<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITITES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23315
PRT GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware No. 13-3914972
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
342 Madison Avenue
New York, New York 10173
(212) 922-0800
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of share outstanding of each of the issuer's classes of
common stock: Common Stock, par value $.001 per share, outstanding as of August
11, 1998 are 18,243,088 shares.
<PAGE> 2
PRT GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Page
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations
for the three months ended June 30, 1998 and 1997
and for the six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 2. Change in Securities 8
ITEM 3. Defaults upon senior securities 8
ITEM 4. Submission of matters to a vote of security holders 8
ITEM 5. Other Information 8
ITEM 6. Exhibits and reports on Form 8-K 9
Signatures 10
<PAGE> 3
PRT Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except number of shares)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 29,499 $ 17,314
Marketable debt securities 14,622 152
Accounts receivable, net of allowance of $334 in 1997 and $472 in 1998 14,493 18,590
Deferred income taxes 11 --
Prepaid expenses and other current assets 1,604 1,440
-------- --------
Total current assets 60,229 37,496
Fixed assets, net 8,738 10,768
Goodwill, net 6,615 21,142
Other assets 332 477
======== ========
Total assets $ 75,914 $ 69,883
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accrued compensation $ 3,479 $ 2,265
Accounts payable and other accrued expenses 4,411 5,625
Deferred income taxes -- 113
Current portion of capital lease obligations 400 563
Deferred revenue 753 797
-------- --------
Total current liabilities 9,043 9,363
Deferred income taxes 44 44
Note payable 2,000 1,000
Capital lease obligations, net of current portion 738 596
-------- --------
Total liabilities 11,825 11,003
Common stockholders' equity:
Common stock, $.001 par value; authorized -- 50,000,000 shares;
issued and outstanding -- 18,229,063 in 1997 and 18 18
18,278,156 shares in 1998
Additional paid-in capital 86,324 86,560
Accumulated deficit (21,853) (27,254)
Treasury stock, 67,090 shares in 1997 and 71,617 shares in 1998 (400) (444)
-------- --------
Total common stockholders' equity 64,089 58,880
======== ========
Total liabilities and stockholders' equity $ 75,914 $ 69,883
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
PRT Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1997 1998 1997 1998
------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues $ 12,275 $ 22,669 $ 21,314 $ 41,521
Cost of revenues 8,596 16,530 15,217 31,847
------------------------- ------------------------
Gross profit 3,679 6,139 6,097 9,674
Selling, general and administrative expenses 4,372 7,731 8,210 16,432
------------------------- ------------------------
Loss from operations (693) (1,592) (2,113) (6,758)
Other income (expense):
Interest expense (105) (44) (190) (328)
Interest income 123 261 264 710
------------------------- ------------------------
Loss before income taxes (675) (1,375) (2,039) (6,376)
Income tax benefit (106) (200) (129) (975)
------------------------- ------------------------
Net loss $ (569) $ (1,175) $ (1,910) $ (5,401)
========================= ========================
Basic net loss per share $ (.04) $ (.06) $ (.13) $ (.30)
========================= ========================
Diluted net loss poer share $ (.04) $ (.06) $ (.13) $ (.29)
========================= =========================
</TABLE>
See accompanying notes.
2
<PAGE> 5
PRT Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,910) $ (5,401)
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 635 2,100
Amortization or debt discount 150 --
Provision for doubtful accounts 13 --
Deferred income taxes (205) 124
Change in foreign exchange rate (64) --
Changes in operating assets and liabilities:
Accounts receivable (4,640) (1,674)
Prepaid expenses and other current assets (739) 164
Other assets (38) (120)
Accrued compensation 517 (1301)
Accounts payable and other accrued expenses 977 (250)
Deferred revenue (130) 44
-------- --------
Net cash used in operating activities (5,434) (6,314)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (2,909) (3,098)
Proceed from sale of marketable debt securities -- 14,470
Purchase of net assets of ACT, net of cash required -- (12,944)
Purchase of net assets of ISPI, net of cash required -- (2,648)
-------- --------
Net cash used in investing activities (2,909) (4,220)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable -- (1,023)
Repayments under line of credit 850 (539)
Advances received from client 632 --
Exercise of stock options 7 236
Principal payments under capital lease obligations (104) (281)
Purchase of treasury stock -- (44)
-------- --------
Net Cash used in financing activities 1,385 (1,651)
-------- --------
Net decrease in cash and equivalents (6,958) (12,185)
Cash and equivalents at beginning of period 14,856 29,499
-------- --------
Cash and equivalents at end of period $ 7,898 $ 17,314
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 42 $ 328
======== ========
Income taxes paid $ 62 $ 150
======== ========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases $ 219 $ 291
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
PRT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in PRT Group Inc. ("the Company") Annual Report on form
10-K for the year ended December 31, 1997. In the opinion of management,
the accompanying consolidated financial statements include all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation of the financial condition and results of operations for
the periods presented. The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
(2) Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(3) Recently Issued Accounting Standard
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income. The
impact of implementing Statement 130 had no impact on the periods
presented.
4
<PAGE> 7
(4) Related Party Transaction
On May 1, 1998, the Company and Forum Computer Services, Inc. ("Forum")
agreed in principal to pay Forum a one time fee of $200,000 in lieu of
all past or future unpaid finders fee relating to certain consultant
contracts placed with Forum's marketing assistance. In exchange for this
one time payment, Forum agreed to release the Company from all claims for
finders fees related to these consultants. Forum is owned 57% by the
father of the Company's Chairman and Chief Operating Officer and 43% by a
stockholder of the Company. In 1997 and through May 1998, PRT paid Forum
$297,000 and $98,000 respectively for finders fee.
(5) Acquisitions and Pro-Forma Financial Information
On July 1, 1997, the Company consummated the purchase of all the issued and
outstanding capital stock of Computer Management Resources, Inc. ("CMR"), a
Connecticut corporation, for approximately $6.3 million. On January 31,
1998, the company purchased substantially all of the assets of Advanced
Computing Techniques, Inc. ("ACT"), a Connecticut corporation, for $12.9
million in cash. On April 15, 1998 the company consummated the purchase of
substantially all the assets of Institute for Software Process Improvement,
Inc. ("ISPI"), a Pennsylvania corporation, for $2.7 million in cash. These
acquisitions have been accounted for by the purchase method of accounting
and their results have been included in the Companys financial statements
from the date of acquisition.
The following unaudited pro-forma financial information shows the results
of operations for the six months ended June 30, 1998 and 1997 assuming
consummation of the CMR, ACT and ISPI acquisitions had occurred at the
beginning of the periods presented.
Six Months
Ended June 30
1998 1997
---- ----
Revenues $ 43,426 $ 39,742
Net Loss (5,575) (2,009)
Basic and diluted
loss Per Share $ (.30) $ (.14)
5
<PAGE> 8
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue. Revenues increased approximately 85% to $22.7 million in the second
quarter of fiscal year 1998 from $12.3 million in the second quarter of fiscal
year 1997. Revenues increased to $41.5 million in the first six months of 1998
as compared to $21.3 million in the first six months of 1997, representing
growth of 95%. This growth in revenue is primarily attributable to increases in
the size of the Company's IT professional workforce, expansion of the Company's
Software Engineering Center ("SEC") operations, additional services provided to
existing clients and, additional revenue obtained from the acquisition of
Computer Management Resources, Inc. in July 1997, Advanced Computer Techniques,
Inc. in January 1998, and the addition of Institute For Software Process
Improvement, Inc. on April 15, 1998. The number of IT professionals in the
second quarter was (including subcontractors) 745 in comparison to 432 in the
second quarter of 1997. Revenues from SECs increased to $7.4 million for the
second quarter of fiscal year 1998 as compared to $2.1 million in the second
quarter of fiscal year 1997.
Cost of Revenues. Cost of revenue was 72.9% and 76.7% of revenues in the second
quarter and first six months of 1998, respectively, compared to 70.0% and 71.4%
for the first quarter and first six months of 1997, respectively. As a percent
of revenue, cost of revenue increased during the 1998 three and six months
periods due principally to (i) the continued expansion of the Company's SEC,
and lower utilization rates at the Company's Barbados SEC in 1998 and the
increased costs associated with the ramp-up of the Test Lab 2000(TM) in the
Hartford SEC.
Gross Profit. For the reasons set forth above, gross profit was 27.1% and 23.3%
of revenues in the second quarter and first six months of 1998, respectively,
compared to 30.0% and 28.6% for the first quarter and first six months of 1997,
respectively. As a percentage of revenues, gross profit decreased due to higher
than expected costs associated with the initial cost and start-up of new
projects and lower than expected utilization in the SEC's.
Selling, General and Administrative. Selling, general and administrative
expenses for the second quarter of 1998 increased $3.3 million to $7.7 million
as compared to $4.4 million in the second quarter of 1997. Selling, general and
administrative expense as a percentage of revenue are 34.1% and 39.6% for the
three and six month periods ended June 30, 1998, respectively, compared to
35.6% and 38.5% for the three and six month periods ended
6
<PAGE> 9
June 30, 1997, respectively. The decrease in the second quarter is attributed to
tightened expense control and the overall increase for the six months is
primarily associated with one-time charges of approximately $1.0 million taken
in the first quarter of 1998 associated with severance expenses and termination
of excess employee housing.
Loss from Operations: For the reasons set forth above, loss from operations was
(7%) and (16.3%) of revenues in the second quarter and first six months of 1998,
respectively, compared to (5.6%) and (9.9%) for the comparable 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to approximately $28.1 million at June
31, 1998 from $51.2 million at December 31, 1997. Cash and equivalents and
marketable debt securities were $17.5 million at June 30, 1998 compared to $44.1
million at December 31, 1997. The primary uses of cash during the six months
ended June 31, 1998 were for the reasons, noted below, including the funding of
a net loss of $5.4 million and an increase of accounts receivable of $1.7
million.
Investing activities used cash of approximately $4.3 million mostly attributed
to additional purchase of property and equipment needed for the software
development centers. In addition, the Company acquired substantially all of the
assets of ACT for approximately $12.9 million and ISPI for $2.7 million in cash.
Net cash of $1.6 million was used primarily in repayment of debt and line of
credit in relation to the acquisition of CMR, ACT and ISPI.
The company had a secured line of credit of $7 million with a commercial bank
under a commitment that expired in June 1998. The company is negotiating a line
of credit with another institution with more favorable terms.
The Company anticipates that existing cash and cash equivalents and highly
liquid marketable securities, and available borrowings will be adequate to meet
its cash requirements for the next twelve months.
7
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Change in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters To A Vote of Security Holders.
None
ITEM 5. Other Information.
None.
8
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
2.1 Asset Purchase, dated as of April 15, 1998, by and among
PRT Group Inc. and Institute For Software Process Improvement, Inc.
b) Reports on Form 8-K
1. On April 15, 1998, the Company filed a Current Report on Form 8-K
disclosing the acquisition of Institute For Software Process
Improvement, Inc. by the Company.
2. June 26, 1998, the Company filed a Current Report on Form 8-K
setting forth certain pro-forma financial information with respect to
the acquisition of Institute For Software Improvement, Inc. by the
Company.
9
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRT GROUP INC.
DATE 8/13/98 BY /s/ Douglas Mellinger
--------- --------------------------------------------------
Douglas Mellinger
Chairman / Chief Executive Officer
DATE 8/13/98 BY /s/ Lowell Robinson
--------- --------------------------------------------------
Lowell Robinson
Executive Vice President, Finance & Administration,
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001045560
<NAME> PRT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,314,000
<SECURITIES> 152,000
<RECEIVABLES> 19,062,000
<ALLOWANCES> 472,000
<INVENTORY> 0
<CURRENT-ASSETS> 37,496,000
<PP&E> 15,012,000
<DEPRECIATION> 4,244,000
<TOTAL-ASSETS> 69,883,000
<CURRENT-LIABILITIES> 9,363,000
<BONDS> 0
0
0
<COMMON> 18,000
<OTHER-SE> 58,862,000
<TOTAL-LIABILITY-AND-EQUITY> 69,883,000
<SALES> 41,521,000
<TOTAL-REVENUES> 41,521,000
<CGS> 31,847,000
<TOTAL-COSTS> 31,847,000
<OTHER-EXPENSES> 16,292,000
<LOSS-PROVISION> 140,000
<INTEREST-EXPENSE> 328,000
<INCOME-PRETAX> (6,376,000)
<INCOME-TAX> (975,000)
<INCOME-CONTINUING> (5,401,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,401,000)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.29)
</TABLE>
