<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1997
Registration No. 333-36169
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 2
TO
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)
--------------------
LEONARD P. CIRIELLO, ESQ.
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:
Vincent J. Pisano, Esq. Claude S. Serfilippi, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Chadbourne & Parke LLP
919 Third Avenue 30 Rockefeller Plaza
New York, New York 10022 New York, New York 10112
(212) 735-3000 (212) 408-5100
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. [ ]
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 NOVEMBER 13, 1997
PROSPECTUS
4,600,000 SHARES
[PRT GROUP INC. LOGO]
PRT GROUP INC.
Common Stock
Of the 4,600,000 shares of common stock, $.001 par value per share
("Common Stock"), offered hereby, 3,850,000 shares are being issued and sold
by PRT Group Inc. ("PRT" or the "Company") and 750,000 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 $12.00 and $14.00 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.
- -------------------------------------------------------------------------------
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------
Per Share $ $ $ $
- -------------------------------------------------------------------------------
Total (3) $ $ $ $
- -------------------------------------------------------------------------------
(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 $1,300,000, 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 690,000 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>
PRT's SOLUTIONS APPROACH
Leveraging its integrated onsite, onshore, near-shore and offshore
capabilities, PRT offers high quality solutions to create positive economic
impact for its clients.
[PRT ARTWORK - Solutions Approach]
People
Global recruiting and commitment to employee learning, growth and satisfaction
enable PRT to attract and retain high quality IT professionals from around
the world.
Precess
PRT's process-driven approach is supported by its proprietary Process Asset
Library software development framework which enables PRT to deliver innovative,
high quality and consistent solutions.
Infrastructure
PRT has made significant investments in its infrastructure including: a global
data network, Software Development Centers and an experienced management team.
These investments provide PRT a platform for growth.
Solutions
PRT utilizes a disciplined software engineering approach in all software
solutions to add value and achieve quality for its clients.
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.
------------------------
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."
<PAGE>
PROSPECTUS SUMMARY
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."
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") software development
framework, a knowledge bank of processes, methodologies, tools and reusable
work product developed by PRT, as well as an internal, independent software
quality assurance function allows the Company to provide high-quality,
effective IT solutions.
Strategic Consulting services include management consulting, strategic IT
planning, emerging technology research, knowledge transfer and "Quality
Journey" strategies and implementations, in which PRT helps clients develop
internal software development quality control mechanisms, processes and
organizational units. Project Solutions services consist of: (i) full life
cycle software development, (ii) hardware and software platform migrations,
in which a client's information systems are moved from obsolete or legacy
hardware or software systems to more efficient and powerful new systems,
(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 software development 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 nine
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.
3
<PAGE>
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 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 nine-month
periods ended September 30, 1997 and September 30, 1996, the Company's
revenues were $40.0 million and $16.0 million, respectively, representing an
increase of approximately 150%. During the same time periods, the Company's
gross margin improved to approximately 30% from approximately 25%.
THE OFFERING
Common Stock offered by the Company ......... 3,850,000 shares
Common Stock offered by the Selling
Stockholders ................................ 750,000 shares
----------
Total....................................... 4,600,000 shares
Common Stock to be outstanding after the
Offering(1) ................................. 18,115,473 shares
Non-Voting Common Stock to be outstanding
after the Offering(2)........................ 46,500 shares
----------
Total....................................... 18,161,973 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) and general
corporate purposes, including
working capital and possible
acquisitions of related
businesses.
Proposed Nasdaq National Market Symbol ....... PRTG
- ------------
(1) Does not include 250,325 shares of Common Stock issuable upon exercise
of outstanding options as of October 28, 1997. See "Management--Stock
Option Plan."
(2) Each share of Non-Voting Common Stock, par value $.001 per share (the
"Non-Voting Common Stock"), is convertible at any time at the option of
the holder into one share of Common Stock. See "Description of Capital
Stock--Common Stock and Non-Voting Common Stock."
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>
FOR THE NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------------------- -----------------------------------
PRO
FORMA PRO FORMA
1992 1993 1994 1995 1996 1996(1) 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 $16,031 $40,034 $44,299
Gross profit 1,210 1,839 3,025 4,752 5,836 7,857 3,938 12,159 13,239
Income (loss) from
operations 180 309 453 642 (3,399) (3,526) (1,670) (1,573) (2,072)
Net income (loss) $ 105 $ 172 $ 251 $ 115 $(3,269) $(3,583) $(1,804) $(1,658) $(2,136)
====== ====== ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share (2): $ 0.01 $ 0.01 $ 0.02 $ 0.01 $ (0.27) $ (0.29) $ (0.14) $ (1.44) $ (1.47)
====== ====== ======= ======= ======= ======= ======= ======= =======
As adjusted net loss
per share (2) $ (0.12) $ (0.15)
Weighted average common
and common equivalent
shares: 12,878,037 12,878,037 12,699,704 12,628,037 12,692,888 12,802,901 12,628,036 14,040,562 14,113,904
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
PRO FORMA
HISTORICAL AS ADJUSTED (3)
---------- ---------------
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash $ 3,714 $ 48,961
Working capital 3,629 52,154
Total assets 34,706 79,808
Total debt (4) 9,602 6,077
Stockholders' equity
(deficit) (21,658) 63,951
</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 conversion of the
Convertible Preferred Stock (as defined herein) into 2,759,610 shares
of Common Stock, (ii) the issuance of an aggregate of 936,365 shares of
Common Stock and Non-Voting Common Stock in connection with the
exercise of the JPMVC PRT Warrants (as defined herein), (iii) the
reclassification of the 119,181 shares of Common Stock issued in
connection with the CMR acquisition which were subject to redemption
and (iv) the issuance and sale of 3,850,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $13.00
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, note issued in the
CMR acquisition 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. During the
years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997, the percentage of revenue generated outside the United States was
0.3%, 15% and 29%, respectively. There were no revenues generated outside the
United States prior to 1995. 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) potential adverse foreign tax
consequences, including impact upon repatriation of earnings; (iv) tariffs
and other trade barriers and (v) political unrest and changing conditions in
countries in which the Company's services are provided or facilities are
located. In addition, although all of the Company's foreign sales are payable
in U.S. Dollars, there can be no assurance that all of the Company's future
contracts will be payable in U.S. Dollars; if any of the Company's future
contracts are payable in foreign currencies, the Company could be exposed to
fluctuations in currency exchange rates. Although the Company does not engage
in currency hedging transactions, to date the Company has not sustained any
foreign currency losses. If any of the above 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
6
<PAGE>
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 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, incurred losses from the
quarter ended December 31, 1995 until the quarter ended June 30, 1997 and as
of September 30, 1997 had an accumulated deficit. Although the Company was
profitable in the quarter ended September 30, 1997, in order to operate
profitably in the future, 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 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, but not limited to: (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
7
<PAGE>
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."
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 nine months of 1997, approximately 73% of
the Company's revenues was derived from its largest five clients, with one
client, Prudential Insurance Company of America, accounting for approximately
24% 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 nine months of 1997, approximately 67% of
the Company's revenues would have been derived from its largest five clients
and 22% 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 nine 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,
8
<PAGE>
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 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 "--Intellectual Property Rights," "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.
While, to date, none of the Company's clients has terminated a material
contract or materially reduced the scope of a large project, there can be no
assurance that one or more of the Company's clients will not take such
actions in the future. 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. While the Company's business,
operating results and financial condition have not been materially adversely
affected by any failure of the Company to complete a fixed-price engagement
within budget in the past and the Company does not anticipate any such
failure in the future, any such failure 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
technological 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."
9
<PAGE>
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, 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, but not limited to: (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. Although, to date,
PRT has not experienced difficulties in obtaining sufficient H-1B work
permits, in the future the Company may be unable to obtain H-1B work permits
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. In
addition, the failure of such protective measures could have a material
adverse effect on the Company's business, operating results and financial
condition. 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. 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
10
<PAGE>
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 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
approximately 40% of the outstanding shares of Common Stock (approximately
36% 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."
BENEFITS OF OFFERING TO PRT'S CURRENT SECURITYHOLDERS
PRT's current securityholders will receive substantial proceeds from this
Offering and certain other benefits in connection with this Offering. This
Offering will establish a public market for the Common Stock and provide
significantly increased liquidity to the current securityholders for the
shares of Common Stock they will own after this Offering. After deduction of
underwriting discounts and commissions, the aggregate realized gain as a
result of this Offering by the Selling Stockholders will be approximately
$7.9 million (at an assumed initial public offering price of $13.00 per
share). Upon completion of this Offering, PRT's current securityholders will
beneficially own an aggregate of approximately 75% of the outstanding Common
Stock. The aggregate unrealized gain to current securityholders with regard
to unsold shares will be approximately $150.3 million. See "Dilution" and
"Principal and Selling Stockholders."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price per share of the
Common Stock will be determined by negotiations among
11
<PAGE>
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 an
aggregate of 18,161,973 shares of Common Stock and Non-Voting Common Stock
outstanding, 4,600,000 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 "Securities Act"), except
those shares, if any, acquired by affiliates of the Company. The remaining
13,561,973 shares in the aggregate of Common Stock and Non-Voting 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., subject to certain limited exceptions. 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 30, 1997, PRT employed or
had subcontracting arrangements with over 700 personnel, including 665 IT
professionals, of whom 202 were subcontractors; of PRT's IT professionals,
approximately 50% 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 $45.2 million (assuming an initial public
offering price of $13.00 per share). 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 $733,000
as of September 30, 1997; (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. Pursuant to the terms of its present credit facility (the "Line of
Credit") with Chase Manhattan Bank, N.A. ("Chase"), the Company is prohibited
from paying dividends on the Common Stock without the prior consent of Chase.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as
of September 30, 1997, and (ii) on a pro forma as adjusted basis to give
effect to the items set forth in footnote (1) below, the issuance and sale by
the Company of 3,850,000 shares of common stock offered hereby at an assumed
initial public offering price of $13.00 per share, and application of the
estimated net proceeds therefrom as described in footnote (2) below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)(2)(3)
------ -----------------
(DOLLARS IN THOUSANDS
EXCEPT NUMBER OF SHARES)
<S> <C> <C>
Short-term borrowings:
Borrowing under line of credit ............................. $ 3,000 $ 3,000
Advance payable to client................................... 3,133 --
Capital lease obligations .................................. 401 401
Long-term borrowings:
Advance payable to client .................................. 392 --
Capital lease obligations .................................. 676 676
Note Payable ............................................... 2,000 2,000
Series A Redeemable Preferred Stock, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
2,759,610 shares-actual and -0-shares pro forma as adjusted 35,407 --
Common Stock subject to redemption .......................... 1,430 --
Stockholders' equity (deficit):
Common Stock; $.001 par value; authorized 50,000,000
shares; issued and outstanding 10,675,681 shares-actual
and 18,175,156 shares pro forma as adjusted ............... 11 18
Non-Voting Common Stock; $.001 par value; authorized
1,000,000 shares; issued and outstanding 46,500 shares pro
forma as adjusted ......................................... --
Additional paid-in-capital .................................. 1,569 87,171
Accumulated deficit ......................................... (22,838) (23,571)
Treasury stock .............................................. (400) (400)
-------- --------
Total stockholders' equity (deficit) ........................ (21,658) 63,218
-------- --------
Total capitalization ........................................ $ 24,781 $ 69,295
======== ========
</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
exercise of the JPMVC PRT Warrants and the issuance of an aggregate of
936,365 shares of Common Stock and Non-Voting Common Stock and (iii)
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 $733,000 at September 30, 1997.
(3) Excludes 161,575 shares of Common Stock issuable upon the exercise of
stock options outstanding as of September 30, 1997, at a weighted
average exercise price of $8.61 per share.
15
<PAGE>
DILUTION
As of September 30, 1997, the Company's as adjusted net tangible book
value was approximately $12,090,000 or $0.85 per share, after giving effect
to: (i) the issuance of 2,759,610 shares of Common Stock in connection with
the conversion of the Convertible Preferred Stock; (ii) the issuance of an
aggregate of 936,365 shares of Common Stock and Non-Voting Common Stock in
connection with the exercise of the JPMVC PRT Warrants; and (iii) the
reclassification of 119,181 shares of Common Stock as of July 1, 1997, in
connection with the acquisition of CMR which were subject to redemption. 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), (ii) and
(iii) above and the sale of 3,850,000 shares of Common Stock by the Company
(at an assumed initial public offering price of $13.00 per share) and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds," the pro forma as adjusted net tangible book value of the Company
at September 30, 1997, would have been $57,337,000 or $3.16 per share. This
amount represents an immediate increase in net tangible book value of $2.31
per share to existing stockholders and an immediate dilution of $9.84 per
share to purchasers of Common Stock in this Offering. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share of Common Stock .............. $13.00
As adjusted net tangible book value per share at September 30, 1997 .. $0.85
Increase in as adjusted net tangible book value per share attributable
to new investors ..................................................... 2.31
=====
Pro forma net tangible book value per share after giving effect to
this Offering ........................................................ 3.16
======
Dilution in net tangible book value per share to new investors ........ $ 9.84
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997 and after giving effect to the conversion into Common Stock of the
Convertible Preferred Stock, the exercise of the JPMVC PRT Warrants, and the
reclassification of the shares of Common Stock issued in the CMR acquisition,
the total consideration paid and the average price paid per share by existing
stockholders and new investors at an assumed initial public offering price of
$13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)(2) 14,304,566 78.8% $24,401 32.8% $ 1.71
New investors (1)(2) ......... 3,850,000 21.2 50,050 67.2 $13.00
------------ --------- --------- ---------
Total......................... 18,154,566 100% $74,451 100%
============ ========= ========= =========
</TABLE>
- ------------
(1) The foregoing table does not reflect the sale of Common Stock by the
Selling Stockholders. Sales by the Selling Stockholders will reduce the
number of shares held by the existing stockholders to 13,554,566 or
approximately 74.7% of the total number of shares of Common Stock
outstanding after this Offering (12,864,566 or approximately 70.9%, if
the Underwriters over-allotment option is exercised in full), and will
increase the number of shares to be purchased by the new investors to
4,600,000 or approximately 25.3% of the total number of shares
outstanding after this Offering (5,290,000 or approximately 29.1%, if
the Underwriters over-allotment option is exercised in full).
(2) Excludes, as of September 30, 1997, options to acquire 161,575 shares
of Common Stock (all of which were then exercisable), at a weighted
average exercise price of $8.61 per share. To the extent that these
options are exercised, there will be further dilution to new investors.
See "Management--Stock Option Plan" for additional information
concerning outstanding options to purchase Common Stock.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the nine months ended September 30, 1997
and for the three years in the period ended December 31, 1996 and the balance
sheet data at September 30, 1997, December 31, 1996 and 1995 are derived from
the audited financial statements included elsewhere herein. The balance sheet
data at December 31, 1994 is derived from audited financial statements. 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 September 30, 1996 and for the nine
month period ended September 30, 1996 is 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 nine
months ended September 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)................ $ 0.01 $ 0.01 $ 0.02 $ 0.01 $ (0.27)
============ ============ ============ ============ ============
As adjusted net loss per
share(2) ...............
Weighted average common
shares and equivalents
outstanding ............ 12,878,037 12,878,037 12,669,704 12,628,037 12,692,888
============ ============ ============ ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR NINE MONTHS ENDED NINE MONTHS
ENDED SEPTEMBER 30 ENDED
DECEMBER 31 ---------------------- SEPTEMBER 30
1996(1) 1996 1997 1997(1)
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues ................ $ 31,304 $ 16,031 $ 40,034 $ 44,299
Cost of revenues ........ 23,447 12,093 27,875 31,060
Gross profit ............ 7,857 3,938 12,159 13,239
Selling, general and
administrative
expenses................ 11,383 5,608 13,732 15,311
Income (loss) from
operations ............. (3,526) (1,670) (1,573) (2,072)
Net income (loss) ....... (3,583) (1,804) (1,658) (2,136)
Accretion and dividends
of redeemable preferred
stock and warrants ..... (117) -- (18,563) (18,563)
Net income (loss)
available to common
stockholders ........... $ (3,700) $ (1,804) $ (20,221) $ (20,699)
============= ============ ============ ==============
Net income (loss) per
share(2)................ $ (0.29) $ (0.14) $ (1.44) $ (1.47)
============= ============ ============ ==============
As adjusted net loss per
share(2) ............... $ (0.12) $ (0.15)
Weighted average common
shares and equivalents
outstanding ............ 12,802,901 12,628,036 14,040,562 14,113,904
============= ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------- SEPTEMBER 30
1992 1993 1994 1995 1996 1997
------ ------- ------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ..................... $220 $ 395 $ 564 $1,277 $13,923 $ 3,629
Total assets ........................ 905 1,937 3,595 4,860 23,960 34,706
Total stockholders' equity
(deficit)........................... 245 418 666 781 (2,081) (21,658)
</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.
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 nine month periods ended September 30,
1997 and September 30, 1996, the Company's revenues were $40.0 million and
$16.0 million, respectively, representing an approximate increase of 150%.
To sustain its growth, the Company has made and continues to make
substantial investments in its infrastructure, including: (i) SDCs in the
United States and Barbados, (ii) international training and recruiting
centers, (iii) the Company's PAL software development 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 nine month periods ended September 30, 1997 and
September 30, 1996, revenues earned through SDCs represented approximately
30% and 12%, 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
<PAGE>
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.
For the nine months ended September 30, 1997 and for the years ended December
31, 1996 and 1995, PRT Barbados incurred a net loss of approximately $1.5
million, $2.8 million and $498,000, respectively. At September 30, 1997, the
accumulated deficit of PRT Barbados was approximately $4.8 million. 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 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 75.4 69.6
Gross profit .................. 21.8 23.4 24.5 24.6 30.4
SG&A .......................... 18.5 20.2 38.8 35.0 34.3
-------- -------- --------- --------- --------
Income (loss) from operations 3.3% 3.2% (14.3)% (10.4)% (3.9)%
======== ======== ========= ========= ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. Revenues increased approximately 150% to $40.0 million in the
nine month period ended September 30, 1997 from $16.0 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 605 on
September 30, 1997 from 262 on September 30, 1996. Revenues from SDCs
increased approximately 526% to $11.9 million for the nine month period ended
September 30, 1997 from $1.9 million for the comparable period in 1996. For
the nine months ended September 30, 1997 and 1996, revenues generated from a
client who is also a stockholder were approximately $8.1 million and $1.6
million, respectively.
Cost of Revenues. Cost of revenues increased approximately 131% to $27.9
million in the nine month period ended September 30, 1997 from $12.1 million
for the comparable period in 1996. As a percentage of revenues, cost of
revenues decreased from approximately 75% for the nine month period ended
September 30, 1996 to approximately 70% 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 209% to $12.2 million for the nine month period ended September
30, 1997 from $3.9 million for the comparable period in 1996. As a percentage
of revenues, gross profit increased to approximately 30% for the nine-month
period ended September 30, 1997 from 25% for the comparable nine month period
in 1996.
SG&A Expenses. SG&A expenses increased approximately 145% to $13.7 million
for the nine month period ended September 30, 1997 from $5.6 million for the
comparable period in 1996. As a
19
<PAGE>
percentage of revenues, SG&A expenses decreased to approximately 34% for the
nine month period ended September 30, 1997 from approximately 35% for the
comparable period in 1996. The increase in SG&A expenses 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) 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 nine months of 1997 was $1.6 million compared to a
loss of $1.7 million in the comparable period in 1996. As a percentage of
revenues, the loss from operations for the nine months ended September 30,
1997 decreased to approximately 4% compared to approximately 10% 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
20
<PAGE>
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.
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
September 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
-----------------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ..................... $4,699 $4,615 $5,157 $6,259 $ 7,770 $ 9,039 $12,275 $18,720
Cost of revenues ............. 3,485 3,525 3,785 4,783 5,872 6,621 8,596 12,658
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Gross profit ................. 1,214 1,090 1,372 1,476 1,898 2,418 3,679 6,062
SG&A ......................... 1,515 1,170 1,994 2,444 3,627 3,838 4,372 5,522
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) from operations $ (301) $ (80) $ (622) $ (968) $(1,729) $(1,420) $ (693) $ 540
========== =========== ========== =========== ========== =========== ========== ===========
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 ............. 74.2 76.4 73.4 76.4 75.6 73.2 70.0 67.6
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Gross profit ................. 25.8 23.6 26.6 23.6 24.4 26.8 30.0 32.4
SG&A.......................... 32.2 25.4 38.7 39.0 46.7 42.5 35.6 29.5
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Income (loss) from operations (6.4)% (1.8)% (12.1)% (15.4)% (22.3)% (15.7)% (5.6)% 2.9%
========== =========== ========== =========== ========== =========== ========== ===========
</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 Line of
Credit, which expires in June 1998 and bears interest at the Company's option
at either the bank's prime rate (8.5% at September 30, 1997) or LIBOR plus
2.25%. 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
September 30, 1997, the Company had $3.0 million outstanding under the Line
of Credit. The Company believes that its receivables collection practices and
terms are consistent with industry practices.
21
<PAGE>
The Company's working capital decreased to $3.6 million at September 30,
1997 from $13.9 million at December 31, 1996. Cash and cash equivalents were
$3.7 million at September 30, 1997 compared to $14.9 million at December 31,
1996. The primary uses of cash during the nine months ended September 30,
1997 were to fund a net loss of $1.7 million, an increase of accounts
receivable of $9.4 million, offset by an increase in accrued compensation,
accounts payable and accrued expenses of $3.6 million. Cash and cash
equivalents of $5.1 million were used to purchase additional fixed assets
during the period ended September 30, 1997. Offsetting the use of cash were
net borrowings from the Line of Credit totaling $3.0 million 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 an aggregate of 936,365 shares of Common Stock and Non-Voting 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 $1.5
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.
22
<PAGE>
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 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.
EXPOSURE TO CURRENCY FLUCTUATIONS
During the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997, the percentage of the Company's revenues generated
outside the United States was 0.1%, 15% and 29%, respectively. Prior to 1995,
there were no revenues generated outside the United States. Although the
Company's sales are payable in U.S. Dollars, there can be no assurance that
all of the Company's future contracts will be payable in U.S. Dollars. To the
extent that any of the Company's future contracts are payable in foreign
currencies, the Company could be exposed to fluctuations in currency exchange
rates. To hedge a portion of the risks associated with such fluctuations, the
Company may engage in hedging transactions in the future.
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 software
development framework, a knowledge bank of processes, methodologies, tools
and reusable work product developed by PRT, as well as an internal,
independent software quality assurance function allows the Company to provide
high-quality, effective IT solutions. As of September 30, 1997, PRT employed
or had subcontracting arrangements with over 700 personnel, including 665 IT
professionals, of whom 202 were subcontractors; of PRT's IT professionals
approximately 50% worked in SDCs.
Strategic Consulting services include (i) management consulting, (ii)
strategic IT planning, (iii) emerging technology research, (iv) knowledge
transfer and (v) "Quality Journey" strategies and implementations, in which
PRT helps clients develop internal software development quality control
mechanisms, processes and organizational units. Project Solutions services
consist of: (i) full life cycle software development, (ii) hardware and
software platform migrations, in which a client's information systems are
moved from obsolete or legacy hardware or software systems to more efficient
and powerful new systems, (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 nine 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 nine month
periods ended September 30, 1997 and September 30, 1996, the Company's
revenues were $40.0 million and $16.0 million, respectively, representing an
increase of approximately 150%.
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
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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.
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, an independent research
organization which provides information concerning the IT services industry,
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, an independent research organization which provides
information concerning the IT services industry, 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, an independent research
organization which provides information concerning the IT services industry,
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
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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.
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 (finding hidden patterns in vast databases), (ii) data
visualization (graphical representation of data), (iii) data warehousing
(assembling massive amounts of data for aggregate analysis), (iv)
client/server technologies, (v) Internet/intranet technologies, (vi)
object-oriented technologies (development of reusable software object
building blocks) and (vii) usability engineering (making computer interfaces
more understandable and easier to use). 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 onshore 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 communications lines to all other PRT
locations and to many clients. Management believes the SDCs will boost PRT's
ability to leverage the capabilities 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
software development 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
integrated computer network. The PAL software development 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 software development
framework through a 12 week training program. In addition, all employees
undergo continuous training as new technologies emerge and as the PAL
software development framework 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.
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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 nine months
of 1997, approximately 90% 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.
Build and Expand Software Development Centers. On September 30, 1997, PRT
employed and subcontracted with 665 IT professionals, approximately 50% 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 software development 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
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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.
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 software development 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 software development processes 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 the 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 software
development 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 software
development 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 and 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
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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 responsive 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 providers created
logistical, cost and quality control 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 solutions 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 software development 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.
As a response to client demands, PRT has opened two SDCs, and a third is
planned to be opened in 1998. In 1994, 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.
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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. The Company 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 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 or subcontractor
arrangement 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 nine 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:
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
Credit Suisse (1994) of America (1996)
Industrial Bank of Japan, Ltd. (1991) Sanwa Bank, Ltd. (1990)
IBM Global Services (1994) Timex Products, Inc. (1993)
ITT Hartford Life and Annuity Wheat First Butcher Singer (1995)
Insurance Company (1992)
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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 nine months of 1997, approximately 73% of
the Company's revenue was derived from its five largest clients, with one
client accounting for approximately 24% of revenues. However, this large
client is comprised of six subsidiaries or divisions with which PRT does
business, none 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 nine
months of 1997, approximately 67% of the Company's revenues would have been
derived from its largest five clients and approximately 22% 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 nine month
period ended September 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, subcontractors, 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
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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.
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, Secretary and Director
Lowell W. Robinson 48 Executive Vice President, Finance and
Administration
and Chief Financial Officer
Richard L. Koppel 47 Executive Vice President, Project Solutions
Greg D. Adams 36 Senior Vice President, Finance and Administration
Leonard P. Ciriello 34 Senior Vice President and General Counsel
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 has been Chairman and Chief Executive Officer of PRT
since 1989 and President of PRT since September 1997. 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.
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.
Lowell W. Robinson has been Executive Vice President, Finance and
Administration and Chief Financial Officer of PRT since October 1997. Prior
to joining PRT, Mr. Robinson was Executive Vice President and Chief Financial
Officer at ADVO, Inc. since 1994. From 1991 to 1993, he was Vice President
and Chief Financial Officer for The Traveler's Managed Care and Employee
Benefits Operations.
33
<PAGE>
Mr. Robinson spent five years at Citicorp where he was Chief Financial
Officer for Citicorp's Global Insurance and Capital Investments Divisions
from 1988 to 1991. From 1986 to 1988, Mr. Robinson was Controller for
Citicorp's Consumer Services Group -- International. Prior to joining
Citicorp, Mr. Robinson was Director of Finance and Operations from 1983 to
1986 for Uncle Ben's Inc., the domestic and international rice subsidiary of
Mars, Inc. During 1973 to 1983, Mr. Robinson held senior financial positions
at General Foods. Mr. Robinson graduated from the Harvard University Graduate
School of Business Administration in 1973 with an M.B.A. and the University
of Wisconsin in 1971 with a B.A. in Economics.
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.
Greg D. Adams has been the Senior Vice President, Finance and
Administration since October 1997. Mr. Adams was the Chief Financial Officer
of PRT from May 1996 to October 1997. 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 worked at 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.
Leonard P. Ciriello has been Senior Vice President and General Counsel of
PRT since October 1997. Prior to joining PRT, Mr. Ciriello was an associate
in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP where he
was involved in the corporate practice, primarily in the mergers and
acquisitions and corporate finance areas. Mr. Ciriello graduated from Suffolk
University Law School in 1994 with a J.D., from Suffolk University Graduate
School of Business in 1990 with an M.B.A. and from Saint Anselm College in
1984 with an A.B. in Political Science.
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.
34
<PAGE>
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 Head 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 Group of Travelers Group Inc.
("Travelers"), since October 1995. He is also a director and member of the
Investment Committee of Greenwich Street Capital Partners Inc., an affiliate
of Travelers which manages private investment funds engaged in merchant
banking-type activities. 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.
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--Mitsubishi Trust Company. Mr. Shapiro graduated from Columbia
University School of Law in 1956 with an LL.B. and Columbia College in 1954
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.
All directors of the Company currently hold office until the next annual
meeting of the Company's stockholders or until their successors are elected
and qualified. Immediately prior to completion of this Offering, the
Company's Board of Directors will be divided into three classes serving
staggered three-year terms. See "Risk Factors--Certain Anti-Takeover
Effects." At each annual meeting of the Company's stockholders, successors to
the class of directors whose term expires at such meeting will be elected to
serve for three-year terms and until their successors are elected and
qualified. Officers are elected by, and serve at the discretion of, the Board
of Directors. See "Description of Capital Stock--Certain Certificate and
By-Law Provisions."
35
<PAGE>
Except for Douglas K. Mellinger and Gregory S. Mellinger, who are
brothers, there are no family relationships among any of the directors and
executive officers of the Company.
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.
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 (#) ($)(2)
- --------------------------- ------ ---------- --------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Douglas K. Mellinger ....... 1996 168,000 10,000 7,785(1) 18,750 1,520
Chief Executive Officer
Gregory S. Mellinger ....... 1996 129,000 10,000 5,795(1) 18,750 1,520
Chief Operating Officer
Srinivasan Viswanathan .... 1996 129,000 10,000 34,800(3) 20,000 --
President, PRT Barbados
</TABLE>
- ------------
(1) The amount includes the personal use of an automobile provided by PRT.
(2) Represents employer matching contributions to the 401(k) Savings
Retirement Plan.
(3) The amount shown in this column includes the value of the use of a
furnished home and the personal use of an automobile, each provided by
PRT.
Option Grants in Last Fiscal Year
The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers during the last fiscal year.
36
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ---------------------------------------------------------------------------------------- -------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS/GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------- ------------------ --------------- ------------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Douglas K. Mellinger .. 18,750 4.2 4.38 2006 51,563 130,875
Gregory S. Mellinger .. 18,750 4.2 4.38 2006 51,563 130,875
Srinivasan Viswanathan 20,000 4.5 4.38 2006 55,000 139,600
</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.
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
37
<PAGE>
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.
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.
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 $623,000
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 receive 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 an aggregate of 936,365 shares of Common Stock (the "Warrant
Exchange Agreement"). The JPMVCPRT Warrants are only exercisable by
forgiveness of the Advances. Upon consummation of this Offering, the JPMVC
PRT Warrants will be exercised for an aggregate of 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.
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
39
<PAGE>
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.
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."
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of October 27, 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 BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1)(2) AFTER OFFERING(1)
------------------------ --------------- ----------------------
NUMBER OF
NUMBER SHARES NUMBER
NAME OF SHARES PERCENT OFFERED(3) OF SHARES PERCENT
- ---- ------------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
The Mellinger Group LLC (4) ........................ 6,477,750 45.3 230,000 6,247,750 34.4
Douglas K. Mellinger (4)(5)(6) ..................... 7,250 * -- 7,250 *
Gregory S. Mellinger (4)(5)(6) ..................... 7,250 * -- 7,250 *
Barbara Mellinger (4)(7) ........................... 896,870 6.3 230,000 666,870 3.7
Isaac Shapiro (4)(8) ............................... 242,000 1.7 -- 242,000 1.3
Irwin J. Sitkin (4)(9) ............................. 242,000 1.7 -- 242,000 1.3
Craig D. Goldman (4)(10) ........................... 42,970 * -- 42,970 *
Esther Dyson (4)(11) ............................... 10,000 * -- 10,000 *
Srinivasan Viswanathan (4)(12) ..................... 127,047 * 16,000 111,047 *
The Travelers Insurance Company (13) ............... 761,960 5.3 114,000 647,960 3.6
One Tower Square
Hartford Connecticut
06183-2030
Tudor Investment Corporation (13) .................. 761,960 5.3 -- 761,960 4.2
40 Rowes Wharf--2nd Floor
Boston, Massachusetts 02110
Capital Research and Management Company ............ 761,960 5.3 -- 761,960 4.2
333 South Hope Street
Los Angeles, California 90071
J.P. Morgan Ventures Corp. (13)(14)................. 701,287 4.9 -- 889,865 4.9
60 Wall Street
New York, New York 10260
The Prudential Insurance Company of America ....... 457,170 3.2 457,170 2.5
80 Livingstone Avenue
Roseland, New Jersey 07068
Rho Management Co., Inc. ........................... 457,170 3.2 68,000 389,170 2.1
767 Fifth Avenue--43rd Floor
New York, New York 10153
David Silverman (4)(15) ............................ 49,190(15) * 3,900 45,290 *
Allan Stern (4)(16) ................................ 823,530(16) 5.8 76,600 746,930 4.1
David Winter (4)(17)................................ 125,000(17) * 11,500 113,500 *
All directors and executive officers as a group (15
persons) .......................................... 5,052,972 35.2 246,000 4,806,972 26.4
</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 an aggregate
of 936,365 shares of Common Stock and Non-Voting 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.
41
<PAGE>
(3) If the Underwriters' over-allotment option is exercised in full, the
Selling Stockholders will sell pursuant to such option the number of
shares of Common Stock set forth opposite their names and, after the
Offering, will beneficially own the number and percentage of shares of
Common Stock set forth opposite their names. For a description of the
relationships of certain Selling Stockholders with the Company, see
"Certain Transactions" and "Underwriting."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER THE OFFERING
SHARES TO --------------------
NAME BE SOLD NUMBER PERCENT
---- ------- ------ -------
<S> <C> <C> <C>
The Mellinger Group LLC ......... 460,000 5,787,750 31.9
Barbara Mellinger ............... 20,000 640,620 3.6
The Travelers Insurance Company 76,000 571,960 3.1
Allan Stern ..................... 134,000 612,930 3.4
</TABLE>
(4) The business address for these persons is: c/o PRT Group Inc., 342
Madison Avenue, 11th Floor, New York, New York 10173.
(5) Does not include shares of The Mellinger Group LLC over which Messrs.
Mellinger have voting and investment power.
(6) Includes 1,000 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(7) Includes 6,250 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(8) Includes 3,000 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(9) Includes 4,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(10) Includes 12,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(11) Includes 1,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(12) Includes 21,667 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(13) None of Travelers Group Inc., Travelers, Tudor Investment Corporation,
J.P. Morgan Ventures Corp. or their respective affiliates has assumed
or has any responsibility for the management, business or operations of
the Company, or for the statements contained in this Prospectus or the
Registration Statement of which this Prospectus forms a part, other
than the limited information regarding stock ownership contained in
this table.
(14) The JPMVC PRT Warrants are exercisable for up to 936,365 shares of the
Company's common equity. However, the JPMVC PRT Warrants limit J.P.
Morgan Ventures Corp. to 5.0% of PRT's voting common equity; the
balance of such 936,365 warrants are exercisable for shares of
Non-Voting Common Stock at the time of the Offering.
(15) Includes 19,500 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
(16) Includes 150,000 shares beneficially owned by members of Mr. Stern's
immediate family.
(17) Includes 9,250 shares subject to options currently exercisable or
exercisable within 60 days of the date hereof.
42
<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. Upon completion of this Offering, the Company will have
18,115,473 shares of Common Stock outstanding, 46,500 shares of Non-Voting
Common Stock outstanding and no shares of Preferred Stock outstanding. As of
the date hereof, there were 31 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.
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
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<PAGE>
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. PRT's Certificate contains a provision electing not to be
governed by Section 203.
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
44
<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 ChaseMellon
Shareholder Services, L.L.C.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 18,115,473 shares
of Common Stock and 46,500 shares of Non-Voting Common Stock outstanding. See
"Capitalization." Of these shares, the 4,600,000 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., subject to certain limited exceptions. After the expiration of
the Lock-Up Period (or earlier upon the prior written consent of Smith Barney
Inc.), 13,561,973 of the Restricted Shares (or 12,871,973 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 (135,620 shares or 128,720 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, 1,416,400 options to purchase shares were outstanding
and 2,885,600 shares of Common Stock remained available for future grant
under the Stock Option Plan.
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<PAGE>
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 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."
47
<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 ................................................. 4,600,000
=========
</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 690,000 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, subject to certain limited exceptions.
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
48
<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. ("Smith Barney"), a Representative and the Lead Manager
in connection with this Offering, 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.
An affiliate of Smith Barney beneficially owns in excess of 10% of the
Company's Convertible Preferred Stock. Accordingly, this Offering is being
conducted in accordance with Rule 2720(c), which provides that, the offering
price can be no higher than that recommended by a "qualified independent
underwriter" meeting certain standards ("QIU"). In accordance with this
requirement, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has
assumed the responsibilities of acting as QIU and will recommend an offering
price in compliance with the requirements of Rule 2720. In connection with
the Offering, DLJ is performing due diligence investigations and reviewing
and participating in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part. As compensation for the
services of DLJ as QIU, Smith Barney has agreed to pay DLJ $5,000.
The Underwriters informed the Company that they will not confirm sales to
any accounts over which they exercise discretionary authority without prior
written approval of such transactions by the customer.
49
<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 September 30, 1997, December 31, 1996 and 1995 and for the
nine months ended September 30, 1997 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.
50
<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 September 30, 1997 ...... F-4
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 (Unaudited) and 1997 ........................ F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1997 ......................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 (Unaudited) and 1997......................... F-7
Notes to Consolidated Financial Statements................................................. F-8
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996......................................................................... F-20
Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 1997........................................................................ F-21
Notes to Pro Forma Consolidated Financial Statements....................................... F-22
COMPUTER MANAGEMENT RESOURCES, INC.
Report of Independent Auditors............................................................. F-23
Balance Sheets as of February 28, 1997 and June 30, 1997 (Unaudited)....................... F-24
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-25
Statements of Cash Flows for the year ended February 28, 1997 and the four months ended
June 30, 1997 and 1996 (Unaudited)........................................................ F-26
Notes to Financial Statements.............................................................. F-27
</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 September 30, 1997, December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the nine months ended September 30, 1997 and for
the two years ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PRT Group Inc. and Subsidiaries as of September 30, 1997, December 31,
1996 and 1995, and the consolidated results of their operations and their
cash flows for the nine months ended September 30, 1997 and for the two years
ended December 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
October 27, 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
--------------------- SEPTEMBER 30 SEPTEMBER 30
1995 1996 1997 1997
--------- ---------- ------------ ------------
(UNAUDITED)
(NOTE 15)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $1,106 $14,856 $ 3,714 $ 3,714
Accounts receivable, net of allowance of $42 in 1995,
$122 in 1996 and $402 in 1997........................ 2,837 5,013 14,881 14,881
Prepaid expenses and other current assets ............ 305 430 1,163 1,163
Deferred income taxes ................................ -- -- 171 171
------ ------- -------- --------
Total current assets .................................. 4,248 20,299 19,929 19,929
Fixed assets, net ..................................... 533 2,955 7,670 7,670
Goodwill, net ......................................... -- 619 6,614 6,614
Deferred registration fees............................. -- -- 145 145
Other assets .......................................... 79 87 348 348
------ ------- -------- --------
Total assets .......................................... $4,860 $23,960 $ 34,706 $ 34,706
====== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit ...................... $ 135 $ -- $ 3,000 $ 3,000
Current installments of advance payable to client ... 350 909 3,133 --
Accrued compensation ................................. 1,105 2,123 3,364 3,364
Accounts payable and other accrued expenses ......... 703 2,425 5,394 5,394
Deferred income taxes ................................ 178 50 -- --
Current portion of capital lease obligations ........ 45 224 401 401
Deferred revenue ..................................... 455 645 1,008 1,008
------ ------- -------- --------
Total current liabilities ............................. 2,971 6,376 16,300 13,167
Deferred income taxes ................................. 386 39 49 49
Advance payable to client, net of current
installments.......................................... 700 1,808 392 --
Note payable .......................................... -- -- 2,000 2,000
Capital lease obligations, net of current portion .... 22 369 676 676
Other liabilities ..................................... -- 14 110 110
------ ------- -------- --------
Total liabilities ..................................... 4,079 8,606 19,527 16,002
Minority interest ..................................... -- 496 -- --
Commitments and contingencies
Series A redeemable preferred stock, $0.01 par value;
authorized--5,000,000 shares; issued and
outstanding--2,759,610 at December 31, 1996 and
September 30, 1997 (liquidation preference $18,188 at
December 31, 1996 and $18,732 at September 30, 1997) -- 16,939 35,407 --
Common stock subject to redemption..................... -- -- 1,430 --
Stockholders' equity (deficit):
Common stock, $.001 par value; authorized--50,000,000
shares; issued and outstanding--10,260,620 shares at
December 31, 1995; 10,537,500 shares at December 31,
1996; 10,675,681 shares at September 30, 1997 and
14,371,656 shares at September 30, 1997 as adjusted . 10 11 11 14
Additional paid-in capital ........................... 5 936 1,569 41,928
Retained earnings (deficit) .......................... 769 (2,617) (22,838) (22,838)
Cumulative translation adjustment .................... -- (11) -- --
Treasury stock, 50,000 common shares at December 31,
1995 and 67,090 common shares at December 31, 1996,
September 30, 1997 and September 30, 1997 as
adjusted ............................................ (3) (400) (400) (400)
------ ------- -------- --------
Total common stockholders' equity (deficit)............ 781 (2,081) (21,658) 18,704
------ ------- -------- --------
Total liabilities and stockholders' equity (deficit) .. $4,860 $23,960 $ 34,706 $ 34,706
====== ======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-----------------------------------------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues .................................... $13,876 $20,346 $23,801 $16,031 $ 40,034
Cost of revenues ............................ 10,851 15,594 17,965 12,093 27,875
------- ------- ------- ------- --------
Gross profit ................................ 3,025 4,752 5,836 3,938 12,159
Selling, general and administrative
expenses.................................... 2,572 4,110 9,235 5,608 13,732
------- ------- ------- ------- --------
Income (loss) from operations ............... 453 642 (3,399) (1,670) (1,573)
Other income (expense):
Interest expense ........................... -- (43) (254) (149) (412)
Interest income ............................ 20 17 78 16 327
------- ------- ------- ------- --------
Income (loss) before income taxes ........... 473 616 (3,575) (1,803) (1,658)
Income tax expense (benefit) ................ 222 501 (306) 1 --
------- ------- ------- ------- --------
Net income (loss) ........................... 251 115 (3,269) (1,804) (1,658)
Accretion of redeemable preferred stock .... -- -- (23) -- (17,925)
Dividends on redeemable preferred stock and
common stock warrants....................... -- -- (94) -- (638)
------- ------- ------- ------- --------
Net income (loss) available to common
stockholders ............................... $ 251 $ 115 $(3,386) $(1,804) $(20,221)
======= ======= ======= ======= ========
Net income (loss) per share ................. $ 0.02 $ 0.01 $ (0.27) $ (0.14) $ (1.44)
======= ======= ======= ======= ========
As adjusted net loss per share............... $ (0.12)
========
Weighted average number of shares used in
calculation of earnings (loss) per share ... 12,669,704 12,628,037 12,692,888 12,628,036 14,040,562
========== ========== ========== ========== ==========
</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 nine months ended September 30, 1997
(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 ................................ -- -- -- (1,658) -- -- (1,658)
Exercise of stock options ............... 19,000 -- 82 -- -- -- 82
Accretion of redeemable preferred stock -- -- -- (17,925) -- -- (17,925)
Dividends on redeemable preferred stock
and common stock warrants............... -- -- -- (638) -- -- (638)
Issuance of shares in connection with
acquisition of CMR ..................... 119,181 -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- 11 -- 11
Exchange of subsidiary warrants.......... -- -- 551 -- -- -- 551
---------- --- ------ -------- ---- ----- --------
Balance at September 30, 1997 ............ 10,675,681 $11 $1,569 $(22,838) $ -- $(400) $(21,658)
========== === ====== ======== ==== ===== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 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) $(1,804) $ (1,658)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 41 60 424 233 1,206
Amortization of debt discount ........................ -- -- 163 89 231
Write-off of abandoned purchase costs ................ -- 29 -- -- --
Write-off of uncollectible affiliate advances ....... -- 34 -- -- --
Provision for doubtful accounts ...................... -- 42 80 37 280
Deferred income taxes ................................ 321 79 (475) (229) (297)
Change in foreign exchange rate ...................... -- -- (11) (13) 11
Changes in operating assets and liabilities:
Accounts receivable ................................. (1,659) 340 (2,256) (2,093) (9,384)
Prepaid expenses and other current assets .......... (68) (224) (111) (98) (733)
Advances to affiliated companies .................... (62) -- -- -- --
Other assets ........................................ (15) (52) (8) (155) (261)
Accrued compensation ................................ -- 230 1,018 (616) 1,241
Accounts payable and other accrued expenses ........ 535 288 1,722 1,304 2,331
Deferred revenue .................................... 217 134 190 247 347
------- ------ ------- ------- --------
Net cash provided by (used in) operating activities .. (439) 1,075 (2,533) (3,098) (6,686)
------- ------ ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets ............................. (117) (434) (2,123) (864) (5,092)
Purchase of treasury stock ............................ (3) -- (400) -- --
Purchase of net assets of CMR, net of cash acquired .. (2,693)
------- ------ ------- ------- --------
Net cash (used in) investing activities ............... (120) (434) (2,523) (864) (7,785)
------- ------ ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loan ................................ -- (800) -- -- --
Borrowings under line of credit ....................... 1,647 334 2,488 2,088 3,850
Repayments under line of credit ....................... (1,344) (199) (2,623) (1,031) (850)
Advances received from client ......................... -- 1,050 2,000 2,000 632
Deferred registration fees............................. -- -- -- -- (145)
Exercise of stock options ............................. -- -- -- -- 82
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) (74) (240)
------- ------ ------- ------- --------
Net cash provided by financing activities ............. 336 345 18,806 2,983 3,329
------- ------ ------- ------- --------
Net increase (decrease) in cash and cash equivalents . (223) 986 13,750 (979) (11,142)
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 $ 127 $ 3,714
======= ====== ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ......................................... $ 34 $ 37 $ 92 $ 58 $ 114
======= ====== ======= ======= ========
Income taxes paid ..................................... $ -- $ 470 $ 188 $ 188 $ 213
======= ====== ======= ======= ========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases ... $ -- $ 73 $ 713 $ 587 $ 724
======= ====== ======= ======= ========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS 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"). The
predecessor corporation to PRT (PRT Corp. of America) was incorporated in the
State of New York on November 7, 1996, it was merged into PRT. The merger was
accounted for as a merger of entities under common control. 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 September 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 8).
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 September 30, 1997 were $73,000.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1996 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 September
30, 1997, the Company has substantially all of its cash deposited with one
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 September 30, 1997
was $6,000 and $111,000, 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 671,150 shares of common stock at $12.00 per share. The 2,759,610,
936,365 and 119,181 shares issuable upon conversion of the Company's
Convertible Preferred Stock (see Note 6), issuable upon exercise of the JPMVC
PRT Warrant (see Note 5) and issued in connection with the CMR acquisition
(see Note 7), respectively, were all deemed to be issued at amounts below the
IPO price. Accordingly, the effect of such transactions and the
aforementioned stock options have all been included in the computation of the
net income (loss) per share for all periods presented in accordance with SAB
83 using an estimated IPO price of $13 per share.
F-9
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The as adjusted net loss per share has been presented assuming the
conversion of the Convertible Preferred Stock occurred as of the beginning of
the period.
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
----------------- SEPTEMBER 30
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Furniture and equipment ....................... $ 404 $1,597 $ 2,997
Computer equipment and software ............... 239 1,732 6,047
Leasehold improvements ........................ 32 182 283
------- -------- --------------
675 3,511 9,327
Less accumulated depreciation and
amortization.................................. (142) (556) (1,657)
------- -------- --------------
$ 533 $2,955 $ 7,670
======= ======== ==============
</TABLE>
Fixed assets include assets under capital lease aggregating approximately
$127,000, $786,000 and $1,368,000 at December 31, 1995, 1996 and September
30, 1997, respectively. The accumulated amortization related to these assets
under capital leases is approximately $24,000, $110,000 and $262,000 at
December 31, 1995, 1996 and September 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 September 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 amount outstanding at September 30, 1997 was $3,000,000.
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.
F-10
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 advances totaling
approximately $2,000,000 were received. During 1997, additional advances
totaling $632,000 were received and the original 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 connection with the 1996 advances, 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. In connection
with the 1997 advance, additional warrants were granted, allowing the client
to maintain their effective 24% interest in the subsidiary. The fair value of
the 1996 and 1997 warrants was determined to be $496,000 and $55,000,
respectively. Such amounts were recorded as a discount to the cash advances
received and minority interest in the subsidiary. The fair value of the
warrants was determined based upon the advances received and the loan rates
available to the Company under its line of credit. 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 nine months ended September 30, 1997, the amount accreted was
approximately $163,000 and $176,000, respectively.
During the first quarter of 1997, the Company and the client agreed to,
among other matters, exchange the subsidiary warrants for warrants to
purchase 936,365 shares of PRT's Common Stock (the "JPMVC PRT Warrant") with
an aggregate 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 (see Note 15). This exchange was consummated in
September 1997.
The carrying value of the advances consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------ SEPTEMBER 30
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Current installments, net of unamortized discount of
$264 in 1996 and $140 in 1997 .......................... $ 350 $ 909 $3,133
Noncurrent installments, net of unamortized discount of
$69 in 1996 and $17 in 1997............................. 700 1,808 392
-------- -------- --------------
$1,050 $2,717 $3,525
======== ======== ==============
</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 amended its Certificate of Incorporation 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 common 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)
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.
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 September 30, 1997,
cumulative dividends in arrears amounted to approximately $80,000 and
$623,000, 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 a qualifying IPO, as defined. 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 if not previously converted into
shares of Common Stock. 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. Accordingly, the Company
has adjusted the value of the Convertible Preferred Stock in the accompanying
balance sheets to reflect the greater of the accreted value or the estimated
fair value of the redemption price. The balance of the Convertible Preferred
Stock at December 31, 1996 reflects the accreted value. The balance of the
Convertible Preferred Stock at September 30, 1997 reflects the estimated fair
value of $13.00 per share. The aforementioned increase in the exchange rate
and redemption obligation of the Convertible Preferred Stock cease upon the
consummation of a qualifying IPO, as defined. However, in October 1997 the
holders of the Convertible Preferred Stock agreed to exercise their rights to
convert each share of outstanding Convertible Preferred Stock into one share
of the Company's Common Stock upon the consummation of the Company's proposed
IPO (see Note 15).
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 $65.62. 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 September 30, 1997,
distributions in arrears under the Warrants amounted to approximately $14,000
and $110,000, 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.
F-12
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (Continued)
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 September 30, 1997, the Company had reserved 4,302,000
shares of Common Stock for the exercise and future grants of stock options
under such Option Plan.
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 in 1996........................... 517,600 $ 4.55
Exercised................................. -- --
Cancelled and expired..................... -- --
----------- --------------
Outstanding at December 31, 1996.......... 517,600 $ 4.55
==============
Granted .................................. 715,100 12.09
Exercised................................. (19,000) 4.38
Cancelled................................. (55,800) 4.49
----------- --------------
Outstanding at September 30, 1997 ........ 1,157,900 9.21
=========== ==============
Exercisable at December 31, 1996.......... 16,350
===========
Exercisable at September 30, 1997 ........ 161,575
===========
Available for grant at September 30,
1997..................................... 3,125,100
===========
</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 SEPTEMBER 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 .................................. .185 .185
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 available
for common shareholders and pro forma net loss per share under SFAS 123
amounted to approximately ($3,441,000) and $(0.27), respectively, and
($21,553,000) and $(1.54), respectively, for the nine months ended September
30, 1997.
The weighted average fair value of options granted during the year ended
December 31, 1996 and the nine months ended September 30, 1997 was $1.45 and
$2.94, respectively. At September 30, 1997 there were 72,200 and 89,375 of
1996 and 1997 options exercisable, respectively. The weighted average
exercise price of the 1996 and 1997 options exercisable is $4.41 and $12.00,
respectively. The weighted average remaining contractual life of the 1996 and
1997 options exercisable is 8.5 and 9.6 years, respectively.
7. ACQUISITION
Effective July 1, 1997, the Company purchased all of the issued and
outstanding capital stock of Computer Management Resources, Inc. ("CMR") for
approximately $6,294,000. CMR is a provider of information technology
services. The acquisition has been accounted for as a purchase and,
accordingly, the aggregate price was 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, is being 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 "CMR
Note"). The CMR 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 CMR 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.
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 nine months ended September 30,
1997 assuming consummation of the CMR acquisition as of January 1, 1996 and
1997, respectively:
F-14
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITION (Continued)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
1996 1997
------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenues ..................... $31,304 $44,299
Net loss ..................... (3,583) (2,136)
Pro forma net loss per share $ (0.29) $ (1.47)
</TABLE>
8. 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 non-operating holding company that was owned by certain
controlling 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.
9. 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)
========= ========== ========
SEPTEMBER 30, 1996 (UNAUDITED)
U.S. Federal .................. $156 $(155) $ 1
State and local ............... 72 (74) (2)
--------- ---------- --------
$228 $(229) $ (1)
========= ========== ========
SEPTEMBER 30, 1997
U.S. Federal .................. $133 $(143) $ (10)
State and local ............... 78 (68) 10
--------- ---------- --------
$211 $(211) $ --
========= ========== ========
</TABLE>
F-15
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (Continued)
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 SEPTEMBER 30
-----------------------------------------------
1994 1995 1996 1996 1997
------ ------ ---------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit) ........................... $161 $209 $(1,215) $(617) $(562)
Nondeductible losses of foreign
subsidiaries......................... -- 171 949 607 512
State and local income taxes, net of
Federal income tax expense (benefit) 54 101 (51) (1) 7
Other................................. 7 20 11 10 43
------ ------ ---------- ----------- --------
$222 $501 $ (306) $ (1) $ 0
====== ====== ========== =========== ========
</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 SEPTEMBER 30
1995 1996 1997
-------- ------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances ....................... $ 19 $ 22 $ 71
Nondeductible license payments ....................... -- 86 86
Net operating loss carryforwards ..................... -- 44 36
Prepaid expenses ..................................... 5 -- --
-------- ------- --------------
Total gross deferred assets ........................... 24 152 193
-------- ------- --------------
Deferred tax liabilities:
Depreciation of fixed assets ......................... (20) (39) (49)
Accrual basis earnings not recognized for tax
purposes ............................................ (549) (181) --
Prepaid expenses ..................................... (19) (21) (22)
-------- ------- --------------
Total gross deferred liabilities ...................... (588) (241) (71)
-------- ------- --------------
Net deferred tax asset (liability) .................... $(564) $ (89) $122
======== ======= ==============
</TABLE>
10. 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 nine months
ended September 30, 1996 three customers accounted for 25%, 13% and 10% of
total revenues. During the nine months ended September 30, 1997, four
customers accounted for 24%, 20%, 13% and 11% of total revenues.
F-16
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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 September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Twelve months ending September 30:
1998 ........................................................ $ 542 $2,164
1999 ........................................................ 431 2,600
2000 ........................................................ 238 2,154
2001 ........................................................ 13 1,522
2002 ........................................................ -- 675
Thereafter ................................................... -- 757
--------- -----------
Total minimum lease payments ................................. 1,224 $9,872
===========
Less amount representing interest ............................ 147
---------
Present value of net minimum capital lease payments ......... 1,077
Less current installments of obligations under capital leases 401
---------
Obligations under capital leases, net of current installments $ 676
=========
</TABLE>
Rent expense was approximately $143,000, $148,000 and $526,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, and $220,000 and
$988,000 for the nine months ended September 30, 1996 and 1997, respectively.
In connection with the $1,000,000 letter of credit related to the CMR
Note, the Company is required to maintain a compensating cash balance of
$1,000,000 with a bank.
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 September 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.
12. 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
nine months ended September 30, 1996 and 1997, the Company recognized
contributions of $31,000, $42,000, $31,000 and $48,000, respectively.
13. 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 nine months ended
September 30, 1996 and 1997, revenue generated from this client was
approximately $1,600,000 and $8,100,000, respectively.
F-17
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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>
NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30,
------------------------------------------------------------------- ----------------------
1994 1995 1996 1997
--------------------- --------------------- ----------------------- ----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
---------- --------- ---------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total identifiable
assets................... $ 3,595 $-- $ 3,947 $ 913 $19,480 $ 4,480 $24,193 $10,513
========== ========= ========== ========= ========== =========== ========== ==========
Revenues.................. $13,876 $-- $20,291 $ 55 $20,310 $ 3,491 28,429 11,605
========== ========= ========== ========= ========== =========== ========== ==========
Income (loss) before
income taxes............. $ 473 $-- 1,118 $(502) $ (783) $ (2,792) $ (153) $(1,505)
========== ========= ========== ========= ========== =========== ========== ==========
Depreciation and
amortization expense ... $ 41 $-- $ 51 $ 9 $ 159 $ 265 $ 416 $ 790
========== ========= ========== ========= ========== =========== ========== ==========
Capital expenditures ..... $ 117 $-- $ 144 $ 363 $ 976 $ 1,860 $ 2,368 $ 3,448
========== ========= ========== ========= ========== =========== ========== ==========
</TABLE>
15. 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, (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 and (iii) 119,181 shares of Common Stock issued
in connection with the CMR Acquisition which were subject to redemption will
be reclassified. The aforementioned conversion, exercise and reclassification
have been reflected in the accompanying unaudited as adjusted balance sheet
assuming that such transactions occurred on September 30, 1997.
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 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 nine months ended September 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 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 (a) 11,383
------------ ------------ ------------- -----------
Income (loss) from operations ................ (3,399) 178 (305) (3,526)
Other income (expense):
Interest expense ............................ (254) (9) (195)(b) (458)
Interest income ............................. 78 6 -- 84
------------ ------------ ------------- -----------
Income (loss) before income taxes ............ (3,575) 175 (500) (3,900)
Income tax expense (benefit) ................. (306) 67 (78)(c) (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 ........................... $ (0.27) $ (0.29)
============ ===========
Weighted average number of shares used in
calculation of loss per share................ 12,692,888 12,802,901
============ ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months ended September 30, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMPANY CMR
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues ..................................... $ 40,034 $4,265 -- $ 44,299
Cost of revenues ............................. 27,875 3,185 -- 31,060
------------ ------------ ------------- -----------
Gross profit ................................. 12,159 1,080 -- 13,239
Selling, general and administrative expenses 13,732 1,350 $ 229(a) 15,311
------------ ------------ ------------- -----------
Loss from operations ......................... (1,573) (270) (229) (2,072)
Other income (expense):
Interest expense ............................ (412) (4) (146)(b) (562)
Interest income ............................. 327 3 -- 330
------------ ------------ ------------- -----------
Loss before income taxes ..................... (1,658) (271) (375) (2,304)
Income tax expense (benefit) ................. -- (110) (58) (c) (168)
------------ ------------ ------------- -----------
Net loss ..................................... (1,658) (161) (317) (2,136)
Accretion of redeemable preferred stock ..... (17,925) -- -- (17,925)
Dividends on redeemable preferred stock and
common stock warrants........................ (638) -- -- (638)
------------ ------------ ------------- -----------
Net loss available to common stockholders ... $(20,221) $ (161) $(317) $(20,699)
============ ============ ============= ===========
Net loss per share ........................... $ (1.44) $ (1.47)
============ ===========
Weighted average number of shares used in
calculation of loss per share ............... 14,040,562 14,113,904
============ ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Year ended December 31, 1996 and
the nine months ended September 30, 1997
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 nine months ended September 30, 1997, the following pro forma
adjustments have been made (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
(a) Increase in amortization from the increase in
goodwill amortized on a straight-line basis over
twenty years.......................................... $305 $229
==== ====
(b) Increase in interest expense from issuance of
$2,000,000 promissory note .......................... $195 $146
==== ====
(c) Adjustment of tax provision:
Adjustment to historical tax provision (benefit) due
to adjustments...................................... $(78) $(58)
==== ====
</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-22
<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-23
<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-24
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED JUNE 30
FEBRUARY 28 --------------------------
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-25
<PAGE>
COMPUTER MANAGEMENT RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED JUNE 30
FEBRUARY 28 -------------------------
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-26
<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-27
<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-28
<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-29
<PAGE>
GLOBAL PRESENCE
With over 600 IT professionals located onsite, onshore, near-shore and
off-shore, PRT has the ability to provide its clients a global set of
integrated services.
[ARTWORK - Map of the World]
Software Development Centers Training & Recruiting Centers
o Barbados o Canada o Sri Lanka
o Connecticut o Caribbean o United Kingdom
o India (1998) o India o United States
o Ireland
Sales & Account Management Offices Administration & Operations Offices
o Connecticut o New York
o Illinois o Barbados
o New Jersey
o New York
o Virginia
o United Kingdom
<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
PAGE
----
Prospectus Summary ...................................................... 3
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 ............................................ 43
Shares Eligible for Future Sale ......................................... 46
Underwriting ............................................................ 48
Legal Matters ........................................................... 50
Experts ................................................................. 50
Additional Information .................................................. 50
Index to Consolidated Financial Statements .............................. F-1
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.
===============================================================================
===============================================================================
4,600,000 SHARES
PRT GROUP INC.
[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
NASD filing fees................ 7,400
Accountants' fees and expenses 400,000
Attorney's fees and expenses .. 500,000
Printing expenses .............. 250,000
Miscellaneous .................. 121,691
-----------
Total........................... $1,300,000
===========
</TABLE>
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"). The primary purposes of the Merger were to change the
name and state of incorporation of the Company. No material changes to the
Company's capital structure or accounts resulted from the Merger.
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"), convertible into 2,759,610 shares of
Common 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, Senior Vice President Finance and
Administration 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 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.
<TABLE>
<CAPTION>
(A) 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, dated as of September 16, 1997*
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 Form of 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.*
10.11 Employment contract of Mr. Leonard P. Ciriello, PRT Group Inc.
11 Computation of Per Share Earnings*
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.*
27.1 Financial Data Schedule--December 31, 1996*
27.2 Financial Data Schedule--September 30, 1997*
</TABLE>
- ------------
* Previously filed.
(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 amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, on the 13th day of
November, 1997.
PRT GROUP INC.
By: /s/ DOUGLAS K. MELLINGER
-------------------------------
Douglas K. Mellinger
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the 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, November 13, 1997
---------------------------- President and
Douglas K. Mellinger Chief Executive Officer
/s/ Lowell W. Robinson Chief Financial Officer November 13, 1997
----------------------------
Lowell W. Robinson
* Director November 13, 1997
----------------------------
Esther Dyson
* Director November 13, 1997
----------------------------
Michael Enthoven
* Director November 13, 1997
----------------------------
Robert P. Forlenza
* Director November 13, 1997
----------------------------
Craig D. Goldman
* Director November 13, 1997
----------------------------
Gregory S. Mellinger
* Director November 13, 1997
----------------------------
Isaac Shapiro
* Director November 13, 1997
----------------------------
Irwin J. Sitkin
* Director November 13, 1997
----------------------------
Jack L. Rivkin
</TABLE>
*By: /s/ DOUGLAS K. MELLINGER
----------------------------
Attorney-in-fact
II-5
<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 September 30, 1997, December 31, 1996 and 1995 and for
the nine months ended September 30, 1997 and the two years ended December 31,
1996, and have issued our report thereon dated October 27, 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
October 27, 1997
S-1
<PAGE>
PRT GROUP INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
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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
NINE MONTHS ENDED SEPTEMBER 30, 1997
Allowances deducted from assets to
which they apply:
Allowance for doubtful accounts $122 $330 $50 $402
</TABLE>
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(a) Uncollectible receivables written off.
Note: Valuation and qualifying accounts for the year ended December 31, 1994
were not material.
S-2
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EXHIBIT INDEX
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EXHIBIT DESCRIPTION
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<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, dated as of September 16, 1997*
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 Form of 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.*
10.11 Employment contract of Mr. Leonard P. Ciriello, PRT Group Inc.
11 Computation of Per Share Earnings*
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.*
27.1 Financial Data Schedule--December 31, 1996*
27.2 Financial Data Schedule--September 30, 1997*
</TABLE>
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* Previously filed.
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4,600,000 Shares
PRT GROUP INC.
Common Stock
UNDERWRITING AGREEMENT
November __, 1997
SMITH BARNEY INC.
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES LLC
PUNK, ZIEGEL & COMPANY L.P.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
PRT Group Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 3,850,000 shares (the "Company Shares") of its
Common Stock, $0.001 par value per share, to the several Underwriters named in
Schedule II hereto (the "Underwriters") and the persons named in Part A of
Schedule I hereto (the "Selling Stockholders") propose to sell to the several
Underwriters an aggregate of 750,000 shares (the "Selling Stockholder Shares")
of such Common Stock of the Company. The Company and the Selling Stockholders
are hereinafter sometimes referred to as the "Sellers". The Company's Common
Stock, $0.001 par value, is hereinafter referred to as the "Common Stock" and
the 3,850,000 shares of Common Stock to be issued and sold to the Underwriters
by the Company and 750,000 shares of Common Stock to be sold to the
Underwriters by the Selling Stockholders are hereinafter referred to as the
"Firm Shares". The Selling Stockholders listed in Part B of Schedule I hereto
also propose to sell to the Underwriters, upon the terms and conditions set
forth in Section 2 hereof, up to an additional 690,000 shares (the "Additional
Shares") of Common Stock solely for the purpose of covering over-allotments.
The Firm Shares and the Additional Shares are hereinafter collectively referred
to as the "Shares."
<PAGE>
The Company and the Selling Stockholders wish to confirm as follows
their respective agreements with you (the "Representatives") and the other
several Underwriters on whose behalf you are acting, in connection with the
several purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act ("an
Abbreviated Registration Statement"), the term "Registration Statement" as used
in this Agreement includes such Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information
contained in the prospectus filed with the Commission pursuant to Rule 424(b).
The term "Prepricing Prospectus" as used in this Agreement means the prospectus
subject to completion in the form included in the registration statement at the
time of the initial filing of the registration statement with the Commission,
and as such prospectus shall have been amended from time to time prior to the
date of the Prospectus.
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2. Agreements to Sell and Purchase. Subject to such adjustments as you
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $_______ per
Share (the "purchase price per share"), the number of Firm Shares which bears
the same proportion to the aggregate number of Firm Shares to be issued and
sold by the Company as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule II hereto (or such number of Firm Shares increased
as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares
to be sold by the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms
and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter, severally and not jointly,
agrees to purchase from each Selling Stockholder at the purchase price per
share that number of Firm Shares which bears the same proportion to the number
of Firm Shares set forth opposite the name of such Selling Stockholder in Part
A of Schedule I hereto as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule II hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company and the Selling Stockholders.
The Selling Stockholders listed in Part B of Schedule I hereto also
agree, subject to all the terms and conditions set forth herein, to sell to the
Underwriters, and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, the Underwriters
shall have the right to purchase from the Selling Stockholders listed in Part B
of Schedule I hereto, at the purchase price per share, pursuant to an option
(the "over-allotment option") which may be exercised at any time and from time
to time prior to 9:00 P.M., New York City time, on the 30th day after the date
of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter
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when the New York Stock Exchange is open for trading), up to an aggregate of
690,000 Additional Shares from the Selling Stockholders listed in Part B of
Schedule I hereto (the maximum number of Additional Shares which each of them
agrees to sell upon the exercise by the Underwriters of the over-allotment
option is set forth opposite their respective names in Part B of Schedule I).
Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
number of Additional Shares which the Underwriters elect to purchase upon any
exercise of the over-allotment option shall be provided by each Selling
Stockholder who has agreed to sell Additional Shares in proportion to the
respective maximum numbers of Additional Shares which each Selling Stockholder
has agreed to sell. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from each Selling
Stockholder who has agreed to sell Additional Shares the number of Additional
Shares (subject to such adjustments as you may determine in order to avoid
fractional shares) which bears the same proportion to the number of Additional
Shares to be sold by each Selling Stockholder who has agreed to sell Additional
Shares as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule II hereto (or such number of Firm Shares increased as
set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to
be sold by the Company and the Selling Stockholders.
Certificates in transferable form for the Shares (including any
Additional Shares) which each of the Selling Stockholders agrees to sell
pursuant to this Agreement have been placed in custody with
_____________________ (the "Custodian") for delivery under this Agreement
pursuant to a Custody Agreement and Power of Attorney (the "Custody Agreement")
executed by each of the Selling Stockholders appointing ______________ and
______________ as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each
Selling Stockholder agrees that (i) the Shares represented by the certificates
held in custody pursuant to the Custody Agreement are subject to the interests
of the Underwriters, the Company and each other Selling Stockholder, (ii) the
arrangements made by the Selling Stockholders for such custody are, except as
specifically provided in the Custody Agreement, irrevocable, and (iii) the
obligations of the Selling Stockholders hereunder and under the Custody
Agreement shall not be terminated by any act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of any Selling Stockholder
or the occurrence of any other event or, if the Selling Stockholder is not a
natural person, upon any dissolution, winding up,
4
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distribution of assets or other event affecting the legal existence of such
Selling Stockholder. If any Selling Stockholder shall die or be incapacitated
or if any other event shall occur before the delivery of the Shares hereunder,
or if the Selling Stockholder is not a natural person, shall dissolve, wind up,
distribute assets or if any other event affecting the legal existence of such
Selling Stockholder shall occur before the delivery of the Shares hereunder,
certificates for the Shares of such Selling Stockholder shall be delivered to
the Underwriters by the Attorneys-in-Fact in accordance with the terms and
conditions of this Agreement and the Custody Agreement as if such death or
incapacity or other event had not occurred, regardless of whether or not the
Attorneys-in-Fact or any Underwriter shall have received notice of such death,
incapacity or other event. Each Attorney-in-Fact is authorized, on behalf of
each of the Selling Stockholders, to execute this Agreement and any other
documents necessary or desirable in connection with the sale of the Shares to
be sold hereunder by such Selling Stockholder, to make delivery of the
certificates for such Shares, to receive the proceeds of the sale of such
Shares, to give receipts for such proceeds, to pay therefrom any expenses to be
borne by such Selling Stockholder in connection with the sale and public
offering of such Shares, to distribute the balance thereof to such Selling
Stockholder, and to take such other action as may be necessary or desirable in
connection with the transactions contemplated by this Agreement. Each
Attorney-in-Fact agrees to perform his duties under the Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on November __, 1997 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among you,
the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney
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Inc. at such time on such date (the "Option Closing Date"), which may be the
same as the Closing Date but shall in no event be earlier than the Closing Date
nor earlier than two nor later than ten business days after the giving of the
notice hereinafter referred to, as shall be specified in a written notice from
you on behalf of the Underwriters to the Company and the Attorneys-in-Fact of
the Underwriters' determination to purchase a number, specified in such notice,
of Additional Shares. The place of closing for any Additional Shares and the
Option Closing Date for such Shares may be varied by agreement among you, the
Company and the Attorneys-in-Fact.
Certificates for the Firm Shares (other than the Selling Stockholder
Shares and the Additional Shares) to be purchased hereunder shall be registered
in such names and in such denominations as you shall request prior to 9:30
A.M., New York City time, on the second business day preceding the Closing Date
or any Option Closing Date, as the case may be, and certificates for the Firm
Shares (other than Company Shares) and for any Additional Shares to be
purchased hereunder shall be endorsed to Smith Barney Inc., as representative
of the several Underwriters or in blank, on each stock certificate in
registered form or on a separate document for the purpose of assigning or
transferring or granting a power to assign or transfer. Such certificates shall
be made available to you in New York City for inspection and packaging not
later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or the Option Closing Date, as the case may be. The
certificates evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the Option
Closing Date, as the case may be, against payment to the order of the Company
and the Attorneys-in-Fact of the purchase price therefor in federal funds or
other funds immediately available in New York City.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the Company will endeavor to cause the Registration Statement or
such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice
in writing, when the Registration Statement or such post-effective
amendment has become effective.
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(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period
of time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth
or results of operations, or of the happening of any event, which makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus (as then amended or supplemented) in order to state a material
fact required by the Act to be stated therein or necessary in order to make
the statements therein not misleading, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented) to comply with
the Act or any state securities laws. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four (4) signed
copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements
and all exhibits thereto, and will also furnish to you, without charge,
such number of conformed copies of the registration statement as originally
filed and of each amendment thereto, but without exhibits, as you may
reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which
you shall not previously have been advised or to which you shall reasonably
object after being so advised or (ii) so long as, in the opinion of counsel
for the Underwriters, a Prospectus is required to be delivered in
connection with sales by any Underwriter or dealer, file any information,
documents or reports pursuant to
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the Securities Exchange Act of 1934, as amended (the "Exchange Act")
without delivering a copy of such information, documents or reports to you,
as Representatives of the Underwriters, prior to or concurrently with such
filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have
reasonably requested, copies of each form of the Prepricing Prospectus. The
Company consents to the use, in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by dealers, prior to the
date of the Prospectus, of each Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the
Company will expeditiously deliver to each Underwriter and each dealer,
without charge, as many copies of the Prospectus (and of any amendment or
supplement thereto) as you may reasonably request. The Company consents to
the use of the Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue
Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by all dealers to whom Shares may be sold, both in
connection with the offering and sale of the Shares and for such period of
time thereafter as the Prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer. If during such period
of time any event shall occur that in the judgment of the Company or in the
opinion of counsel for the Company and for the Underwriters is required to
be set forth in the Prospectus (as then amended or supplemented) or should
be set forth therein in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
is necessary to supplement or amend the Prospectus to comply with the Act
or any state securities law, the Company will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission
an appropriate supplement or amendment thereto, and will expeditiously
furnish to the Underwriters and dealers a reasonable
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number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters agree that the Prospectus
should be amended as supplemented, the Company, if requested by you, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to file a general consent to service of process or to take any other
action which would subject it to service of process in suits, other than
those arising out of the offering or sale of the Shares, or to taxation in
respect of doing business, in each case in any jurisdiction where it is not
now so subject.
(h) The Company will make generally available to its security holders
a consolidated earning statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement (as defined in Rule 158 under the Act) and ending not later than
18 months thereafter, as soon as practicable after the end of such period,
which consolidated earning statement shall satisfy the provisions of
Section 11(a) of the Act.
(i) During the period of three years hereafter, the Company will
furnish to you as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and from time to time
such other information concerning the Company as you may reasonably
request; provided, further, that you agree (i) to maintain the
confidentiality of any such information to the extent such information is
designated "confidential" by the Company and (ii) if reasonably requested
by the Company, to enter into a confidentiality agreement with respect to
any "confidential" information.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions
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hereof (otherwise than pursuant to the second paragraph of Section 12
hereof or by notice given by you terminating this Agreement pursuant to
Section 12 or Section 13 hereof) or if this Agreement shall be terminated
by the Underwriters because of any failure or refusal on the part of the
Company or the Selling Stockholders to comply with the terms or fulfill, in
all material respects, any of the conditions of this Agreement, the Company
agrees to reimburse the Representatives for all reasonable out-of-pocket
expenses (including fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option
or warrant to purchase, pledge or otherwise transfer or dispose of any
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, for a period of 180 days after the date of the Prospectus,
without the prior written consent of Smith Barney Inc.; provided, however,
that the Company may (i) issue shares of Common Stock pursuant to benefit
plans, stock option plans or other compensation plans existing on the date
hereof and (ii) issue unregistered shares of Common Stock in a private
placement in connection with potential acquisitions.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance reasonably satisfactory to you, signed by
each of its current officers and directors and each of its stockholders set
forth on the attached Exhibit A.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or
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manipulation of the price of the Common Stock to facilitate the sale
or resale of the Shares.
(p) The Company will use its best efforts to have the Common Stock
included for quotation, subject to notice of issuance, on the Nasdaq
National Market concurrently with the effectiveness of the Registration
Statement.
6. Agreements of the Selling Stockholders. Each of the Selling
Stockholders agrees with the several Underwriters as follows (except that (i)
clause (f) shall be applicable to all Selling Stockholders other than The
Mellinger Group LLC and (ii) clause (g) shall be applicable only to The
Mellinger Group LLC):
(a) Such Selling Stockholder will cooperate to the extent reasonably
necessary to cause the Registration Statement or any post-effective
amendment thereto to become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal and other taxes, if
any, on the transfer or sale of the Shares being sold by such Selling
Stockholder to the Underwriters.
(c) Such Selling Stockholder will do or perform all things reasonably
required to be done or performed by such Selling Stockholder prior to the
Closing Date or any Option Closing Date, as the case may be, to satisfy all
conditions precedent with respect to such Selling Stockholder to the
delivery of the Shares pursuant to this Agreement.
(d) Such Selling Stockholder has executed or will execute a "lock-up"
letter as provided in Section 5(n) above and will not sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase,
pledge or otherwise transfer or dispose of any shares of Common Stock, or
any securities convertible into or exercisable or exchangeable for Common
Stock, except for the sale of Shares to the Underwriters pursuant to this
Agreement, prior to the expiration of 180 days after the date of the
Prospectus, without the prior written consent of Smith Barney Inc.;
provided, however, that such Selling Stockholder may transfer shares of
Common Stock to a member of such Selling Stockholder's immediate family, to
a trust of which such Selling Stockholder or an immediate family member is
the beneficiary, to a spouse
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in a divorce proceeding or to any other persons as a bona fide gift;
and provided further, that, upon any such transfer, the transferee agrees
to enter into a "lock-up" letter substantially similar to the "lock-up"
letter entered into by the Selling Stockholder for the remainder of the
"lock-up" period.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Stockholder will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(f) To the extent that any statements or omissions made in the
Registration Statement or the Prospectuses (as amended or supplemented, if
amended or supplemented) specifically refer to the information regarding a
Selling Stockholder under the caption "Principal and Selling Stockholders,"
such Selling Stockholder will advise you promptly upon becoming aware, and
if requested by you, will confirm such advice in writing, within the period
of time referred to in Section 5(f) hereof, of any change in such
information that comes to the attention of such Selling Stockholder that
makes any statement made in the Registration Statement or the Prospectuses
(as then amended or supplemented) untrue or which requires the making of
any additions to or changes in the Registration Statement or the
Prospectuses (as then amended or supplemented) in order to state a material
fact required by the Act or the regulations thereunder to be stated therein
or necessary in order to make the statement therein not misleading, or of
the necessity to amend or supplement the Prospectuses (as then amended or
supplemented) to comply with the Act or any state securities law.
(g) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of
time referred to in Section 5(f) hereof, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth
or results of operations or of any change in information relating to such
Selling Stockholder or the Company or any new information relating to the
Company or relating to any matter stated in the Prospectus or any amendment
or supplement thereto which comes to the attention of such Selling
Stockholder that suggests that any statement
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made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any
material respect or that the Registration Statement or Prospectus (as then
amended or supplemented, if amended or supplemented) omits or may omit to
state a material fact or a fact necessary to be stated therein in order to
make the statements therein not misleading in any material respect, or of
the necessity to amend or supplement the Prospectus (as then amended or
supplemented, if amended or supplemented) in order to comply with the Act
or any state securities law.
(h) Such Selling Stockholder shall provide you with a United States
Treasury Department Form W-9 properly completed or executed or other
evidence satisfactory to you that such Selling Stockholder is not subject
to backup withholding.
7. Representations and Warranties of the Company. The Company and,
with respect to clause (b) only, The Mellinger Group LLC (the "Indemnifying
Selling Stockholder") represent and warrant to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Registration Statement in the form in which it became or
becomes effective, including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule
430A(b), and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any
supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects with
the provisions of the Act and did not or will not at any such times contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the case of the Prospectus, in light of the circumstances in which they
are made, not misleading, except that this representation and warranty does
not apply to statements in or omissions from the Registration
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Statement or the Prospectus made in reliance upon and in conformity
with information relating to any Selling Stockholder or any Underwriter
furnished to the Company in writing by or on behalf of any Selling
Stockholder or any Underwriter through you expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares to be issued and
sold by the Company after giving effect to the Amended and Restated
Certificate of Incorporation of the Company (in substantially the form
filed as an exhibit to the Registration Statement (the "Amended and
Restated Certificate of Incorporation")) will be duly authorized and, when
issued and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and will not be issued in violation of any preemptive or
similar rights; and the capital stock of the Company, after giving effect
to the Amended and Restated Certificate of Incorporation, will conform to
the description thereof in the Registration Statement and the Prospectus
under the caption "Description of Capital Stock."
(d) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature of
its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not,
individually or in the aggregate, have a material adverse effect on the
condition (financial or other), business, properties, net worth or results
of operations of the Company and the Subsidiaries (as hereinafter defined)
taken as a whole (a "Material Adverse Effect").
(e) All of the Company's subsidiaries as defined in Rule 1-02(x) of
Regulation S-X (collectively, the "Subsidiaries") are listed in Exhibit A
hereto. Each Subsidiary is a corporation duly organized, validly
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existing and in good standing in the jurisdiction of its organization,
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly registered or qualified to
conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure so to register
or qualify does not have a Material Adverse Effect; all the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable, and are
owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to
which any of their respective properties is subject, that are required to
be described in the Registration Statement or the Prospectus but are not
described as required; and all pending legal or governmental proceedings to
which the Company or any of the Subsidiaries is a party or that affect any
of their respective properties, that are not described in the Prospectus,
including ordinary routine litigation incidental to the business, are not
expected to result, individually or in the aggregate, in a Material Adverse
Effect.
(g) There are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act.
(h) Neither the Company nor any of the Subsidiaries is in violation of
(A) its certificate or articles of incorporation or by-laws, or other
organizational documents, or (B) of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries, including, without limitation, (i) any foreign, Federal,
state or local law or regulation relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
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pollutants or contaminants ("Environmental Laws"), (ii) any Federal or
state law relating to discrimination in the hiring, promotion or pay of
employees or any applicable Federal or state wages and hours laws, or (iii)
any provisions of the Employee Retirement Income Security Act or the rules
and regulations promulgated thereunder (collectively, "ERISA"), which in
the case of the foregoing clause (B) would, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(i) Neither the Company nor any of its Subsidiaries is (A) in
violation of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or (B) in default
in any material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any material agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties may be bound,
except for such violations or defaults, in the case of the foregoing
clauses (A) and (B), as would not, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(j) Neither the issuance and sale of the Company Shares, the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby
(including, without limitation, the inclusion in the Registration Statement
of the Shares to be sold by the Selling Stockholders) (A) requires any
consent, approval, authorization or other order of or registration or
filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required for
the registration of the Shares under the Act and the Exchange Act and
compliance with the securities or Blue Sky laws of various jurisdictions,
all of which have been or will be effected in accordance with this
Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company
or (B) conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, any agreement, indenture, lease or other
instrument to which the
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Company or any of the Subsidiaries is a party or by which any of them
or any of their respective properties may be bound, or violates or will
violate any statute, law or regulation, injunction, order or decree
applicable to the Company or any of the Subsidiaries or any of their
respective properties, or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of the Subsidiaries pursuant to the terms of any agreement or
instrument to which any of them is a party or by which any of them may be
bound or to which any of the property or assets of any of them is subject
except for any such conflicts, breaches, defaults, liens, charges or
encumbrances under clause (B), which would not, individually or in the
aggregate, be reasonably likely to (i) have a Material Adverse Effect or
(ii) impair the validity or enforceability of the Shares.
(k) The accountants, Ernst & Young LLP and Schulman, Cohen, Furst,
Kramer & Rosen, P.C., who have certified or shall certify the financial
statements included in the Registration Statement and the Prospectus (or
any amendment or supplement thereto) are, to the best knowledge of the
Company, independent public accountants as required by the Act.
(l) The historical financial statements, together with related
schedules and notes, included in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and the Subsidiaries on the basis stated
in the Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other historical financial and statistical
information and data included in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are accurately
presented and prepared on a basis consistent with such financial statements
and the books and records of the Company and the Subsidiaries. The pro
forma condensed combined financial data for the year ended December 31,
1996 and the nine month period ended September 30, 1997 included in the
Prospectus, have been prepared in accordance with the Commission's
applicable rules and guidelines
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with respect to pro forma financial statements, the pro forma
adjustments contained therein have been properly applied to the historical
amounts in the compilation of those statements, and, the Company believes
that the assumptions used in the preparation therefore reasonable.
(m) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company.
(n) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability
or obligation, direct or contingent, or entered into any transaction, not
in the ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
capital stock, or material increase in the short-term debt or long-term
debt, of the Company or any of the Subsidiaries, or any material adverse
change, or any development having or which may reasonably be expected to
have a Material Adverse Effect.
(o) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as
being owned by it, free and clear of all liens, claims, security interests
or other encumbrances except such as are described in the Registration
Statement and the Prospectus (or any amendment or supplement thereto) or in
a document filed as an exhibit to the Registration Statement and all the
property described in the Prospectus as being held under lease or sublease
by each of the Company and the Subsidiaries, which is material to the
business of the Company and its Subsidiaries taken as a whole, is held by
it under valid, subsisting and enforceable leases or subleases with only
such exceptions as in the aggregate do not interfere in any material
respect with the conduct of the business of the Company and its
Subsidiaries taken as a whole or the use made or proposed to be made of
such property by the Company or its Subsidiaries; neither the Company nor
any of the Subsidiaries has any
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notice of any claim of any sort that has been asserted by anyone
adverse to the rights of the Company or any of the Subsidiaries under any
of the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or any of the Subsidiaries to the continued
possession of the leased or subleased premises under any such lease or
sublease, which claim could reasonably be expected individually or in the
aggregate to have a Material Adverse Effect.
(p) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted
by the Act.
(q) The Company and each of its Subsidiaries possess such permits,
licenses, franchises and authorizations including, without limitation,
under any applicable Environmental Laws, of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties
and to conduct its business in the manner described in the Prospectus,
except where the failure to so possess would not, individually or in the
aggregate, have a Material Adverse Effect and subject to such
qualifications as may be set forth in the Prospectus; the Company and each
of the Subsidiaries has fulfilled and performed all its material
obligations with respect to such permits and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the
rights of the holder of any such permit, except where any such revocation,
termination or impairment would not have, individually or in the aggregate,
a Material Adverse Effect and subject in each case to such qualification as
may be set forth in the Prospectus; and, except as described in the
Prospectus, none of such permits contains any restriction that is
materially burdensome to the Company or any of the Subsidiaries.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements
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in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(s) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(t) The Company and each of its Subsidiaries have filed all tax
returns required to be filed or obtained extensions therefor, which returns
are complete and correct in all material respects, and neither the Company
nor any Subsidiary is in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto,
except where the failure to file such returns or to pay such taxes is not
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect.
(u) Except as described in the Registration Statement and the
Prospectus, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company because of the filing of the Registration Statement or consummation
of the transactions contemplated by this Agreement.
(v) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by them or any of
them or necessary for the conduct of their respective businesses, except
where the lack of such ownership or possession would not, individually or
in the aggregate, have a Material Adverse Effect, and the Company is not
aware of any claim to the contrary or any challenge by any other person to
the rights of the Company and the Subsidiaries with respect to the
foregoing.
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(w) The Company is not now, and after sale of the Shares to be issued
and sold by it hereunder and application of the net proceeds to the Company
from such sale as described in the Prospectus under the caption "Use of
Proceeds" will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(x) Except as disclosed in the Registration Statement and the
Prospectus, there are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, the Company
or any Subsidiary thereof from the Company or such Subsidiaries.
(y) No labor problem exists with the employees of the Company or any
of the Subsidiaries or, to the knowledge of the Company, is imminent that,
in either case, could reasonably be expected individually or in the
aggregate to result in any Material Adverse Effect.
(z) The Company and each of the Subsidiaries maintain insurance of the
types and in the amounts that are customary for similarly situated
companies in the Company's and such Subsidiaries' industries.
8. Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date, if applicable, will have, valid and marketable title
to the Selling Stockholder Shares to be sold by such Selling Stockholder,
free and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer.
(b) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date, if applicable, will have, full legal right, power and
authorization, and any approval required by law, to sell, assign, transfer
and deliver such Selling Stockholder Shares in the manner provided in this
Agreement, and upon delivery of and payment for such Shares hereunder, the
several Underwriters will acquire valid and marketable title to such Shares
free and
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clear of any lien, claim, security interest, or other encumbrance.
(c) This Agreement and the Custody Agreement have been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder.
(d) Neither the execution and delivery of this Agreement or the
Custody Agreement by or on behalf of such Selling Stockholder nor the
consummation of the transactions herein or therein contemplated by or on
behalf of such Selling Stockholder (i) requires any consent, approval,
authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required under the Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) or (ii) conflicts or will conflict with or
constitutes or will constitute a breach of, or default under, or violates
or will violate, any agreement, indenture or other instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is or
may be bound or to which any of such Selling Stockholder's property or
assets is subject, or any statute, law, rule, regulation, ruling, judgment,
injunction, order or decree applicable to such Selling Stockholder or to
any property or assets of such Selling Stockholder, except for any such
conflicts, breaches, defaults, liens, charges or encumbrances under clause
(ii), which would not, individually or in the aggregate, be reasonably
likely to impair the validity, enforceability or rights of the Underwriters
pursuant to this Agreement or the Custody Agreement.
(e) The information pertaining to such Selling Stockholder provided to
the Company for inclusion under the caption "Principal and Selling
Stockholders" in the Registration Statement and the Prospectus, does not
and will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
(f) Such Selling Stockholder does not have any knowledge or any reason
to believe that the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or
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<PAGE>
necessary to make the statements therein not misleading.
(g) The representations and warranties of such Selling Stockholder in
the Custody Agreement are, and on the Closing Date and, to the extent that
such Selling Stockholders sell Additional Shares, on any Option Closing
Date will be, true and correct.
(h) Such Selling Stockholder has not taken, directly or indirectly,
any action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up
arrangements described in the Prospectus.
9. Indemnification and Contribution. (a) Each of the Company and the
Indemnifying Selling Stockholder agrees to indemnify and hold harmless each of
you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, the liability of the Indemnifying Selling Stockholder under this
paragraph (a) shall not exceed the net proceeds received by such Indemnifying
Selling Stockholder from the sale of such Selling Stockholder's Shares
hereunder; and provided, further, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter to any person if a copy
of
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the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the regulations thereunder, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to such
Underwriter in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any
liability which the Company or the Indemnifying Selling Stockholder may
otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or the Indemnifying Selling
Stockholder, such Underwriter or such controlling person shall promptly notify
the parties against whom indemnification is being sought (the "indemnifying
parties"), and such indemnifying parties shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action, suit or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including
any impleaded parties) include both such Underwriter or such controlling person
and the indemnifying parties and such Underwriter or such controlling person
shall have been advised by its counsel that representation of such indemnified
party and any indemnifying party by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with
any one such action, suit or proceeding or separate but substantially similar
or related actions, suits or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of only one separate firm of attorneys (in addition to one
local counsel in each jurisdiction) at any time for all such Underwriters and
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controlling persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by Smith Barney
Inc., and that all such fees and expenses shall be reimbursed as they are
incurred. The indemnifying parties shall not be liable for any settlement of
any such action, suit or proceeding effected without their prior written
consent, but if settled with such written consent, or if there be a final
judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of
such settlement or judgment.
(c) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, the Company, its directors,
its officers who sign the Registration Statement, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each Underwriter, but only with respect to the information furnished in writing
by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto; provided, however, the liability of a Selling
Stockholder under this paragraph (c) shall not exceed the net proceeds received
by such Selling Stockholder from the sale of such Selling Stockholder's Shares
hereunder. If any action, suit or proceeding shall be brought against any
Underwriter, any such controlling person of any Underwriter, the Company, any
of its directors, any such officer, or any such controlling person of the
Company, based on the Registration Statement, the Prospectus or any Prepricing
Prospectus or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Selling Stockholder pursuant to this
paragraph (c), such Selling Stockholder shall have the rights and duties given
to the Company by paragraph (b) above (except that if the Company shall have
assumed the defense thereof such Selling Stockholder shall not be required to
do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such Selling
Stockholder's expense), and each Underwriter, each such controlling person of
any Underwriter, the Company, its directors, any such officer, and any such
controlling person of the Company shall have the rights and duties given to the
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Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be
in addition to any liability which any Selling Stockholder may otherwise have.
(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each Selling Stockholder, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company
and the Selling Stockholders to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, any Selling Stockholder,
or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (d), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
such Underwriter's expense), and the Company, its directors, any such officer,
the Selling Stockholder, and any such controlling person shall have the rights
and duties given to the Underwriters by paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which any Underwriter
may otherwise have.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters
on the other hand from the offering of the Shares, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause
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(i) above but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in connection
with the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company, the Selling Stockholders or the Underwriters
from the offering of the Shares shall include the net proceeds (before
deducting expenses) received by the Company and the Selling Stockholders, and
the underwriting discounts and commissions received by the Underwriters, from
the sale of such Additional Shares, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(f) The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (e) above. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, liabilities and expenses referred
to in paragraph (e) above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in
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excess of the amount by which the total price of the Shares underwritten by it
and distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. Notwithstanding the
provisions of this Section 9, no Selling Stockholder shall be required to
contribute any amount in excess of the net proceeds of the Shares sold by such
Selling Stockholder. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule II hereto (or such numbers of Firm Shares increased as set
forth in Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Stockholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. Notwithstanding any other provisions of this
Agreement, if this Agreement terminates prior to the purchase of the Shares by
the Underwriters, the Company and the Selling Stockholders shall not be liable
for any lost profits. A successor to any Underwriter or any person controlling
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to
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the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 9.
10. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M. (or in the case of a
Registration Statement filed pursuant to Rule 462(b) under the Act, not
later than 10:00 P.M.), New York City time, on the date hereof, or at such
later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have
been timely made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Company or
any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to
your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company
and its Subsidiaries taken as a whole not contemplated by the Prospectus,
which in your reasonable opinion, as Representatives of the several
Underwriters, would materially, adversely affect the market for the Shares,
or (ii) any event or development relating to or involving the Company or
any officer or director of the Company or any Selling Stockholder which
makes any statement made in the Prospectus untrue or which, in the opinion
of the Company and its counsel or the Underwriters and their counsel,
requires the making of any addition to or change in the Prospectus in order
to state a material fact required by the Act or any other law to be stated
therein or necessary in order to make the statements therein not
misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in your reasonable opinion, as Representatives
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of the several Underwriters, materially adversely affect the market for the
Shares.
(c) You shall have received on the Closing Date, an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company and The
Mellinger Group LLC, Barbara Mellinger, David Silverman, Allan Stern,
Srinivasan Viswanathan, and David Winter (collectively, the "PRT
Stockholders"), dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware (the opinion of such counsel to be based solely upon a
review of a certificate of and a telegram from the Secretary of State
of the State of Delaware);
(ii) The Company has the corporate power and corporate authority
to conduct its business and to own, lease and operate its properties,
in each case as described in the Prospectus;
(iii) After giving effect to the Amended and Restated Certificate
of Incorporation, the authorized capital stock of the Company consists
of (A) 50,000,000 shares of Common Stock of which, to such counsel's
knowledge, _______ shares are issued and outstanding, (B) 1,000,000
shares of Non-Voting Common Stock, of which, to such counsels
knowledge, _____ shares are issued and outstanding, and (C) 5,000,000
shares of Preferred Stock, of which, to such counsel's knowledge, no
shares are issued and outstanding; and the authorized capital stock of
the Company conforms in all material respects as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock;"
(iv) The Company Shares have been duly authorized by the Company
and, when delivered to and paid for by the Underwriters in accordance
with the terms hereof, will be validly issued, fully paid and
non-assessable. As used herein, the term "Applicable Laws" means the
Delaware General Corporation Law and the laws, rules and regulations
of the State of New York and the United States of America that, in the
experience
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of such counsel are normally applicable to transactions of the
type contemplated by this Agreement, but without such counsel having
made any special investigation concerning any other laws, rules or
regulations; provided, that the term "Applicable Laws" does not
include (A) the rules and regulations of the National Association of
Securities Dealers, Inc., (B) state securities or blue sky laws, (C)
antifraud laws or (D) any law, rule or regulation that may have become
applicable to the Company as a result of the Underwriters' involvement
with transactions contemplated by this Agreement or because of any
facts specifically pertaining to them;
(v) The issuance and sale of the Company Shares by the Company
and the sale of the Selling Stockholder Shares by the Selling
Stockholders are not subject to the preemptive or other similar rights
of any stockholder of the Company arising under any agreement listed
as an exhibit to the Registration Statement (the "Applicable
Contracts"), the Amended and Restated Certificate of Incorporation,
the Amended and Restated By-Laws or Applicable Laws;
(vi) The form of specimen certificate evidencing the Common Stock
attached as an exhibit to the Registration Statement to be delivered
to you at the Closing complies in all material respects with all
applicable requirements of the Delaware General Corporation Law and
with any applicable requirements of the Amended and Restated
Certificate of Incorporation and the Amended and Restated By-Laws;
(vii) The Registration Statement has become effective under the
Act and, to the best knowledge of such counsel after reasonable
inquiry, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been
made in accordance with Rule 424(b);
(viii) (A) The Company has the corporate power and corporate
authority to execute, deliver and perform its obligations hereunder
and to issue, sell and deliver the Company Shares to the
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Underwriters pursuant to this Agreement and (B) this Agreement
has been duly authorized, executed and delivered by the Company;
(ix) The execution and delivery by the Company of this Agreement
and the performance by the Company of its obligations hereunder, the
compliance by the Company with the provisions hereof, and the
consummation by the Company of the transactions contemplated hereby,
each in accordance with its terms, do not (A) violate or conflict with
the Amended and Restated Certificate of Incorporation or the Amended
and Restated By-Laws, (B) constitute a violation of or a default under
any Applicable Contract, (C) result in the creation of any lien or
encumbrance upon any of the property of the Company or any of its
Subsidiaries pursuant to any Applicable Contract (except that with
respect to the foregoing clauses (B) and (C), such counsel need not
express an opinion as to any covenant, restriction or provision of any
Applicable Contract with respect to financial ratios or tests or any
aspect of the financial condition or results of operations of the
Company or any of its Subsidiaries, or (D) contravene any provision of
any Applicable Law or any Applicable Order (as defined herein). The
term "Applicable Orders" means those orders of Government Authorities
(as defined herein) identified to such counsel by the Company and set
forth in a schedule to such counsel's opinion;
(x) No Governmental Approval (as defined herein), which has not
been obtained, made or taken and is not in full force and effect, is
required for the execution or delivery by the Company of this
Agreement, or the performance by the Company of its obligations
hereunder, except those which are not required to be obtained, made or
taken prior to the date hereof. The term "Governmental Approval" means
any consent, approval, license, authorization or validation of, or
filing, recording or registration with, any New York or federal
executive, legislative, judicial, administrative or regulatory body
pursuant to Applicable Laws;
(xi) The Registration Statement, as of its effective date, and
the Prospectus and any supplements or amendments thereto, as of their
date, appeared on their face to be appropriately
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responsive in all material respects to the requirements of the
Act, except that, in each case, such counsel need express no opinion
as to the financial statements, schedules and other financial or
statistical data included therein or excluded therefrom or the
exhibits to the Registration Statement, and such counsel may state
that it does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement and the Prospectuses (other than to the extent
specified in paragraph (xiv) below);
(xii) To the best knowledge of such counsel after reasonable
inquiry, other than as described or contemplated in the Prospectus (or
any supplement thereto), there are no legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or
any of their respective properties, is subject, which are required to
be described in the Registration Statement or Prospectus (or any
amendment or supplement thereto); such counsel may base its opinion
solely on discussions with the officers of the Company responsible for
the matters discussed herein and its review of documents furnished to
it by the Company; and such counsel may state that it has made no
other inquiries or searches of the public docket records of any court,
governmental agency or body or administrative agency;
(xiii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock" insofar as they purport to
describe or summarize certain provisions of the Amended and Restated
Certificate of Incorporation, the Amended and Restated By-Laws or the
statutes and regulations referred to therein, fairly describe or
summarize such provisions in all material respects;
(xiv) Upon physical delivery to Smith Barney Inc., as
representative of the several Underwriters (the "Buyer") in the State
of New York of the PRT Stockholders' Shares identified on Schedule I
hereto (the "Securities") indorsed to it or in blank, the Buyer will
acquire the Securities free of any adverse claims (within the meaning
of Section 8-102 (a)(1) of the New York
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Uniform Commercial Code (the "UCC") (such counsel may assume that
neither the Buyer nor any other Underwriter has notice of any adverse
claims with respect to the Securities) and such opinion may be limited
to the UCC;
(xv) Such counsel has participated in conferences with officers
and other representatives of the Company, the Selling Stockholders,
representatives of the independent accountants of the Company and
representatives of and counsel for the Underwriters at which the
contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon,
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
or the Prospectus and has made no independent check or verification
thereof (other than to the extent specified in paragraph (xiv) above),
on the basis of the foregoing, no facts have come to such counsel's
attention that lead it to believe that the Registration Statement, at
the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or as of the date
hereof, contained or contain an untrue statement of a material fact or
omitted or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, except that such counsel need not
express an opinion or belief with respect to the financial statements,
schedules and other financial or statistical data included therein or
excluded therefrom or the exhibits to the Registration Statement;
(xvi) This Agreement and the Custody Agreement have each been
duly executed and delivered by or on behalf of each of the PRT
Stockholders; and
(xvii) The execution and delivery by each of the PRT Stockholders
of this Agreement and the performance by each of the PRT Stockholders
of its obligations hereunder, the compliance by each of the PRT
Stockholders with the provisions hereof,
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<PAGE>
and the consummation by each of the PRT Stockholders of the
transactions contemplated hereby, each in accordance with its terms,
do not, to the extent applicable (A) violate or conflict with the
certificate of incorporation or the by-laws or other organizational
documents of such PRT Stockholder, (B) constitute a violation of or a
default under any Applicable Contract to which such PRT Stockholder is
a party, (C) result in the creation of any lien or encumbrance upon
any of the property of the PRT Stockholder pursuant to any Applicable
Contract to which such PRT Stockholder is a party (except that with
respect to the foregoing clauses (B) and (C), such counsel need not
express an opinion as to any covenant, restriction or provision of any
Applicable Contract with respect to financial ratios or tests or any
aspect of the financial condition or results of operations of the
Company or any of its Subsidiaries or (D) contravene any provision of
any Applicable Law or any Applicable Order, except for (other than in
the case of the certificate of incorporation and the by-laws or other
organizational documents of such PRT Stockholder, to the extent
applicable) such conflicts, breaches, violations or defaults which
would not, individually or in the aggregate, affect the validity or
enforceability of, or adversely affect such PRT Stockholder's ability
to consummate, the transactions contemplated by or perform its
obligations under this Agreement.
In rendering such opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of the Company's
officers or the Selling Stockholders and, as to matters of law, may rely
upon an opinion or opinions, each dated the Closing Date, of other counsel
retained by such counsel or the Company as to laws of any jurisdiction
other than the United States, the State of New York or the General
Corporation Law of the State of Delaware, provided that (1) each such local
counsel is reasonably acceptable to the Representatives, (2) such reliance
is expressly authorized by each opinion so relied upon and a copy of each
such opinion is delivered to the Representatives and is, in form and
substance reasonably satisfactory to them and their counsel, and (3) such
counsel shall state in its opinion that it believes that they and the
Underwriters are justified in relying thereon.
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(d) You shall have received on the Closing Date an opinion of
Leonard P. Ciriello, Esq., Senior Vice President and General Counsel of
the Company, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) All of the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be issued and sold by the
Company hereunder, have been duly authorized and validly issued, and
are fully paid and nonassessable;
(ii) To the best knowledge of such counsel, after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in default
in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of
indebtedness, except as may be disclosed in the Prospectus;
(iii) To the best knowledge of such counsel, the Company is not
in violation of its respective certificate or articles of
incorporation or bylaws;
(iv) To the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in
violation of any law, ordinance, administrative or governmental rule
or regulation applicable to the Company or any of the Subsidiaries,
including, without limitation, (A) any Environmental Laws, (B) any
Federal or state law relating to discrimination in the hiring,
promotion or pay of employees or any applicable federal or state wages
and hours laws or (C) any provisions of ERISA, except for such
violations which in the case of any of (A), (B) or (C) above would
not, individually or in the aggregate, have a Material Adverse Effect;
(v) Neither the Company nor any of its Subsidiaries is in
violation of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries,
except for such violations which would not, individually or in the
aggregate, have a Material Adverse Effect;
(vi) To the best knowledge of such counsel, the Company and the
Subsidiaries own or
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possess licenses to use all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights
(collectively, the "Intellectual Property") described in the
Prospectus as being owned by them or any of them or necessary for the
conduct of their respective businesses, and the general counsel for
the Company is not aware of any claim to the contrary or any challenge
by any other person to the rights of the Company and the Subsidiaries
with respect to the foregoing, except where the failure to own or
possess licenses to use such Intellectual Property would not have a
Material Adverse Effect;
(vii) Except as described in the Prospectus, there is no material
number of outstanding options, warrants or other rights calling for
the issuance of, and such counsel does not know of any commitment,
plan or arrangement to issue, any material number of shares of capital
stock of the Company or any security convertible into or exchangeable
or exercisable for capital stock of the Company; and (viii) Except as
described in the Prospectus, there is no holder of any security of the
Company or any other person who has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or
to permit them to underwrite the sale of, the Shares or the right to
have any Common Stock or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of
the Registration Statement, to require the Company to register under
the Act any shares of Common Stock or other securities of the Company.
(e) You shall have received on the Closing Date an opinion of the
respective counsel for each of the Selling Stockholders (other than the PRT
Stockholders, which are covered in the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP pursuant to the foregoing paragraph (c)), dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, with respect to the matters referred to in clauses (xv),
(xvi) and (xvii) to the foregoing paragraph (c).
(f) You shall have received on the Closing Date an opinion of
Chadbourne & Parke LLP, counsel for the
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Underwriters, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, with respect to the matters
referred to in clauses (iv), (vii), (viii) (with respect to paragraph (B)
only), (xi) and (xiv) of the foregoing paragraph (c) and such other related
matters as you may request.
In addition to the matters set forth above, such opinion shall also
contain a statement to the effect that, although such counsel has not
undertaken, except as otherwise indicated in its opinion, to determine
independently, and does not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement, such counsel
has participated in the preparation of the Registration Statement and the
Prospectus, including review and discussion of the contents thereof, and
nothing has come to the attention of such counsel that has caused it to
believe (i) that the Registration Statement, at the time it became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or (ii) that the Prospectus, any
amendment or supplement to the Prospectus, as of its respective date, and
as of the Closing Date or the Option Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no statement with respect
to the financial statements and the notes thereto and the schedules and
other financial and statistical data included in the Registration Statement
or the Prospectus).
(g) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and
the Closing Date from Ernst & Young LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(h)(A) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be contemplated
by the Commission at or prior to the Closing Date; (B) there shall not have
been any material change in the capital stock of the Company nor
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any material increase in the short-term or long-term debt of the
Company (other than in the ordinary course of business) from that set forth
or contemplated in the Registration Statement or the Prospectus, as amended
or supplemented to the date hereof; (C) there shall not have been, since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, as amended or supplemented to the date
hereof, except as may otherwise be stated in the Registration Statement and
Prospectus, as amended or supplemented to the date hereof, any material
adverse change in the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole; (D) the Company and the Subsidiaries shall
not have any liabilities or obligations, direct or contingent (whether or
not in the ordinary course of business), that are material to the Company
and the Subsidiaries, taken as a whole, other than those reflected in the
Registration Statement or the Prospectus, as amended or supplemented to the
date hereof; and (E) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by the chief executive officer and the chief financial
officer of the Company (or such other officers as are acceptable to you),
to the effect set forth in this Section 10(h) and in Section 10(i) hereof.
(i) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained
and required to be performed or complied with by it hereunder at or prior
to the Closing Date.
(j) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by or on behalf of the Selling Stockholders to the effect
set forth in this Section 10(j) and in Section 10(k) hereof.
(k) The Selling Stockholders shall not have failed at or prior to the
Closing Date to have performed or complied with any of their agreements
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herein contained and required to be performed or complied with by them
hereunder at or prior to the Closing Date.
(l) The Shares shall have been approved for quotation upon notice of
issuance on the Nasdaq National Market.
(m) The Sellers shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company or
any Attorney-in-Fact or any Selling Stockholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, in
connection with the execution of this Agreement shall be deemed a
representation and warranty by the Company, the Selling Stockholders or the
particular Selling Stockholder, as the case may be, to each Underwriter as to
the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option
Closing Date of the conditions set forth in this Section 10, except that, if
any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (k) shall be dated
the Option Closing Date in question and the opinions called for by paragraphs
(c), (d), (e) and (f) shall be revised to reflect the sale of Additional
Shares.
11. Expenses. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be
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reasonably requested for use in connection with the offering and sale of the
Shares; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares, including any stamp taxes in connection with
the original issuance and sale of the Shares; (iv) the printing (or
reproduction) and delivery of this Agreement and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the registration of the Shares under the Exchange Act and
the listing of the Shares on the Nasdaq National Market; (vi) the filing fees
and the fees and expenses of counsel for the Underwriters in connection with
any filings required to be made with the National Association of Securities
Dealers, Inc.; (vii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (viii) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the PRT Stockholders.
12. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters
are obligated to purchase on the Closing Date, each non-defaulting Underwriter
shall be obligated, severally, in the proportion which the number of Firm
Shares set forth opposite its name in Schedule II hereto bears to the aggregate
number of Firm Shares set forth opposite the names of all non-defaulting
Underwriters or in such other proportion as you may specify in accordance with
Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to
purchase the Shares which such defaulting Underwriter or Underwriters are
obligated, but
41
<PAGE>
fail or refuse, to purchase. If any one or more of the Underwriters shall fail
or refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
or the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement. The
term "Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule II hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting
Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but, if by telephone, shall be subsequently confirmed in writing.
13. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Stockholder, by notice to the
Company, if prior to the Closing Date or any Option Closing Date (if different
from the Closing Date and then only as to the Additional Shares), as the case
may be, (i) trading in securities generally on the New York Stock Exchange,
American Stock Exchange or the Nasdaq National Market shall have been suspended
or materially limited, (ii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to
42
<PAGE>
the public set forth on the cover page of the Prospectus or to enforce
contracts for the resale of the Shares by the Underwriters. Notice of such
termination may be given to the Company by telegram, telecopy or telephone and,
if by telephone, shall be subsequently confirmed in writing.
14. Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first (including the table
thereunder), third, sixth, eleventh, twelfth and thirteenth paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and
13 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company or the Selling
Stockholders, at the office of the Company at 342 Madison Avenue, 11th Floor,
New York, New York 10173, Attention: Leonard P. Ciriello, Senior Vice President
and General Counsel; or (ii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Selling Stockholders, the Company, its directors and
officers, and the other controlling persons referred to in Section 9 hereof and
their respective successors and assigns, to the extent provided herein, and no
other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns"
as used in this Agreement shall include a purchaser from any Underwriter of any
of the Shares in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
43
<PAGE>
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
PRT GROUP INC.
By:
----------------------------
Name: Douglas K. Mellinger
Title: President and Chief
Executive Officer
Each of the Selling
Stockholders named in
Schedule I hereto
By:
---------------------------
Attorney-in-Fact
By:
---------------------------
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES LLC
PUNK, ZIEGEL & COMPANY L.P.
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
-----------------------------
Name:
Title: Managing Director
44
<PAGE>
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
November 13, 1997
PRT Group Inc.
342 Madison Avenue, 11th Floor
New York, New York 10173
Re: PRT Group Inc. Registration
Statement on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to PRT Group Inc., a Delaware corporation
(the "Company"), in connection with (a) the public offering by certain
stockholders of the Company (the "Selling Stockholders") of (i) up to 1,182,000
shares (the "Outstanding Shares") of the Company's Common Stock, par value
$.001 per share ("Common Stock"), and (ii) up to 258,000 shares (the
"Conversion Shares") of Common Stock issuable upon conversion of up to 258,000
shares (the "Preferred Shares") of the Company's Series A Convertible Preferred
Stock, par value $.01 per share (in each case including shares of Common Stock
to be sold to cover over-allotments) and (b) the issuance and sale by the
Company of up to 3,850,000 shares of Common Stock (the "Company Shares").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933 (the "Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Company's
Registration Statement on Form S-1 (Registration No. 333-36169) as filed with
the Securities and Exchange Commission (the
<PAGE>
PRT Group Inc.
November 13, 1997
Page 2
"Commission") on September 23, 1997 under the Act, Amendment No. 1 thereto
filed with the Commission on October 29, 1997 and Amendment No. 2 thereto filed
with the Commission on the date hereof (as so amended, the "Registration
Statement"); (ii) the form of Underwriting Agreement (the "Underwriting
Agreement") proposed to be entered into among the Company, the Selling
Stockholders, and Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, UBS Securities LLC and Punk, Ziegel & Company L.P., as
representatives of the underwriters named therein (the "Underwriters"), filed
as an exhibit to the Registration Statement; (iii) a specimen certificate
evidencing the Common Stock; (iv) the Certificate of Incorporation of the
Company, as presently in effect, and the form of Amended and Restated
Certificate of Incorporation of the Company to become effective prior to
consummation of the offering contemplated by the Registration Statement; (v)
the By-Laws of the Company, as presently in effect, and the form of Amended and
Restated By-laws of the Company to become effective prior to consummation of
the offering contemplated by the Registration Statement; and (vi) certain
resolutions of the stockholders of the Company and of the Board of Directors of
the Company and drafts of certain resolutions (the "Draft Resolutions") of a
Pricing Committee of the Board of Directors of the Company. We have also
examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and records as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also
<PAGE>
PRT Group Inc.
November 13, 1997
Page 3
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of
the Company and others.
In rendering the opinions set forth in paragraphs 2 and 3 below, we have
assumed that the certificates evidencing the Conversion Shares and the Company
Shares will conform to the specimen certificate examined by us, will be
manually signed by an authorized officer of the transfer agent and registrar
for the Common Stock and will be duly registered by such transfer agent and
registrar.
Members of our firm are admitted to the bar in the State of New York, and
we do not express any opinion as to the laws of any jurisdiction, except the
General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Outstanding Shares have been duly authorized and validly issued and
are fully paid and nonassessable.
2. The Conversion Shares have been duly authorized for issuance and, when
the Preferred Shares have been converted into the Conversion Shares in
accordance with the Certificate of Incorporation of the Company, the Conversion
Shares will be validly issued, fully paid and nonassessable.
3. When (i) the Amended and Restated Certificate of Incorporation of the
Company in the form examined by us has been filed with the Secretary of State
of the State of Delaware and has become effective; (ii) the Registration
Statement, as finally amended (including all necessary post-effective
amendments and any Rule 462(b) Registration Statement), becomes effective;
(iii) the Draft Resolutions have been adopted by the Pricing Com-
<PAGE>
PRT Group Inc.
November 13, 1997
Page 4
mittee; (iv) the price at which the Company Shares are to be sold to the
Underwriters pursuant to the Underwriting Agreement and other matters relating
to the issuance and sale of the Company Shares have been approved by the
Pricing Committee in accordance with the Draft Resolutions; (v) the
Underwriting Agreement has been duly executed and delivered; and (vi) the
Company Shares are delivered to and paid for by the Underwriters at a price per
share not less than the per share par value of the Common Stock as contemplated
by the Underwriting Agreement, the issuance and sale of the Company Shares will
have been duly authorized, and the Company Shares will be validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. We
further consent to the incorporation of this opinion by reference as an exhibit
to any Rule 462(b) Registration Statement and to the reference to our firm
under the caption "Legal Matters" in the prospectus included or incorporated by
reference in any such Rule 462(b) Registration Statement. In giving this
consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
<PAGE>
EMPLOYMENT AGREEMENT
Agreement dated as of October 13, 1997 between PRT Group Inc., a
Delaware Corporation ("PRT" or the "Company"), with its principal office at 342
Madison Avenue, New York, New York 10173, and Leonard P. Ciriello, the
executive ("Executive") residing at [address].
The parties agree as follows:
1. (a) The Company employs the Executive as General Counsel and Senior
Vice President of the Company, to carry out the duties and responsibilities
more fully de scribed in Exhibit A hereto and as shall from time to time be
reasonably assigned to him by the Company's Board of Directors, President and
Chief Executive Officer. The Executive accepts such employment and agrees to
devote his full time and effort to the business and affairs of the Company. The
Executive shall carry out such duties at the Company's principal office at
the address set forth above.
(b) The term of Executive's employment shall commence on October
13, 1997 and terminate on the third anniversary thereof, unless sooner
terminated pursuant to the provisions set forth below in paragraph 2 (the
"Term"). Commencing on the third 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 at
least ninety (90) days 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 frequently
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 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 and provide health benefits 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.
<PAGE>
(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 four (4) months prior written notice. Upon such a
termination (a termination "Without Cause") the Company shall provide
Executive with the following: (i) if such termination Without Cause occurs
during the first 30 months of the Term, the Company shall continue to pay
Executive his base salary hereunder and provide health benefits for a period of
one (1) year or the remainder of the Term, whichever is less, and all benefits
that are tied to a vesting schedule shall immediately vest; provided, that,
if Executive is terminated in connection with any Change in Control of the
Company (as hereafter defined) and such termination Without Cause occurs
during the first 30 months of the Term, the Company shall continue to pay
Executive his base salary hereunder and provide health benefits for a period of
two (2) 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 30th month of the Term, the Company
shall continue to pay Executive his base salary hereunder and provide health
benefits 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. Notwithstanding the foregoing, a termination Without Cause shall include,
without limitation, any (i) demotion, (ii) material adverse change in the
duties of the Executive set forth on Exhibit A, or (iii) movement of the
Company's principal offices (as set forth in the first paragraph of this
Agreement) in excess of twenty-five miles. 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. A "Change in Control" as
used herein shall mean any (x) merger, consolidation or amalgamation of the
Company with another entity in which the shareholders of the Company prior to
such transaction hold less than 51% of the voting power of the securities of
the surviving entity after such transaction, (y) sale of all or substantially
all of the Company's assets, or (z) tender offer or other transaction or series
of related transactions which results in any entity (other than The Mellinger
Group LLC) holding in excess of 51% of the voting power of the securities of
the Company outstanding immediately after such tender offer, transaction or
series of related transactions.
(c) The Executive may terminate the Execu tive's employment with
the Company and all rights and obliga tions of the parties hereunder (except
with regard to Sec tions 3 and 4) by four (4) 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 provi-
sion of this Agreement, (ii) any act of fraud, misappropriation of funds or
embezzlement by the Executive in connection with his employment hereunder, and
(iii) any act of gross negligence or other 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
2
<PAGE>
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 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.
3
<PAGE>
6. (a) This Agreement and the Exhibits hereto contain 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 of 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 the address
4
<PAGE>
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/ Gregory S. Mellinger /s/ Leonard P. Ciriello
-------------------------- ------------------------------
Name: Gregory S. Mellinger Leonard P. Ciriello
Title: Chief Operating Officer Executive
and Secretary
5
<PAGE>
EXHIBIT A
POSITION GOALS, DUTIES AND RESPONSIBILITIES
Mr. Leonard P. Ciriello will assume the official titles of Senior Vice
President and General Counsel of PRT Group Inc. reporting to the Chairman of
the Board of Directors and the President and Chief Executive Officer. His
responsibilities will include all legal matters concerning PRT Group Inc. and
its subsidiaries. PRT further defines these responsibilities as:
1. MAJOR GOALS
o Provide the Company with legal counsel to enable it to achieve its goals.
o Achieve reductions in significant expense items of the Company (after
taking Company growth into account) by, among other things, negotiating
more favorable agreements with vendors and service providers.
2. JOB DESCRIPTION
o Perform necessary day to day legal functions to assist in building a highly
trained, effective, and motivated consulting company that is able to take
advantage of the market conditions to ensure consistent financial and
market growth.
o Build PRT through selective acquisition opportunities.
o Work to protect the Company from harmful litigation, damage, or risk
exposure.
o Develop and implement control mechanisms so as to ensure substantial
compliance with applicable law.
o Determine ways to improve and increase the effectiveness and scope of PRT's
active engagement contracts and arrangements.
o Manage PRT's legal budget and expenses to maximize return on investment
for PRT shareholders and stock option participants.
o Effectively communicate and report on PRT's legal status on a regular basis
to the Company's Chief Executive Officer and Board of Directors.
o Demonstrate strong verbal and written communications skills.
6
<PAGE>
EXHIBIT B
EMPLOYMENT AGREEMENT ADDENDUM
SALARY AND BENEFITS
o Your salary at PRT for the first year of the Term is $150,000 per year.
Future raises will be determined by the Board of Director's Compensation
Committee.
o On the date hereof, you will be granted 75,000 options to purchase shares
of PRT common stock under the Com pany's Amended and Restated 1996 Stock
Incentive Plan with an exercise price of $13.50 per share, vesting 33 1/3%
on each of the first three anniversaries of the date hereof.
o On the date hereof, you will be granted 7,407 shares of PRT common stock,
valued at $100,000 in the aggregate at the current fair market value, fully
vested.
o During the Term, Executive shall be entitled to participate in an
executive performance based incentive compensation program developed by
the Board of Directors' Compensation Committee for the Company's
executives. Such participation shall be based on the overall financial
growth of the Company and certain other factors and shall be on a basis no
less favorable than that of any other Company executive. This compensation
will be paid not later than the first quarter of each calendar year.
o You will receive PRT stock options during the duration of the program in
accordance with the compensation programs for executive employees.
o PRT will offer its partial matching 401(k) plan program to you.
o PRT will offer its disability insurance program to you when implemented.
o PRT will offer you its standard vacation and personal day policy for PRT
employees with four(4) years of service (for vacation, personal and sick
days).
o During the Term, 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 his performance
of duties hereunder. Such reimbursement shall include, among other things,
(i) New York and Massachusetts State bar fees, (ii) fees for Executive's
membership in the New York Bar Association, and (iii) a corporate
membership at two professional clubs or associations suitable to
Executive's stature as General Counsel, not to exceed $1,500 per annum,
and (iv) travel and entertainment expenses incurred in connection with Exec
utive's participation in conferences.
o During the Term, Executive shall be eligible to participate in all
employee benefit plans and arrangements that may be offered from time to
time by the Company to its employees or executives, in accordance with the
terms and provisions of such plans.
7
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports with respect to the financial statements and schedule
of PRT Group Inc. dated October 27, 1997 and with respect to the financial
statements of Computer Management Resources, Inc. dated August 28, 1997
included in Amendment No. 2 (Registration No. 333-36169) on Form S-1 and the
related Prospectus of PRT Group Inc., for the registration of 4,600,000
shares of its common stock.
/s/ ERNST & YOUNG LLP
New York, New York
November 11, 1997
<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/ Shulman, Cohen, Furst, Kramer &
Rosen, P.C.
New York, New York
November 13, 1997
