus is a part. Upon completion of
this Offering, the Company will have shares of Common Stock (or
shares of Common Stock if the Underwriters' over-allotment options are
exercised in full) outstanding, shares of Non-Voting Common Stock
outstanding and no shares of Preferred Stock outstanding. As of the date
hereof, there were record holders of Common Stock and one record holder
of Non-Voting Common Stock.
COMMON STOCK AND NON-VOTING COMMON STOCK
The Certificate provides for two classes of common stock: Common Stock and
Non-Voting Common Stock. The two classes of Common Stock are substantially
identical except for disparity in voting power.
Each share of Common Stock entitles the holder of record to one vote, and
each share of Non-Voting Common Stock does not entitle the holder of record
to vote, at each annual or special meeting of stockholders and for all other
purposes. The holders of shares of Common Stock do not have cumulative voting
rights.
The holders of the Common Stock and Non-Voting Common Stock will be
entitled to receive dividends and other distributions as may be declared
thereon by the Board of Directors of the Company out of assets or funds of
the Company legally available therefor, subject to the rights of the holders
of any series of Preferred Stock then outstanding and any other provision of
the Certificate. The Certificate provides that if at any time a dividend or
other distribution in cash or other property is paid on the Common Stock or
Non-Voting Common Stock, a like dividend or other distribution in cash or
other property will also be paid on the Non-Voting Common Stock or Common
Stock, as the case may be, in an equal amount per share. The Certificate
provides that if shares of Common Stock are paid as a dividend on Common
Stock and shares of Non-Voting Common Stock are paid as a dividend on shares
of Non-Voting Common Stock, in an equal amount per share of Common Stock and
Non-Voting Common Stock, such payment will be deemed to be a like dividend or
other distribution. In the case of any split, subdivision, combination or
reclassification of Common Stock or Non-Voting Common Stock, the shares of
Non-Voting Common Stock, or Common Stock, as the case may be, will also be
split, subdivided, combined or reclassified so that the number of shares of
Common Stock and Non-Voting Common Stock outstanding immediately following
such split, subdivision, combination or reclassification will remain in the
same proportion to each other as that which existed immediately prior
thereto.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Common Stock and Non-Voting Common Stock will be entitled to
receive the assets and funds of the Company available for distribution after
payments to creditors and to the holders of any Preferred Stock of the
Company that may at the time be outstanding, in proportion to the number of
shares held by them, respectively, without regard to class.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of Common Stock or Non-Voting
Common Stock, the holders of Common Stock and Non-Voting Common Stock will
receive the same consideration on a per share basis, except that the
disparity in voting rights may continue if any portion of such consideration
consists of stock.
42
<PAGE>
The Certificate further provides that each share of Non-Voting Common
Stock may be converted into shares of Common Stock at any time at the option
of the holder thereof. Holders of the Common Stock and Non-Voting Common
Stock have no preemptive, subscription or redemption rights, and, except as
set forth in the preceding sentence, there are no conversion or similar
rights with respect to such shares. The outstanding shares of Common Stock
and Non-Voting Common Stock are fully paid and non-assessable.
The Common Stock is expected to be listed on NASDAQ under the symbol
"PRTG."
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue, from time to time, Preferred Stock in one or more
series, to establish the number of shares to be included in any such series
and to fix the designations, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
including dividend rights and preferences over dividends on the Common Stock
and Non-Voting Common Stock, conversion rights, voting rights, redemption
rights, the terms of any sinking fund therefor and rights upon liquidation.
The ability of the Board of Directors of the Company to issue Preferred
Stock, while providing flexibility in connection with financing, acquisitions
and other corporate purposes, could have the effect of discouraging,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal, since the issuance of Preferred Stock could be used to
dilute the share ownership of a person or entity seeking to obtain control of
the Company. In addition, because the Board of Directors of the Company has
the power to establish the preferences, powers and rights of the shares of
any such series of Preferred Stock, it may afford the holders of any
Preferred Stock preferences, powers and rights (including voting rights)
senior to the rights of the holders of Common Stock and Non-Voting Common
Stock, which could adversely affect the rights of holders of Common Stock and
Non-Voting Common Stock. At present, the Company has no plans to issues any
shares of Preferred Stock. See "Risk Factors--Certain Anti-Takeover Effects."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ("Section 203") of the General Corporation Law of the State of
Delaware (the "DGCL") provides, in general, that a stockholder who acquires
more than 15% of the outstanding voting stock of a corporation subject to
Section 203 (an "Interested Stockholder") but less than 85% of such stock may
not engage in certain Business Combinations (as defined in Section 203) with
the corporation for a period of three years subsequent to the date on which
the stockholder became an Interested Stockholder unless (i) prior to such
date the corporation's board of directors approved either the Business
Combination or the transaction in which the stockholder became an Interested
Stockholder or (ii) the Business Combination is approved by the corporation's
board of directors and authorized by a vote of at least 66 2/3% of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder.
CERTAIN CERTIFICATE AND BY-LAW PROVISIONS
The Certificate provides for the Board of Directors to be divided into
three classes, with staggered three-year terms. As a result, only one class
of directors will be elected at each annual meeting of stockholders of the
Company, with the other classes continuing for the remainder of their
respective terms.
Any action required or permitted to be taken by the stockholders of the
Company may be effected only at an annual or special meeting of stockholders
and will not be permitted to be taken by written consent in lieu of a
meeting. The Certificate and the By-Laws also provide that special meetings
of stockholders may only be called by the Board of Directors, the Chairman of
the Board of Directors or the President of the Company. Stockholders will not
be permitted to call a special meeting or to require that the Board of
Directors call a special meeting of stockholders.
The Certificate establishes an advance notice procedure for nomination,
other than by or at the direction of the Board of Directors, of candidates
for election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent
to nominate
43
<PAGE>
a director or raise business at such meeting must be received by the Company
not less than 60 nor more than 90 days prior to the scheduled annual meeting,
and must contain certain specified information concerning the person to be
nominated or the matter to be brought before the meeting.
Certain provisions contained in the Certificate, including those relating
to the size and classification of the Board of Directors, the removal of
directors, the prohibition on action by written consent, the calling of
special meetings, and advance notice provisions may only be amended by the
affirmative vote of the holders of at least 80% of the total outstanding
voting stock of the Company. In addition, the Certificate provides that the
By-Laws may only be amended by the affirmative vote of the holders of at
least 80% of the outstanding voting stock of the Company.
The foregoing provisions could have the effect of discouraging, delaying
or making more difficult certain attempts to acquire the Company or to remove
incumbent directors even if some, or even a majority, of the Company's
stockholders were to deem such an attempt to be in the best interest of the
Company and its stockholders. See "Risk Factors--Certain Anti-Takeover
Effects."
LIMITATIONS ON DIRECTORS' LIABILITY
As permitted by Section 145 of the DGCL, the Certificate contains a
provision which eliminates the personal liability of a director to the
Company and its stockholders for certain breaches of his fiduciary duty of
care as a director. This provision does not, however, eliminate or limit the
personal liability of a director (i) for any breach of such 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 Delaware statutory provisions making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
repurchases or redemptions or (iv) for any transaction from which the
director derived an improper personal benefit. This provision offers persons
who serve on the Board of Directors of the Company protection against awards
of monetary damages resulting from breaches of their duty of care (except as
indicated above), including grossly negligent business decisions made in
connection with takeover proposals for the Company. As a result of this
provision, the ability of the Company or a stockholder thereof to
successfully prosecute an action against a director for a breach of his duty
of care has been limited. However, the provision does not affect the
availability of equitable remedies such as an injunction or recision based
upon a director's breach of his duty of care. The Commission has taken the
position that the provision will have no effect on claims arising under the
federal securities laws.
In addition, the Certificate and By-Laws provide mandatory indemnification
rights, subject to limited exceptions, to any person who was or is party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have shares (or
shares if the Underwriters' over-allotment is exercised in full) of
Common Stock and shares of Non-Voting Common Stock outstanding. See
"Capitalization." Of these shares, the shares of Common Stock sold in
this Offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations
of Rule 144 ("Rule 144") under the Securities Act described below. All of the
remaining shares of Common Stock and Non-Voting Common Stock are restricted
securities ("Restricted Shares") within the meaning of Rule 144 and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption offered by
Rule 144.
Certain of the Company's current stockholders have agreed (the "Lock-Up
Agreements") not to sell or otherwise dispose of any of their shares of
Common Stock for a period of 180 days after the effective date of this
Offering (the "Lock-Up Period") without the prior written consent of Smith
Barney Inc. After the expiration of the Lock-Up Period (or earlier upon the
prior written consent of Smith Barney Inc.), of the Restricted Shares
(or Restricted Shares if the Underwriters' over-allotment is exercised
in full) may be sold in the public market subject to Rule 144.
In general, under Rule 144, beginning 90 days after the date of this
Offering, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including a
person who may be deemed to be an Affiliate of the Company, may sell within
any three-month period a number of shares of Common Stock that does not
exceed the greater of 1% of the then outstanding shares of Common Stock of
the Company ( shares (or shares if the Underwriters'
over-allotment is exercised in full) after giving effect to this Offering) or
the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 are subject to certain restrictions relating to manner
of sale, notice and the availability of current public information about the
Company. In addition, under Rule 144(k) of the Securities Act, a person who
is not an Affiliate of the Company at any time 90 days preceding a sale and
who has beneficially owned shares for at least two years would be entitled to
sell such shares immediately following this Offering without regard to the
volume limitations, manner of sale provisions or notice or other requirements
of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-Affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before
selling such shares.
Certain holders of the Company's Common Stock and Non-Voting Common Stock
have rights to require the Company to register their shares under the
Securities Act. See "Certain Transactions--Certain Financing Transactions,"
"--Acquisition of Computer Management Resources, Inc." and "--The Mellinger
Group LLC Registration Rights Agreement."
The Company intends to file a registration statement on Form S-8 under the
Securities Act, approximately 90 days after the closing of this Offering, to
register an aggregate of 4,302,000 shares of Common Stock reserved for
issuance under the Company's Stock Option Plan. See "Management--Executive
Compensation--Stock Option Plan." Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations
applicable to Affiliates, be available for sale in the open market, unless
such options are subject to vesting restrictions or the Lock-Up Agreements.
As of the date hereof, 1,152,700 options to purchase shares were outstanding
and 3,149,300 shares of Common Stock remained available for future grant
under the Stock Option Plan.
Prior to this Offering there has been no market for the Common Stock. The
Company can make no prediction as to the effect, if any, that market sales of
shares of Common Stock or the availability of shares
45
<PAGE>
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of significant numbers of shares of Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale; Registration Rights."
46
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the underwriting
agreement (the "Underwriting Agreement") dated the date hereof by and among
the Company, the Selling Stockholders and each of the underwriters named
below (the "Underwriters"), for whom Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, UBS Securities LLC and Punk, Ziegel &
Company L.P. are acting as representatives (the "Representatives"), has
severally agreed to purchase, and the Company and the Selling Stockholders
have agreed to sell to each such Underwriter, the number of shares of Common
Stock set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- -------------
<S> <C>
Smith Barney Inc. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation ....
UBS Securities LLC ......................................
Punk, Ziegel & Company L.P. .............................
-------------
Total ...................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters initially propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which
represents a concession not in excess of $ per share below the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares to the public, the public
offering price and such concessions may be changed by the Underwriters. The
Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm any shares to any accounts over which
they exercise discretionary authority.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
an aggregate of additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less the underwriting
discounts and commissions. The Underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with the
Offering.
The Company, its officers and directors, and certain stockholders of the
Company have agreed that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to purchase any
shares of Common Stock of the Company.
In connection with this Offering and in compliance with applicable law,
the Underwriters may over-allot (i.e., sell more of the Common Stock than the
total amount shown on the list of Underwriters and participations which
appears above) and may effect transactions which stabilize, maintain or
otherwise affect the market price of the Common Stock at levels above those
which might otherwise prevail in the open market. Such transactions may
include placing bids for the Common Stock or effecting purchases of the
Common Stock for the purpose of pegging, fixing or maintaining the price of
the Common Stock or for the purpose of reducing a syndicate short position
created in connection with the Offering. A syndicate short position may be
covered by exercise of the option described above rather than by open-market
purchases. In addition, the contractual arrangements among the Underwriters
include a provision whereby, if, prior to termination of price and trading
restrictions, the Representatives purchase Common Stock in the open market
for the account of the underwriting syndicate and the securities
47
<PAGE>
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling
group member in question to purchase the Common Stock in question at the cost
price to the syndicate or may recover from (or decline to pay to) the
Underwriter or selling group member in question the selling concession
applicable to the securities in question. The Underwriters are not required
to engage in any of these activities and any such activities, if commenced,
may be discontinued at any time.
Prior to this Offering, there has not been any public market for the
Common Stock of the Company. Consequently, the initial public offering price
for the shares of Common Stock included in this Offering has been determined
by negotiations between the Company, the Selling Stockholders and the
Representatives. Among the factors considered in determining such price were
the history of and prospects for the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the past and present revenues and
earnings of the Company, the prospects for growth of the Company's revenues
and earnings, the current state of the economy in the United States and the
current level of economic activity in the industry in which the Company
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company.
There can be no assurance that an active trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
At the request of the Company, up to 5% of the shares of Common Stock
offered hereby are being reserved for sale to certain persons, including PRT
employees and others who have a business relationship with the Company.
Smith Barney Inc. provided investment banking services to the Company in
connection with the private placement of the Convertible Preferred Stock for
which it received fees of approximately $1.1 million.
48
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby and
certain other legal matters in connection with this Offering will be passed
upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP. Certain
legal matters in connection with this Offering will be passed upon for the
Underwriters by Chadbourne & Parke LLP. Isaac Shapiro, a member of Skadden,
Arps, Slate, Meagher & Flom LLP, is a director of the Company. As of the date
hereof, Mr. Shapiro and his wife together hold 239,000 shares of Common Stock
and 15,200 shares of Convertible Preferred Stock and options to acquire 4,500
shares of Common Stock at an average price per share of $9.46; such options
were granted to Mr. Shapiro in accordance with the Stock Option Plan.
EXPERTS
The consolidated financial statements (including Schedule 16(b), which is
included in the Registration Statement of which this Prospectus forms a part)
of the Company at December 31, 1996 and 1995 and for the two years ended
December 31, 1996, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, and for the
year ended December 31, 1994, by Shulman, Cohen, Furst, Kramer and Rosen
P.C., independent auditors, as set forth in their respective reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement, of which
this Prospectus constitutes a part, on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may
be inspected without charge at the Commission's principal office in
Washington, D.C., public reference facilities maintained by the Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the
following regional offices of the Commission: Seven World Trade Center, Room
1400, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained from the Public Reference Section of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. The
Registration Statement, including the exhibits and schedules thereto, is also
available at the Commission's web site at www.sec.gov. Copies of reports,
proxy and information statements and other information regarding the Company
will be available at the Commission's web site.
49
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PRT GROUP INC. AND SUBSIDIARIES
Reports of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(Unaudited)............................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (Unaudited)............................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 (Unaudited).................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (Unaudited)............................... F-7
Notes to Consolidated Financial Statements................................................. F-8
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of June 30, 1997................................... F-20
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996......................................................................... F-21
Pro Forma Consolidated Statement of Operations for the six months ended
June 30, 1997............................................................................. F-22
Notes to Pro Forma Consolidated Financial Statements....................................... F-23
COMPUTER MANAGEMENT RESOURCES, INC.
Report of Independent Auditors............................................................. F-24
Balance Sheets as of February 28, 1997 and June 30, 1997 (Unaudited)....................... F-25
Statements of Operations and Retained Earnings for the year ended
February 28, 1997 and the four months ended June 30, 1997 and 1996 (Unaudited) ........... F-26
Statements of Cash Flows for the year ended February 28, 1997 and the four months ended
June 30, 1997 and 1996 (Unaudited)........................................................ F-27
Notes to Financial Statements.............................................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PRT Group Inc.
We have audited the accompanying consolidated balance sheets of PRT Group
Inc. and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PRT Group Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
September 16, 1997
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
PRT Group Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of PRT Group Inc. for the year ended December 31, 1994.
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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, stockholders' equity and
cash flows of PRT Group Inc. for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
Shulman, Cohen, Furst, Kramer & Rosen, P.C.
New York, New York
February 11, 1995
F-3
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
<TABLE>
<CAPTION>
DECEMBER 31 AS ADJUSTED
--------------------- JUNE 30 JUNE 30
1995 1996 1997 1997
--------- ---------- ------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 14)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $1,106 $14,856 $ 7,898 $ 7,898
Accounts receivable, net of allowance of $42 in 1995,
$122 in 1996 and $135 in 1997........................ 2,837 5,013 9,640 9,640
Prepaid expenses and other current assets ............ 305 430 1,169 1,169
Deferred income taxes ................................ -- -- 40 40
--------- ---------- ----------- -------------
Total current assets .................................. 4,248 20,299 18,747 18,747
Fixed assets, net ..................................... 533 2,955 5,463 5,463
Goodwill, net ......................................... -- 619 604 3,396
Other assets .......................................... 79 87 125 125
Deferred income taxes ................................. -- -- 76 76
--------- ---------- ----------- -------------
Total assets .......................................... $4,860 $23,960 $25,015 $27,807
========= ========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit ...................... $ 135 $ -- $ 850 $ 850
Current installments of advance payable to client ... 350 909 1,913 --
Accrued compensation ................................. 1,105 2,123 2,640 2,640
Accounts payable and other accrued expenses ......... 703 2,425 3,402 3,402
Deferred income taxes ................................ 178 50 -- --
Current portion of capital lease obligations ........ 45 224 399 399
Deferred revenue ..................................... 455 645 515 515
--------- ---------- ----------- -------------
Total current liabilities ............................. 2,971 6,376 9,719 7,806
Deferred income taxes ................................. 386 39 -- --
Advance payable to client, net of current
installments.......................................... 700 1,808 1,531 --
Capital lease obligations, net of current portion .... 22 369 309 309
Other liabilities ..................................... -- 14 78 78
--------- ---------- ----------- -------------
Total liabilities ..................................... 4,079 8,606 11,637 8,193
Minority interest ..................................... -- 496 551 --
Commitments and contingencies
Series A redeemable preferred stock, $0.01 par value;
authorized--500,000 shares; issued and
outstanding--2,759,610 at December 31, 1996 and June
30, 1997 (liquidation preference $18,188 at December
31, 1996 and $18,550 at June 30, 1997) ............... -- 16,939 17,407 --
Stockholders' equity (deficit):
Common stock, $.001 par value; authorized--50,000,000
shares; issued and outstanding--10,260,620 shares at
December 31, 1995; 10,539,000 shares at December 31,
1996 and June 30, 1997 and 14,234,975 shares at June
30, 1997 as adjusted................................. 10 11 11 14
Additional paid-in capital ........................... 5 936 943 25,134
Retained earnings (deficit) .......................... 769 (2,617) (5,059) (5,059)
Cumulative translation adjustment .................... -- (11) (75) (75)
Treasury stock, 50,000 common shares at December 31,
1995 and 67,090 common shares at December 31, 1996,
June 30, 1997 and June 30, 1997 as adjusted ........ (3) (400) (400) (400)
--------- ---------- ----------- -------------
Total common stockholders' equity (deficit)............ 781 (2,081) (4,580) 19,614
--------- ---------- ----------- -------------
Total liabilities and stockholders' equity (deficit) .. $4,860 $23,960 $25,015 $27,807
========= ========== =========== =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30
----------------------------------------------------
1994 1995 1996 1996 1997
--------- --------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues .................................... $13,876 $20,346 $23,801 $9,772 $21,314
Cost of revenues ............................ 10,851 15,594 17,965 7,310 15,217
--------- --------- ---------- -------- ----------
Gross profit ................................ 3,025 4,752 5,836 2,462 6,097
Selling, general and administrative
expenses.................................... 2,572 4,110 9,235 3,164 8,210
--------- --------- ---------- -------- ----------
Income (loss) from operations ............... 453 642 (3,399) (702) (2,113)
Other income (expense):
Interest expense ........................... -- (43) (254) (61) (190)
Interest income ............................ 20 17 78 10 264
--------- --------- ---------- -------- ----------
Income (loss) before income taxes ........... 473 616 (3,575) (753) (2,039)
Income tax expense (benefit) ................ 222 501 (306) (44) (129)
--------- --------- ---------- -------- ----------
Net income (loss) ........................... 251 115 (3,269) (709) (1,910)
Accretion of redeemable preferred stock .... -- -- (23) -- (106)
Dividends on redeemable preferred stock and
common stock warrants....................... -- -- (94) -- (426)
--------- --------- ---------- -------- ----------
Net income (loss) available to common
stockholders ............................... $ 251 $ 115 $(3,386) $ (709) $(2,442)
========= ========= ========== ======== ==========
Net income (loss) per share ................. $ $ $ $ $
========= ========= ========== ======== ==========
Weighted average number of shares used in
calculation of earnings (loss) per share ...
========= ========= ========== ======== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997 (Unaudited)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
---------------------- PAID-IN EARNINGS TRANSLATION TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL
------------ -------- ---------- --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ............. 10,260,620 $10 $ 5 $ 403 $ -- $ -- $ 418
Net income .............................. -- -- -- 251 -- -- 251
Purchase of treasury stock--250,000
shares.................................. -- -- -- -- -- (3) (3)
------------ -------- ------------ ---------- ------------- ---------- ---------
Balance at December 31, 1994 ............. 10,260,620 10 5 654 -- (3) 666
Net income .............................. -- -- -- 115 -- -- 115
------------ -------- ------------ ---------- ------------- ---------- ---------
Balance at December 31, 1995 ............. 10,260,620 10 5 769 -- (3) 781
Net loss ................................ -- -- -- (3,269) -- -- (3,269)
Issuance of shares in connection with
acquisition of minority interest in a
subsidiary.............................. 526,880 1 642 -- -- -- 643
Retirement of treasury stock ............ (250,000) -- (3) -- -- 3 --
Purchase of treasury stock--67,090
shares.................................. -- -- -- -- -- (400) (400)
Sale of common stock warrants ........... -- -- 292 -- -- -- 292
Accretion of redeemable preferred stock -- -- -- (23) -- -- (23)
Dividends on redeemable preferred stock
and common stock warrants............... -- -- -- (94) -- -- (94)
Foreign currency translation adjustment -- -- -- -- (11) -- (11)
------------ -------- ------------ ---------- ------------- ---------- ---------
Balance at December 31, 1996 ............. 10,537,500 11 936 (2,617) (11) (400) (2,081)
Net loss ................................ -- -- -- (1,910) -- -- (1,910)
Exercise of stock options ............... 1,500 -- 7 -- -- -- 7
Accretion of redeemable preferred stock -- -- -- (106) -- -- (106)
Dividends on redeemable preferred stock
and common stock warrants............... -- -- -- (426) -- -- (426)
Foreign currency translation adjustment -- -- -- -- (64) -- (64)
------------ -------- ------------ ---------- ------------- ---------- ---------
Balance at June 30, 1997 (unaudited) .... 10,539,000 $11 $943 $(5,059) $(75) $(400) $(4,580)
============ ======== ============ ========== ============= ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31 30
----------------------------------------------------
1994 1995 1996 1996 1997
--------- -------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................... $ 251 $ 115 $(3,269) $ (709) $(1,910)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... 41 60 424 98 635
Amortization of debt discount ....................... -- -- 163 30 150
Write-off of abandoned purchase costs ............... -- 29 -- -- --
Write-off of uncollectible affiliate advances ...... -- 34 -- -- --
Provision for doubtful accounts ..................... -- 42 80 37 13
Deferred income taxes ............................... 321 79 (475) (231) (205)
Change in foreign exchange rate ..................... -- -- (11) (1) (64)
Changes in operating assets and liabilities:
Accounts receivable ................................ (1,659) 340 (2,256) (431) (4,640)
Prepaid expenses and other current assets ......... (68) (224) (111) (62) (739)
Advances to affiliated companies ................... (62) -- -- -- --
Other assets ....................................... (15) (52) (8) (107) (38)
Accrued compensation ............................... -- 230 1,018 (42) 517
Accounts payable and other accrued expenses ....... 535 288 1,722 144 977
Deferred revenue ................................... 217 134 190 (175) (130)
--------- -------- ---------- --------- ----------
Net cash provided by (used in) operating activities . (439) 1,075 (2,533) (1,449) (5,434)
--------- -------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets ............................ (117) (434) (2,123) (234) (2,909)
Purchase of treasury stock ........................... (3) -- (400) -- --
--------- -------- ---------- --------- ----------
Net cash used in investing activities ................ (120) (434) (2,523) (234) (2,909)
--------- -------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loan ............................... -- (800) -- -- --
Net borrowings (repayments) under line of credit .... 303 135 (135) 329 850
Advances received from client ........................ -- 1,050 2,000 500 632
Exercise of stock options ............................ -- -- -- -- 7
Issuance of preferred shares and common stock
warrants, net of issuance costs of $1,277,000 ....... -- -- 17,128 -- --
Principal payments under capital lease obligations .. 33 (40) (187) (12) (104)
--------- -------- ---------- --------- ----------
Net cash provided by financing activities ............ 336 345 18,806 817 1,385
--------- -------- ---------- --------- ----------
Net increase (decrease) in cash and cash equivalents (223) 986 13,750 (866) (6,958)
Cash and cash equivalents at beginning of period .... 343 120 1,106 1,106 14,856
--------- -------- ---------- --------- ----------
Cash and cash equivalents at end of period .......... $ 120 $1,106 $14,856 $ 240 $ 7,898
========= ======== ========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ........................................ $ 34 $ 37 $ 92 $ 34 $ 42
========= ======== ========== ========= ==========
Income taxes paid .................................... $ -- $ 470 $ 188 $ 186 $ 62
========= ======== ========== ========= ==========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases .. $ -- $ 73 $ 713 $ 295 $ 219
========= ======== ========== ========= ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 ARE UNAUDITED)
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
PRT Group Inc. ("PRT"), incorporated in the State of Delaware in October
1996, and its wholly-owned subsidiaries, (collectively, the "Company"). PRT
is a provider of information technology solutions including; Strategic
Consulting, Project Solutions and Staff Augmentation.
The Company has sales and account management offices located in
Connecticut, New York, New Jersey, Illinois, and Virginia; software
development centers in Barbados and Connecticut; and a recruitment and
training center in Mumbai, India.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from time and materials are recognized during the period in which
the related services are provided. Revenue from fixed price contracts is
recognized using the percentage-of-completion method. Cash payments received
but unearned as of December 31, 1995, 1996 and June 30, 1997 are recorded as
deferred revenue.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PRT and its
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Through October 1996, minority
shareholders' proportionate share of the equity of the Company's consolidated
subsidiaries and income and losses allocable to such minority interests in
excess of their investments have been reflected in the consolidated
statements of operations (see Note 7).
RESEARCH AND SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes costs incurred to develop new software
products upon determination that technological feasibility has been
established for the product, whereas costs incurred prior to the
establishment of technological feasibility are charged to expense. Research
and software development costs of approximately $43,000 which commenced in
1997 have been expensed by the Company and are included in selling, general
and administrative expenses. Research and software development costs
capitalized as of June 30, 1997 were insignificant.
INTERIM FINANCIAL INFORMATION
The interim financial statements at June 30, 1997 and for the six months
ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all adjustments, consisting only of normal recurring accruals
necessary for a fair presentation, have been included. Results of interim
periods are not necessarily indicative of results to be expected for the
entire year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments approximate their estimated
fair value as a result of variable market interest rates and the short-term
maturity of these instruments.
F-8
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents. At June 30,
1997, the Company has substantially all of its cash deposited with two
financial institutions.
FIXED ASSETS
Fixed assets are stated at cost and depreciation on furniture and
equipment and computer equipment and software is calculated on the
straight-line method over the estimated useful lives of the assets ranging
from three to seven years. Equipment held under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
INCOME TAXES
The Company accounts for income taxes on the liability method as required
by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and
liabilities are recognized with respect to the future tax consequences
attributable to differences between the financial statement carrying values
and tax bases of existing assets and liabilities and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
GOODWILL
Goodwill is being amortized over 20 years using the straight-line method.
The Company systematically reviews the recoverability of its goodwill by
comparing the unamortized carrying value to anticipated undiscounted future
cash flows. Any impairment is charged to expense when such determination is
made. Accumulated amortization at December 31, 1996 and June 30, 1997 was
$6,000 and $21,000, respectively.
NET INCOME (LOSS) PER SHARE
The income (loss) per share amounts in the consolidated statements of
operations have been computed in accordance with Staff Accounting Bulletin 83
("SAB 83") of the Securities and Exchange Commission. SAB 83 requires that
common stock, options and warrants issued within a twelve month period prior
to an initial public offering ("IPO") of common stock, at amounts below the
public offering price, be treated as common stock equivalents outstanding for
all periods presented. In October and December 1996, the Company granted
options to purchase 16,950 and 69,350 shares of common stock at $4.38 and
$5.63 per share, respectively. In May 1997, the Company granted options to
purchase 648,450 shares of common stock at $12.00 per share. Accordingly, the
number of such shares actually issued and issuable upon the exercise of such
common stock options, reduced by the number of shares that could be
repurchased from the proceeds, have been added to the number of shares of
common stock outstanding for all periods presented.
F-9
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivables. Concentrations of credit risk with respect to
accounts receivables are limited due to the creditworthiness of customers
comprising the Company's customer base. Management regularly monitors the
creditworthiness of its customers and believes that it has adequately
provided for any exposure to potential credit losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and warrants will be
excluded. Statement No. 128 is not expected to have a material impact on the
net income (loss) and pro forma net income (loss) per share.
3. FIXED ASSETS
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------- JUNE 30
1995 1996 1997
------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment ....................... $ 404 $1,597 $ 1,695
Computer equipment and software ............... 239 1,732 4,719
Leasehold improvements ........................ 32 182 225
------- -------- -----------
675 3,511 6,639
Less accumulated depreciation and
amortization.................................. (142) (556) (1,176)
------- -------- -----------
$ 533 $2,955 $ 5,463
======= ======== ===========
</TABLE>
Fixed assets include assets under capital lease aggregating approximately
$127,000, $786,000 and $940,000 at December 31, 1995, 1996 and June 30, 1997,
respectively. The accumulated amortization related to these assets under
capital leases is approximately $24,000, $110,000 and $257,000 at December
31, 1995, 1996 and June 30, 1997, respectively.
4. BORROWINGS UNDER LINE OF CREDIT
In May 1997, the Company obtained a $7,000,000 credit facility with a
bank, expiring in June 1998 and bearing interest at the Company's option at
either the bank's prime rate (8.5% at June 30, 1997) or LIBOR plus 2.25%.
Borrowings on the credit facility, which are based on 75% of eligible U.S.
accounts receivable, as defined, are collateralized by a security interest in
substantially all of the Company's assets. The credit facility contains
financial covenants relating to PRT's minimum tangible net worth and working
capital.
The Company had a $2,000,000 credit facility with a bank, which expired on
December 31, 1996, bearing interest at 1.5% per annum above the bank's prime
rate (7.75% at December 31, 1996). This facility was secured by the Company's
accounts receivable and other tangible and intangible assets.
5. ADVANCE PAYABLE TO CLIENT
On August 15, 1995, a subsidiary of the Company entered into an agreement
with a client to perform services for which a cash advance of approximately
$1,050,000 was received. During 1996, additional
F-10
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
advances totaling approximately $2,000,000 were received. During 1997,
additional advances totaling $632,000 were received and the repayment period
was extended. No interest is payable on these outstanding advances. Repayment
commences in February 1998 in nine equal monthly installments which will be
credited to the client against actual monthly charges pursuant to the
agreement.
In July 1996, the subsidiary issued warrants that entitled the client to
purchase approximately 24% of the total outstanding shares of such subsidiary
on a fully diluted basis, for approximately $3,050,000, at any time between
July 1996 and January 1999. During the first quarter of 1997, the Company and
the client agreed to, among other matters, exchange the subsidiary warrants
for warrants to purchase 2,759,610 shares of PRT's Common Stock (the "JPMVC
PRT Warrant") with an exercise price of $3,682,000. The JPMVC PRT Warrant is
only exercisable by forgiveness of the amounts outstanding under the advances
payable to the client in their entirety and is required to be exercised upon
a consummation of an IPO. This exchange was consummated in September 1997 and
the estimated fair value of the warrant of $3,343,000 and goodwill of
$2,792,000 was recorded (see Note 14).
The estimated amount of interest of approximately $496,000 and $55,000
relating to the warrants issued in July 1996 and the subsequent advance in
1997, that the subsidiary would have been obligated to pay on the advances
had they been a loan at rates available to the Company under its line of
credit was determined by the Company to be the value of the warrant, was
recorded as a debt discount and minority interest. The advances are being
accreted up to the face value of $3,682,000 using the interest method over
the period the advances are outstanding. For the year ended December 31, 1996
and the six months ended June 30, 1997, the amount accreted was approximately
$163,000 and $95,000, respectively.
The carrying value of the advances consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------ JUNE 30
1995 1996 1997
-------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current installments, net of unamortized discount of
$264 in 1996 and $132 in 1997 .......................... $ 350 $ 909 $1,913
Noncurrent installments, net of unamortized discount of
$69 in 1996 and $106 in 1997............................ 700 1,808 1,531
-------- -------- -----------
$1,050 $2,717 $3,444
======== ======== ===========
</TABLE>
6. STOCKHOLDERS' EQUITY
STOCK SPLIT
In October 1996, the Company effected a five-for-one stock split of Common
Stock. In addition, the Company restated its Certificate of Incorporation to
incorporate in Delaware and to increase its authorized shares of Common Stock
from 200,000 to 5,000,000 shares with a par value of $0.01 per share. In May
1997, the Company effected a ten-for-one stock split of Common Stock and
amended its certificate of incorporation to increase its authorized shares
from 5,000,000 to 50,000,000 shares with a par value of $0.001 per share. All
outstanding share amounts in the accompanying financial statements have been
adjusted to reflect the aforementioned stock splits.
PRIVATE PLACEMENT OF SECURITIES
In November 1996, the Company issued 2,759,610 shares, after giving effect
to the ten for one stock split, of its Series A Redeemable Preferred Stock
("Convertible Preferred Stock") for a price of $6.56 per share and 486,310
Warrants (the "Warrants") for a price of $.60 per warrant in a private
placement. The Company incurred approximately $1,277,000 of fees and related
expenses in this transaction.
F-11
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (Continued)
SERIES A REDEEMABLE PREFERRED STOCK
Holders of the Convertible Preferred Stock are entitled to receive
cumulative dividends at the annual rate of 4%. Such dividends are payable
quarterly in cash if, as and when declared by the Company's Board of
Directors or otherwise upon conversion of the Convertible Preferred Stock
into Common Stock, redemption of the Convertible Preferred Stock or
liquidation of the Company. At December 31, 1996 and June 30, 1997,
cumulative dividends in arrears amounted to approximately $80,000 and
$442,000, respectively, which is included in the carrying value of the
Convertible Preferred Stock in the accompanying consolidated balance sheets.
The Convertible Preferred Stock is convertible into Common Stock of the
Company at any time at the option of the holder or automatically upon the
sale of the Company's Common Stock in an IPO, as defined (see Note 14). As of
June 30, 1997, each share of the Convertible Preferred Stock would receive
one share of Common Stock upon conversion. If the Company does not attain
certain specified operating results in fiscal 1997, the holder would instead
receive up to approximately 1.27 shares of Common Stock for each share of the
Convertible Preferred Stock converted. This conversion rate would further
increase if, prior to conversion, the Company issued Common Stock or
securities convertible or exchangeable for Common Stock at a price per share
of less than $6.56. Upon a request by a holder of the Convertible Preferred
Stock on or after November 21, 2002, the Company shall redeem the requested
number of shares. To the extent the Company has funds legally available
therefore, and provided that redemption payments do not exceed certain
specified percentages of net income, the Company shall redeem the shares on a
quarterly basis. The redemption price shall be the greater of the liquidation
value of $6.56 per share plus accrued dividends or the current market value,
as defined, of the shares on the redemption date. The aforementioned increase
in the exchange rate and redemption obligation of the Convertible Preferred
Stock cease upon the consummation of an IPO, as defined.
The difference between the net proceeds received from the sale of the
Convertible Preferred Stock and the liquidation value is being accreted over
the earliest possible liquidation date via a charge to stockholders' equity.
WARRANTS
The Warrants were designed to give the holder certain benefits that
holders of the Company's Convertible Preferred Stock receive. The Warrants
entitle the holder to receive cumulative distributions at the annual rate of
4% of $6.56. These distributions shall be payable in cash, if as and when
declared by the Board of Directors of the Company. Such distributions may be
paid in cash or Common Stock at the Company's option upon the sale of the
Company's Common Stock in an IPO or liquidation of the Company. A holder of a
Warrant is entitled to receive shares of Common Stock upon an exercise only
if the Company does not attain certain specified operating results in fiscal
1997 or, if prior to exercise, the Company has issued Common Stock or
securities convertible or exchangeable for Common Stock at a price per share
of less than $6.56 per share. Upon consummation of the IPO, all of these
warrants will expire and will not be converted into any shares of the
Company's Common Stock. At December 31, 1996 and June 30, 1997, distributions
in arrears under the Warrants amounted to approximately $14,000 and $78,000,
respectively.
STOCK OPTION PLAN
In June 1996, the Company established a Stock Option Plan (the "Option
Plan") for officers, employees, consultants and nonemployee directors to
purchase shares of the Company's Common Stock. The Option Plan requires the
Company to reserve 15% of the total number of issued and outstanding shares
for issuance upon the exercise of options under the Option Plan. At December
31, 1996 and June 30, 1997, the Company had reserved 1,302,000 shares of
Common Stock for the exercise and future grants of stock options under such
Option Plan.
F-12
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (Continued)
The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the
number of shares and terms of the awards and the exercise price. The exercise
price shall not be less than the fair market value of the Company's Common
Stock at the date the option is granted. As such, the Company has not
recorded compensation expense in connection with these awards. The options
are exercisable for a period not to exceed ten years from the date of the
grant. Vesting periods range from immediate vesting to five years.
Activity in the Option Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Granted.................................. 517,600 $ 4.55
Exercised................................ -- --
Cancelled and expired.................... -- --
----------- --------------
Outstanding at December 31, 1996 ........ 517,600 $ 4.55
==============
Granted ................................. 648,450 $12.00
Exercised................................ (1,500) 4.38
Cancelled................................ (55,800) 4.49
----------- --------------
Outstanding at June 30, 1997............. 1,108,750 $ 8.91
=========== ==============
Exercisable at December 31, 1997 ........ 16,350
===========
Exercisable at June 30, 1997............. 260,725
===========
Available for grant at December 31,
1997.................................... 784,400
===========
Available for grant at June 30, 1997 .... 191,750
===========
</TABLE>
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), and has been
determined as if the Company had accounted for its employees' stock options
under the fair value method provided by that Statement. The fair value of the
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for vested and non-vested
options:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
ASSUMPTION 1996 1997
---------- --------------- -----------
<S> <C> <C>
Risk-free interest rate .................................. 6.62% 6.67%
Dividend yield ........................................... 0% 0%
Volatility factor of the expected market price of the
Company's Common Stock .................................. .489 .489
Average life ............................................. 5 years 5 years
</TABLE>
F-13
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options under SFAS 123 is amortized to expense over the options' vesting
period. For the year ended December 31, 1996, pro forma net loss and pro
forma net loss per share under SFAS 123 amounted to approximately
($3,353,000) and $ , respectively, and ($3,036,000) and $ , respectively,
for the six months ended June 30, 1997.
The weighted average fair value of options granted during the year ended
December 31, 1996 and the six months ended June 30, 1997 was $2.31 and $4.55,
respectively. At June 30, 1997 there were 16,350 and 244,375 of 1996 and 1997
options exercisable, respectively. The weighted average exercise price of the
1996 and 1997 options exercisable is $4.53 and $12.00, respectively. The
weighted average remaining contractual life of the 1996 and 1997 options
exercisable is 8.7 and 9.8 years, respectively.
7. ACQUISITION OF MINORITY INTERESTS
In October 1996, the Company acquired, in exchange for 421,500 shares of
its Common Stock, the 20% interest in the outstanding shares of a subsidiary
that was owned by a related entity that was also owned by certain
stockholders of the Company. In addition, the Company acquired, in exchange
for 105,380 shares of its Common Stock, the 5% interest in the outstanding
shares of the subsidiary that were owned by the president of the subsidiary,
who was not previously a stockholder of the Company.
The Company recorded the Common Stock issued to the related entity at that
entity's carrying value of its investment in the subsidiary of approximately
$15,000. The Company recorded the Common Stock issued to the president of the
subsidiary at the estimated value of $5.96 per share, or approximately
$628,000, based on the price at which shares of the Company's Common Stock
were sold by certain investors to third parties in November 1996 (see Note
6). At the time of this transaction, the subsidiary's liabilities exceeded
the value of its tangible assets. This additional investment by the Company
was attributable to goodwill and recorded as such in the accompanying
consolidated financial statements.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ---------- --------
<S> <C> <C> <C>
DECEMBER 31, 1994
U.S. Federal ............. $ -- $ 139 $ 139
State and local .......... 5 78 83
--------- ---------- --------
$ 5 $ 217 $ 222
========= ========== ========
DECEMBER 31, 1995
U.S. Federal ............. $273 $ 61 $ 334
State and local .......... 149 18 167
--------- ---------- --------
$422 $ 79 $ 501
========= ========== ========
DECEMBER 31, 1996
U.S. Federal ............. $ 86 $(369) $(283)
State and local .......... 83 (106) (23)
--------- ---------- --------
$169 $(475) $(306)
========= ========== ========
F-14
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (Continued)
CURRENT DEFERRED TOTAL
--------- ---------- --------
JUNE 30, 1996 (UNAUDITED)
U.S. Federal ............. $128 $(156) $ (28)
State and local .......... 59 (75) (16)
--------- ---------- --------
$187 $(231) $ (44)
========= ========== ========
JUNE 30, 1997 (UNAUDITED)
U.S. Federal ............. $ 49 $(138) $ (89)
State and local .......... 27 (67) (40)
--------- ---------- --------
$ 76 $(205) $(129)
========= ========== ========
</TABLE>
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) computed by applying the U.S. Federal corporate tax rate of
34% to income taxes, as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
---------------------------------------------
1994 1995 1996 1996 1997
------ ------ ---------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit) ........................... $161 $209 $(1,215) $(256) $(693)
Nondeductible losses of foreign
subsidiaries......................... -- 171 949 221 578
State and local income taxes, net of
Federal income tax expense (benefit) 54 101 (51) (11) (26)
Other................................. 7 20 11 2 12
------ ------ ---------- -------- ---------
$222 $501 $ (306) $ (44) $ (129)
====== ====== ========== ======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996 1997
-------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances ....................... $ 19 $ 22 $ 58
Nondeductible license payments ....................... - 86 86
Net operating loss carryforwards ..................... - 44 37
Prepaid expenses ..................................... 5 - -
-------- ------- -----------
Total gross deferred assets ........................... 24 152 181
-------- ------- -----------
Deferred tax liabilities:
Depreciation of fixed assets ......................... (20) (39) (47)
Accrual basis earnings not recognized for tax
purposes ............................................ (549) (181) -
Prepaid expenses ..................................... (19) (21) (18)
-------- ------- -----------
Total gross deferred liabilities ...................... (588) (241) (65)
-------- ------- -----------
Net deferred tax asset (liability) .................... $(564) $ (89) $116
======== ======= ===========
</TABLE>
F-15
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SIGNIFICANT CLIENTS
Two clients accounted for 22% and 16% of total revenues for the year ended
December 31, 1994 and 29% and 10% of total revenues for the year ended
December 31, 1995. For the year ended December 31, 1996, three clients
accounted for 28%, 17% and 15% of total revenues. During the six months ended
June 30, 1996 four customers accounted for 27%, 12%, 11% and 10% of total
revenues. During the six months ended June 30, 1997, four customers accounted
for 25%, 18%, 16% and 13% of total revenues.
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under capital leases for computer and office
equipment that expire at various dates through July 2001 with interest
ranging from 10% to 15%. Future minimum lease payments relating to office
space under noncancelable operating leases and future minimum capital lease
payments as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Year ending December 31:
1997 ........................................................ $241 $1,531
1998 ........................................................ 205 1,681
1999 ........................................................ 147 1,568
2000 ........................................................ 29 1,083
2001 ........................................................ 9 673
Thereafter ................................................... -- 1,261
--------- -----------
Total minimum lease payments ................................. 631 $7,797
===========
Less amount representing interest ............................ 38
---------
Present value of net minimum capital lease payments ......... 593
Less current installments of obligations under capital leases 224
---------
Obligations under capital leases, net of current installments $369
=========
</TABLE>
Rent expense was approximately $143,000, $148,000 and $526,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, and $121,000 and
$632,000 for the six months ended June 30, 1996 and 1997, respectively.
There are certain claims against the Company arising in the ordinary
course of its business. The amount of liability, if any, with respect to
these claims at June 30, 1997 is not presently determinable. However, in the
opinion of management, the ultimate liability related to such claims, if any,
will not have a material adverse effect on the Company's results of
operations or financial position.
11. DEFERRED COMPENSATION PLAN
In 1995, the Company established a 401(k) plan (the "Plan") covering all
its eligible employees. The Plan is currently funded by voluntary salary
deductions by plan members and is limited to the maximum amount that can be
deducted for Federal income tax purposes. The Company is not required to make
contributions to the Plan however, employer contributions may be made on a
discretionary basis. For the years ended December 31, 1995 and 1996 and the
six months ended June 30, 1996 and 1997, the Company recognized contributions
of $31,000, $42,000, $22,000 and $31,000, respectively.
12. RELATED PARTY TRANSACTIONS
Revenue generated from a client, who is also a stockholder, was
approximately $2,200,000, $2,100,000 and $4,000,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. For the six months ended June
30, 1996 and 1997, revenue generated from this client was approximately
$1,000,000 and $4,000,000, respectively.
F-16
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. GEOGRAPHIC AREAS
The Company operates in one industry segment: providing information
technology solutions to its clients. In addition to its domestic operations,
which include the United States, the Company has operations in the West
Indies and Asia. The Company's operations in Asia are not individually
material and are included in foreign operations along with the West Indies.
Geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- -----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
---------- --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total identifiable
assets................... $ 3,595 $-- $ 3,947 $ 913 $19,480 $ 4,480
========== ========= ========== ========= ========== ===========
Revenues.................. $13,876 $-- $20,291 $ 55 $20,310 $ 3,491
========== ========= ========== ========= ========== ===========
Income (loss) before
income taxes............. $ 473 $-- 1,118 $(502) $ (783) $ (2,792)
========== ========= ========== ========= ========== ===========
Depreciation and
amortization expense ... $ 41 $-- $ 51 $ 9 $ 159 $ 265
========== ========= ========== ========= ========== ===========
Capital expenditures ..... $ 117 $-- $ 144 $ 363 $ 976 $ 1,860
========== ========= ========== ========= ========== ===========
</TABLE>
14. AS ADJUSTED BALANCE SHEET AND EVENTS CONCURRENT WITH THE IPO (UNAUDITED)
The Board of Directors has authorized the Company to file a registration
statement with the U.S. Securities and Exchange Commission for an IPO. In
connection with the proposed IPO: (i) all of the Company's Convertible
Preferred Stock will be converted into 2,759,610 shares of common stock and
(ii) the JPMVC PRT Warrant will be exercised in exchange for the amounts
outstanding under the advance payable to the client and 936,365 shares of
Common Stock will be issued. The aforementioned conversion and exercise has
been reflected in the accompanying unaudited as adjusted balance sheet
assuming that the conversion and exercise occurred on June 30, 1997.
15. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement (the "Agreement"), effective July
1, 1997, the Company purchased all of the issued and outstanding capital
stock of Computer Management Resources, Inc. ("CMR") for $6,294,000. CMR is a
provider of information technology services. The acquisition will be
accounted for as a purchase and, accordingly, the aggregate price will be
allocated to the underlying assets and liabilities based upon their
respective fair values at the date of the acquisition. The excess of costs
over net assets acquired, estimated to be approximately $6,100,000, will be
amortized on a straight-line basis over twenty years.
The purchase price consisted of $2,864,000 in cash, 119,181 shares of the
Company's Common Stock valued at approximately $1,430,000, or $12.00 per
share, and a promissory note in the principal amount of $2,000,000 (the
"Note"). The Note, which is secured by a $1,000,000 letter of credit, bears
interest at 9.75% per annum with the principal balance due no later than July
18, 2002. Payment of the Note, in part or in full prior to its maturity, is
subject to a prepayment premium, as defined. Upon completion of an IPO of the
Company's Common Stock, as defined, the Company is required to (i) prepay the
lesser of (a) $1,000,000 or (b) the outstanding principal balance plus, in
either case, the prepayment premium, as defined or (ii) obtain an additional
letter of credit for an amount equal to the difference between the existing
letter of credit and the outstanding principal balance at that date.
F-17
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (Continued)
After December 31, 1999, provided an IPO of the Company's Common Stock
has not occurred, the Company is required to repurchase in quarterly
installments the shares issued under the Agreement at the greater of $10.90
per share or the fair market value per share, as defined, on the repurchase
date. Furthermore, if the IPO price is less than $10.90 per share, the
Company is required to issue additional shares so that the market value of
the shares issued in the acquisition is at least $1,300,000.
The table below sets forth the unaudited pro forma results of operations
for the year ended December 31, 1996 and the six months ended June 30, 1997
assuming consummation of the CMR acquisition as of January 1, 1996 and 1997,
respectively:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
1996 1997
--------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
Revenues ......................... $31,304 $25,579
Net loss ......................... (3,583) (2,282)
Pro forma net loss per share .... $( ) $( )
</TABLE>
F-18
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma consolidated financial statements of PRT
Group Inc. and Subsidiaries (the "Company") give effect to the acquisition on
July 1, 1997 of all of the issued and outstanding capital stock of Computer
Management Resources, Inc. ("CMR") for cash of $2,864,000, a $2,000,000
promissory note and 119,181 shares of the Company's Common Stock valued at
$12 per share. The pro forma information is based on the historical financial
statements of the Company and CMR giving effect to the aforementioned
transaction under the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the pro forma consolidated financial
statements.
The allocation of the purchase price has not been finally determined.
Accordingly, the accounts reflected in the pro forma consolidated financial
statements may differ from the amounts that would have been determined if the
final purchase price allocation had been known.
The unaudited pro forma consolidated balance sheet as of June 30, 1997
gives effect to the CMR acquisition as if it occurred on June 30, 1997. The
unaudited pro forma consolidated statements of operations for the year ended
December 31, 1996 are based on the historical consolidated financial
statements of the Company for the year ended December 31, 1996 and the
historical financial statements of CMR for the year ended February 28, 1997.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996 and the six months ended June 30, 1997 give effect to
the CMR acquisition as if it had occurred as of January 1, 1996 and 1997,
respectively.
The pro forma consolidated financial statements have been prepared by the
Company's management. The pro forma consolidated financial statements may not
be indicative of the results that actually would have occurred if the
acquisition had been consummated on the date indicated or which may be
obtained in the future. The pro forma consolidated financial statements
should be read in conjunction with the financial statements and notes of the
Company and CMR, included herein.
F-19
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 1997
(In thousands, except number of shares)
<TABLE>
<CAPTION>
COMPANY CMR ADJUSTMENTS
HISTORICAL HISTORICAL (a) PRO FORMA
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 7,898 $171 $(2,864) $ 5,205
Accounts receivable, net ........................... 9,640 764 -- 10,404
Prepaid expenses and other current assets ......... 1,169 -- -- 1,169
Deferred income taxes .............................. 40 -- -- 40
------------ ------------ ------------- -----------
Total current assets ................................ 18,747 935 (2,864) 16,818
Fixed assets, net ................................... 5,463 -- -- 5,463
Goodwill, net ....................................... 604 -- 6,100 6,704
Other assets ........................................ 125 -- -- 125
Deferred income taxes ............................... 76 -- -- 76
------------ ------------ ------------- -----------
Total assets ........................................ $25,015 $935 $ 3,236 $29,186
============ ============ ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit .................... $ 850 $ -- $ -- $ 850
Current installments of advance payable to client .. 1,913 -- -- 1,913
Accrued compensation ............................... 2,640 -- -- 2,640
Accounts payable and other accrued expenses ....... 3,402 639 -- 4,041
Current installments of capital lease obligations . 399 -- -- 399
Deferred income taxes .............................. -- 86 -- 86
Deferred revenue .................................... 515 16 -- 531
------------ ------------ ------------- -----------
Total current liabilities ........................... 9,719 741 -- 10,460
Promissory note ..................................... -- -- 2,000 2,000
Advance payable to client, net of current
installments ....................................... 1,531 -- -- 1,531
Capital lease obligations, net of current
installments ....................................... 309 -- -- 309
Other liabilities ................................... 78 -- -- 78
------------ ------------ ------------- -----------
Total liabilities ................................... 11,637 741 2,000 14,378
Minority interest ................................... 551 -- -- 551
Series A redeemable preferred stock, $0.01 par
value; authorized--500,000 shares; issued and
outstanding--2,759,610 shares (liquidation
preference $18,550) ................................ 17,407 -- -- 17,407
Common stock subject to redemption .................. -- -- 1,430 1,430
Common stockholders' equity (deficit):
Common stock, $.001 par value;
authorized--50,000,000 shares; issued and
outstanding--10,539,000 ........................... 11 -- -- 11
Additional paid-in capital.......................... 943 -- -- 943
Accumulated deficit................................. (5,059) -- -- (5,059)
CMR net equity...................................... -- 194 (194) --
Cumulative translation adjustment................... (75) -- -- (75)
Treasury stock, 67,090 common shares ............... (400) -- -- (400)
------------ ------------ ------------- -----------
Total common stockholders' equity (deficit) ......... (4,580) 194 (194) (4,580)
------------ ------------ ------------- -----------
Total liabilities and stockholders' equity
(deficit)........................................... $25,015 $935 $ 3,236 $29,186
============ ============ ============= ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Year ended December 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMPANY CMR
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues ..................................... $23,801 $7,503 -- $31,304
Cost of revenues ............................. 17,965 5,482 -- 23,447
------------ ------------ ------------- -----------
Gross profit ................................. 5,836 2,021 -- 7,857
Selling, general and administrative expenses 9,235 1,843 $ 305 11,383
------------ ------------ ------------- -----------
Income (loss) from operations ................ (3,399) 178 (305) (3,526)
Other income (expense):
Interest expense ............................ (254) (9) (195) (458)
Interest income ............................. 78 6 -- 84
------------ ------------ ------------- -----------
Income (loss) before income taxes ............ (3,575) 175 (500) (3,900)
Income tax expense (benefit) ................. (306) 67 (78) (317)
------------ ------------ ------------- -----------
Net income (loss) ............................ (3,269) 108 (422) (3,583)
Accretion of redeemable preferred stock ..... (23) -- -- (23)
Dividends on redeemable preferred stock and
common stock warrants........................ (94) -- -- (94)
------------ ------------ ------------- -----------
Net income (loss) available to common
stockholders ................................ $(3,386) $ 108 $ (422) $ (3,700)
============ ============ ============= ===========
Net loss per share ........................... $ $
============ ===========
Weighted average number of shares used in
calculation of loss per share................
============ ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Six Months ended June 30, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMPANY CMR
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues ..................................... $21,314 $4,265 -- $25,579
Cost of revenues ............................. 15,217 3,185 -- 18,402
------------ ------------ ------------- -----------
Gross profit ................................. 6,097 1,080 -- 7,177
Selling, general and administrative expenses 8,210 1,350 $ 152 9,712
------------ ------------ ------------- -----------
Loss from operations ......................... (2,113) (270) (152) (2,535)
Other income (expense):
Interest expense ............................ (190) (4) (98) (292)
Interest income ............................. 264 3 -- 267
------------ ------------ ------------- -----------
Loss before income taxes ..................... (2,039) (271) (250) (2,560)
Income tax expense (benefit) ................. (129) (110) (39) (278)
------------ ------------ ------------- -----------
Net loss ..................................... (1,910) (161) (211) (2,282)
Accretion of redeemable preferred stock ..... (106) -- -- (106)
Dividends on redeemable preferred stock and
common stock warrants........................ (426) -- -- (426)
------------ ------------ ------------- -----------
Net loss available to common stockholders ... $(2,442) $ (161) $(211) $(2,814)
============ ============ ============= ===========
Net loss per share ........................... $ $
============ ===========
Weighted average number of shares used in
calculation of loss per share ...............
============ ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Year ended December 31, 1996 and
the six months ended June 30, 1997
For the purposes of determining the pro forma effect of the acquisition on
the consolidated balance sheet at June 30, 1997, the following pro forma
adjustment has been made (in thousands):
<TABLE>
<CAPTION>
<S> <C>
(a) Purchase price:
Cash paid ............................................................ $2,864
Issuance of promissory note .......................................... 2,000
Issuance of 119,181 shares of common stock, valued at $12.00 per
share................................................................. 1,430
--------
6,294
Net assets acquired .................................................. (194)
--------
Goodwill ............................................................. $6,100
========
</TABLE>
For purposes of determining the pro forma effect of the acquisition on the
consolidated statements of operations for the year ended December 31, 1996
and for the six months ended June 30, 1997, the following pro forma
adjustments have been made (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
<S> <C> <C>
(b) Increase in amortization from the increase in
goodwill amortized on a straight-line basis over
twenty years.......................................... $305 $152
================= ===============
(c) Increase in interest expense from issuance of
$2,000,000 promissory note .......................... $195 $ 98
================= ===============
(d) Adjustment of tax provision:
Adjustment to historical tax provision (benefit) due
to adjustments...................................... $(78) $(39)
================= ===============
</TABLE>
The historical net income per share is based on the weighted average
number of common shares outstanding during the respective periods including
common stock equivalents. The pro forma net income per share gives effect to
the issuance of 119,181 shares of the Company's Common Stock as of January 1,
1996 in connection with the acquisition of CMR.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Computer Management Resources, Inc.
We have audited the accompanying balance sheet of Computer Management
Resources, Inc. as of February 28, 1997, and the related statements of
operations and retained earnings and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Computer Management
Resources, Inc. as of February 28, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
August 28, 1997
F-24
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28 JUNE 30
1997 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 6,460 $170,867
Accounts receivable, net of allowance of $100,000 at
June 30, 1997......................................... 794,651 764,621
Other current assets .................................. 38,918 -
------------- -----------
Total current assets and assets ..................... $840,029 $935,488
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................. $ 9,561 $639,267
Deferred revenue ...................................... 68,756 16,191
Borrowings under line of credit ....................... 108,000 -
Deferred income taxes ................................. 288,300 86,300
------------- -----------
Total current liabilities and liabilities ............. 474,617 741,758
Stockholders' equity:
Common stock, $1 par value, authorized--5,000 shares;
issued and outstanding 1,000 shares................... 1,000 1,000
Retained earnings ..................................... 364,412 192,730
------------- -----------
Total stockholders' equity ............................ 365,412 193,730
------------- -----------
Total liabilities and stockholders' equity ......... $840,029 $935,488
============= ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
FEBRUARY 28 JUNE 30
1997
------------------------------------
1997 1997 1996
------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues ..................................... $7,503,287 $3,068,396 $2,438,920
Cost of revenues ............................. 5,482,126 2,384,756 1,812,411
------------- ------------ ------------
Gross profit ................................. 2,021,161 683,640 626,509
Selling, general and administrative expenses 1,843,548 969,934 583,359
------------- ------------ ------------
Operating income (loss) ...................... 177,613 (286,294) 43,150
Other income (expense):
Interest expense ........................... (8,872) (3,913) (4,028)
Interest income ............................ 6,415 1,525 2,126
------------- ------------ ------------
Income (loss) before income taxes ............ 175,156 (288,682) 41,248
Income tax expense (benefit) ................. 67,110 (117,000) 5,900
------------- ------------ ------------
Net income (loss) ............................ 108,046 (171,682) 35,348
Retained earnings at beginning of period .... 256,366 364,412 256,366
------------- ------------ ------------
Retained earnings at end of period ........... $ 364,412 $ 192,730 $ 291,714
============= ============ ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
FEBRUARY 28 JUNE 30
1997
---------------------------------------
1997 1997 1996
------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................. $ 108,046 $(171,682) $ 35,348
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for doubtful accounts .................. -- 100,000 --
Deferred income taxes ............................ 64,495 (202,000) (23,050)
Changes in operating assets and liabilities:
Accounts receivable ............................. (167,037) (69,970) (158,113)
Other current assets ............................ 27,082 38,918 (15,084)
Accounts payable and accrued expenses .......... (6,250) 629,706 352,413
Deferred revenue ................................ 35,105 (52,565) (26,093)
------------- ------------ -----------
Net cash provided by operating activities ........ 61,441 272,407 165,421
------------- ------------ -----------
FINANCING ACTIVITIES
Net repayments of borrowings under line of credit (62,000) (108,000) (95,000)
------------- ------------ -----------
Net cash used in financing activities ............. (62,000) (108,000) (95,000)
------------- ------------ -----------
Decrease in cash and cash equivalents ............. (559) 164,407 70,421
Cash and cash equivalents at beginning of period . 7,019 6,460 7,019
------------- ------------ -----------
Cash and cash equivalents at end of period ....... $ 6,460 $ 170,867 $ 77,440
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ..................................... $ 8,872 $ 3,913 $ 4,028
============= ============ ===========
Income taxes paid ................................. $ 11,098 $ 1,525 $ 2,126
============= ============ ===========
</TABLE>
See accompanying notes.
F-27
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 28, 1997 AND THE FOUR MONTHS ENDED
JUNE 30, 1997 AND 1996 (INFORMATION AS OF JUNE 30, 1997
AND FOR THE FOUR MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Computer Management Resources, Inc. ("CMR") was incorporated in the State
of Connecticut in March 1981. CMR is a provider of information technology
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized during the period
in which the related services are provided. At February 28, 1997 and June 30,
1997, cash payments received but unearned are recorded as deferred revenue.
CASH AND CASH EQUIVALENTS
CMR considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents. At June 30, 1997,
CMR has substantially all of its cash in one financial institution.
INCOME TAXES
For income taxes purposes, CMR is on the cash basis of accounting. For
financial statement purposes, CMR accounts for income taxes on the liability
method as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred tax
assets and liabilities are recognized with respect to the future tax
consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject CMR to concentrations of
credit risk consist principally of cash, cash equivalents and accounts
receivables. Concentrations of credit risk with respect to accounts
receivables are limited due to the credit worthiness of customers comprising
CMR's customer base. Management regularly monitors the creditworthiness of
its customers and believes that it has adequately provided for any exposure
to potential credit losses.
INTERIM FINANCIAL INFORMATION
The interim financial statements at June 30, 1997 and for the four months
ended June 30, 1997 and 1996 are unaudited; however, in the opinion of the
management, all adjustments, consisting only of normal recurring accruals
necessary for a fair presentation, have been included. Results of the interim
period are not necessarily indicative of results to be expected for the
entire year.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes.
F-28
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BORROWINGS UNDER LINE OF CREDIT
CMR had a $250,000 credit facility with a bank. The line of credit, which
terminated in July 1997, had an interest rate of 1.0% per annum above the
bank's prime rate (8.25% at February 28, 1997). This Facility was secured by
substantially all of the assets of CMR.
4. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ------------ ------------
<S> <C> <C> <C>
FEBRUARY 28, 1997
U.S. Federal ............ $ 1,140 $ 46,632 $ 47,772
State and local ......... 1,475 17,863 19,338
--------- ------------ ------------
$ 2,615 $ 64,495 $ 67,110
========= ============ ============
JUNE 30, 1997
(UNAUDITED)
U.S. Federal ............ $61,000 $(149,000) $ (88,000)
State and local ......... 24,000 (53,000) (29,000)
--------- ------------ ------------
$85,000 $(202,000) $(117,000)
========= ============ ============
JUNE 30, 1996
(UNAUDITED)
U.S. Federal ............ $18,300 $ (17,000) $ 1,300
State and local ......... 10,650 (6,050) 4,600
--------- ------------ ------------
$28,950 $ (23,050) $ 5,900
========= ============ ============
</TABLE>
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) computed by applying the U.S. Federal corporate tax rate of
34% to income taxes, as follows:
<TABLE>
<CAPTION>
FEBRUARY 28 JUNE 30 JUNE 30
1997 1997 1996
------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) ......... $59,533 $ (98,000) $ 14,000
State and local income taxes, net of Federal income
tax expense (benefit).............................. 12,760 (19,000) 3,100
Other .............................................. (5,183) -- (11,200)
------------- ------------ ----------
$67,110 $(117,000) $ 5,900
============= ============ ==========
</TABLE>
Temporary differences which represent a significant portion of the
deferred tax liability are attributable to certain cash to accrual
adjustments.
5. SIGNIFICANT CLIENTS
During the year ended February 28, 1997, revenues from three clients
represented 23%, 14% and 10% of total revenues.
6. EMPLOYEE BENEFIT PLAN
CMR has a 401(k) plan (the "Plan") in which all eligible employees can
contribute a portion of their compensation up to a maximum amount allowable
pursuant to the Internal Revenue Code. CMR is not required to make
contributions to the Plan, however, employer contributions may be made on a
discretionary basis. For the year ended February 28, 1997 and the four months
ended June 30, 1997 and 1996, CMR did not make contributions to the Plan.
F-29
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS
Total rent expense charged to operations was approximately $76,000,
$28,000 and $25,000 for the year ended February 28, 1997 and the four months
ended June 30, 1997 and 1996, respectively.
Future minimum lease payments relating to office space under noncancelable
operating leases as of February 28, 1997 are $81,600 (1998), $81,600 (1999)
and $54,400 (2000).
8. CONTINGENCIES
In January 1996, an action was commenced against CMR whereby a former
employee alleged that he was a shareholder of CMR and that CMR failed to pay
him for the fair market value of his shares upon his termination and failed
to pay him his 1994 bonus. Plaintiff's counsel has stated a damage claim of
$500,000. Because discovery in this matter has not yet been completed, an
evaluation of the probability of a favorable or unfavorable outcome or an
estimate of the range of any potential loss is not possible at this time. CMR
management has rejected the plaintiff's demand and intends to vigorously
contest this matter. CMR management believes that the eventual outcome will
not have a material adverse effect on CMR's results of operations, cash flows
or financial condition.
9. SUBSEQUENT EVENT
Effective July 1, 1997, PRT Group Inc. purchased all of the outstanding
shares of CMR's common stock for $6,294,000. On such date, CMR ceased to
operate as a separate entity. The stockholders of CMR have contractually
agreed to indemnify PRT Group Inc. for any amounts incurred with respect to
the litigation described in Note 8.
F-30
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ......................... 3
The Offering ............................... 4
Summary Historical and Pro Forma
Financial Data ............................ 5
Risk Factors ............................... 6
The Company ................................ 13
Use of Proceeds ............................ 14
Dividend Policy ............................ 14
Capitalization ............................. 15
Dilution ................................... 16
Selected Financial Data .................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 18
Business ................................... 24
Management ................................. 33
Certain Transactions ....................... 39
Principal and Selling Stockholders ........ 41
Description of Capital Stock ............... 42
Shares Eligible for Future Sale ............ 45
Underwriting ............................... 47
Legal Matters .............................. 49
Experts .................................... 49
Additional Information ..................... 49
Index to Consolidated Financial Statements . F-1
</TABLE>
UNTIL , 1997 (25 DAYS 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
PRT GROUP INC.
[LOGO]
COMMON STOCK
-----------
PROSPECTUS
, 1997
-----------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
PUNK, ZIEGEL & COMPANY
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an estimate of all expenses in connection with the
issuance and distribution of the securities being registered hereby:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee ........... $20,909
Accountants' fees and expenses .. *
Attorney's fees and expenses .. *
Printing expenses .............. *
Miscellaneous .................. *
----------
Total........................... $ *
==========
</TABLE>
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of the State
of Delaware, each director and officer of PRT Group Inc. ("PRT" or the
"Company") may be indemnified by PRT against expenses (including attorney's
fees, judgments, fines and amounts paid in settlement) actually and
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceedings in which he is involved by
reason of the fact that he is or was a director or officer of PRT if he acted
in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of PRT and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. However, if the legal proceeding is by or in the right of PRT, the
director or officer may not be indemnified in respect of any claim, issue or
matter as to which he shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to PRT unless a court determines
otherwise.
In addition, PRT's By-Laws provide that PRT shall indemnify and hold
harmless, to the fullest extent permitted by applicable law, any person who
was or is made or is threatened to be made a party to, or is otherwise
involved in, any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding") by reason of the fact that
he or she, or a person for whom he or she is the legal representative, is or
was a director, officer, employee or agent of PRT or is or was serving at the
request of PRT as a director, officer, employee or agent of another company
or of a partnership, joint venture, trust, enterprise or non-profit entity,
including service with respect to employee benefit plans, against all
liability and loss suffered and expenses reasonably incurred by such person.
PRT shall be required to indemnify a person in connection with a Proceeding
initiated by such person only if the Proceeding was authorized by the Board
of Directors of PRT.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information with respect to the securities of the
Company issued or sold by the Company within the last three years that were
not registered under the Securities Act of 1933, as amended (the "Securities
Act") and issued under the exemption from registration provided by Section
4(2) of the Securities Act. Except as set forth below, all sales were to
sophisticated accredited investors. Except as set forth below, no
underwriters were involved in any of the sales and no underwriting discounts
or commissions were accrued or paid. The following information is adjusted to
take into account a 10-for-1 stock split effectuated by the Company in May,
1997; unless stated otherwise herein, all share numbers set forth in this
Registration Statement have been retroactively restated to give effect to
this split.
(a) In November 7, 1996, PRT Corp. of America, a New York corporation and
the predecessor corporation to the Company, was merged (the "Merger") with
and into the Company with the Company surviving; in the Merger, each issued
and outstanding share of common stock of PRT Corp. of America was converted
into one share of common stock, par value $.001 per share, of the Company
(the "Common Stock").
II-1
<PAGE>
(b) On November 21, 1996, the Company completed the sale of 275,961
shares of its Series A Convertible Preferred Stock, par value $.01 per share
(the "Convertible Preferred Stock"), for $65.62 per share or $18.1 million in
the aggregate. Smith Barney Inc., an affiliate of Travelers Group Inc., was
paid fees of approximately $1.1 million in connection with this private
placement and the private placement described in Item 15(c) below.
(c) On November 21, 1996, the Company and a stockholder of the Company who
is not currently an employee or director of the Company completed a private
placement of 486,310 split-adjusted units (the "Units"), each comprised of
one share of Common Stock and one warrant convertible into shares of Common
Stock under certain circumstances (the "Warrants"), for $6.56 per Unit or
$3.2 million in the aggregate. The Company received approximately $292,000
for the Warrants. All of the 486,310 split-adjusted shares of Common Stock
were sold by a stockholder of the Company and the Company received none of
the proceeds thereof. Upon consummation of this Offering, all of the Warrants
will expire and will not be converted into any shares of PRT Common Stock or
other securities.
(d) On July 16, 1996 and April 18, 1997, the Company and PRT Barbados
entered into agreements providing for advances to PRT Barbados of
approximately $3.7 million in the aggregate (the "Advances") by J.P. Morgan
Ventures Corporation ("JPMVC"). In consideration for the Advances, PRT
Barbados issued to JPMVC warrants (the "PRT Barbados Warrants") to purchase
up to 24% of the authorized shares of PRT Barbados capital stock. On
September 16, 1997, the Company and JPMVC entered into an agreement providing
for, among other things, the exchange of the PRT Barbados Warrants for
warrants (the "JPMVC PRT Warrants") to purchase 936,365 shares of Common
Stock. The JPMVC PRT Warrants are only exercisable by forgiveness of the
Advances. Upon consummation of this Offering, the JPMVC PRT Warrants will be
exercised for 936,365 split adjusted shares of Common Stock and the Advances
will be forgiven.
(e) During 1996, the Company granted various incentive stock options to
purchase 517,600 shares of Common Stock to certain employees and directors of
the Company at a weighted average exercise price of $4.55 per share. All of
the options are exercisable in either three or four annual installments,
commencing one year from the date of the grant.
(f) During 1997, the Company granted various incentive stock options to
purchase 468,450 shares of Common Stock to certain employees and directors of
the Company at a weighted average price of $12.00 per share. All of the
options become exercisable in annual installments, at the rate of 33 1/3% or
25% commencing on the first anniversary of the date of the grant except for
directors for whom 50% of those options became execisable immediately.
(g) On June 1, 1997, Isaac Shapiro, a director of the Company, exercised
non qualified stock options and purchased 1,500 shares of Common Stock at an
exercise price of $4.38 per share.
(h) As of July 1, 1997, the Company acquired Computer Management
Resources, Inc. ("CMR") for an aggregate of $6.3 million in cash, a note,
119,181 shares of Common Stock and certain warrants convertible into shares
of Common Stock under certain circumstances (which circumstances have not
occurred and will not occur) (the "CMR PRT Warrants"). Upon consummation of
this Offering, all of the CMR PRT Warrants will expire and will not be
converted into any shares of Common Stock or other securities.
(i) On August 1, 1997, Douglas K. Mellinger, Chief Executive Officer and
Chairman, and Gregory S. Mellinger, Chief Operating Officer and Director,
exercised non-qualified stock options and each purchased 6,250 shares of
Common Stock at an exercise price of $4.38 per share.
(j) On August 1, 1997, Greg D. Adams, Chief Financial Officer of the
Company, exercised incentive stock options and purchased 5,000 shares of
Common Stock at an exercise price of $4.38 per share.
(k) On September 16, 1997, the Company granted non qualified stock options
to purchase 3,000 shares of Common Stock to each of Esther Dyson, a newly
elected director of the Company, at an exercise price of $13.50 per share.
The options are exercisable in two equal installments commencing immediately
and one year from the date of the grant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of PRT Group Inc.
3.2 Form of Amended and Restated By-Laws of PRT Group Inc.
4.1 Form of Certificate of Common Stock*
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the
Common Stock*
10.1 Employment contract of Mr. Douglas K. Mellinger, PRT Group Inc.
10.2 Employment contract of Mr. Gregory S. Mellinger, PRT Group Inc.
10.3 Employment contract of Mr. Srinivasan Viswanathan, PRT (Barbados) Ltd.
10.4 Form of Registration Rights Agreement*
10.5 Amended and Restated 1996 Stock Option Plan of PRT Group Inc.
10.6 Common Stock and Warrant Unit Purchase Agreement, dated as of November 21, 1996
10.7 Preferred Stock Purchase Agreement, dated as of November 21, 1996
10.8 Warrant Exchange Agreement, dated as of September 16, 1997*
10.9 Stock Purchase Agreement among Robert Marchetti, Stephen Michaelson, and PRT Group
Inc., dated as of July 1, 1997
10.10 Line of Credit, dated July 31, 1997, between Chase Manhattan
Bank, N.A. and PRT Group Inc.
16.1 Letter re: change in certifying accountant from KPMG Peat Marwick LLP
16.2 Letter re: change in certifying accountant from Shulman, Cohen, Furst, Kramer and
Rosen, P.C.
21 Subsidiaries of PRT Group Inc.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shulman, Cohen, Furst, Kramer and Rosen, P.C.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1)*
24 Power of Attorney of certain officers and directors of PRT Group Inc. (contained in,
and incorporated herein by reference to, Page II-5 of this Registration Statement)
27.1 Financial Data Schedule--December 31, 1996
27.2 Financial Data Schedule--June 30, 1997
</TABLE>
- ------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULE:
II -Valuation and Qualifying Accountants
All other schedules are omitted either because they are not applicable or
are not material, or the information presented therein is contained in the
Financial Statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(b) The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by the
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, PRT Group Inc.
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 New York, on the 23rd day of September, 1997.
PRT GROUP INC.
By: /s/ DOUGLAS K. MELLINGER
-------------------------------
Douglas K. Mellinger
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Douglas K. Mellinger and Greg D. Adams
his true and lawful attorney-in-fact and agent, 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 (or any
registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ----------------------------- ----------------------
<S> <C> <C>
/S/ DOUGLAS K. MELLINGER Chairman of the Board and September 23, 1997
----------------------------- Chief Executive Officer
Douglas K. Mellinger
/s/ GREG D. ADAMS Chief Financial Officer September 23, 1997
-----------------------------
Greg D. Adams
/s/ ESTHER DYSON Director September 23, 1997
-----------------------------
Esther Dyson
/s/ MICHAEL ENTHOVEN Director September 23, 1997
-----------------------------
Michael Enthoven
/s/ ROBERT P. FORLENZA Director September 23, 1997
-----------------------------
Robert P. Forlenza
/s/ CRAIG D. GOLDMAN Director September 23, 1997
-----------------------------
Craig D. Goldman
/s/ GREGORY S. MELLINGER Director September 23, 1997
-----------------------------
Gregory S. Mellinger
II-5
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ISAAC SHAPIRO Director September 23, 1997
-----------------------------
Isaac Shapiro
/s/ IRWIN J. SITKIN Director September 23, 1997
-----------------------------
Irwin J. Sitkin
/s/ JACK L. RIVKIN Director September 23, 1997
-----------------------------
Jack L. Rivkin
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PRT Group, Inc.
We have audited the consolidated financial statements of PRT Group Inc.
and Subsidiaries as of December 31, 1995 and 1996 and for the years then
ended, and have issued our report thereon dated September 16, 1997 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein
for the periods stated above.
ERNST & YOUNG LLP
New York, New York
September 16, 1997
S-1
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------- -------------- -------------- ------------ -----------
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING OF TO COSTS AND (A) AT END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------- -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowances deducted from assets
to which they apply:
Allowance for doubtful
accounts $ - $42 $ - $ 42
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from assets
to which they apply:
Allowance for doubtful
accounts $42 $80 $- $122
</TABLE>
- ------------
(a) Uncollectible receivables written off.
Note: Valuation and qualifying accounts for the year ended December 31, 1994
were not material.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of PRT Group Inc.
3.2 Form of Amended and Restated By-Laws of PRT Group Inc.
4.1 Form of Certificate of Common Stock*
5.1 Opinion and consent of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the Common
Stock*
10.1 Employment contract of Mr. Douglas K. Mellinger, PRT Group Inc.
10.2 Employment contract of Mr. Gregory S. Mellinger, PRT Group Inc.
10.3 Employment contract of Mr. Srinivasan Viswanathan, PRT (Barbados) Ltd.
10.4 Form of Registration Rights Agreement*
10.5 Amended and Restated 1996 Stock Option Plan of PRT Group Inc.
10.6 Common Stock and Warrant Unit Purchase Agreement, dated as of November 21, 1996
10.7 Preferred Stock Purchase Agreement, dated as of November 21, 1996
10.8 Warrant Exchange Agreement, dated as of September 16, 1997*
10.9 Stock Purchase Agreement among Robert Marchetti, Stephen Michaelson, and PRT Group Inc., dated
as of July 1, 1997
10.10 Line of Credit, dated July 31, 1997, between Chase Manhattan
Bank, N.A. and PRT Group Inc.
16.1 Letter re: change in certifying accountant from KPMG Peat Marwick LLP
16.2 Letter re: change in certifying accountant from Shulman, Cohen, Furst, Kramer and Rosen, P.C.
21 Subsidiaries of PRT Group Inc.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shulman, Cohen, Furst, Kramer and Rosen, P.C.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1)*
24 Power of Attorney of certain officers and directors of PRT Group Inc. (contained in, and incorporated
herein by reference to, Page II-5 of this Registration Statement)
27.1 Financial Data Schedule--December 31, 1996
27.2 Financial Data Schedule--June 30, 1997
</TABLE>
- ------------
* To be filed by amendment.
<PAGE>
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PRT GROUP INC.
-------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
-------------------------------------------------
PRT Group Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"GCL"), does hereby certify as follows:
(1) The name of the Corporation is PRT Group Inc. The original
certificate of incorporation of the Corporation was filed with the office of
the Secretary of State of the State of Delaware on September 18, 1996.
(2) This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation (the "Board of Directors")
and by the stockholders of the Corporation in accordance with Sections 228, 242
and 245 of the GCL.
(3) This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
<PAGE>
(4) The text of the Certificate of Incorporation is amended and
restated in its entirety as follows:
FIRST: The name of the Corporation is PRT Group Inc. (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 that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of
stock which the Corporation shall have authority to issue is 65,000,000 shares
of capital stock, consisting of (i) 50,000,000 shares of voting common stock,
par value $.001 per share (the "Voting Common Stock"), (ii) 1,000,000 shares of
non-voting common stock, par value $.001 per share (the "Non-Voting
2
<PAGE>
Common Stock" and, together with the Voting Common Stock, the "Common Stock"),
and (iii) 10,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock").
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of each class of the Common
Stock are as follows:
(1) Ranking. Except as otherwise expressly provided in this Amended
and Restated Certificate of Incorporation, the powers, preferences and rights
of the holders of Voting Common Stock and holders of Non-Voting Common Stock,
and the qualifications, limitations and restrictions thereof, shall be in all
respects identical.
(2) Voting. Except as otherwise expressly required by law or
provided in this Amended and Restated Certificate of Incorporation, and subject
to any voting rights provided to holders of Preferred Stock at any time
outstanding, the holders of any outstanding shares of Voting Common Stock shall
vote together as a single class on all matters with respect to which
stockholders are entitled to vote under applicable law, this Amended and
Restated Certificate of Incorporation or the By-Laws of the Corporation, or
upon which a vote of
3
<PAGE>
stockholders is otherwise duly called for by the Corporation. At each annual or
special meeting of stockholders, each holder of record of shares of Voting
Common Stock on the relevant record date shall be entitled to cast one vote in
person or by proxy for each share of the Voting Common Stock standing in such
holder's name on the stock transfer records of the Corporation, and each holder
of record of shares of Non-Voting Common Stock on the relevant record date
shall not be entitled to cast any votes in person or by proxy.
(3) No Cumulative Voting. The holders of shares of Voting Common Stock
shall not have cumulative voting rights.
(4) Conversion of Non-Voting Common Stock. Each share of Non-Voting
Common Stock shall be convertible, at the option of its record holder, into one
validly issued, fully paid and non-assessable share of Voting Common Stock at
any time. At the time of a voluntary conversion, the record holder of shares of
NonVoting Common Stock shall deliver to the principal office of the Corporation
or any transfer agent for shares of the Voting Common Stock (i) the certificate
or certificates representing the shares of Non-Voting Common Stock to be
converted, duly endorsed in blank or accompanied by
4
<PAGE>
proper instruments of transfer, and (ii) written notice to the Corporation
specifying the number of shares of Non-Voting Common Stock to be converted into
shares of Voting Common Stock and stating the name or names (with addresses)
and denominations in which the certificate or certificates representing the
shares of Voting Common Stock issuable upon such conversion are to be issued
and including instructions for the delivery thereof. Conversion shall be deemed
to have been effected at the time when delivery is made to the Corporation of
both such written notice and the certificate or certificates representing the
shares of Non-Voting Common Stock to be converted or such later time as may be
specified in such written notice, and as of such time each person named in such
written notice as the person to whom a certificate representing shares of
Non-Voting Common Stock is to be issued shall be deemed to be the holder of
record of the number of shares of Voting Common Stock to be evidenced by that
certificate. Delivery of such certificates and such written notice shall
obligate the Corporation to issue such shares of Voting Common Stock, and
thereupon the Corporation or its transfer agent shall promptly issue and
deliver at such stated address to such record holder of shares of Voting Common
Stock a certificate or
5
<PAGE>
certificates representing the number of shares of Voting Common Stock to which
such record holder is entitled by reason of such conversion, and shall cause
such shares of Voting Common Stock to be registered in the name of such record
holder.
(5) Unconverted Shares. In the event of the conversion of less than
all of the shares of Non-Voting Common Stock evidenced by a certificate
surrendered to the Corporation in accordance with the procedures of
subparagraphs (b)(4) of this Article FOURTH hereof, the Corporation shall
execute and deliver to or upon the written order of the holder of such
unconverted shares, without charge to such holder, a new certificate evidencing
the number of shares of Non-Voting Common Stock not converted.
(6) Reservation. The Corporation hereby reserves and shall at all
times reserve and keep available, out of its authorized and unissued shares of
Voting Common Stock, for the purposes of effecting conversions, such number of
duly authorized shares of Voting Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Non-Voting
Common Stock. The Corporation covenants that all of the shares of Voting Common
Stock so issuable shall, when so
6
<PAGE>
issued, be duly and validly issued, fully paid and non-assessable, and free
from liens and charges. The Corporation shall take all action as may be
necessary to ensure that all such shares of Voting Common Stock may be so
issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the shares of
Voting Common Stock are or may be listed, or of any inter-dealer quotation
system of a registered national securities association upon which the shares of
Voting Common Stock are or may be listed.
(7) Dividends; Stock Splits. Subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of this Amended and
Restated Certificate of Incorporation, as it may be amended from time to time,
holders of shares of Voting Common Stock and shares of Non-Voting Common Stock
shall be entitled to receive such dividends and other distributions in cash,
stock or property of the Corporation when, as and if declared thereon by the
Board of Directors from time to time out of assets or funds of the Corporation
legally available therefor. If, at any time, a dividend or other distribution
in cash or other property (other than dividends or other distributions payable
in shares of Voting Common
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Stock or other voting securities of the Corporation, or rights, options or
warrants to purchase shares of Voting Common Stock or other voting securities
of the Corporation or securities convertible into or exchangeable for shares of
Voting Common Stock or other voting securities of the Corporation) is declared
or paid on the shares of Voting Common Stock or shares of Non-Voting Common
Stock, a like dividend or other distribution in cash or other property shall
also be declared or paid, as the case may be, on shares of Non-Voting Common
Stock or shares of Voting Common Stock, as the case may be, in an equal amount
per share. If, at any time, a dividend or other distribution payable in shares
of Common Stock or other securities of the Corporation, or rights, options or
warrants to purchase shares of Common Stock or other securities of the
Corporation, or securities convertible into or exchangeable for shares of
Common Stock or other securities of the Corporation is paid or declared on
shares of Voting Common Stock or Non-Voting Common Stock, a like dividend or
other distribution shall also be paid or declared, as the case may be, on
shares of Non-Voting Common Stock or Voting Common Stock, as the case may be,
in an equal amount per share; provided, that, for this purpose, if shares of
Voting Common Stock or other voting
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securities of the Corporation, or rights, options or warrants to purchase
shares of Voting Common Stock or other voting securities of the Corporation or
securities convertible into or exchangeable for shares of Voting Common Stock
or other voting securities of the Corporation, are paid on shares of Voting
Common Stock, and shares of Non-Voting Common Stock or non-voting securities
identical to the other securities paid on the shares of Voting Common Stock
(except that the securities paid on the Non-Voting Common Stock will have no
votes per share) or rights, options or warrants to purchase shares of
Non-Voting Common Stock or such other non-voting securities or securities
convertible into or exchangeable for shares of Non-Voting Common Stock or such
other non-voting securities, are paid on shares of Non-Voting Common Stock, in
an equal amount per share of Voting Common Stock and Non-Voting Common Stock,
such dividend or other distribution shall be deemed to be a like dividend or
other distribution. In the case of any split, subdivision, combination or
reclassification of shares of Voting Common Stock or Non-Voting Common Stock,
the shares of Non-Voting Common Stock or Voting Common Stock, as the case may
be, shall also be split, subdivided, combined or reclassified so that the
number of shares of Voting Common Stock and Non-
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Voting Common Stock outstanding immediately following such split, subdivision,
combination or reclassification shall bear the same relationship to each other
as did the number of shares of Voting Common Stock and Non-Voting Common Stock
outstanding immediately prior to such split, subdivision, combination or
reclassification.
(8) Liquidation, Dissolution, etc. In the event of any liquidation,
dissolution or winding up (either voluntary or involuntary) of the Corporation,
the holders of shares of Voting Common Stock and the holders of shares of
Non-Voting Common Stock shall be entitled to receive the assets and funds of
the Corporation available for distribution after payments to creditors and to
the holders of any Preferred Stock of the Corporation that may at the time be
outstanding, in proportion to the number of shares held by them, respectively,
without regard to class.
(9) Merger, etc. In the event of a merger or consolidation of the
Corporation with or into another entity (whether or not the Corporation is the
surviving entity), the holders of each share of Voting Common Stock and
Non-Voting Common Stock shall be entitled to receive the same per share
consideration on a per share basis; provided that, if such consideration shall
10
<PAGE>
consist in any part of voting securities (or of options or warrants to
purchase, or of securities convertible into or exchangeable for, voting
securities), the holders of shares of Non-Voting Common Stock may receive, on a
per share basis, non-voting securities, or securities convertible into or
exchangeable for, non-voting securities).
(10) No Preemptive or Subscription Rights. No holder of shares of
Voting Common Stock or Non-Voting Common Stock shall be entitled to preemptive
or subscription rights.
(11) Power to Sell and Purchase Shares. Subject to the requirements of
applicable law, the Corporation shall have the power to issue and sell all or
any part of any shares of any class of stock herein or hereafter authorized to
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not greater
consideration could be received upon the issue or sale of the same number of
shares of another class, and as otherwise permitted by law. Subject to the
requirements of applicable law, the Corporation shall have the power to
purchase any shares of any class of stock herein or hereafter authorized from
such persons, and for such
11
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consideration, as the Board of Directors shall from time to time, in its
discretion, determine, whether or not less consideration could be paid upon the
purchase of the same number of shares of another class, and as otherwise
permitted by law.
(c) Preferred Stock. The Board of Directors is hereby expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or
series such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof, as
shall be stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of such class or series,
including, without limitation, the authority to provide that any such class or
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or any other series; (iii) enti-
12
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tled to such rights upon the dissolution of, or upon any distribution of the
assets of, the Corporation; or (iv) convertible into, or exchangeable for,
shares of any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation at such price
or prices or at such rates of exchange and with such adjustments; all as may be
stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the By-Laws of the Corporation.
Election of directors need not be by written ballot unless the By-Laws so
provide.
(c) The directors shall be divided into three classes, designated
Class I, Class II and Class III.
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Each class shall consist, as nearly as may be possible, of one-third of the
total number of directors constituting the entire Board of Directors. The
initial division of the Board of Directors into classes shall be made by the
decision of the affirmative vote of a majority of the entire Board of
Directors. The term of the initial Class I directors shall terminate on the
date of the 1998 annual meeting; the term of the initial Class II directors
shall terminate on the date of the 1999 annual meeting; and the term of the
initial Class III directors shall terminate on the date of the 2000 annual
meeting. At each succeeding annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from
an increase in such class shall hold office for a term that shall coincide with
the remaining term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director.
14
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(d) A director shall hold office until the annual meeting for the year
in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(e) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director of any class elected to fill a vacancy
resulting from an increase in the number of directors of such class shall hold
office for a term that shall coincide with the remaining term of that class.
Any director elected to fill a vacancy not resulting from an increase in the
number of directors shall have the same remaining term as that of his
predecessor. Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from
15
<PAGE>
office at any time, but only for cause and only by the affirmative vote of the
holders of at least [a majority] of the voting power of the Corporation's then
outstanding capital stock entitled to vote generally in the election of
directors. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Amended and Restated Certificate of Incorporation
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article FIFTH unless expressly provided by such terms.
(f) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject, nevertheless, to the provisions of the GCL, this
Amended and Restated Certificate of Incorporation, and any By-Laws adopted by
the stockholders; provided, however, that no By-Laws
16
<PAGE>
hereafter adopted by the stockholders shall invalidate any prior act of the
directors which would have been valid if such By-Laws had not been adopted.
SIXTH: No director shall be personally liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. If the GCL is amended hereafter to authorize the further elimination
or limitation of the liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
authorized by the GCL, as so amended. Any repeal or modification of this
Article SIXTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.
SEVENTH: The Corporation shall indemnify its directors and officers
to the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such
17
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right to indemnification shall continue as to a person who has ceased to be a
director or officer of the Corporation and shall inure to the benefit of his or
her heirs, executors and personal and legal representatives; provided, however,
that, except for proceedings to enforce rights to indemnification, the
Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives) in connection
with a proceeding (or part thereof) initiated by such person unless such
proceeding (or part thereof) was authorized or consented to by the Board of
Directors. The right to indemnification conferred by this Article SEVENTH shall
include the right to be paid by the Corporation the expenses incurred in
defending or otherwise participating in any proceeding in advance of its final
disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses
conferred in this Article SEVENTH shall
18
<PAGE>
not be exclusive of any other right which any person may have or hereafter
acquire under this Amended and Restated Certificate of Incorporation, the
By-Laws of the Corporation, any statute, agreement, vote of stockholders or
disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall not adversely affect any rights to indemnification and
to the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
EIGHTH: Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation, and the ability of the
stockholders to consent in writing to the taking of any action is hereby
specifically denied.
NINTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the GCL) outside the State
19
<PAGE>
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the By-Laws of the Corporation.
TENTH: In furtherance and not in limitation of the powers conferred
upon it by the laws of the State of Delaware, the Board of Directors shall have
the power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of at least a majority of the entire Board of Directors shall
be required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of the shares entitled to vote at an election of directors.
ELEVENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Amended and
Restated Certificate of Incorporation, the Corporation's By-Laws or the GCL,
and all rights herein conferred upon stockholders are granted subject to such
20
<PAGE>
reservation; provided, however, that, notwithstanding any other provision of
this Amended and Restated Certificate of Incorporation (and in addition to any
other vote that may be required by law), the affirmative vote of the holders of
at least eighty percent (80%) of the voting power of the shares entitled to
vote at an election of directors shall be required to amend, alter, change or
repeal, or to adopt any provision as part of this Amended and Restated
Certificate of Incorporation inconsistent with the purpose and intent of
Articles FIFTH, EIGHTH and TENTH of this Amended and Restated Certificate of
Incorporation or this Article ELEVENTH.
21
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed and attested to on its
behalf this __th day of _________, 1997.
PRT GROUP INC.
By:
------------------------------
Name:
Title:
22
<PAGE>
FORM OF
AMENDED AND RESTATED
BY-LAWS
of
PRT GROUP INC.
A Delaware Corporation
Effective as of ____, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - OFFICES........................................................ 1
Section 1. Registered Office......................................... 1
Section 2. Other Offices............................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1
Section 1. Place of Meetings......................................... 1
Section 2. Annual Meetings........................................... 2
Section 3. Special Meetings.......................................... 2
Section 4. Quorum.................................................... 3
Section 5. Proxies................................................... 4
Section 6. Voting.................................................... 6
Section 7. Nature of Business at Meetings of Stockholders............ 6
Section 8. List of Stockholders Entitled to Vote..................... 9
Section 9. Stock Ledger.............................................. 10
Section 10. Record Date. ............................................ 10
Section 11. Inspectors of Election.................................... 12
ARTICLE III - DIRECTORS.................................................... 13
Section 1. Number and Election of Directors.......................... 13
Section 2. Nomination of Directors................................... 13
Section 3. Vacancies................................................. 17
Section 4. Duties and Powers......................................... 17
Section 5. Organization.............................................. 18
Section 6. Resignations and Removals of Directors.................... 18
Section 7. Meetings.................................................. 19
Section 8. Quorum.................................................... 20
Section 9. Actions of Board.......................................... 20
Section 10. Meetings by Means of Conference Telephone................. 21
Section 11. Committees................................................ 21
Section 12. Compensation.............................................. 22
Section 13. Interested Directors...................................... 23
ARTICLE IV - OFFICERS...................................................... 24
Section 1. General................................................... 24
Section 2. Election.................................................. 25
Section 3. Voting Securities Owned by the Corporation................ 25
Section 4. Chairman of the Board of Directors........................ 26
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Section 5. President................................................. 27
Section 6. Vice Presidents........................................... 28
Section 7. Secretary................................................. 28
Section 8. Treasurer................................................. 30
Section 9. Assistant Secretaries..................................... 31
Section 10. Assistant Treasurers...................................... 31
Section 11. Other Officers............................................ 32
ARTICLE V - STOCK.......................................................... 32
Section 1. Form of Certificates...................................... 32
Section 2. Signatures................................................ 33
Section 3. Lost, Destroyed, Stolen or
Mutilated Certificates.................................... 33
Section 4. Transfers................................................. 34
Section 5. Transfer and Registry Agents.............................. 35
Section 6. Beneficial Owners......................................... 35
ARTICLE VI - NOTICES....................................................... 35
Section 1. Notices................................................... 35
Section 2. Waivers of Notice......................................... 36
ARTICLE VII - GENERAL PROVISIONS........................................... 37
Section 1. Dividends................................................. 37
Section 2. Disbursements............................................. 38
Section 3. Fiscal Year............................................... 38
Section 4. Corporate Seal............................................ 38
ARTICLE VIII - INDEMNIFICATION............................................. 38
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
than Those by or in the Right of the Corporation.......... 38
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation........................... 40
Section 3. Authorization of Indemnification.......................... 41
Section 4. Good Faith Defined........................................ 42
Section 5. Indemnification by a Court................................ 43
Section 6. Expenses Payable in Advance............................... 44
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses.................................................. 44
Section 8. Insurance................................................. 45
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Section 9. Certain Definitions....................................... 46
Section 10. Survival of Indemnification and Advancement of Expenses... 47
Section 11. Limitation on Indemnification............................. 47
Section 12. Indemnification of Employees and Agents................... 48
ARTICLE IX - AMENDMENTS.................................................... 48
Section 1. Amendments................................................ 48
Section 2. Entire Board of Directors................................. 49
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<PAGE>
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
PRT GROUP INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place,
<PAGE>
either within or without the State of Delaware, as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect directors, and transact such other
business as may properly be brought before the meeting. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by
the certificate of incorporation of the Corporation, as amended and restated
from time to time (the "Certificate of Incorporation"), special meetings of
stockholders, for any purpose or purposes, may be called by either (i) the
Chairman of the Board of Directors, (ii) the President, or (iii) the Board of
Direc-
2
<PAGE>
tors. Such request shall state the purpose or purposes of the proposed meeting.
At a special meeting of the stockholders, only such business shall be conducted
as shall be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors. Written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten
nor more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise required by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present
3
<PAGE>
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 5. Proxies. Any stockholder entitled to vote may do so in
person or by his or her proxy appointed by an instrument in writing subscribed
by such stockholder or by his or her attorney thereunto authorized, delivered
to the Secretary of the meeting; provided, however, that no proxy shall be
voted or acted upon after three years from its date, unless said proxy provides
for a longer period. Without limiting the manner in which a stockholder may
authorize another person or
4
<PAGE>
persons to act for him or her as proxy, either of the following shall
constitute a valid means by which a stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another person or
persons to act for him or her as proxy. Execution may be accomplished by
the stockholder or his or her authorized officer, director, employee or
agent signing such writing or causing his or her signature to be affixed to
such writing by any reasonable means, including, but not limited to, by
facsimile signature.
(ii) A stockholder may authorize another person or persons to act for
him or her as proxy by transmitting or authorizing the transmission of a
telegram or other means of electronic transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will
be the holder of the proxy to receive such transmission, provided that any
5
<PAGE>
such telegram or other means of electronic transmission must either
set forth or be submitted with information from which it can be determined
that the telegram or other electronic transmission was authorized by the
stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
for a stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used; provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
Section 6. Voting. At all meetings of the stockholders at which a
quorum is present, except as otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the affirmative vote of the holders of a
majority of the total number of votes of the capital stock present in person or
6
<PAGE>
represented by proxy and entitled to vote on such question, voting as a single
class. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his or her discretion,
may require that any votes cast at such meeting shall be cast by written
ballot.
Section 7. Nature of Business at Meetings of Stockholders. No business
may be transacted at an annual meeting of stockholders, other than business
that is either (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors (or any duly
authorized committee thereof), (b) otherwise properly brought before the annual
meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 7
and on the record date for the determination of stockholders entitled to vote
at such annual meeting and (ii) who complies with the notice procedures set
forth in this Section 7.
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In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary
of the Company.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company not less than sixty (60) days nor more than ninety (90) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual
8
<PAGE>
meeting (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Company which are owned
beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business and (v) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 7, provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 7 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of
9
<PAGE>
an annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the Chairman shall
declare to the meeting that the business was not properly brought before the
meeting and such business shall not be transacted.
Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of
10
<PAGE>
the meeting during the whole time thereof, and may be inspected by any
stockholder of the Corporation who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 10. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and
which record date: (1) in the case of determination of stockholders entitled to
vote at any meeting of stock-
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holders or adjournment thereof, shall not be more than sixty nor less than ten
days before the date of such meeting; and (2) in the case of any other action,
shall not be more than sixty days prior to such other action. If no record date
is fixed: (1) the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held; and (2) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 11. Inspectors of Election. In advance of any meeting of
stockholders, the Board by resolution or the Chairman or President shall
appoint one or
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more inspectors of election to act at the meeting and make a written report
thereof. One or more other persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is
present, ready and willing to act at a meeting of stockholders, the Chairman of
the meeting shall appoint one or more inspectors to act at the meeting. Unless
otherwise required by law, inspectors may be officers, employees or agents of
the Corporation. Each inspector, before entering upon the discharge of his or
her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector shall have the duties prescribed by law and shall take
charge of the polls and, when the vote is completed, shall make a certificate
of the result of the vote taken and of such other facts as may be required by
law.
ARTICLE III
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DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors
shall consist of not less than five nor more than eleven members, the exact
number of which shall be determined from time to time by resolution adopted by
the Board of Directors. Except as provided in Section 3 of this Article III,
directors shall be elected by the stockholders at the annual meetings of
stockholders, and each director so elected shall hold office until such
director's successor is duly elected and qualified, or until such director's
death, or until such director's earlier resignation or removal. Directors need
not be stockholders.
Section 2. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Company, except as may be otherwise provided in the
Certificate of Incorporation with respect to the right of holders of preferred
stock of the Corporation to nominate and elect a specified number of directors
in certain circumstances. Nominations of persons for election to the Board of
Directors may be made at any annual meeting
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of stockholders, or at any special meeting of stockholders called for the
purpose of electing directors, (a) by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (b) by any stockholder
of the Company (i) who is a stockholder of record on the date of the giving of
the notice provided for in this Section 2 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 2.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice
thereof in proper written form to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company (a) in the case of an annual meeting, not less than sixty (60) days nor
more than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not
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within thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the tenth (10th) day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure of the date
of the annual meeting was made, whichever first occurs; and (b) in the case of
a special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth (10th) day following the day
on which notice of the date of the special meeting was mailed or public
disclosure of the date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Company which are owned beneficially or of record by the person and (iv) any
other information relating to
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the person that would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitations of proxies for
election of directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice (i) the
name and record address of such stockholder, (ii) the class or series and
number of shares of capital stock of the Company which are owned beneficially
or of record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice and (v) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the
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rules and regulations promulgated thereunder. Such notice must be accompanied
by a written consent of each proposed nominee to being named as a nominee and
to serve as a director if elected.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with the procedures set forth in this Section 2.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall
be disregarded.
Section 3. Vacancies. Subject to the terms of any one or more classes
or series of preferred stock, any vacancy on the Board of Directors that
results from an increase in the number of directors may be filled by a majority
of the directors then in office, provided that a quorum is present, and any
other vacancy occurring on the Board of Directors may be filled by a majority
of the Board of Directors then in office, even if less than a quorum, or by a
sole remaining director. Notwithstanding the foregoing, whenever the holders of
any one or more
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class or classes or series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the Certificate of
Incorporation.
Section 4. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Certificate of Incorporation or by these By-Laws
required to be exercised or done by the stockholders.
Section 5. Organization. At each meeting of the Board of Directors,
the Chairman of the Board of Directors, or, in his or her absence, a director
chosen by a majority of the directors present, shall act as Chairman. The
Secretary of the Corporation shall act as Secretary at each meeting of the
Board of Directors. In case the Secretary shall be absent from any meeting of
the Board of Directors, an Assistant Secretary shall perform the duties of
Secretary at such meeting; and in
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the absence from any such meeting of the Secretary and all the Assistant
Secretaries, the Chairman of the meeting may appoint any person to act as
Secretary of the meeting.
Section 6. Resignations and Removals of Directors. Any director of the
Corporation may resign at any time, by giving written notice to the Chairman of
the Board of Directors, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time therein specified or, if no time is
specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective.
Except as otherwise required by law and subject to the rights, if any, of the
holders of shares of preferred stock then outstanding, any director or the
entire Board of Directors may be removed from office at any time, but only for
cause, and only by the affirmative vote of the holders of at least a majority
in voting power of the issued and outstanding capital stock of the Corporation
entitled to vote in the election of directors.
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Section 7. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the
Chairman of the Board of Directors, the Vice Chairman, if there be one, or a
majority of the directors then in office. Notice thereof stating the place,
date and hour of the meeting shall be given to each director either by mail not
less than forty-eight (48) hours before the date of the meeting, by telephone,
facsimile or telegram on twenty-four (24) hours' notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 8. Quorum. Except as may be otherwise required by law, the
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall consti-
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tute a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting of the time
and place of the adjourned meeting, until a quorum shall be present.
Section 9. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all the members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
Section 10. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Certificate of Incorporation or these By-Laws,
members of the Board of Directors of the Corporation, or any committee desig-
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nated by the Board of Directors, may participate in a meeting of the Board of
Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 10 shall constitute presence in person at such meeting.
Section 11. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors
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to act at the meeting in the place of any absent or disqualified member. Any
committee, to the extent permitted by law and provided in the resolution
establishing such committee, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required.
Section 12. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary, or such other emoluments as the Board of Directors shall from time to
time determine. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for
attending committee meetings.
Section 13. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and
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any other corporation, partnership, association, or other organization in which
one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because such person's or their votes are counted for
such purpose if (i) the material facts as to such person's or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of
Directors or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to such person's or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or trans-
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action is fair as to the Corporation as of the time it is authorized, approved
or ratified, by the Board of Directors, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director) and one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these By-Laws. The officers of the Corporation
need not be stockholders of the Corporation nor, except in the
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case of the Chairman of the Board of Directors, need such officers be directors
of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation
or removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the
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President or any Vice President and any such officer may, in the name of and on
behalf of the Corporation, take all such action as any such officer may deem
advisable to vote in person or by proxy at any meeting of security holders of
any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman of the Board of
Directors shall be the Chief Executive Officer of the Corporation, and except
where by law the signature of the President is required, the Chairman of the
Board of Directors shall possess the same power as the President to sign all
contracts, certificates and other instruments of the Corporation which may be
authorized by the Board
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of Directors. During the absence or disability of the President, the Chairman
of the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him or her by these By-Laws or by the Board of
Directors.
Section 5. President. The President shall, subject to the control of
the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The President shall execute all bonds, mortgages, contracts and
other instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors
or the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall
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preside at all meetings of the stockholders and the Board of Directors. If
there be no Chairman of the Board of Directors, the President shall be the
Chief Executive Officer of the Corporation. The President shall also perform
such other duties and may exercise such other powers as from time to time may
be assigned to him or her by these By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his
or her absence or in the event of his or her inability or refusal to act (and
if there be no Chairman of the Board of Directors), the Vice President or the
Vice Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If
there be no Chairman of the Board of Directors and no Vice President, the Board
of Directors shall designate the officer of the Corporation who, in the absence
of the President or in the event of the
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inability or refusal of the President to act, shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision the Secretary shall be. If the
Secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and if there be no Assistant Secretary, then either the Board of Directors or
the President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary
or any
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Assistant Secretary, if there be one, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest the affixing by his or her signature.
The Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
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its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of the office of Treasurer and for the restoration to the Corporation,
in case of the Treasurer's death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in the Treasurer's possession or under control of the Treasurer belonging
to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided
in these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have
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all the powers of and be subject to all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in
the event of the Treasurer's disability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the Treasurer. If required by the Board
of Directors, an Assistant Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of Assistant
Treasurer and for the restoration to the Corporation, in case of the Assistant
Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in the
Assistant Treasurer's possession or
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under control of the Assistant Treasurer belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation, (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares owned by such holder of stock in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate
may be a facsimile. In case
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any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such person were such
officer, transfer agent or registrar at the date of issue.
Section 3. Lost, Destroyed, Stolen or Mutilated Certificates. The
Board of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or such person's legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be
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made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, properly endorsed for transfer
and payment of all necessary transfer taxes; provided, however, that such
surrender and endorsement or payment of taxes shall not be required in any case
in which the officers of the Corporation shall determine to waive such
requirement. Every certificate exchanged, returned or surrendered to the
Corporation shall be marked "Cancelled," with the date of cancellation, by the
Secretary or Assistant Secretary of the Corporation or the transfer agent
thereof. No transfer of stock shall be valid as against the Corporation for any
purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
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Section 5. Transfer and Registry Agents. The Corporation may from time
to time maintain one or more transfer offices or agencies and registry offices
or agencies at such place or places as may be determined from time to time by
the Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by
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mail, addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, facsimile, telex or cable.
Section 2. Waivers of Notice.
(a) Whenever any notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed, by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting, present by person or represented by proxy, shall constitute a waiver
of notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
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(b) Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by law, the Certificate of Incorporation or these By-Laws.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Subject to the requirements of the Delaware
General Corporation Law ("GCL") and the provisions of the Certificate of
Incorporation, dividends upon the capital stock of the Corporation may be
declared by the Board of Directors at any regular or special meeting of the
Board of Directors, and may be paid in cash, in property, or in shares of the
Corporation's capital stock. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves to meet contingencies, or for purchasing
any of the shares of
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capital stock, warrants, rights, options, bonds, debentures, notes, scrip or
other securities or evidences of indebtedness of the Corporation, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any other proper purpose, and the Board of Directors may
modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
41
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall 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 such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of
42
<PAGE>
the Corporation, and, with respect to any criminal action or proceeding, such
person had no reasonable cause to believe his or her 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 such person did not act in good faith and in
a manner which such person 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 or her conduct was
unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall 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 such person is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the
43
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request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation; 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
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only
44
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as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because such person has
met the applicable standard of conduct set forth in Section 1 or Section 2 of
this Article VIII, as the case may be. Such determination shall be made (i) by
a majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the stockholders. To the extent, however, that a
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection therewith, without the necessity of authorization
in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
45
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faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the Corporation, or, with respect to any criminal
action or proceeding, to have had no reasonable cause to believe his or her
conduct was unlawful, if such person's action is based on the records or books
of account of the Corporation or another enterprise, or on information supplied
to such person by the officers of the Corporation or another enterprise in the
course of their duties, or on the advice of legal counsel for the Corporation
or another enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public accountant
or by an appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" as used in
this Section 4 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 4 shall not be deemed to be
exclusive or to limit in any way the circumstances in
46
<PAGE>
which a person may be deemed to have met the applicable standard of conduct set
forth in Section 1 or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery of the State of Delaware or any
other court of competent jurisdiction in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
standards of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director or officer seeking indemnification has not met any applicable
standard of
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<PAGE>
conduct. Notice of any application for indemnification pursuant to this Section
5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall 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 such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under the Certif-
48
<PAGE>
icate of Incorporation or any By-Law, agreement, contract, vote of stockholders
or disinterested directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of the
persons specified in Section 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Section 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the GCL, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or
49
<PAGE>
other enterprise against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of such person's
status as such, whether or not the Corporation would have the power or the
obligation to indemnify such person against such liability under the provisions
of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer
of such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such
50
<PAGE>
person would have with respect to such constituent corporation if its separate
existence had continued. For purposes of this Article VIII, references to
"fines" shall include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
agent of the Corporation which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or officer
and shall inure to
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the benefit of the heirs, executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer (or his or her heirs, executors or personal or legal representatives)
or advance expenses in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
52
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ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended or
repealed, in whole or in part, or new By-Laws may be adopted by the Board of
Directors or by the stockholders as provided in the Certificate of
Incorporation.
Section 2. Entire Board of Directors. As used in this Article IX and
in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
53
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EMPLOYMENT AGREEMENT
--------------------
Agreement dated as of November 21, 1996 between PRT Group Inc., a Delaware
Corporation (the "Company"), with its principal office at 342 Madison Avenue,
New York, New York 10173, and Douglas Mellinger, the executive, ("Executive")
residing at 260 Sycamore Terrace, Stamford, CT 06902.
The parties agree as follows:
1. (a) The Company employs the Executive as Chairman and Chief Executive
Officer of PRT Group Inc., to carry out the duties and responsibilities more
fully described in Exhibit A and as shall from time to time be assigned to
him by the Company's Board of Directors. The Executive accepts such
employment and agrees to devote his full time and effort to the business and
affairs of the Company.
(b) The term of Executive's employment shall commence on October 1, 1996
and terminate on the fourth anniversary thereof, unless sooner terminated
pursuant to the provisions set forth below in paragraph 2 (the "Term").
Commencing on the fourth anniversary date of this Agreement, and on each
anniversary thereafter, the Term shall automatically be extended for one
additional year unless either party shall have notified the other party prior
to such date that it does not wish to extend the Term.
(c) The Company shall pay the Executive for all services to be rendered by
him to the Company the compensation set forth in Exhibit B, payable during
the Term in accordance with the Company's payroll practices for executive
employees as in effect from time to time, but not less than monthly.
(d) During the Term, the Executive shall be entitled to receive
reimbursement in accordance with the Company's established policies and
procedures for all reasonable expenses incurred by him in connection with
performance of his duties hereunder.
2. (a) If, during the Term, the Executive is unable to perform his duties
hereunder on account of illness, accident or other physical or mental
incapacity, as determined by an independent medical doctor, and such illness
or other incapacity shall continue for a period of more than
<PAGE>
three consecutive months or four months out of any twelve month period, the
Company shall have the right, on two months written notice (given after such
period) to Executive, to terminate this Agreement. In such event, the Company
shall be obligated to pay to Executive, his base salary for a period of one
year following such termination, and shall have no further obligation to
Executive hereunder. However, if, prior to the date specified in such notice,
the Executive's illness or incapacity shall have terminated and he shall have
taken up the performance of his duties hereunder, the Executive shall be
entitled to renew his employment and receive the compensation payable
hereunder as though such notice had not been given.
(b) The Company may terminate the Executive's employment with the Company
and all rights and obligations of the parties hereunder (except with regard
to Section 3) by a one (1) month prior written notice. Upon such a
termination Without Cause the Company shall provide Executive with the
following: (i) if such termination Without Cause occurs during the first 42
months of the Term, the Company shall continue to pay Executive his base
salary hereunder for a period of two years or the remainder of the Term,
whichever is less, and all benefits that are tied to a vesting schedule shall
immediately vest; and (ii) if such termination occurs at any time after the
42nd month of the Term, the Company shall continue to pay Executive his base
salary hereunder for period of six months or the remainder of the Term,
whichever is less, and all benefits that are tied to a vesting schedule shall
immediately vest. Other than the payments set forth in this Section 2(b), the
Company shall have no further obligation to Executive hereunder in the event
of termination Without Cause.
(c) The Executive may terminate the Executive's employment with the
Company and all rights and obligations of the parties hereunder (except with
regard to Sections 3 and 4) by six (6) months prior written notice to the
Company.
(d) The Company shall have the right to terminate this Agreement and
Executive's employment by the Company immediately for justifiable Cause,
which is limited to (i) a material breach by Executive of any material
provision of this Agreement, (ii) any act of gross negligence, fraud,
misappropriation of funds or embezzlement by the Executive in connection with
his employment hereunder, and
2
<PAGE>
(iii) action by Executive constituting willful malfeasance having a
materially adverse effect on the Company. Upon such termination, the Company
shall have no further obligations to Executive hereunder.
3. Executive agrees with the Company that Executive will not during or
after the Term disclose to anyone (except to the extent reasonably necessary
for Executive to perform his duties hereunder) any "confidential information"
as such term is hereinafter qualified concerning the business or affairs of
the Company which Executive may have acquired in the course of or as incident
to his employment or prior dealings with the Company, including, without
limitation, customer lists, business or trade secrets of, or methods or
techniques used by, the Company or any information concerning its customers.
For purposes of this Section, confidential information shall not include
information which (i) is known to the public prior to the date of
communication thereof by the Executive, (ii) becomes known to the public
thereafter other than through communications by Executive, or (iii) becomes
known to Executive subsequent to the date of his termination of employment
with the Company.
4. (a) Executive acknowledges that his services and responsibilities are
of unique and particular significance to the Company and that his position
with the Company will give him a close knowledge of its policies and trade
secrets. Executive agrees as follows: if Executive ceases to be an employee
of the Company for any reason whatsoever other than his termination Without
Cause, Executive will not, directly or indirectly, on behalf of himself or
others, commencing with the date of termination and ending one year after the
termination date (A) own an interest in, manage, operate, join, control, lend
money or render financial or other assistance to or participate in or be
connected with, as an officer, director, employee, partner, stockholder,
consultant or otherwise, any individual, partnership, firm, corporation or
other business organization or entity that competes anywhere in the world
directly or indirectly with the Company or any of its subsidiaries in the
"information technology professional services" business, (B) solicit or
attempt to solicit any employee of the Company to terminate his or her
employment by the Company, or (C) induce or attempt to induce any customer or
independent contractor of the Company to terminate its relationships with or
to take any action that would be disadvantageous to the business of, the
Company. Notwithstanding the foregoing, the Executive may
3
<PAGE>
own solely as a passive investor up to 5% of the equity securities of any
company which has a class of securities that are publicly traded.
(b) Executive acknowledges that the provisions of this Section are
reasonable and necessary for the protection of the Company, and that each
provision and the period of time, geographic areas and types and scope of
restrictions on the activities specified herein are, and are intended to be,
divisible. If any provision of this Section, including any sentence or part
hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall
not be affected, but shall, subject to the discretion of such court, remain
in full force and effect and any invalid and unenforceable provisions shall
be deemed, without further action on the part of the parties hereto, modified
and limited to the extent necessary to render this valid and enforceable. The
parties acknowledge that the Company shall be entitled to all remedies
provided for at law or in equity, including without limitation, an injunction
to enforce the provisions of this Section. This Section shall not be the
exclusive remedy available to the Company in the event of breach of this
Agreement and the rights and remedies provided for in this Section shall be
in addition to all other rights and remedies available to the Company.
5. Executive represents and warrants to the Company that he is not under
any obligation of a contractual or other nature to any person, firm or
corporation other than the Company which would be inconsistent or in conflict
with this Agreement at the time Executive works on a full time basis with
Company.
6. (a) This Agreement contains the entire agreement between the parties
hereto, supersedes and nullifies all prior understandings, promises and
undertakings, if any, made orally or in writing by or on behalf of the
parties with respect to the subject matter hereof, and may not be modified or
terminated orally. This Agreement shall be construed and governed in
accordance with the laws of the State of New York.
(b) This Agreement shall be binding upon and inure to the benefit of the
Company and its successors and assigns and the Executive and his heirs,
executors, administrators and legal representatives, but no right or
responsi-
4
<PAGE>
bility the Executive hereunder may be assigned, pledged or encumbered by him
without the written consent of the Company.
(c) Any notice referred to herein shall be sufficient if furnished in
writing, and delivered in person or mailed by overnight courier or certified
mail (return receipt requested) to the respective parties at his address set
forth above or such other address as either party from time to time shall
designate in writing.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PRT GROUP INC.
BY: /S/ JEROME MELLINGER /S/ DOUGLAS MELLINGER
-------------------------- ---------------------
Jerome Mellinger Douglas Mellinger
Member, Board of Directors Executive
5
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EMPLOYMENT AGREEMENT
Agreement dated as of November 21, 1996 between PRT Group Inc., a
Delaware Corporation (the "Company"), with its principal office at 342 Madison
Avenue, New York, New York 10173, and Gregory Mellinger, the executive,
("Executive") residing at 144 River Road, Scarborough, New York 10510
The parties agree as follows:
1. (a) The Company employs the Executive as Chief Operating
Officer of PRT Group Inc., to carry out the duties and responsibilities more
fully described in Exhibit A and as shall from time to time be assigned to
him by the Company's Board of Directors. The Executive accepts such employment
and agrees to devote his full time and effort to the business and affairs of
the Company.
(b) The term of Executive's employment shall commence on October 1,
1996 and terminate on the fourth anniversary thereof, unless sooner terminated
pursuant to the provisions set forth below in paragraph 2 (the "Term").
Commencing on the fourth anniversary date of this Agreement, and on each
anniversary thereafter, the Term shall automatically be extended for one
additional year unless either party shall have notified the other party prior
to such date that it does not wish to extend the Term.
(c) The Company shall pay the Executive for all services to be
rendered by him to the Company the compensation set forth in Exhibit B, payable
during the Term in accordance with the Company's payroll practices for
executive employees as in effect from time to time, but not less than monthly.
(d) During the Term, the Executive shall be entitled to receive
reimbursement in accordance with the Company's established policies and
procedures for all reasonable expenses incurred by him in connection with
performance of his duties hereunder.
2. (a) If, during the Term, the Executive is unable to perform his
duties hereunder on account of illness, accident or other physical or mental
incapacity, as determined by an independent medical doctor, and such illness or
other incapacity shall continue for a period of more than
<PAGE>
three consecutive months or four months out of any twelve month period, the
Company shall have the right, on two months written notice (given after such
period) to Executive, to terminate this Agreement. In such event, the Company
shall be obligated to pay to Executive, his base salary for a period of one
year following such termination, and shall have no further obligation to
Executive hereunder. However, if, prior to the date specified in such notice,
the Executive's illness or incapacity shall have terminated and he shall have
taken up the performance of his duties hereunder, the Executive shall be
entitled to renew his employment and receive the compensation payable hereunder
as though such notice had not been given.
(b) The Company may terminate the Executive's employment with the
Company and all rights and obligations of the parties hereunder (except with
regard to Section 3) by a one (1) month prior written notice. Upon such a
termination Without Cause the Company shall provide Executive with the
following: (i) if such termination Without Cause occurs during the first 42
months of the Term, the Company shall continue to pay Executive his base salary
hereunder for a period of two years or the remainder of the Term, whichever is
less, and all benefits that are tied to a vesting schedule shall immediately
vest; and (ii) if such termination occurs at any time after the 42nd month of
the Term, the Company shall continue to pay Executive his base salary hereunder
for period of six months or the remainder of the Term, whichever is less, and
all benefits that are tied to a vesting schedule shall immediately vest. Other
than the payments set forth in this Section 2(b), the Company shall have no
further obligation to Executive hereunder in the event of termination Without
Cause.
(c) The Executive may terminate the Executive's employment with the
Company and all rights and obligations of the parties hereunder (except with
regard to Sections 3 and 4) by six (6) months prior written notice to the
Company.
(d) The Company shall have the right to terminate this Agreement
and Executive's employment by the Company immediately for justifiable Cause,
which is limited to (i) a material breach by Executive of any material
provision of this Agreement, (ii) any act of gross negligence, fraud,
misappropriation of funds or embezzlement by the Executive in connection with
his employment hereunder, and
2
<PAGE>
(iii) action by Executive constituting willful malfeasance having a materially
adverse effect on the Company. Upon such termination, the Company shall have no
further obligations to Executive hereunder.
3. Executive agrees with the Company that Executive will not during or
after the Term disclose to anyone (except to the extent reasonably necessary
for Executive to perform his duties hereunder) any "confidential information"
as such term is hereinafter qualified concerning the business or affairs of the
Company which Executive may have acquired in the course of or as incident to
his employment or prior dealings with the Company, including, without
limitation, customer lists, business or trade secrets of, or methods or
techniques used by, the Company or any information concerning its customers.
For purposes of this Section, confidential information shall not include
information which (i) is known to the public prior to the date of communication
thereof by the Executive, (ii) becomes known to the public thereafter other
than through communications by Executive, or (iii) becomes known to Executive
subsequent to the date of his termination of employment with the Company.
4. (a) Executive acknowledges that his services and responsibilities
are of unique and particular significance to the Company and that his position
with the Company will give him a close knowledge of its policies and trade
secrets. Executive agrees as follows: if Executive ceases to be an employee of
the Company for any reason whatsoever other than his termination Without Cause,
Executive will not, directly or indirectly, on behalf of himself or others,
commencing with the date of termination and ending one year after the
termination date (A) own an interest in, manage, operate, join, control, lend
money or render financial or other assistance to or participate in or be
connected with, as an officer, director, employee, partner, stockholder,
consultant or otherwise, any individual, partnership, firm, corporation or
other business organization or entity that competes anywhere in the world
directly or indirectly with the Company or any of its subsidiaries in the
"information technology professional services" business, (B) solicit or attempt
to solicit any employee of the Company to terminate his or her employment by
the Company, or (C) induce or attempt to induce any customer or independent
contractor of the Company to terminate its relationship with or to take any
action that would be disadvantageous to the business of, the Company.
Notwithstanding the foregoing, the Executive may
3
<PAGE>
own solely as a passive investor up to 5% of the equity securities of any
company which has a class of securities that are publicly traded.
(b) Executive acknowledges that the provisions of this Section
are reasonable and necessary for the protection of the Company, and that each
provision and the period of time, geographic areas and types and scope of
restrictions on the activities specified herein are, and are intended to be,
divisible. If any provision of this Section, including any sentence or part
hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall
not be affected, but shall, subject to the discretion of such court, remain in
full force and effect and any invalid and unenforceable provisions shall be
deemed, without further action on the part of the parties hereto, modified and
limited to the extent necessary to render this valid and enforceable. The
parties acknowledge that the Company shall be entitled to all remedies provided
for at law or in equity, including without limitation, an injunction to enforce
the provisions of this Section. This Section shall not be the exclusive remedy
available to the Company in the event of breach of this Agreement and the
rights and remedies provided for in this Section shall be in addition to all
other rights and remedies available to the Company.
5. Executive represents and warrants to the Company that he is not
under any obligation of a contractual or other nature to any person, firm or
corporation other than the Company which would be inconsistent or in conflict
with this Agreement at the time Executive works on a full time basis with
Company.
6. (a) This Agreement contains the entire agreement between the
parties hereto, supersedes and nullifies all prior understandings, promises and
undertakings, if any, made orally or in writing by or on behalf of the parties
with respect to the subject matter hereof, and may not be modified or
terminated orally. This Agreement shall be construed and governed in accordance
with the laws of the State of New York.
(b) This Agreement shall be binding upon and inure to the benefit
of the Company and its successors and assigns and the Executive and his heirs,
executors, administrators and legal representatives, but no right or responsi-
4
<PAGE>
bility the Executive hereunder may be assigned, pledged or encumbered by him
without the written consent of the Company.
(c) Any notice referred to herein shall be sufficient if furnished
in writing, and delivered in person or mailed by overnight courier or certified
mail (return receipt requested) to the respective parties at his address set
forth above or such other address as either party from time to time shall
designate in writing.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the data first above written.
PRT GROUP INC.
BY: /s/ JEROME MELLINGER /s/ GREGORY MELLINGER
-------------------------- --------------------------
Jerome Mellinger Gregory Mellinger
Member, Board of Directors Executive
5
<PAGE>
EMPLOYMENT AGREEMENT
Agreement dated as of April 1, 1996 between Total Technology
Solutions, Ltd., a Barbados Corporation ("Company"), with its principal office
at #6 Harbor Industrial Estate, Bridgetown, Barbados, W.I., and Srinivasan
Viswanathan, the Executive, (Executive) residing at #158 South Point Row,
Atlantic Shores, Christ Church, Barbados, W.I.
The parties agree as follows:
1. (a) The Company employs Srinivasan Viswanathan as President and
Chief Operating Officer of Total Technology Solutions, Ltd., to carry out the
duties and responsibilities more fully described in Exhibit A and as shall from
time to time be assigned to him by the Company's Board of Directors. The
Executive accepts such employment and agrees to devote his full time and effort
to the business and affairs of the Company.
(b) The term of Executive's employment shall commence on April 1,
1996 and terminate on the fourth anniversary thereof, unless sooner terminated
pursuant to the provisions set forth below in paragraph 2 (the "Term").
Commencing on the fourth anniversary date of this Agreement, and on each
anniversary thereafter, the Term shall automatically be extended for one
additional year unless either party shall have notified the other party prior
to such date that it does not wish to extend the Term.
(c) The Company shall pay the Executive for all services to be
rendered by him to the Company the compensation set forth in Exhibit B, payable
during the Term in accordance with the Company's payroll practices for
executive employees as in effect from time to time, but not less often than
monthly.
(d) During the Term, the Executive shall be entitled to receive
reimbursement in accordance with the Company's established policies and
procedures for all reasonable expenses incurred by him in connection with
performance of his duties hereunder.
2. (a) If, during the Term, the Executive is unable to perform his
duties hereunder on account of illness, accident or other physical or mental
incapacity, shall continue for a period of more than three consecutive months
or four months out of any twelve period, the Company shall have the right, on
two
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months written notice (given after such period) to Executive, to terminate this
Agreement. In such event, the Company shall be obligated to pay to Executive,
his base salary for a period of one year following such termination, and shall
have no further obligation to Executive hereunder. However, if prior to the
date specified in such notice, the Executive's illness or incapacity shall have
terminated and he shall all have taken up the performance of his duties
hereunder, the Executive shall be entitled to renew his employment and receive
the compensation payable hereunder as though such notice had not been given.
(b) The Company may terminate the Executive's employment with the
Company and all rights and obligations of the parties hereunder except with
regard to this contract by a one (1) month prior written notice. Upon such
termination Without Cause the Company shall provide Executive with the
following: (i) if such termination Without Cause occurs during the first year
of the Term, the Company shall continue to pay Executive his base salary
hereunder for a period of four years and all benefits that are tied to a
vesting schedule shall immediately vest; (ii) if such termination Without Cause
occurs during the second year of the Term, the Company shall continue to pay
Executive his base salary hereunder for a period of three years and all
benefits that are tied to a vesting schedule shall immediately vest; (iii) if
such termination Without Cause occurs during the third year of the Term, the
Company shall continue to pay Executive his base salary hereunder for a period
of two years and all benefits that are tied to a vesting schedule shall
immediately vest; (iv) if such termination Without Cause occurs during the
fourth year of the Term, the Company shall continue to pay Executive his base
salary hereunder for a period of eighteen months and all benefits that are tied
to a vesting schedule shall immediately vest, and (v) if such termination
occurs at any time after the fourth year of the Term, the Company shall
continue to pay Executive his base salary hereunder for a period of one year
and all benefits that are tied to a vesting schedule shall immediately vest.
Other than the payments set forth in this Section 2(c), the Company shall have
no further obligation to Executive hereunder in the event of a termination
Without Cause.
(c) The Executive may terminate the Executive's employment with the
Company and all rights and obligations of the parties hereunder except with
regard to this contract by a one (1) month prior written notice to the other.
At this time, all PRT stock option benefits that are tied to a vesting schedule
shall immediately vest.
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(d) The Company shall have the right to terminate this Agreement
and Executive's employment by the Company immediately for justifiable Cause,
which is limited to (i) a material breach by Executive of any material
provision of this Agreement, (ii) any act of fraud, misappropriation of funds
or embezzlement by the Executive in connection with his employment thereunder,
and (iii) action by Executive constituting willful malfeasance having a
materially adverse effect on the Company. Upon such termination, the company
shall have no further obligations to Executive hereunder.
3. Executive agrees with the Company that Executive will not during or
after the Term disclose to anyone (except to the extent reasonably necessary
for Executive to perform his duties hereunder) any "confidential information"
as such terms is hereinafter qualified concerning the business or affairs of
the Company which Executive may have acquired in the course of or as incident
to his employment or prior dealings with the Company, including, without
limitation, customer lists, business or trade secrets of, or methods or
techniques used by, the Company or any information concerning its customers.
For purposes of this Section, confidential information shall not include
information which (i) is known to the public prior to the date of communication
thereof by the Executive, (ii) becomes known to the public thereafter or other
than through communications by Executive, or (iii) becomes known to Executive
subsequent to the date of his termination of employment with the Company.
4. (a) Executive acknowledges that his services and responsibilities
are of unique and particular significance to the Company and that his position
with the Company will give him a close knowledge of its policies and trade
secrets. Executive agrees as follows: If prior to the expiration of the Term,
he voluntarily resigns his employment with the Company or the Company
terminates his employment for Cause, Executive will not, directly or
indirectly, on behalf of himself or others, commencing with the date of
termination and ending one year after the termination date, (A) compete
directly or indirectly for any business opportunity that he knew about through
his employment with Company, whether as an officer, director, employee,
partner, investor, or agent of any company, (B) solicit or attempt to solicit
any employee of the Company to terminate his or her employment by the Company,
or (C) induce or attempt to induce any customer or independent contractor of
the Company to terminate its relationship with or to take any action that would
be disadvantageous to the business of, the Company. Notwithstanding the
foregoing, the Executive may own solely as a passive investor up to 5% of the
equity securities of any company which has a class of securities that are
publicly traded.
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(b) Executive acknowledges that the provisions of this Section are
reasonable and necessary for the protection of the Company, and that each
provision and the period of time, geographic areas and types and scope of
restrictions on the activities specified herein are, and are intended to be,
divisible. If any provision of this Section, including any sentence or part
hereof, shall be deemed contrary to law or invalid on unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall
not be affected, but shall, subject to the discretion of such court, remain in
full force and effect and any invalid and unenforceable provisions shall be
deemed, without further action on the part of the parties hereto, modified and
limited to the extent necessary to render this valid and enforceable. The
parties acknowledge that the Company shall be entitled to all remedies provided
for at last or in equity, including without limitation, an injunction to
enforce the provisions of this Section. This Section shall not be the exclusive
remedy available to the Company in the event of breach of this Agreement and
the rights and remedies provided for in this Section shall be in addition to
any other rights and remedies available to the Company.
5. Executive represents and warrants to the Company that he is not
under any obligation of a contractual or other nature to any person, firm or
corporation other than the Company which would be inconsistent or in conflict
with this Agreement at the time Executive works on a full time basis with the
Company.
6. (a) This Agreement contains the entire agreement between the
parties hereto, supersedes and nullifies all prior understandings, promises and
undertakings, if any, made orally or in writing by or on behalf of the parties
with respect to the subject matter hereof, and may not be modified or
terminated orally. This Agreement shall be construed and governed in accordance
with the laws of the State of New York.
(b) This Agreement shall be binding upon and inure to the benefit
of the Company and its successors and assigns and the Executive and his heirs,
executors, administrators and legal representatives, but no right or
responsibility the Executive hereunder may be assigned, pledged or encumbered
by him without the written consent of the Company.
(c) Any notice referred to herein shall be sufficient if furnished
in writing, and delivered in person or mailed by overnight courier or certified
mail (return receipt requested) to the respective parties at his address set
forth
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above or such other address as either party from time to time shall designate
in writing.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the data first written.
PRT GROUP INC.
BY: /s/ IRWIN SITKIN /s/ SRINVASAN VISWANATHAN
---------------------------- ----------------------------
Irwin Sitkin Srinvasan Viswanathan
Member, Board of Directors Executive
Witnessed by:
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PRT GROUP INC.
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
1. Purpose.
The purpose of the PRT Group Inc. 1996 Stock Incentive Plan (the
"Plan") is to align the interests of directors, officers, other employees and
consultants of PRT Group Inc., a Delaware corporation ("PRT") and its
subsidiaries, now held or hereafter acquired (collectively with PRT, the
"Company"), with those of the stockholders of PRT; to attract, motivate and
retain the best available executive personnel and key employees of the Company
by permitting them to acquire or increase their proprietary interest in PRT;
and to reward the performance of individual officers and other employees in
fulfilling their personal responsibilities for long-range achievements.
2. Definitions.
The following terms, as used herein, shall have the following
meanings:
(a) "PRT" shall have the meaning set forth in Section 1 hereof.
(b) "Award" shall mean any Option granted pursuant to the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or other
instrument or document between PRT and a Participant evidencing an
Award.
(d) "Board" shall mean the Board of Directors of PRT.
(e) "Cause" shall mean (i) the engaging by the Participant in willful
misconduct that is materially injurious to the Company, (ii) the
embezzlement or misappropriation of funds or property of the Company
by the Participant or the conviction of the Participant of a felony or
the entrance of a plea of guilty or nolo contendere by the Participant
to a felony, or (iii) the willful failure or refusal by the
<PAGE>
Participant to substantially perform his duties or responsibilities
that continues after being brought to the attention of the Participant
(other than any such failure resulting from the Participant's
incapacity due to disability). For purposes of this paragraph, no act,
or failure to act, on the Participant's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith
and without reasonable belief that his action or omission was in the
best interest of the Company. Determination of Cause shall be made by
the Committee in its sole discretion. Any such determination shall be
final and binding on a Participant.
(f) "Common Stock" shall mean the Common Stock, par value $0.001 per share,
of PRT.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(h) "Committee" shall mean the committee of the Board comprised of at
least two Non-Employee Directors which administers the Plan as
provided herein.
(i) "Company" shall have the meaning set forth in Section 1 hereof.
(j) "Effective Date" shall have the meaning set forth in Section 8(j)
hereof.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(l) "Fair Market Value" of a share of Common Stock on any date shall be
the fair market value of such Common Stock as determined by the
Committee in its sole discretion pursuant to such policies as to
valuation as may be adopted be the Board; provided, that if the
Options granted pursuant to an Award are Incentive Stock Options,
the Fair Market Value of a share of Common Stock shall be determined
in accordance with Section 422 of the Code; provided, further, that
(A) if the Common Stock is admitted to trading on a national
securities exchange,
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Fair Market Value on any date shall be the last sale price reported
for the Common Stock on such exchange on such date or, if none, the
next earlier date on which a sale was reported, (B) if the Common
Stock is admitted to quotation on the Nasdaq National Market or other
comparable quotation system, Fair Market Value on any date shall be
the last sale price reported for the Common Stock on such system on
such date or, if none, the next earlier date on which a sale was
reported, or (C) if the Common Stock is admitted to quotation on the
Nasdaq Stock Market, Fair Market Value on any date shall be the
average of the highest bid and lowest asked prices of the Common Stock
on such system on such date or, if none, the next earlier date on
which a sale was reported.
(m) "Incentive Stock Option" shall mean an Option that meets the
requirements of Section 422 of the Code, or any successor provision,
and is designated by the Committee as an Incentive Stock Option.
(n) "Initial Public Offering" shall mean a public offering of Common Stock
pursuant to a registration statement under the Securities Act.
(o) "Non-Employee Director" shall mean a member of the Board who is not
also an employee of the Company.
(p) "Nonqualified Stock Option" shall mean an Option other than an
Incentive Stock Option.
(q) "Option" shall mean the right, granted pursuant to the Plan, of a
holder to purchase shares of Common Stock.
(r) "Participant" shall mean an officer, other employee or consultant of
the Company who is, pursuant to Section 4 of the Plan, selected to
participate in the Plan and Non-Employee Directors eligible to
participate in the Plan pursuant to Section 7 hereof.
(s) "Plan" shall have the meaning set forth in Section 1 hereof.
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(t) "Plan Year" shall mean PRT's fiscal year.
(u) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time, and as now or hereafter construed, interpreted and
applied by regulations, rulings and cases.
(v) "Ten Percent Stockholder" shall mean a Participant who, at the time
an Incentive Stock Option is to be granted to such Participant, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company within the meaning of Sections 422(e)
and 422(f), respectively, of the Code.
3. Administration.
The Plan shall be administered by the Committee. The Committee shall
have the authority, in its sole discretion, subject to and not inconsistent
with the express provisions of the Plan, to administer the Plan and to exercise
all the powers and authorities either specifically granted to it under the Plan
or necessary or advisable in connection with the administration of the Plan,
including, without limitation, the authority to grant Awards; to determine the
persons to whom and the time or times at which Awards shall be granted; to
determine the type and number of Awards to be granted, the number of shares of
Common Stock to which an Award may relate and the terms, conditions,
restrictions and performance criteria relating to any Award; to determine
whether, to what extent, and under what circumstances an Award may be settled,
cancelled, adjusted, forfeited, exchanged, or surrendered or accelerated or an
Option or Options may be repriced to a lower exercise price; to construe and
interpret the Plan and any Award; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and provisions of
Award Agreements, consistent with the terms and provisions of the Plan; and to
make all other determinations deemed necessary or advisable for the
administration of the Plan, consistent with the terms and provisions of the
Plan. The Committee shall consist of two or more persons who are intended to be
"disinterested persons" within the meaning of Rule 16b-3 under the Exchange
Act.
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<PAGE>
4. Eligibility.
Awards may be granted to officers, other employees and consultants of
the Company in the sole discretion of the Committee. In determining the persons
to whom Awards shall be granted and the type of Award, the Committee shall take
into account such factors as the Committee shall deem relevant in connection
with accomplishing the purposes of the Plan. In addition, Non-Employee
Directors of the Company will be granted options as set forth herein.
5. Stock Subject to the Plan.
(a) Number of Shares. The maximum number of shares of Common Stock
reserved for issuance pursuant to the Plan shall be 4,302,000. All such shares
of Common Stock shall be subject to equitable adjustment as provided herein.
Such shares may, in whole or in part, be authorized but unissued shares or
shares that shall have been or may be reacquired by the Company in the open
market, in private transactions or otherwise. If any shares subject to an Award
are forfeited, cancelled, exchanged or surrendered or if an Award otherwise
terminates or expires without a distribution of shares to the Participant, the
shares of Common Stock with respect to such Award shall, to the extent of any
such forfeiture, cancellation, exchange, surrender, termination or expiration,
again be available for Awards under the Plan.
(b) Equitable Adjustment. In the event that an extraordinary
transaction or other event or circumstance affecting the Common Stock shall
occur, including, but not limited to, any dividend or other distribution
(whether in the form of cash, stock or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, sale of assets or other similar
transaction or event, and the Committee determines that a change or adjustment
in the terms of any Award is appropriate, then the Committee may, in its sole
discretion, make such equitable changes or adjustments or take any other
actions that it deems necessary or appropriate (which shall be effective at
such time as the Committee in its sole discretion determines), including, but
not limited to (A) causing changes or adjustments to any or all of (i) the
number and kind of shares of stock or other securities or property which may
thereafter be issued in connection with Awards (including Awards to
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<PAGE>
Non-Employee Directors pursuant to Section 7 hereof), (ii) the number and kind
of shares of stock or other securities or property issued or issuable in
respect of outstanding Awards, (iii) the exercise price relating to any Award,
and (iv) the limitation on Option grants pursuant to Section 6(a)(9) hereof,
and (B) cancelling outstanding Awards in exchange for replacement awards or
cash, it being understood that the Committee shall have the authority to cause
different changes or adjustments to be made to any Awards held by Participants
even if such Awards are identical and such Participants are similarly situated;
further, provided, however, that with respect to Options which are intended by
the Committee to remain Incentive Stock Options subsequent to any such
adjustment, such adjustment shall be made in accordance with Section 424 of the
Code.
6. Stock Options.
Each Option granted pursuant to this Section 6 shall be evidenced by
an Award Agreement, in such form and containing such terms and conditions as
the Committee shall from time to time approve, which Award Agreement shall
comply with and be subject to the following terms and conditions, as
applicable.
(a) Stock Options
(1) Number of Shares. Each Award Agreement shall state the
number of shares of Common Stock to which the Option relates.
(2) Type of Option. Each Award Agreement shall state that the
Option constitutes an Incentive Stock Option or a Nonqualified Stock Option.
(3) Option Exercise Price. Each Award Agreement shall state the
Option exercise price, which, except as provided in Section 6(a)(7)(B) below,
shall not be less than one hundred percent (100%) of the Fair Market Value of
the shares of Common Stock covered by the Option on the date of grant. The
Option exercise price shall be subject to adjustment as provided in Section 5
hereof. Unless otherwise expressly stated in the Committee resolution expressly
granting an Option, the date as of which the Committee adopts the resolution
expressly granting an Option shall be considered the day on which such Option
is granted.
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<PAGE>
(4) Method and Time of Payment. The Option exercise price shall
be paid in full, at the time of exercise, in cash (which may include cash
received from the Company as compensation or cash borrowed from the Company),
in shares of Common Stock having a Fair Market Value equal to such Option
exercise price, in a combination of cash and Common Stock (or other
consideration deemed acceptable by the Committee) or, in the sole discretion of
the Committee, through a cashless exercise procedure.
(5) Term and Exercisability of Options. Each Award Agreement
shall provide that each Option shall become exercisable over a period
determined by the Committee in its discretion; provided, that the Committee
shall have the authority to accelerate the exercisability of any outstanding
Option at such time and under such circumstances as it, in its sole discretion,
deems appropriate. The exercise period shall be not more than ten (10) years
from the date of the grant of the Option, or such shorter period as is
determined by the Committee. The exercise period shall be subject to earlier
termination as provided in Section 6(a)(6) hereof. An Option may be exercised,
as to any or all full shares of Common Stock as to which the Option has become
exercisable, by written notice delivered in person or by mail to the Secretary
of PRT, specifying the number of shares of Common Stock with respect to which
the Option is being exercised, together with payment in full of the Option
exercise price. For purposes of the preceding sentence, the date of exercise
will be deemed to be the date upon which the Secretary of PRT receives both the
notification and such payment.
(6) Termination. If a Participant's employment by the Company
terminates, the Committee will have the exclusive authority to determine if and
for how long, and under what conditions, such Option may be exercised after
such termination; provided, however, that in no event will an Option continue
to be exercisable beyond the expiration date of such Option; provided, further,
that if an Award is of Incentive Stock Options, such Incentive Stock Options
must be exercised within ninety (90) days after any termination which is not a
result of death or disability.
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(7) Incentive Stock Options. Options granted as Incentive Stock
Options shall be subject to the following special terms and conditions, in
addition to the general terms and conditions specified in this Section 6.
(A) Value of Shares. The aggregate Fair Market Value
(determined as of the date the Incentive Stock Option is granted) of
the shares of Common Stock with respect to which Incentive Stock
Options granted under this Plan and all other plans of the Company
become exercisable for the first time by each Participant during any
calendar year shall not exceed $100,000.
(B) Ten Percent Stockholder. In the case of an Incentive
Stock Option granted to a Ten Percent Stockholder, (x) the option
exercise price shall not be less than one hundred ten percent (110%)
of the Fair Market Value of the shares of Common Stock on the date of
grant of such Incentive Stock Option, and (y) the exercise period
shall not exceed five (5) years from the date of grant of such
Incentive Stock Option.
(8) Nontransferability of Common Stock. Each Award Agreement
shall provide that upon receipt of any shares of Common Stock acquired through
the exercise of the Options granted hereby ("Option Shares") prior to an
Initial Public Offering, the Participant shall execute a stockholders agreement
(a "Stockholders Agreement") with respect to the shares of Common Stock to
which such Option relates, in such form and containing such terms and
conditions as the Committee shall from time to time approve, including, without
limiting the forgoing, any restrictions on the transferability of such Option
Shares.
(9) Maximum Grant of Options. No Plan Participant may receive an
Award or Awards of Options covering in excess of 100,000 shares of Common Stock
in any Plan year.
(10) Option Shares Holding Period. In each Award Agreement
evidencing an Award granted to a Participant prior to an Initial Public
Offering, the Participant receiving the Award shall covenant and agree to hold
and not sell or otherwise dispose of any shares of Company Common Stock
acquired through the exercise of the
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Options granted thereby ("Option Shares") for a period of not less than six
months after the exercise of the Options under which such Option Shares were
acquired; provided that any Option Shares acquired after an Initial Public
Offering shall be freely transferrable upon receipt of such Option Shares,
subject to applicable law.
(11) Right of First Refusal. If a Participant shall determine
to sell any Option Shares after the end of any applicable holding period, the
Company shall have a right of first refusal to repurchase any such Option
Shares at the Fair Market Value of the Option Shares at the time the
Participant so determines to sell such Option Shares; provided, that the
Company shall be under no obligation to repurchase such Option Shares.
7. Non-Employee Director Options.
Notwithstanding any other provision of the Plan to the contrary, the
provisions of this Section 7 shall apply to and govern grants of Options to
Non-Employee Directors. Except as set forth in this Section 7, the other
provisions of the Plan shall apply to grants of Options to Non-Employee
Directors to the extent not inconsistent with this Section. The provisions of
this Section 7 shall not be amended more than once every six months, other than
to comport with changes in the Code, the Employee Retirement Income Security
Act of 1974, as amended, or the rules promulgated thereunder.
(a) General. Non-Employee Directors shall receive Nonqualified Stock
Options in accordance with this Section 7. The purchase price per share of
Common Stock purchasable under Options granted to Non-Employee Directors shall
be the Fair Market Value of such share on the date of grant. No Award Agreement
with any Non-Employee Director may alter the provisions of this Section 7 and
no Option granted to a Non-Employee Director may be subject to a discretionary
acceleration of exercisability or vesting.
(b) Initial Grant. As of August 1, 1996, each person who is then a
Non-Employee Director (an "Initial Director") shall be granted automatically,
without action by the Committee, an Option to purchase 3,000 shares of Common
Stock.
(c) Grants to New Non-Employees Directors. Each person who, after
August 1, 1996, becomes a Non-Em-
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<PAGE>
ployee Director for the first time (a "Subsequent Director"), shall, at the
time such director is elected and duly qualified, be granted automatically,
without action by the Committee, an Option to purchase 3,000 shares of Common
Stock.
(d) Annual Grants to Continuing Directors. On the date of each annual
meeting of stockholders of the Company, commencing with the 1997 annual meeting
of stockholders, each continuing Initial Director shall be granted
automatically, without action by the Committee, an Option to purchase 3,000
shares of Common Stock. On the date of each annual meeting of stockholders of
the Company subsequent to a Subsequent Director's becoming a Non-Employee
Director, each continuing Subsequent Director shall be granted automatically,
without action by the Committee, an Option to purchase 3,000 shares of Common
Stock, unless such Non-Employee Director received a grant pursuant to paragraph
(c) above by reason of being elected a Non-Employee Director at such annual
meeting.
(e) Vesting. Each Option granted to a Non-Employee Director shall
vest and become exercisable with respect to fifty percent (50%) of the shares
of Common Stock subject thereto on each of the first two anniversaries of the
date of grant thereof, provided that such Non-Employee Director shall have
continually served as such from such date of grant through and on such
anniversary dates; provided, however, that each Option shall become immediately
vested and exercisable in full upon the death of the Non-Employee Director.
Sections 6(a)(5) and (6) hereof shall not apply to Options granted to Non-
Employee Directors.
(f) Duration. Subject to the immediately following sentence, each
Option granted to a Non-Employee Director shall remain outstanding for a term
of 10 years from the date of grant. Upon the cessation of a Non-Employee
Director's membership on the Board for any reason, Options granted to such
Non-Employee Director shall expire upon the earlier of (i) three (3) years from
the date of such cessation of Board membership or (ii) expiration of the term
of the Option. The Committee may not provide for an extended exercise period
beyond the periods set forth in this Section 7(f).
8. General Provisions.
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(a) Compliance with Legal Requirements. The Plan and the granting and
exercising of Awards, and the other obligations of the Company under the Plan
and any Award Agreement or other agreement shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or governmental authority or agency as may be required. The
Company, in its discretion, may postpone the issuance or delivery of Common
Stock under any Award as the Company may consider appropriate and may require
any Participant to make such representations and furnish such information as it
may consider appropriate in connection with the issuance or delivery of Common
Stock in compliance with applicable laws, rules and regulations.
(b) Nontransferability. Awards shall not be transferable by a
Participant other than by will or the laws of descent and distribution or, if
then permitted by Rule 16b-3 under the Exchange Act, pursuant to a qualified
domestic relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder,
and shall be exercisable during the lifetime of a Participant only by such
Participant or his guardian or legal representative.
(c) No Right To Continued Employment. Nothing in the Plan or in any
Award granted or any Award Agreement or other agreement entered into pursuant
hereto shall confer upon any Participant the right to continue in the employ of
the Company or to be entitled to any remuneration or benefits not set forth in
the Plan or such Award Agreement or other agreement or to interfere with or
limit in any way the right of the Company to terminate such Participant's
employment.
(d) Withholding Taxes. Where a Participant or other person is entitled
to receive shares of Common Stock pursuant to the exercise of an Option or is
otherwise entitled to receive shares of Common Stock or cash pursuant to an
Award hereunder, the Company shall have the right to require the Participant or
such other person to pay to the Company the amount of any taxes which the
Company may be required to withhold before delivery to such Participant or
other person of cash or a certificate or certificates representing such shares.
Upon the disposition of shares of Common Stock acquired pursuant to
the exercise of an Incentive Stock
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Option, the Company shall have the right to require the payment of the amount
of any taxes which are required by law to be withheld with respect to such
disposition.
Unless otherwise prohibited by the Committee or by applicable law, a
Participant may satisfy any such withholding tax obligation by any of the
following methods, or by a combination of such methods: (a) tendering a cash
payment; (b) authorizing the Company to withhold from the shares of Common
Stock or cash otherwise payable to such Participant (1) one or more of such
shares having an aggregate Fair Market Value, determined as of the date the
withholding tax obligation arises, less than or equal to the amount of the
total withholding tax obligation or (2) cash in an amount less than or equal to
the amount of the total withholding tax obligation; or (c) delivering to the
Company previously acquired shares of Common Stock (none of which shares may be
subject to any claim, lien, security interest, community property right or
other right of spouses or present or former family members, pledge, option,
voting agreement or other restriction or encumbrance of any nature whatsoever)
having an aggregate Fair Market Value, determined as of the date the
withholding tax obligation arises, less than or equal to the amount of the
total withholding tax obligation. A Participant's election to pay his or her
withholding tax obligation (in whole or in part) by the method described in
(b)(1) above is irrevocable once it is made, may be disapproved by the
Committee and, if made by any director, officer or other person who is subject
to Section 16(b) of the Exchange Act, must be made (x) only during the period
beginning on the third business day following the date of release of the
Company's quarterly or annual summary statement of sales and earnings and
ending on the twelfth business day following the date of such release or (y)
not less than six months prior to the date such Participant's withholding tax
obligation arises.
(e) Amendment and Termination of the Plan. The Board or the Committee
may at any time and from time to time alter, amend, suspend, or terminate the
Plan in whole or in part; provided that, no amendment which requires
stockholder approval under applicable New York law or in order for the Plan to
continue to comply with Rule 16b-3 under the Exchange Act shall be effective
unless the same shall be approved by the requisite vote of the stockholder(s)
of PRT. Notwithstanding the foregoing, subject to the other provisions of the
Plan, no amendment shall affect adversely any of the rights of any Partici-
12
<PAGE>
pant, without such Participant's consent, under any Award theretofore granted
under the Plan. The power to grant Options under the Plan will automatically
terminate on July 31, 2006. If the Plan is terminated, any unexercised Option
shall continue to be exercisable in accordance with its terms and the terms of
the Plan in effect immediately prior to such termination.
(f) Participant Rights. No Participant shall have any claim to be
granted any Award under the Plan, and there is no obligation for uniformity of
treatment for Participants. Except as provided specifically herein, a
Participant or a transferee of an Award shall have no rights as a stockholder
with respect to any shares of stock covered by any Award until the date of the
issuance of a certificate to him for such shares.
(g) Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of PRT.
(h) No Fractional Shares. No fractional shares of Common Stock shall
be issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(i) Governing Law. The Plan and all determinations made and actions
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
(j) Effective Date. The Plan has been adopted by the Board. After
approval by the stockholders of PRT, the Plan shall become effective on August
1, 1996, which shall be the Effective Date.
13
<PAGE>
(k) Beneficiary. A Participant may file with the Committee a written
designation of a beneficiary on such form as may be prescribed by the Committee
and may, from time to time, amend or revoke such designation. If no designated
beneficiary survives the Participant, the executor or administrator of the
Participant's estate shall be deemed to be the grantee's beneficiary.
(l) Interpretation. The Plan is designed and intended to comply with
Rule 16b-3 promulgated under the Exchange Act, and all provisions hereof shall
be construed in a manner to so comply.
14
<PAGE>
Exhibit A
[FORM OF OPTION AGREEMENT]
STOCK OPTION AWARD AGREEMENT
AGREEMENT made on [ ], 19 (the "Date of Grant"), by and between PRT
Corp. of America, a New York corporation (the "Company") and [ ] (the
"Executive"["Employee"] ["Consultant"]).
WHEREAS, the Company has adopted the PRT Corp. of America 1996 Stock
Option and Incentive Plan (the "Plan"); and
WHEREAS, the Company desires to grant to the Executive options under
the Plan to acquire an aggregate of [ ] shares of common stock of the Company,
par value $.01 per share (the "Stock"), on the terms set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the Plan.
2. Grant of Options. The Executive is hereby granted options (the
"Options") to purchase an aggregate of [ ] shares of Stock, pursuant to the
terms of this Agreement and the provisions of the Plan. The Options are
intended to constitute [Incentive][Nonqualified] Stock Options.
3. Option Price. The initial exercise price per share of the Options
shall be $_____, subject to adjustment in accordance with the Plan.
4. Conditions to Exercisability. The Options shall vest and become
exercisable with respect to ____ percent (__%) of the shares subject thereto on
each of the first _______ anniversaries of the Date of Grant, so long as the
Executive continues to be employed by the Company or any of its subsidiaries on
such dates. In the event of death or permanent disability of the Executive, all
Options shall vest immediately. In the event of
A-1
<PAGE>
approved retirement or partial disability of the Executive, all Options shall
vest upon the earlier of (i) ninety (90) days or (ii) the regular vesting
schedule set forth above. In the event the Executive's employment is terminated
other than as a result of the death or permanent or partial disability or
approved retirement of the Executive, all unvested Options shall be forfeited.
5. Period of Options. The Options shall expire on the earliest to
occur of:
(a) the tenth anniversary of the Date of Grant [five years in the
case of 10% holders];
(b) the date of the Executive's termination of employment with
the Company or any of its subsidiaries for Cause;
(c) the first anniversary of the Executive's death or
termination of employment with the Company or any of its subsidiaries by
reason of disability of the Executive or approved retirement; and
(d) the first anniversary of the Executive's termination of
employment with the Company or any of its subsidiaries for any other reason;
provided, that if the Options granted hereunder are Incentive Stock Options,
such Options must be exercised within ninety (90) days after any termination
which is not a result of death or disability.
[THE FOLLOWING SECTION 5A MAY BE ADDED TO CERTAIN INDIVIDUAL AWARD AGREEMENTS
AS DETERMINED BY THE COMMITTEE.]
[5A. Change in Control. Notwithstanding any other provision of the
Plan or this Agreement to the contrary, if, [after an Initial Public Offering
and] while this Award remains outstanding under the Plan, a Change in Control
(as defined below) of PRT shall occur, then all Options granted under this
Award Agreement that are outstanding at the time of such Change in Control
shall become immediately exercisable in full, without regard to the years that
have elapsed from the date of grant, and, at the option of the Committee, such
Options may be cancelled in exchange for a cash payment or a replacement award
of equivalent value.
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<PAGE>
For purposes of this Section 5A, a "Change in Control" of PRT shall
occur upon the happening of the earliest to occur of the following:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than (1) PRT, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of PRT or (3)
any corporation owned, directly or indirectly, by the stockholders of PRT
in substantially the same proportions as their ownership of the common
stock of PRT), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of PRT
(not including in the securities beneficially owned by such person any
securities acquired directly from PRT or its affiliates [or in an Initial
Public Offering]) representing [ ]% or more of the combined voting power of
PRT's then outstanding voting securities;
(ii) during any period of not more than two consecutive years,
individuals who at the beginning of such period constitute the Board (such
board of directors being referred to herein as the "PRT Board"), and any
new director (other than a director designated by a person who has entered
into an agreement with PRT to effect a transaction described in clause (i),
(iii) or (iv) of this Section 5A) whose election by the PRT Board or
nomination for election by PRT's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved (other than approval
given in connection with an actual or threatened proxy or election
contest), cease for any reason to constitute at least [70]% of such PRT
Board;
(iii) the stockholders of PRT approve a merger or consolidation
of PRT with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of PRT outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
without conversion or by being converted into voting securities of the
surviving or parent entity) [ ]% or more of the combined voting power of
the voting
A-3
<PAGE>
securities of PRT or such surviving or parent entity outstanding
immediately after such merger or consolidation or (B) a merger or
consolidation effected to implement a recapitalization of PRT (or similar
transaction) in which no "person" (as hereinabove defined) acquires [ ]% or
more of the combined voting power of PRT's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect).]
6. Exercise of Options. Options shall be exercised in the following
manner: the Executive shall deliver to the Company written notice specifying
the number of shares of Stock that he elects to purchase. The Executive must
include with such notice full payment of the exercise price for the Stock being
purchased pursuant to such notice. The exercise price shall be paid in full at
the time of exercise. The exercise price may be paid in cash or by check; by
the tender by the Executive to the Company of shares of Common Stock
outstanding prior to the receipt of the Option Shares (as defined below) by the
Executive; or a combination of any of the foregoing, in an amount having a
combined value equal to such exercise price. The value of any Stock tendered
pursuant to the preceding sentence shall be the Fair Market Value of such Stock
as of the last trading day prior to the date of exercise.
Upon the delivery of shares of Stock acquired pursuant to the
exercise of Options, the Company shall have the right to require the payment of
the amount of any taxes that are required by law to be withheld with respect to
such delivery.
The Executive shall not be deemed to be a holder of any shares of
Stock pursuant to exercise of Options until the date of the issuance of a stock
certificate to him for such shares and until such shares are paid for in full.
7. Holding Period. The Executive covenants and agrees to hold and not
sell or otherwise dispose of any shares of Company Common Stock acquired
through the
A-4
<PAGE>
exercise of the Options granted hereby ("Option Shares") for a period of not
less than six months after the exercise of the Options under which such Option
Shares were acquired; provided that any Option Shares acquired after an Initial
Public Offering shall be freely transferrable upon receipt of such Option
Shares, subject to applicable law.
8. Right of First Refusal. If the Executive shall determine to sell
any Option Shares after the end of any applicable holding period, the Company
shall have a right of first refusal to repurchase any such Option Shares at the
Fair Market Value of the Option Shares at the time the Executive so determines
to sell such Option Shares; provided, that the Company shall be under no
obligation to repurchase such Option Shares.
9. Stockholders Agreement. Prior to or upon receipt of any Option
Shares hereunder prior to an Initial Public Offering, the Executive covenants
and agrees to enter into a Stockholders Agreement relating to such Option
Shares in such form and containing such terms and conditions as the Committee
shall from time to time approve, including, without limiting the forgoing, any
restrictions on the transferability of such Option Shares.
10. Representations. The Company represents and warrants that this
Agreement has been authorized by all necessary corporate action of the Company
and is a valid and binding agreement of the Company enforceable against them in
accordance with its terms.
The Executive represents and warrants that he is not a party to any
agreement or instrument that would prevent him from entering into or performing
his duties in any way under this Agreement.
11. Entire Agreement. This Agreement and the Plan contain all the
understandings between the parties hereto pertaining to the matters referred to
herein, and supersedes all undertakings and agreements, whether oral or in
writing, previously entered into by them with respect thereto. The Executive
represents that, in executing this Agreement, he does not rely and has not
relied upon any representation or statement not set forth therein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
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<PAGE>
12. Amendment or Modification, Waiver. Except as set forth in the
Plan, no provision of this Agreement may be amended or waived unless such
amendment or waiver is agreed to in writing, signed by the Executive and by a
duly authorized officer of the Company. No waiver by any party hereto of any
breach by another party hereto of any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, any prior time or any
subsequent time.
13. Notices. Any notice to be given hereunder shall be in writing and
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such
other address as such party may subsequently give notice of hereunder in
writing:
To Executive at:
To the Company at:
PRT Group Inc.
342 Madison Avenue
New York, New York 10173
Attn: Corporate Secretary
Any notice delivered personally or by courier under this Section 13
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
14. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which
it is so determined to
A-6
<PAGE>
be invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.
15. Survival. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to its
conflicts of laws principles.
17. Headings. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
18. Construction. This Agreement is made under and subject to the
provisions of the Plan, and all of the provisions of the Plan are hereby
incorporated herein as provisions of this Agreement. If there is a conflict
between the provisions of this Agreement and the provisions of the Plan, the
provisions of the Agreement shall govern. By signing this Agreement, the
Executive confirms that he has received a copy of the Plan and has had an
opportunity to review the contents thereof.
19. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
20. Confidentiality. The provisions, terms and conditions of this
Agreement shall be held confidential by the parties hereto.
A-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PRT GROUP INC.
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
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<PAGE>
CONFORMED COPY
===============================================================================
PRT GROUP INC.
COMMON STOCK AND WARRANT UNIT PURCHASE AGREEMENT
dated as of November 21, 1996
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Purchase and Sale of Units...................... 1
Section 1.1 Sale and Issuance of Warrants................................ 1
Section 1.2 Closing...................................................... 1
ARTICLE II
Representations and Warranties of the Company........... 2
Section 2.1 Organization, Good Standing and Qualification................ 2
Section 2.2 Capitalization and Voting Rights............................. 2
Section 2.3 Subsidiaries................................................. 5
Section 2.4 Authorization................................................ 5
Section 2.5 Valid Issuance of Warrants and Warrant Shares................ 6
Section 2.6 Governmental and Third Party Consents........................ 6
Section 2.7 Litigation; Compliance with Laws............................. 7
Section 2.8 Patents and Trademarks....................................... 7
Section 2.9 Proprietary Information of Third Parties..................... 8
Section 2.10 Compliance with Other Instruments............................ 9
Section 2.11 Other Agreements............................................. 10
Section 2.12 Disclosure................................................... 10
Section 2.13 Title to Property and Assets; Leases......................... 10
Section 2.14 Changes...................................................... 11
Section 2.15 Employee Benefit Plans....................................... 14
Section 2.16 Tax Matters.................................................. 14
Section 2.17 Insurance.................................................... 15
Section 2.18 Labor Agreements and Actions................................. 16
Section 2.19 Financial Statements......................................... 16
Section 2.20 Absence of Undisclosed Liabilities........................... 17
Section 2.21 Other Agreements............................................. 17
Section 2.22 Loans and Advances........................................... 20
Section 2.23 Employees; Officers.......................................... 20
Section 2.24 [Reserved]................................................... 21
Section 2.25 Environmental Protection..................................... 21
Section 2.26 Foreign Corrupt Practices Act................................ 22
Section 2.27 Federal Reserve Regulations.................................. 22
Section 2.28 Offering of the Shares....................................... 23
Section 2.29 Returns...................................................... 23
Section 2.30 Related-Party Transactions................................... 23
Section 2.31 Permits...................................................... 24
Section 2.32 Manufacturing and Marketing Rights........................... 24
i
<PAGE>
Page
Section 2.33 Registration Rights.......................................... 24
Section 2.34 Minute Books................................................. 24
ARTICLE III
Covenants of the Company...................... 25
Section 3.1 Financial Statements, Reports, Etc........................... 25
Section 3.2 Properties, Business, Insurance.............................. 28
Section 3.3 Inspection, Consultation and Advice.......................... 28
Section 3.4 Restrictive Agreements Prohibited............................ 29
Section 3.5 Transactions with Affiliates................................. 29
Section 3.6 Expenses of Directors........................................ 30
Section 3.7 Board of Directors Meetings.................................. 30
Section 3.8 [RESERVED]................................................... 30
Section 3.9 Performance of Contracts..................................... 30
Section 3.10 Employee Agreements.......................................... 31
Section 3.11 Compliance with Laws......................................... 31
Section 3.12 Keeping of Records and Books of Account...................... 31
Section 3.13 Compensation and Audit Committees............................ 31
Section 3.14 Corporate Existence.......................................... 32
Section 3.15 Limitations of Certain Rights................................ 32
Section 3.16 Survival..................................................... 32
Section 3.17 Use of Proceeds.............................................. 32
Section 3.18 Preemptive Rights............................................ 32
Section 3.19 Reservation of Common Stock.................................. 35
Section 3.20 Co-Sale Rights............................................... 35
Section 3.21 Increase in Expenses......................................... 39
Section 3.22 Use of Name and Management Responsibility.................... 40
Section 3.23 Right of First Offer From Founders........................... 40
Section 3.24 Board Size................................................... 42
ARTICLE IV
Representations, Warranties and Covenants of the Investors ..... 42
Section 4.1 Authorization................................................ 42
Section 4.2 Purchase Entirely for Own Account............................ 42
Section 4.3 Disclosure of Information.................................... 43
Section 4.4 Restricted Securities........................................ 43
Section 4.5 Further Limitations on Disposition........................... 43
Section 4.6 Legends...................................................... 44
Section 4.7 Accredited Investor.......................................... 44
Section 4.8 [RESERVED]................................................... 44
Section 4.9 No Sales to Competitors...................................... 44
Section 4.10 Consultation on Investor Sales of Securities................. 45
ii
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Page
ARTICLE V
Conditions of Each Investor's Obligations at Closing......... 45
Section 5.1 Representations and Warranties............................... 45
Section 5.2 Compliance Certificate....................................... 45
Section 5.3 Proceedings and Documents.................................... 45
Section 5.4 Opinion of Company Counsel................................... 46
Section 5.5 Performance.................................................. 46
Section 5.6 Purchase by Other Investors.................................. 46
Section 5.7 Supporting Documents......................................... 46
Section 5.8 Certificate of Incorporation................................. 47
Section 5.9 Employee Agreements.......................................... 47
ARTICLE VI
Conditions of the Company's Obligations at Closing.......... 47
ARTICLE VII
Registration Rights......................... 48
Section 7.1 Definitions.................................................. 48
Section 7.2 Demand for Registration...................................... 49
Section 7.3 Company Registration......................................... 52
Section 7.4 Obligations of the Company................................... 52
Section 7.5 Furnish Information.......................................... 54
Section 7.6 Expenses of Demand Registration.............................. 54
Section 7.7 Expenses of Company Registration............................. 55
Section 7.8 Underwriting Requirements.................................... 55
Section 7.9 Delay of Registration........................................ 56
Section 7.10 Indemnification.............................................. 56
Section 7.11 Reports Under Securities Exchange Act of 1934................ 60
Section 7.12 Form S-3 Registration........................................ 61
Section 7.13 Assignment of Registration Rights............................ 63
Section 7.14 Limitations on Subsequent Registration Rights................ 64
Section 7.15 Amendment of Registration Rights............................. 64
Section 7.16 Termination of Registration Rights........................... 64
ARTICLE VIII
Miscellaneous............................. 64
Section 8.1 Survival of Warranties....................................... 64
Section 8.2 Successors and Assigns....................................... 65
Section 8.3 Governing Law................................................ 65
Section 8.4 Counterparts; Facsimile Counterparts......................... 65
Section 8.5 Titles and Subtitles......................................... 65
iii
<PAGE>
Page
Section 8.6 Notices...................................................... 65
Section 8.7 Finder's Fee................................................. 66
Section 8.8 Expenses..................................................... 66
Section 8.9 Amendments and Waivers....................................... 66
Section 8.10 Severability................................................. 67
Section 8.11 Entire Agreement............................................. 67
Section 8.12 Disclosure Required under the Laws of Certain
States and Foreign Countries................................. 67
Schedule 1.1 - Investors
Schedule 2.1 - Organization, Good Standing and
Qualifications
Schedule 2.2(c) - Capitalization
Schedule 2.11 - Other Agreements
Schedule 2.13 - Title to Property and Assets; Leases
Schedule 2.14 - Changes
Schedule 2.15 - Employee Benefit Plans
Schedule 2.16 - Tax Matters
Schedule 2.21 - Other Agreements
Schedule 2.23 - Executive Officers and Key Employees
of the Company
Schedule 2.28 - Offering of the Shares
Schedule 2.30 - Related-Party Transactions
Exhibit A - Certificate of Incorporation
Exhibit B - Form of Employee Agreement (Executive
Officers)
Exhibit C - Form of Employee Agreement (Key Employees)
Exhibit D - Form of Opinion of Skadden, Arps, Slate,
Meagher & Flom
Exhibit E - Form of Stock Option Plan
Exhibit F - Form of Warrant Certificate
Exhibit G - Form of Preferred Stock Purchase Agreement
Exhibit H - Certificate of Incorporation of Total
Technology Solutions Limited
Exhibit I - Certificate of Incorporation of PRT
Software Services (India) Pvt. Ltd.
Exhibit J - Certificate of Incorporation of PRT Europe
Limited
iv
<PAGE>
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
THIS COMMON STOCK AND WARRANT UNIT PURCHASE AGREEMENT is made as of
the 15th day of November 1996 (the "Agreement"), by and among PRT Group Inc., a
Delaware corporation (the "Company"), Jerome Mellinger ("Mellinger") and the
investors listed on Schedule 1.1 hereto, each of which is herein referred to as
an "Investor." Any reference herein to an "Investor" shall further include all
mutual funds or other pooled investment vehicles or entities under the control
or management of such Investor, or the general partner or investment advisor
thereof, or any affiliate of any of the foregoing.
THE PARTIES HEREBY AGREE AS FOLLOWS:
ARTICLE I
Purchase and Sale of Units
Section 1.1 Sale and Issuance of Warrants. Subject to the terms and
conditions of this Agreement, Investor agrees to purchase at the Closing (as
defined below), and Mellinger agrees to sell to Investor, 48,631 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), and the
Company agrees to sell and issue to Investor at the Closing 48,631 warrants
(the "Warrants") convertible into shares of Common Stock in certain
circumstances as set forth in the form of Warrant Certificate (the "Warrant
Certificate"), attached hereto as Exhibit F (a "Warrant"); such shares of
Common Stock and Warrants shall be transferrable only as units (the "Units"),
each comprised of one share of Common Stock and one Warrant. Mellinger agrees
to sell to Investor, and Investor agrees to purchase, such shares of Common
Stock at a price of $59.62 per share of Common Stock and the Company agrees to
sell, and Investor agrees to purchase, such Warrants at a price of $6.00 per
Warrant, or $65.62 per Unit, such consideration to be payable by certified or
bank cashier's check in immediately available funds or by wire transfer payable
to the order of Mellinger or the Company, as the case may be.
Section 1.2 Closing. The closing of the purchase and sale of the
Units shall be on a date by mutual
<PAGE>
agreement of the parties but, without the consent of the Company, in no event
later than November 30, 1996 and shall take place at the offices of Skadden,
Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022 (which
time and place are designated as the "Closing"). At the Closing, the Company
shall deliver to each Investor certificates representing the number of Warrants
such Investor is purchasing as specified on Schedule 1.1 hereto. At the
Closing, Mellinger shall deliver to each Investor certificates representing the
number of shares of Common Stock such Investor is purchasing as specified on
Schedule 1.1 hereto.
ARTICLE II
Representations and Warranties of the Company
The Company, on behalf of itself and each of its Subsidiaries (as
hereinafter defined), hereby represents, warrants and covenants to each
Investor that:
Section 2.1 Organization, Good Standing and Qualification. The Company
and each Subsidiary (as defined herein) is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and each has all requisite corporate power and authority
necessary to own and operate its properties and to carry on its business as now
conducted and as proposed to be conducted as described in the Confidential
Offering Memorandum of the Company dated July 15, 1996 (the "Memorandum"). The
Company has the corporate power and authority to execute, deliver and perform
this Agreement, to issue, sell and deliver the Warrants, and to issue and
deliver the Common Stock, $.01 par value per share ("Common Stock"), of the
Company issuable upon conversion of the Warrants (the "Warrant Shares"). Except
as set forth on Schedule 2.1 attached hereto, the Company and each Subsidiary
is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business, affairs, financial condition, properties or prospects.
Section 2.2 Capitalization and Voting Rights. The authorized capital
of the Company consists, or will consist immediately prior to the Closing, of:
2
<PAGE>
(a) Preferred Stock. Five hundred thousand (500,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), consisting
of (i) two hundred seventy five thousand nine hundred and sixty one (275,961)
shares of Series A Convertible Preferred Stock, $.01 par value per share (the
"Series A Preferred Stock"), none of which have been issued, and which shall be
issued pursuant to the Preferred Stock Purchase Agreement, by and among the
Company and certain investors, as set forth therein (the "Preferred Stock
Purchase Agreement"), a form of which is attached hereto as Exhibit G, and (ii)
two hundred twenty four thousand and thirty nine (224,039) shares of
undesignated preferred stock, none of which have been issued.
(b) Common Stock. 5,000,000 shares of Common Stock, of which
1,053,750 shares are outstanding as of the date hereof and were duly and
validly issued, and are fully paid and non-assessable, with no personal
liability attaching to the ownership thereof; provided that, on the date
hereof, Jerome Mellinger is selling 48,631 shares of Common Stock hereunder and
Allan Stern is selling 6,095 shares of Common Stock to the Company. An
appropriate number of shares of Common Stock have been reserved for issuance
upon the (i) exercise of options issued, and issuable, pursuant to the
Company's 1996 Stock Incentive Plan (the "Option Plan"), a copy of which is
attached hereto as Exhibit E,(ii) conversion of the Series A Preferred Stock
and (iii) conversion of the Warrants.
(c) Options, Warrants, etc. The stockholders of record and
holders of subscriptions, warrants, options, convertible securities, and other
rights (contingent or otherwise) to purchase or otherwise acquire equity
securities of the Company and each Subsidiary, and the number of shares of
equity securities and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
the attached Schedule 2.2(c).
The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in the Company's Certificate of
Incorporation dated as of September 18, 1996 attached hereto as Exhibit A (the
"Certificate of
3
<PAGE>
Incorporation"), and all such designations, powers, preferences, rights,
qualifications, limitations and restrictions are valid, binding and enforceable
and in accordance with all applicable laws (subject, as to enforcement, to the
discretion of the courts in awarding equitable relief and to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
the rights of creditors generally). Except as provided for in this Agreement or
the Preferred Stock Purchase Agreement, or as set forth in the attached
Schedule 2.2(c), (i) no person owns of record, or is known to the Company to
own beneficially, any share of Common Stock or Preferred Stock, (ii) no
subscription, warrant, option, convertible security or other right (contingent
or otherwise) to purchase or otherwise acquire equity securities of the Company
is authorized or outstanding and (iii) there is no commitment by the Company to
issue shares, subscriptions, warrants, options, convertible securities, or
other such rights or to distribute to holders of any of its equity securities
any evidence of indebtedness or asset.
The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of each of the Company's Subsidiaries are as set forth in the
certificates of incorporation of such Subsidiaries, and all such designations,
powers, preferences, rights, qualifications, limitations and restrictions are
valid, binding and enforceable and in accordance with all applicable laws
(subject, as to enforcement, to the discretion of the courts in awarding
equitable relief and to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting the rights of creditors generally).
Except as set forth in the attached Schedule 2.2(c), (i) no person owns of
record, or is known to the Company to own beneficially, any share of capital
stock of such Subsidiary, (ii) no subscription, warrant, option, convertible
security or other right (contingent or otherwise) to purchase or otherwise
acquire equity securities of such Subsidiary is authorized or outstanding and
(iii) there is no commitment by the Company or any Subsidiary to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities, any evidence of
indebtedness or asset of any Subsidiary.
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(d) Outstanding Agreements. The Company and each Subsidiary has
no obligation (contingent or otherwise) to pay any dividend or make any other
distribution in respect of any of its capital stock. Except as set forth on
Schedule 2.2(c) hereto, the Company and each Subsidiary is not a party to, and
to the Company's knowledge there are no voting trusts or agreements,
stockholders' agreements, pledge agreements, buy-sell agreements, rights of
first refusal or proxies relating to any securities of the Company or any
Subsidiary (whether or not the Company or any Subsidiary is a party thereto).
All of the outstanding securities of the Company and each Subsidiary were
issued in compliance with all applicable federal and state securities laws.
Except as set forth in the certificate of incorporation of the Company and each
Subsidiary or in this Agreement, the Company and each Subsidiary has no
obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire
any shares of its capital stock, except as set forth in Section 2.2(b) hereof.
Section 2.3 Subsidiaries. The Company has formed Total Technology
Solutions Limited ("TTSL") under the laws of Barbados, PRT Software Services
(India) Pvt. Ltd. under the laws of India and PRT Europe Limited under the laws
of the United Kingdom (the "Subsidiaries"). Other than the Subsidiaries, the
Company and each Subsidiary does not presently own or control, directly or
indirectly, any interest in any other corporation, association, or other
business entity.
Section 2.4 Authorization. All corporate action on the part of the
Company and its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance, sale and
delivery of the Warrants and reservation, issuance and delivery of the Warrant
Shares has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
in accordance with its terms. The Company has obtained, or prior to the Closing
will have obtained, any authorization, consent or approval or other action by,
or made any filing with any court or administrative body that is required under
the applicable state securities laws in
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connection with the issuance of the Warrants and the conversion of the
Warrants.
Section 2.5 Valid Issuance of Warrants and Warrant Shares.
(a) The Warrants, when issued, sold and delivered in accordance
with the terms hereof for the consideration expressed herein, will be duly and
validly issued, fully paid and non-assessable with no personal liability
attaching to the ownership thereof, and will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in Article VII hereof and, in reliance upon the
representations of the Investors in this Agreement, will be issued in
compliance with all applicable federal and state securities laws. The Warrant
Shares have been duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Warrants, shall be duly and validly issued,
fully paid and nonassessable, with no personal liability attaching to the
ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in Article VII hereof, and shall be issued in compliance with all
applicable federal and state securities laws, as presently in effect.
(b) In reliance upon the representations of the Investors,
neither the offer, sale or delivery of the Warrants nor the issuance and
delivery of the Warrant Shares upon conversion of the Warrants in conformity
with the terms of this Agreement will violate the Securities Act, as presently
in effect.
Section 2.6 Governmental and Third Party Consents. No permit, consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state or local
governmental authority or third party on the part of the Company or any
Subsidiary is required in connection with the execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby, except for (a) filings pursuant to Regulation
D under the Securities Act, and pursuant to applicable state securities laws,
and (b) with respect to
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Article VII hereof, registration under the Securities Act.
Section 2.7 Litigation; Compliance with Laws. There is no action,
suit, proceeding or investigation pending or currently threatened against the
Company or any Subsidiary which questions the validity of this Agreement or the
right of the Company to execute and deliver this Agreement, or to consummate
the transactions contemplated hereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
condition, affairs or prospects of the Company or any Subsidiary, financial or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company or any Subsidiary aware that there is any basis for the foregoing.
The Company and each Subsidiary is not in default under the material provisions
of any law, regulation or order, is not under any order of any court or
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality wherever located, and there are no (i)
claims, actions, suits or proceedings pending, or to its knowledge threatened
against or affecting the Company or any Subsidiary at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality wherever located; (ii)
arbitration proceedings relating to the Company or any Subsidiary pending under
collective bargaining agreements or otherwise; or (iii) governmental inquiries
pending or, to the Company's or any Subsidiary's knowledge, threatened against
or affecting the Company or any Subsidiary (including without limitation any
inquiry as to the qualification of the Company or any Subsidiary to hold or
receive any license or permit). The Company and each Subsidiary has not taken
any action which has resulted in, or is reasonably likely to result in, the
Company or any Subsidiary incurring any liability which may be material to its
business, prospects, financial condition, operations, property or affairs,
other than as reflected in financial statements at September 30, 1996. There is
no action or suit by the Company or any Subsidiary pending or threatened
against others.
Section 2.8 Patents and Trademarks. The Company and its Subsidiaries
have sufficient title and ownership of, or license rights to, or have applied
for,
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all patents, patent applications, trademarks, trademark applications, service
marks, service mark applications, trade names, copyrights, trade secrets,
information, proprietary rights and processes (collectively, "Intellectual
Property") necessary for their business as now conducted and as proposed to be
conducted as described in the Memorandum. No claim is pending or, to the
Company's or any Subsidiary's knowledge, threatened to the effect that the
operations of the Company or any Subsidiary infringe upon or conflict with the
asserted rights of any other person with respect to any Intellectual Property
and the Company and each Subsidiary knows of no basis for such claim. No claim
is pending or threatened to the effect that any Intellectual Property owned or
licensed by the Company or any Subsidiary, or which the Company or any
Subsidiary otherwise has the right to use, is invalid or unenforceable by the
Company or any Subsidiary and the Company and each Subsidiary knows of no basis
for such claim. The Company and each Subsidiary have used reasonable efforts to
maintain the confidentiality of all proprietary information developed by and
belonging to them which has not been patented. To the Company's and each
Subsidiary's knowledge, all scientific and technical information developed by
and belonging to the Company or any Subsidiary which has not been patented has
been kept confidential.
Section 2.9 Proprietary Information of Third Parties. To the Company's
and each Subsidiary's knowledge, no third party has claimed that any person
employed by or under the control of the Company or any Subsidiary has (a)
violated or may be violating any of the terms or conditions of his employment,
non-competition or non-disclosure agreement with such third party, (b)
disclosed or may be disclosing or utilized or may be improperly utilizing any
trade secret or proprietary information or documentation of such third party or
(c) interfered or may be interfering in the employment relationship between
such third party and any of its present or former employees and no third party
has requested information from the Company or any Subsidiary which suggests
that such a claim might be contemplated. To the Company's and each Subsidiary's
knowledge, none of the execution or delivery of this Agreement, or the carrying
on of the business of the Company or any Subsidiary by any officer, director or
key employee of the Company and each Subsidiary, or the conduct or proposed
conduct of the business of the Compa-
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ny and each Subsidiary as described in the Memorandum, will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any such person
is obligated. To the Company's and each Subsidiary's knowledge, no person
employed by or under the control of the Company or any Subsidiary has, in
connection with such person's performance of any employment or other services
rendered to the Company or any Subsidiary, employed any trade secret or any
information or documentation proprietary to any former employer, and to the
Company's and each Subsidiary's knowledge, no person employed by or under the
control of the Company or any Subsidiary has, in connection with such person's
performance of any employment or other services rendered to the Company or any
Subsidiary, violated any confidentiality obligation which such person may have
owed to any third party.
Section 2.10 Compliance with Other Instruments. The Company and each
Subsidiary are not in violation or default of any provisions of (i) its
certificate of incorporation or by-laws or (ii) any instrument, judgment,
order, writ, decree, contract or other agreement to which it is a party or by
which it is bound which violation or default would either individually or in
the aggregate have a material adverse effect on the condition, financial or
otherwise, or operation of the Company and its Subsidiaries taken as a whole,
and the Company and each Subsidiary has not received notice alleging any
material violation thereof. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the issuance, sale and delivery of the Warrants or
the Warrant Shares, will not result in any such violation or be in conflict
with or constitute, with or without the passage of time and giving of notice,
either a default under any such provision, instrument, judgment, order, writ,
decree, contract or other agreement or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the Company or any
Subsidiary or the suspension, revocation, impairment, forfeiture, or nonrenewal
of any permit, license, authorization or approval applicable to the Company or
any Subsidiary, except (i) for pledges or liens which either individually or in
the aggregate are not material to the Company and its Subsidiaries taken as a
whole, or (ii) a
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violation or conflict with any permit, license, authorization or approval which
would not have a material adverse effect on the condition, financial or
otherwise, or operation of the Company and its Subsidiaries taken as a whole.
The Shares are not subject to any preemptive rights.
Section 2.11 Other Agreements. Except as otherwise disclosed herein or
set forth in Schedule 2.11 attached hereto, there are no, and within the past
year there have not been any, agreements, understandings or proposed
transactions between the Company or any Subsidiary and any of their
stockholders, officers, directors, affiliates, or any affiliate thereof.
Section 2.12 Disclosure. Neither this Agreement, nor any schedule or
exhibit to this Agreement, nor the Memorandum, as amended by the disclosures
set forth in this Agreement, taken together as a whole, contains an untrue
statement of a material fact or omits a material fact necessary, in light of
the circumstances under which they were made, to make the statements contained
herein or therein not misleading; provided, that the Company has not made, and
will not make, any statement regarding the tax consequences of an investment in
the Warrants, Units, Common Stock, or Warrant Shares, and the Investors hereby
acknowledge that no such statement has been or will be made and such Investors
have not relied upon any disclosure (or non-disclosure) by the Company
regarding such tax consequences in making their decision to invest in the
Shares or the Conversion Shares. None of the statements, documents,
certificates or other items prepared or supplied by the Company with respect to
the transactions contemplated hereby contains an untrue statement of a material
fact or omits a material fact necessary to make the statements contained
therein not misleading. There is no fact which the Company has not disclosed to
the Investors and their counsel in writing and of which the Company is aware
which materially and adversely affects or could reasonably be expected to
materially and adversely affect the business, prospects, financial condition,
operations, property or affairs of the Company or any of its subsidiaries.
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Section 2.13 Title to Property and Assets; Leases. The Company and
each Subsidiary owns its property and assets free and clear of all mortgages,
liens and encumbrances, except such encumbrances and liens which arise in the
ordinary course of business and do not materially impair the Company's or such
Subsidiary's ownership or use of such property or assets or the Company's or
such Subsidiary's ability to obtain financing by using such property as
collateral. To the Company's and each Subsidiary's knowledge, there are no
condemnation, environmental, zoning or other land use regulation proceedings,
either instituted or planned to be instituted, which would adversely affect the
use or operation of the Company's or any Subsidiary's properties and assets for
their respective intended uses and purposes, or the value of such properties,
and the Company and each Subsidiary has not received notice of any special
assessment proceedings which would affect such properties and assets. With
respect to the property and assets it leases, the Company and each Subsidiary
is in compliance with such leases and, to the Company's and each Subsidiary's
knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances. The Company's and each Subsidiary's possession of such property
has not been disturbed and, to the Company's and each Subsidiary's knowledge,
no claim has been asserted against the Company or any Subsidiary adverse to its
rights in such leasehold interests. Each lease or agreement to which the
Company or any Subsidiary is a party under which it is a lessee of any
property, real or personal, is a valid and subsisting agreement of the Company
or such Subsidiary, duly authorized and entered into by the Company or such
Subsidiary, without any material default of the Company or any Subsidiary
thereunder and, to the Company's and each Subsidiary's knowledge, without any
default thereunder of any other party thereto. No event has occurred and is
continuing which, with due notice or lapse of time or both, would constitute a
default or event of default by the Company or any Subsidiary under any such
lease or agreement or, to the Company's or any Subsidiary's knowledge, by any
other party thereto. The tangible assets of the Company and each Subsidiary are
located at the premises as set forth in Schedule 2.13.
Section 2.14 Changes. Except as set forth on Schedule 2.14 hereof,
from December 31, 1995 until the
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date hereof, there has not been, and from the date hereof until the Closing,
except as set forth or contemplated on Schedule 2.14, there will not be:
(a) any adverse change in the assets, liabilities, financial
condition or operating results of the Company and each Subsidiary, except
changes in the ordinary course of business which have not been, individually or
in the aggregate, materially adverse, including the expenditure of funds for
research and development and otherwise in connection with the Company's and
each Subsidiary's operations;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company and each
Subsidiary (as such business is presently conducted and as it is proposed to be
conducted);
(c) any waiver or compromise by the Company or any Subsidiary of
a valuable right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company or any Subsidiary,
except in the ordinary course of business and which is not material to the
assets, properties, financial condition, operating results, prospects or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted as described in the Memorandum);
(e) any change or amendment to a contract or arrangement by which
the Company, any Subsidiary or any of their assets or properties are bound or
subject which has a material effect on the Company and its Subsidiaries taken
as a whole, except as set forth in this Agreement;
(f) any changes in the identity of, or material information
presented in the Memorandum regarding, any of the Company's or its
Subsidiaries' officers or directors or any material increases in the
compensation, including the grant of options to purchase a material number of
shares of Common Stock, of any of the
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Company's or any Subsidiaries' employees, officers or directors;
(g) any incurrence, assumption or guarantee by the Company or
any Subsidiary of any material obligation for borrowed money, except for
current liabilities incurred in the ordinary course of business;
(h) any mortgage, pledge, lien, charge or other encumbrance
placed on or incurred with respect to any of the Company's or any Subsidiary's
properties or assets;
(i) to the Company's knowledge, any other event or condition of
any character which can reasonably be expected to materially and adversely
affect the assets, properties, financial condition, operating results,
prospects or business of the Company and its Subsidiaries taken as a whole (as
such business is presently conducted and as it is proposed to be conducted as
described in the Memorandum);
(j) any declaration or payment of any dividend or other
distribution of the assets of the Company or any Subsidiary or any direct or
indirect redemption or other acquisition of any equity security of the Company
or any Subsidiary;
(k) except as provided in Exhibit A, any change in the authorized
capital of the Company or any Subsidiary;
(l) a sale, assignment or transfer by the Company or any
Subsidiary of any of its tangible assets except in the ordinary course of
business;
(m) a sale, assignment, transfer or grant of any exclusive
license with respect to any of the Company's or any Subsidiary's Intellectual
Property;
(n) any material change in the manner of business or operations
of the Company or any Subsidiary;
(o) any transaction with respect to the Company or any Subsidiary
except in the ordinary course of business or as otherwise contemplated hereby;
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(p) any resignation or termination of employment of any executive
officer or key employee of the Company or any Subsidiary; and to the best of
the Company's and each Subsidiary's knowledge, any facts that would indicate
that a key officer or employee of the Company is planning to resign or expected
to be terminated;
(q) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company or any Subsidiary;
(r) any loan or guarantee made by the Company or any Subsidiary
to or for the benefit of its employees, officers, directors or stockholders, or
any members of their immediate families, other than travel advances and other
advances made in the ordinary course of its business;
(s) any commitment (contingent or otherwise) to do any of the
foregoing; or
(t) any material adverse change, or, to the best of the Company's
and each Subsidiary's knowledge, the existence of any fact that would indicate
a material adverse change is likely to occur, in the arrangements between TTSL
and the government of Barbados.
Section 2.15 Employee Benefit Plans. Except as set forth on Schedule
2.15, the Company does not have any Employee Benefit Plan as defined in the
Employee Retirement Income Security Act of 1974, as amended, other than those
providing for health and medical benefits.
Section 2.16 Tax Matters. (a) Except as set forth on Schedule 2.16
hereto, (i) the Company and each Subsidiary has filed or has had filed on its
behalf in a timely manner (within any applicable extension periods) all
material Tax Returns (as defined herein) required to be filed with respect to
Taxes (as defined herein) of the Company and each Subsidiary, and (ii) all
material Taxes with respect to the Company and each Subsidiary shown to be due
and payable on such Tax Returns or on any assessment received by the Company or
a Subsidiary, as the case may be, and all other Taxes due and payable by the
Company and each Subsidiary on or before the Closing have been paid in full or
have been adequately provided for by the
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Company and each Subsidiary, respectively. The Tax Returns filed by the Company
and each Subsidiary are, to the Company's and each Subsidiary's knowledge, true
and correct in all material respects. The Company and each Subsidiary have
never waived any statute of limitations on the assessment or collection of any
tax or governmental charge. Neither the Company nor any of its present or
former stockholders has ever filed an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended, that the Company be taxed as an S
corporation. The federal income tax returns of the Company have never been
audited by the Internal Revenue Service, and the tax returns of each Subsidiary
have never been subject to audit by any taxing authority.
(b) For purposes of this Agreement, (i) "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, sales, use, ad valorem, goods and services,
capital, transfer, franchise, profits, license, withholding, payroll,
employment, employee health, excise, estimated, severance, stamp, occupation,
property or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority and (ii) "Tax Return"
shall mean any report, return, document, declaration or other information or
filing required to be supplied to any taxing authority or jurisdiction with
respect to Taxes.
(c) PRT Corp. of America, a New York corporation ("Old PRT"), is
in the process of filing certain tax forms with respect to the merger of Old
PRT with and into the Company, with the Company surviving. Upon clearance of
such tax filings and the payment of any additional taxes due, if any, the State
of New York shall accept for filing the certificate of merger previously
submitted to the Secretary of State of the State of New York. While the Company
expects the amount of any such taxes to be sufficiently provided for in the
financial statements of the Company, the Company hereby represents and warrants
that the tax liabilities of Old PRT will not exceed $500,000 above the amount
provided for the payment of any such taxes in the financial statements of the
Company. A description of the merger is set forth on Schedule 2.16 attached
hereto.
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Section 2.17 Insurance. The Company and each Subsidiary has insured by
reputable insurers its assets that are of an insurable character against risks
of liability, casualty and fire in adequate amounts and consistent with prudent
industry practice. The Company has made, and will make, available to any
Investor, upon its request, a list of all insurance coverage carried by the
Company and its Subsidiaries, the carrier and the terms and amount of coverage.
Section 2.18 Labor Agreements and Actions. The Company and each
Subsidiary is not bound by or subject to (and none of their assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and no labor union
has requested or, to the knowledge of the Company and each Subsidiary, has
sought to represent any of the employees, representatives or agents of the
Company or any Subsidiary. There is no strike or other labor dispute involving
the Company or any Subsidiary pending, or to the Company's or any Subsidiary's
knowledge, threatened, that has had or would reasonably be expected to have a
material adverse effect on the business affairs, financial condition,
properties or prospects of the Company and its Subsidiaries taken as a whole,
nor is the Company or any Subsidiary aware of any labor organization activity
involving its employees. The Company and each Subsidiary are not aware that any
officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company or any Subsidiary, nor does the
Company or any Subsidiary have a present intention to terminate the employment
of any of the foregoing. The employment of each officer and employee of the
Company and each Subsidiary is terminable at the will of the Company or the
Subsidiary, except as provided in the Employee Agreements (as defined in
Section 2.23 hereof). To its knowledge, the Company and each Subsidiary has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
Section 2.19 Financial Statements. The Company has furnished to the
Investors the audited consolidated balance sheet of the Company as at December
31, 1995 and the related statements of operations, stockholders' equity and
cash flows of the Company for the period from January 1, 1995 through December
31, 1995, and the relat-
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ed unaudited statements of income, stockholders' equity and cash flows of the
Company for the nine months ended September 30, 1996 (collectively, the
"Financial Statements"). All such Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
(except that such unaudited financial statements do not contain all of the
required footnotes) and fairly present the financial position of the Company
and its Subsidiaries as of September 30, 1996 and December 31, 1995,
respectively, and the results of their operations and cash flows for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
Section 2.20 Absence of Undisclosed Liabilities. The Company does not
have any material liabilities or obligations (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due) which are
not reflected in this Agreement or the Financial Statements. Except as
disclosed in the Financial Statements, the Company and each Subsidiary is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. The Company and each Subsidiary maintain and will continue to
maintain a system of accounting established and administered in accordance with
generally accepted accounting principles.
Section 2.21 Other Agreements. Except as set forth in the attached
Schedule 2.21, the Company and each Subsidiary is not a party to or otherwise
bound by any written or oral:
(a) service, distributor, dealer, manufacturer's representative
or sales agency agreement which is not terminable on less than ninety (90)
days' notice without cost or other liability to the Company or any Subsidiary,
as applicable, except for those agreements that involve less than $50,000
individually or in the aggregate;
(b) agreement which entitles any customer to a rebate or right of
set-off, to return any product to the Company or any Subsidiary after
acceptance thereof or to delay the acceptance thereof, or which varies in any
material respect from the Company's or any Subsidiary's standard form
agreements, except for those agreements which individually or in the aggregate
do not have and
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are not reasonably expected to have a material adverse effect on the business,
affairs, financial condition, properties or prospects of the Company and its
Subsidiaries taken as a whole;
(c) agreement with any labor union (and, to the knowledge of the
Company and each Subsidiary, no organizational effort is being made with
respect to any of its employees);
(d) agreement containing any provision permitting any party other
than the Company or any Subsidiary to renegotiate the price or other terms, or
containing any payback or other similar provision, upon the occurrence of a
failure by the Company or any Subsidiary to meet its obligations under the
agreement when due or the occurrence of any other event, except for those
agreements which individually or in the aggregate do not have and are not
reasonably expected to have a material adverse effect on the business, affairs,
financial condition, properties or prospects of the Company and its
Subsidiaries taken as a whole;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment, except for those
agreements that involve less than $50,000 individually or in the aggregate;
(f) agreement for the employment of any officer, employee or
other person (whether of a legally binding nature or in the nature of informal
understandings) on a full-time or consulting basis which is not terminable on
notice without cost or other liability to the Company, except normal severance
arrangements and accrued vacation pay;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company or any Subsidiary (other than group insurance plans applicable to
employees generally);
(h) agreement relating to the borrowing of money or to the
mortgaging or pledging of, or other-
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wise placing a lien or security interest on, any asset of the Company or any
Subsidiary;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) agreement, or group of related agreements with the same
party or any group of affiliated parties, under which the Company or any
Subsidiary has advanced or agreed to advance money or has agreed to lease any
property as lessee or lessor, except for those leases involving less than
$50,000 individually or $250,000 in the aggregate;
(k) assignment, license, indemnification or other agreement with
respect to any form of intangible property;
(l) agreement under which it has granted any person any
registration rights, other than this Agreement;
(m) agreement under which it has limited or restricted its right
to compete with any person in any respect, except for certain restrictive
covenants in contracts with customers which prevent the Company from providing
services to the competitors of such customers (for confidentiality reasons),
and which restrictions do not materially adversely affect the Company and its
Subsidiaries, taken as a whole;
(n) other agreement or group of related agreements with the same
party involving more than $50,000 or continuing over a period of more than one
year from the date or dates thereof (including renewals or extensions optional
with another party), which agreement or group of agreements is not terminable
by the Company or any Subsidiary, as applicable, without penalty upon notice of
thirty (30) days or less, but excluding any agreement or group of agreements
with a customer of the Company for the sale, lease or rental of the Company's
products or services if such agreement or group of agreements was entered into
by the Company or any Subsidiary in the ordinary course of business; or
(o) other agreement, instrument, commitment, plan or
arrangement, a copy of which would be
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required to be filed with the SEC as an exhibit to a registration statement on
Form S-1 if the Company or any Subsidiary were registering securities under the
Securities Act.
To the Company's and each Subsidiary's knowledge, each party other
than the Company or any Subsidiary to all such agreements listed on Schedule
2.21 has in all material respects performed the obligations required to be
performed by such party to date. The Company and each Subsidiary has no
knowledge of any material breach or anticipated material breach by any other
party to any of such agreement, instrument, commitment, plan or arrangement
listed on Schedule 2.21.
Section 2.22 Loans and Advances. The Company and each Subsidiary does
not have any outstanding loans or advances to any person and is not obligated
to make any such loans or advances, except, in each case, for advances to
employees of the Company or any Subsidiary in respect of reimbursable business
expenses anticipated to be incurred by them in connection with their
performance of services for the Company or any Subsidiary.
Section 2.23 Employees; Officers. Set forth in Schedule 2.23 is a list
of the names of the executive officers and key employees of the Company and
each Subsidiary, together with the title or job classification of each such
person and the total compensation anticipated to be paid to each such person by
the Company and its Subsidiaries in 1996. Each of the executive officers and
each key employee employed by the Company and each Subsidiary has executed an
Employee Agreement substantially in the form of Exhibit B (in the case of
executive officers) or Exhibit C (in the case of key employees) (collectively,
the "Employee Agreements"), and such agreements are in full force and effect.
Each of the persons listed on Schedule 2.23 shall agree in their respective
Employee Agreement, to, among other things, dedicate substantially their full
working schedule to the Company or the Subsidiary, as applicable, and not to
pursue outside business activities during the Company's or any Subsidiary's
business hours, consistent with the Company's or such Subsidiary's personnel
policies, as they exist on the date hereof, until such person shall no longer
be employed by the Company or such Subsidiary. No executive officer or key
employee of the Company or any
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Subsidiary has advised the Company or any Subsidiary (orally or in writing)
that he or she intends to terminate employment with the Company and each
Subsidiary.
The Company and each Subsidiary has complied in all material respects
with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither the
Company, any Subsidiary nor any entity required to be aggregated with the
Company under Sections 414(b), (c), (m) or (n) of the Code sponsors, maintains,
has any obligation to contribute to, has any liability under, or is otherwise a
party to, any Benefit Plan. For purposes of this Agreement, "Benefit Plan"
shall mean any plan, fund, program, policy, arrangement or contract, whether
formal or informal, which is in the nature of (i) an employee pension benefit
plan (as defined in Section 3(2) of ERISA) or (ii) an employee welfare benefit
plan (as defined in Section 3(1) of ERISA).
Section 2.24 [Reserved]
Section 2.25 Environmental Protection. The Company and each Subsidiary
has not caused or allowed, or contracted with any party for, the generation,
use, transportation, treatment, storage or disposal of any Hazardous Substances
(as defined below) in connection with the operation of its business or
otherwise. The Company and each Subsidiary, the operation of their business,
and, to the knowledge of the Company and each Subsidiary any real property
that the Company or any Subsidiary leases or otherwise occupies or uses (the
"Premises") are in compliance with all applicable Environmental Laws (as
defined below) and orders or directives of any governmental authorities having
jurisdiction under such Environmental Laws, including, without limitation, any
Environmental Laws or orders or directives with respect to any cleanup or
remediation of any release or threat of release of Hazardous Substances. The
Company and each Subsidiary has not received any citation, directive, letter or
other communication, written or oral, or any notice of any proceeding, claim or
lawsuit, from any person arising out of the ownership or occupation of the
Premises, or the conduct of its operations, and the
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Company and each Subsidiary is not aware of any basis therefor. The Company and
each Subsidiary has obtained and is maintaining in full force and effect all
necessary permits, licenses and approvals required by all Environmental Laws
applicable to the Premises and the business operations conducted thereon
(including operations conducted by tenants on the Premises), and is in
compliance with all such permits, licenses and approvals. The Company and each
Subsidiary has not caused or allowed a release, or a threat of release, of any
Hazardous Substance unto, at or near the Premises, and, to the Company's and
each Subsidiary's knowledge, neither the Premises nor any property at or near
the Premises has ever been subject to a release, or a threat of release, of any
Hazardous Substance. For the purposes of this Agreement, the term
"Environmental Laws" shall mean any federal, state, local or foreign law,
ordinance or regulation pertaining to the protection of human health or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq., the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001,
et seq. and the Resource Conservation and Recovery Act, 42 U.S.C. Sections
6901, et seq. For purposes of this Agreement, the term "Hazardous Substances"
shall include oil and petroleum products, asbestos, polychlorinated biphenyls,
urea formaldehyde and any other materials classified as hazardous or toxic
under any Environmental Laws.
Section 2.26 Foreign Corrupt Practices Act. The Company and each
Subsidiary has not taken any action which would cause it to be in violation of
the Foreign Corrupt Practices Act of 1977, as amended, or any rules and
regulations thereunder. To the Company's and each Subsidiary's knowledge, there
is not now, and there has never been, any employment by the Company or any
Subsidiary of, or beneficial ownership in the Company or any Subsidiary by, any
governmental or political official in any country in the world.
Section 2.27 Federal Reserve Regulations. The Company is not engaged
in the business of extending credit for the purpose of purchasing or carrying
margin securities (within the meaning of Regulation G of the Board of Governors
of the Federal Reserve System), and no part of the proceeds of the Shares will
be used to pur-
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chase or carry any margin security or to extend credit to others for the
purpose of purchasing or carrying any margin security or in any other manner
which would involve a violation of any of the regulations of the Board of
Governors of the Federal Reserve System.
Section 2.28 Offering of the Shares. Except as set forth in Schedule
2.28, neither the Company, any Subsidiary nor any person authorized or employed
by the Company or any Subsidiary as agent, broker, dealer or otherwise in
connection with the offering or sale of the Shares or any security of the
Company similar to the Shares has offered the Shares or any such similar
security for sale to, or solicited any offer to buy the Shares or any such
similar security from, or otherwise approached or negotiated with respect
thereto with, any person or persons, and neither the Company, any Subsidiary
nor any person acting on their behalf has taken or will take any other action
(including, without limitation, any offer, issuance or sale of any security of
the Company under circumstances which might require the integration of such
security with the Shares under the Securities Act or the rules and regulations
of the Commission thereunder), in either case so as to subject the offering,
issuance or sale of the Shares, Conversion Shares or other securities into
which such Shares have been converted, to the registration provisions of the
Securities Act. Except as set forth in Schedule 2.28, the Company has no
contract, arrangement or understanding with any broker, finder or similar agent
with respect to the transactions contemplated by this Agreement.
Section 2.29 Returns. The Company and the Subsidiaries have not had
any of their products returned by the purchasers thereof, which returns
collectively taken together have had or would reasonably be expected to have a
material adverse effect on the business, affairs, financial condition,
properties or prospects of the Company and the Subsidiaries taken as a whole.
Section 2.30 Related-Party Transactions. Except as set forth in
Schedule 2.30 attached hereto, no employee, officer, director or stockholder of
the Company or any Subsidiary or member of his or her immediate family is
indebted to the Company or any Subsidiary, nor is the Company or any Subsidiary
indebted (or committed to make loans or extend or guarantee credit) to any of
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them. To the Company's and each Subsidiary's knowledge, none of such persons
has any direct or indirect ownership interest in any firm or corporation with
which the Company or any Subsidiary is affiliated or with which the Company or
any Subsidiary has a business relationship, or any firm or corporation that
competes with the Company or any Subsidiary, except that employees, officers,
directors or stockholders of the Company and the Subsidiaries and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company and the Subsidiaries. Except for the MARS Agreement
between the Company and Barbara and Jerome D. Mellinger, no member of the
immediate family of any employee, officer, director or stockholder of the
Company or any Subsidiary is directly or indirectly interested in any material
contract with the Company or any Subsidiary.
Section 2.31 Permits. The Company and each Subsidiary have all
franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which has had
or would reasonably be expected to have a material adverse effect on business,
affairs, financial condition, properties or prospects of the Company and its
Subsidiaries taken as a whole, and the Company and each Subsidiary believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as planned to be conducted. The Company and each
Subsidiary are not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
Section 2.32 Manufacturing and Marketing Rights. The Company and each
Subsidiary have not granted rights to manufacture, produce, assemble, license,
market, or sell its products to any other person and is not bound by any
agreement that affects the Company's or any Subsidiary's exclusive right to
develop, manufacture, assemble, distribute, market or sell its products.
Section 2.33 Registration Rights. Except for certain registration
rights granted to J.P. Morgan Ventures Corporation and its affiliates pursuant
to the Registration Rights Agreement, dated July 16, 1996, between TTSL and
J.P. Morgan Ventures Corporation, and as provided herein and in the Preferred
Stock Purchase Agreement, the Company has not granted or agreed to grant
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any registration rights, including piggyback rights, to any person or entity.
Section 2.34 Minute Books. The minute books of the Company and each
Subsidiary provided to the Investors contain a summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
ARTICLE III
Covenants of the Company
Section 3.1 Financial Statements, Reports, Etc.
(a) The Company shall furnish to each Investor, as soon as
available but in no case later than ninety (90) days after the end of each
fiscal year of the Company, a consolidated balance sheet of the Company and its
subsidiaries as of the end of such fiscal year and the related consolidated
statements of income, stockholders' equity and cash flows for the fiscal year
then ended, prepared in accordance with generally accepted accounting
principles and certified by a firm of independent public accountants of
recognized national standing selected by the Board of Directors of the Company;
provided, that if the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company
may satisfy its obligations under this Section 3.1(a) by providing to each
Investor a copy of the Company's Annual Report on Form 10-K or 10-KSB and any
proxy statement and other annual report to shareholders provided to other
shareholders of the Company, as applicable.
(b) The Company shall furnish to each Investor purchasing Units
with an original aggregate purchase price in excess of $1,000,000 who continues
to hold securities of the Company with an aggregate liquidation preference (if
applicable) or a fair market value in excess of $500,000 (each such Investor, a
"Qualifying Investor") as soon as available, but in no case later than:
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(i) forty-five (45) days after the end of each fiscal
quarter in each fiscal year (other than the last fiscal quarter in each fiscal
year), a consolidated balance sheet of the Company and its subsidiaries and the
related consolidated statements of income, stockholders' equity and cash flows,
unaudited but prepared in accordance with generally accepted accounting
principles and certified by the Chief Financial Officer of the Company, such
consolidated balance sheet to be as of the end of such fiscal quarter and such
consolidated statements of income, stockholders' equity and cash flows to be
for such fiscal quarter and for the period from the beginning of the fiscal
year to the end of such fiscal quarter, in each case with comparative
statements for the corresponding period of the prior fiscal year; provided,
that if the Company is subject to the reporting requirements of the Exchange
Act the Company may satisfy its obligations under this Section 3.1(b) by
providing each Qualifying Investor with a copy of the Company's quarterly
report on Form 10-Q or 10-QSB and any Form 8-K filed in such fiscal quarter, as
applicable.
(ii) thirty (30) days after the end of each month in each
fiscal year (other than after the last month in each fiscal year and the last
month in each fiscal quarter of each fiscal year), a consolidated balance sheet
of the Company and its subsidiaries and the related consolidated statements of
income, stockholders' equity and cash flows, unaudited but prepared in
accordance with generally accepted accounting principles and certified by the
Chief Financial Officer of the Company, such consolidated balance sheet to be
as of the end of such month and such consolidated statements of income,
stockholders' equity and cash flows to be for such month and for the period
from the beginning of the fiscal year to the end of such month, in each case
with comparative statements for the prior fiscal year, provided that the
Company's obligations under this Section 3.1(b) shall terminate upon the
completion of an Initial Public Offering as defined below).
For the purposes of this Agreement, the term "Initial Public
Offering" shall mean the Company's initial public offering of its Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), declared effective by the Securities and
Exchange Commission, in which the
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aggregate gross proceeds to the Company equal or exceed $25,000,000 (before
deducting underwriting discounts and commissions and offering expenses) at a
price per share of at least $131.24 (as appropriately adjusted for any stock
dividend, stock split or similar recapitalization event).
(c) Until the completion of an Initial Public Offering, as soon
as available but in no case later than 30 days prior to the start of each
fiscal year (except fiscal year 1997, for which such information shall be
delivered by February 1, 1997), the Company shall deliver to each Qualifying
Investor consolidated capital and operating expense budgets (including such
information, and variations from budget, with respect to the prior fiscal
year), cash flow projections and income and loss projections and a business
plan for the Company and its subsidiaries in respect of such fiscal year which
have been approved by the Company's Board of Directors, all itemized in
reasonable detail and prepared on a monthly basis, and, promptly after
preparation, any major revisions to any of the foregoing.
(d) Until the completion of an Initial Public Offering, the
Company shall furnish to each Qualifying Investor:
(i) promptly upon sending, making available or filing the
same, all press releases, reports and financial statements that the Company
sends or makes available to its stockholders or files with the SEC; and
(ii) promptly, from time to time, such other information
regarding the business, prospects, financial condition, operations, property or
affairs of the Company and its subsidiaries as such Qualifying Investor
reasonably may request.
All such financial statements, reports or other information (other
than publicly available information) provided to any Investor pursuant to this
Section 3.1 shall be deemed to be confidential information of the Company. Each
Investor agrees to use reasonable efforts to prevent the disclosure of such
confidential information to any other person (excluding its and its
subsidiaries' and affiliates' officers, employees, agents or counsel) except
(i) as may be necessary or desirable in
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connection with a request by a governmental agency, regulatory or supervisory
authority or court having or claiming jurisdiction over such Investor
including, without limitation, the National Association of Insurance
Commissioners, or as otherwise required by applicable law, (ii) information
obtained from a third party which is not subject to the provisions of any
confidentiality agreement in favor of the Company, (iii) in connection with the
enforcement of such Investor's rights hereunder or under the Certificate of
Incorporation and (iv) disclosure to other Investors.
Section 3.2 Properties, Business, Insurance. The Company shall
maintain and cause each of its subsidiaries to maintain as to their respective
properties and businesses, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
shall be deemed by the Company to be sufficient. The Company shall also
maintain in effect "key person" life insurance policies, payable to the
Company, on the lives of Douglas K. Mellinger and Srinivasan Viswanathan (so
long as each, respectively, remains an employee of the Company), in the amount
of $2,250,000 each, with the Company as beneficiary. The Company shall not
cause or permit any assignment or change in beneficiary and shall not borrow
against any such policy. If requested by Investors holding at least a majority
of the outstanding Shares the Company will add one designee of such Investors
as a notice party for each such policy and shall request that the issuer of
each policy provide such designee with ten (10) days' notice before such policy
is terminated (for failure to pay premiums or otherwise) or assigned or before
any change is made in the beneficiary thereof.
Section 3.3 Inspection, Consultation and Advice. Until the completion
of an Initial Public Offering, the Company shall permit and cause its
subsidiaries to permit each Qualifying Investor and such persons as it may
designate and reasonably acceptable to the Company, at such Qualifying
Investor's expense, to visit and inspect any of the properties of the Company
and its subsidiaries, examine their books and make copies and extracts
therefrom, discuss the affairs, finances and accounts of the Company and its
subsidiaries with their executive officers, key employees and public
accountants
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(and the Company hereby authorizes said accountants to discuss with such
Qualifying Investor and such designees such affairs, finances and accounts),
all at reasonable times and upon reasonable notice, and with due regard for the
Company's ongoing operations; provided, that the Investors shall have no right
to receive any confidential information from any customer of the Company or its
Subsidiaries; provided, further, that no information shall be supplied
hereunder to the extent that such information is subject to confidentiality
provisions in a given customer's contract with the Company. Any information or
documentation (other than publicly available information) provided to any such
Qualifying Investor or any such designee pursuant to this Section 3.3 shall be
deemed to be confidential information of the Company. Each Qualifying Investor
agrees to use reasonable efforts to prevent the disclosure of such confidential
information to any other person (excluding its and its subsidiaries' and
affiliates' officers, employees, agents or counsel) except (i) as may be
necessary or desirable in connection with a request by a governmental agency,
regulatory or supervisory authority or court having or claiming jurisdiction
over such Qualifying Investor including, without limitation, the National
Association of Insurance Commissioners, or as otherwise required by applicable
law, (ii) information obtained from a third party which is not subject to the
provisions of any confidentiality agreement in favor of the Company, (iii) in
connection with the enforcement of such Qualifying Investor's rights hereunder
or under the Certificate of Incorporation and (iv) disclosure to other
Qualifying Investors.
Section 3.4 Restrictive Agreements Prohibited. Neither the Company nor
its subsidiaries shall become a party to any agreement which by its terms
restricts the Company's performance of this Agreement or the Warrants as set
forth in the Warrant Certificate.
Section 3.5 Transactions with Affiliates. Except for the arrangements
between the Company and TTSL, and the transactions contemplated by this
Agreement or as otherwise approved by the Board of Directors, neither the
Company nor any of its subsidiaries shall enter into any transaction with any
director, officer, employee or holder of more than 5% of the outstanding
capital stock of any class or series of capital stock of the Company or any of
its subsidiaries, member of the family of any such
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person, or any corporation, partnership, trust or other entity in which any
such person, or member of the family of any such person, is a director,
officer, trustee, partner or holder of more than 5% of the outstanding capital
stock thereof, except for transactions on customary terms related to such
person's employment.
Section 3.6 Expenses of Directors. The Company shall promptly
reimburse in full each director of the Company if he or she is not an employee
of the Company for all of his or her reasonable out-of-pocket expenses incurred
in attending each meeting of the Board of Directors of the Company or any
Committee thereof.
Section 3.7 Board of Directors Meetings. The Company shall use its
best efforts to ensure that meetings of its Board of Directors are held at
least four times each year and at least once each quarter. The Company shall
provide to each Qualifying Investor copies of all notices, reports (including
all materials distributed at the meeting and in the board books), minutes and
consents at the time and in the manner as they are provided to the Board of
Directors or committee, except for information reasonably designated as
proprietary information by the Board of Directors. Any information or
documentation (other than publicly available information) provided to any such
Qualifying Investor pursuant to this Section 3.7 shall be deemed to be
confidential information of the Company. Each Qualifying Investor agrees to use
reasonable efforts to prevent the disclosure of such confidential information
to any other person (excluding its and its subsidiaries' and affiliates'
officers, employees, agents or counsel) except (i) as may be necessary or
desirable in connection with a request by a governmental agency, regulatory or
supervisory authority or court having or claiming jurisdiction over such
Qualifying Investor including, without limitation, the National Association of
Insurance Commissioners, or as otherwise required by applicable law, (ii)
information obtained from a third party which is not subject to the provisions
of any confidentiality agreement in favor of the Company, (iii) in connection
with the enforcement of such Qualifying Investor's rights hereunder or under
the Certificate of Incorporation and (iv) disclosure to other Qualifying
Investors.
Section 3.8 [RESERVED]
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Section 3.9 Performance of Contracts. The Company shall not amend,
modify, terminate, waive or otherwise alter, in whole or in part, any of the
Employee Agreements (as defined in Section 3.10 hereof) without the affirmative
vote of both of the Series A Board Members.
Section 3.10 Employee Agreements. The Company shall obtain, and shall
cause its Subsidiaries to obtain, an Employee Agreement in substantially the
form of Exhibit B or Exhibit C hereto, as applicable, from all future executive
officers and key employees of the Company or any of its Subsidiaries upon their
employment by the Company or any of such subsidiaries (the executive officer
and key employee Employee Agreements shall be collectively referred to herein
as the "Employee Agreements").
Section 3.11 Compliance with Laws. The Company shall comply, and use
its best efforts to cause each Subsidiary to comply, with all applicable laws,
rules, regulations and orders, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise.
Section 3.12 Keeping of Records and Books of Account. The Company
shall keep, and use its best efforts to cause its subsidiaries to keep,
adequate records and books of account, in which complete entries will be made
in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and such
subsidiary.
Section 3.13 Compensation and Audit Committees. The Company shall, by
amending its By-laws or otherwise, establish and maintain a Compensation
Committee and an Audit Committee of the Board of Directors, each of which shall
consist of three directors, two of whom (on each Committee) may be directors
elected solely by the holders of Common Stock or appointed by the members of
the Board of Directors (provided that one of such two committee members is not
an employee or Founder (as hereinafter defined) of the Company) and one of whom
(on each Committee) shall be a Series A Board Member (as provided by the
Preferred Stock Purchase Agreement). No additional employee stock option plan,
or employee stock purchase plan, employee restricted stock plan or other
employee stock plan shall be established without the
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approval of the Compensation Committee. The Audit Committee shall select
(subject to the approval of the Board of Directors) and provide instructions to
the Company's auditors.
Section 3.14 Corporate Existence. The Company shall maintain its
corporate existence, rights and franchises in full force and effect.
Section 3.15 Limitations of Certain Rights. For purposes of
determining the number of Units or Warrant Shares held by any Investor under
this Agreement, all affiliated holders of Units or Warrant Shares shall be
treated as if such affiliated holders were a single Investor; provided, that
each such group of affiliated holders of Units or Warrant Shares shall
designate a single representative who shall be granted authority to (i) receive
all notices and other information required to be provided to such Investors,
and (ii) exercise all rights of an Investor (or Qualifying Investor, as
applicable) on behalf of such group of affiliated holders. For the purposes of
this Section 3.15, "affiliates" shall include all mutual funds or other pooled
investment vehicles or entities under the control or management of any
Investor.
Section 3.16 Survival. Except for Sections 3.18, 3.20, 3.22 and 3.23
hereof, the covenants set forth in Article III of this Agreement, to the extent
applicable to an Investor, shall survive with respect to each Investor until
the date such Investor no longer holds securities of the Company with an
aggregate liquidation preference (if applicable) or a fair market value of at
least $1,000,000, except that Section 3.1 hereof shall survive until such
Investor no longer holds Units with an aggregate market value of at least
$500,000.
Section 3.17 Use of Proceeds. The proceeds of the sale of the Offering
shall be used for the purposes stated in the Memorandum including, without
limitation, marketing, expansion, product development, acquisitions and general
operations.
Section 3.18 Preemptive Rights. Subject to the terms and conditions
specified in this Section 3.18, each time the Company proposes to offer any
shares of, or securities convertible into, or exchangeable or exercis-
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able for shares, of its capital stock (whether newly issued or treasury stock),
the Company shall make an offering of such securities to each Investor in
accordance with the following provisions:
(a) The Company shall deliver a notice ("Notice") to each
Investor stating (i) its bona fide intention to offer such securities, (ii) the
number of such securities to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such securities.
(b) By written notification received by the Company, within
twenty (20) calendar days after giving of the Notice, each Investor (including
its affiliates) may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such securities which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Warrants then held, by such Investor bears to
the total number of shares of Common Stock of the Company then outstanding
(assuming full conversion of all convertible securities and the exercise of all
outstanding options, warrants or rights to purchase Common Stock or other
securities convertible into or exercisable for shares of Common Stock
exercisable as of the date of such Notice) ("Pro Rata Share"). The Company
shall promptly, in writing, inform each Investor and holder of Series A
Preferred Stock (a "Series A Holder") that purchases all of such securities
available to it (a "Fully-Exercising Investor") of any other Investor's or
Series A Holder's failure to do likewise. During the ten-day period following
delivery of such information, each Fully-Exercising Investor shall be entitled
to purchase that portion of such securities for which Investors were entitled
to subscribe but which were not subscribed by the Investors and Series A
Holders which is equal to the proportion that the number of shares of Common
Stock issued and held, or issuable upon conversion of the Warrants then held,
by such FullyExercising Investor bears to the total number of shares of Common
Stock then outstanding (assuming full conversion of all convertible securities
(including the Series A Preferred Stock)) and the exercise of all options,
warrants or rights to purchase Common Stock or other securities convertible
into or exercisable for shares of Common Stock) then held by all
Fully-Exercising Investors ("Pro-
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portional Share"). If any Investor or Series A Holder fails to purchase its Pro
Rata Share or Proportional Share, any affiliate of such Investor may purchase
the shares available to, but not purchased by, such Investor.
(c) If all securities referred to in the Notice which Investors
are entitled to obtain pursuant to Section 3.18(b) are not elected to be
obtained as provided in Section 3.18(b) hereof, the Company may, during the
sixty (60) day period following the expiration of the last notice provision
provided in Section 3.18(b) hereof, offer the remaining unsubscribed portion of
such securities to any person or persons at a price not less than, and upon
terms no more favorable to the offeree than those specified in the Notice. If
the Company does not enter into an agreement for the sale of such securities
within such period, or if such agreement is not consummated within sixty (60)
days of the execution thereof, the right provided hereunder shall be deemed to
be revived and such securities shall not be offered unless first re-offered to
the Investors in accordance herewith.
(d) The preemptive right in this Section 3.18 shall not be
applicable to:
(i) Shares of Common Stock issuable or issued to employees,
advisors, consultants or outside directors of the Company directly or pursuant
to a stock option plan or restricted stock plan approved by the Board of
Directors of the Company, the total number of such shares not to exceed 130,200
(appropriately adjusted for stock splits, stock dividends or similar
recapitalizations);
(ii) Common Stock, or securities convertible into, or
exchangeable or exercisable for shares of Common Stock, issued or issuable in
connection with bona fide research, licensing or corporate partnering
relationships, in connection with equipment lease financing, or in connection
with non-convertible debt financing with institutional lenders, in each case
approved by a majority of the Board of Directors of the Company including both
of the Series A Board Members; provided, that such issuances of Common Stock
are for other than primarily equity financing purposes;
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(iii) Common Stock issued or issuable upon conversion of
the Warrants or shares of Series A Preferred Stock;
(iv) Common Stock issued or issuable in connection with a
merger or consolidation as a result of which the holders of the Company's
outstanding securities immediately prior to the consummation of such
transaction hold voting securities in excess of fifty percent (50%) of the
voting power of the surviving or resulting entity; or
(v) Common Stock issued in an Initial Public Offering.
(e) No holder shall be entitled to exercise any preemptive
right provided for in this Section 3.18 after the effective date of the
registration statement filed with respect to the Company's Initial Public
Offering.
(f) The preemptive rights set forth in this Section 3.18 may be
assigned or transferred by an Investor to a transferee or assignee of any of
its shares of capital stock of the Company, provided such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
Section 3.19 Reservation of Common Stock. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, sufficient numbers of such duly authorized securities for the
purpose of effecting the conversion of the Warrants and otherwise complying
with the terms of this Agreement. If at any time the number of authorized but
unissued shares of such securities shall not be sufficient to effect the
conversion of the Warrants or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of such securities to
such number of shares as shall be sufficient for such purposes. The Company
will obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Warrants.
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Section 3.20 Co-Sale Rights. The Mellinger Group, L.L.C., Barbara
Mellinger and Jerome Mellinger shall be referred to as the "Founders." If any
Founder (a "Selling Founder") shall offer to sell any of the shares of Common
Stock held by it as of the date hereof or subsequently acquired to any third
party:
(a) Such Selling Founder shall deliver a notice (a "Sale Notice")
to each Investor stating (i) its bona fide intention to offer such Common
Stock, (ii) the number of shares of Common Stock to be offered, and (iii) the
price and terms, if any, upon which it proposes to offer such Common Stock.
(b) By written notification received by the Selling Founder
within twenty (20) calendar days after giving of the Sale Notice, each Investor
(including its affiliates) may elect to sell, at the price and on the terms
specified in the Sale Notice, up to that portion of such Common Stock which
equals the proportion that the number of shares of Common Stock issued and held
or issuable upon conversion of the Warrants then held by such Investor bears to
the total number of shares of Common Stock issued and held, or issuable upon
conversion of shares of Series A Preferred Stock or Warrants then held by the
Selling Founder and all other Investors and any Series A Holders electing to
participate in such sale.
The Selling Founders shall promptly, in writing, inform each Investor
and Series A Holder that sells all of such securities available to it (a
"Fully-Selling Investor") of any other Investor's or Series A Holder's failure
to do likewise. During the ten-day period following delivery of such
information, each Fully-Selling Investor shall be entitled to sell that portion
of such securities which Investors or Series A Holders were entitled to sell
but which were not sold by the Investors or Series A Holders which is equal to
the proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Shares then held, by such Fully-Selling
Investor bears to the total number of shares of Common Stock then outstanding
(assuming full conversion of all convertible securities (including the
Warrants) and the exercise of all options, warrants or rights to purchase
Common Stock or other securities convertible into or exercisable for shares of
Common Stock)
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then held by all Fully-Selling Investors ("Co-Sale Proportional Share"). If any
Investor fails to sell its Co-sale Proportional Share, any affiliate of such
Investor may sell the shares available to, but not sold by, such Investor.
(c) Each Investor electing to participate shall effect its
participation in the sale by promptly delivering to the Selling Founder for
transfer to the prospective investor one or more certificates, properly
endorsed for transfer, for Units which represent the number of shares of Common
Stock of the Company which such Investor elects to sell.
(d) The Common Stock and Warrant certificate or certificates
that the Investor delivers to the Selling Founder shall be converted into
shares of Common Stock pursuant to their terms and transferred to the
prospective purchaser in consummation of the sale of the Common Stock, pursuant
to the terms and conditions specified in the Sale Notice, and the Selling
Founder shall concurrently therewith remit to such Investor that portion of the
sale proceeds to which such Investor is entitled by reason of its participation
in such sale. To the extent that any prospective purchaser or transferee
prohibits such assignment or otherwise refuses to purchase shares or other
securities from an Investor exercising its rights of co-sale hereunder, the
Selling Founders shall not sell to such prospective purchaser or purchasers any
Common Stock unless and until, simultaneously with such sale, the Selling
Founder shall purchase an equivalent number of such Units or other securities
from such Investor.
(e) After the expiration of the notice period provided in
paragraph (b) hereof, the Selling Founder may, not later than sixty (60) days
following the expiration of the notice period provided in paragraph (b) hereof,
enter into an agreement providing for the closing of the sale or transfer of
the Common Stock (including shares of Common Stock of Investors or Series A
Holder electing to participate in such sale) covered by the Sale Notice within
thirty (30) days of such agreement on terms and conditions not more favorable
to the Selling Founder than those described in the Sale Notice. Any proposed
transfer on terms and conditions more favorable to the Selling Founder than
those described in the Sale Notice,
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as well as any subsequent proposed transfer of any of the Common Stock by the
Selling Founder, shall again be subject to the Co-Sale Rights of the Investors
and shall require compliance by the Selling Founder with the procedures
described in this Section 3.20.
(f) In the event any Founder should sell any Common Stock in
contravention of the participation rights of the Investors under this Agreement
(a "Prohibited Transfer"), the Investors, in addition to such other remedies as
may be available at law, in equity or hereunder, shall have the put option
provided in Section 3.20(f)(i) below, and such Founder shall be bound by the
applicable provisions of such put option.
(i) In the event of a Prohibited Transfer, each Investor shall
have the right to sell to such Founder, and such Founder shall have the
obligation to purchase, a number of Units which upon conversion equals the
number of shares of Common Stock equal to the number of Units that such
Investor would have been entitled to transfer to the purchaser in the
Prohibited Transfer pursuant to the terms hereof. Such sale shall be made on
the following terms and conditions:
(A) The price per share of Common Stock at which the shares are
to be sold to such Founder shall be equal to the price per share paid by
the purchaser to such Founder in the Prohibited Transfer. Such Founder
shall also reimburse each Investor for reasonable fees and expenses,
including legal fees and expenses, incurred pursuant to the exercise or the
attempted exercise of the Investor's rights under this Section 3.20.
(B) Within a period of thirty (30) days after the later of the
dates on which any Investor (i) receives notice from a Founder of the
Prohibited Transfer or (ii) otherwise becomes aware of the Prohibited
Transfer, that Investor shall, if exercising the put option created hereby,
deliver to such Founder the certificate or certificates representing shares
of Common Stock to be sold, each certificate to be properly endorsed for
transfer.
(C) Such Founder shall, immediately upon receipt of the
certificate or certificates for the
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shares to be sold by a Investor pursuant to Section 3.20
(f)(i)(B), pay to the order of that Investor the aggregate purchase price
therefor and the reasonable amount of any fees and expenses reimbursable
under Section 3.20(f)(i)(A) (each in immediately available funds).
(D) Notwithstanding the foregoing, any attempt to transfer shares
of the Company in violation of Section 3.20 hereof shall be void, and the
Company agrees it will not effect such a transfer nor will it treat any
alleged transferee as the holder of such shares without the written consent
of Investors having the right to amend this Agreement as provided below.
(g) Notwithstanding the foregoing, the provisions of this Section
3.20 shall not apply to (i) a sale or sales, or other transfer or transfers, in
one or more transactions, by a Founder of up to an aggregate of five percent
(5%) of the shares of Common Stock held on the date hereof, or issuable upon
the exercise of any options held on the date hereof, by such Founder, and (ii)
the sale by Jerome Mellinger of 56,189 shares of Common Stock to the Company on
the date hereof.
(h) The Co-Sale Rights set forth in this Section 3.20 may be
assigned and transferred by an Investor to a transferee or assignee of any of
its shares of capital stock of the Company, provided such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
(i) The Co-Sale Rights set forth in this Section 3.20 shall
terminate upon the closing of an Initial Public Offering.
(j) Notwithstanding the provisions of this Section 3.20, Jerome
Mellinger shall be permitted to sell up to 6,381 shares of Common Stock without
complying with this Section 3.20.
Section 3.21 Increase in Expenses. The approval of a majority of the
non-employee directors of the Company will be necessary for any increase in the
level of operating expenses to be made by the Company in excess of ten percent
(10%) of the aggregate operating expenses
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set forth in the budgets provided to Qualifying Investors pursuant to Section
3.1(c) hereof.
Section 3.22 Use of Name and Management Responsibility. The Company
shall not use or reference the name of any Investor in any publicly available
document or communication, including but not limited to any press release,
without the prior written approval of such Investor. The Company acknowledges
that each Investor has no responsibility for managing the Company.
Section 3.23 Right of First Offer From Founders. Subject to the terms
and conditions specified in this Section 3.23, each Founder hereby grants to
each Investor a right of first offer with respect to future sales or transfers
by such Founder of his Additional Shares (as hereinafter defined).
Each time a Founder proposes to sell or transfer any shares of his
capital stock of the Company ("Additional Shares"), such Founder (a
"Transferring Founder") shall first make an offering of such Additional Shares
to each Investor in accordance with the following provisions:
(a) The Transferring Founder shall deliver a written notice (an
"ROF Notice") to the Investors stating (i) his bona fide intention to sell or
transfer such Additional Shares, (ii) the number of such Additional Shares to
be sold or transferred, and (iii) the price and terms, if any, upon which he
proposes to sell or transfer such Additional Shares.
(b) Within 20 calendar days after receipt of the ROF Notice, each
Investor may elect to purchase or obtain, at the price and on the terms
specified in the ROF Notice, up to that portion of such Additional Shares which
equals the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion of the Warrants then held, by such Investor
bears to the total number of shares of Common Stock of the Company then held by
all Investors and Series A Holders (assuming full conversion of all convertible
securities and exercise of all exercisable securities). The Transferring
Founder shall promptly, in writing, inform each Investor and Series A Holder
that purchases all of such shares available to it (a "Fully-Participating
Investor") of any
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other Investor's or Series A Holder's failure to do likewise. During the
ten-day period following delivery of such information, each Fully-Participating
Investor shall be entitled to purchase that portion of such Additional Shares
for which Investors or Series A Holders were entitled to subscribe but which
were not subscribed by the Investors or Series A Holders which is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Warrants then held, by such Fully-Participating
Investor bears to the total number of shares of Common Stock then outstanding
(assuming full conversion of all convertible securities (including the
Warrants) and the exercise of all options, warrants or rights to purchase
Common Stock or other securities convertible into or exercisable for shares of
Common Stock) then held by all Fully-Participating Investors.
(c) If all Additional Shares which Investors are entitled to
obtain pursuant to subsection 3.23(b) are not elected to be obtained as
provided in subsection 3.23(b) hereof, the Transferring Founder may, during the
60-day period following the expiration of the period provided in subsection
3.23(b) hereof, offer the remaining unsubscribed portion of such Additional
Shares to any person or persons at a price not less than, and upon terms no
more favorable to the offeree or transferee than those specified in the ROF
Notice. If the Transferring Founder does not enter into an agreement for the
sale of the Additional Shares within such period, or if such agreement is not
consummated within 60 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Additional Shares shall not be
sold or transferred unless first reoffered to the Investors in accordance
herewith.
(d) No Founder may sell or transfer any of his capital stock of
the Company without first complying with the right of first offer provisions of
this Section 3.23.
(e) The right of first offer in this Section 3.23 shall expire
upon an Initial Public Offering.
(f) The right of first offer set forth in this Section 3.23 may
be assigned or transferred by an Investor to a transferee or assignee of any of
its shares
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of capital stock of the Company, provided such transferee or assignee agrees in
writing to be bound by and subject to the terms and conditions of this
Agreement.
(g) Notwithstanding the provisions of this Section 3.23, Jerome
Mellinger shall be permitted to sell up to 6,381 shares of Common Stock without
complying with this Section 3.23.
Section 3.24 Board Size. The Company hereby covenants and agrees that
the number of directors which shall comprise the Company's Board of Directors
shall not exceed nine (9) directors.
ARTICLE IV
Representations, Warranties and Covenants
of the Investors
Each of the following representations, warranties and covenants is
made by each Investor severally (as to itself) and not jointly.
Section 4.1 Authorization. Each Investor represents and warrants that
this Agreement when executed shall constitute its valid and legally binding
obligation, enforceable in accordance with its terms except as enforceability
thereof may be limited by bankruptcy, insolvency, reorganization or moratorium
or other similar laws relating to the enforcement of creditors' rights
generally and by general equitable principles.
Section 4.2 Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Units and any Warrant Shares to be received by such
Investor hereunder and pursuant to the Warrants (collectively, the
"Securities"), will be acquired for investment for such Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that such Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, each Investor further represents that such Investor does not
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have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities. Each Investor represents that it has
full power and authority to enter into this Agreement.
Section 4.3 Disclosure of Information. Each Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the sale of the Warrants
and Common Stock (and the Units comprised of such Warrants and shares of Common
Stock).
Section 4.4 Restricted Securities. Each Investor understands that the
Units are characterized as "restricted securities" under the federal securities
laws inasmuch as such securities are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act, only in certain limited circumstances.
Section 4.5 Further Limitations on Disposition. Without in any way
limiting the representations set forth in Section 4.4 above, each Investor
further agrees not to make any disposition of all or any portion of the Units
being purchased hereunder (or any Securities issuable upon the exercise and/or
conversion thereof) unless:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with a satisfactory opinion of counsel (which counsel may be in-house
counsel to the Investor), that such disposition will not require registration
of the Securities under the Securities Act (iii) the transferee has agreed in
writing for the benefit of the Company to be bound by this Section 4.5,
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provided and to the extent such section is then applicable and (iv) such
Investor shall have complied with Section 4.10 hereof. Notwithstanding the
foregoing, the requirements of this paragraph (b) shall not be applicable to
sales of Units or Securities made pursuant to Rule 144 under the Securities
Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement, notice to the Company or opinion of
counsel shall be necessary for (i) a transfer by an Investor which is a
partnership to an affiliate or partner of such partnership or a retired partner
of such partnership who retires after the date hereof, or to the estate of any
such partner or retired partner or the transfer by gift, will or intestate
succession of any partner to his spouse or to the siblings, lineal descendants
or ancestors of such partner or his spouse, or (ii) a transfer by an Investor
which is a corporation to any corporate entities who are controlling,
controlled by or under common control with such Investor, or (iii) a transfer
by an Investor which is trust to a grantor of such trust or a nominee thereof;
provided, in any such case, that the transferee agrees in writing to be subject
to the terms hereof to the same extent as if he were an original Investor
hereunder.
Section 4.6 Legends. It is understood that the certificates evidencing
the Securities may bear a legend substantially similar to the following:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED
UNDER SUCH ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE
SECURITIES LAWS."
Section 4.7 Accredited Investor. Each Investor is an Accredited
Investor within the definition set forth in Rule 501(a) under the Securities
Act.
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Section 4.8 [RESERVED]
Section 4.9 No Sales to Competitors. Prior to an Initial Public
Offering, each Investor covenants not to sell any Units or Warrant Shares or
other securities of the Company to any competitor of the Company; provided,
that no bank, investment bank, insurance company, mutual fund or other pooled
investment vehicle shall be considered a competitor of the Company hereunder.
Section 4.10 Notification on Investor Sales of Securities.
Prior to an Initial Public Offering, if any Investor shall offer to sell any of
the Securities held by it to any third party, each such Investor agrees to
notify the Company before any such sale and to inform the Company of the
proposed purchaser of such Securities.
ARTICLE V
Conditions of Each Investor's
Obligations at Closing
The obligations of each Investor under Section 1.1 of this Agreement
are subject to the fulfillment on or before the Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent in writing thereto:
Section 5.1 Representations and Warranties. The representations and
warranties made by the Company in Article II hereof shall be true and correct
in all material respects when made and shall be true and correct in all
material respects on the date of the Closing, except that the number of issued
and outstanding shares of the Company's capital stock may be affected pursuant
to (A) sales of Warrants and Common Stock pursuant to this Agreement or shares
of Series A Preferred Stock pursuant to the Preferred Stock Purchase Agreement
or (B) any conversion of the Warrants or shares of Series A Preferred Stock.
Section 5.2 Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to each Investor at the Closing a certificate certifying
that the conditions specified in Section 5.1 have been fulfilled and that there
has been no material adverse change in the business, affairs, prospects,
operations, properties, as-
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sets, or financial condition of the Company and its Subsidiaries taken as a
whole since the date of the audited Financial Statements.
Section 5.3 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors and their counsel and such counsel shall have
received all such counterpart original and certified or other copies of such
documents as the Investors may reasonably request, including but not limited to
a copy of this Agreement executed by the Company.
Section 5.4 Opinion of Company Counsel. Each Investor shall have
received from Skadden, Arps, Slate, Meagher & Flom, counsel for the Company, an
opinion, dated as of the Closing, in form and substance satisfactory to the
Investors in substantially the form of Exhibit D attached hereto.
Section 5.5 Performance. The Company shall have performed and complied
with all agreements contained herein required to be performed or complied with
by it prior to or at the Closing, and the Chief Executive Officer of the
Company shall have certified to the Investors in writing to such effect and to
the further effect that all of the conditions set forth in this Article V have
been satisfied.
Section 5.6 Purchase by Other Investors. Each Investor shall have
purchased and paid for the Units being purchased by it on the date of the
Closing.
Section 5.7 Supporting Documents. The Investors and their counsel
shall have received copies of the following documents at or prior to the
Closing:
(i) (A) the Certificate of Incorporation and Certificate of
Amendment, certified as of a recent date by the Secretary of State of the State
of Delaware and (B) a certificate of said Secretary dated as of a recent date
as to the due incorporation and good standing of the Company, the payment of
all excise taxes by the Company;
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(ii) a certificate of the Secretary or an Assistant Secretary of
the Company dated the date of the Closing and certifying: (A) that attached
thereto is a true and complete copy of the By-laws of the Company as in effect
on the date of such certification; (B) that attached thereto is a true and
complete copy of all resolutions adopted by the Board of Directors or the
stockholders of the Company authorizing the execution, delivery and performance
of this Agreement, the issuance, sale and delivery of the Warrants, the
reservation of the Warrant Shares, the issuance and delivery of the Warrant
Shares upon conversion of the Warrants, and that all such resolutions are in
full force and effect and are all the resolutions adopted in connection with
the transactions contemplated by this Agreement; (C) that the Certificate of
Incorporation has not been amended since the date of the last amendment
referred to in the certificate delivered pursuant to clause (i)(B) above; and
(D) to the incumbency and specimen signature of each officer of the Company
executing this Agreement, the certificates representing the Warrants and any
certificate or instrument furnished pursuant hereto, and a certification by
another officer of the Company as to the incumbency and signature of the
officer signing the certificate referred to in this clause (ii); and
(iii) such additional supporting documents and other information
with respect to the operations and affairs of the Company as the Investors or
their counsel reasonably may request.
Section 5.8 Certificate of Incorporation. The Certificate of
Incorporation shall read in its entirety as set forth in Exhibit A.
Section 5.9 Employee Agreements. Copies of the Employee Agreements
shall have been delivered to counsel for the Investors.
ARTICLE VI
Conditions of the Company's Obligations at Closing
The obligations of the Company to each Investor under this Agreement
are subject to the delivery on or
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before the Closing of the purchase price to be paid by such Investor specified
in Section 1.1.
ARTICLE VII
Registration Rights
Section 7.1 Definitions. For purposes of this Article VII:
(a) The terms "register", "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registered Securities" means any Registrable
Securities which have been included in an effective Registration Statement
pursuant to the terms hereof;
(c) The term "Registrable Securities" means the Common Stock (i)
held by the Founders and Management as of the Closing, (ii) into which any
shares of Series A Preferred Stock or Warrants shall have been (or can be)
converted, (iii) for which any warrants or options issued (or issuable) by the
Company to Founders, Management or Investors have been or can be exercised and
(iv) acquired by an Investor or Series A Holder through any other means after
the date hereof; provided, that, Registrable Securities shall not include any
Registrable Securities, securities convertible into Registrable Securities or
securities exercisable for securities convertible into Registrable Securities
sold by a person in a transaction in which his rights under this Agreement are
not assigned and the purchaser thereof has not assumed the obligations of an
Investor hereunder in accordance with Section 7.13 hereof; provided, however,
that as to any particular security or securities that are contained in
Registrable Securities, such securities shall cease to be Registrable
Securities when (i) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement or (ii) such
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securities shall have been sold to the public pursuant to Rule 144;
(d) The number of shares of "Registrable Securities Then
Outstanding" shall be equal to the total of (i) the number of shares of Common
Stock which has been issued, or which shall be issued, pursuant to this
Agreement, and (ii) the number of shares of Common Stock issued (or issuable)
upon conversion of any shares of Series A Preferred Stock or Warrants;
provided, however, that in each case such shares are Registrable Securities (or
would be if issued);
(e) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 7.13 hereof; and
(f) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any registration form under the Securities
Act subsequently adopted by the Securities and Exchange Commission ("SEC")
which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(g) The term "Management" means the individuals set forth on
Schedule 2.23 hereof.
Section 7.2 Demand for Registration.
(a) If the Company shall receive, at any time after a date six
(6) months after the effective date of a registration statement for the Initial
Public Offering, a written request from either (i) the Management of the
Company (a "Management Demand Registration"), or (ii) the Holders of
thirty-three percent (33%) of the Registrable Securities Then Outstanding (an
"Investor Demand Registration") that the Company file a registration statement
under the Securities Act covering the registration of the shares of Registrable
Securities that are the subject of such request (a "Demand Registration"), then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders of Registrable Securities and shall,
subject to the limitations of Sections 7.2(d) and (e), use its best efforts to
effect as soon as practicable the registration
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under the Securities Act in accordance with Section 7.4 hereof of all
Registrable Securities which all of the Holders request be registered within
forty-five (45) days after the mailing of such notice by the Company in
accordance with Section 8.6. Management Holders shall have piggy-back
registration rights with respect to any Investor Demand Registration, and
non-Management Holders shall have piggy-back registration rights with respect
to any Management Demand Registration, in each case subject to the provisions
of paragraph (b), below.
(b) If such Holders initiating a Demand Registration (the
"Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 7.2, and the Company
shall include such information in the written notice referred to in Section
7.2(a). In such event, the right of any Holder to include his securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's securities in the underwriting
to the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company as
provided in Section 7.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 7.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, then the Initiating Holders shall so advise all
Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares of such securities that may be
included in the underwriting shall be allocated (x) first among all of the
respective Holders thereof who requested the Demand Registration, including the
Initiating Holders, whose shares are to be included in such registration by a
pro rata allocation, and then (y) among any other persons, if any, exercising
piggy-back rights (including Management, in the case of an Investor Demand
Registration, or non-Management Holders, in the case of a Management Demand
Registration, as the case may be) by a pro rata allocation.
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(c) The Company shall be obligated to effect only two (2)
Investor Demand Registrations under this Section 7.2, and only one (1)
Management Demand Registration under this Section 7.2. For the purposes of this
paragraph (c), the exercise of piggy-back registration rights by Management
with respect to an Investor Demand Registration shall not constitute a
Management Demand Registration, and the exercise of piggy-back registration
rights by non-Management Holders with respect to a Management Demand
Registration shall not constitute an Investor Demand Registration.
(d) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the Chief Executive Officer
of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right with respect to
a Demand Registration more than once in any twelve (12) month period.
(e) Notwithstanding the foregoing provisions of this Section
7.2, if at the time of any request by the Initiating Holders under this Section
7.2, the Company has fixed plans to file within sixty (60) days after such
request for the sale of any of its securities in a public offering under the
Securities Act, no registration of the Initiating Holders' securities shall be
initiated under this Section 7.2 until one hundred eighty (180) days after the
effective date of such registration unless the Company is no longer proceeding
diligently to effect such registration; provided that the Company shall provide
the Holders of Registrable Securities the right to participate in such public
offering pursuant to, and subject to, Section 7.3 hereof.
(f) A registration request pursuant to this Section 7.2 may be
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities Then Outstanding to be registered thereunder, subject to
the provisions of Section 7.6 hereof.
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Section 7.3 Company Registration. If at any time after the Initial
Public Offering (but without any obligation to do so), the Company proposes to
register (including for this purpose a registration effected by the Company for
stockholders other than the Holders of Registrable Securities) any of its stock
or other securities under the Securities Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely to the sale of securities to participants in a Company stock plan, or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder of Registrable Securities written notice of
such registration. Upon the written request of any Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with
Section 8.6, the Company shall use its best efforts, subject to the provisions
of Section 7.8, to cause to be registered under the Securities Act all of the
Registrable Securities that such Holder has requested to be registered (a
"Piggy Back Registration"); provided, that the Company shall have the right to
postpone or withdraw any registration effected pursuant to this Section 7.3
without obligation to any Holder.
Section 7.4 Obligations of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously and reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred eighty (180) days;
provided, however, that such 180-day period shall be extended for a period of
time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of the Company.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement
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and the prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement.
(c) Furnish to the Holders of Registered Securities such numbers
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of Registered
Securities owned by them.
(d) Use its best efforts to register and qualify the Registered
Securities under such other securities or Blue Sky laws of such jurisdictions
as shall be reasonably requested by the Holders thereof, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder of
Registrable Securities participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registered Securities covered by such
registration statement in the event the Company has delivered preliminary or
final prospectuses to any such Holder and, after having done so, such
prospectus is amended to comply with the requirements of the Securities Act.
Upon such notification, such Holders shall immediately cease making offers of
Registered Securities and return all prospectuses to the Company. The Company
shall promptly provide such Holders with revised prospectuses and, following
receipt of the revised prospectuses, such Holders shall be free to resume
making offers of the Registered Securities.
(g) Furnish, at the request of any Holder requesting registration
of Registrable Securities pursuant to this Agreement, on the date that such
Registrable
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Securities are delivered to the underwriters for sale in connection with a
registration pursuant to this Agreement, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders of such
Registered Securities and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
to the Holders of such Registered Securities.
(h) Use its best efforts to list the Registrable Securities
covered by such registration statement with any securities exchange on which
the Common Stock of the Company is then listed.
(i) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration.
Section 7.5 Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Agreement
with respect to the Registrable Securities of any selling Holder (the "Selling
Holder") that such Selling Holder shall furnish to the Company such information
regarding itself, the Registrable Securities held by it, and the intended
method of disposition of such securities as shall be required to effect the
registration of such Selling Holder's Registrable Securities.
Section 7.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions, which discounts and commissions shall
be paid by the Selling Holders on a pro rata basis according to the amount of
Registrable Securities sold by each Selling Holder, incurred in connection with
registrations, filings or qualifications
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pursuant to Section 7.2, including (without limitation) all registration,
filing and qualification fees, printing and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel for the Selling Holders shall be borne by the
Company; provided, however, that the Company shall not be required to pay for
any expenses of any registration proceeding begun pursuant to Section 7.2 if
the registration request is subsequently withdrawn at the request of the
Holders of a majority of the Registrable Securities Then Outstanding to be
registered thereunder (in which case all Initiating Holders shall bear such
expenses), unless the Holders of a majority of the Registrable Securities Then
Outstanding to be registered thereunder agree to forfeit their right to one
Demand Registration; provided further, however, that if at the time of such
withdrawal, such Holders have learned of a material adverse change in the
condition or business of the Company from that known to such Holders at the
time of their request and have withdrawn the request with reasonable promptness
following disclosure by the Company of such material adverse change, then such
Holders shall not be required to pay any of such expenses and shall retain
their rights pursuant to Subsection 7.2(a).
Section 7.7 Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with all registration, filing or
qualification of Registrable Securities with respect to all Piggy-Back
Registrations pursuant to Section 7.3 for each Holder (which right may be
assigned as provided in Section 7.13), including (without limitation) all
registration, filing, and qualification fees, printing and accounting fees
relating or apportionable thereto, and the fees and disbursements of one
counsel for the Selling Holders of Registered Securities (provided that the
fees of such counsel shall not exceed $10,000), but excluding underwriting
discounts and commissions relating to Registered Securities, which shall be
paid by the Selling Holders on a pro rata basis according to the amount of
Registrable Securities sold by each Selling Holder.
Section 7.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 7.3 to include any of such Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between
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the Company and the underwriters selected by it (or by other persons entitled
to select the underwriters), and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling stockholders according to the total amount of securities
entitled to be included therein owned by each selling stockholder or in such
other proportions as shall mutually be agreed to by such selling stockholders),
but in no event shall (i) the amount of Registrable Securities of the Selling
Holders included in the offering be reduced below thirty-three and one-third
percent (33 1/3%) of the total amount of the selling stockholder securities
included in such offering or (ii) notwithstanding (i) above, any shares being
sold by a stockholder exercising a demand registration right under Section 7.2
be excluded from such offering except in accordance with Section 7.2.
Section 7.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
Section 7.10 Indemnification. In the event any Registrable Securities
are included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Selling Holder of Registered Securities and such Selling
Holder's officers and directors, any underwriter (as defined in the Securities
Act) for such Selling Holder and each person, if any, who controls such Selling
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act (each, an "Indemnitee"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become
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subject under the Securities Act, or the Exchange Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, or the Exchange Act or any state
securities law; and the Company will pay to each such Indemnitee any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section 7.10(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Indemnitee. Notwithstanding the above, the foregoing indemnity agreement is
subject to the condition that, insofar as it relates to any such untrue
statement, alleged untrue statement, omission or alleged omission made in a
preliminary prospectus, such indemnity agreement shall not inure to the benefit
of any Holder if a copy of the final prospectus was not furnished to the person
asserting the loss, liability, claim or damage at or prior to the time such
action is required by the Securities Act if the final prospectus corrected the
untrue statement or omission or alleged untrue statement or omission and was
(i) provided to the Holder, and (ii) such Holder was required by applicable law
to deliver such prospectus.
(b) To the extent permitted by law, each Selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed
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the registration statement, each person, if any, who controls the Company
within the meaning of the Securities Act, any underwriter, any other Selling
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Selling Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, or the Exchange
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration; and each such Selling Holder will pay any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
Section 7.10(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 7.10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Selling Holder, which consent
shall not be unreasonably withheld; further provided, that, in no event shall
any indemnity under this Section 7.10(b) exceed the gross proceeds (excluding
underwriting discounts and commissions) from the offering received by such
Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 7.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 7.10,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate, in the reasonable judgment
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of the indemnified party, due to actual or potential differing interests
between such indemnified party and any other party represented by such counsel
in such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7.10 to the extent of such prejudice, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 7.10.
(d) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 7(a) or
7(b) but it is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case, even though
this Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Securities Act,
the Exchange Act, or otherwise, then the Company (including for this purpose
any contribution made by or on behalf of any officer, director, employee, agent
or counsel of the Company, or any controlling person of the Company), on the
one hand, and the Holders (including for this purpose any contribution by or on
behalf of an indemnified party), on the other hand, shall contribute to the
losses, liabilities, claims, damages, and expenses to which any of them may be
subject, in such proportions as are appropriate to reflect the relative fault
of the Company and the Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses shall also be
considered.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by the Holders, and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement, alleged statement, omission, or alleged
omission. The Company and Holders agree that it would be unjust and inequitable
if the respective obligations of the Company and the Holders for contribution
were determined by pro rata or per capital allocation of the aggregate losses,
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liabilities, claims, damages, and expenses or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
7.10(d). No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 7.10(d), each person, if any, who controls a Holder within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act and each officer, director, stockholder, employee, agent, and counsel of
the Holders, shall have the same rights of contribution as the Holder, and each
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act and each officer,
director, employee, agent, and counsel of the Company, shall have the same
rights to contribution as the Company, subject in each case to the provisions
of this Section 7.10(d). Anything in this Section 7.10(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 7.10(d) is intended to supersede any right to contribution under the
Securities Act, the Exchange Act, or otherwise.
(e) The obligations of the Company and Selling Holders under this
Section 7.10 shall survive the completion of any offering of Registered
Securities under this Agreement, and otherwise.
Section 7.11 Reports Under Securities Exchange Act of 1934. With a
view to making available to the Holders of Registrable Securities the benefits
of Rule 144 and any other rule or regulation of the SEC that may at any time
permit a Holder thereof to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to
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utilize Form S-3 for the sale of their Registrable Securities, such action to
be taken as soon as practicable after the end of the fiscal year in which the
first registration statement filed by the Company for the offering of its
securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at
any time after ninety (90) days after the effective date of the registration
statement filed by the Company under the Exchange Act), the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or regulation
of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
Section 7.12 Form S-3 Registration. If at any time after a date twelve
(12) months after the effective date of the Initial Public Offering, the
Company shall receive a written request from the Holders of thirty-three
percent (33%) of the Registrable Securities Then Outstanding that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such
Holders, the Company will:
(a) promptly mail written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Secu-
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rities as are specified in such request, together with all or such portion of
the Registrable Securities of any other Holder or Holders joining in such
request as are specified in a written request received by the Company within
twenty (20) days after the mailing of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 7.12: (i)
if Form S-3 (or a similar successor form) is not available for such offering by
the requesting Holders; (ii) if the requesting Holders, together with the
Holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public (net of any underwriters discounts
or commissions) of less than $1,000,000; (iii) if the Company shall furnish to
the Holders a certificate signed by the Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 Registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than ninety (90) days after receipt of the
request of the Holder or Holders under this Section 7.12; provided, however,
that the Company shall not utilize this right more than once in any twelve (12)
month period; (iv) if the Company has, within the six (6) month period
preceding the date of such request, already effected one registration on Form
S-3 for Holders of Registrable Securities pursuant to this Section 7.12; (v) in
any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance; or (vi) if the
requesting Holder or Holders receive an opinion from counsel to the Company
that registration of such Holder's or Holders' Registrable Securities is not
required under the Securities Act in order to effect the sale or other
distribution contemplated by such Holder or Holders.
(c) The Company shall be obligated to effect only three (3)
registrations pursuant to this Section 7.12.
(d) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practi-
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cable after receipt of the request or requests of the Holders. All expenses
incurred in connection with such registrations requested pursuant to Section
7.12, including (without limitation) all registration, filing, qualification,
printing and accounting fees and the reasonable fees and disbursements of one
counsel for the Selling Holder or Selling Holders and counsel for the Company,
but excluding any underwriters' discounts or commissions associated with
Registered Securities, shall be borne by the Company. Registrations effected
pursuant to this Section 7.12 shall not be counted as demands for registration
pursuant to Section 7.2 or registrations effected pursuant to Section 7.3.
Section 7.13 Assignment of Registration Rights. The rights to cause
the Company to register Registrable Securities pursuant to this Agreement may
be assigned (but only with all related obligations) by a Holder to a trans-
feree or assignee of such Registrable Securities, provided: (i) such assignment
shall not be effective until the Company is furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; (ii) such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act; (iii) such transferee or assignee shall as
a condition to such transfer, deliver to the Company a written instrument by
which such transferee agrees to be bound by the obligations imposed upon
Holders of Registrable Securities pursuant to this Agreement; (iv) any such
transferee or assignee may not again transfer such rights to any other person
or entity, other than as provided in this Section 7.13; and (v) such transfer
of Registrable Securities is in compliance with applicable federal and state
securities laws.
Section 7.14 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of 66% of the Registrable Securities Then
Outstanding, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under this
Agreement, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such
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registration only to the extent that the inclusion of his securities will not
reduce the amount of the Registrable Securities of the Holders which is
included, or (b) to make a demand registration which could result in such
registration statement being declared effective within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section
7.2.
Section 7.15 Amendment of Registration Rights. Any provision of this
Article VII may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Company and the Holders of
66% of the Registrable Securities Then Outstanding. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each Holder of
any Registrable Securities then outstanding, each future Holder of all such
Registrable Securities and the Company.
Section 7.16 Termination of Registration Rights. No Holder shall be
entitled to exercise any right provided for in this Section 7 after seven (7)
years following the consummation of an Initial Public Offering.
ARTICLE VIII
Miscellaneous
Section 8.1 Survival of Warranties. The warranties, representations
and covenants of the Company and the Investors contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
Section 8.2 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including permitted transferees of any of the Units or Warrant Shares issued
hereunder or upon exercise of any options). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, reme-
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dies, obligations, or liabilities under or by reason of this Agreement, except
as expressly provided in this Agreement.
Section 8.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York applicable to contracts made
and to be performed in such jurisdiction, without regard to choice of law
principles.
Section 8.4 Counterparts; Facsimile Counterparts. This Agreement may
be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Agreement may be executed by means of facsimile transmission;
provided, that an original, manually executed copy of such facsimile
counterpart shall be promptly sent by overnight delivery to the other parties
to this Agreement.
Section 8.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 8.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with a reputable overnight courier or with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party on the signature
page hereof, or at such other address as such party may designate by ten (10)
days advance written notice to the other parties. Copies of Notices to be given
to the Investors shall be sent to the Investors at their addresses set forth on
the signature pages hereof, or as otherwise specified by such Investor from
time to time upon notification to the Company.
Section 8.7 Finder's Fee. Each party represents that it neither is nor
will be obligated for any finder's fee or commission in connection with this
transaction, except for the obligations of the Company to Smith Barney Inc.
Each Investor agrees severally and not jointly to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the
65
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Investor or any of its officers, partners, employees, or representatives is
responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's
fee (and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
Section 8.8 Expenses. Irrespective of whether the Closing is effected,
the Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Certificate of Incorporation, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
Section 8.9 Amendments and Waivers. Except for the provisions of
Article VI hereof which may be waived with the written consent of the Company
only, and except as set forth in Section 7.15 hereof, any term of this
Agreement may be amended and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the Holders of 66% of the Common Stock issued hereunder or issued or
issuable upon conversion of the Warrants; provided, however, that the
provisions of this Section 8.9 may be amended only with the written consent of
the Company and all of such Holders. Any amendment or waiver effected in
accordance with this Section 8.9 shall be binding upon each Holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future Holder of
all such securities, and the Company; provided, however, that no condition set
forth in Article V hereof may be waived with respect to any Investor who does
not consent thereto.
Section 8.10 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be inter-
66
<PAGE>
preted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
Section 8.11 Entire Agreement. This Agreement, the Memorandum, and the
other documents delivered pursuant hereto and thereto constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
Section 8.12 Disclosure Required under the Laws of Certain States and
Foreign Countries. The offer and sale of the Warrants, Common Stock and Units,
unless otherwise required, are intended to be exempt from registration under
the securities laws of certain states and foreign countries. Investors who
reside in the following jurisdictions should note the language set forth below,
which is required to be included in this Agreement by the securities laws of
those jurisdictions. Furthermore, all Investors must note that there are
restrictions on transfer of (i) the Units and (ii) the Warrant Shares, as
agreed upon in Section 4.6 of this Agreement and as set forth in the Warrant
Certificates.
FOR ALL INVESTORS:
THE UNITS (AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION
OF THE WARRANTS COMPRISING THE UNITS) ARE SUITABLE ONLY FOR SOPHISTICATED
INVESTORS FOR WHOM AN INVESTMENT IN THE UNITS DOES NOT CONSTITUTE A COMPLETE
INVESTMENT PROGRAM AND WHO FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISKS
INVOLVED IN PURCHASE OF THE UNITS. NO OFFER TO SELL (OR SOLICITATION OF AN
OFFER TO BUY) IS BEING MADE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
THE UNITS (AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION
OF THE WARRANTS COMPRISING THE UNITS) ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED.
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<PAGE>
THE UNITS (AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION OF THE
WARRANTS COMPRISING THE UNITS) HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF ANY
INFORMATION PROVIDED HEREWITH. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
68
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PRT GROUP INC.
By: /s/ DOUGLAS K. MELLINGER
------------------------
Douglas K. Mellinger
Chairman and Chief
Executive Officer
342 Madison Avenue
New York, New York 10173
69
<PAGE>
JEROME MELLINGER hereby represents and warrants to Investor that the
shares of Common Stock sold by him hereunder are free and clear of any liens,
charges, security interests or claims of any kind; that Investor shall acquire
good and marketable title to such shares of Common Stock upon payment therefor
by Investor; and further covenants and agrees to execute the instrument of
transfer on the reverse of the certificates representing such shares and
thereby sell, assign and transfer to Investor such shares.
JEROME MELLINGER
By: /s/ JEROME MELLINGER
--------------------
70
<PAGE>
CAPITAL RESEARCH AND
MANAGEMENT COMPANY, on
behalf of SMALLCAP World
Fund, Inc.
By: /s/ MICHAEL J. DOWNER
--------------------------------
Name: Michael J. Downer
Title: Secretary
Address:
333 South Hope Street
Los Angeles, CA 90071
71
<PAGE>
WITH RESPECT TO SECTIONS 3.20 AND 3.23, AND ARTICLE VII HEREOF, the
undersigned agree to be bound by the provisions of Sections 3.20 and 3.23 and
Article VII hereof.
THE MELLINGER GROUP, L.L.C.
By: /s/ DOUGLAS K. MELLINGER
--------------------------------
Name: Douglas K. Mellinger
Title: Member
BARBARA MELLINGER
By: /s/ BARBARA MELLINGER
--------------------------------
JEROME MELLINGER
By: /s/JEROME MELLINGER
--------------------------------
72
<PAGE>
SCHEDULE 1.1
NUMBER AGGREGATE
OF PURCHASE
INVESTOR: SECURITIES: PRICE:
- -------------------------------------------------------------------------------
Warrants:
Capital Research.............................48,631...............$291,786.00
Common Stock:
Capital Research.............................48,631.............$2,899,380.22
73
<PAGE>
CONFORMED COPY
===============================================================================
PRT GROUP INC.
PREFERRED STOCK PURCHASE AGREEMENT
SERIES A CONVERTIBLE PREFERRED STOCK
dated as of November 21, 1996
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I Purchase and Sale of Stock...................................... 1
Section 1.1 Sale and Issuance of Preferred Stock.................... 1
Section 1.2 Closing................................................. 1
ARTICLE II Representations and Warranties of the Company.................. 2
Section 2.1 Organization, Good Standing and Qualification........... 2
Section 2.2 Capitalization and Voting Rights........................ 2
Section 2.3 Subsidiaries............................................ 6
Section 2.4 Authorization........................................... 6
Section 2.5 Valid Issuance of Preferred and Common Stock............ 6
Section 2.6 Governmental Consents................................... 7
Section 2.7 Litigation; Compliance with Laws........................ 7
Section 2.8 Patents and Trademarks.................................. 8
Section 2.9 Proprietary Information of Third Parties................ 8
Section 2.10 Compliance with Other Instruments....................... 9
Section 2.11 Other Agreements........................................ 10
Section 2.12 Disclosure.............................................. 10
Section 2.13 Title to Property and Assets; Leases.................... 11
Section 2.14 Changes................................................. 12
Section 2.15 Employee Benefit Plans.................................. 14
Section 2.16 Tax Returns, Payments and Elections..................... 14
Section 2.17 Insurance............................................... 15
Section 2.18 Labor Agreements and Actions............................ 16
Section 2.19 Financial Statements.................................... 16
Section 2.20 Absence of Undisclosed Liabilities...................... 17
Section 2.21 Other Agreements........................................ 17
Section 2.22 Loans and Advances...................................... 19
Section 2.23 Employees; Officers..................................... 20
Section 2.24 [Reserved].............................................. 20
Section 2.25 Environmental Protection................................ 20
Section 2.26 Foreign Corrupt Practices Act........................... 22
Section 2.27 Federal Reserve Regulations............................. 22
Section 2.28 Offering of the Shares.................................. 22
Section 2.29 Returns................................................. 23
Section 2.30 Related-Party Transactions.............................. 23
Section 2.31 Permits................................................. 23
Section 2.32 Manufacturing and Marketing............................. 23
Section 2.33 Registration Rights..................................... 24
Section 2.34 Minute Books............................................ 24
i
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Page
ARTICLE III Covenants of the Company...................................... 24
Section 3.1 Financial Statements, Reports, Etc...................... 24
Section 3.2 Properties, Business, Insurance......................... 27
Section 3.3 Inspection, Consultation and Advice..................... 27
Section 3.4 Restrictive Agreements Prohibited....................... 28
Section 3.5 Transactions with Affiliates............................ 28
Section 3.6 Expenses of Directors................................... 29
Section 3.7 Board of Directors Meetings............................. 29
Section 3.8 By-laws................................................. 29
Section 3.9 Performance of Contracts................................ 30
Section 3.10 Employee Agreements..................................... 30
Section 3.11 Compliance with Laws.................................... 30
Section 3.12 Keeping of Records and Books of Account................. 30
Section 3.13 Compensation and Audit Committees....................... 30
Section 3.14 Corporate Existence..................................... 31
Section 3.15 Limitations of Certain Rights........................... 31
Section 3.16 Survival................................................ 31
Section 3.17 Use of Proceeds......................................... 31
Section 3.18 Preemptive Rights....................................... 31
Section 3.19 Reservation of Shares................................... 34
Section 3.20 Co-Sale Rights.......................................... 34
Section 3.21 Increase in Expenses.................................... 38
Section 3.22 Use of Name and Management Responsibility............... 38
Section 3.23 Right of First Offer From Founders...................... 38
Section 3.23 Board Size.............................................. 40
ARTICLE IV Representations, Warranties and Covenants of the Investors..... 40
Section 4.1 Authorization........................................... 40
Section 4.2 Purchase Entirely for Own Account....................... 40
Section 4.3 Disclosure of Information............................... 41
Section 4.4 Restricted Securities................................... 41
Section 4.5 Further Limitations on Disposition...................... 41
Section 4.6 Legends................................................. 42
Section 4.7 Accredited Investor..................................... 43
Section 4.8 [Reserved].............................................. 43
Section 4.9 No Sales to Competitors................................. 43
Section 4.10 Notification of Investor Sales of Securities............ 43
ARTICLE V Conditions of Each Investor's Obligations at Closing............ 43
Section 5.1 Representations and Warranties.......................... 43
Section 5.2 Compliance Certificate.................................. 43
Section 5.3 Proceedings and Documents............................... 44
Section 5.4 Opinion of Company Counsel.............................. 44
Section 5.5 Performance............................................. 44
ii
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Page
Section 5.6 Purchase by Other Investors............................. 44
Section 5.7 Supporting Documents.................................... 44
Section 5.8 Certificate of Incorporation............................ 45
Section 5.9 Employee Agreements..................................... 45
Section 5.10 By-Laws................................................. 45
Section 5.11 Fees of Investors' Counsel.............................. 45
ARTICLE VI Conditions of the Company's Obligations at Closing............. 46
ARTICLE VII Registration Rights........................................... 46
Section 7.1 Definitions............................................. 46
Section 7.2 Demand for Registration................................. 47
Section 7.3 Company Registration.................................... 49
Section 7.4 Obligations of the Company.............................. 50
Section 7.5 Furnish Information..................................... 52
Section 7.6 Expenses of Demand Registration......................... 52
Section 7.7 Expenses of Company Registration........................ 53
Section 7.8 Underwriting Requirements............................... 53
Section 7.9 Delay of Registration................................... 54
Section 7.10 Indemnification......................................... 54
Section 7.11 Reports Under Securities Exchange Act of 1934........... 58
Section 7.12 Form S-3 Registration................................... 58
Section 7.13 Assignment of Registration Rights....................... 60
Section 7.14 Limitations on Subsequent Registration Rights........... 60
Section 7.15 Amendment of Registration Rights........................ 61
Section 7.16 Termination of Registration Rights...................... 61
ARTICLE VIII Miscellaneous................................................ 61
Section 8.1 Survival of Warranties.................................. 61
Section 8.2 Successors and Assigns.................................. 61
Section 8.3 Governing Law........................................... 62
Section 8.4 Counterparts; Facsimile Counterparts.................... 62
Section 8.5 Titles and Subtitles.................................... 62
Section 8.6 Notices................................................. 62
Section 8.7 Finder's Fee............................................ 62
Section 8.8 Expenses................................................ 63
Section 8.9 Amendments and Waivers.................................. 63
Section 8.10 Severability............................................ 63
Section 8.11 Entire Agreement........................................ 64
Section 8.12 Disclosure Required under the Laws of Certain
States and Foreign Countries............................ 64
iii
<PAGE>
Schedule 1.1 - Investors................................................ 69
Schedule 2.1 - Organization, Good Standing and Qualifications........... 70
Schedule 2.2(c) - Capitalization........................................... 71
Schedule 2.11 - Other Agreements......................................... 73
Schedule 2.13 - Title to Property and Assets; Leases..................... 74
Schedule 2.14 - Changes.................................................. 75
Schedule 2.15 - Employee Benefit Plans................................... 76
Schedule 2.16 - Tax Matters.............................................. 77
Schedule 2.21 - Other Agreements......................................... 78
Schedule 2.23 - Executive Officers and
Key Employees of the Company............................. 80
Schedule 2.28 - Offering of the Shares................................... 81
Schedule 2.30 - Related-Party Transactions............................... 82
Exhibit A - Certificate of Incorporation
Exhibit B - Form of Employee Agreement (Executive Officers)
Exhibit C - Form of Employee Agreement (Key Employees)
Exhibit D - Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
Exhibit E - Form of Stock Option Plan
Exhibit F - Form of Certificate of Amendment to the Certificate of
Incorporation
Exhibit G - Form of Unit Purchase Agreement
Exhibit H - Certificate of Incorporation of Total Technology Solutions
Limited
Exhibit I - Certificate of Incorporation of PRT Software Services
(India) Pvt. Ltd.
Exhibit J - Certificate of Incorporation of PRT Europe Limited
iv
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT is made as of the 15th day of
November 1996 (the "Agreement"), by and among PRT Group Inc., a Delaware
corporation (the "Company"), and the investors listed on Schedule 1.1 hereto,
each of which is herein referred to as an "Investor." Any reference herein to
an "Investor" shall further include all mutual funds or other pooled investment
vehicles or entities under the control or management of such Investor, or the
general partner or investment advisor thereof, or any affiliate of any of the
foregoing.
THE PARTIES HEREBY AGREE AS FOLLOWS:
ARTICLE I
Purchase and Sale of Stock
Section 1.1 Sale and Issuance of Preferred Stock. Subject to the terms
and conditions of this Agreement each Investor agrees, severally and not
jointly, to purchase at the Closing (as defined below) and the Company agrees
to sell and issue to each such Investor at the Closing, the number of shares
(the "Shares"), of the Company's Series A Convertible Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock"), set forth opposite such
Investor's name on Schedule 1.1 hereto for a price equal to $65.62 per Share
and an aggregate purchase price as set forth opposite such Investor's name
thereon, such consideration to be payable by certified or bank cashier's check
in immediately available funds or by wire transfer payable to the order of the
Company.
Section 1.2 Closing. The closing of the purchase and sale of the
Shares shall be on a date by mutual agreement of the parties but, without the
consent of the Company, in no event later than November 30, 1996 and shall take
place at the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue,
New York, New York 10022 (which time and place are designated as the
"Closing"). At the Closing, the Company shall deliver to each Investor
certificates representing the number of Shares such Investor is purchasing as
specified on Schedule 1.1 hereto.
<PAGE>
ARTICLE II
Representations and Warranties of the Company
The Company, on behalf of itself and each of its Subsidiaries (as
hereinafter defined), hereby represents, warrants and covenants to each
Investor that:
Section 2.1 Organization, Good Standing and Qualification. The Company
and each Subsidiary (as defined herein) is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and each has all requisite corporate power and authority
necessary to own and operate its properties and to carry on its business as now
conducted and as proposed to be conducted as described in the Confidential
Offering Memorandum of the Company dated July 15, 1996 (the "Memorandum"). The
Company has the corporate power and authority to execute, deliver and perform
this Agreement, to issue, sell and deliver the Shares, and to issue and deliver
the Common Stock, $.01 par value per share ("Common Stock"), of the Company
issuable upon conversion of the Shares (the "Conversion Shares"). Except as set
forth on Schedule 2.1 attached hereto, the Company and each Subsidiary is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material adverse effect on its
business, affairs, financial condition, properties or prospects.
Section 2.2 Capitalization and Voting Rights. The authorized capital
of the Company consists, or will consist immediately prior to the Closing, of:
(a) Preferred Stock. Five hundred thousand (500,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), consisting
of (i) two hundred seventy five thousand nine hundred and sixty one (275,961)
shares of Series A Convertible Preferred Stock, $.01 par value per share, none
of which have been issued, and (ii) two hundred twenty four thousand and thirty
nine(224,039) shares of undesignated preferred stock, none of which have been
issued. The rights, privileges and preferences of the Series A Preferred Stock
are as stated in the Company's Certificate of Amendment to the Certificate of
Incorporation dated as of November 21, 1996 attached hereto as Exhibit F (the
"Certificate of Amendment").
2
<PAGE>
(b) Common Stock. 5,000,000 shares of Common Stock, of which
1,053,750 shares are outstanding as of the date hereof and were duly and
validly issued, and are fully paid and non-assessable, with no personal
liability attaching to the ownership thereof; provided that, on the date
hereof, Jerome Mellinger is selling 48,631 shares of Common Stock to SMALLCAP
World Fund, Inc. pursuant to the Common Stock and Warrant Unit Purchase
Agreement, dated as of the date hereof, by and among the Company, Jerome
Mellinger and certain investors, as set forth therein, (the "Unit Purchase
Agreement") a form of which is attached hereto as Exhibit G, and Allan Stern is
selling 6,095 shares of Common Stock to the Company. An appropriate number of
shares of Common Stock have been reserved for issuance upon the (i) exercise of
options issued, and issuable, pursuant to the Company's 1996 Stock Incentive
Plan (the "Option Plan"), a copy of which is attached hereto as Exhibit E (ii)
conversion of the Series A Preferred Stock and (iii) conversion of the warrants
(the "Warrants") issued pursuant to the Unit Purchase Agreement. The term
"Units", as used herein, shall mean the Units sold by the Company pursuant to
the Unit Purchase Agreement.
(c) Options, Warrants, etc. The stockholders of record and
holders of subscriptions, warrants, options, convertible securities, and other
rights (contingent or otherwise) to purchase or otherwise acquire equity
securities of the Company and each Subsidiary, and the number of shares of
equity securities and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
the attached Schedule 2.2(c).
The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in the Company's Certificate of
Incorporation dated as of September 18, 1996 attached hereto as Exhibit A (the
"Certificate of Incorporation"), and all such designations, powers,
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws (subject, as
to enforcement, to the discretion of the courts in awarding equitable relief
and to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the rights of creditors generally). Except as provided
for in this Agreement, the Unit Purchase Agreement, or as set forth in the
attached Schedule 2.2(c), (i) no person
3
<PAGE>
owns of record, or is known to the Company to own beneficially, any share of
Common Stock or Preferred Stock, (ii) no subscription, warrant, option,
convertible security or other right (contingent or otherwise) to purchase or
otherwise acquire equity securities of the Company is authorized or outstanding
and (iii) there is no commitment by the Company to issue shares, subscriptions,
warrants, options, convertible securities, or other such rights or to
distribute to holders of any of its equity securities, any evidence of
indebtedness or asset.
The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of each of the Subsidiaries of the Company are as set forth in
the corporate constituent documents attached hereto as Exhibits H, I and J, all
such designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws (subject, as to enforcement, to the discretion of the courts in
awarding equitable relief and to applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting the rights of creditors
generally). Except as provided for in the attached Schedule 2.2(c), (i) no
person owns of record, or is known to the Company to own beneficially, any
share of capital stock of such Subsidiary, (ii) no subscription, warrant,
option, convertible security or other right (contingent or otherwise) to
purchase or otherwise acquire equity securities of the Subsidiaries is
authorized or outstanding and (iii) there is no commitment by the Company or
any Subsidiary to issue shares, subscriptions, warrants, options, convertible
securities, or other such rights or to distribute to holders of any of the
equity securities, any evidence of indebtedness or asset of any Subsidiary.
(d) Outstanding Agreements. The Company and each Subsidiary has
no obligation (contingent or otherwise) to pay any dividend or make any other
distribution in respect of any of its capital stock. Except as set forth on
Schedule 2.2(c) hereto, the Company and each Subsidiary is not a party to, and
to the Company's knowledge there are no voting trusts or agreements,
stockholders' agreements, pledge agreements, buy-sell agreements, rights of
first refusal or proxies relating to any securities of the Company or any
Subsidiary (whether or not the Company or any Subsidiary is a party thereto).
All of the outstanding securities of the Company and each Subsidiary were
issued in compliance
4
<PAGE>
with all applicable federal and state securities laws. Except as set forth in
the certificate of incorporation for the Company and each Subsidiary or in this
Agreement, the Company and each Subsidiary has no obligation (contingent or
otherwise) to repurchase, redeem or otherwise acquire any shares of its capital
stock, except as set forth in Section 2.2(b) hereof.
(e) Series A Board Members. The Company's Certificate of
Incorporation provides that, or on the date of the Closing will provide that,
(i) prior to an Initial Public Offering (as defined below) and (ii) after an
Initial Public Offering and until the Investors shall hold, in the aggregate,
less than 60% of the total number of Shares purchased hereunder and shares of
Common Stock or other securities into which such Shares have been converted,
the Company's Board of Directors shall include two members elected solely by
the Investors voting as a separate class (the "Series A Board Members"). One of
such Series A Board Members may be elected by The Travelers Insurance Company,
and one of such Series A Board Members may be elected by Tudor (as defined
below), at their respective sole option, each for so long as The Travelers
Insurance Company or Tudor, respectively, continues to hold securities of the
Company with a liquidation preference or fair market value, whichever is lower,
in excess of 10% of the amount purchased by such Investor hereunder; the
Investors hereby agree to vote for the respective nominees of The Travelers
Insurance Company and Tudor for so long as each, respectively, may so appoint a
Series A Board Member.
For the purposes of this Agreement, the term "Initial Public
Offering" shall mean the Company's initial public offering of its Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and declared effective by the Securities and
Exchange Commission, in which the aggregate gross proceeds to the Company equal
or exceed $25,000,000 (before deducting underwriting discounts and commissions
and offering expenses) at a price per share of at least $131.24 (as
appropriately adjusted for any stock dividend, stock split or similar
recapitalization event). For the purposes of this Agreement, the term "Tudor"
shall mean Tudor Investment Corporation and its affiliates (including all
mutual funds or other pooled investment vehicles or entities under the control
or management of Tudor Investment Corporation or any of its affiliates),
collectively.
5
<PAGE>
Section 2.3 Subsidiaries. The Company has formed Total Technology
Solutions Limited ("TTSL") under the laws of Barbados, PRT Software Services
(India) Pvt. Ltd. under the laws of India and PRT Europe Limited under the laws
of the United Kingdom (the "Subsidiaries"). Other than the Subsidiaries, the
Company and each Subsidiary does not presently own or control, directly or
indirectly, any interest in any other corporation, association, or other
business entity.
Section 2.4 Authorization. All corporate action on the part of the
Company and its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance, sale and
delivery of the Shares and reservation, issuance and delivery of the Conversion
Shares has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
in accordance with its terms. The Company has obtained, or prior to the Closing
will have obtained, any authorization, consent or approval or other action by,
or made any filing with any court or administrative body that is required under
the applicable state securities laws in connection with the issuance of the
Shares and the conversion of the Shares.
Section 2.5 Valid Issuance of Preferred and Common Stock.
(a) The Shares, when issued, sold and delivered in accordance
with the terms hereof for the consideration expressed herein, will be duly and
validly issued, fully paid and non-assessable with no personal liability
attaching to the ownership thereof, and will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in Article VII hereof and, in reliance upon the
representations of the Investors in this Agreement, will be issued in
compliance with all applicable federal and state securities laws. The
Conversion Shares have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Certificate of Incorporation shall
be duly and validly issued, fully paid and nonassessable, with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in Article VII hereof, and shall be
6
<PAGE>
issued in compliance with all applicable federal and state securities laws, as
presently in effect.
(b) In reliance upon the representations of the Investors,
neither the offer, sale or delivery of the Shares nor the issuance and delivery
of the Conversion Shares upon conversion of the Shares in conformity with the
terms of this Agreement will violate the Securities Act, as presently in
effect.
Section 2.6 Governmental and Third Party Consents. No permit, consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state or local
governmental authority or any third party on the part of the Company or any
Subsidiary is required in connection with the execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby, except for (a) filings pursuant to Regulation
D under the Securities Act, and pursuant to applicable state securities laws,
and (b) with respect to Article VII hereof, registration under the Securities
Act.
Section 2.7 Litigation; Compliance with Laws. There is no action,
suit, proceeding or investigation pending or currently threatened against the
Company or any Subsidiary which questions the validity of this Agreement or the
right of the Company to execute and deliver this Agreement, or to consummate
the transactions contemplated hereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
condition, affairs or prospects of the Company or any Subsidiary, financial or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company or any Subsidiary aware that there is any basis for the foregoing.
The Company and each Subsidiary is not in default under the material provisions
of any law, regulation or order, is not under any order of any court or
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality wherever located, and there are no (i)
claims, actions, suits or proceedings pending, or to its knowledge threatened
against or affecting the Company or any Subsidiary at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality wherever located; (ii)
arbitration proceedings relating to the Company or any Subsidiary pending under
collective bargaining agreements or otherwise; or (iii)
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governmental inquiries pending or, to the Company's or any Subsidiary's
knowledge, threatened against or affecting the Company or any Subsidiary
(including without limitation any inquiry as to the qualification of the
Company or any Subsidiary to hold or receive any license or permit). The
Company and each Subsidiary has not taken any action which has resulted in, or
is reasonably likely to result in, the Company or any Subsidiary incurring any
liability which may be material to its business, prospects, financial
condition, operations, property or affairs, other than as reflected in
financial statements at September 30, 1996. There is no action or suit by the
Company or any Subsidiary pending or threatened against others.
Section 2.8 Patents and Trademarks. The Company and its Subsidiaries
have sufficient title and ownership of, or license rights to, or have applied
for, all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, trade
secrets, information, proprietary rights and processes (collectively,
"Intellectual Property") necessary for their business as now conducted and as
proposed to be conducted as described in the Memorandum. No claim is pending
or, to the Company's or any Subsidiary's knowledge, threatened to the effect
that the operations of the Company or any Subsidiary infringe upon or conflict
with the asserted rights of any other person with respect to any Intellectual
Property and the Company and each Subsidiary knows of no basis for such claim.
No claim is pending or threatened to the effect that any Intellectual Property
owned or licensed by the Company or any Subsidiary, or which the Company or any
Subsidiary otherwise has the right to use, is invalid or unenforceable by the
Company or any Subsidiary and the Company and each Subsidiary knows of no basis
for such claim. The Company and each Subsidiary have used reasonable efforts to
maintain the confidentiality of all proprietary information developed by and
belonging to them which has not been patented. To the Company's and each
Subsidiary's knowledge, all scientific and technical information developed by
and belonging to the Company or any Subsidiary which has not been patented has
been kept confidential.
Section 2.9 Proprietary Information of Third Parties. To the Company's
and each Subsidiary's knowledge, no third party has claimed that any person
employed by or under the control of the Company or any Subsidiary has (a)
violated or may be violating any of the terms or
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conditions of his employment, non-competition or nondisclosure agreement with
such third party, (b) disclosed or may be disclosing or utilized or may be
improperly utilizing any trade secret or proprietary information or
documentation of such third party or (c) interfered or may be interfering in
the employment relationship between such third party and any of its present or
former employees and no third party has requested information from the Company
or any Subsidiary which suggests that such a claim might be contemplated. To
the Company's and each Subsidiary's knowledge, none of the execution or
delivery of this Agreement, or the carrying on of the business of the Company
or any Subsidiary by any officer, director or key employee of the Company and
each Subsidiary, or the conduct or proposed conduct of the business of the
Company and each Subsidiary as described in the Memorandum, will conflict with
or result in a breach of the terms, conditions or provisions of, or constitute
a default under, any contract, covenant or instrument under which any such
person is obligated. To the Company's and each Subsidiary's knowledge, no
person employed by or under the control of the Company or any Subsidiary has,
in connection with such person's performance of any employment or other
services rendered to the Company or any Subsidiary, employed any trade secret
or any information or documentation proprietary to any former employer, and to
the Company's and each Subsidiary's knowledge, no person employed by or under
the control of the Company or any Subsidiary has, in connection with such
person's performance of any employment or other services rendered to the
Company or any Subsidiary, violated any confidentiality obligation which such
person may have owed to any third party.
Section 2.10 Compliance with Other Instruments. The Company and each
Subsidiary are not in violation or default of any provisions of (i) its
certificate of incorporation or by-laws or (ii) any instrument, judgment,
order, writ, decree, contract or other agreement to which it is a party or by
which it is bound which violation or default would either individually or in
the aggregate have a material adverse effect on the condition, financial or
otherwise, or operation of the Company and its Subsidiaries taken as a whole,
and the Company and each Subsidiary has not received notice alleging any
material violation thereof. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the issuance, sale and delivery of the Shares or
the Conversion Shares, will not result in any such
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violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree, contract or other agreement or an
event which results in the creation of any lien, charge or encumbrance upon any
assets of the Company or any Subsidiary or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any permit, license, authorization or
approval applicable to the Company or any Subsidiary, except (i) for pledges or
liens which either individually or in the aggregate are not material to the
Company and its Subsidiaries taken as a whole, or (ii) a violation or conflict
with any permit, license, authorization or approval which would not have a
material adverse effect on the condition, financial or otherwise, or operation
of the Company and its Subsidiaries taken as a whole. The Shares are not
subject to any preemptive rights.
Section 2.11 Other Agreements; Action. Except as otherwise disclosed
herein or as set forth on Schedule 2.11 attached hereto, there are no, and
within the past year there have not been any, agreements, understandings or
proposed transactions between the Company or any Subsidiary and any of their
stockholders, officers, directors, affiliates, or any affiliate thereof.
Section 2.12 Disclosure. Neither this Agreement, nor any schedule or
exhibit to this Agreement, nor the Memorandum, as amended by the disclosures
set forth in this Agreement, taken together as a whole, contains an untrue
statement of a material fact or omits a material fact necessary, in light of
the circumstances under which they were made, to make the statements contained
herein or therein not misleading; provided, that the Company has not made, and
will not make, any statement regarding the tax consequences of an investment in
the Shares or the Conversion Shares, and the Investors hereby acknowledge that
no such statement has been or will be made and such Investors have not relied
upon any disclosure (or non-disclosure) by the Company regarding such tax
consequences in making their decision to invest in the Shares or the Conversion
Shares. None of the statements, documents, certificates or other items prepared
or supplied by the Company with respect to the transactions contemplated hereby
contains an untrue statement of a material fact or omits a material fact
necessary to make the statements contained therein not misleading. There is no
fact which the Company has not disclosed to the Investors and their counsel in
writing and of which the Company is
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aware which materially and adversely affects or could reasonably be expected to
materially and adversely affect the business, prospects, financial condition,
operations, property or affairs of the Company or any of its subsidiaries.
Section 2.13 Title to Property and Assets; Leases. The Company and
each Subsidiary owns its property and assets free and clear of all mortgages,
liens and encumbrances, except such encumbrances and liens which arise in the
ordinary course of business and do not materially impair the Company's or such
Subsidiary's ownership, or use of such property or assets or the Company's or
such Subsidiary's ability to obtain financing by using such property as
collateral. To the Company's and each Subsidiary's knowledge, there are no
condemnation, environmental, zoning or other land use regulation proceedings,
either instituted or planned to be instituted, which would adversely affect the
use or operation of the Company's or any Subsidiary's properties and assets for
their respective intended uses and purposes, or the value of such properties,
and the Company and each Subsidiary has not received notice of any special
assessment proceedings which would affect such properties and assets. With
respect to the property and assets it leases, the Company and each Subsidiary
is in compliance with such leases and, to the Company's and each Subsidiary's
knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances. The Company's and each Subsidiary's possession of such property
has not been disturbed and, to the Company's and each Subsidiary's knowledge,
no claim has been asserted against the Company or any Subsidiary adverse to its
rights in such leasehold interests. Each lease or agreement to which the
Company or any Subsidiary is a party under which it is a lessee of any
property, real or personal, is a valid and subsisting agreement of the Company
or such Subsidiary, duly authorized and entered into by the Company or such
Subsidiary, without any material default of the Company or any Subsidiary
thereunder and, to the Company's and each Subsidiary's knowledge, without any
default thereunder of any other party thereto. No event has occurred and is
continuing which, with due notice or lapse of time or both, would constitute a
default or event of default by the Company or any Subsidiary under any such
lease or agreement or, to the Company's or any Subsidiary's knowledge, by any
other party thereto. The tangible assets of the Company and each Subsidiary are
located at the premises as set forth in Schedule 2.13.
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Section 2.14 Changes. Except as set forth on Schedule 2.14 hereof,
from December 31, 1995 until the date hereof, there has not been, and from the
date hereof until the Closing, except as set forth or contemplated on Schedule
2.14, there will not be:
(a) any adverse change in the assets, liabilities, financial
condition or operating results of the Company and each Subsidiary, except
changes in the ordinary course of business which have not been, individually or
in the aggregate, materially adverse, including the expenditure of funds for
research and development and otherwise in connection with the Company's and
each Subsidiary's operations;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company and each
Subsidiary (as such business is presently conducted and as it is proposed to be
conducted);
(c) any waiver or compromise by the Company or any Subsidiary of
a valuable right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company or any Subsidiary,
except in the ordinary course of business and which is not material to the
assets, properties, financial condition, operating results, prospects or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted as described in the Memorandum);
(e) any change or amendment to a contract or arrangement by which
the Company, any Subsidiary or any of their assets or properties are bound or
subject which has a material effect on the Company and its Subsidiaries taken
as a whole, except as set forth in this Agreement;
(f) any changes in the identity of, or material information
presented in the Memorandum regarding, any of the Company's or its
Subsidiaries' officers or directors or any material increases in the
compensation, including the grant of options to purchase a material number of
shares of Common Stock, of any of the
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Company's or any Subsidiaries' employees, officers or directors;
(g) any incurrence, assumption or guarantee by the Company or
any Subsidiary of any material obligation for borrowed money, except for
current liabilities incurred in the ordinary course of business;
(h) any mortgage, pledge, lien, charge or other encumbrance
placed on or incurred with respect to any of the Company's or any Subsidiary's
properties or assets;
(i) to the Company's knowledge, any other event or condition of
any character which can reasonably be expected to materially and adversely
affect the assets, properties, financial condition, operating results,
prospects or business of the Company and its Subsidiaries taken as a whole (as
such business is presently conducted and as it is proposed to be conducted as
described in the Memorandum);
(j) any declaration or payment of any dividend or other
distribution of the assets of the Company or any Subsidiary or any direct or
indirect redemption or other acquisition of any equity security of the Company
or any Subsidiary;
(k) except as provided in Exhibit A, any change in the authorized
capital of the Company or any Subsidiary;
(l) a sale, assignment or transfer by the Company or any
Subsidiary of any of its tangible assets except in the ordinary course of
business;
(m) a sale, assignment, transfer or grant of any exclusive
license with respect to any of the Company's or any Subsidiary's Intellectual
Property;
(n) any material change in the manner of business or operations
of the Company or any Subsidiary;
(o) any transaction with respect to the Company or any Subsidiary
except in the ordinary course of business or as otherwise contemplated hereby;
(p) any resignation or termination of employment of any executive
officer or key employee of the Company or any Subsidiary; and to the best of
the
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Company's and each Subsidiary's knowledge, any facts that would indicate that a
key officer or employee of the Company is planning to resign or expected to be
terminated;
(q) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company or any Subsidiary;
(r) any loan or guarantee made by the Company or any Subsidiary
to or for the benefit of its employees, officers, directors or stockholders, or
any members of their immediate families, other than travel advances and other
advances made in the ordinary course of its business;
(s) any commitment (contingent or otherwise) to do any of the
foregoing; or
(t) any material adverse change, or, to the best of the Company's
and each Subsidiary's knowledge, the existence of any fact that would indicate
a material adverse change is likely to occur, in the arrangements between TTSL
and the government of Barbados.
Section 2.15 Employee Benefit Plans. Except as set forth on Schedule
2.15, the Company does not have any Employee Benefit Plan as defined in the
Employee Retirement Income Security Act of 1974, as amended, other than those
providing for health and medical benefits.
Section 2.16 Tax Matters. (a) Except as set forth on Schedule 2.16
hereto, (i) the Company and each Subsidiary has filed or has had filed on its
behalf in a timely manner (within any applicable extension periods) all
material Tax Returns (as defined herein) required to be filed with respect to
Taxes (as defined herein) of the Company and each Subsidiary, and (ii) all
material Taxes with respect to the Company and each Subsidiary shown to be due
and payable on such Tax Returns or on any assessment received by the Company or
a Subsidiary, as the case may be, and all other Taxes due and payable by the
Company and each Subsidiary on or before the Closing have been paid in full or
have been adequately provided for by the Company and each Subsidiary,
respectively. The Tax Returns filed by the Company and each Subsidiary are, to
the Company's and each Subsidiary's knowledge, true and correct in all material
respects. The Company and each Subsidiary have never waived any statute of
limitations on the assessment or collection of any tax or governmen-
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tal charge. Neither the Company nor any of its present or former stockholders
has ever filed an election pursuant to Section 1362 of the Internal Revenue
Code of 1986, as amended, that the Company be taxed as an S corporation. The
federal income tax returns of the Company have never been audited by the
Internal Revenue Service, and the tax returns of each Subsidiary have never
been subject to audit by any taxing authority.
(b) For purposes of this Agreement, (i) "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, sales, use, ad valorem, goods and services,
capital, transfer, franchise, profits, license, withholding, payroll,
employment, employee health, excise, estimated, severance, stamp, occupation,
property or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority and (ii) "Tax Return"
shall mean any report, return, document, declaration or other information or
filing required to be supplied to any taxing authority or jurisdiction with
respect to Taxes.
(c) PRT Corp. of America, a New York corporation ("Old PRT"), is
in the process of filing certain tax forms with respect to the merger of Old
PRT with and into the Company, with the Company surviving. Upon clearance of
such tax filings and the payment of any additional taxes due, if any, the State
of New York shall accept for filing the certificate of merger previously
submitted to the Secretary of State of the State of New York. While the Company
expects the amount of any such taxes to be sufficiently provided for in the
financial statements of the Company, the Company hereby represents and warrants
that the tax liabilities of Old PRT will not exceed $500,000 above the amount
provided for the payment of any such taxes in the financial statements of the
Company. A description of the merger is set forth on Schedule 2.16 attached
hereto.
Section 2.17 Insurance. The Company and each Subsidiary has insured by
reputable insurers its assets that are of an insurable character against risks
of liability, casualty and fire in adequate amounts and consistent with prudent
industry practice. The Company has made, and will make, available to any
Investor, upon its request, a list of all insurance coverage carried by the
Company and its Subsidiaries, the carrier and the terms and amount of coverage.
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Section 2.18 Labor Agreements and Actions. The Company and each
Subsidiary is not bound by or subject to (and none of their assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and no labor union
has requested or, to the knowledge of the Company and each Subsidiary, has
sought to represent any of the employees, representatives or agents of the
Company or any Subsidiary. There is no strike or other labor dispute involving
the Company or any Subsidiary pending, or to the Company's or any Subsidiary's
knowledge, threatened, that has had or would reasonably be expected to have a
material adverse effect on the business affairs, financial condition,
properties or prospects of the Company and its Subsidiaries taken as a whole,
nor is the Company or any Subsidiary aware of any labor organization activity
involving its employees. The Company and each Subsidiary are not aware that any
officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company or any Subsidiary, nor does the
Company or any Subsidiary have a present intention to terminate the employment
of any of the foregoing. The employment of each officer and employee of the
Company and each Subsidiary is terminable at the will of the Company or the
Subsidiary, except as provided in the Employee Agreements (as defined in
Section 2.23 hereof). To its knowledge, the Company and each Subsidiary has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
Section 2.19 Financial Statements. The Company has furnished to the
Investors the audited consolidated balance sheet of the Company as at December
31, 1995 and the related statements of operations, stockholders' equity and
cash flows of the Company for the period from January 1, 1995 through December
31, 1995, and the related unaudited statements of income, stockholders' equity
and cash flows of the Company for the nine months ended September 30, 1996
(collectively, the "Financial Statements"). All such Financial Statements have
been prepared in accordance with generally accepted accounting principles
consistently applied (except that such unaudited financial statements do not
contain all of the required footnotes) and fairly present the financial
position of the Company and its Subsidiaries as of September 30, 1996 and
December 31, 1995, respectively, and the results of their operations and cash
flows for the year ended December 31, 1995 and the nine months ended September
30, 1996, respectively.
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Section 2.20 Absence of Undisclosed Liabilities. The Company does not
have any material liabilities or obligations (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due) which are
not reflected in this Agreement or the Financial Statements. Except as
disclosed in the Financial Statements, the Company and each Subsidiary is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. The Company and each Subsidiary maintain and will continue to
maintain a system of accounting established and administered in accordance with
generally accepted accounting principles.
Section 2.21 Other Agreements. Except as set forth in the attached
Schedule 2.21, the Company and each Subsidiary is not a party to or otherwise
bound by any written or oral:
(a) service, distributor, dealer, manufacturer's representative
or sales agency agreement which is not terminable on less than ninety (90)
days' notice without cost or other liability to the Company or any Subsidiary,
as applicable, except for those agreements that involve less than $50,000
individually or in the aggregate;
(b) agreement which entitles any customer to a rebate or right of
set-off, to return any product to the Company or any Subsidiary after
acceptance thereof or to delay the acceptance thereof, or which varies in any
material respect from the Company's or any Subsidiary's standard form
agreements, except for those agreements which individually or in the aggregate
do not have and are not reasonably expected to have a material adverse effect
on the business, affairs, financial condition, properties or prospects of the
Company and its Subsidiaries taken as a whole;
(c) agreement with any labor union (and, to the knowledge of the
Company and each Subsidiary, no organizational effort is being made with
respect to any of its employees);
(d) agreement containing any provision permitting any party other
than the Company or any Subsidiary to renegotiate the price or other terms, or
containing any payback or other similar provision, upon the occurrence of a
failure by the Company or any Subsidiary to meet its obligations under the
agreement when due or the occurrence of any other event, except for those
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agreements which individually or in the aggregate do not have and are not
reasonably expected to have a material adverse effect on the business, affairs,
financial condition, properties or prospects of the Company and its
Subsidiaries taken as a whole;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment, except for those
agreements that involve less than $50,000 individually or in the aggregate;
(f) agreement for the employment of any officer, employee or
other person (whether of a legally binding nature or in the nature of informal
understandings) on a full-time or consulting basis which is not terminable on
notice without cost or other liability to the Company, except normal severance
arrangements and accrued vacation pay;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company or any Subsidiary (other than group insurance plans applicable to
employees generally);
(h) agreement relating to the borrowing of money or to the
mortgaging or pledging of, or otherwise placing a lien or security interest
on, any asset of the Company or any Subsidiary;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) agreement, or group of related agreements with the same
party or any group of affiliated parties, under which the Company or any
Subsidiary has advanced or agreed to advance money or has agreed to lease any
property as lessee or lessor, except for those leases involving less than
$50,000 individually or $250,000 in the aggregate;
(k) assignment, license, indemnification or other agreement with
respect to any form of intangible property;
(l) agreement under which it has granted any person any
registration rights, other than this Agreement;
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(m) agreement under which it has limited or restricted its right
to compete with any person in any respect, except for certain restrictive
covenants in contracts with customers which prevent the Company from providing
services to the competitors of such customers (for confidentiality reasons),
and which restrictions do not materially adversely affect the Company and its
Subsidiaries, taken as a whole;
(n) other agreement or group of related agreements with the same
party involving more than $50,000 or continuing over a period of more than one
year from the date or dates thereof (including renewals or extensions optional
with another party), which agreement or group of agreements is not terminable
by the Company or any Subsidiary, as applicable, without penalty upon notice of
thirty (30) days or less, but excluding any agreement or group of agreements
with a customer of the Company for the sale, lease or rental of the Company's
products or services if such agreement or group of agreements was entered into
by the Company or any Subsidiary in the ordinary course of business; or
(o) other agreement, instrument, commitment, plan or
arrangement, a copy of which would be required to be filed with the SEC as an
exhibit to a registration statement on Form S-1 if the Company or any
Subsidiary were registering securities under the Securities Act.
To the Company's and each Subsidiary's knowledge, each party other
than the Company or any Subsidiary to all such agreements listed on Schedule
2.21 has in all material respects performed the obligations required to be
performed by such party to date. The Company and each Subsidiary has no
knowledge of any material breach or anticipated material breach by any other
party to any of such agreement, instrument, commitment, plan or arrangement
listed on Schedule 2.21.
Section 2.22 Loans and Advances. The Company and each Subsidiary does
not have any outstanding loans or advances to any person and is not obligated
to make any such loans or advances, except, in each case, for advances to
employees of the Company or any Subsidiary in respect of reimbursable business
expenses anticipated to be incurred by them in connection with their
performance of services for the Company or any Subsidiary.
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Section 2.23 Employees; Officers. Set forth in Schedule 2.23 is a list
of the names of the executive officers and key employees of the Company and
each Subsidiary, together with the title or job classification of each such
person and the total compensation anticipated to be paid to each such person by
the Company and its Subsidiaries in 1996. Each of the executive officers and
each key employee employed by the Company and each Subsidiary has executed an
Employee Agreement substantially in the form of Exhibit B (in the case of
executive officers) or Exhibit C (in the case of key employees) (collectively,
the "Employee Agreements"), and such agreements are in full force and effect.
Each of the persons listed on Schedule 2.23 shall agree in their respective
Employee Agreement, to, among other things, dedicate substantially their full
working schedule to the Company or the Subsidiary, as applicable, and not to
pursue outside business activities during the Company's or any Subsidiary's
business hours, consistent with the Company's or such Subsidiary's personnel
policies, as they exist on the date hereof, until such person shall no longer
be employed by the Company or such Subsidiary. No executive officer or key
employee of the Company or any Subsidiary has advised the Company or any
Subsidiary (orally or in writing) that he or she intends to terminate
employment with the Company or such Subsidiary.
The Company and each Subsidiary has complied in all material respects
with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither the
Company, any Subsidiary nor any entity required to be aggregated with the
Company under Sections 414(b), (c), (m) or (n) of the Code sponsors, maintains,
has any obligation to contribute to, has any liability under, or is otherwise a
party to, any Benefit Plan. For purposes of this Agreement, "Benefit Plan"
shall mean any plan, fund, program, policy, arrangement or contract, whether
formal or informal, which is in the nature of (i) an employee pension benefit
plan (as defined in Section 3(2) of ERISA) or (ii) an employee welfare benefit
plan (as defined in Section 3(1) of ERISA).
Section 2.24 [Reserved]
Section 2.25 Environmental Protection. The Company and each Subsidiary
has not caused or allowed, or
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contracted with any party for, the generation, use, transportation, treatment,
storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company and
each Subsidiary, the operation of their business, and, to the knowledge of the
Company and each Subsidiary any real property that the Company or any
Subsidiary leases or otherwise occupies or uses (the "Premises") are in
compliance with all applicable Environmental Laws (as defined below) and orders
or directives of any governmental authorities having jurisdiction under such
Environmental Laws, including, without limitation, any Environmental Laws or
orders or directives with respect to any cleanup or remediation of any release
or threat of release of Hazardous Substances. The Company and each Subsidiary
has not received any citation, directive, letter or other communication,
written or oral, or any notice of any proceeding, claim or lawsuit, from any
person arising out of the ownership or occupation of the Premises, or the
conduct of its operations, and the Company and each Subsidiary is not aware of
any basis therefor. The Company and each Subsidiary has obtained and is
maintaining in full force and effect all necessary permits, licenses and
approvals required by all Environmental Laws applicable to the Premises and the
business operations conducted thereon (including operations conducted by
tenants on the Premises), and is in compliance with all such permits, licenses
and approvals. The Company and each Subsidiary has not caused or allowed a
release, or a threat of release, of any Hazardous Substance unto, at or near
the Premises, and, to the Company's and each Subsidiary's knowledge, neither
the Premises nor any property at or near the Premises has ever been subject to
a release, or a threat of release, of any Hazardous Substance. For the purposes
of this Agreement, the term "Environmental Laws" shall mean any federal, state,
local or foreign law, ordinance or regulation pertaining to the protection of
human health or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Sections 9601, et seq., the Emergency Planning and Community Right-to-Know Act,
42 U.S.C. Sections 11001, et seq. and the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6901, et seq. For purposes of this Agreement, the term
"Hazardous Substances" shall include oil and petroleum products, asbestos,
polychlorinated biphenyls, urea formaldehyde and any other materials classified
as hazardous or toxic under any Environmental Laws.
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Section 2.26 Foreign Corrupt Practices Act. The Company and each
Subsidiary has not taken any action which would cause it to be in violation of
the Foreign Corrupt Practices Act of 1977, as amended, or any rules and
regulations thereunder. To the Company's and each Subsidiary's knowledge, there
is not now, and there has never been, any employment by the Company or any
Subsidiary of, or beneficial ownership in the Company or any Subsidiary by, any
governmental or political official in any country in the world.
Section 2.27 Federal Reserve Regulations. The Company is not engaged
in the business of extending credit for the purpose of purchasing or carrying
margin securities (within the meaning of Regulation G of the Board of Governors
of the Federal Reserve System), and no part of the proceeds of the Shares will
be used to purchase or carry any margin security or to extend credit to
others for the purpose of purchasing or carrying any margin security or in any
other manner which would involve a violation of any of the regulations of the
Board of Governors of the Federal Reserve System.
Section 2.28 Offering of the Shares. Except as set forth in Schedule
2.28, neither the Company, any Subsidiary nor any person authorized or employed
by the Company or any Subsidiary as agent, broker, dealer or otherwise in
connection with the offering or sale of the Shares or any security of the
Company similar to the Shares has offered the Shares or any such similar
security for sale to, or solicited any offer to buy the Shares or any such
similar security from, or otherwise approached or negotiated with respect
thereto with, any person or persons, and neither the Company, any Subsidiary
nor any person acting on their behalf has taken or will take any other action
(including, without limitation, any offer, issuance or sale of any security of
the Company under circumstances which might require the integration of such
security with the Shares under the Securities Act or the rules and regulations
of the Commission thereunder), in either case so as to subject the offering,
issuance or sale of the Shares, Conversion Shares or other securities into
which such Shares have been converted, to the registration provisions of the
Securities Act. Except as set forth in Schedule 2.28, the Company has no
contract, arrangement or understanding with any broker, finder or similar agent
with respect to the transactions contemplated by this Agreement.
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Section 2.29 Returns. The Company and the Subsidiaries have not had
any of their products returned by the purchasers thereof, which returns
collectively taken together have had or would reasonably be expected to have a
material adverse effect on the business, affairs, financial condition,
properties or prospects of the Company and the Subsidiaries taken as a whole.
Section 2.30 Related-Party Transactions. Except as set forth in
Schedule 2.30 attached hereto, no employee, officer, director or stockholder of
the Company or any Subsidiary or member of his or her immediate family is
indebted to the Company or any Subsidiary, nor is the Company or any Subsidiary
indebted (or committed to make loans or extend or guarantee credit) to any of
them. To the Company's and each Subsidiary's knowledge, none of such persons
has any direct or indirect ownership interest in any firm or corporation with
which the Company or any Subsidiary is affiliated or with which the Company or
any Subsidiary has a business relationship, or any firm or corporation that
competes with the Company or any Subsidiary, except that employees, officers,
directors or stockholders of the Company and the Subsidiaries and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company and the Subsidiaries. Except for the MARS Agreement
between the Company and Barbara and Jerome D. Mellinger, no member of the
immediate family of any employee, officer, director or stockholder of the
Company or any Subsidiary is directly or indirectly interested in any material
contract with the Company or any Subsidiary.
Section 2.31 Permits. The Company and each Subsidiary have all
franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which has had
or would reasonably be expected to have a material adverse effect on business,
affairs, financial condition, properties or prospects of the Company and its
Subsidiaries taken as a whole, and the Company and each Subsidiary believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as planned to be conducted. The Company and each
Subsidiary are not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
Section 2.32 Manufacturing and Marketing Rights. The Company and each
Subsidiary have not granted rights to manufacture, produce, assemble, license,
mar-
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ket, or sell its products to any other person and is not bound by any agreement
that affects the Company's or any Subsidiary's exclusive right to develop,
manufacture, assemble, distribute, market or sell its products.
Section 2.33 Registration Rights. Except for certain registration
rights granted to J.P. Morgan Ventures Corporation and its affiliates pursuant
to the Registration Rights Agreement, dated July 16, 1996, between TTSL and
J.P. Morgan Ventures Corporation, and as provided herein and in the Unit
Purchase Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
Section 2.34 Minute Books. The minute books of the Company and each
Subsidiary provided to the Investors contain a summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
ARTICLE III
Covenants of the Company
Section 3.1 Financial Statements, Reports, Etc.
(a) The Company shall furnish to each Investor, as soon as
available but in no case later than ninety (90) days after the end of each
fiscal year of the Company, a consolidated balance sheet of the Company and its
subsidiaries as of the end of such fiscal year and the related consolidated
statements of income, stockholders' equity and cash flows for the fiscal year
then ended, prepared in accordance with generally accepted accounting
principles and certified by a firm of independent public accountants of
recognized national standing selected by the Board of Directors of the Company;
provided, that if the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company
may satisfy its obligations under this Section 3.1(a) by providing to each
Investor a copy of the Company's Annual Report on Form 10-K or 10-KSB and any
proxy statement and other annual report to shareholders provided to other
shareholders of the Company, as applicable.
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(b) The Company shall furnish to each Investor purchasing Shares
with an original aggregate purchase price in excess of $1,000,000 who continues
to hold securities of the Company with an aggregate liquidation preference (if
applicable) or a fair market value in excess of $500,000 (each such Investor, a
"Qualifying Investor") as soon as available, but in no case later than:
(i) forty-five (45) days after the end of each fiscal
quarter in each fiscal year (other than the last fiscal quarter in each fiscal
year), a consolidated balance sheet of the Company and its subsidiaries and the
related consolidated statements of income, stockholders' equity and cash flows,
unaudited but prepared in accordance with generally accepted accounting
principles and certified by the Chief Financial Officer of the Company, such
consolidated balance sheet to be as of the end of such fiscal quarter and such
consolidated statements of income, stockholders' equity and cash flows to be
for such fiscal quarter and for the period from the beginning of the fiscal
year to the end of such fiscal quarter, in each case with comparative
statements for the corresponding period of the prior fiscal year; provided,
that if the Company is subject to the reporting requirements of the Exchange
Act the Company may satisfy its obligations under this Section 3.1(b) by
providing each Qualifying Investor with a copy of the Company's quarterly
report on Form 10-Q or 10-QSB and any Form 8-K filed in such fiscal quarter, as
applicable.
(ii) thirty (30) days after the end of each month in each
fiscal year (other than after the last month in each fiscal year and the last
month in each fiscal quarter of each fiscal year), a consolidated balance sheet
of the Company and its subsidiaries and the related consolidated statements of
income, stockholders' equity and cash flows, unaudited but prepared in
accordance with generally accepted accounting principles and certified by the
Chief Financial Officer of the Company, such consolidated balance sheet to be
as of the end of such month and such consolidated statements of income,
stockholders' equity and cash flows to be for such month and for the period
from the beginning of the fiscal year to the end of such month, in each case
with comparative statements for the prior fiscal year, provided that the
Company's obligations under this Section 3.1(b) shall terminate upon the
completion of an Initial Public Offering (as defined below).
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For the purposes of this Agreement, the term "Initial Public Offering"
shall mean the Company's initial public offering of its Common Stock pursuant
to a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), declared effective by the Securities and Exchange
Commission, in which the aggregate gross proceeds to the Company equal or
exceed $25,000,000 (before deducting underwriting discounts and commissions and
offering expenses) at a price per share of at least $131.24 (as appropriately
adjusted for any stock dividend, stock split or similar recapitalization
event).
(c) Until the completion of an Initial Public Offering, as soon
as available but in no case later than 30 days prior to the start of each
fiscal year (except fiscal year 1997, for which such information shall be
delivered by February 1, 1997), the Company shall deliver to each Qualifying
Investor consolidated capital and operating expense budgets (including such
information, and variations from budget, with respect to the prior fiscal
year), cash flow projections and income and loss projections and a business
plan for the Company and its subsidiaries in respect of such fiscal year which
have been approved by the Company's Board of Directors, all itemized in
reasonable detail and prepared on a monthly basis, and, promptly after
preparation, any major revisions to any of the foregoing.
(d) Until the completion of an Initial Public Offering, the
Company shall furnish to each Qualifying Investor:
(i) promptly upon sending, making available or filing the
same, all press releases, reports and financial statements that the Company
sends or makes available to its stockholders or files with the SEC; and
(ii) promptly, from time to time, such other information
regarding the business, prospects, financial condition, operations, property or
affairs of the Company and its subsidiaries as such Qualifying Investor
reasonably may request.
All such financial statements, reports or other information (other
than publicly available information) provided to any Investor pursuant to this
Section 3.1 shall be deemed to be confidential information of the Company. Each
Investor agrees to use reasonable efforts to prevent the disclosure of such
confidential informa-
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tion to any other person (excluding its and its subsidiaries' and affiliates'
officers, employees, agents or counsel) except (i) as may be necessary or
desirable in connection with a request by a governmental agency, regulatory or
supervisory authority or court having or claiming jurisdiction over such
Investor including, without limitation, the National Association of Insurance
Commissioners, or as otherwise required by applicable law, (ii) information
obtained from a third party which is not subject to the provisions of any
confidentiality agreement in favor of the Company, (iii) in connection with the
enforcement of such Investor's rights hereunder or under the Certificate of
Incorporation and (iv) disclosure to other Investors.
Section 3.2 Properties, Business, Insurance. The Company shall
maintain and cause each of its subsidiaries to maintain as to their respective
properties and businesses, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
shall be deemed by the Company to be sufficient. The Company shall also
maintain in effect "key person" life insurance policies, payable to the
Company, on the lives of Douglas K. Mellinger and Srinivasan Viswanathan (so
long as each, respectively, remains an employee of the Company), in the amount
of $2,250,000 each, with the Company as beneficiary. The Company shall not
cause or permit any assignment or change in beneficiary and shall not borrow
against any such policy. If requested by Investors holding at least a majority
of the outstanding Shares the Company will add one designee of such Investors
as a notice party for each such policy and shall request that the issuer of
each policy provide such designee with ten (10) days' notice before such policy
is terminated (for failure to pay premiums or otherwise) or assigned or before
any change is made in the beneficiary thereof.
Section 3.3 Inspection, Consultation and Advice. Until the completion
of an Initial Public Offering, the Company shall permit and cause its
subsidiaries to permit each Qualifying Investor and such persons as it may
designate and reasonably acceptable to the Company, at such Qualifying
Investor's expense, to visit and inspect any of the properties of the Company
and its subsidiaries, examine their books and make copies and extracts
therefrom, discuss the affairs, finances and accounts of the Company and its
subsidiaries with their executive officers, key employees and public
accountants
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(and the Company hereby authorizes said accountants to discuss with such
Qualifying Investor and such designees such affairs, finances and accounts),
all at reasonable times and upon reasonable notice, and with due regard for the
Company's ongoing operations; provided, that the Investors shall have no right
to receive any confidential information from any customer of the Company or its
Subsidiaries; provided, further, that no information shall be supplied
hereunder to the extent that such information is subject to confidentiality
provisions in a given customer's contract with the Company. Any information or
documentation (other than publicly available information) provided to any such
Qualifying Investor or any such designee pursuant to this Section 3.3 shall be
deemed to be confidential information of the Company. Each Qualifying Investor
agrees to use reasonable efforts to prevent the disclosure of such confidential
information to any other person (excluding its and its subsidiaries' and
affiliates' officers, employees, agents or counsel) except (i) as may be
necessary or desirable in connection with a request by a governmental agency,
regulatory or supervisory authority or court having or claiming jurisdiction
over such Qualifying Investor including, without limitation, the National
Association of Insurance Commissioners, or as otherwise required by applicable
law, (ii) information obtained from a third party which is not subject to the
provisions of any confidentiality agreement in favor of the Company, (iii) in
connection with the enforcement of such Qualifying Investor's rights hereunder
or under the Certificate of Incorporation and (iv) disclosure to other
Qualifying Investors.
Section 3.4 Restrictive Agreements Prohibited. Neither the Company nor
its subsidiaries shall become a party to any agreement which by its terms
restricts the Company's performance of this Agreement or the Certificate of
Incorporation.
Section 3.5 Transactions with Affiliates. Except for the arrangements
between the Company and TTSL, and the transactions contemplated by this
Agreement or as otherwise approved by the Board of Directors, neither the
Company nor any of its subsidiaries shall enter into any transaction with any
director, officer, employee or holder of more than 5% of the outstanding
capital stock of any class or series of capital stock of the Company or any of
its subsidiaries, member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or member of the
family of any such person, is a director, officer, trustee,
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partner or holder of more than 5% of the outstanding capital stock thereof,
except for transactions on customary terms related to such person's employment.
Section 3.6 Expenses of Directors. The Company shall promptly
reimburse in full each director of the Company if he or she is not an employee
of the Company for all of his or her reasonable out-of-pocket expenses incurred
in attending each meeting of the Board of Directors of the Company or any
Committee thereof.
Section 3.7 Board of Directors Meetings. The Company shall use its
best efforts to ensure that meetings of its Board of Directors are held at
least four times each year and at least once each quarter. The Company shall
provide to each Qualifying Investor copies of all notices, reports (including
all materials distributed at the meeting and in the board books), minutes and
consents at the time and in the manner as they are provided to the Board of
Directors or committee, except for information reasonably designated as
proprietary information by the Board of Directors. Any information or
documentation (other than publicly available information) provided to any such
Qualifying Investor pursuant to this Section 3.7 shall be deemed to be
confidential information of the Company. Each Qualifying Investor agrees to use
reasonable efforts to prevent the disclosure of such confidential information
to any other person (excluding its and its subsidiaries' and affiliates'
officers, employees, agents or counsel) except (i) as may be necessary or
desirable in connection with a request by a governmental agency, regulatory or
supervisory authority or court having or claiming jurisdiction over such
Qualifying Investor including, without limitation, the National Association of
Insurance Commissioners, or as otherwise required by applicable law, (ii)
information obtained from a third party which is not subject to the provisions
of any confidentiality agreement in favor of the Company, (iii) in connection
with the enforcement of such Qualifying Investor's rights hereunder or under
the Certificate of Incorporation and (iv) disclosure to other Qualifying
Investors.
Section 3.8 By-laws. The Company shall at all times cause its By-laws
to provide that the number of directors fixed in accordance therewith shall in
no event conflict with any of the terms or provisions of the Series A Preferred
Stock as set forth in the Certificate of Incorporation. The Company shall at
all times maintain provisions in its By-laws and/or Certificate of
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Incorporation indemnifying all directors against liability and absolving all
directors from liability to the Company and its stockholders to the maximum
extent permitted under the laws of the State of Delaware.
Section 3.9 Performance of Contracts. The Company shall not amend,
modify, terminate, waive or otherwise alter, in whole or in part, any of the
Employee Agreements (as defined in Section 3.10 hereof) without the affirmative
vote of both of the Series A Board Members.
Section 3.10 Employee Agreements. The Company shall obtain, and shall
cause its Subsidiaries to obtain, an Employee Agreement in substantially the
form of Exhibit B or Exhibit C hereto, as applicable, from all future executive
officers and key employees of the Company or any of its Subsidiaries upon their
employment by the Company or any of such subsidiaries (the executive officer
and key employee Employee Agreements shall be collectively referred to herein
as the "Employee Agreements").
Section 3.11 Compliance with Laws. The Company shall comply, and use
its best efforts to cause each Subsidiary to comply, with all applicable laws,
rules, regulations and orders, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise.
Section 3.12 Keeping of Records and Books of Account. The Company
shall keep, and use its best efforts to cause its subsidiaries to keep,
adequate records and books of account, in which complete entries will be made
in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and such
subsidiary.
Section 3.13 Compensation and Audit Committees. The Company shall, by
amending its By-laws or otherwise, establish and maintain a Compensation
Committee and an Audit Committee of the Board of Directors, each of which shall
consist of three directors, two of whom (on each Committee) may be directors
elected solely by the holders of Common Stock or appointed by the members of
the Board of Directors (provided that one of such two committee members is not
an employee or Founder (as hereinafter defined) of the Company) and one of whom
(on each Committee) shall be a Series A Board Member. No additional employee
stock option plan, or employee stock purchase plan, employee restricted stock
plan or other
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employee stock plan shall be established without the approval of the
Compensation Committee. The Audit Committee shall select (subject to the
approval of the Board of Directors) and provide instructions to the Company's
auditors.
Section 3.14 Corporate Existence. The Company shall maintain its
corporate existence, rights and franchises in full force and effect.
Section 3.15 Limitations of Certain Rights. For purposes of
determining the number of Shares or Conversion Shares held by any Investor
under this Agreement, all affiliated holders of Shares or Conversion Shares
shall be treated as if such affiliated holders were a single Investor;
provided, that each such group of affiliated holders of Shares or Conversion
Shares shall designate a single representative who shall be granted authority
to (i) receive all notices and other information required to be provided to
such Investors, and (ii) exercise all rights of an Investor (or Qualifying
Investor, as applicable) on behalf of such group of affiliated holders. For the
purposes of this Section 3.15, "affiliates" shall include all mutual funds or
other pooled investment vehicles or entities under the control or management of
any Investor (including, without limiting the foregoing, the affiliated
investment vehicles of Tudor or its affiliates).
Section 3.16 Survival. Except for Sections 3.1, 3.18, 3.20, 3.22 and
3.23 hereof, the covenants set forth in Article III of this Agreement, to the
extent applicable to an Investor, shall survive with respect to each Investor
until the date such Investor no longer holds securities of the Company with an
aggregate liquidation preference (if applicable) or a fair market value of at
least $500,000.
Section 3.17 Use of Proceeds. The proceeds of the sale of the Offering
shall be used for the purposes stated in the Memorandum including, without
limitation, marketing, expansion, product development, acquisitions and general
operations.
Section 3.18 Preemptive Rights. Subject to the terms and conditions
specified in this Section 3.18, each time the Company proposes to offer any
shares of, or securities convertible into, or exchangeable or exercisable for
any shares of, its capital stock (whether newly issued or treasury stock), the
Company shall make an
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offering of such securities to each Investor in accordance with the following
provisions:
(a) The Company shall deliver a notice ("Notice") to each
Investor stating (i) its bona fide intention to offer such securities, (ii) the
number of such securities to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such securities.
(b) By written notification received by the Company, within
twenty (20) calendar days after giving of the Notice, each Investor (including
its affiliates) may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such securities which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Shares then held, by such Investor bears to the
total number of shares of Common Stock of the Company then outstanding
(assuming full conversion of all convertible securities and the exercise of all
outstanding options, warrants or rights to purchase Common Stock or other
securities convertible into or exercisable for shares of Common Stock
exercisable as of the date of such Notice) ("Pro Rata Share"). The Company
shall promptly, in writing, inform each Investor and holder of Units (a "Unit
Holder") that purchases all of such securities available to it (a
"Fully-Exercising Investor") of any other Investor's or Unit Holder's failure
to do likewise. During the ten-day period following delivery of such
information, each Fully-Exercising Investor shall be entitled to purchase that
portion of such securities for which Investors or Unit Holders were entitled to
subscribe but which were not subscribed by the Investors or Unit Holders which
is equal to the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion of the Shares then held, by such
Fully-Exercising Investor bears to the total number of shares of Common Stock
then outstanding (assuming full conversion of all convertible securities
(including the Warrants) and the exercise of all options, warrants or rights to
purchase Common Stock or other securities convertible into or exercisable for
shares of Common Stock) then held by all Fully-Exercising Investors and Unit
Holders ("Proportional Share"). If any Investor or Unit Holder fails to
purchase its Pro Rata Share or Proportional Share, any affiliate of such
Investor may purchase the shares available to, but not purchased by, such
Investor.
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(c) If all securities referred to in the Notice which Investors
are entitled to obtain pursuant to Section 3.18(b) are not elected to be
obtained as provided in Section 3.18(b) hereof, the Company may, during the
sixty (60) day period following the expiration of the last notice provision
provided in Section 3.18(b) hereof, offer the remaining unsubscribed portion of
such securities to any person or persons at a price not less than, and upon
terms no more favorable to the offeree than those specified in the Notice. If
the Company does not enter into an agreement for the sale of such securities
within such period, or if such agreement is not consummated within sixty (60)
days of the execution thereof, the right provided hereunder shall be deemed to
be revived and such securities shall not be offered unless first re-offered to
the Investors in accordance herewith.
(d) The preemptive right in this Section 3.18 shall not be
applicable to:
(i) Shares of Common Stock issuable or issued to employees,
advisors, consultants or outside directors of the Company directly or pursuant
to a stock option plan or restricted stock plan approved by the Board of
Directors of the Company, the total number of such shares not to exceed 130,200
(appropriately adjusted for stock splits, stock dividends or similar
recapitalizations);
(ii) Common Stock, or securities convertible into, or
exchangeable or exercisable for shares of Common Stock, issued or issuable in
connection with bona fide research, licensing or corporate partnering
relationships, in connection with equipment lease financing, or in connection
with non-convertible debt financing with institutional lenders, in each case
approved by a majority of the Board of Directors of the Company including both
of the Series A Board Members; provided, that such issuances of Common Stock
are for other than primarily equity financing purposes;
(iii) Common Stock issued or issuable upon conversion of
the Shares or the Warrants issued pursuant to the Unit Purchase Agreement;
(iv) Common Stock issued or issuable in connection with a
merger or consolidation as a result of which the holders of the Company's
outstanding securities immediately prior to the consummation of such
transaction hold voting securities in excess of fifty percent
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(50%) of the voting power of the surviving or resulting entity; or
(v) Common Stock issued in an Initial Public Offering.
(e) No holder shall be entitled to exercise any preemptive right
provided for in this Section 3.18 after the effective date of the registration
statement filed with respect to the Company's Initial Public Offering.
(f) The preemptive rights set forth in this Section 3.18 may be
assigned or transferred by an Investor to a transferee or assignee of any of
its shares of capital stock of the Company, provided such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
Section 3.19 Reservation of Shares. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, sufficient numbers of such duly authorized securities for the purpose of
effecting the exercise of the conversion of the Shares and otherwise complying
with the terms of this Agreement. If at any time the number of authorized but
unissued shares of such securities shall not be sufficient to effect the
exercise of the conversion of the Shares or otherwise to comply with the terms
of this Agreement, the Company will forthwith take such corporate action as may
be necessary to increase its authorized but unissued shares of such securities
to such number of shares as shall be sufficient for such purposes. The Company
will obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Shares.
Section 3.20 Co-Sale Rights. The Mellinger Group, L.L.C., Barbara
Mellinger and Jerome Mellinger shall be referred to as the "Founders." If any
Founder (a "Selling Founder") shall offer to sell any of the shares of Common
Stock held by it as of the date hereof or subsequently acquired to any third
party:
(a) Such Selling Founder shall deliver a notice (a "Sale Notice")
to each Investor stating (i) its bona fide intention to offer such Common
Stock, (ii) the number of shares of Common Stock to be offered, and (iii)
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the price and terms, if any, upon which it proposes to offer such Common Stock.
(b) By written notification received by the Selling Founder
within twenty (20) calendar days after giving of the Sale Notice, each Investor
(including its affiliates) may elect to sell, at the price and on the terms
specified in the Sale Notice, up to that portion of such Common Stock which
equals the proportion that the number of shares of Common Stock issued and held
or issuable upon conversion of the Shares then held by such Investor bears to
the total number of shares of Common Stock issued and held, or issuable upon
conversion of the Shares or Warrants then held by the Selling Founder and all
other Investors and any Unit Holders electing to participate in such sale.
The Selling Founders shall promptly, in writing, inform each Investor
and each Unit Holder that sells all of such securities available to it (a
"Fully-Selling Investor") of any other Investor's or Unit Holder's failure to
do likewise. During the ten-day period following delivery of such information,
each Fully-Selling Investor shall be entitled to sell that portion of such
securities which Investors or Unit Holders were entitled to sell but which were
not sold by the Investors or Unit Holders which is equal to the proportion that
the number of shares of Common Stock issued and held, or issuable upon
conversion of the Shares then held, by such Fully-Selling Investor bears to the
total number of shares of Common Stock then outstanding (assuming full
conversion of all convertible securities (including the Warrants) and the
exercise of all options, warrants or rights to purchase Common Stock or other
securities convertible into or exercisable for shares of Common Stock) then
held by all Fully-Selling Investors ("Co-Sale Proportional Share"). If any
Investor fails to sell its Co-sale Proportional Share, any affiliate of such
Investor may sell the shares available to, but not sold by, such Investor.
(c) Each Investor electing to participate shall effect its
participation in the sale by promptly delivering to the Selling Founder for
transfer to the prospective investor one or more certificates, properly
endorsed for transfer, which represent the number of shares of Common Stock of
the Company which such Investor elects to sell.
(d) The stock certificate or certificates that the Investor
delivers to the Selling Founder shall
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be transferred to the prospective purchaser in consummation of the sale of the
Common Stock, pursuant to the terms and conditions specified in the Sale
Notice, and the Selling Founder shall concurrently therewith remit to such
Investor that portion of the sale proceeds to which such Investor is entitled
by reason of its participation in such sale. To the extent that any prospective
purchaser or transferee prohibits such assignment or otherwise refuses to
purchase shares or other securities from an Investor exercising its rights of
co-sale hereunder, the Selling Founders shall not sell to such prospective
purchaser or purchasers any Common Stock unless and until, simultaneously with
such sale, the Selling Founder shall purchase an equivalent number of such
shares or other securities from such Investor.
(e) After the expiration of the notice period provided in
paragraph (b) hereof, the Selling Founder may, not later than sixty (60) days
following the expiration of the notice period provided in paragraph (b) hereof,
enter into an agreement providing for the closing of the sale or transfer of
the Common Stock (including shares of Common Stock of Investors or Unit Holders
electing to participate in such sale) covered by the Sale Notice within thirty
(30) days of such agreement on terms and conditions not more favorable to the
Selling Founder than those described in the Sale Notice. Any proposed transfer
on terms and conditions more favorable to the Selling Founder than those
described in the Sale Notice, as well as any subsequent proposed transfer of
any of the Common Stock by the Selling Founder, shall again be subject to the
Co-Sale Rights of the Investors and shall require compliance by the Selling
Founder with the procedures described in this Section 3.20.
(f) In the event any Founder should sell any Common Stock in
contravention of the participation rights of the Investors under this Agreement
(a "Prohibited Transfer"), the Investors, in addition to such other remedies as
may be available at law, in equity or hereunder, shall have the put option
provided in Section 3.20(f)(i) below, and such Founder shall be bound by the
applicable provisions of such put option.
(i) In the event of a Prohibited Transfer, each Investor shall
have the right to sell to such Founder, and such Founder shall have the
obligation to purchase, a number of shares of Common Stock equal to the number
of shares that such Investor would have been entitled to transfer to the
purchaser in the Prohibited
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Transfer pursuant to the terms hereof. Such sale shall be made on the following
terms and conditions:
(A) The price per share at which the shares are to be sold to
such Founder shall be equal to the price per share paid by the
purchaser to such Founder in the Prohibited Transfer. Such Founder
shall also reimburse each Investor for reasonable fees and expenses,
including legal fees and expenses, incurred pursuant to the exercise
or the attempted exercise of the Investor's rights under this Section
3.20.
(B) Within a period of thirty (30) days after the later of the
dates on which any Investor (i) receives notice from a Founder of the
Prohibited Transfer or (ii) otherwise becomes aware of the Prohibited
Transfer, that Investor shall, if exercising the put option created
hereby, deliver to such Founder the certificate or certificates
representing shares to be sold, each certificate to be properly
endorsed for transfer.
(C) Such Founder shall, immediately upon receipt of the
certificate or certificates for the shares to be sold by a Investor
pursuant to Section 3.20 (f)(i)(B), pay to the order of that Investor
the aggregate purchase price therefor and the reasonable amount of any
fees and expenses reimbursable under Section 3.20(f)(i)(A) (each in
immediately available funds).
(D) Notwithstanding the foregoing, any attempt to transfer shares
of the Company in violation of Section 3.20 hereof shall be void, and
the Company agrees it will not effect such a transfer nor will it
treat any alleged transferee as the holder of such shares without the
written consent of Investors having the right to amend this Agreement
as provided below.
(g) Notwithstanding the foregoing, the provisions of this Section
3.20 shall not apply to (i) a sale or sales, or other transfer or transfers, in
one or more transactions, by a Founder of up to an aggregate of five percent
(5%) of the shares of Common Stock held on the date hereof, or issuable upon
the exercise of any options held on the date hereof, by such Founder, and (ii)
the sale by Jerome Mellinger of 56,189 shares of Common Stock to the Company on
the date hereof.
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(h) The Co-Sale Rights set forth in this Section 3.20 may be
assigned and transferred by an Investor to a transferee or assignee of any of
its shares of capital stock of the Company, provided such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
(i) The Co-Sale Rights set forth in this Section 3.20 shall
terminate upon the closing of an Initial Public Offering.
(j) Notwithstanding the provisions of this Section 3.20, Jerome
Mellinger shall be permitted to sell up to 6,381 shares of Common Stock without
complying with this Section 3.20.
Section 3.21 Increase in Expenses. The approval of a majority of the
non-employee directors of the Company will be necessary for any increase in the
level of operating expenses to be made by the Company in excess of ten percent
(10%) of the aggregate operating expenses set forth in the budgets provided to
Qualifying Investors pursuant to Section 3.1(c) hereof.
Section 3.22 Use of Name and Management Responsibility. The Company
shall not use or reference the name of any Investor in any publicly available
document or communication, including but not limited to any press release,
without the prior written approval of such Investor. The Company acknowledges
that each Investor has no responsibility for managing the Company.
Section 3.23 Right of First Offer From Founders. Subject to the terms
and conditions specified in this Section 3.23, each Founder hereby grants to
each Investor a right of first offer with respect to future sales or transfers
by such Founder of his Additional Shares (as hereinafter defined).
Each time a Founder proposes to sell or transfer any shares of his
capital stock of the Company ("Additional Shares"), such Founder (a
"Transferring Founder") shall first make an offering of such Additional Shares
to each Investor in accordance with the following provisions:
(a) The Transferring Founder shall deliver a written notice (an
"ROF Notice") to the Investors stating (i) his bona fide intention to sell or
transfer such Additional Shares, (ii) the number of such Addition-
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al Shares to be sold or transferred, and (iii) the price and terms, if any,
upon which he proposes to sell or transfer such Additional Shares.
(b) Within 20 calendar days after receipt of the ROF Notice, each
Investor may elect to purchase or obtain, at the price and on the terms
specified in the ROF Notice, up to that portion of such Additional Shares which
equals the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion of the Shares then held, by such Investor
bears to the total number of shares of Common Stock of the Company then held by
all Investors and Unit Holders (assuming full conversion of all convertible
securities and exercise of all exercisable securities). The Transferring
Founder shall promptly, in writing, inform each Investor and Unit Holder that
purchases all of such shares available to it (a "Fully-Participating Investor")
of any other Investor's or Unit Holder's failure to do likewise. During the
ten-day period following delivery of such information, each Fully-Participating
Investor shall be entitled to purchase that portion of such Additional Shares
for which Investors or Unit Holders were entitled to subscribe but which were
not subscribed by the Investors or Unit Holders which is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Shares then held, by such Fully-Participating
Investor bears to the total number of shares of Common Stock then outstanding
(assuming full conversion of all convertible securities (including the
Warrants) and the exercise of all options, warrants or rights to purchase
Common Stock or other securities convertible into or exercisable for shares of
Common Stock) then held by all Fully-Participating Investors.
(c) If all Additional Shares which Investors are entitled to
obtain pursuant to subsection 3.23(b) are not elected to be obtained as
provided in subsection 3.23(b) hereof, the Transferring Founder may, during the
60-day period following the expiration of the period provided in subsection
3.23(b) hereof, offer the remaining unsubscribed portion of such Additional
Shares to any person or persons at a price not less than, and upon terms no
more favorable to the offeree or transferee than those specified in the ROF
Notice. If the Transferring Founder does not enter into an agreement for the
sale of the Additional Shares within such period, or if such agreement is not
consummated within 60 days of the execution thereof, the right provided
hereunder shall be
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deemed to be revived and such Additional Shares shall not be sold or
transferred unless first reoffered to the Investors in accordance herewith.
(d) No Founder may sell or transfer any of his capital stock of
the Company without first complying with the right of first offer provisions of
this Section 3.23.
(e) The right of first offer in this Section 3.23 shall expire
upon an Initial Public Offering.
(f) The right of first offer set forth in this Section 3.23 may
be assigned or transferred by an Investor to a transferee or assignee of any of
its shares of capital stock of the Company, provided such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
(g) Notwithstanding the provisions of this Section 3.23, Jerome
Mellinger shall be permitted to sell up to 6,381 shares of Common Stock without
complying with this Section 3.23.
Section 3.24 Board Size. The Company hereby covenants and agrees that
the number of directors which shall comprise the Company's Board of Directors
shall not exceed nine (9) directors.
ARTICLE IV
Representations, Warranties and Covenants
of the Investors
Each of the following representations, warranties and covenants is
made by each Investor severally (as to itself) and not jointly.
Section 4.1 Authorization. Each Investor represents and warrants that
this Agreement when executed shall constitute its valid and legally binding
obligation, enforceable in accordance with its terms except as enforceability
thereof may be limited by bankruptcy, insolvency, reorganization or moratorium
or other similar laws relating to the enforcement of creditors' rights
generally and by general equitable principles.
Section 4.2 Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance
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upon such Investor's representation to the Company, which by such Investor's
execution of this Agreement such Investor hereby confirms, that the Shares and
any Conversion Shares to be received by such Investor hereunder (collectively,
the "Securities"), will be acquired for investment for such Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, each Investor further represents that
such Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to any of the Securities. Each Investor
represents that it has full power and authority to enter into this Agreement.
Section 4.3 Disclosure of Information. Each Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the sale of the Shares.
Section 4.4 Restricted Securities. Each Investor understands that the
Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as such securities are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act, only in certain limited circumstances.
Section 4.5 Further Limitations on Disposition. Without in any way
limiting the representations set forth in Section 4.4 above, each Investor
further agrees not to make any disposition of all or any portion of the Shares
being purchased hereunder (or any Securities issuable upon the exercise and/or
conversion thereof) unless:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition,
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(ii) if reasonably requested by the Company, such Investor shall have furnished
the Company with a satisfactory opinion of counsel (which counsel may be
in-house counsel to the Investor), that such disposition will not require
registration of the Securities under the Securities Act (iii) the transferee
has agreed in writing for the benefit of the Company to be bound by this
Section 4.5, provided and to the extent such section is then applicable and
(iv) such Investor shall have complied with Section 4.10 hereof.
Notwithstanding the foregoing, the requirements of this paragraph (b) shall not
be applicable to sales of Shares or Securities made pursuant to Rule 144 under
the Securities Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement, notice to the Company or opinion of
counsel shall be necessary for (i) a transfer by an Investor which is a
partnership to an affiliate or partner of such partnership or a retired partner
of such partnership who retires after the date hereof, or to the estate of any
such partner or retired partner or the transfer by gift, will or intestate
succession of any partner to his spouse or to the siblings, lineal descendants
or ancestors of such partner or his spouse, or (ii) a transfer by an Investor
which is a corporation to any corporate entities who are controlling,
controlled by or under common control with such Investor, or (iii) a transfer
by an Investor which is trust to a grantor of such trust or a nominee thereof,
or (iv) a transfer by an Investor to any entity which is included with in the
definition of "Investor" hereunder; provided, in any such case, that the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if he were an original Investor hereunder.
Section 4.6 Legends. It is understood that the certificates evidencing
the Securities may bear a legend substantially similar to the following:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED
UNDER SUCH ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE
SECURITIES LAWS."
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Section 4.7 Accredited Investor. Each Investor is an Accredited
Investor within the definition set forth in Rule 501(a) under the Securities
Act.
Section 4.8 [RESERVED]
Section 4.9 No Sales to Competitors. Prior to an Initial Public
Offering, each Investor covenants not to sell any Shares or Conversion Shares
or other securities of the Company to any competitor of the Company; provided,
that no bank, investment bank, insurance company, mutual fund or other pooled
investment vehicle shall be considered a competitor of the Company hereunder.
Section 4.10 Notification of Investor Sales of Securities. Prior to an
Initial Public Offering, if any Investor shall offer to sell any of the
Securities held by it to any third party, each such Investor agrees to notify
the Company before any such sale and to inform the Company of the identity of
the proposed purchaser of such Securities.
ARTICLE V
Conditions of Each Investor's
Obligations at Closing
The obligations of each Investor under Section 1.1 of this Agreement
are subject to the fulfillment on or before the Closing of each of the
following conditions, the waiver of which shall not be effective against any
Investor who does not consent in writing thereto:
Section 5.1 Representations and Warranties. The representations and
warranties made by the Company in Article II hereof shall be true and correct
in all material respects when made and shall be true and correct in all
material respects on the date of the Closing, except that the number of issued
and outstanding shares of the Company's capital stock may be affected pursuant
to (A) sales of Shares pursuant to this Agreement or shares of Common Stock
pursuant to the Unit Purchase Agreement or (B) any conversions of the Shares or
Warrants.
Section 5.2 Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to each Investor at the Closing a certificate certifying
that the conditions specified in Section 5.1 have been fulfilled and that there
has been no material adverse change in the
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business, affairs, prospects, operations, properties, assets, or financial
condition of the Company and its Subsidiaries taken as a whole since the date
of the audited Financial Statements.
Section 5.3 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors and their counsel and such counsel shall have
received all such counterpart original and certified or other copies of such
documents as the Investors may reasonably request, including but not limited to
a copy of this Agreement executed by the Company.
Section 5.4 Opinion of Company Counsel. Each Investor shall have
received from Skadden, Arps, Slate, Meagher & Flom, counsel for the Company, an
opinion, dated as of the Closing, in form and substance satisfactory to the
Investors in substantially the form of Exhibit D attached hereto.
Section 5.5 Performance. The Company shall have performed and complied
with all agreements contained herein required to be performed or complied with
by it prior to or at the Closing, and the Chief Executive Officer of the
Company shall have certified to the Investors in writing to such effect and to
the further effect that all of the conditions set forth in this Article V have
been satisfied.
Section 5.6 Purchase by Other Investors. Each Investor shall have
purchased and paid for the Shares being purchased by it on the date of the
Closing.
Section 5.7 Supporting Documents. The Investors and their counsel
shall have received copies of the following documents at or prior to the
Closing:
(i) (A) the Certificate of Incorporation and Certificate of
Amendment, certified as of a recent date by the Secretary of State of the State
of Delaware and (B) a certificate of said Secretary dated as of a recent date
as to the due incorporation and good standing of the Company, the payment of
all excise taxes by the Company;
(ii) a certificate of the Secretary or an Assistant Secretary of
the Company dated the date of the
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Closing and certifying: (A) that attached thereto is a true and complete copy
of the By-laws of the Company as in effect on the date of such certification;
(B) that attached thereto is a true and complete copy of all resolutions
adopted by the Board of Directors or the stockholders of the Company
authorizing the execution, delivery and performance of this Agreement, the
issuance, sale and delivery of the Shares, the reservation of the Conversion
Shares, the issuance and delivery of the Conversion Shares upon conversion of
the Shares and the Certificate of Amendment, and that all such resolutions are
in full force and effect and are all the resolutions adopted in connection with
the transactions contemplated by this Agreement; (C) that the Certificate of
Incorporation has not been amended since the date of the last amendment
referred to in the certificate delivered pursuant to clause (i)(B) above; and
(D) to the incumbency and specimen signature of each officer of the Company
executing this Agreement, the stock certificates representing the Shares and
any certificate or instrument furnished pursuant hereto, and a certification by
another officer of the Company as to the incumbency and signature of the
officer signing the certificate referred to in this clause (ii); and
(iii) such additional supporting documents and other
information with respect to the operations and affairs of the Company as the
Investors or their counsel reasonably may request.
Section 5.8 Certificate of Incorporation. The Certificate of
Incorporation, which shall include the Certificate of Amendment, shall read in
its entirety as set forth in Exhibit A.
Section 5.9 Employee Agreements. Copies of the Employee Agreements
shall have been delivered to counsel for the Investors.
Section 5.10 By-Laws. The By-Laws of the Company shall have been
amended as described in Section 2.2(e) hereof.
Section 5.11 Fees of Investors' Counsel. The Company shall have paid,
or shall have made provision to pay, in accordance with Section 8.8 the
reasonable fees and disbursements of counsel for The Travelers Insurance
Company invoiced at the Closing.
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ARTICLE VI
Conditions of the Company's Obligations at Closing
The obligations of the Company to each Investor under this Agreement
are subject to the delivery on or before the Closing of the purchase price to
be paid by such Investor specified in Section 1.1.
ARTICLE VII
Registration Rights
Section 7.1 Definitions. For purposes of this Article VII:
(a) The terms "register", "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registered Securities" means any Registrable
Securities which have been included in an effective Registration Statement
pursuant to the terms hereof;
(c) The term "Registrable Securities" means the Common Stock (i)
held by the Founders and Management as of the Closing, (ii) issued pursuant to
the Unit Purchase Agreement (iii) into which any Shares or Warrants shall have
been (or can be) converted, (iv) for which any warrants or options issued (or
issuable) by the Company to Founders, Management or Investors have been or can
be exercised and (v) acquired by an Investor or Unit Holder through any other
means after the date hereof; provided, that, Registrable Securities shall not
include any Registrable Securities, securities convertible into Registrable
Securities or securities exercisable for securities convertible into
Registrable Securities sold by a person in a transaction in which his rights
under this Agreement are not assigned and the purchaser thereof has not assumed
the obligations of an Investor hereunder in accordance with Section 7.13
hereof; provided, however, that as to any particular security or securities
that are contained in Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such
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securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement or (ii) such securities shall have been sold to the public pursuant
to Rule 144;
(d) The number of shares of "Registrable Securities Then
Outstanding" shall be equal to the total of (i) the number of shares of Common
Stock which has been issued, or which shall be issued, pursuant to the Unit
Purchase Agreement to Unit Holders, and (ii) the number of shares of Common
Stock issued (or issuable) upon conversion of any Shares or Warrants; provided,
however, that in each case such shares are Registrable Securities (or would be
if issued);
(e) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 7.13 hereof; and
(f) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any registration form under the Securities
Act subsequently adopted by the Securities and Exchange Commission ("SEC")
which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(g) The term "Management" means the individuals set forth on
Schedule 2.23 hereof.
Section 7.2 Demand for Registration.
(a) If the Company shall receive, at any time after a date six
(6) months after the effective date of a registration statement for the Initial
Public Offering, a written request from either (i) the Management of the
Company (a "Management Demand Registration"), or (ii) the Holders of
thirty-three percent (33%) of the Registrable Securities Then Outstanding (an
"Investor Demand Registration") that the Company file a registration statement
under the Securities Act covering the registration of the shares of Registrable
Securities that are the subject of such request (a "Demand Registration"), then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders of Registrable Securities and shall,
subject to the limitations of Sections 7.2(d) and (e), use its best efforts to
effect as soon as practicable the registration
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under the Securities Act in accordance with Section 7.4 hereof of all
Registrable Securities which all of the Holders request be registered within
forty-five (45) days after the mailing of such notice by the Company in
accordance with Section 8.6. Management Holders shall have piggy-back
registration rights with respect to any Investor Demand Registration, and
non-Management Holders shall have piggy-back registration rights with respect
to any Management Demand Registration, in each case subject to the provisions
of paragraph (b), below.
(b) If such Holders initiating a Demand Registration (the
"Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 7.2, and the Company
shall include such information in the written notice referred to in Section
7.2(a). In such event, the right of any Holder to include his securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's securities in the underwriting
to the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company as
provided in Section 7.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 7.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, then the Initiating Holders shall so advise all
Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares of such securities that may be
included in the underwriting shall be allocated (x) first among all of the
respective Holders thereof within the class who requested the Demand
Registration, including the Initiating Holders, whose shares are to be included
in such registration by a pro rata allocation, and then (y) among any other
persons, if any, exercising piggyback rights (including Management, in the case
of an Investor Demand Registration, or non-Management Holders, in the case of a
Management Demand Registration, as the case may be) by a pro rata allocation.
(c) The Company shall be obligated to effect only two (2)
Investor Demand Registrations under this Section 7.2, and only one (1)
Management Demand
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Registration under this Section 7.2. For the purposes of this paragraph (c),
the exercise of piggy-back registration rights by Management with respect to an
Investor Demand Registration shall not constitute a Management Demand
Registration, and the exercise of piggy-back registration rights by
non-Management Holders with respect to a Management Demand Registration shall
not constitute an Investor Demand Registration.
(d) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the Chief Executive Officer
of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right with respect to
a Demand Registration more than once in any twelve (12) month period.
(e) Notwithstanding the foregoing provisions of this Section
7.2, if at the time of any request by the Initiating Holders under this Section
7.2, the Company has fixed plans to file within sixty (60) days after such
request for the sale of any of its securities in a public offering under the
Securities Act, no registration of the Initiating Holders' securities shall be
initiated under this Section 7.2 until one hundred eighty (180) days after the
effective date of such registration unless the Company is no longer proceeding
diligently to effect such registration; provided that the Company shall provide
the Holders of Registrable Securities the right to participate in such public
offering pursuant to, and subject to, Section 7.3 hereof.
(f) A registration request pursuant to this Section 7.2 may be
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities Then Outstanding to be registered thereunder, subject to
the provisions of Section 7.6 hereof.
Section 7.3 Company Registration. If at any time after the Initial
Public Offering (but without any obligation to do so), the Company proposes to
register (including for this purpose a registration effected by the Company for
stockholders other than the Holders of
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Registrable Securities) any of its stock or other securities under the
Securities Act in connection with the public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities
to participants in a Company stock plan, or a registration on any form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder of
Registrable Securities written notice of such registration. Upon the written
request of any Holder given within twenty (20) days after mailing of such
notice by the Company in accordance with Section 8.6, the Company shall use its
best efforts, subject to the provisions of Section 7.8, to cause to be
registered under the Securities Act all of the Registrable Securities that
such Holder has requested to be registered (a "Piggy Back Registration");
provided, that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 7.3 without obligation to any
Holder.
Section 7.4 Obligations of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously and reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred eighty (180) days;
provided, however, that such 180-day period shall be extended for a period of
time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of the Company.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement.
(c) Furnish to the Holders of Registered Securities such numbers
of copies of a prospectus, in-
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cluding a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in
order to facilitate the disposition of Registered Securities owned by them.
(d) Use its best efforts to register and qualify the Registered
Securities under such other securities or Blue Sky laws of such jurisdictions
as shall be reasonably requested by the Holders thereof, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder of
Registrable Securities participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registered Securities covered by such
registration statement in the event the Company has delivered preliminary or
final prospectuses to any such Holder and, after having done so, such
prospectus is amended to comply with the requirements of the Securities Act.
Upon such notification, such Holders shall immediately cease making offers of
Registered Securities and return all prospectuses to the Company. The Company
shall promptly provide such Holders with revised prospectuses and, following
receipt of the revised prospectuses, such Holders shall be free to resume
making offers of the Registered Securities.
(g) Furnish, at the request of any Holder requesting registration
of Registrable Securities pursuant to this Agreement, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Agreement, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders
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of such Registered Securities and (ii) a letter dated such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders of such Registered Securities.
(h) Use its best efforts to list the Registrable Securities
covered by such registration statement with any securities exchange on which
the Common Stock of the Company is then listed.
(i) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration.
Section 7.5 Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Agreement
with respect to the Registrable Securities of any selling Holder (the "Selling
Holder") that such Selling Holder shall furnish to the Company such information
regarding itself, the Registrable Securities held by it, and the intended
method of disposition of such securities as shall be required to effect the
registration of such Selling Holder's Registrable Securities.
Section 7.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions, which discounts and commissions shall
be paid by the Selling Holders on a pro rata basis according to the amount of
Registrable Securities sold by each Selling Holder, incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2, including
(without limitation) all registration, filing and qualification fees, printing
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the Selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 7.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities Then
Outstanding to be registered thereunder (in which case all Initiating Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities Then Outstanding to be registered thereunder agree to forfeit
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their right to one Demand Registration; provided further, however, that if at
the time of such withdrawal, such Holders have learned of a material adverse
change in the condition or business of the Company from that known to such
Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then such Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Subsection 7.2(a).
Section 7.7 Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with all registration, filing or
qualification of Registrable Securities with respect to all Piggy-Back
Registrations pursuant to Section 7.3 for each Holder (which right may be
assigned as provided in Section 7.13), including (without limitation) all
registration, filing, and qualification fees, printing and accounting fees
relating or apportionable thereto, and the fees and disbursements of one
counsel for the Selling Holders of Registered Securities (provided that the
fees of such counsel shall not exceed $10,000), but excluding underwriting
discounts and commissions relating to Registered Securities, which shall be
paid by the Selling Holders on a pro rata basis according to the amount of
Registrable Securities sold by each Selling Holder.
Section 7.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 7.3 to include any of such Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (or by other persons entitled to select the underwriters), and then only
in such quantity as the underwriters determine in their sole discretion will
not jeopardize the success of the offering by the Company. If the total amount
of securities, including Registrable Securities, requested by stockholders to
be included in such offering exceeds the amount of securities sold other than
by the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such
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other proportions as shall mutually be agreed to by such selling stockholders),
but in no event shall (i) the amount of Registrable Securities of the Selling
Holders included in the offering be reduced below thirty-three and one-third
percent (33 1/3%) of the total amount of the selling stockholder securities
included in such offering or (ii) notwithstanding (i) above, any shares being
sold by a stockholder exercising a demand registration right under Section 7.2
be excluded from such offering except in accordance with Section 7.2.
Section 7.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
Section 7.10 Indemnification. In the event any Registrable Securities
are included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Selling Holder of Registered Securities and such Selling
Holder's officers and directors, any underwriter (as defined in the Securities
Act) for such Selling Holder and each person, if any, who controls such Selling
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act (each, an "Indemnitee"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, or the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
or the Exchange Act or any state securities law; and the Company will pay to
each such Indemnitee any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity
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agreement contained in this Section 7.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Indemnitee. Notwithstanding the above, the
foregoing indemnity agreement is subject to the condition that, insofar as it
relates to any such untrue statement, alleged untrue statement, omission or
alleged omission made in a preliminary prospectus, such indemnity agreement
shall not inure to the benefit of any Holder if a copy of the final prospectus
was not furnished to the person asserting the loss, liability, claim or damage
at or prior to the time such action is required by the Securities Act if the
final prospectus corrected the untrue statement or omission or alleged untrue
statement or omission and was (i) provided to the Holder, and (ii) such Holder
was required by applicable law to deliver such prospectus.
(b) To the extent permitted by law, each Selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Selling Holder selling securities in such registration statement and
any controlling person of any such underwriter or other Selling Holder, against
any losses, claims, damages, or liabilities (joint or several) to which any of
the foregoing persons may become subject, under the Securities Act, or the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Selling Holder expressly for use in connection
with such registration; and each such Selling Holder will pay any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this Section 7.10(b), in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 7.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of
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the Selling Holder, which consent shall not be unreasonably withheld; further
provided, that, in no event shall any indemnity under this Section 7.10(b)
exceed the gross proceeds (excluding underwriting discounts and commissions)
from the offering received by such Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 7.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 7.10,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate, in the reasonable judgment of the
indemnified party, due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 7.10 to the extent of
such prejudice, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 7.10.
(d) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 7(a) or
7(b) but it is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case, even though
this Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Securities Act,
the Exchange Act, or otherwise, then the Company (including for this purpose
any contribution made by or on behalf of any officer, director, employee, agent
or counsel of the Company, or any controlling person of the Company), on the
one hand, and the Holders (including for
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this purpose any contribution by or on behalf of an indemnified party), on the
other hand, shall contribute to the losses, liabilities, claims, damages, and
expenses to which any of them may be subject, in such proportions as are
appropriate to reflect the relative fault of the Company and the Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses shall also be considered.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by the Holders, and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement, alleged statement, omission, or alleged
omission. The Company and Holders agree that it would be unjust and inequitable
if the respective obligations of the Company and the Holders for contribution
were determined by pro rata or per capital allocation of the aggregate losses,
liabilities, claims, damages, and expenses or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
7.10(d). No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 7.10(d), each person, if any, who controls a Holder within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act and each officer, director, stockholder, employee, agent, and counsel of
the Holders, shall have the same rights of contribution as the Holder, and each
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act and each officer,
director, employee, agent, and counsel of the Company, shall have the same
rights to contribution as the Company, subject in each case to the provisions
of this Section 7.10(d). Anything in this Section 7.10(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 7.10(d) is intended to supersede any right to contribution under the
Securities Act, the Exchange Act, or otherwise.
(e) The obligations of the Company and Selling Holders under this
Section 7.10 shall survive the completion of any offering of Registered
Securities under this Agreement, and otherwise.
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Section 7.11 Reports Under Securities Exchange Act of 1934. With a
view to making available to the Holders of Registrable Securities the benefits
of Rule 144 and any other rule or regulation of the SEC that may at any time
permit a Holder thereof to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of the
fiscal year in which the first registration statement filed by the Company for
the offering of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at
any time after ninety (90) days after the effective date of the registration
statement filed by the Company under the Exchange Act), the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or regulation
of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
Section 7.12 Form S-3 Registration. If at any time after a date twelve
(12) months after the effective date of the Initial Public Offering, the
Company shall receive a written request from the Holders of thirty-three
percent (33%) of the Registrable Securities Then Outstanding
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that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holders, the Company will:
(a) promptly mail written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities
of any other Holder or Holders joining in such request as are specified in a
written request received by the Company within twenty (20) days after the
mailing of such written notice from the Company; provided, however, that the
Company shall not be obligated to effect any such registration, qualification
or compliance, pursuant to this Section 7.12: (i) if Form S-3 (or a similar
successor form) is not available for such offering by the requesting Holders;
(ii) if the requesting Holders, together with the Holders of any other
securities of the Company entitled to inclusion in such registration, propose
to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public (net of any underwriters discounts or
commissions) of less than $1,000,000; (iii) if the Company shall furnish to the
Holders a certificate signed by the Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 Registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than ninety (90) days after receipt of the
request of the Holder or Holders under this Section 7.12; provided, however,
that the Company shall not utilize this right more than once in any twelve (12)
month period; (iv) if the Company has, within the six (6) month period
preceding the date of such request, already effected one registration on Form
S-3 for Holders of Registrable Securities pursuant to this Section 7.12; (v) in
any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance; or (vi) if the
requesting Holder or Holders receive an opinion from counsel to the Company
that registration of
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such Holder's or Holders' Registrable Securities is not required under the
Securities Act in order to effect the sale or other distribution contemplated
by such Holder or Holders.
(c) The Company shall be obligated to effect only three (3)
registrations pursuant to this Section 7.12.
(d) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Holders. All expenses incurred in connection with such registrations
requested pursuant to Section 7.12, including (without limitation) all
registration, filing, qualification, printing and accounting fees and the
reasonable fees and disbursements of one counsel for the Selling Holder or
Selling Holders and counsel for the Company, but excluding any underwriters'
discounts or commissions associated with Registered Securities, shall be borne
by the Company. Registrations effected pursuant to this Section 7.12 shall not
be counted as demands for registration pursuant to Section 7.2 or registrations
effected pursuant to Section 7.3.
Section 7.13 Assignment of Registration Rights. The rights to cause
the Company to register Registrable Securities pursuant to this Agreement may
be assigned (but only with all related obligations) by a Holder to a transferee
or assignee of such Registrable Securities, provided: (i) such assignment shall
not be effective until the Company is furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; (ii) such assignment shall
be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted
under the Securities Act; (iii) such transferee or assignee shall as a
condition to such transfer, deliver to the Company a written instrument by
which such transferee agrees to be bound by the obligations imposed upon
Holders of Registrable Securities pursuant to this Agreement; (iv) any such
transferee or assignee may not again transfer such rights to any other person
or entity, other than as provided in this Section 7.13; and (v) such transfer
of Registrable Securities is in compliance with applicable federal and state
securities laws.
Section 7.14 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement,
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the Company shall not, without the prior written consent of the Holders of 66%
of the Registrable Securities Then Outstanding, enter into any agreement with
any holder or prospective holder of any securities of the Company which would
allow such holder or prospective holder (a) to include such securities in any
registration filed under this Agreement, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included, or (b) to make a demand registration which could result in such
registration statement being declared effective within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section
7.2.
Section 7.15 Amendment of Registration Rights. Any provision of this
Article VII may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Company and the Holders of
66% of the Registrable Securities Then Outstanding. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each Holder of
any Registrable Securities then outstanding, each future Holder of all such
Registrable Securities and the Company.
Section 7.16 Termination of Registration Rights. No Holder shall be
entitled to exercise any right provided for in this Section 7 after seven (7)
years following the consummation of an Initial Public Offering.
ARTICLE VIII
Miscellaneous
Section 8.1 Survival of Warranties. The warranties, representations
and covenants of the Company and the Investors contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
Section 8.2 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including permitted transferees of any of the Series A Pre-
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ferred Stock or Conversion Shares issued hereunder or upon exercise of any
options). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
Section 8.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York applicable to contracts made
and to be performed in such jurisdiction, without regard to choice of law
principles.
Section 8.4 Counterparts; Facsimile Counterparts. This Agreement may
be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Agreement may be executed by means of facsimile transmission;
provided, that an original, manually executed copy of such facsimile
counterpart shall be promptly sent by overnight delivery to the other parties
to this Agreement.
Section 8.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 8.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with a reputable overnight courier or with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party on the signature
page hereof, or at such other address as such party may designate by ten (10)
days advance written notice to the other parties. Copies of Notices to be given
to the Investors shall be sent to the Investors at their addresses set forth on
the signature pages hereof, or as otherwise specified by such Investor from
time to time upon notification to the Company.
Section 8.7 Finder's Fee. Each party represents that it neither is nor
will be obligated for any finder's fee or commission in connection with this
transaction, except for the obligations of the Company to Smith Barney Inc.
Each Investor agrees to severally and not jointly indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a
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finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finder's
fee (and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
Section 8.8 Expenses. Irrespective of whether the Closing is effected,
the Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. In
addition, the Company shall pay the reasonable legal expenses of the counsel
for The Travelers Insurance Company in connection with the negotiation,
execution and delivery of this Agreement up to a maximum aggregate amount of
$40,000. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement or the Certificate of Incorporation, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
Section 8.9 Amendments and Waivers. Except for the provisions of
Article VI hereof which may be waived with the written consent of the Company
only, and except as set forth in Section 7.15 hereof, any term of this
Agreement may be amended and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the Holders of 66% of the Common Stock issued or issuable upon conversion
of the Series A Preferred Stock; provided, however, that the provisions of this
Section 8.9 may be amended only with the written consent of the Company and all
of such Holders. Any amendment or waiver effected in accordance with this
Section 8.9 shall be binding upon each Holder of any securities purchased under
this Agreement at the time outstanding (including securities into which such
securities are convertible), each future Holder of all such securities, and the
Company; provided, however, that no condition set forth in Article V hereof may
be waived with respect to any Investor who does not consent thereto.
Section 8.10 Severability. If one or more provisions of this
Agreement are held to be unenforceable under
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applicable law, such provision shall be excluded from this Agreement and the
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
Section 8.11 Entire Agreement. This Agreement, the Memorandum, and the
other documents delivered pursuant hereto and thereto constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
Section 8.12 Disclosure Required under the Laws of Certain States and
Foreign Countries. The offer and sale of the Series A Preferred Stock, unless
otherwise required, are intended to be exempt from registration under the
securities laws of certain states and foreign countries. Investors who reside
in the following jurisdictions should note the language set forth below, which
is required to be included in this Agreement by the securities laws of those
jurisdictions. Furthermore, all Investors must note that there are restrictions
on transfer of (i) the Series A Preferred Stock and (ii) the Conversion Shares,
as agreed upon in Section 4.6 of this Agreement.
FOR ALL INVESTORS:
THE SERIES A PREFERRED STOCK (AND THE COMMON STOCK INTO WHICH SUCH
SERIES A PREFERRED STOCK IS CONVERTIBLE ISSUABLE UPON CONVERSION THEREOF) ARE
SUITABLE ONLY FOR SOPHISTICATED INVESTORS FOR WHOM AN INVESTMENT IN THE SERIES
A PREFERRED STOCK DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND WHO
FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISKS INVOLVED IN PURCHASE OF
THE SHARES. NO OFFER TO SELL (OR SOLICITATION OF AN OFFER TO BUY) IS BEING MADE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
THE SERIES A PREFERRED STOCK (AND THE COMMON STOCK INTO WHICH SUCH
SERIES A PREFERRED STOCK IS CONVERTIBLE) ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED.
64
<PAGE>
THE SERIES A PREFERRED STOCK (AND THE COMMON STOCK INTO WHICH SUCH SERIES A
PREFERRED STOCK IS CONVERTIBLE) HAS NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF ANY
INFORMATION PROVIDED HEREWITH. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
65
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PRT GROUP INC.
By: /s/ DOUGLAS K. MELLINGER
------------------------
Douglas K. Mellinger
Chairman and Chief
Executive Officer
342 Madison Avenue
New York, New York 10173
66
<PAGE>
THE TRAVELERS INSURANCE THE PRUDENTIAL INSURANCE
COMPANY COMPANY OF AMERICA
By: /s/ JORDAN M. STITZER By: /s/ RICHARD T. GREENWOOD
----------------------------- -----------------------------
Name: Jordan M. Stitzer Name:
Title: Vice President Title: Vice President
Address: Address:
388 Greenwich Street 80 Livingstone Avenue
New York, NY 10013 Roseland, NJ 07068
TUDOR INVESTMENT CORPORATION, RHO MANAGEMENT CO., INC., on
on behalf of Raptor Global behalf of Rho Management
Fund L.P., Raptor Global Trust I
Fund, Ltd., Tudor BVI Futures,
Ltd. and Tudor Arbitrage
Partners L.P.
By: /s/ JAMES J. PALLOTTA By: /s/ HABIB KAIROUZ
----------------------------- -----------------------------
Name: James J. Pallotta Name: Habib Kairouz
Title: Vice President Title: Vice President
Address: Address:
40 Rowes Wharf 767 Fifth Avenue
2nd Floor 43rd Floor
Boston, MA 02110 New York, NY 10153
CAPITAL RESEARCH AND JACQUELINE W. SHAPIRO
MANAGEMENT COMPANY, on behalf
of SMALLCAP World Fund, Inc.
By: /s/ MICHAEL J. DOWNER By: /s/ JACQUELINE W. SHAPIRO
----------------------------- -----------------------------
Name: Michael J. Downer
Title: Secretary
Address: Address:
333 South Hope Street 550 Park Avenue, Apt 7-E
Los Angeles, CA 90071 New York, NY 10021
CRAIG GOLDMAN
By: /s/ CRAIG GOLDMAN
-----------------------------
Address:
591 Jackson Avenue
Washington Township, NJ 07675
67
<PAGE>
WITH RESPECT TO SECTIONS 3.20 AND 3.23, AND ARTICLE VII HEREOF, the
undersigned agree to be bound by the provisions of Sections 3.20 and 3.23 and
Article VII hereof.
THE MELLINGER GROUP, L.L.C.
By: /s/ DOUGLAS K. MELLINGER
------------------------
Name: Douglas K. Mellinger
Title: Member
BARBARA MELLINGER
By: /s/ BARBARA MELLINGER
------------------------
JEROME MELLINGER
By: /s/ JEROME MELLINGER
------------------------
68
<PAGE>
CONFORMED COPY
STOCK PURCHASE AGREEMENT
BY AND AMONG
ROBERT MARCHETTI,
STEPHEN MICHAELSON,
AND
PRT GROUP, INC.
DATED AS OF JULY 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
PURCHASE AND SALE OF THE SHARES
Section 1.1 Purchase and Sale............................................ 1
Section 1.2 Consideration................................................ 1
Section 1.3 [Reserved]................................................... 2
Section 1.4 Closing...................................................... 2
Section 1.5 Deliveries by Sellers........................................ 2
Section 1.6 Deliveries by Buyer.......................................... 3
Section 1.7 Post-Closing Adjustments..................................... 3
ARTICLE II
RELATED MATTERS
Section 2.1 Books and Records of the Company.............................. 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Section 3.1 Organization................................................. 6
Section 3.2 Authorization................................................ 7
Section 3.3 Capital Stock................................................ 7
Section 3.4 Ownership of the Shares...................................... 8
Section 3.5 Consents and Approvals; No Viola-
tions........................................................ 9
Section 3.6 Financial Statements......................................... 9
Section 3.7 Absence of Undisclosed Liabilities........................... 10
Section 3.8 Related-Party Transactions................................... 10
Section 3.9 Title, Ownership and Related Mat-
ters......................................................... 10
Section 3.10 Leases....................................................... 11
Section 3.11 Intellectual Property........................................ 11
Section 3.12 Computer Software............................................ 13
Section 3.13 Litigation................................................... 14
Section 3.14 Compliance with Applicable Law............................... 14
Section 3.15 Certain Contracts and Arrangements........................... 14
[Section 3.16 Employee Benefit Plans; ERISA; Em-
ployees...................................................... 15
Section 3.17 Taxes........................................................ 16
Section 3.18 Certain Fees................................................. 16
Section 3.19 Environmental Protection..................................... 16
Section 3.20 Receivables.................................................. 18
Section 3.21 Accuracy of Minute Books, Stock
Books and Ledger Books....................................... 18
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Page
Section 3.22 Disclosure................................................... 18
Section 3.23 Insurance.................................................... 18
Section 3.24 Bank Accounts................................................ 19
Section 3.25 Customers and Suppliers...................................... 19
Section 3.26 Warranties................................................... 19
Section 3.27 Proprietary Information of Third
Parties...................................................... 20
Section 3.28 Restricted Securities........................................ 20
Section 3.29 Legends...................................................... 21
Section 3.30 Accredited Investor.......................................... 21
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Organization and Authority of Buyer.......................... 21
Section 4.2 Consents and Approvals; No Violations........................ 22
Section 4.3 Availability of Funds........................................ 23
Section 4.4 Litigation................................................... 23
Section 4.5 Capitalization............................................... 23
Section 4.6 Financial Statements......................................... 24
Section 4.7 Buyer Common Stock........................................... 24
Section 4.8 Certain Fees................................................. 24
ARTICLE V
COVENANTS
Section 5.1 Conduct of the Company's Business............................ 25
Section 5.2 Access to Information........................................ 25
Section 5.3 Consents..................................................... 26
Section 5.4 Best Efforts................................................. 26
Section 5.5 Covenant to Satisfy Conditions............................... 27
Section 5.6 Certain Tax Matters.......................................... 27
Section 5.7 Registration Rights.......................................... 34
Section 5.8 Further Limitations on Disposition........................... 35
Section 5.9 No Sales to Competitors...................................... 36
Section 5.10 No Solicitation.............................................. 37
Section 5.11 Certain Litigation........................................... 37
Section 5.12 Covenant Not to Compete and Secrecy
Agreement.................................................... 37
Section 5.13 Optional Repurchase.......................................... 39
ii
<PAGE>
Page
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE PARTIES
Section 6.1 Conditions to Each Party's Obligation........................ 41
Section 6.2 Conditions to Obligations of Sellers........................ 42
Section 6.3 Conditions to Obligations of Buyer........................... 42
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.1 Termination.................................................. 43
Section 7.2 Procedure and Effect of Termination.......................... 44
Section 7.3 Amendment, Modification and Waiver........................... 44
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
Section 8.1 Survival of Representations, Warranties and Agreements....... 45
Section 8.2 Sellers' Agreement to Indemnify.............................. 45
Section 8.3 Third Party Indemnification.................................. 47
ARTICLE IX
MISCELLANEOUS
Section 9.1 Fees and Expenses............................................ 48
Section 9.2 Further Assurances........................................... 48
Section 9.3 Notices...................................................... 48
Section 9.4 Severability................................................. 50
Section 9.5 Binding Effect; Assignment................................... 50
Section 9.6 No Third Party Beneficiaries................................. 50
Section 9.7 Interpretation............................................... 50
Section 9.8 Jurisdiction and Consent to Ser-
vice......................................................... 51
Section 9.9 Entire Agreement............................................. 51
Section 9.10 Governing Law................................................ 51
Section 9.11 Specific Performance......................................... 51
Section 9.12 Counterparts................................................. 52
iii
<PAGE>
INDEX OF DEFINED TERMS
Page
Agreement.................................................................. 1
Marchetti.................................................................. 1
Michaelson................................................................. 1
Sellers .................................................................. 1
Buyer .................................................................. 1
Shares .................................................................. 1
Common Stock............................................................... 1
Company .................................................................. 1
Closing .................................................................. 1
Purchase Consideration..................................................... 1
Cash Consideration......................................................... 1
Promissory Note............................................................ 2
Buyer Common Stock......................................................... 2
Warrants .................................................................. 2
Closing Date............................................................... 2
Working Capital Statement.................................................. 4
Final Working Capital Statement............................................ 4
Independent Accounting Firm................................................ 4
Final Working Capital Statement............................................ 5
Closing Working Capital.................................................... 5
Current Assets............................................................. 5
Current Liabilities........................................................ 5
Material Adverse Effect.................................................... 6
Disclosure Schedule........................................................ 7
Liens .................................................................. 8
Share Ownership Claim...................................................... 8
Financial Statements....................................................... 10
Business .................................................................. 11
Leases .................................................................. 11
License Agreements......................................................... 12
Intellectual Property...................................................... 12
Cases .................................................................. 14
employee benefit plan...................................................... 15
ERISA .................................................................. 15
ERISA Affiliate............................................................ 15
single employer............................................................ 15
Plans .................................................................. 15
Code .................................................................. 15
qualified.................................................................. 15
IRS .................................................................. 15
reportable event........................................................... 15
Taxes .................................................................. 16
Tax Return................................................................. 16
Environmental Laws......................................................... 17
restricted securities...................................................... 20
Securities Act............................................................. 21
Options .................................................................. 23
iv
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Page
Convertible Preferred Stock................................................ 23
Buyer Financial Statements................................................. 24
Confidentiality Agreement.................................................. 26
Election .................................................................. 27
Election Taxes............................................................. 27
Pre-Closing Period......................................................... 27
Sellers Group.............................................................. 27
Straddle Period............................................................ 27
Straddle Period............................................................ 27
Aggregate Deemed Sales Price............................................... 28
Aggregate Deemed Sales Price............................................... 28
Aggregate Deemed Sales Price............................................... 28
Aggregate Deemed Sales Price............................................... 28
Pre-Closing Period Returns................................................. 29
Straddle Period Returns.................................................... 29
Indemnification Statement.................................................. 30
Tax Indemnified Party...................................................... 33
Tax Indemnifying Party..................................................... 33
Tax Claim.................................................................. 33
Piggy-Back Registration.................................................... 35
Cutback .................................................................. 35
Requesting Seller.......................................................... 39
Repurchase Request......................................................... 39
Repurchase Price........................................................... 40
Parties' Appraisers........................................................ 40
Third Appraiser............................................................ 40
Repurchase Date............................................................ 41
Repurchase Notice.......................................................... 41
Indemnity Period........................................................... 45
Buyer Indemnitees.......................................................... 45
Buyer Damages.............................................................. 45
threshold.................................................................. 46
Claim .................................................................. 47
person .................................................................. 50
affiliate.................................................................. 51
v
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of, and deemed to occur as of, July
1, 1997 (the "Agreement"), by and among Robert Marchetti ("Marchetti"), Stephen
Michaelson ("Michaelson" and collectively with Marchetti, the "Sellers"), and
PRT Group, Inc., a Delaware corporation ("Buyer").
WHEREAS, pursuant to the terms and conditions of this Agreement,
Sellers desire to sell to Buyer, and Buyer desires to purchase from Sellers,
1,000 shares (the "Shares") of common stock, par value $1.00 per share (the
"Common Stock"), representing all of the issued and outstanding shares of
capital stock of Computer Management Resources, Inc., a Connecticut corporation
(the "Company").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the parties hereto agree
as follows:
ARTICLE I
PURCHASE AND SALE OF THE SHARES
Section 1.1 Purchase and Sale. Subject to the terms and conditions of
this Agreement, at the Closing provided for in Section 1.4 hereof (the
"Closing"), Sellers will sell, transfer and deliver to Buyer, and Buyer will
purchase, acquire and accept from Sellers, the Shares.
Section 1.2 Consideration. Subject to the terms and conditions of this
Agreement, in consideration of the aforesaid sale, transfer and delivery of the
Shares, Buyer will deliver or cause to be delivered to Sellers at the Closing
the purchase consideration (the "Purchase Consideration"), which shall consist
of:
(a) $2,850,000 in cash (such amount, as adjusted pursuant to
Section 1.7 hereof, the "Cash Consideration"), to be delivered to the Sellers
in the
<PAGE>
amounts set forth on Exhibit A hereto by wire transfer of immediately available
funds to such bank accounts as shall be designated by Sellers prior to the
Closing;
(b) a promissory note (the "Promissory Note") in the amount of
$2,000,000, the form of which is attached hereto as Exhibit B;
(c) 119,181 shares of Buyer common stock, par value $.01 per
share ("Buyer Common Stock") to be delivered to the Sellers in the amounts set
forth on Exhibit A hereto; and
(d) 119,181 fully paid-up warrants (the "Warrants"), a form of
which is attached hereto as Exhibit C, convertible into additional shares of
Buyer Common Stock upon the occurrence of certain events, as set forth therein,
to be delivered to the Sellers in the amounts set forth on Exhibit A hereto.
Section 1.3 [Reserved].
Section 1.4 Closing. The Closing of the transactions contemplated by
this Agreement shall take place on July 18, 1997 at 9:00 a.m., local time, at
the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New
York, New York, or on such other date and at such other time or place as the
parties may agree. The date of the Closing is sometimes referred to herein as
the "Closing Date."
Section 1.5 Deliveries by Sellers. At the Closing, Sellers will
deliver or cause to be delivered to Buyer (unless delivered previously) the
following:
(a) The stock certificate or certificates representing all (and
not less than all) of the Shares, accompanied by stock powers duly executed in
blank or duly executed stock transfer forms or instruments of transfer, with
any applicable transfer stamps affixed, which validly transfer title of the
Shares to Buyer free and clear of any Liens (as defined in Section 3.4 hereof);
(b) Documentation, effective as of the Closing and satisfactory
to Buyer, with respect to the designation of Douglas Mellinger, Gregory
Mellinger and
2
<PAGE>
the designee of the holders of Buyers Series A Convertible Preferred Stock as
directors of the Company, and (ii) the resignations of Robert Marchetti and
Stephen Michaelson as directors of the Company;
(c) The corporate seal, books and records of the Company, other
than the stock books and minute books of the Company;
(d) The officer's certificate referred to in Section 6.3 hereof,
if any is required;
(e) The opinion of Sellers' counsel referred to in Section
6.3(e) hereof;
(f) The Employment Agreements, forms of which are attached hereto
as Exhibits D and E, duly executed and delivered by each of Marchetti and
Michaelson, as the case may be; and
(g) All other documents, instruments and writings required or
reasonably requested to be delivered by Sellers at or prior to the Closing
pursuant to this Agreement or otherwise required in connection herewith.
Section 1.6 Deliveries by Buyer. At the Closing, Buyer will deliver or
cause to be delivered to Sellers (unless previously delivered) the following:
(a) The Purchase Consideration referred to in Section 1.2 hereof;
(b) A letter of credit in the amount of $1,000,000 securing the
Promissory Note in favor of and reasonably acceptable to the Sellers;
(c) The officer's certificate referred to in Section 6.2(c)
hereof, if any is required;
(d) The Employment Agreements duly executed and delivered by an
appropriate officer of Buyer; and
(e) All other documents, instruments or writings required or
reasonably requested to be delivered by Buyer at or prior to the Closing
pursuant to this Agreement or otherwise required in connection herewith.
3
<PAGE>
Section 1.7 Closing Date Working Capital Adjustments.
(a) On the Closing Date, Sellers will deliver to Buyer a
statement (the "Working Capital Statement") setting forth the Closing Working
Capital (as hereinafter defined) of the Company as of the opening of business
on the Closing Date, which Working Capital Statement shall be prepared on a
basis consistent with the unaudited balance sheet of the Company as of May 31,
1997, described in Section 3.6 hereof, including the notes thereto.
(b) The Cash Consideration shall be (i) increased by the amount
by which the Closing Working Capital as set forth in the Working Capital
Statement is greater than $557,000, or (ii) decreased by the amount by which
the Closing Working Capital is less than $557,000.
(c) The term "Closing Working Capital" shall mean Current Assets
minus Current Liabilities. The term "Current Assets" shall mean cash, accounts
receivable and prepaid expenses, reflected in a manner consistent with the
account classifications and basis of preparation used in the Financial
Statements (as defined in Section 3.6 below), as of the Closing Date. The term
"Current Liabilities" shall mean accounts payable, accrued liabilities and
deferred revenue, as the case may be, reflected in a manner consistent with the
account classifications and basis of preparation used in the Financial
Statements, as of the Closing Date.
(d) Buyer's rights to indemnification pursuant to Article VIII
hereof (and any limitations on such rights) shall not be deemed to limit,
supersede or otherwise affect Buyer's or Sellers' rights to a full purchase
price adjustment pursuant to this Section 1.7, provided that no claim for
indemnification may be made with respect to any matters or categories of items
to the extent reflected in the Final Working Capital Statement.
4
<PAGE>
ARTICLE II
RELATED MATTERS
Section 2.1 Books and Records of the Company. Sellers shall cause the
Company to deliver to Buyer at or prior to the Closing all books and records of
the Company (including, but not limited to, correspondence, memoranda, books of
account, personnel and payroll records and the like, excluding the Company's
minute books and stock ledgers). All books and records delivered by the Company
to Buyer will be preserved by Buyer for a period of at least ten (10) years
following the Closing and Buyer will permit Sellers and their authorized
representatives to have reasonable access to, and examine and make copies of,
all such books and records as reasonably requested by Sellers.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each of the Sellers jointly and severally represents and warrants to
Buyer (provided that any representation or warranty herein made by either
Seller in his individual capacity shall be solely that of such individual
Seller and shall not be made jointly and severally by both of the Sellers) as
follows:
Section 3.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Connecticut and has all requisite corporate and other power and corporate
authority to own, lease and operate its properties and to carry on its business
and operations as now being conducted (the "Business"), except where any such
failure to be so organized, existing and in good standing or to have such power
and authority would not individually or in the aggregate have a material
adverse effect on the Business, operations, assets, liabilities, results of
operations or financial condition of the Company (a "Material Adverse Effect").
The Company is duly qualified or licensed and in good standing to do business
in each jurisdiction in which the property owned, leased or operated by the
Company or the nature of the Business makes such qualification necessary,
except in any such jurisdictions where the failure to be so duly qualified or
licensed and
5
<PAGE>
in good standing would not have a Material Adverse Effect. Sellers have
heretofore delivered to Buyer complete and correct copies of the Company's
Certificate of Incorporation and By-laws, as currently in effect.
Section 3.2 Authorization. Each Seller has the power and authority to
execute and deliver this Agreement and consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized and
no other actions are necessary to authorize the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
such Seller and constitutes, and when executed and delivered each of the
other agreements, documents and instruments to be executed and delivered by
such Seller pursuant hereto will constitute, a valid and binding agreement of
such Seller, enforceable against such Seller in accordance with their
respective terms, except that (a) such enforcement may be subject to any
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
other laws, now or hereafter in effect, relating to or limiting creditors'
rights generally and (b) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought. To the Sellers' knowledge, the Company's minute books and stock
ledgers cannot be located, but warrant that no Buyer Damages (as defined in
Section 8.2(a)) shall result from the contents, or the purported contents (by
any third party or otherwise), thereof.
Section 3.3 Capital Stock. Set forth on Section 3.3 of the Disclosure
Schedule being delivered to Buyer by Sellers herewith (the "Disclosure
Schedule"), is the number of authorized shares of capital stock of the Company,
the par value of such shares, and the number of such shares which are issued
and outstanding. No shares of capital stock of the Company are held in the
Company's treasury. All of the Shares are validly issued, fully paid and
non-assessable. There are no outstanding securities convertible into,
exchangeable for, or carrying the right to acquire, equity securities of the
Company, nor are there any subscriptions, warrants, options, rights or other
arrangements or commitments (other than
6
<PAGE>
pursuant to this Agreement) which could obligate the Company to issue or
Sellers to sell any shares of capital stock of the Company. Except as set forth
on Section 3.3 of the Disclosure Schedule, the Company has no outstanding debt,
equity, hybrid, derivative or other securities of any kind.
Section 3.4 Ownership of the Shares.
(a) Each Seller is the record and beneficial owner of the
number of Shares set forth opposite his name on Section 3.4 of the Disclosure
Schedule, which Shares comprise all of the issued and outstanding shares of all
classes of capital stock of the Company. Each Seller has good title to the
Shares owned by him, free and clear of all Liens (as hereafter defined). Upon
the transfer by Sellers to Buyer of the certificate or certificates evidencing
the Shares, Sellers will have transferred to Buyer good title to the Shares
free and clear of all Liens, other than Liens which become applicable as a
result of the business or activities of Buyer or as a result of any acts or
omissions by, or the status of any facts pertaining to, Buyer, and except as
set forth on Section 3.4 of the Disclosure Schedule.
As used herein, "Liens" shall mean any pledge, mortgage, charge,
claim, title imperfection, defect or objection, security interest, conditional
and installment sales agreement, encumbrance, charge, easement, encroachment or
restriction, of any kind.
(b) Notwithstanding the fact that information with respect to
the pending lawsuit among Richard Godfrey, Computer Management Resources, Inc.,
Robert Marchetti and Stephen Michaelson concerning Shares (the "Share Ownership
Claim") is disclosed in the Disclosure Schedule, Buyer shall have the right to
indemnification by Sellers under Article VII hereof with respect to any Buyer
Damages (as defined in Section 8.2 hereof) suffered by the Company, Buyer, or
any Buyer Indemnitee (as defined in Section 8.2 hereof) as a result of the
Share Ownership Claim.
(c) The Company has never had and currently has no
subsidiaries. The Company has never had and currently does not own, directly or
indirectly, any capital stock or equity securities of any person or
7
<PAGE>
entity or have any direct or indirect equity or ownership interest in any
business other than the Business.
Section 3.5 Consents and Approvals; No Violations. Except as set forth
on Section 3.5 of the Disclosure Schedule, neither the execution, delivery or
performance of this Agreement nor the consummation by Sellers of the
transactions contemplated hereby (including the transfer of the Shares) will
(a) conflict with or result in any breach or violation of any provision of the
Certificate of Incorporation or By-Laws of the Company; (b) require any filing
or registration with, or notice or declaration to, or the obtaining of any
permit, license, authorization, consent or approval of, any court, arbitral
tribunal, administration agency or commission or other federal or state
governmental or regulatory authority whether within or outside the United
States; (c) violate, breach, conflict with or result in a default (or any event
which, with notice or lapse of time or both, would constitute a default) under,
or result in any termination, cancellation or acceleration or give rise to any
such right of termination, cancellation or acceleration or require any consent
under, any of the terms, conditions or provisions of any note, mortgage, other
evidence of indebtedness, guarantee, license, agreement, lease or other
contract or instrument or obligation to which the Company or Sellers
(individually or collectively) are a party or by which the Company or either of
the Sellers or any of their respective assets are subject or by which any of
them may be bound; (d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Company or Sellers, or any of their
respective assets or properties, or (e) result in the creation or imposition of
any Lien upon any properties, assets or the Business of the Company or Sellers,
excluding from the foregoing clauses (b), (c), (d) and (e) such requirements,
conflicts, defaults, rights, security interests, claims, Liens, charges, other
encumbrances or violations which would not have a Material Adverse Effect and
would not adversely affect the ability of Sellers to consummate the
transactions contemplated by this Agreement, or which become applicable as a
result of the business or activities (other than the business currently
conducted by the Company) in which Buyer is or proposes to be engaged or as a
result of any acts or omissions by, or the status of or any facts pertaining
to, Buyer.
8
<PAGE>
Section 3.6 Financial Statements. Attached as Schedule 3.6(a) of the
Disclosure Schedule are copies of the Company's unaudited (a) balance sheet as
of May 31, 1997 and (b) income statement for the year ended February 28, 1997
and five months ended May 31, 1997 (the financial statements referred to in
clauses (a) and (b) above are referred to herein collectively as the "Fi-
nancial Statements"). Except as disclosed in the Financial Statements or as
set forth on Schedule 3.6(b) of the Disclosure Schedule, such balance sheet
fairly presents, in all material respects, the financial position of the
Company as of the date thereof, and such income statement fairly presents, in
all material respects, the results of operations of the Company for the period
indicated and have been derived from the books and records of the Company;
provided, that the Financial Statements present such information in accordance
with the Company's historical practices and do not conform to U.S. generally
accepted accounting principles consistently applied ("GAAP"); provided,
further, that all such accounting practices to the extent material and all
deviations from historical practices with respect to the May 31, 1997 Financial
Statements, have been fairly disclosed to Buyer by the Sellers.
Section 3.7 Absence of Undisclosed Liabilities. Except to the extent
reflected or reserved against in the Financial Statements or otherwise
disclosed herein or in the Disclosure Schedule, the Company had, as of May 31,
1997, no material liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise and whether due or to become due that would
be required to be reflected or reserved against in such Financial Statements
under the Company's historical accounting practices.
Section 3.8 Related Party Transactions. Except as set forth in Section
3.8 of the Disclosure Schedule, no current or former employee, officer,
director or stockholder of the Company or member of his or her immediate family
(collectively, the "Related Parties") is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them. To each Seller's knowledge, none of such Related Parties (other
than Michael Ciardi) has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with
9
<PAGE>
which the Company has a business relationship, or any firm or corporation that
competes with the Company, the Business or Buyer, except that such Related
Parties may own stock in publicly traded companies that may compete with the
Company, the Business or Buyer. No Related Party is directly or indirectly
interested in any material contract with the Company other than employment
contracts with employees disclosed or made available to Buyer.
Section 3.9 Title, Ownership and Related Matters.
(a) As of the date hereof, the Company does not own any real
property.
(b) Except as set forth in Section 3.9(b) of the Disclosure
Schedule, the Company has, or will as of the Closing have (i) good title to all
material owned properties and assets of the Company, whether real, personal,
mixed or other, free from any Liens (as hereafter defined); or (ii) rights by
license, lease or other agreement to use all material properties and assets not
owned by the Company, whether real, personal, mixed or other, necessary to
permit the Company to conduct the Business as currently conducted.
As used herein "Permitted Liens" shall mean (i) liens for current
taxes not yet due, (ii) mechanic's, materialmen's, warehousemen's and similar
liens attaching by operation of law, incurred in the ordinary course of
business and securing payments not delinquent or payments which are being
contested in good faith by the Company, and (iii) imperfections of title,
easements and zoning restrictions, if any, which do not materially detract from
the value of the property subject thereto for the uses and purposes to which
such property is currently employed or materially impair the operations of the
Company and which have arisen only in the ordinary course of business and
consistent with past practice.
Section 3.10 Leases. Section 3.10 of the Disclosure Schedule lists, as
of the date hereof, all real property leases for space occupied by the Company
(collectively, the "Leases"). The Company is not a party to any sublease of
real property. True and complete copies of the Leases and all amendments and
agreements
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relating thereto have been delivered or made available to Buyer. To the best
knowledge of Sellers, all of the Leases are valid, binding and enforceable in
accordance with their respective terms, and neither the Company nor the other
party to any Lease is in default under such Lease in any material respect.
Section 3.11 Intellectual Property.
(a) Schedule 3.11(a) of the Disclosure Schedule contains a complete
and correct list of all material Intellectual Property (as hereafter defined)
owned by the Company other than off-the-shelf software. Schedule 3.11(b) of the
Disclosure Schedule identifies each material agreement pertaining to the
licensed use of such Intellectual Property in the Business and listing, in each
case, whether the Company is the licensor or licensee thereunder, the subject
matter of the license, and whether the rights granted are exclusive or
non-exclusive (the "License Agreements").
As used herein, "Intellectual Property" shall mean all U.S. and
foreign patents and patent applications, registered and unregistered copyrights
and copyright applications (including copyrights in proprietary computer
software and databases), trademarks, service marks, trade dress, logos,
tradenames and similar business identifiers, including, in each case, all
registrations and applications therefor, and the goodwill of the business
symbolized by any of the foregoing, confidential or proprietary technical and
business information, know-how and trade secrets, formulae, processes,
inventions (whether patentable or unpatentable) and other technical
information.
(b) Except as set forth in Section 3.11 of the Disclosure Schedule,
the Company owns all material Intellectual Property or possesses adequate
licenses or other valid right to the material Intellectual Property used in or
necessary to conduct the Business as currently conducted, in each case without
the payment of any royalties except under the agreements set forth on Schedule
3.11(b) of the Disclosure Schedule. The Company is the sole and exclusive owner
of the Intellectual Property set forth on Section 3.11(a) of the Disclosure
Schedule, free and clear of all Liens, except as set forth therein. All
applications and registrations that exist for the Intel-
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lectual Property set forth on Schedule 3.11(a) of the Disclosure Schedule stand
in the name of the Company. To the knowledge of the Sellers, the Intellectual
Property set forth on Schedule 3.11(a) of the Disclosure Schedule has not
lapsed, expired or been abandoned and is valid and enforceable. To the
knowledge of the Sellers, no application or registration therefor is the
subject of any opposition or cancellation proceeding before any registration
authority in any jurisdiction for which notice has been provided to the Company
nor is any such proceeding threatened.
(c) To the knowledge of the Sellers, the activities, products and
services of the Company do not infringe upon, violate or conflict with the
Intellectual Property rights of any other person or entity. There are no claims
or suits pending for which notice has been provided or, to the knowledge of the
Sellers, threatened (i) alleging that the Company's activities or products
infringe upon or constitute the unauthorized use of a third party's
Intellectual Property rights or (ii) challenging the Company's ownership of,
right to use, or the validity or enforceability of any Intellectual Property
owned or used by the Company. To the knowledge of the Sellers, there are no
infringements by third parties of any Intellectual Property owned by the
Company. The Company has not entered into any consent, indemnification,
forbearance to sue, or settlement agreement with any third party relating to
Intellectual Property.
(d) The License Agreements constitute binding and enforceable
obligations of the Company, and, to the knowledge of the Sellers, the Company
is not in breach of or default under the License Agreements nor has an event or
condition occurred (or is alleged by any other party to have occurred) which,
with or without due notice or lapse of time or both, would constitute a breach
or event of default on the part of the Company or would provide a basis for a
valid claim, acceleration or termination by any other party under the License
Agreements. To the knowledge of the Sellers, no other party is in breach of or
default under the License Agreements nor has any event or condition occurred
(or is alleged by any other party to have occurred) which, with or without due
notice or lapse of time or both, would constitute a breach or event of default
on the part of such other party under the License Agreements. The consummation
of the transactions
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contemplated by this Agreement will not result in the loss or impairment of any
of the Company's rights pursuant to the License Agreements in the Intellectual
Property used in or necessary to conduct the Business as currently conducted.
Except as disclosed in Section 3.11(b) of the Disclosure Schedule, the Company
is not a party to any technology license agreement or sales agency or
distributorship agreement that limits in any material manner the ability of the
Company to compete or to conduct any significant line of business or compete
with any person or entity in any geographic area or during any period of time
exceeding one year from the date hereof.
Section 3.12 Computer Software. Except as set forth in Section 3.12 of
the Disclosure Schedule, the Company has such title to or the right to use, by
license or other agreement, all material computer software programs used by
the Company as are necessary to permit the Company to conduct the Business as
currently conducted, without any known conflict with the rights of others or
any known use by others which conflicts, in any material respect, with the
rights of the Company.
Section 3.13 Litigation. Set forth in Section 3.13 of the Disclosure
Schedule is a list and brief description of all material actions, claims,
suits, administrative, arbitration or other proceedings and governmental
investigations and inquiries pending (collectively "Cases") and, to the
knowledge of Sellers, threatened against Sellers or the Company or any of their
respective properties, assets and business operations, as of the date hereof,
by or before any court, governmental or regulatory authority or by any third
party which if determined adversely to the Company would have a Material
Adverse Effect on the Company or would prevent the Sellers or the Company from
consummating the transactions contemplated hereby. To the best knowledge of
Sellers, no investigation with respect to the Company is pending, or
threatened, by any federal, state, local or foreign governmental authority or
by any agency or instrumentality thereof, the effect of which could reasonably
be expected to have a Material Adverse Effect.
Section 3.14 Compliance with Applicable Law. The Company is, and
conducts the Business, in compliance with all applicable laws, ordinances,
rules and regulations of any federal, state, local or foreign governmen-
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tal authority applicable to the Company or the Business, except for violations,
if any, which would not have a Material Adverse Effect. The Company holds all
licenses, permits, variances and approvals of governmental entities necessary
for the lawful conduct of the Business as currently conducted, except where the
failure to hold such licenses, permits, variances and approvals would not have
a Material Adverse Effect.
Section 3.15 Certain Contracts and Arrangements. Except as set forth
in Section 3.15 of the Disclosure Schedule, as of the date hereof, the Company
is not a party to any material written or oral (a) employment agreement,
independent contractor agreement, consulting agreement, personal service or
similar agreement; (b) indenture, mortgage, note, installment obligation,
agreement or other instrument relating to the borrowing of money by the
Company, or the guaranty by the Company of any obligation for the borrowing of
money; or (c) other agreement, including, without limitation, any purchase
order or work order, which individually, or together with related agreements
with the same or related parties, involves the receipt or payment after the
date hereof of more than $25,000 on an annual basis or $25,000 over the
remaining term thereof. All such agreements are valid, binding and enforceable
in accordance with their terms and, to the best knowledge of Sellers, neither
the Company nor any other party thereto is in default under any of the
aforesaid agreements.
Section 3.16 Employee Benefit Plans; ERISA; Employees. (a) Section
3.16(a) of the Disclosure Schedule contains a true and complete list of each
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance or termination pay, change-in-control, hospitalization or
other medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension, or retirement plan, program, agreement or arrangement,
and each other employee benefit plan, program, agreement or arrangement, with
respect to which the Company or any trade or business, whether or not
incorporated (an "ERISA Affiliate"), that together with the Company would be
deemed a "single employer" within the meaning of section 4001(b)(1) of ERISA,
has a liability (the "Plans"). With respect to each of the Plans, the Company
has heretofore delivered to Buyer true and complete copies of each of the
following documents:
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(i) a copy of the Plan, if any; (ii) a copy of the most recent annual report
with respect to each such Plan for which annual reports are required to be
filed; (iii) a copy of the most recent Summary Plan Description with respect to
such Plan, if any; (iv) a copy of the trust or other funding agreement, if any;
and (v) the most recent opinion letter received from the Internal Revenue
Service by the sponsor of any so-called "prototype" retirement plan.
(b) No liability under Title IV of ERISA has been incurred by the
Company or any ERISA Affiliate that has not been satisfied in full, and no
condition exists that presents a material risk of incurring a liability under
such Title. None of the Plans is subject to Title IV of ERISA. No Plan is a
"multiemployer plan," as such term is defined in section 3(37) of ERISA.
(c) The Sellers do not have any knowledge that the Company, any ERISA
Affiliate, any of the Plans, any trust created thereunder or any trustee or
administrator thereof has engaged in a transaction or has taken or failed to
take any action in connection with which the Company, any ERISA Affiliate, any
of the Plans, any such trust, any trustee or administrator thereof, or any
party dealing with the Plans or any such trust could be subject to either a
civil penalty assessed pursuant to section 409 or 502(i) of ERISA or a tax
imposed pursuant to section 4975, 4976 or 4980B of the Internal Revenue Code of
1986, as amended (the "Code").
(d) Full payment has been made, or will be made in accordance with
section 404(a)(6) of the Code, of all amounts which the Company is required to
pay under the terms of each of the Plans and section 412 of the Code, and all
such amounts properly accrued through the Closing with respect to the current
plan year thereof will be paid by the Company on or prior to the Closing or
will be properly recorded in the Financial Statements; and none of the Plans or
any trust established thereunder has incurred any "accumulated funding
deficiency" (as defined in section 302 of ERISA and section 412 of the Code),
whether or not waived, as of the last day of the most recent fiscal year of
each of the Plans ended prior to the date of this Agreement.
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(e) Each of the Plans has been operated and administered in all
material respects in accordance with applicable Laws, including but not limited
to ERISA and the Code. Each of the Plans that is intended to be "qualified"
within the meaning of section 401(a) of the Code is a so-called
"nonstandardized prototype plan" with respect to which the Internal Revenue
Service has issued a favorable opinion letter. Sellers have no knowledge of any
facts or circumstances that would preclude the Internal Revenue Service from
issuing a favorable determination letter with respect to said Plans if
applications for determination were made on the Closing Date.
(f) No amounts payable under the Plans or any other agreement or
arrangement to which any of the Company or any ERISA Affiliate is a party will,
as a result of the transaction contemplated hereby, fail to be deductible for
federal income tax purposes by virtue of section 280G of the Code.
(g) Except for the retirement plans identified in Section 3.16(a) of
the Disclosure Schedule, no Plan provides benefits, including without
limitation death or medical benefits (whether or not insured), with respect to
current or former employees after retirement or other termination of service,
other than coverage mandated by applicable law.
(h) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or officer of the
Company to severance pay, unemployment compensation or any other payment,
except as expressly provided in this Agreement or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due any such
employee or officer.
(i) There are no pending or threatened claims by or on behalf of any
Plan, by any employee or beneficiary covered under any such Plan, or otherwise
involving any such Plan (other than routine claims for benefits).
(j) Sellers have previously delivered to Buyer a list of all employees
of the Company and the total compensation of each such employee for the year
ended December 31, 1996.
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Section 3.17 Taxes. (a) Except as set forth as Section 3.17 of the
Disclosure Schedule:
(i) Giving effect to all extensions obtained, the Company has (x) duly
and timely filed (or there has been filed on its behalf) with the appropriate
governmental authorities all Tax Returns (as hereafter defined) required to be
filed by it, and all such Tax Returns are true, correct and complete in all
material respects and (y) timely paid all Taxes (as hereafter defined) shown
thereon as due or for which notification of a claim has been received by the
Company from any taxing authority;
(ii) The Company has complied in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign laws) and have,
within the time and manner prescribed by law, withheld and paid over to the
proper governmental authorities all amounts required to be withheld and paid
over under all applicable laws;
(iii) There are no Liens for Taxes upon the assets or properties of
the Company except for statutory Liens for current Taxes not yet due;
(iv) The Company has not requested any extension of time within which
to file any Tax Return that has not since been filed and no outstanding waivers
or comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns has been given by or on behalf of the
Company;
(v) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings ("Audits") exist or have been initiated with
regard to any Taxes or Tax Returns of the Company, and the Company has not
received any notice that such an Audit is pending or threatened with respect to
any Taxes due from or with respect to the Company or any Tax Return filed by or
with respect to the Company;
(vi) The Company has not requested a ruling or received an adverse
ruling from any taxing authority or signed a closing or similar agreement with
any taxing au-
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thority which could have an adverse effect on the Company;
(vii) The Tax Returns of the Company for the taxable periods ending
before February 28, 1997 have been examined by the appropriate governmental
authority (or the applicable statue of limitations for the assessment of Taxes
for such periods has expired) and a list of all Audits commenced or completed
with respect to the Company from such date to the present is set forth on
Section 3.17 of the Disclosure Schedule;
(viii) All Tax deficiencies which have been claimed, proposed or
asserted against the Company have been fully paid or finally settled, and no
issue has been raised in any examination by any taxing authority which, by
application of similar principles, could be expected to result in the proposal
or assertion of a Tax deficiency for any other year not so examined;
(ix) The Company is not required to include in income any adjustment
pursuant to Section 481(a) of the Code, by reason of any voluntary or
involuntary change in accounting method (nor has any taxing authority proposed
in writing any such adjustment or change of accounting method);
(x) The Company is not a party to, is not bound by, and has no
obligation under, any Tax sharing agreement, Tax indemnification agreement or
similar contract or arrangement. The Company is not aware of any potential
liability or obligation to any person as a result of, or pursuant to, any such
agreement, contract or arrangement;
(xi) No power of attorney has been granted by or with respect to the
Company with respect to any matter relating to Taxes that is currently in
effect;
(xii) No amounts paid by the Company to any ERISA Plan would fail to
be deductible under Section 404 of the Code;
(xiii) The Company has not filed a consent pursuant to Section 341(f)
of the Code (or any predecessor provision) or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset
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(as such term is defined in Section 341(f)(4) of the Code) owned by the
Company;
(xiv) The reserves for Taxes (determined in accordance with GAAP)
reflected in the June 30, 1997 Financial Statements are adequate for the
payment of all Taxes incurred or which may be incurred by the Company through
the date hereof for all periods covered thereby or prior thereto. Since the
date of the Financial Statements, the Company has not incurred any liability
for Taxes other than in the ordinary course of business;
(xv) The Company is not and has never been a member of an affiliated
group (or similar state or local filing group);
(xvi) The Company is not and has never been a United States real
property holding company as defined in Section 897(c)(2) of the Code;
(xvii) The Company has not knowingly taken any position on any Tax
Return that could give rise to an understatement of federal income tax
liability within the meaning of Section 6662(d) of the Code;
(xviii) The Company has not participated in, or cooperated with, an
international boycott within the meaning of Section 999 of the Code;
(xix) Section 3.17 of the Disclosure Schedule sets forth (as actual
or, in the case of Tax Attributes (as hereafter defined), for the preceding and
current taxable year, as estimated) the net operating losses, Section 1231
losses (as such term is defined under Section 1231(a)(3)(B) of the Code),
capital losses, alternative minimum tax credits, and other similar tax
attributes ("Tax Attributes") (for federal, state, local, foreign and all other
tax purposes, as applicable) of the Company and the date on which such Tax
Attributes will expire. Prior to the consummation of the transaction
contemplated by this Agreement none of such Tax Attributes are subject to
Section 382 of the Code or any other applicable law disallowing, limiting or
reducing their use on any other basis;
(b) All material elections with respect to Taxes required to be
specifically described on a Tax
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Return listed in Section 3.17 of the Disclosure Schedule including affecting
the Company are set forth in Section 3.17 of the Disclosure Schedule.
(c) The Company has previously delivered or made available to Buyer
complete and accurate copies of (i) all audit reports, letter rulings,
technical advice memoranda and similar documents issued by a governmental
authority relating to the United States federal, state, local or foreign Taxes
due from or with respect to the Company, (ii) the United States federal, and
any state, local and foreign income Tax Returns filed by the Company and (iii)
any closing agreements entered into by the Company with any taxing authority in
each case existing on the date hereof. The Company will deliver to Buyer all
materials with respect to the foregoing for all matters arising after the date
hereof.
(d) For purposes of this Agreement, (i) "Taxes" (including, with
correlative meaning, the term "Tax") shall mean all taxes, charges, fees,
levies, penalties or other assessments of any kind whatsoever imposed by any
federal, state, local or foreign taxing authority, including, but not limited
to, income, gross receipts, excise, property, sales, transfer, franchise,
payroll, withholding, social security or other taxes, including any interest,
penalties or additions attributable thereto and (ii) "Tax Return" shall mean
any return, report, information return or other document (including any related
or supporting information) required to be filed with a governmental taxing
authority with respect to Taxes.
Section 3.18 Certain Fees. Neither the Company nor either Seller has
employed any financial advisor or finder or incurred any liability for any
financial advisory or finders' fees in connection with this Agreement or the
transactions contemplated hereby.
Section 3.19 Environmental Protection.
(a) The Company has obtained, with respect to the Business, all
material permits, licenses, and other authorizations which are required under
federal, state and local statutes, ordinances, and other laws relating to
pollution or protection of the environment, including laws relating to
emissions, discharges, releases, or
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threatened releases of pollutants, contaminants, chemicals, or industrial,
hazardous, or toxic materials or waste into the environment (including, without
limitation, ambient air, surface water, ground water, land surface, or
subsurface strata) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, hazardous, or toxic
materials or wastes, or any regulation, rule, code, plan, judicial order,
decree, judgment, injunction, or notice issued, entered, promulgated, or
approved thereunder ("Environmental Laws"). To the best knowledge of Sellers,
the Company is in substantial compliance with all terms and conditions of such
required permits, licenses, and authorizations, and is also in substantial
compliance, with respect to the Company's business, with all other requirements
of Environmental Laws.
(b) To the best knowledge of Sellers, there is no pending or
threatened civil or criminal litigation, material notice of violation, or
administrative proceeding, with respect to the Business, relating in any way to
the Environmental Laws.
(c) To the best knowledge of Sellers, there have not been and there
are not any events, conditions, circumstances, activities, practices, incidents
or actions which may reasonably be expected to interfere with or prevent
continued substantial compliance with existing Environmental Laws after the
Closing, or which may reasonably be expected to give rise to any substantial
liability under common law precedents, or otherwise form the basis of any
claim, action or suit under existing Environmental Law based on or related to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release, or threatened
release into the environment, of any pollutant, contaminant, chemical,
industrial, hazardous, or toxic material or waste, including, without
limitation, any liability arising, or any claim, action, demand, suit,
proceeding, hearing, study, or investigation which may be brought, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
and the Resource Conservation and Recovery Act of 1976, or similar federal,
state or local laws.
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Section 3.20 Receivables. Except to the extent of any reserves
reflected in the Financial Statements, all of the receivables reflected in the
Financial Statement are bona fide accounts receivable accrued in the ordinary
course of the Business and to the best knowledge of Sellers none of such
account receivables are subject to set-offs, counterclaims, or disputes
existing or asserted with respect thereto or subject to any Lien.
Section 3.21 Accuracy of Minute Books, Stock Books and Ledger Books.
Sellers represent and warrant that the minute books, stock books and ledger
books of the Company are true, complete and accurate in all material respects.
Any minute books delivered to Buyer pursuant to this Agreement, if any, are
replacements of the original minute books of the Company, which minute books
have been lost.
Section 3.22 Disclosure. (a) Sellers have not knowingly failed to
disclose to Buyer any material facts relating to Sellers, the Company, the
Business or the results of operations, assets, liabilities, financial condition
and prospects of the Company. To the best knowledge of Sellers, no
representation or warranty by Sellers in this Agreement and no statement by
Sellers in any other document referred to herein (including the Schedules of
the Disclosure Schedule), contains any untrue statement of a material fact or
omits to state any material fact necessary, in order to make the statements
made herein or therein, in light of the circumstances under which they were
made, not misleading.
Section 3.23 Insurance. Section 3.23(a) of the Disclosure Schedule
sets forth a complete and correct list as of the Closing of all primary, excess
and umbrella policies, bonds and other forms of insurance, and renewals
thereof, owned or held by or on behalf of the Company, copies of which have
previously been made available to the Buyer. All of such insurance policies are
in full force and effect, all premiums currently payable or previously due have
been paid, no notice of cancellation or termination has been received with
respect to any such policy and no assignment of proceeds or Liens exist with
respect to the proceeds of any such policy. Except as and to the extent set
forth on Section 3.23(b) of the Disclosure Schedule, there are no pending
claims against such policies.
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Section 3.24 Bank Accounts. Section 3.24 of the Disclosure Schedule
sets forth a complete and correct list of (i) the names and locations of all
financial institutions at which the Company maintains a checking account,
deposit account, securities account, safety deposit box or other deposit or
safekeeping arrangement, (ii) the number or other identification of all such
accounts and arrangements and (iii) the names of all persons authorized to draw
thereon or have access thereto.
Section 3.25 Customers and Suppliers. Section 3.25(a) of the
Disclosure Schedule sets forth a complete and correct list of (i) the names of
the ten largest customers (by revenues generated) of the Company and the
approximate amount of revenues generated by each such customer in the year
ended February 28, 1997 and (ii) the names of suppliers to whom the Company
paid more than $50,000 in the year ended February 28, 1997 and the approximate
total purchases by the Company from each such supplier during such year. Except
as and to the extent set forth on Section 3.25(b) of the Disclosure Schedule,
there have been no material adverse changes in the relationships between the
Company and its customers and suppliers since February 28, 1997. The Company
has not been provided with any notice that any material supplier, manufacturer
or customer intends to cease doing business with the Company. To the knowledge
of the Sellers, there are no facts or circumstances that could reasonably be
expected to have an adverse affect on the Company's relationships with its
customers and suppliers.
Section 3.26 Warranties. Section 3.26 of the Disclosure Schedule sets
forth a complete and correct list of all material express written warranties
with respect to any products or services created, sold, distributed, rendered
or licensed by the Company, including warranties in customer contracts. Except
as and to the extent set forth on Section 3.26(a) of the Disclosure Schedule,
there are no material express or implied warranties outstanding with respect
to any products or services created, sold, distributed, rendered or licensed by
the Company (other than those imposed by applicable law).
Section 3.27 Proprietary Information of Third Parties. To each
Seller's knowledge, except for the
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Share Ownership Claim, no third party has claimed that any person employed by
or under the control of the Company has (i) violated or may be violating any of
the material terms or conditions of his employment, independent contractor,
non-competition or non-disclosure agreement with such third party, (ii)
disclosed or may be disclosing or utilized or may be improperly utilizing any
trade secret or proprietary information or documentation of such third party or
(iii) interfered or may be interfering in the employment relationship between
such third party and any of its present or former employees and to Sellers'
knowledge, no third party has requested information from the Company which
suggests that such a claim might be contemplated. To each Seller's knowledge,
none of the execution or delivery of this Agreement, or the carrying on of the
Business by any officer, director, independent contractor, or employee of the
Company, or the conduct of the Business, will conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any such person is
obligated. To each Seller's knowledge, no person employed by or under the
control of the Company has, in connection with such person's performance of any
employment or other services rendered to the Company, employed any material
trade secret or any information or documentation proprietary to any former
employer, and to each Seller's knowledge, no person employed by or under the
control of the Company has, in connection with such person's performance of any
employment or other services rendered to the Company, violated any material
confidentiality obligation which such person may have owed to any third party.
Section 3.28 Restricted Securities. Each Seller understands that the
shares of Buyer Common Stock and the Warrants to be received by such Seller
hereunder as part of the Purchase Consideration are characterized as
"restricted securities" under the federal securities laws inasmuch as such
securities are being acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the "Secu-
rities Act"), only in certain limited circumstances.
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Section 3.29 Legends. It is understood that the Promissory Note, the
certificates evidencing the shares of Buyer Common Stock and the Warrants to be
received hereunder may bear a legend substantially similar to the following:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED
UNDER SUCH ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES ARE FURTHER SUBJECT TO CERTAIN CONTRACTUAL
RESTRICTIONS ON DISPOSITION PURSUANT TO THE STOCK PURCHASE AGREEMENT BY AND
AMONG ROBERT MARCHETTI, STEPHEN MICHAELSON AND PRT GROUP INC., DATED AS OF JULY
1, 1997, A COPY OF WHICH WILL BE PROVIDED TO THE HOLDER HEREOF UPON REQUEST TO
PRT GROUP INC."
Section 3.30 Accredited Investor. Each Seller is an accredited
investor within the definition set forth in Rule 501(a) under the Securities
Act.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
Section 4.1 Organization and Authority of Buyer. (a) Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware. Buyer has heretofore delivered to Sellers
complete and correct copies of its Certificate of Incorporation and By-laws, as
currently in effect. Buyer has the corporate power and authority to execute and
deliver this Agreement and consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Buyer and no other corporate proceedings on the part of
Buyer are necessary to autho-
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rize the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby.
(b) This Agreement has been duly executed and delivered by Buyer and
constitutes, and when executed and delivered each of the other agreements,
documents and instruments to be executed and delivered by Buyer pursuant hereto
will constitute, a valid and binding agreement of Buyer, enforceable against
Buyer in accordance with its terms, except that (i) such enforcement may be
subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other laws, now or hereafter in effect, relating to or limiting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
Section 4.2 Consents and Approvals; No Violations. Neither the
execution, delivery or performance of this Agreement nor the consummation by
Buyer of the transactions contemplated hereby will (a) conflict with or result
in any breach or violation of any provision of the Certificate of Incorporation
or By-Laws of Buyer; (b) require any filing or registration with, or notice or
declaration to, or the obtaining of any permit, license, authorization, consent
or approval of, any court, arbitral tribunal, administrative agency or
commission, or other governmental or regulatory authority whether within or
outside the United States; (c) violate, breach, conflict with or result in a
default (or any event which, with notice or lapse of time or both, would
constitute a default) under, or result in any termination, amendment
cancellation or acceleration, or give rise to any such right of termination,
cancellation or acceleration or require any consent under, any of the terms,
conditions or provisions of any note, mortgage, other evidence of indebtedness,
guarantee, license, agreement, lease or other instrument or obligation to which
Buyer is a party or by which Buyer or any of its assets are subject or by which
it may be bound; (d) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to Buyer, or (e) result in the creation or imposition
of any Lien upon any properties, assets or business of Buyer, excluding from
the foregoing clauses (b), (c), (d)
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and (e) such requirements, conflicts, defaults, rights, security interests,
Liens, or violations which would not adversely affect the ability of Buyer to
consummate the transactions contemplated by this Agreement or which become
applicable as a result of any acts or omissions by, or the status of or any
facts pertaining to, the Company or Sellers.
Section 4.3 Availability of Funds. Buyer currently has sufficient cash
equivalents and will have at the Closing sufficient immediately available
funds, in cash, to pay the Cash Consideration, to provide the Company with
sufficient working capital and to pay any other amounts payable pursuant to
this Agreement and to effect the transactions contemplated hereby. The Promis-
sory Note to be delivered to Sellers at the Closing will be the duly authorized
and enforceable obligation of the Buyer.
Section 4.4 Litigation. There is no claim, action, suit,
administrative, arbitration or other proceeding or governmental investigation
or inquiry pending or, to the best knowledge of Buyer, threatened against
Buyer, by or before any court, governmental or regulatory authority or by any
third party which challenges the validity of this Agreement.
Section 4.5 Capitalization. The capital structure of Buyer consists of
(i) 50,000,000 authorized shares of Buyer Common Stock, par value $.001 per
share, (ii) 275,961 authorized shares of Series A Convertible Preferred Stock,
par value $.01 per share (the "Convertible Preferred Stock"), all of which
shares are issued and outstanding, and (iii) 224,039 authorized shares of
undesignated preferred stock, of which none are issued and outstanding. A
summary of equity ownership is attached hereto as Schedule 4.5. No shares of
capital stock of the Company are held in the Company's treasury. All of the
issued and outstanding shares of Buyer capital stock are validly issued, fully
paid and non-assessable. Other than the Warrant, dated as of November 21, 1996,
by and between Capital Research and Buyer, employee stock options (the
"Options") and the Convertible Preferred Stock, there are no outstanding
securities convertible into, exchangeable for, or carrying the right to
acquire, equity securities of Buyer, nor are there any subscriptions,
warrants, options, rights or other arrangements or
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commitments (other than pursuant to this Agreement) which could obligate the
Buyer to issue any shares of capital stock of Buyer.
Section 4.6 Financial Statements. Buyer has furnished to Sellers the
audited consolidated balance sheet of Buyer as at December 31, 1996 and the
related statements of operations, stockholders' equity and cash flows of Buyer
for the period from January 1, 1996 through December 31, 1996, and the related
unaudited statements of income, stockholders' equity and cash flows of Buyer
for the three months ended March 31, 1997 (collectively, the "Buyer Financial
Statements"). All such Buyer Financial Statements have been prepared in accor-
dance with GAAP (except that such unaudited financial statements do not contain
all of the required footnotes) and fairly present the financial position of the
Buyer and its subsidiaries as of March 31, 1997 and December 31, 1996,
respectively, and the results of their operations and cash flows for the year
ended December 31, 1996 and the three months ended March 31, 1997,
respectively.
Section 4.7 Buyer Common Stock. Upon the issuance to the Sellers by
Buyer of the shares of Buyer Common Stock and Warrants as part of the Purchase
Consideration at the Closing, (i) the shares of Buyer Common Stock received
by each Seller, and the shares of Buyer Common Stock issuable upon conversion
of the Warrants, when so issued, will be validly issued, fully paid, non-
assessable, duly authorized and free of any preemptive rights, and (ii) each
Seller will have good and marketable title to such shares of Buyer Common
Stock, and to the shares of Buyer Common Stock to be issued upon the conversion
of the Warrants, if any, free and clear of any Liens.
Section 4.8 Certain Fees. Neither Buyer nor any of its affiliates has
employed any financial advisor or finder or incurred any liability for any
financial advisory or finders' fees in connection with this Agreement or the
transactions contemplated hereby.
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Section 4.9 Violations of Sellers' representations and Warranties. To
the knowledge of Buyer, except for the Share Ownership Claim, nothing has come
to the attention of Buyer during the course of its due diligence investigation
of the Company as of the date hereof which would give rise to a claim for
indemnification of Buyer Damages (as defined in Section 8.2 hereof) under
Article VII hereof.
ARTICLE V
COVENANTS
Section 5.1 Confidentiality of Information.
(a) All information concerning Sellers or Buyer, respectively,
furnished or provided by Sellers or Buyer or their respective affiliates to
Buyer or Sellers, respectively, or their representatives (whether furnished
before or after the date of this Agreement) shall be held subject to the
confidentiality agreement between Sellers and Buyer, dated as of June 9, 1997
(the "Confidentiality Agreement").
Section 5.2 Consents. Each of the Sellers and Buyer shall cooperate,
and use its reasonable efforts, to make all filings and obtain all licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and other third parties necessary to consummate the
transactions contemplated by this Agreement. In addition to the foregoing,
Buyer agrees to provide such assurances as to financial capability, resources
and creditworthiness as may be reasonably requested by any third party whose
consent or approval is sought hereunder. Notwithstanding the foregoing, nothing
herein shall obligate or be construed to obligate Sellers, the Company or Buyer
to make any payment to any third party in order to obtain the consent or
approval of such third party.
Section 5.3 Reasonable Efforts. Each Seller and Buyer shall cooperate,
and use its reasonable efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement.
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Section 5.4 Covenant to Satisfy Conditions. Each Seller will use its
reasonable efforts to ensure that the conditions set forth in Article VI hereof
are satisfied, insofar as such matters are within the control of either of
them, and Buyer will use its reasonable efforts to ensure that the conditions
set forth in Article VI hereof are satisfied, insofar as such matters are
within its control. Sellers and Buyer further covenant and agree, with respect
to any threatened or pending preliminary or permanent injunction or other
order, decree or ruling or statute, rule, regulation or executive order that
would adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby, to use all reasonable efforts to prevent or
lift the entry, enactment or promulgation thereof, as the case may be.
Section 5.5 Certain Tax Matters.
(a) Certain Definitions. As used in this Agreement:
(i) "Pre-Closing Period" means any taxable period which ends
on or before the Closing Date.
(ii) "Straddle Period" means any taxable period that
includes (but does not end on) the Closing Date.
(iii) "Straddle Period Return" means a Tax Return filed for
a Straddle Period.
(b) Return Filings, Refunds and Credits.
(i) Sellers shall prepare, or cause to be prepared, and
file, or cause to be filed, on a timely basis all Tax Returns with respect
to the Company for the Pre-Closing Period (the "Pre-Closing Period
Returns") except that Sellers may, in their discretion and solely at their
expense, request Buyer to cause the Company to prepare any Pre-Closing
Period Return. Sellers shall indemnify the Buyer for and pay, or cause to
be paid, all Taxes with respect to the Company shown to be due on the
Pre-Closing Period Returns.
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(ii) Buyer shall prepare, or cause to be prepared, and shall
file, or cause to be filed, on a timely basis all Tax Returns with respect
to the Company not described in Section 5.5(b)(i), including any Straddle
Period Returns. Buyer shall pay, or cause to be paid, all Taxes shown to be
due on such Tax Returns.
(iii) Sellers and Buyer shall reasonably cooperate, and
shall cause their respective affiliates, officers, employees, agents,
auditors and representatives reasonably to cooperate, in preparing and
filing all Tax Returns (including amended returns and claims for refund),
including maintaining and making available to each other all records
necessary in connection with Taxes and in resolving all disputes and audits
with respect to all taxable periods relating to Taxes. Buyer and Sellers
recognize that Sellers will need access, from time to time, after the
Closing Date, to certain accounting and tax records and information held by
the Company to the extent such records and information pertain to events
occurring on or prior to the Closing Date; therefore, Buyer agrees that
from and after the Closing Date Buyer shall, and shall cause the Company
to, (A) retain and maintain such records of the Company pertaining to the
period prior to the Closing Date until such time as Sellers determine that
such retention and maintenance is no longer necessary (subject to the terms
and conditions of Section 5.5(b)(iv) below) and (B) allow Sellers and its
agents and representatives, to inspect, review and make copies of such
records during Company's regular business hours as Sellers may deem
necessary or appropriate from time to time.
(iv) For a period of ten years from the Closing Date, Buyer
shall not, and shall cause the Company not to, dispose of or destroy any of
the business records and files of the Company pertaining to Taxes related
to periods prior to the Closing Date without first offering to turn over
possession thereof to Sellers by written notice to Sellers at least thirty
days prior to the proposed date of such disposition or destruction.
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(v) Buyer (solely at the expense of Sellers) shall file, and
shall cause the Company to file, any Tax refund claims requested by
Sellers. Any refunds and credits of Taxes of the Company with respect to
any taxable period ending on or before the Closing Date shall be for the
account of Sellers, and if received or utilized by Buyer or the Company,
shall be paid to Sellers within ten business days after Buyer or the
Company receives such refund or utilizes such credit.
(c) Elections. Buyer shall not, and shall cause the Company
not to, make, amend or revoke any Tax election if such action would adversely
affect Sellers with respect to any taxable period ending on or before the
Closing Date or for the Pre-Closing Period or any Tax refund with respect
thereto.
(d) Tax Indemnification.
(i) Notwithstanding anything in this Agreement to the
contrary, Sellers shall indemnify, defend and hold harmless Buyer and its
affiliates, at any time after the Closing, from and against any liability
for Taxes of the Company for the PreClosing Period for which Sellers are
liable pursuant to Section 5.5(b)(i). The indemnity provided for in this
Section shall be independent of and in addition to any other indemnity
provision of this Agreement and shall not be subject to any monetary
limitations or time bars.
(ii) Notwithstanding anything in this Agreement to the
contrary, Buyer shall indemnify, defend and hold harmless Sellers, at any
time after the Closing, from and against any liability for (A) Straddle
Period Taxes, and (B) any liability for taxes of the Company for any
taxable period ending after the Closing Date which is not a Straddle
Period.
(iii) If a claim for Taxes shall be made by any taxing
authority in writing, which, if successful, might result in an indemnity
payment pursuant to this Section 5.5, the party seeking indemnification
(the "Tax Indemnified Party") shall promptly notify the other party (the
"Tax Indemni-
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fying Party") in writing of such claim (a "Tax Claim") within a reasonably
sufficient period of time to allow the Tax Indemnifying Party effectively
to contest such Tax Claim, and in reasonable detail to apprise the Tax
Indemnifying Party of the nature of the Tax Claim, and provide copies of
all correspondence and documents received by it from the relevant taxing
authority. Failure to give prompt notice of a Tax Claim hereunder shall not
affect the Tax Indemnifying Party's obligation under this Section except to
the extent that the Tax Indemnifying Party is prejudiced by such failure to
give prompt notice.
(iv) With respect to any Tax Claim which might result in an
indemnity payment to Buyer pursuant to this Section 5.5(d), Sellers shall
control all proceedings taken in connection with such Tax Claim and,
without limiting the foregoing, may in their sole discretion and at their
sole expense pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any taxing authority with
respect thereto, and may, in their sole discretion, either pay the Tax
claimed and sue for a refund where applicable law permits such refund suits
or contest such Tax Claim. Buyer shall not under any circumstances settle
or otherwise compromise any Tax Claim referred to in the preceding sentence
without Sellers' prior written consent; provided, that, if Buyer does so
settle or otherwise compromise such a Tax Claim, Sellers shall not
indemnify Buyer for any such Taxes. In connection with any proceeding taken
in connection with such Tax Claim, (A) Sellers shall keep Buyer informed of
all material developments and events relating to such Tax Claim if
involving a material liability for Taxes and (B) Buyer shall have the
right, at its sole expense, to participate in any such proceedings;
provided, that, the final decision with respect to any settlement or
compromise of any such Tax Claims shall be that of Sellers. Buyer shall
cooperate with Sellers in contesting such Tax Claim, which cooperation
shall include, without limitation, the retention and the provision to
Sellers of records and information which are reasonably relevant to such
Tax Claim, and making employees available to Sellers to provide additional
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information or explanation of any material provided hereunder or to testify
at proceedings relating to such Tax Claim. Sellers shall reimburse Buyer
for reasonable out-of-pocket expenses incurred by Buyer in providing such
assistance to Sellers.
(v) With respect to any Tax Claim not described in Section
5.5(d)(iv) hereof which might result in an indemnity payment to Sellers
pursuant hereto, Buyer shall control all proceedings in accordance with
provisions that are parallel to those in Section 5.5(d)(iv) hereof.
(e) Any Indemnification payment made pursuant to this Section 5.5
shall be treated by the parties hereto as an adjustment to the Purchase
Consideration for federal, state, local and foreign tax purposes.
Section 5.6 Registration Rights. (a) If Buyer proposes to file a
registration statement under the Securities Act with respect to an offering by
Buyer for its own account or for the account of any of its respective
securityholders (other than the Sellers) of any shares of Buyer Common Stock or
securities convertible into or exchangeable for shares of Buyer Common Stock
(other than a registration statement on Form S-4 or S-8 or any substitute form
that may be adopted by the Securities and Exchange Commission (the "SEC")) then
Buyer shall give written notice of such proposed filing to each Seller as soon
as practicable (but in no event less than 30 days before the anticipated filing
date), and such notice shall offer such Seller the opportunity to register such
number of shares of Buyer Common Stock as such Seller may request (a
"Piggy-Back Registration"). Buyer shall use all reasonable efforts to cause the
securities requested to be included in a Piggy-Back Registration by each Seller
to be included on the same terms and conditions as any similar securities of
Buyer included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of such offering determine that the aggregate
number of shares proposed to be included in such registration statement exceeds
the maximum number of shares that should be included therein, then the amount
of shares of Buyer Common Stock to be offered for the account of Buyer and
Sellers to be included in such offering shall be first reduced, pro-rata on
based on the number of shares requested to be sold by Buyer and
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Sellers, to the extent necessary to reduce the total amount of securities to be
included in such offering to the amount recommended by such managing
underwriter or underwriters (a "Cutback"). The number of shares of Buyer Common
Stock to be sold for the account of any of the holders of (i) Buyer's
Convertible Preferred Stock or (ii) the Units, each comprised of one share of
Buyer Common Stock and one warrant, issued pursuant to the Common Stock and
Warrant Unit purchase Agreement, dated as of November 21, 1996, by and between
Buyer, Jerome Mellinger and Capital Research and Management Company, shall not
be subject to a Cutback under any circumstances as a result of any Piggy-Back
Registration hereunder without the prior approval of such securityholders.
(b) Each Seller agrees that he may not participate in any
underwritten registration unless he (i) agrees to sell his shares of Buyer
Common Stock on the basis provided in any underwriting arrangements approved by
Buyer and (ii) completes and executes all customary questionnaires, powers of
attorney, indemnities (including those in favor of the underwriter or
underwriters and Buyer for, among other things, misstatements or omissions of
the Sellers), underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements.
(c) In the case of any offering registered pursuant to this
Section 5.6, Buyer agrees to indemnify and hold each Seller harmless against
any and all losses, claims, damages or liabilities to which they or either of
them may become subject under the Securities Act or any other statute or common
law or otherwise, and to reimburse each of them, from time to time upon
request, for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions shall arise out of or shall be based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in the registration statement relating to the sale of their
respective shares of Buyer Common Stock, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) any untrue statement or
alleged untrue statement or a material fact contained in any preliminary
prospectus (as amended or supplemented if
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Buyer shall have filed with the SEC any amendment thereof or supplement
thereto), if used prior to the effective date of such registration statement,
or contained in the prospectus (as amended or supplemented if Buyer shall have
filed with the SEC any amendment thereof or supplement thereto), or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the indemnification
agreement contained in this paragraph (c) shall not apply to such losses,
claims, damages, liabilities or actions which shall arise from the sale of
shares of Buyer Common Stock to any person if such losses, claims, damages,
liabilities or actions shall arise out of or shall be based upon any such
untrue statement or alleged untrue statement, or any such omission or alleged
omission, if such statement or omission shall have been made in reliance upon
and in conformity with information furnished to Buyer by the Seller seeking
such indemnification specifically for use in connection with the preparation of
the registration statement or any preliminary prospectus or prospectus
contained in the registration statement or any such amendment thereof or
supplement thereto.
Section 5.7 Further Limitations on Disposition. Without in any way
limiting the representations set forth in Section 3.28 above, each Seller
further agrees not to make any disposition of all or any portion of the shares
of Buyer Common Stock or Warrants to be received hereunder unless:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) (A) Such Seller shall have notified Buyer of the
proposed disposition and shall have furnished Buyer with a reasonably detailed
statement of the circumstances surrounding the proposed disposition, including,
without limitation, the offer price and the name of the offeror, (B) Buyer
shall have right to purchase such shares of Buyer Common Stock on terms no less
favorable than those disclosed pursuant to clause (A), above, and Buyer shall
have failed to give Seller notice of its intent to purchase such shares of
Buyer Common
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Stock within 15 days of Buyer's receipt of the Seller notice pursuant to clause
(A), (ii) if reasonably requested by Buyer, such Seller shall have furnished
Buyer with a satisfactory opinion of counsel that such disposition will not
require registration of the Buyer Common Stock under the Securities Act, (iii)
the transferee has agreed in writing for the benefit of Buyer to be bound by
this Section 5.7, provided and to the extent such section is then applicable,
and to be bound by all other provisions of this Agreement, to the extent then
applicable, and (iv) such sale to the third party shall have occurred within 30
days after the provisions of clause (i)(B) have expired. Notwithstanding the
foregoing, the requirements of this paragraph (b) shall not be applicable to
sales of Buyer Common Stock made pursuant to Rule 144 under the Securities Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement, notice to Buyer or opinion of counsel
shall be necessary for (i) a transfer by a Seller to the estate of such Seller
or the transfer by gift, will or intestate succession of such Seller to his
spouse or to the siblings, lineal descendants or ancestors of such Seller or
his spouse, or (ii) a transfer by a Seller to a trust of which such Seller is
the grantor; provided, in any such case, that the transferee agrees in writing
to be subject to the terms hereof to the same extent as if he was a party
hereunder.
Section 5.8 No Sales to Competitors. Prior to an initial public
offering of Buyer Common Stock, each Seller covenants not to sell any Buyer
Common Stock or other securities of Buyer to any purchaser known by such Seller
to be a competitor of the Company, the Business or Buyer.
Section 5.9 [RESERVED]
Section 5.10 Certain Litigation. From and after the Closing, Sellers
shall indemnify and hold harmless Buyer, its affiliates and their successors
and assigns from and against any litigation, claim or proceeding, whether
commenced or threatened, to which Buyer or any of its affiliates and their
respective successors and assigns are named as a defendant which relates to the
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Share Ownership Claim subject to the limitations set forth in Section 8.2(b)(i)
hereof.
Section 5.11 Covenant Not to Compete and Secrecy Agreement.
(a) Each Seller agrees that, for a period of two (2) years from
and after the termination, for any reason, of such Seller's employment under
his respective Employment Agreement, such Seller shall not, either directly or
indirectly, through any subsidiary or affiliate or otherwise, own, manage or
operate any business or enterprise, which competes or would compete (i) in any
material way with the Company, the Business, Buyer, or any of their respective
affiliates, or (ii) in the business of computer software consulting, including,
without limitation, programming, troubleshooting, planning, training, project
management and year 2000 compliance.
Notwithstanding the foregoing, either Seller may (i) own, solely
as a passive investor, up to 5% of the equity securities of any company which
has a class of securities that are publicly traded which may compete with the
Company, the Business, Buyer, or their affiliates, or (ii) become an employee
of a client of the Buyer to the extent permitted by such Seller's Employment
Agreement.
(b) Each Seller agrees that he shall not, for a period of two (2)
years from and after the termination, for any reason, of such Seller's
employment under his respective Employment Agreement, except:
(i) as otherwise may be required by applicable law, governmental
regulation, subpoena or order of any court or governmental body, or
(ii) as may be necessary in connection with the filing of Tax
Returns, or
(iii) in connection with the defense of any claim, action, suit
or proceeding to which either Seller or any affiliate of either of
them is a party or as to which they are indemnifying Buyer hereunder,
or
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(iv) as may be necessary to carry out its obligations under this
Agreement or to enforce any obligation of Buyer under this Agreement
or any document executed and delivered in connection herewith, or
(v) for disclosures to accountants, financial advisors, counsel
or other representatives of such Seller,
disclose to anyone, use, sell, or otherwise transfer any trade secrets,
Confidential Information (as defined in the Confidentiality Agreement),
proprietary information, customer or supplier lists, or other nonpublic
information pertaining to the financial condition, business, manner of
operation, affairs (including labor matters), plans or prospects of the
Company. In the event that either Seller shall make or be required to make
disclosures as set forth above, each Seller agrees to do so in such manner as
to preserve to the fullest extent reasonably practicable the confidentiality of
all confidential business records and information and the attorney-client and
work-product privileges.
(c) Each Seller agrees that he shall not, until the second
anniversary of the date of this Agreement, (i) solicit, or induce, directly or
indirectly, any employee or independent contractor of the Company to terminate
his or her employment or contract or other agreement with the Company or to
refrain from rendering services to the Company or to enter into an employment
or independent contractor relationship with a competitor of the Company; (ii)
approach any such employee or independent contractor for any of the foregoing
purposes; or (iii) knowingly authorize, approve or assist in the taking of any
such actions by any person other than the Company, Buyer or their respective
affiliates.
(d) Each Seller acknowledges that no adequate remedy at law
exists for a breach of this Section. In addition to any other right or remedy
Buyer may have at law or in equity, Buyer shall be entitled to seek appropriate
injunctive relief, including preliminary and mandatory injunctive relief,
without the posting of any bond or other security, enjoining or restraining
either or both Sellers or any affiliate of either of them from any violation or
threatened violation of this Section.
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(e) The invalidity or unenforceability of any provision of this
Section shall in no way affect the validity or enforceability of any other
provision hereof. Moreover, if any provision of this Section shall be held to
be unenforceable because it is excessively broad as to either scope or subject,
it is agreed by the parties that such provision shall be construed by a court
of competent jurisdiction by limiting or reducing it so as to be enforceable to
the extent compatible with the then applicable law.
Section 5.12 Optional Repurchase. (a) On or after December 31, 1999,
provided that there has not previously occurred an initial public offering of
Buyer Common Stock, upon the written request of either Seller, (a "Requesting
Seller"), delivered to the Buyer (a "Repurchase Request"), Buyer shall
repurchase such number of shares of Buyer Common Stock then held by each
Requesting Seller as shall be specified in such notice by such Requesting
Seller. Repurchases pursuant to this Section 5.12 shall be made in quarterly
installments equal to the lesser of (i) five percent (5%) of the quarterly net
income (determined in accordance with GAAP) of the Buyer and (ii) $200,000;
provided, that the Buyer shall not be required to make any such repurchase
installment except to the extent that the Buyer shall have funds legally
available therefor.
The repurchase price for each share of Buyer Common Stock redeemed
pursuant to this Section 5.12 shall be the greater of (i) $10.90 per share of
Buyer Common Stock, and (ii) the current fair market value of the shares of
Buyer Common Stock on the date fixed for repurchase of such shares (the greater
of (i) and (ii) being the "Repurchase Price"). In the event that both Sellers
have Repurchase Requests outstanding simultaneously, each repurchase of shares
of Buyer Common Stock shall be made pro rata (based on the levels of funds to
be received) among Sellers, based upon the number of shares of Buyer Common
Stock to requested to be repurchased in the Repurchase Request.
For the purposes of this Section 5.12, the fair market value of such
shares of Buyer Common Stock shall be determined in good faith by the Board of
Directors of the Buyer at the time of the repurchase payment. In the event of
any dispute between the Sellers and the Buyer
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regarding the determination of the fair market value of such shares of Buyer
Common Stock, other than a claim that Buyer has breached its obligation to make
such determination in good faith, the Buyer and the Sellers shall each select
qualified appraisers for the Buyer Common Stock (the "Parties' Appraisers"),
and the Parties' Appraisers shall together select a third appraiser (the "Third
Appraiser"). Each of the Parties' Appraisers and the Third Appraiser shall
establish a fair market value for the Buyer Common Stock. The final fair market
value of the Buyer Common Stock, which shall be binding upon all parties, shall
be the average of (i) the appraisal of the Parties' Appraiser closest to that
of the Third Appraiser, and (ii) the appraisal of the Third Appraiser. Each
party shall bear the costs of its Party Appraiser and shall share the costs of
the Third Appraiser, with fifty percent (50%) of such Third Appraiser costs to
be paid by the Company and fifty percent (50%) of such Third Appraiser costs to
be paid by the Sellers.
(b) The Buyer Common Stock Repurchase Price set forth in this Section
5.12 shall be subject to equitable adjustment whenever there shall occur a
stock split, stock dividend, combination, recapitalization, reclassification or
other similar event involving a change in the Buyer Common Stock.
(c) At least seven (7) days prior to the anticipated date of each
quarterly repurchase installment payment, which shall occur on a date not more
than 45, nor less than 30, days after the end of a quarter (the "Repurchase
Date"), written notice (a "Repurchase Notice") shall be mailed, first class or
certified mail, postage prepaid, by the Buyer to each Seller whose Buyer Common
Stock which is to be redeemed, at its address shown an the records of the
Buyer. The Repurchase Notice shall contain the following information:
(i) the number of shares of Buyer Common Stock held by the Seller
which shall be repurchased by the Buyer and the total number of shares
of Buyer Common Stock held by both Sellers to be so repurchased;
(ii) the Repurchase Date and the Repurchase Price; and
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(iii) instructions with respect to the Seller's surrender to the
Buyer of certificates representing the shares of Buyer Common Stock to
be repurchased.
Section 5.13 Certain Finders Fees. Buyer shall pay any finder's fee,
if any, due to Irwin Sitkin.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE PARTIES
Section 6.1 Conditions to Each Party's Obligation. The respective
obligation of each party to consummate the transactions contemplated herein is
subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) No statute, rule or regulation shall have been enacted,
entered, promulgated or enforced by any court or governmental authority which
prohibits or restricts the consummation of the transactions contemplated
hereby;
(b) There shall not be in effect any judgment, order, injunction
or decree of any court of competent jurisdiction enjoining the consummation of
the transactions contemplated hereby; and
(c) There shall not be any suit, action, investigation, inquiry
or other proceeding instituted, pending or threatened by any governmental or
other regulatory or administrative agency or commission which seeks to enjoin
or otherwise prevent consummation of the transactions contemplated hereby.
Section 6.2 Conditions to Obligations of Sellers. The obligations of
Sellers to consummate the transactions contemplated hereby are further subject
to the satisfaction (or waiver) at or prior to the Closing of the following
conditions:
(a) The representations and warranties of Buyer contained in this
Agreement shall be true and correct in all material respects at the date hereof
and as of the Closing as if made at and as of such time, except
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for changes permitted or contemplated hereby and except for representations
which are as of a specific date;
(b) Buyer shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Closing pursuant to the terms hereof;
(c) If the date hereof is not also the Closing Date, Buyer shall
have delivered to Sellers a certificate, reasonably satisfactory to Sellers,
with respect to the accuracy of the representations and warranties, and
fulfillment of the obligations of Buyer set forth herein, dated as of the
Closing Date executed by an officer of Buyer; and
(d) Buyer shall have delivered to Sellers those items set forth
in Section 1.6 hereof.
Section 6.3 Conditions to Obligations of Buyer. The obligations of
Buyer to consummate the transactions contemplated hereby are further subject to
the satisfaction (or waiver) at or prior to the Closing of the following
conditions:
(a) The representations and warranties of Sellers contained in
this Agreement shall be true and correct in all material respects at the date
hereof and as of the Closing as if made at and as of such time, except for
changes permitted or contemplated hereby and except for representations which
are as of a specific date;
(b) Sellers shall have each performed in all material respects
their obligations under this Agreement required to be performed by them at or
prior to the Closing pursuant to the terms hereof;
(c) If the date hereof is not also the Closing Date, Sellers
shall have delivered to Buyer a certificate, reasonably satisfactory to Buyer,
with respect to the accuracy of the representations and warranties and
fulfillment of the obligations of Sellers set forth herein, dated as of the
Closing Date and executed by each of the Sellers;
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(d) Sellers shall have delivered to Buyer those items set forth
in Section 1.5 hereof; and
(e) Buyer shall have received the opinion of Day, Berry & Howard,
legal counsel to Sellers, dated as of the Closing Date and reasonably
satisfactory to Buyer, with respect to, among other things, the due
incorporation, valid existence and good standing of the Company, the
capitalization of the Company, the valid issuance, non-assessability of and
title to the Shares and the authorization and enforceability of this Agreement
with respect to Sellers.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned:
(a) at any time, by mutual written consent of Sellers and
Buyer; or
(b) at any time on or after August 31, 1997, by either Sellers,
on the one hand, or Buyer, on the other hand, if the Closing shall not have
occurred on or prior to such date; provided that the party so terminating this
Agreement may not then be in default of any of its obligations, representations
or warranties set forth herein.
Section 7.2 Procedure and Effect of Termination. In the event of the
termination of this Agreement and the abandonment of the transactions
contemplated hereby pursuant to Section 7.1(b) hereof, written notice thereof
shall forthwith be given by the party so terminating to the other party hereto
and this Agreement shall terminate and the transactions contemplated hereby
shall be abandoned, without further action by Sellers, on the one hand, or
Buyer, on the other hand. If this Agreement is terminated pursuant to Section
7.1 hereof:
(a) each party shall redeliver all documents, work papers and
other materials of the other parties relating to the transactions
contemplated hereby,
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whether so obtained before or after the execution hereof, to the party
furnishing the same, and all confidential information received by any party
hereto with respect to the other party shall be treated in accordance with the
Confidentiality Agreement;
(b) all filings, applications and other submissions made pursuant
hereto shall, at the option of Sellers, and to the extent practicable, be
withdrawn from the agency or other person to which made; and
(c) there shall be no liability or obligation hereunder on the
part of Sellers or Buyer or any of their respective directors, officers,
employees, affiliates, controlling persons, agents or representatives, except
that Sellers or Buyer, as the case may be, may have liability to the other
party if the basis of termination is a willful, material breach by Sellers or
Buyer, as the case may be, of one or more of the provisions of this Agreement,
and except that the obligations provided for in Sections 7.2(a), 7.2(b) and 9.1
hereof shall survive any such termination.
Section 7.3 Amendment, Modification and Waiver. This Agreement may be
amended, modified or supplemented at any time by written agreement of Sellers
and Buyer. Any failure of Sellers, on the one hand, or Buyer, on the other
hand, to comply with any term or provision of this Agreement may be waived,
with respect to Buyer, by Sellers and, with respect to Sellers, by Buyer, by an
instrument in writing signed by or on behalf of the appropriate party, but such
waiver or failure to insist upon strict compliance with such term or provision
shall not operate as a waiver of, or estoppel with respect to, any subsequent
or other failure to comply.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
Section 8.1 Survival of Representations, Warranties and Agreements.
Except for Section 3.4(b), which shall survive indefinitely, the
representations and warranties, but not the agreements and covenants, of each
of Sellers and Buyer, made in this Agreement shall survive the Closing until
the first anniversary of the Closing
45
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(the "Indemnity Period"), but, except as provided in Section 7.2(c) hereof,
shall not survive any termination of this Agreement. The agreements and
covenants of the parties, including, without limitation, Section 5.10 hereof,
shall survive the Closing in accordance with their terms. The parties intend to
shorten the statute of limitations and agree that no claims or causes of action
may be brought against Sellers, Buyer or any of its directors, officers,
employees, affiliates, controlling persons, agents or representatives based
upon, directly or indirectly, any of the representations or warranties
contained in this Agreement after the Indemnity Period or, except as provided
in Section 7.2(c) hereof, any termination of this Agreement. This Section 8.1
shall not limit any covenant or agreement of the parties which contemplates
performance after the Closing, including, without limitation, the covenants and
agreements set forth in Sections 5.5 and 5.7 hereof.
Section 8.2 Sellers' Agreement to Indemnify.
(a) Subject to the terms and conditions set forth herein, from
and after the Closing, Sellers shall, jointly and severally, indemnify and hold
harmless Buyer, the Company and their respective directors, officers,
employees, affiliates, controlling persons, agents and representatives and
their successors and assigns (collectively, the "Buyer Indemnitees") from and
against all liability, demands, claims, actions or causes of action,
assessments, losses, damages, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) (collectively "Buyer
Damages") asserted against or incurred by any Buyer Indemnitee as a result of
or arising out of (i) a breach of any representation or warranty contained in
this Agreement when made or at and as of the Closing as though such
representations and warranties were made at and as of the Closing and (ii) the
Share Ownership Claim.
(b) Each Seller's obligations to indemnify the Buyer
Indemnitees pursuant to (x) clause (i) of Section 8.2(a) hereof with respect to
a breach of a representation or warranty contained in this Agreement, and (y)
Section 5.10 hereof, are subject to the following limitations:
46
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(i) Except as otherwise expressly provided herein, no
indemnification shall be made by Sellers unless the aggregate amount
of Buyer Damages exceeds $50,000 and, in such event, indemnification
shall be made by Sellers for all Buyer Damages in excess of $50,000,
it being understood that such $50,000 shall be a "deductible".
(ii) Except as otherwise expressly provided herein, Sellers shall
be obligated to indemnify the Buyer Indemnitees only for those claims
giving rise to Buyer Damages as to which the Buyer Indemnitees have
given Sellers written notice thereof prior to the end of the Indemnity
Period in the event that the Indemnity Period applies to such Buyer
Damages. Any written notice delivered by a Buyer Indemnitee to Sellers
with respect to Buyer Damages shall set forth with as much specificity
as is reasonably practicable the basis of the claim for Buyer Damages
and, to the extent reasonably practicable, a reasonable estimate of
the amount thereof.
(c) In the event of any conflict or inconsistency between any of
the provisions of Sections 8.1, 8.2 and 8.4 and any other section of this
Agreement, on the one hand and Section 5.5 on the other hand, the provisions of
Section 5.5 will control.
(d) Sellers agree to each bear their prorata share of any Buyer
Damages indemnified based on the proportion of the Purchase Consideration
received by such Seller hereunder.
(e) Sellers agree that any indemnification of Buyer Damages
under this Article VIII shall be first made by set-off against the principal
amount of the Promissory Note, as described in the form of Promissory Note
attached hereto, and next by payment in cash by the Sellers to the affected
Buyer Indemnitee.
Section 8.3 Third Party Indemnification. The obligations of either
party to indemnify the other under Section 8.2 or 8.4 hereof with respect to
Buyer Damages or Seller Damages, as the case may be, resulting from the
assertion of liability by third parties (a "Claim"), will be subject to the
following terms and conditions:
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(a) A Buyer Indemnitee or Seller Indemnitee, as the case may be
(the "Indemnified Party"), against whom any Claim is asserted will give Sellers
or Buyer, as the case may be (the "Indemnifying Party"), written notice of any
such Claim promptly after learning of such Claim, and the Indemnifying Party
may at its option undertake the defense thereof by representatives of their own
choosing. Failure to give prompt notice of a Claim hereunder shall not affect
the Indemnifying Party's obligations under this Section 8.3, except to the
extent the Indemnifying Party is materially prejudiced by such failure to give
prompt notice. If the Indemnifying Party, within 30 days after notice of any
such Claim, or such shorter period as is reasonably required, fails to assume
the defense of such Claim, the Indemnified Party against whom such Claim has
been made will (upon further notice to the Indemnifying Party) have the right
to undertake the defense, compromise or settlement of such Claim on behalf of
and for the account and risk, and at the expense, of the Indemnifying Party
subject to the right of the Indemnifying Party to assume the defense of such
Claim at any time prior to settlement, compromise or final determination
thereof.
(b) Anything in this Section 8.3 to the contrary notwithstanding,
the neither party shall enter into any settlement or compromise of any action,
suit or proceeding or consent to the entry of any judgment (i) which does not
include as an unconditional term thereof the delivery by the claimant or
plaintiff to the other party of a written release from all liability in respect
of such action, suit or proceeding and (ii) for other than monetary damages to
be borne by the other party without the prior written consent of the other
party, which consent shall not be unreasonably withheld.
Section 8.4 Buyer's Agreement to Indemnify.
(a) Subject to the terms and conditions set forth herein, from
and after the Closing, Buyer shall indemnify and hold harmless each of the
Sellers and their respective heirs, successors and assigns (collectively, the
"Seller Indemnitees") from and against all liability, demands, claims, actions
or causes of action, assessments, losses, damages, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
(collectively "Seller Damages") asserted against
48
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or incurred by any Seller Indemnitee as a result of or arising out of (i) a
breach of any representation or warranty contained in this Agreement when made
or at and as of the Closing as though such representations and warranties were
made at and as of the Closing and (ii) the operation of the business of the
Company from and after the Closing, including any liabilities of the Company
incurred prior to the Closing that are provided for in the Financial
Statements.
(b) Buyer's obligations to indemnify the Seller Indemnitees
pursuant to clause (i) of Section 8.4(a) hereof with respect to a breach of a
representation or warranty contained in this Agreement are subject to the
following limitations:
(i) Except as otherwise expressly provided herein, no
indemnification shall be made by Sellers unless the aggregate amount
of Seller Damages exceeds $50,000 and, in such event, indemnification
shall be made by Buyers for all Seller Damages in excess of $50,000,
it being understood that such $50,000 shall be a "deductible".
(ii) Except as otherwise expressly provided herein, Buyer shall
be obligated to indemnify the Seller Indemnitees only for those claims
giving rise to Seller Damages as to which the Seller Indemnitees have
given Buyer written notice thereof prior to the end of the Indemnity
Period in the event that the Indemnity Period applies to such Seller
Damages. Any written notice delivered by a Seller Indemnitee to Buyer
with respect to Seller Damages shall set forth with as much
specificity as is reasonably practicable the basis of the claim for
Seller Damages and, to the extent reasonably practicable, a reasonable
estimate of the amount thereof.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Fees and Expenses. Whether or not the transactions
contemplated herein are consummated pursuant hereto, except as otherwise
provided herein, each of Sellers, on the one hand, and Buyer, on the other
hand, shall pay all fees and expenses incurred by, or on behalf of, such party
in connection with, or in anticipa-
49
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tion of, this Agreement and the consummation of the transactions contemplated
hereby; provided, that, the Company may pay Sellers' professional fees and
expenses incurred in connection with the transactions contemplated hereby;
provided, further, that such Company paid professional fees and expenses shall
be reflected in the Working Capital Statement. Each of Sellers, on the one
hand, and Buyer, on the other hand, shall indemnify and hold harmless the other
party from and against any and all claims or liabilities for financial advisory
and finders' fees incurred by reason of any action taken by such party or
otherwise arising out of the transactions contemplated by this Agreement by any
person claiming to have been engaged by such party.
Section 9.2 Further Assurances. From time to time after the Closing
Date, at the request of another party hereto and at the expense of the party so
requesting, each of the parties hereto shall execute and deliver to such
requesting party such documents and take such other action as such requesting
party may reasonably request in order to consummate more effectively the
transactions contemplated hereby.
Section 9.3 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and may be given by any of the following methods: (a) personal
delivery; (b) registered or certified mail, postage prepaid, return receipt
requested; or (c) reputable, national, overnight delivery service. Notices
shall be sent to the appropriate party at its address given below (or at such
other address for such party as shall be specified by notice given hereunder):
If to Buyer, to:
PRT Group Inc.
342 Madison Avenue
New York, NY 10173
Attention: Douglas Mellinger
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with a copy to:
Skadden, Arps, Slate,
Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-9931
Attention: Mark N. Kaplan
If to Sellers, to:
Computer Management Resources, Inc.
Liberty Plaza
101 Barnes Road, Suite 300
Wallingford, CT 06492
Attention: Robert Marchetti and
Stephen Michaelson
with a copy to:
Day, Berry & Howard
CityPlace I
Hartford, CT 06103-3499
Attention: Jeffrey G. Grody
All such notices, requests, demands, waivers and communications shall be deemed
received upon (i) if by personal delivery, upon actual receipt thereof by the
addressee, (ii) if by mail, upon receipt of the return receipt, or (iii) if by
overnight delivery, on the day following delivery to the overnight delivery
service.
Section 9.4 Severability. Should any provision of this Agreement for
any reason be declared invalid or unenforceable, such decision shall not affect
the validity or enforceability of any of the other provisions of this
Agreement, which remaining provisions shall remain in full force and effect and
the application of such invalid or unenforceable provision to persons or
circumstances other than those as to which it is held invalid or unenforceable
shall be valid and enforced to the fullest extent permitted by law.
Section 9.5 Binding Effect; Assignment. This Agreement and all of the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties
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hereto and their respective successors and permitted assigns. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, directly or indirectly, including, without limitation, by operation
of law, by any party hereto without the prior written consent of the other
parties hereto.
Section 9.6 No Third Party Beneficiaries. This Agreement is solely for
the benefit of Sellers, and their successors and permitted assigns, with
respect to the obligations of Buyer under this Agreement, and for the benefit
of Buyer and its respective successors and permitted assigns, with respect to
the obligations of Sellers, under this Agreement, and this Agreement shall not
be deemed to confer upon or give to any other third party any remedy, claim
liability, reimbursement, cause of action or other right.
Section 9.7 Interpretation.
(a) The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
(b) As used in this Agreement, the term "person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or any department or agency
thereof.
(c) As used in this Agreement, the term "affiliate" shall have
the meaning set forth in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
Section 9.8 Jurisdiction and Consent to Service. Notwithstanding the
jurisdiction or venue of any other court, each of Sellers and Buyer (a) agree
that any suit, action or proceeding arising out of or relating to this
Agreement may be brought only in the state or federal courts of the States of
New York or Connecticut; (b) consents to the exclusive jurisdiction of each
such court in any suit, action or proceeding relating to or arising out of this
Agreement; (c) waives any objection which it may have to the laying of venue in
any such suit, action
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or proceeding in any such court; and (d) agrees that service of any court paper
may be made in such manner as may be provided under applicable laws or court
rules governing service of process.
Section 9.9 Entire Agreement. This Agreement, the Confidentiality
Agreement, the Disclosure Schedule, and the Exhibits and other documents
referred to herein or delivered pursuant hereto which form a part hereof
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, between the parties or any of them with respect to the
subject matter hereof.
Section 9.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York (regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
Section 9.11 Specific Performance. The parties acknowledge and agree
that any breach of the terms of this Agreement would give rise to irreparable
harm for which money damages would not be an adequate remedy and accordingly
the parties agree that, in addition to any other remedies, each shall be
entitled to enforce the terms of this Agreement by a decree of specific
performance without the necessity of proving the inadequacy of money damages as
a remedy.
Section 9.12 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
SELLERS
/s/ ROBERT MARCHETTI
------------------------------
Robert Marchetti
/s/ STEPHEN MICHAELSON
------------------------------
Stephen Michaelson
PRT GROUP INC.
By: /s/ GREGORY S. WELLINGER
---------------------------
Name: Gregory s. Wellinger
Title: Chief Operating Officer
54
<PAGE>
July 31, 1997
Mr. Douglas Mellinger
President
PRT Group, Inc.
7 Skyline Drive
Hawthorne, New York 10532
Dear Mr. Mellinger:
The Chase Manhattan Bank ("Chase") is pleased to advise that it is
prepared, in its sole discretion, to offer a line of credit to PRT Group, Inc.
(the "Borrower") subject to the terms and conditions described below.
$7,000,000 LINE OF CREDIT TO PRT GROUP, INC.
Amount: $7,000,000, subject to a Borrowing Base formula set
forth below.
Borrower: PRT Group, Inc.
Type of Credit: Advised Line of Credit
Maturity: June 30, 1998
Use of Proceeds: Working capital
Interest Rate: PRT Group, Inc. will have the following interest rate
options when borrowing under the facility.
Prime Rate
----------
The unpaid principal balance will bear interest equal
at all times to Chase's Prime Rate per annum in effect
from time to time. Interest is to be computed on an
actual/360 day basis and including any time extended by
reason of Saturdays, Sundays and holidays. Chase's
Prime Rate shall mean that annual rate of interest from
time to time announced by Chase at its head office as
its prime commercial lending rate. Interest shall be
payable on a monthly basis on the first day of each
month.
<PAGE>
-2-
LIBOR
-----
Interest shall be determined for periods of one, two,
or three months (as selected by the Borrower);
provided, however, no interest period shall extend
beyond the maturity of the facility, and shall be at an
annual rate equal to the London Interbank Offered Rate
("LIBOR") for corresponding deposits of U.S. Dollars
(i.e., Eurodollars) plus 2.25%. LIBOR will be
determined by the principal London Office of The Chase
Manhattan Bank at the start of each interest period.
Interest shall be paid at the end of each interest
period or quarterly, whichever is earlier, and is to be
calculated on the basis of the actual number of days
elapsed in a year of 360 days. LIBOR drawings shall
require three business days' prior notice and shall be
in minimum amounts of $250,000.
Prepayment
Compensation: Any prepayment of a LIBOR loan prior to the end of an
applicable interest period shall result in the payment
of additional compensation to the Bank.
Security: A first priority security interest in all of Borrower's
accounts receivable, inventory, machinery, equipment,
fixtures, chattel paper and general intangibles,
including but not limited to, corporate name,
trademarks, trade names, goodwill, patents, copyrights
and know how.
Financial Covenants: 1. The Working Capital of Borrower, and of Borrower
only and measured on an unconsolidated basis, is to be
equal to or greater than $8,000,000 at all times.
2. The Tangible Net Worth of Borrower, and of Borrower
only and measured on an unconsolidated basis, plus
Preferred Stock, is to be equal to or greater than
$8,000,000 at all times.
Reporting Covenants: 1. Within 90 days after and as at the close of each
Fiscal Year, a consolidated and consolidating balance
sheet of Borrower and its consolidated Subsidiaries,
and consolidated and consolidating statements of
income, cash flows and changes in shareholders' equity
of Borrower and its consolidated Subsidiaries prepared
in accordance with GAAP consistently applied, each
accompanied by a statement that they have been audited
by Arthur Andersen LLP or other independent certified
public accounting firm satisfactory to Chase, and the
report of such accountants shall not contain any
qualification or disclaimer or opinion by reason of
audit limitations imposed by Borrower.
<PAGE>
-3-
2. Within 60 days after the end of each Fiscal Quarter,
a consolidated and consolidating balance sheet of
Borrower and its consolidated Subsidiaries as at the
end of each such Fiscal Quarter and related
consolidated and consolidating statements of income,
cash flows and changes in shareholders' equity of the
Borrower and its consolidated Subsidiaries for the
Fiscal Quarter and from the beginning of such Fiscal
Year to the end of such Fiscal Quarter, prepared in
conformity with GAAP consistently applied, including
all accruals, and accompanied by a statement that they
have been reviewed by Arthur Andersen LLP or other
independent certified public accounting firm
satisfactory to Chase.
3. Within 15 days after the end of each month during
which the line of credit is outstanding, a detailed
accounts receivable aging and a Borrowing Base
Certificate, in form and detail satisfactory to Chase.
Additional
Conditions: Borrowing Base: All advances under this line of credit
to be limited to 75% of eligible accounts receivable,
to include those receivables under ninety days from
date of invoice, excluding all intercompany receivables
and excluding the principal of and interest owing on
the time loan owing by Company to Chase in the original
principal amount of $2,000,000.
In the event the aggregate amount advanced at any time
exceeds the Borrowing Base, such excess shall be
immediately due and payable by Company to Chase.
Annual Clean Up: This line of credit shall be subject
to the requirement that for 30 consecutive days during
each twelve month period or during the term hereof,
whichever is shorter, there shall be no loans
outstanding.
Affirmative and
Negative Covenants: The typical affirmative and negative covenants which
are appropriate to this transaction shall be required
including but not limited to a prohibition on further
indebtedness, dividends or guarantees without the
consent of the Bank.
Expenses: Borrower will pay all fees and expenses incurred in
connection with the negotiation, preparation and
documentation of the proposed
<PAGE>
-4-
line credit facility including any collateral costs,
disbursements, search fees, filing fees and Bank's
attorneys' fees, whether or not the proposed financing
is consummated.
This line of credit does not constitute a commitment and the continued
availability of this facility is subject to Chase, in its sole discretion,
continuing to be satisfied with the Borrower's financial condition and economic
prospects, prompt advice to Chase of any circumstances which might materially
or adversely affect the Borrower, and the Borrower's maintenance of a
satisfactory relationship with Chase.
This letter constitutes the entire understanding between Chase and the
Borrower and supersedes all prior discussions. The terms and conditions set
forth in this letter shall survive the execution of the note evidencing the
indebtedness and shall remain in effect so long as this facility remains in
place or any amounts remain outstanding under this line of credit.
Chase will consider requests for advances hereunder until June 30,
1998 unless this discretionary line of credit is earlier terminated by Chase in
its sole discretion.
Please acknowledge your understanding of the foregoing by signing and
returning the enclosed copy of this letter to the undersigned no later than
August 8, 1997.
We appreciate the opportunity to be of service to you.
Very truly yours,
THE CHASE MANHATTAN BANK
/s/ KEVIN J. ANDERSON
Kevin J. Anderson
Vice President
(212) 403-5020
ACKNOWLEDGED AND AGREED:
PRT GROUP, INC.
By: /s/ GREG D. ADAMS
-------------------------------
Date: July 31, 1997
-----------------------------
Its: Chief Financial Officer
------------------------------
<PAGE>
Exhibit 16.1
[LOGO] KPMG Peat Marwick LLP
345 Park Avenue Telephone 212 758 9700 Telefax 212 758 9819
New York, NY 10154 Telex 428038
September 19, 1997
Securities and Exchange Commission
Washington, D.C.
Ladies and gentleman:
We were previously principal accountants for PRT Group, Inc. On July 6, 1997
we resigned. We have read PRT Group, Inc.'s statements included in "Changes
in Accountants" in the accompanying Prospectus and we agree with such statements
except that we are not in a position to agree with PRT Group, Inc.'s comments
regarding Ernst & Young LLP in the first paragraph or the comments related
to Schulman, Cohen, Furst & Rosen P.C. in the second paragraph.
Very truly yours,
/s/ KPMG Peat Marwick LLP
<PAGE>
Exhibit 16.2
To: Securities and Exchange Commission
We audited the financial statements of PRT Group Inc. at December 31, 1994 and
for the year then ended. In this regard, we agree with the statements made by
PRT in the Registration Statement on Form S-1 dated the date hereof under the
caption "Change in Accountants."
/s/ Shulman, Cohen, Furst, Kramer & Rosen, P.C.
Shulman, Cohen, Furst, Kramer & Rosen, P.C.
New York, New York
September 22, 1997
<PAGE>
EXHIBIT 21
PRT GROUP INC.
SUBSIDIARIES
Computer Management Resources, Inc.
PRT International Ltd.
PRT (Barbados) Ltd.
PRT Europe Ltd.
PRT Mauritius Ltd.
PRT Software Services INDIA Pvt. Ltd.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated September 16, 1997, in the Registration
Statement (Form S-1) and related Prospectus of PRT Group Inc., for
the registration of shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
September 19, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 11, 1995, with respect to the financial
statements of PRT Group Inc. included in the Registration Statement (Form S-1)
and related Prospectus of PRT Group Inc., for the registration of shares of
its common stock.
/s/ Shulman, Cohen, Furst, Kramer & Rosen, P.C.
New York, New York
September 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE PROSPECTUS WHICH FORMS
A PART OF THIS REGISTRATION STATEMENT FOR THE PERIOD INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,856,000
<SECURITIES> 0
<RECEIVABLES> 5,135,000
<ALLOWANCES> 122,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,299,000
<PP&E> 3,511,000
<DEPRECIATION> 556,000
<TOTAL-ASSETS> 23,960,000
<CURRENT-LIABILITIES> 6,376,000
<BONDS> 0
16,939,000
0
<COMMON> 11,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,960,000
<SALES> 23,801,000
<TOTAL-REVENUES> 23,801,000
<CGS> 17,965,000
<TOTAL-COSTS> 17,965,000
<OTHER-EXPENSES> 9,235,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,000
<INCOME-PRETAX> (3,575,000)
<INCOME-TAX> (306,000)
<INCOME-CONTINUING> (3,399,000)
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<EXTRAORDINARY> 0
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<NET-INCOME> (3,269,000)
<EPS-PRIMARY> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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A PART OF THIS REGISTRATION STATEMENT FOR THE PERIOD INDICATED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,898,000
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<DEPRECIATION> 1,176,000
<TOTAL-ASSETS> 25,015,000
<CURRENT-LIABILITIES> 9,719,000
<BONDS> 0
17,407,000
0
<COMMON> 11,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,015,000
<SALES> 21,314,000
<TOTAL-REVENUES> 21,314,000
<CGS> 15,217,000
<TOTAL-COSTS> 15,217,000
<OTHER-EXPENSES> 8,210,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,000
<INCOME-PRETAX> (2,039,000)
<INCOME-TAX> (129,000)
<INCOME-CONTINUING> (2,113,000)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (1,910,000)
<EPS-PRIMARY> 0
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</TABLE>
