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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-23315
PRT GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3914972
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
342 MADISON AVENUE, 11TH FLOOR, 10173
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 922-0800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.001 par value Nasdaq NMS
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates of the registrant as of March 9, 1998, was
approximately $118,247,000.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 9, 1998 was 18,161,963 shares.
DOCUMENTS INCORPORATED BY REFERENCE
THERE IS INCORPORATED HEREIN BY REFERENCE THE REGISTRANT'S PROXY STATEMENT
FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS, EXPECTED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON OR BEFORE APRIL 30, 1998, IN PART III
HEREOF.
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PART I
ITEM 1. BUSINESS
The following description of the business of PRT Group Inc. ("PRT" or the
"Company") contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this section and elsewhere in this Form
10-K Annual Report, 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below.
GENERAL
PRT Group Inc. was incorporated under the laws of the State of Delaware in
1996. The Company was first incorporated 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.
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 IT 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 engineering 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 December 31, 1997, PRT
employed or had subcontracting arrangements with over 750 personnel, including
693 IT professionals, of whom 289 were subcontractors; of PRT's IT professionals
approximately 50% worked in PRT's Software Engineering Centers ("SECs"). As of
January 31, 1998, the Company acquired Advanced Computing Techniques, Inc.
("ACT") (see "-- Certain Acquisition Transactions" below). Taking the
acquisition of ACT into account, as of January 31, 1998 the Company employed or
had subcontracting arrangements with 868 IT professionals.
PRT offers its services to clients at their site or off-site. The Company
has offices in Connecticut, Illinois, Massachusetts, New Jersey, New York and
Virginia, as well as the United Kingdom. In addition, the Company has SECs in
Barbados, West Indies, and the Hartford, Connecticut area and a recruitment
center in Mumbai, formerly Bombay, India. SECs are the key sites where PRT's
Project Solutions are designed, engineered, constructed, tested and supported in
accordance with the PAL software engineering framework. Each SEC has a number of
project teams dedicated to clients and separate quality assurance groups to
ensure high-quality, cost-effective solutions. The SECs have common
infrastructure, organizational units and human resource practices that are
designed to allow projects and personnel to be shifted among the SECs to
maximize utilization rates while meeting client requirements.
PRT's 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 engineering quality control mechanisms,
processes and organizational units. PRT's Project Solutions services consist of:
(i) full life cycle software engineering, (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 SECs.
PRT's Staff Augmentation group
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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 twelve months ended
December 31, 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 $59.8 million in 1997 from $5.3
million in 1992 representing a compound annual growth rate ("CAGR") of
approximately 62%. For the twelve month periods ended December 31, 1997 and
1996, the Company's revenues were $59.8 million and $23.8 million, respectively,
representing an increase of 151%.
THE IT SERVICES INDUSTRY
OVERVIEW
Worldwide competition, heightened by deregulation, globalization and rapid
technological advancement, is placing increasing demands on corporations to: (i)
improve the quality of products and services, (ii) reduce costs and time to
market of new products and services, (iii) improve operating efficiencies and
(iv) strengthen client relationships. The rapid rate of advancement in IT
capabilities, as well as the greater complexities and costs to an organization
of maintaining the IT function, is transforming the role of the in-house IT
department. The ability to integrate and deploy improved IT in a cost-effective
manner has become critical to an organization's success. As a result,
organizations are increasingly viewing the IT function as less of a support
center and more as an integral component of corporate strategy.
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 billion in 1996 and will reach $303 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
projected that by the end of 1997 only 20% of all systems in the world would be
Year 2000 compliant and that only 50% of such systems will be Year 2000
compliant by the end of 1999.
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Offshore Software Engineering. 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 engineering 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 engineering 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 engineering will continue to be exacerbated by mass change
problems.
Software Engineering Challenges. Software engineering 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 engineering projects will be cancelled
before completion and over one-half will have significant cost overruns. Because
software engineering 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 Company has achieved CMM Level 3 certification at its
Barbados SEC.
THE PRT GLOBAL SOLUTION
The PRT Global Solution enables the Company's clients to outsource a broad
range of business and technology needs. PRT's international fulfillment
capability offers a high-quality alternative to traditional onsite consulting.
The Company strives to reliably and predictably provide flexible technical and
business 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 SECs, (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 market 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 Engineering Centers. The Company intends to increase
its investment in an integrated network of onshore, near-shore and offshore SECs
and offices to facilitate offsite development of high quality software on a cost
effective basis. PRT opened its first SEC in September 1995, near-shore in
Barbados, West Indies. A second SEC is located onshore in the Hartford,
Connecticut area. The Company's SECs are directly linked by high-speed dedicated
communications lines to all other PRT locations and to many clients. Management
believes the SECs 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 SEC.
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
engineering framework based upon the CMM model. PAL is a knowledge bank of
software engineering life cycle processes, methodologies, tools and reusable
work product developed by PRT. As processes are refined,
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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 engineering framework enables the
Company to deliver consistent, predictable, reliable, high-quality solutions to
its clients on a flexible, cost-effective basis.
In addition, PRT's Barbados SEC achieved CMM Level 3 certification based on
an independent assessment in November, 1997. According to Software Engineering
Institute data, only approximately 15% of the over 600 organizations worldwide
that have launched a process improvement program have achieved Level 3
certification and above. The CMM model consists of 5 levels of maturity, which
mark increasing value in terms of predictability, control and effectiveness. A
Level 3 assessment is known as "Defined" and indicates that software engineering
processes are well defined, implemented effectively and consistently throughout
an organization, while the infrastructure in the organization supports
continuous learning and improvement of these processes.
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 SEC
employees are trained on the PAL software engineering framework through a 12
week training program. In addition, all employees undergo continuous training as
new technologies emerge and as the PAL software engineering framework is
enhanced. As PRT replicates the SEC 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 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 technological 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 software
engineering quality management function and 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 clients. New technologies on
which PRT is focusing include: (i) data mining, (ii) data visualization, (iii)
data warehousing, (iv) emerging client/server technologies, (v) intelligent
agents, (vi) Internet/intranet technologies, (vii) object-oriented technologies
and (viii) usability engineering.
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Project Solutions
PRT's Project Solutions service involves the analysis, design,
implementation, testing and management of highly complex, large scale software
engineering 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 engineering framework
onsite at a client's location or at one of PRT's SECs located onshore
(Connecticut) or near-shore (Barbados).
Staff Augmentation
Due to the shortage of trained IT professionals, PRT's clients often lack
the in-house personnel or skills necessary to accomplish IT objectives. PRT
provides flexible Staff Augmentation services to fill short-and long-term or
specialized technology skill set needs, generally providing qualified candidates
within 48 to 72 hours of notification. For most of the Company's clients, PRT
assigns an account management team comprised of a senior account manager, an
account associate and a recruiting coordinator to provide 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 and staff augmentation 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. This business accounted for 53% of
revenue in 1997 and 78% in 1996.
SOFTWARE ENGINEERING CENTERS
SECs are the key sites where PRT Project Solutions are designed,
engineered, constructed, tested and supported in accordance with the Company's
PAL software engineering framework. Each SEC has a number of project teams
dedicated to clients and separate quality assurance groups to ensure
high-quality, cost-effective solutions. The SECs have common infrastructure,
organizational units and human resource practices that allow projects and
personnel to be shifted among the SECs to maximize utilization rates while
meeting client requirements. The SECs accounted for 35% of revenue in 1997 and
15% in 1996.
As a response to client demands, PRT has opened two SECs. In 1994, PRT
determined that opening an SEC 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 SEC 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 SEC 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.
RECRUITING AND TRAINING
PRT employs 27 recruitment personnel, including 15 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 twenty-five
different subcontractor
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firms and seven finders to provide it with additional IT professionals when
necessary. Additionally, the Company has a referral program providing rewards to
PRT's internal staff for locating IT professionals.
PRT evaluates and qualifies candidates prior to placing them with clients
through a computerized 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 SEC 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 six to twelve 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
engineering needs. PRT's clients include companies primarily in the financial
services, consumer products, communications and healthcare industries.
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 34 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 December 31, 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 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%; in 1997, approximately 79% of the Company's revenue was
derived from its five largest clients, with one client accounting for
approximately 30% of revenues. As of July 1, 1997, the Company acquired Computer
Management Resources, Inc. ("CMR"). If CMR had been acquired on January 1, 1997,
on a pro-forma basis during the twelve month period ending on December 31, 1997,
approximately 73% of the Company's revenues would have been derived from its
largest five clients and approximately 28% 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 year ended
December 31, 1997, 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.
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CERTAIN ACQUISITION TRANSACTIONS
COMPUTER MANAGEMENT RESOURCES, INC.
Effective July 1, 1997, the Company purchased all of the issued and
outstanding capital stock of CMR for an aggregate purchase price of
approximately $6.3 million. The purchase price consisted of $2,864,00 in cash,
119,181 shares of the Company's common stock , par value $.001 per share
("Common Stock"), valued at approximately $1,430,000 and a promissory note in
the principal amount of $2,000,000. Subsequent to December 3, 1997, the Company
repaid $1,000,000 of the promissory note.
ADVANCED COMPUTING TECHNIQUES, INC.
Effective January 31, 1998, PRT acquired substantially all of the assets of
ACT, headquartered in Glastonbury, Connecticut, for an aggregate purchase price
of $12.8 million in cash, subject to purchase price adjustments, as defined. ACT
provides IT software engineering and staffing solutions on the East Coast with
locations in Glastonbury, Norwalk, Boston and New York. Through its staff of
approximately 175 experienced consultants, ACT provides a wide range of IT
solutions and staff augmentation to Fortune 500-sized companies. ACT's 1997
revenue was $13.8 million.
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 to a
certain extent 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 name recognition are more important to
establish and maintain a leadership position and strengthen its brand.
As part of its confidentiality procedures, the Company generally enters
into agreements with its employees, subcontractors and certain clients which
limit access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that steps taken by the
Company will be adequate to prevent misappropriation of its technology, that
agreements entered into for that purpose will be enforceable or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its intellectual property rights. Policing unauthorized use of the Company's
proprietary rights is difficult. Any misappropriation of the Company's
technology or development of competitive technologies could have a material
adverse effect on the Company's business, results of operations or financial
condition. The Company could incur substantial costs and management's attention
could be diverted from the Company's operations in protecting and enforcing its
intellectual property. Moreover, there can be no assurance that claims asserting
that its intellectual property rights infringe on the intellectual property
rights of
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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.
ITEM 2. PROPERTIES
The Company leases all of its facilities, consisting of over 175,000 square
feet of space in nine locations. PRT currently operates in four types of
facilities: (i) SECs, (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, Massachusetts, New Jersey, New York
and Virginia. Currently, the Company operates two SECs, located in Barbados,
West Indies and in the Hartford, Connecticut area. The Company currently
operates a recruiting and training center in Mumbai, India. In addition, the
Company acquired a total of approximately 11,000 square feet of leased space in
Glastonbury and Norwalk, Connecticut in connection with its acquisition of ACT.
The Company expects that additional space may be required as it expands its
business and believes that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
("Nasdaq") under the symbol "PRTG." The Common Stock commenced trading on Nasdaq
on November 20, 1997 in connection with the underwritten initial public offering
of shares of the Company's Common Stock at an initial price to the public of
$13.00 per share (the "Offering").
Set forth below are the high and low sales prices for shares of the Common
Stock commencing November 20, 1997 and ending December 31, 1997.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
------------- ------ ------
<S> <C> <C>
November 20, 1997 through December 31, 1997................ $15.25 $11.00
</TABLE>
The number of stockholders of record of the Common Stock as of March 9,
1998, was 63 based on transfer agent reports; the closing price of the Common
Stock on Nasdaq on March 9, 1998 was $9.813.
During the years ended December 31, 1997, 1996 and 1995, the Company
declared dividends of $724,000, $0 and $0, respectively. The 1997 dividends
represented dividends paid to the former holders of the Company's Series A
Convertible Preferred Stock (the "Convertible Preferred Stock") and
distributions paid to the former holder of the Company's Unit Warrants (as
hereinafter defined) at the time of the Company's initial public offering. At
the time of consummation of the initial public offering of the Company's Common
Stock, the Convertible Preferred Stock and Unit Warrants were converted into
shares of Common Stock and are no longer outstanding. The Company does not
intend to declare or pay cash dividends in the
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foreseeable future. Management anticipates that all earnings and other cash
resources of the Company, if any, will be retained by the Company for investment
in its business.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 8,181 $ 13,876 $ 20,346 $ 23,801 $ 59,816
Cost of revenues................ 6,342 10,851 15,594 17,965 40,898
----------- ----------- ----------- ----------- -----------
Gross profit.................... 1,839 3,025 4,752 5,836 18,918
Selling, general and
administrative expenses....... 1,530 2,572 4,110 9,235 19,332
----------- ----------- ----------- ----------- -----------
Income (loss) from operations... $ 309 $ 453 $ 642 $ (3,399) $ (414)
=========== =========== =========== =========== ===========
Net income (loss)............... $ 172 $ 251 $ 115 $ (3,269) $ (553)
=========== =========== =========== =========== ===========
Diluted net income (loss) per
share......................... $ 0.01 $ 0.02 $ 0.01 $ (0.23) $ (.04)
=========== =========== =========== =========== ===========
Denominator for diluted income
(loss) per share.............. 14,719,692 14,511,359 14,469,691 14,508,605 15,067,118
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 395 $ 564 $ 1,277 $ 13,923 $ 51,186
Total assets.................... 1,937 3,595 4,860 23,960 75,914
Total stockholders' equity
(deficit)..................... 418 666 781 (2,081) 64,089
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operation" contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this section or
elsewhere in this Form 10-K Annual Report, 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 under the caption "Certain Factors that May Affect Future
Results".
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<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues............................................ 100.0% 100.0% 100.0%
Cost of Revenues.................................... 76.6 75.5 68.4
Gross Profit........................................ 23.4 24.5 31.6
SG&A................................................ 20.2 38.8 32.3
----- ----- -----
Income (loss) from operations....................... 3.2% (14.3)% (0.7)%
===== ===== =====
</TABLE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenues. Revenues increased approximately 151% to $59.8 million in fiscal
year 1997 from $23.8 million in fiscal year 1996. This growth in revenue is
primarily attributable to increases in the size of the Company's IT professional
workforce, expansion of the Company's SEC 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
693 on December 31, 1997 from 308 as of December 1996. Revenues from SECs
increased to $19.9 million for the year ended December 31, 1997 from $3.5
million for the comparable period in 1996. For the year ended December 31, 1997
and 1996, revenues generated from a client who is also a stockholder were
approximately $18.1 million and $4.0 million, respectively.
Cost of Revenues. Cost of revenues increased approximately 128% to $40.9
million in fiscal year 1997 from $18.0 million for the comparable period in
1996. As a percentage of revenues, cost of revenues decreased to approximately
68% in fiscal year 1997 from approximately 76% for fiscal year 1996. The
increase in cost of revenues is primarily attributable in 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 SECs, (ii) the continued strategic shift of its business toward
higher-margin service offerings and (iii) higher utilization rates at the
Company's SECs in 1997.
Gross Profit. For the reasons set forth above, gross profit increased
approximately 224% to $18.9 million for fiscal year 1997 from $5.8 million for
the comparable period in 1996. As a percentage of revenues, gross profit
increased to approximately 32% for the fiscal year 1997 from approximately 25%
for the comparable period in 1996.
SG&A Expenses. SG&A expenses increased approximately 109% to $19.3 million
in fiscal year 1997 from $9.2 million for the comparable period in 1996. As a
percentage of revenues, SG&A expenses decreased to approximately 32% in fiscal
year 1997 from approximately 39% 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
SECs, (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 fiscal year 1997 was $414,000 compared to a loss of $3.4 million
in the comparable period in 1996. As a percentage of revenues, the loss from
operations for the fiscal year 1997 decreased to less than 1% compared to
approximately 14% in the comparable period in 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenues. Revenues increased 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 SEC 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
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<PAGE> 12
utilized by the Company (including subcontractors) increased to 308 as of
December 31, 1996 from 133 as of December 31, 1995. Revenues from SECs increased
to approximately $3.5 million in fiscal year 1996 from $55,000 in 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 was 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 was primarily due to billing rate increases partially
offset by salary increases to IT professionals (particularly at the Company's
Barbados SEC) and the strategic shift of its business toward higher-margin
service offerings. Additionally, the Company achieved higher utilization rates
in its SEC in 1996 as compared to 1995.
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 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 SEC 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, (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.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for the most recent eight quarters ending with the quarter ended
December 31, 1997. This information has been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the period presented.
This information should be read in conjunction with the Company's
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<PAGE> 13
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MAR 31, JUNE 30, 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1996 1996 1996 1996 1997 1997 1997 1997
------- -------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................... $4,615 $5,157 $6,259 $ 7,770 $ 9,039 $12,275 $18,720 $19,782
Cost of revenues............ 3,525 3,785 4,783 5,872 6,621 8,596 12,658 13,023
------ ------ ------ ------- ------- ------- ------- -------
Gross Profit................ 1,090 1,372 1,476 1,898 2,418 3,679 6,062 6,759
SG&A........................ 1,170 1,994 2,444 3,627 3,838 4,372 5,522 5,600
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) from
operations................ $ (80) $ (622) $ (968) $(1,729) $(1,420) $ (693) $ 540 $ 1,159
====== ====== ====== ======= ======= ======= ======= =======
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............ 76.4 73.4 76.4 75.6 73.2 70.0 67.6 65.8
------ ------ ------ ------- ------- ------- ------- -------
Gross profit................ 23.6 26.6 23.6 24.4 26.8 30.0 32.4 34.2
SG&A........................ 25.4 38.7 39.0 46.7 42.5 35.6 29.5 28.3
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) from
operations................ (1.8)% (12.1)% (15.4)% (22.3)% (15.7)% (5.6)% 2.9% 5.9%
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund working capital to
support its growth and to fund acquisitions. In November 1997, the Company
consummated its initial public offering ("IPO") and realized approximately
$44,922,000 after underwriting commissions and closing costs of approximately
$1,624,000 upon the sale of 3,850,000 shares of common stock. These monies have
been temporarily invested in short-term investment grade interest bearing
securities. The Company used $852,000 of the net proceeds of the IPO to pay
certain accrued dividends on the Company's Convertible Preferred Stock and
distributions on the Unit Warrants; at the time of the IPO the Convertible
Preferred Stock and Unit Warrants were converted into shares of Common Stock and
are no longer outstanding. The Company expects to use the remaining net proceeds
from the IPO for: (i) expansion of existing operations, including the Company's
SECs and development of new service capabilities; (ii) general corporate
purposes, including working capital and (iii) possible acquisitions of related
businesses. The Company currently anticipates that its cash, lines of credit and
internally generated funds will be sufficient to meet its working capital needs
through 1998.
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 December 31, 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 December 31, 1997,
the Company did not have any borrowings outstanding under the Line of Credit.
The Company believes that its receivables collection practices and terms are
consistent with industry practices.
The Company's working capital increased to $51.2 million at December 31,
1997 from $13.9 million at December 31, 1996. Cash and equivalents and
marketable debt securities were $44.1 million at December 31, 1997 compared to
$14.9 million at December 31, 1996. The primary uses of cash during the year
ended December 31, 1997 were to fund a net loss of $553,000, an increase of
accounts receivable of $9.7 million, offset by an increase in accrued
compensation, accounts payable and accrued expenses of $3.3 million. Cash and
equivalents of $6.9 million were used to purchase additional fixed assets during
fiscal year ended December 31, 1997. For the year ended December 31, 1997, the
Company generated $44.6 million in cash from financing activities. The primary
source of cash was $44.9 million generated from the Company's IPO.
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<PAGE> 14
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
unit warrants (the "Unit Warrants"), and $2.0 million from an advance payable to
J.P. Morgan Ventures Corporation ("JPMVC").
The Company and PRT Barbados entered into agreements providing for advances
to PRT Barbados of $3.7 million in the aggregate (the "Advances") by 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 were only exercisable by forgiveness of the Advances. Upon
the consummation of the Initial Public Offering, the JPMVC PRT Warrants were
exercised for an aggregate of 936,365 shares of Common Stock and Non-Voting
Common Stock and the Advances were forgiven.
In July 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. As of January 31, 1998, the
Company acquired substantially all of the assets of ACT for approximately $12.8
million in cash.
On March 5, 1998, PRT announced that first quarter 1998 revenues are
expected to be below fourth quarter 1997 revenues of $19.8 million. As a result
of increased expenses associated with staffing and other resources allocated to
certain delayed projects, the Company expects to report a net loss for the first
quarter of 1998.
The Company anticipates that its primary uses of working capital in the
near term will be the establishment of additional SECs, the development of new
facilities and funding growth through acquisitions and otherwise, and the
accounts receivable related thereto. Accordingly, the Company may in the future
be required to seek additional sources of financing, including borrowing and/or
sale of equity securities resulting in further dilution to stockholders. No
assurance can be given that any such additional sources of financing will be
available on acceptable terms.
IMPACT OF YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. As a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations,
causing disruptions of operation, including among other things a temporary
inability to process transactions, send incorrect invoices or engage in similar
normal business activities.
The Company has completed an assessment of its computer systems and will
have to modify or replace portions of its software so that its computer systems
will function properly with respect to dates in the Year 2000 and thereafter.
The total Year 2000 project cost is estimated at approximately $1.0 million
which includes the purchase of new financial software that will be Year 2000
compliant. The Company anticipates completing the Year 2000 project within one
year but not later than March 31, 1999, which is prior to any anticipated impact
on its computerized information systems.
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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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's 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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, 1996 and 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 nearly all of the Company's
foreign sales are payable in U.S. Dollars, there can be no assurance that of the
Company's future contracts will be payable in U.S. Dollars; to the extent that
the Company's future contracts are payable in foreign currencies, the Company
could be exposed to fluctuations in currency exchange rates.
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<PAGE> 16
Although the Company does not currently 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 SEC 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 SECs, sales and account management offices and training and
recruiting centers. PRT currently has a recruiting center in Mumbai, India. 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.
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
expects to incur a loss for the quarter ending March 31, 1998. Although the
Company was profitable in the quarters ended September 30 and December 31, 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.
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 (or
delayed by the client) 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 projects
and opportunities for revenue growth. Quarterly results are likely to fluctuate,
which may cause a material adverse effect on the market price of PRT's Common
Stock.
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<PAGE> 17
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 SECs. 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 SECs; (ii) the ability to replicate SECs 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 SECs; (vii) the successful performance
of recently opened or acquired offices, (viii) the ability to anticipate,
acquire, master and exploit new technologies as they develop, (ix) the ability
to anticipate the ramp-up rate of client projects and (x) the ability to manage
expenses in anticipation of expected project revenue ramp-up. There can be no
assurance that recently opened or acquired offices will achieve and sustain any
level of profitability or that the Company's historical revenue growth will
continue. Further, the Company's rapid growth and expansion has placed and could
continue to place a significant strain on the Company's management, personnel
and resources. The Company's ability to continue to manage its growth
successfully will require it to further enhance its management, financial and
information systems and controls. Finally, the Company's management has no
demonstrated experience in managing the Company during times of economic
downturn, and there can be no assurance that management can maintain
profitability or growth levels at such times. The failure to manage growth
effectively would have a material adverse effect on the Company's business,
operating results and financial condition.
CONCENTRATION OF REVENUES
In fiscal year 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 fiscal year 1997, approximately 79% of
the Company's revenues was derived from its largest five clients. J.P. Morgan
accounted for approximately 30% of the Company's revenues in 1997 and 9% in
1996. 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. If
CMR had been acquired on January 1, 1997, on a pro forma basis during the twelve
month period ending on December 31, 1997, approximately 73% of the Company's
revenues would have been derived from its largest five clients and 28% 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.
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.
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.
16
<PAGE> 18
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 the Company and 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.
POTENTIAL DECREASES IN DEMAND FOR YEAR 2000 SERVICES
The Company realized less than 20% of its total revenues from Year 2000
solutions in each of fiscal years 1995, 1996 and 1997. The Company expects that
it will receive increased revenues for Year 2000 solutions. After the year 2000,
the Company believes that demand for Year 2000 solutions will continue; however,
such demand is expected to begin to diminish as many Year 2000 solutions are
implemented and tested. A core element of the Company's growth strategy is to
use the business relationships and the knowledge of clients' computer systems
obtained in providing Year 2000 solutions to generate additional IT projects
with such clients. There can be no assurance, however, that the Company will be
successful in generating additional business from its Year 2000 clients. In
addition, by utilizing significant resources during the next several years to
solve its clients' Year 2000 problems, the Company's ability to deliver other IT
services could be adversely affected. Finally, the Company relies on licenses
from outside parties for certain of its Year 2000 software tools; any disruption
of the relationship 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.
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 to delay or 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. In the first quarter of 1998, the Company experienced
unanticipated delays in the ramp-up of certain client projects. As a result of
increased expenses associated with staffing and other resources allocated to
these delayed projects, the Company expects to report a net loss for the first
quarter of 1998. The delay, cancellation or significant reduction in the scope
of a large project or number of projects 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 or
line of code 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.
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
17
<PAGE> 19
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.
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.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company has expanded and expects to continue to expand its operations
through the acquisition of additional businesses. 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, as of the date hereof it
has no existing binding 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.
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
December 31, 1997, approximately 3% 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 or
foreign 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 or employees working under work permits in other
countries, 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.
18
<PAGE> 20
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.
Although the Company believes that its intellectual property rights, including
intellectual property rights licensed from third parties by the Company, do not
infringe on the intellectual property rights of others, there can be no
assurance that: (i) such a claim will not be asserted against the Company in the
future, (ii) assertion of such claims will not result in litigation or that the
Company would prevail in such litigation or be able to obtain a license for the
use of any infringed intellectual property from a third party on commercially
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.
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.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of March 9, 1998, the Mellinger family owned approximately 40% of the
outstanding shares of Common Stock and effectively controlled 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
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<PAGE> 21
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.
POSSIBLE VOLATILITY OF STOCK PRICE
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 or the flow of Company business,
may have a significant impact on the market price of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
As of December 31, 1997, the Company had an aggregate of 18,229,063 shares
of Common Stock and Non-Voting Common Stock outstanding, 4,600,000 of which were
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, owned or acquired
by affiliates of the Company. The remaining 13,629,063 shares in the aggregate
of Common Stock and Non-Voting Common Stock outstanding are "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 the initial public offering of the Common Stock, or
May 21, 1998, without the prior consent of Salomon 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, on January 22, 1998 the Company filed 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of PRT Group Inc. and Subsidiaries,
Exhibit 13.1 hereto, and the Independent Auditors' Report included therein, are
each incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants
involving accounting and financial disclosure matters.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information called for by Item 10 with respect to identification of
directors of the Company is included in the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders which is expected to be filed with the
Securities and Exchange Commission on or before April 30, 1998 (the "1998 Proxy
Statement").
(b) The following table sets forth the executive officers of the Company
and their ages as of March 1, 1998 (collectively, the "Management").
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Douglas K. Mellinger(1)................... 33 Chairman and Chief Executive Officer
Srinivasan Viswanathan.................... 47 President, PRT and PRT Barbados
Gregory S. Mellinger(1)................... 31 Chief Operating Officer, Secretary and Director
Lowell W. Robinson........................ 49 Executive Vice President, Finance and
Administration, and Chief Financial Officer
Greg D. Adams............................. 36 Senior Vice President, Finance and Administration
Timothy R. Cyr............................ 40 Senior Vice President, Sales
Stephen E. Michaelson..................... 50 Senior Vice President and Chief Information Officer
</TABLE>
- ---------------
(1) Member of Company's Board of Directors
Douglas K. Mellinger has been Chairman and Chief Executive Officer of PRT
since 1989 and was President of PRT from September 1997 to February 1998. 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 and President of the Company since February 1998. 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 shared services and M&A activities, 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 November 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. 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.
21
<PAGE> 23
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.
Timothy R. Cyr has been Senior Vice President, Sales, of PRT since February
1998. Prior to joining PRT, Mr. Cyr was President of ACT from January 1992 until
January 1998 and Senior Account Executive for On-Line Software of Fort Lee, NJ
from 1986 through 1991. Mr. Cyr graduated from Western New England College in
1980 with a B.A. in Economics.
Stephen E. Michaelson has been a Senior Vice President and CIO 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.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Certain Holders of Voting Securities" in the
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) During the year ended December 31, 1997, the Company (i) paid license
fees of approximately $48,000 in the aggregate to BJ equities, a partnership
wholly-owned by Jerome and Barbara Mellinger, parents of Douglas and Gregory
Mellinger, for the use by PRT of a database of software engineer names and
resumes, (ii) paid finders fees of approximately $297,000 to Forum Computing
Services, a corporation owned 57% by Jerome Mellinger and 43% by Allan Stern,
holder of approximately 4% of PRT's Common Stock (including shares held by the
Stern family), for new business referred to PRT, (iii) employed Barbara
Mellinger as a financial advisor to the Company; the aggregate amount paid by
the Company for such services was approximately $75,000, including benefits; and
(iv) paid an aggregate of approximately $205,000 to Erickson Travel, Inc., a
corporation wholly owned by Vereena and Robert Erickson, father- and
mother-in-law of Gregory Mellinger, for travel related services (including
airfare, hotel accommodations and auto rentals) provided to the Company.
(b) Mr. Isaac Shapiro, a Director of the Company, is a member of Skadden,
Arps, Slate, Meagher & Flom LLP ("Skadden Arps"). PRT retained Skadden Arps to
provide various legal services to the Company during 1997.
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Consolidated Financial Statements of PRT Group Inc. and
Subsidiaries, Exhibit 13.1 hereto.
(2) Financial Statement Schedules
See Index to Consolidated Financial Statements of PRT Group Inc. and
Subsidiaries, Exhibit 13.1 hereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.1 Stock Purchase Agreement among Robert Marchetti, Stephen
Michaelson and PRT Group Inc., dated as of July 1, 1997(1)
2.2 Asset Purchase Agreement, dated as of January 31, 1998, by
and among PRT Group Inc., Advanced Computing Techniques,
Inc., Daniel R. Walsh, Carol A. Anderson and Timothy R.
Cyr(2)
3.1 Form of Amended and Restated Certificate of Incorporation of
PRT Group Inc.(1)
3.2 Form of Amended and Restated By-Laws of PRT Group Inc.(1)
4.1 Form of Certificate of Common Stock(1)
10.1 Employment contract of Mr. Douglas K. Mellinger, PRT Group
Inc.(1)
10.2 Employment contract of Mr. Gregory S. Mellinger, PRT Group
Inc.(1)
10.3 Employment contract of Mr. Srinivasan Viswanathan, PRT
(Barbados) Ltd.(1)
10.4 Form of Registration Rights Agreement(1)
10.5 Amended and Restated 1996 Stock Option Plan of PRT Group
Inc.(1)
10.6 Common Stock and Warrant Unit Purchase Agreement, dated as
of November 21, 1996(1)
10.7 Preferred Stock Purchase Agreement, dated as of November 21,
1996(1)
10.8 Warrant Exchange Agreement, dated as of September 16,
1997(1)
10.9 Line of Credit, dated July 31, 1997, between Chase Manhattan
Bank, N.A. and PRT Group Inc.(1)
13.1 Consolidated Financial Statements of PRT Group Inc. and
Subsidiaries
16.1 Letter re: change in certifying accountant from KPMG Peat
Marwick LLP(1)
16.2 Letter re: change in certifying accountant from Shulman,
Cohen, Furst, Kramer and Rosen, P.C.(1)
21 Subsidiaries of PRT Group Inc.(1)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule -- December 31, 1997
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement on Form S-1, as
amended (File No. 333-36169), as filed with the Commission on September 23,
1997.
(2) Incorporated by reference to the Current Report on Form 8-K filed with the
Commission on January 29, 1998.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1997.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
Date: March 31, 1998 By: /s/ DOUGLAS K. MELLINGER
------------------------------------------
Douglas K. Mellinger
Chairman of the Board and Chief Executive
Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
the dates indicated:
<TABLE>
<S> <C>
Date: March 31, 1998 By: /s/ DOUGLAS K. MELLINGER
------------------------------------------
Douglas K. Mellinger
Chairman of the Board and Chief Executive
Officer
Date: March 31, 1998 By: /s/ LOWELL ROBINSON
------------------------------------------
Lowell Robinson
Chief Financial Officer
Date: March 31, 1998 By: /s/ ESTHER DYSON
------------------------------------------
Esther Dyson
Director
Date: March 31, 1998 By: /s/ MICHAEL ENTHOVEN
------------------------------------------
Michael Enthoven
Director
Date: March 31, 1998 By: /s/ ROBERT P. FORLENZA
------------------------------------------
Robert P. Forlenza
Director
Date: March 31, 1998 By: /s/ CRAIG D. GOLDMAN
------------------------------------------
Craig D. Goldman
Director
Date: March 31, 1998 By: /s/ GREGORY S. MELLINGER
------------------------------------------
Gregory S. Mellinger
Director
Date: March 31, 1998 By: /s/ ISAAC SHAPIRO
------------------------------------------
Isaac Shapiro
Director
</TABLE>
24
<PAGE> 26
<TABLE>
<S> <C>
Date: March 31, 1998 By: /s/ IRWIN J. SITKIN
----------------------------------------------
Irwin J. Sitkin
Director
Date: March 31, 1998 By: /s/ JACK L. RIVKIN
------------------------------------------
Jack L. Rivkin
Director
</TABLE>
25
<PAGE> 1
EXHIBIT 13.1
PRT GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRT GROUP INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
The following Consolidated Financial Statement Schedule of
PRT Group Inc. and Subsidiaries is included in Item 14(d):
Schedule II-Valuation Qualifying Accounts................... F-19
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PRT Group Inc.
We have audited the accompanying consolidated balance sheets of PRT Group
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
January 28, 1998
New York, New York
F-2
<PAGE> 3
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $14,856 $ 29,499
Marketable debt securities................................ -- 14,622
Accounts receivable, net of allowance of $122 in 1996 and
$334 in 1997........................................... 5,013 14,493
Deferred income taxes..................................... -- 11
Prepaid expenses and other current assets................. 430 1,604
------- --------
Total current assets........................................ 20,299 60,229
Fixed assets, net........................................... 2,955 8,738
Goodwill, net............................................... 619 6,615
Other assets................................................ 87 332
------- --------
Total assets................................................ $23,960 $ 75,914
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of advance payable to client......... $ 909 $ --
Accrued compensation...................................... 2,123 3,479
Accounts payable and other accrued expenses............... 2,425 4,411
Deferred income taxes..................................... 50 --
Current portion of capital lease obligations.............. 224 400
Deferred revenue.......................................... 645 753
------- --------
Total current liabilities................................... 6,376 9,043
Deferred income taxes....................................... 39 44
Note payable................................................ -- 2,000
Advance payable to client, net of current installments...... 1,808 --
Capital lease obligations, net of current portion........... 369 738
Other liabilities........................................... 14 --
------- --------
Total liabilities........................................... 8,606 11,825
Minority interest........................................... 496 --
Commitments
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 none at
December 31, 1997 (liquidation preference $18,188 at
December 31, 1996)........................................ 16,939 --
Common stockholders' equity (deficit):
Common stock, $.001 par value; authorized -- 50,000,000
shares; issued and outstanding -- 10,537,500 at
December 31, 1996 and 18,229,063 shares at December 31,
1997................................................... 11 18
Additional paid-in capital................................ 936 86,324
Accumulated deficit....................................... (2,617) (21,853)
Cumulative translation adjustment......................... (11) --
Treasury stock, 67,090 common shares at December 31, 1996
and 1997............................................... (400) (400)
------- --------
Total common stockholders' equity (deficit)................. (2,081) 64,089
------- --------
Total liabilities and stockholders' equity (deficit)........ $23,960 $ 75,914
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 4
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $20,346 $23,801 $59,816
Cost of revenues............................................ 15,594 17,965 40,898
------- ------- -------
Gross profit................................................ 4,752 5,836 18,918
Selling, general and administrative expenses................ 4,110 9,235 19,332
------- ------- -------
Income (loss) from operations............................... 642 (3,399) (414)
Other income (expense):
Interest expense.......................................... (43) (254) (577)
Interest income........................................... 17 78 613
------- ------- -------
Income (loss) before income taxes........................... 616 (3,575) (378)
Income tax expense (benefit)................................ 501 (306) 175
------- ------- -------
Net income (loss)........................................... $ 115 $(3,269) $ (553)
======= ======= =======
Basic and diluted net income (loss) per share............... $ .01 $ (.23) $ (.04)
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 5
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 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, 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..................... -- -- -- (553) -- -- (553)
Exercise of stock options.... 19,000 -- 82 -- -- -- 82
Issuance of common stock for
compensation............... 7,407 -- 100 -- -- -- 100
Accretion of redeemable
preferred stock............ -- -- -- (17,925) -- -- (17,925)
Dividends on redeemable
preferred stock and common
stock warrants............. -- -- -- (758) -- -- (758)
Issuance of common stock in
connection with acquisition
of CMR..................... 119,181 -- 1,430 -- -- -- 1,430
Issuance of common stock,
net of issuance costs...... 3,850,000 3 44,919 -- -- -- 44,922
Exchange of subsidiary
warrants................... -- -- 551 -- -- -- 551
Issuance of common stock in
connection with exercise of
common stock warrants...... 936,365 1 3,524 -- -- -- 3,525
Conversion of redeemable
preferred stock............ 2,759,610 3 34,782 -- -- -- 34,785
Foreign currency translation
adjustment................. -- -- -- -- 11 -- 11
---------- --- ------- -------- ---- ----- --------
Balance at December 31, 1997... 18,229,063 $18 $86,324 $(21,853) $ -- $(400) $ 64,089
========== === ======= ======== ==== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 6
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 115 $(3,269) $ (553)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 60 424 1,988
Compensation expense...................................... -- -- 100
Amortization of debt discount............................. -- 163 231
Write-off of abandoned purchase costs..................... 29 -- --
Write-off of uncollectible affiliate advances............. 34 -- --
Provision for doubtful accounts........................... 42 80 212
Deferred income taxes..................................... 79 (475) (56)
Change in foreign exchange rate........................... -- (11) 11
Changes in operating assets and liabilities:
Accounts receivable.................................... 340 (2,256) (9,692)
Prepaid expenses and other current assets.............. (224) (111) (1,174)
Other assets........................................... (52) (8) (245)
Accrued compensation................................... 230 1,018 1,356
Accounts payable and other accrued expenses............ 288 1,722 1,986
Deferred revenue....................................... 134 190 108
------ ------- -------
Net cash provided by (used in) operating activities......... 1,075 (2,533) (5,728)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................................... (434) (2,123) (6,855)
Purchases of marketable debt securities..................... -- -- (14,622)
Purchase of treasury stock.................................. -- (400) --
Purchase of net assets of CMR, net of cash required......... (2,750)
------ ------- -------
Net cash (used in) investing activities..................... (434) (2,523) (24,227)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loan...................................... (800) -- --
Borrowings under line of credit............................. 334 2,488 3,850
Repayments under line of credit............................. (199) (2,623) (3,850)
Advances received from client............................... 1,050 2,000 632
Issuance of common stock, net of issuance costs of
$1,624,000................................................ -- -- 44,922
Exercise of stock options................................... -- -- 82
Dividends paid.............................................. -- -- (852)
Issuance of preferred shares and common stock warrants, net
of issuance costs of $1,277,000........................... -- 17,128 --
Principal payments under capital lease obligations.......... (40) (187) (186)
------ ------- -------
Net cash provided by financing activities................... 345 18,806 44,598
------ ------- -------
Net increase in cash and equivalents........................ 986 13,750 14,643
Cash and equivalents at beginning of period................. 120 1,106 14,856
------ ------- -------
Cash and equivalents at end of period....................... $1,106 $14,856 $29,499
====== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 37 $ 92 $ 275
====== ======= =======
Income taxes paid........................................... $ 470 $ 188 $ 569
====== ======= =======
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases.......... $ 73 $ 713 $ 732
====== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 7
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
PRT Group Inc. ("PRT"), incorporated in the State of Delaware in September 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 in and merged into PRT on November 7, 1996. 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.
In November 1997, the Company consummated their Initial Public Offering
("IPO") and realized approximately $44,922,000, net of issuance costs of
$1,624,000, upon the sale of 3,850,000 shares of common stock. In addition,
750,000 shares were sold by existing shareholders. On December 23, 1997, an
additional 140,000 shares were sold by existing shareholders upon exercise of
the underwriter's over-allotment option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from time and materials contracts 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 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 9).
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 December 31,
1997 were $160,000.
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-7
<PAGE> 8
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND EQUIVALENTS AND MARKETABLE DEBT SECURITIES
Cash and equivalents includes all cash, demand deposits, money market
accounts and debt instruments purchased with an original maturity of three
months or less. Marketable debt securities are debt instruments purchased with a
maturity of more than three months.
The Company classifies its investments in debt securities, including those
considered to be cash equivalents, as securities held-to-maturity and carries
them at amortized cost, which approximates market value, in the accompanying
consolidated balance sheet. The purchase cost of such securities is included in
either cash and equivalents or marketable debt securities.
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. 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 December 31, 1997 was $6,000
and $190,000, respectively.
NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted income (loss) per share with basic and diluted income (loss) per
share. Unlike primary income (loss) per share, basic income (loss) per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted income (loss) per share is very similar to the previously reported fully
diluted income (loss) per share. All income (loss) per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
Statement 128 requirements. In addition, the income (loss) per share amounts in
the consolidated statements of operations have been computed in accordance with
Staff Accounting Bulletin 83 and the revisions thereto pursuant to Staff
Accounting Bulletin 98 of the Securities and Exchange Commission
("SEC"). Accordingly, in
F-8
<PAGE> 9
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computing basic income (loss) per share for periods covered by statements of
operations included in the registration statement and in subsequent filings with
the SEC, common stock, options and warrants issued at amounts below the public
offering price within a twelve month period prior to an IPO of common stock have
been reflected in a manner similar to a stock split or stock dividend.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
marketable debt securities 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.
RECENTLY ISSUED ACCOUNTING STANDARD
The Company adopted SFAS 123 Accounting for Stock-Based Compensation ("SFAS
123"), which requires disclosure of the fair value and other characteristics of
stock options. The Company has chosen under the provisions of SFAS 123 to
continue using the intrinsic value of accounting for employee stock based
compensation in accordance with Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25").
3. CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES
The following is a summary of the Company's held-to-maturity securities,
which are classified as cash equivalents and marketable debt securities (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
CASH EQUIVALENTS:
Commercial Paper....................... $21,897 $-- $-- $21,897
Corporate Obligation................... 2,995 2 -- 2,997
MARKETABLE DEBT SECURITIES:
Commercial Paper....................... $14,622 -- -- $14,622
------- -- -- -------
Total.................................... $39,514 $2 $-- $39,516
======= == == =======
</TABLE>
All of the Company's investments in debt securities are classified as
held-to-maturity and, at December 31, 1997, have scheduled maturities of less
than one year. There were no gross realized gains or losses on sales of
held-to-maturity securities during 1997.
F-9
<PAGE> 10
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
------ -------
<S> <C> <C>
Furniture and equipment................................... $1,597 $ 3,612
Computer equipment and software........................... 1,732 6,993
Leasehold improvements.................................... 182 493
------ -------
3,511 11,098
Less accumulated depreciation and amortization............ (556) (2,360)
------ -------
$2,955 $ 8,738
====== =======
</TABLE>
Fixed assets include assets under capital lease aggregating approximately
$786,000 and $1,518,000 at December 31, 1996 and 1997, respectively. The
accumulated amortization related to assets under capital leases is approximately
$110,000 and $321,000 at December 31, 1996 and 1997, respectively.
5. 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 December 31, 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. As of December 31, 1997, there was no borrowings outstanding under the
line.
6. 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 repayment period was extended. No interest was payable on
these outstanding advances. Repayment was to commence in February 1998 in nine
equal monthly installments and to 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 were being accreted up to the
face value of $3,682,000 using the interest method over the period the advances
were outstanding. For the years ended December 31, 1996 and 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 was only exercisable by
forgiveness of the amounts outstanding under the advances payable to the client
in their entirety and was required to be exercised upon a consummation of an
IPO. The exchange was consummated in
F-10
<PAGE> 11
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 1997. Upon the consummation of the IPO in November 1997, the client
exercised the warrant and the amounts outstanding under the advances payable to
the client were forgiven.
The current installment of advance payable to client and advance payable to
client, net of current installments included in the 1996 consolidated balance
sheet are net of unamortized discounts of $264,000 and $69,000, respectively.
7. STOCKHOLDERS' EQUITY
NON-VOTING COMMON STOCK
Of the total shares of Common Stock issued and outstanding at December 31,
1997, 46,500 shares are non-voting. Each share of non-voting Common Stock is
convertible into one share of voting Common Stock at any time at the option of
the holder.
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 August 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 split-adjusted price of $6.56 per
share and 486,310 Warrants (the "Warrants") for a split-adjusted price of $.60
per warrant in a private placement. The Company incurred approximately
$1,277,000 of fees and related expenses in this transaction. The difference
between the net proceeds received from the sale of the Convertible Preferred
Stock and the liquidation value was being accreted over the earliest possible
liquidation date via a charge to stockholders' equity.
SERIES A REDEEMABLE PREFERRED STOCK
The Convertible Preferred Stock was 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. Upon a request by
a holder of the Convertible Preferred Stock on or after November 21, 2002, the
Company was to redeem the requested number of shares if not previously converted
into shares of Common Stock. The redemption price was to 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 adjusted the value of the Convertible Preferred Stock to reflect the
greater of the accreted value or the estimated fair value. The balance of the
Convertible Preferred Stock at December 31, 1996 reflects the accreted value.
The redemption obligation of the Convertible Preferred Stock ceased upon the
consummation of the Company's IPO in November 1997, as 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. At the date of exercise the estimated fair value of the
convertible preferred stock was approximately $34,785,000 based upon the IPO
market price. As a result, $17,925,000 was recorded as a charge to retained
earnings in 1997.
F-11
<PAGE> 12
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of the Convertible Preferred Stock were entitled to receive
cumulative dividends at the annual rate of 4%. Such dividends were 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. Upon consummatoin of the IPO, dividends in arrears aggregating
approximately $724,000 were paid.
WARRANTS
The Warrants were designed to give the holder certain benefits that holders
of the Company's Convertible Preferred Stock received. The Warrants entitled the
holder to receive cumulative distributions at the annual rate of 4% of $65.62
(or 4% of $6.56 on a split-adjusted basis). These distributions were payable in
cash, if as and when declared by the Board of Directors of the Company. Such
distributions could 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 was entitled to receive shares of Common Stock upon an
exercise only if the Company did not attain certain specified operating results
in fiscal 1997, subject to further adjustment, as defined, or 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, these Warrants
expired and were not converted into any shares of the Company's Common Stock. At
December 31, 1996 distributions in arrears under the Warrants amounted to
approximately $14,000 and upon consummation of the IPO, distributions in arrears
of approximately $128,000 were paid.
STOCK OPTION PLAN
In June 1996, the Company established a Stock Option Plan (the "Option
Plan") for officers, employees, consultants and nonemployee directors to
purchase shares of the Company's Common Stock. The Option Plan requires the
Company to reserve a sufficient number of authorized shares for issuance upon
the exercise of all options that may be granted under the Option Plan. At
December 31, 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.
F-12
<PAGE> 13
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the Option Plan is summarized as follows (in shares):
<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 in 1997....................................... 1,150,450 $12.39
Exercised............................................. (19,000) 4.38
Canceled and expired.................................. (83,250) 4.38
---------
Outstanding at December 31, 1997...................... 1,565,800
=========
Exercisable at December 31, 1996...................... 16,350
=========
Exercisable at December 31, 1997...................... 419,814
=========
Available for grant at December 31, 1997.............. 2,717,200
=========
</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
------------------
ASSUMPTION 1996 1997
---------- ------- -------
<S> <C> <C>
Risk-free interest rate................................... 6.36% 6.28%
Dividend yield............................................ 0% 0%
Volatility factor of the expected market price of the
Company's common stock.................................. .843 .843
Average life.............................................. 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options under SFAS 123 is amortized to expense over the options' vesting period.
For the year ended December 31, 1996, pro forma net loss and pro forma net loss
per share under SFAS 123 amounted to approximately $(3,441,000) and $(0.24),
respectively, and ($4,224,000) and $(.28), respectively, for the year ended
December 31, 1997.
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1997 was $3.22 and $8.75, respectively. At December 31,
1997 there were 168,588 and 251,226 of 1996 and 1997 options exercisable,
respectively. The weighted average exercise price of the 1996 and 1997 options
exercisable
F-13
<PAGE> 14
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is $4.45 and $10.18, respectively. The weighted-average remaining contractual
life of the 1996 and 1997 options exercisable is five years.
8. 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, of approximately $6,180,000 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 such time 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. Subsequent to
December 31, 1997, the Company repaid $1,000,000 of the CMR Note.
The table below sets forth the unaudited pro forma results of operations
for the years ended December 31, 1996 and 1997 assuming consummation of the CMR
acquisition as of January 1, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues............................................... $31,304 $64,081
Net loss............................................... (3,583) (963)
Pro forma net loss per share........................... $ (0.25) $ (0.07)
</TABLE>
9. 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 7). 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.
F-14
<PAGE> 15
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share data):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Net Income (Loss).............................. $ 115 $ (3,269) $ (553)
---------- ---------- ----------
Numerator for basic and diluted income (loss)
per share -- income (loss) available to
common stockholders.......................... $ 115 $ (3,386) $ (553)
========== ========== ==========
DENOMINATOR:
Denominator for basic income (loss) per
share -- weighted average shares............. 14,371,656 14,310,155 14,728,087
Effect of dilutive securities:
Employee stock options......................... 98,035 198,450 339,031
---------- ---------- ----------
Denominator for diluted income (loss) per
share -- adjusted weighted-average shares and
assumed conversions.......................... 14,469,691 14,508,605 15,067,118
========== ========== ==========
Basic net income (loss) per share.............. $ .01 $ (.23) $ (.04)
========== ========== ==========
Diluted net income (loss) per share............ $ .01 $ (.23) $ (.04)
========== ========== ==========
</TABLE>
Options to purchase 293,950 shares of common stock at a per share price
ranging from $13.00 to $13.50 were outstanding during 1997 but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
11. 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, 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)
==== ===== =====
DECEMBER 31, 1997
U.S. Federal............................................. $194 $ (42) $ 152
State and local.......................................... 37 (14) 23
---- ----- -----
$231 $ (56) $ 175
==== ===== =====
</TABLE>
F-15
<PAGE> 16
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
------------------------
1995 1996 1997
---- ------- -----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................. $209 $(1,215) $(129)
Nondeductible losses of foreign subsidiaries.............. 171 949 250
State and local income taxes, net of Federal income tax
expense (benefit)....................................... 101 (51) 15
Other..................................................... 20 11 39
---- ------- -----
$501 $ (306) $ 175
==== ======= =====
</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
--------------
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................ $ 22 $ 107
Nondeductible license payments............................ 86 --
Net operating loss carryforwards.......................... 44 37
----- -----
Total gross deferred assets................................. 152 144
----- -----
Deferred tax liabilities:
Depreciation of fixed assets.............................. (39) (44)
Accrual basis earnings not recognized for tax purposes.... (181) --
Prepaid expenses.......................................... (21) (133)
----- -----
Total gross deferred liabilities............................ (241) (177)
----- -----
Net deferred tax liability.................................. $ (89) $ (33)
===== =====
</TABLE>
12. SIGNIFICANT CLIENTS
Two clients accounted for 29% and 10% of total revenues for the year ended
December 31, 1995. Three clients accounted for 28%, 17% and 15% of total
revenues for the year ended December 31, 1996. Three clients accounted for 30%,
23% and 12% of total revenues for the year ended December 31, 1997.
13. COMMITMENTS
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
F-16
<PAGE> 17
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
office space under noncancelable operating leases and future minimum capital
lease payments as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
December 31:
1998...................................................... $ 506 $ 2,428
1999...................................................... 442 2,298
2000...................................................... 279 1,690
2001...................................................... 46 1,220
2002...................................................... 37 1,174
Thereafter.................................................. 83 1,421
------ -------
Total minimum lease payments................................ 1,393 $10,231
=======
Less amount representing interest........................... 255
------
Present value of net minimum capital lease payments......... 1,138
Less current installments of obligations under capital
leases.................................................... 400
------
Obligations under capital leases, net of current
installments.............................................. $ 738
======
</TABLE>
Rent expense was approximately $148,000, $526,000 and $1,380,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
14. DEFERRED COMPENSATION PLAN
The Company maintains 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, 1996 and 1997, the Company recognized
contributions of $31,000, $42,000 and $94,000, respectively.
15. RELATED PARTY TRANSACTIONS
Revenue generated from a client who is also a stockholder was approximately
$2,100,000, $4,000,000 and $18,100,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
16. 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.
F-17
<PAGE> 18
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total identifiable
assets................ $ 3,947 $ 913 $19,480 $4,480 $64,742 $11,172
======= ===== ======= ======= ======= =======
Revenues................ $20,291 $ 55 $20,310 $3,491 $42,618 $17,198
======= ===== ======= ======= ======= =======
Income (loss) before
income taxes.......... $ 1,118 $(502) $ (783) $(2,792) $ 337 $ (715)
======= ===== ======= ======= ======= =======
Depreciation and
amortization
expense............... $ 51 $ 9 $ 159 $ 265 $ 714 $ 1,274
======= ===== ======= ======= ======= =======
Capital expenditures.... $ 144 $ 363 $ 976 $1,860 $ 2,998 $ 4,589
======= ===== ======= ======= ======= =======
</TABLE>
17. SUBSEQUENT EVENT
Effective January 31, 1998, the Company entered into an agreement to
purchase substantially all of the assets of Advanced Computing Techniques, Inc.,
("ACT") for an aggregate cash purchase price of $12.8 million, subject to
purchase price adjustments, as defined.
F-18
<PAGE> 19
PRT GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------ ---------- ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND (A) END OF
DESCRIPTION OF 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
YEAR ENDED DECEMBER 31, 1997
Allowances deducted from assets to which they
apply:
Allowance for doubtful accounts............... $122 $212 $ -- $334
</TABLE>
- ---------------
(a) Uncollectible receivables written off.
F-19
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
PRT Group Inc. on Form S-8 (File No. 333-44725) of our report dated January 28,
1998, with respect to the consolidated financial statements and schedule of PRT
Group Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
ERNST & YOUNG LLP
March 30, 1998
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001045560
<NAME> PRT GROUP INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,499,000
<SECURITIES> 14,622,000
<RECEIVABLES> 14,827,000
<ALLOWANCES> 334,000
<INVENTORY> 0
<CURRENT-ASSETS> 60,229,000
<PP&E> 11,098,000
<DEPRECIATION> 2,360,000
<TOTAL-ASSETS> 75,914,000
<CURRENT-LIABILITIES> 9,043,000
<BONDS> 0
0
0
<COMMON> 18,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 75,914,000
<SALES> 0
<TOTAL-REVENUES> 59,816,000
<CGS> 0
<TOTAL-COSTS> 40,898,000
<OTHER-EXPENSES> 19,332,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 577,000
<INCOME-PRETAX> (378,000)
<INCOME-TAX> 175,000
<INCOME-CONTINUING> (553,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (553,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
