<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITITES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23315
PRT GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware No. 13-3914972
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
80 Lamberton Road
Windsor, Connecticut 06095
(860) 687-2200
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: Common Stock, par value $.001 per share, outstanding as of
November 8, 1999 are 18,288,169 shares.
1
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PRT GROUP INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements: Page
-----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 3
Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1999
and for the nine months ended September 30, 1998 and 1999 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 2. Change in Securities Not Applicable
ITEM 3. Defaults upon senior securities Not Applicable
ITEM 4. Submission of matters to a vote of security holders Not Applicable
ITEM 5. Other Information Not Applicable
ITEM 6. Exhibits and reports on Form 8-K Not Applicable
Signatures 10
</TABLE>
2
<PAGE> 3
PRT Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except number of shares)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1998 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 14,772 $ 5,726
Marketable debt securities 609 61
Accounts receivable, net of allowance of $539 in 1998 and
$555 in 1999 14,639 11,789
Prepaid expenses and other current assets 2,106 1,614
-------- --------
Total current assets 32,126 19,190
Fixed assets, net 9,936 7,328
Goodwill, net 20,504 17,111
Other assets 216 115
-------- --------
Total assets $ 62,782 $ 43,744
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation $ 3,610 $ 3,553
Accounts payable and other accrued expenses 3,972 4,737
Current portion of capital lease obligations 456 306
Deferred revenue 511 593
-------- --------
Total current liabilities 8,549 9,189
Note payable 1,000 1,000
Capital lease obligations, net of current portion 424 134
Deferred rent 422 441
-------- --------
Total liabilities 10,395 10,764
Commitments - -
Series A redeemable preferred stock, $0.01 par value;
authorized - 5,000,000 shares; none issued and outstanding
in 1998 and 1999 - -
Common stockholders' equity:
Common stock, $.001 par value; authorized--50,000,000
shares; issued and outstanding--18,245,571 in 1998 and
18,293,652 shares in 1999 18 18
Additional paid-in capital 86,262 86,361
Accumulated deficit (33,893) (53,399)
-------- --------
Total common stockholders' equity 52,387 32,980
-------- --------
Total liabilities and stockholders' equity $ 62,782 $ 43,744
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
PRT Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1998 1999 1998 1999
-------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues $ 22,552 $ 15,909 $ 64,073 $ 52,918
Cost of revenues 16,011 10,098 47,858 39,072
------------- ------------ ------------- -------------
Gross profit 6,541 5,811 16,215 13,846
Selling, general and administrative
expenses 8,065 6,899 24,497 26,013
Restructuring charges - - - 7,483
------------- ------------ ------------- -------------
Loss from operations (1,524) (1,088) (8,282) (19,650)
Other income (expense):
Interest expense (57) (42) (385) (119)
Interest income 216 66 926 262
------------- ------------ ------------- -------------
Loss before income taxes (1,365) (1,064) (7,741) (19,507)
Income tax benefit - - (975) -
------------- ------------ ------------- -------------
Net loss $ (1,365) $ (1,064) $ (6,766) $ (19,507)
============= ============ ============= =============
Basic and diluted net loss per share $ (.07) $ (.06) $ (.37) $ (1.07)
============= ============ ============= =============
</TABLE>
See accompanying notes
4
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PRT Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,766) $(19,507)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3,556 3,664
Provision for doubtful accounts 441 16
Loss on disposal of fixed assets - 1,654
Write-off of goodwill - 2,597
Deferred income taxes 124 -
Deferred rent - 19
Changes in operating assets and liabilities:
Accounts receivable (2,578) 2,834
Prepaid expenses and other current assets (158) 492
Other assets (119) 101
Accrued compensation (652) (57)
Accounts payable and other accrued expenses (1,957) 765
Deferred revenue (283) 82
-------- --------
Net cash used in operating activities (8,392) (7,340)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities 14,622 548
Purchases of fixed assets (4,408) (1,913)
Purchase of net assets of ACT, net of cash acquired (12,944) -
Purchase of net assets of ISPI, net of cash
required (2,704) -
-------- --------
Net cash used in investing activities (5,434) (1,365)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable (1,265) -
Repayments under line of credit (297) -
Exercise of stock options 331 99
Principal payments under capital lease obligations (422) (440)
-------- --------
Net cash used in financing activities (1,653) (341)
-------- --------
Net decrease in cash and equivalents (15,479) (9,046)
Cash and equivalents at beginning of period 29,499 14,772
-------- --------
Cash and equivalents at end of period $ 14,020 $ 5,726
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 385 $ 118
======== ========
Income taxes paid $ 191 $ 112
======== ========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases $ 291 $ -
======== ========
</TABLE>
See accompanying notes.
5
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PRT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the accompanying consolidated financial statements include all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation of the financial condition and results of operations for
the periods presented. The results of operations for the nine month period
ended September 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. The statements should
be read in conjunction with the audited consolidated financial statements
and notes thereto included in the PRT Group Inc. (the "Company") Annual
Report on form 10-K for the year ended December 31, 1998.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
3. Restructuring and Write-Down of Intangible Assets
On June 30, 1999, the Company announced a restructuring, the purpose of
which is to refocus the Company's efforts on it's core business and reduce
costs. In connection with the restructuring, the Company recorded aggregate
charges of $7.5 million relating to $2 million in severance costs, $3
million in office closures and the write-off of goodwill related to the
Institute for Software Process Improvement ("ISPI") acquisition.
In accordance with SFAS No. 121 "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" management
performed a discounted cash flow analysis of the ISPI operations.
Management concluded that this analysis warranted a write-down of the
intangible assets of ISPI of approximately $2.5 million.
The aforementioned restructure and impairment charges were recorded in the
quarter ending June 30, 1999.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue. Revenues decreased to $15.9 million during the quarter ended September
30, 1999 compared to $22.6 million during the quarter ended September 30, 1998.
For the first nine months of 1999, revenues were $52.9 million compared to $64.1
million in the first nine months of 1998. The decrease in revenue was the result
of several projects coming to an end and the non-renewal of certain client
assignments in our Professional Services Group, coupled with a reduction in
offshore projects and elimination of the Institute for Software Process
Improvement ("ISPI"). As a result of the reduction in work force due to the
restructuring in the second quarter of 1999, the number of IT professionals,
including subcontractors, in the third quarter ended September 30, 1999 was 345
in comparison to 724 in the third quarter of 1998.
Cost of Revenues. The cost of revenues was 63.5% and 73.8% of revenues for the
three and nine month periods ended September 30, 1999, respectively, compared to
71.0% and 74.7% of revenue, for the three and nine month periods ended
September 30, 1998, respectively. The decrease in cost of revenues was a result
of the reduction of unproductive professionals and the discontinuation of
relocation packages to the United States thereby substantially reducing the
relocation and housing costs.
Gross Profit. Gross profit was 36.5% and 26.2% of revenues for the three and
nine month periods ended September 30, 1999, respectively, compared to 29.0% and
25.3% for the three and nine month periods ended September 30 ,1998,
respectively.
Selling, General & Administrative Expenses. SG&A expenses for the third quarter
of 1999 decreased $1.2 million to $6.9 million as compared to $8.1 million in
the third quarter of 1998. Selling, general and administrative expenses as a
percentage of revenue were 43.4% and 49.2% for the three and nine month periods
ended September 30, 1999 respectively, compared to 35.8% and 38.2% for the three
and nine months periods ended September 30, 1998, respectively. The decrease in
SG&A expenses was the result of the closure of offices, the elimination of ISPI
operations, and the reduction of administrative workforce.
Restructuring: During the quarter ended June 30, 1999, the Company incurred
$7.5 million in restructuring charges comprised of $2 million of severance
costs, $3 million of office closures and $2.5 million for the write-off of
goodwill related to the ISPI acquisition. Furthermore, the Company moved its
headquarters to Windsor, Connecticut, has converted its former Manhattan
headquarters to a smaller sales office, and sub-let the excess space in the
former headquarters. The Company will continue to review the productivity of its
offices and customer Software Engineering Centers.
7
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Loss from Operations: For the reasons set forth above, loss from operations was
6.8% and 37.1% of revenues in the third quarter and first nine months of 1999,
respectively, compared to 6.8% and 12.9% for the comparable 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to approximately $10.0 million at
September 30, 1999 from $23.6 million at December 31, 1998. Cash and equivalents
and marketable debt securities were $5.8 million at September 30, 1999 compared
to $15.4 million at December 31, 1998. The primary uses of cash during the nine
months ended September 30, 1999 were to fund normal operating expenses and to
pay certain restructuring costs. The Company's accounts receivable were $11.8
million at September 30, 1999 down from $14.6 million at December 31, 1998. Days
sales outstanding were 67 days at September 30, 1999 and 62 days at December 31,
1998.
Investing activities used cash of approximately $1.4 million for the nine months
ended September 30, 1999 which can be attributed to additional purchase of
property and equipment for the Software Engineering Centers.
On August 5, 1999, the Company entered into a Loan and Security Agreement and
related agreements with NationsCredit Commercial Corporation, through its
NationsCredit Commercial Funding Division ("Loan Agreement"). The Loan Agreement
has a term of 2 years and provides the Company with access to up to $11,000,000
in additional working capital. The Loan Agreement is secured by security
interest in all of the Company's tangible and intangible assets including
account receivables, equipment, intellectual property and other Company assets.
The Loan Agreement is subject to certain financial covenants and other
conditions including a restriction on the amount of cumulative losses the
Company can incur during the term of the Loan Agreement. As of September 30,
1999, there was nothing outstanding under this credit facility.
The Company expects that its operating cash flow and credit facility will be
sufficient to fund the Company's working capital requirements. However, the
Company's ability to achieve this result is affected by the extent of cash
generated from operations and pace at which the Company utilizes its available
resources. Accordingly, the Company may in the future be required to seek
additional sources of financing, including borrowing and/or sale of equity
securities. If additional funds are raised by issuing equity securities, further
dilution to shareholders may result. No assurance can be given that any such
additional sources of financing will be available on acceptable terms or at all.
8
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Change in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRT GROUP INC.
DATE: BY /s/ Dan S. Woodward
--------------------------------------
Dan S. Woodward
Chief Executive Officer / President
DATE: BY /s/ Rocco Mitarotonda
--------------------------------------
Rocco Mitarotonda
Chief Financial Officer / Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,726,000
<SECURITIES> 61,000
<RECEIVABLES> 12,344,000
<ALLOWANCES> 555,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,190,000
<PP&E> 15,869,000
<DEPRECIATION> (8,541,000)
<TOTAL-ASSETS> 43,744,000
<CURRENT-LIABILITIES> 9,189,000
<BONDS> 0
0
0
<COMMON> 18,000
<OTHER-SE> 86,361,000
<TOTAL-LIABILITY-AND-EQUITY> 43,744,000
<SALES> 52,918,000
<TOTAL-REVENUES> 52,918,000
<CGS> 39,072,000
<TOTAL-COSTS> 39,072,000
<OTHER-EXPENSES> 33,496,000
<LOSS-PROVISION> 411,000
<INTEREST-EXPENSE> 118,000
<INCOME-PRETAX> (19,507,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,507,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,507,000)
<EPS-BASIC> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
