<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, 2000
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
ENHERENT CORP.
(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)
12300 Ford Road, Suite 450
Dallas, Texas 75234
(972) 243-8345
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of share outstanding of each of the issuer's classes of
common stock: Common Stock, par value $.001 per share, outstanding as of October
25, 2000 are 18,351,311 shares.
<PAGE> 2
ENHERENT CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements: Page
----
<S> <C>
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 1
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 and for the nine months ended
September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4-5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 2. Change in Securities 8
ITEM 3. Defaults upon senior securities Not Applicable
ITEM 4. Submission of matters to a vote of security holders Not Applicable
ITEM 5. Other Information 9
ITEM 6. Exhibits and reports on Form 8-K 9
ITEM 7. Factors that may affect future results 9-11
Signatures 12
</TABLE>
<PAGE> 3
ENHERENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,052 $ 7,385
Marketable securities 1,810 --
Accounts receivable, net of allowance of $529 in 1999 and $268 in 2000 8,712 8,518
Prepaid expenses and other current assets 1,203 666
-------- --------
Total current assets 16,777 16,569
Fixed assets, net 6,507 3,594
Goodwill, net 16,863 16,155
Other assets 388 164
-------- --------
Total assets $ 40,535 $ 36,482
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation $ 2,350 $ 1,548
Accounts payable and other accrued expenses 4,534 2,856
Current portion of capital lease obligations 227 22
Deferred revenue 632 284
-------- --------
Total current liabilities 7,743 4,710
Note payable 1,000 --
Capital lease obligations, net of current portion 135 38
Deferred rent 386 324
-------- --------
Total liabilities 9,264 5,072
Commitments -- --
Series A redeemable convertible preferred stock, $0.01 par value:
authorized - 10,000,000 shares; none issued in 1999 and 8,000,000 in 2000 -- 5,139
Stockholders' equity:
Common stock, $.001 par value; authorized -- 50,000,000 shares; issued
and outstanding -- 18,283,642 in 1999 and 18,351,311 in 2000 18 18
Additional paid-in capital 86,361 94,213
Accumulated deficit (55,108) (67,960)
-------- --------
Total stockholders' equity 31,271 26,271
-------- --------
Total liabilities and stockholders' equity $ 40,535 $ 36,482
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
ENHERENT CORP. 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
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 15,909 $ 10,587 $ 52,918 $ 34,383
Cost of revenues 10,098 7,268 39,072 24,420
-------- -------- -------- --------
Gross profit 5,811 3,319 13,846 9,963
Selling, general and administrative
expenses 6,899 4,113 26,013 17,658
Restructuring charges -- -- 7,483 --
-------- -------- -------- --------
(1,088) (794) (19,650) (7,695)
Other income (expense):
Interest expense (42) (21) (119) (208)
Interest income 66 133 262 407
-------- -------- -------- --------
Net loss (1,064) (682) (19,507) (7,496)
Preferred stock dividends and accretion -- (113) -- (5,356)
-------- -------- -------- --------
Net loss applicable to common
stockholders $ (1,064) $ (795) $(19,507) $(12,852)
======== ======== ======== ========
Net loss per share applicable to common
stockholders $ (.06) $ (.04) $ (1.07) $ (.70)
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
ENHERENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,507) $ (7,496)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,664 2,935
Provision for doubtful accounts 16 (261)
Loss on disposal of fixed assets 1,654 1,280
Write-off of goodwill 2,597 --
Deferred rent 19 (62)
Changes in operating assets and liabilities:
Accounts receivable 2,834 455
Prepaid expenses and other current assets 492 537
Other assets 101 224
Accrued compensation (57) (802)
Accounts payable and other accrued expenses 765 (1,678)
Deferred revenue 82 (348)
-------- --------
Net cash used in operating activities (7,340) (5,216)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities 548 1,810
Purchases of fixed assets (1,913) (607)
Proceeds from sale of fixed assets -- 13
-------- --------
Net cash (used in) provided by investing activities (1,365) 1,216
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable -- (1,000)
Exercise of stock options 99 208
Principal payments under capital lease obligations (440) (302)
Issuance of preferred shares and common stock warrants net of
issuance costs -- 7,427
-------- --------
Net cash (used in) provided by financing activities (341) 6,333
-------- --------
Net decrease (increase) in cash and equivalents (9,046) 2,333
Cash and equivalents at beginning of period 14,772 5,052
-------- --------
Cash and equivalents at end of period $ 5,726 $ 7,385
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 118 $ 208
======== ========
Income taxes paid $ 112 $ --
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
ENHERENT CORP.
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, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000. The statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the enherent Corp. (the "Company"
or "enherent") Annual Report on form 10-K for the year ended December 31,
1999.
2. Name Change
On July 2, 2000, PRT Group received shareholder approval to change its name
from PRT Group Inc. to enherent Corp. and received approval from NASDAQ to
trade its listed shares under the ticker symbol ENHT from PRTG. The Company
amended its charter to reflect the name change on July 13, 2000 and began
doing business under the new name.
3. 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.
4. Series A Redeemable Convertible Preferred Stock
On April 13, 2000, the Company issued 8,000,000 shares of its Series A
Senior Participating Redeemable Convertible Preferred Stock ("Preferred
Stock") for $8,000,000. The Company also issued a warrant to the Preferred
Stock investors to purchase 4,000,000 shares of the Company's common stock
at an initial exercise price of $1.00 per share subject to adjustment, as
defined. The Preferred Stock is convertible, subject to adjustment, as
defined, into common stock on a one for one basis at any time and is
redeemable, after April 14, 2005, at the option of the holder at its
liquidation value plus accrued and unpaid dividends.
4
<PAGE> 7
ENHERENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
Each warrant entitles the holder to purchase one share of common stock
prior to April 14, 2005. The Preferred Stock and related warrants were sold
below the then market price of the Company's common stock. Accordingly, the
guaranteed discount on the conversion of the Preferred Stock and the value
of the warrants, aggregating approximately $5,167,000, was deemed to be a
dividend for purpose of calculating loss per share and was recorded at the
date of issuance. The Preferred Stock is being amortized to its redemption
amount.
5. Insurance Refund
The Company received a refund of $229,000 during the quarter from its
directors and officers liability insurance carrier. The directors and
officers liability policy entitled enherent to receive reimbursement of its
legal fees incurred in the successful dismissal with prejudice of the
Steinberg v. PRT Group Inc., Douglas K. Mellinger, Lowell W. Robinson,
Gregory S. Mellinger and The Mellinger Group, (98 Civ. 6550 (DC)) class
action lawsuit. The action was dismissed on March 28, 2000 and plaintiff's
time to appeal the dismissal has elapsed.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue. Revenues decreased to $10.6 million during the quarter ended September
30, 2000 compared to $15.9 million during the quarter ended September 30, 1999.
For the first nine months of 2000, revenues were $34.4 million compared to $52.9
million in the first nine months of 1999. The decrease in revenue was the result
of reduced billable consultants, a slowdown in the industry and the completion
of assignments. In addition, during the second half of 1999, enherent Corp.
exited non-profitable businesses including The Institute of Software Process
Improvements which reduced revenues in the current year.
Cost of Revenues. Cost of revenues was 68.7% and 71.0% in the third quarter and
the first nine months of 2000, respectively, compared to 63.5% and 73.8% of
revenue, respectively, for the same periods in fiscal 1999. The decrease in cost
of revenues was due to a higher utilization and billable rates for e-business
assignments offset partially from lower margins in the outsourcing solution
business.
Gross Profit. Gross profit was 31.3% and 29.0% in the third quarter and first
nine months of 2000, respectively, compared to 36.5% and 26.2% for the third
quarter and first nine months of 1999, respectively. The increase in gross
profit for the first nine months of 2000 is due to higher utilization and higher
billable rates for e-commerce and IT professional staffing business. The
decrease in gross profit for the third quarter of 2000 is due to higher resource
costs.
Selling, General & Administrative Expenses. SG&A expenses for the third quarter
of 2000 decreased $2.8 million to $4.1 million as compared to $6.9 million in
the third quarter of 1999. Selling, general and administrative expenses as a
percentage of revenue were 38.9% and 51.4% for the three- and nine-month periods
ended September 30, 2000 respectively, compared to 43.4% and 49.2% for the
three- and nine-month periods ended September 30, 1999, respectively. During the
second quarter of 2000, enherent incurred $1.8 million in charges related to the
relocation of its Hawthorne, New York office to Dallas, Texas. This included
relocation costs ($300,000), severance and related expenses ($800,000) arising
from the relocation and the Company recorded charges associated with the
reduction of its delivery capabilities in its software centers ($700,000). In
the third quarter of 2000, enherent received a refund of $229,000 for legal fees
associated with the lawsuit dismissed in the first quarter of 2000. The Company
continues to review costs associated with facilities and infrastructure.
Restructuring: The Company incurred $7.5 million in restructuring charges in
1999 comprised of $2 million in severance costs, $3 million in office closures
and $2.5 million for the write-off of goodwill related to the ISPI acquisition.
Loss from Operations: For the reasons set forth above, loss from operations was
7.5% and 22.4% of revenues in the third quarter and first nine months of 2000,
respectively, compared to 6.8% and 37.1% for the comparable 1999 periods.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to approximately $11.8 million at
September 30, 2000 from $9.0 million at December 31, 1999. Cash and equivalents
and marketable debt securities were $7.4 million at September 30, 2000 compared
to $6.9 million at December 31, 1999. The improvement in cash is mainly a result
of the equity infusion related to our sale of the Series A Redeemable
Convertible Preferred Stock. The primary uses of cash during the nine months
ended September 30, 2000 were to fund normal operating expenses and the
repayment of a note ($1,000,000) related to the acquisition of Computer
Management Resources. The Company's accounts receivable were $8.5 million at
September 30, 2000 down from $8.7 million at December 31, 1999. Days sales
outstanding were 74 days at September 30, 2000 and 63 days at December 31, 1999.
Investing activities provided cash of approximately $1.2 million resulting from
the sale of marketable securities offset by the purchases of property and
equipment.
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.
7
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
On October 27, 2000 the Company received a demand for arbitration from its
former Chief Financial Officer, Lowell W. Robinson. Mr. Robinson claims the
Company breached his employment agreement (the "Agreement") by not providing him
with additional stock options at the time of his termination in July 1999. Mr.
Robinson asserts that under the Agreement he is entitled to approximately
$3,000,000 in cash or additional stock options such that the total value of his
stock options is worth $3,000,000. Under the Agreement all disputes are to be
resolved by arbitration under the rules of the American Arbitration Association.
The Company has consulted with outside counsel and believes the former
employee's claim is without merit. The Company intends to vigorously defend the
claim.
ITEM 2. Change in Securities.
On April 13, 2000, the Company issued 8,000,000 shares of its Series A Senior
Participating Redeemable Convertible Preferred Stock ("Preferred Stock") for
$8,000,000. The Company also issued a warrant to the Preferred Stock investors
to purchase 4,000,000 shares of the Company's common stock at an initial
exercise price of $1.00 per share subject to adjustment, as defined. The
Preferred Stock is convertible, subject to adjustment, as defined, into common
stock on a one-for-one basis at any time and is redeemable after April 14, 2005
at the option of the holder at its liquidation value plus accrued and unpaid
dividends. Each warrant entitles the holder to purchase one share of common
stock prior to April 14, 2005. The Preferred Stock and related warrants were
sold below the then-market price of the Company's common stock. Accordingly, the
guaranteed discount on the conversion of the Preferred Stock and the value of
the warrants, aggregating approximately $5,167,000, were deemed to be a dividend
for purpose of calculating loss per share.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
8
<PAGE> 11
PART II. OTHER INFORMATION
(continued)
ITEM 5. Other Information.
On August 22, 2000, enherent Corporation Board of Directors approved the
repurchase of up to two million shares of enherent common stock. The Board
authorized the company officers to implement the repurchase of common stock
through open-market purchases to be made from time to time and at prevailing
market prices.
Effective September 15, 2000, Jack D. Mullinax was elected Chief Financial
Officer and Executive Vice President, Corporate Services of enherent Corp. This
appointment was part of the company's consolidation of shared corporate
services.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
(a) Form 8-K filed July 14, 2000
(b) Form 8-K filed August 13, 2000
(c) Form 8-K filed September 15, 2000
ITEM 7. Factors That May Affect Future Results
RELIANCE ON KEY PERSONNEL
The Company's future success depends on the continued services of certain key
management personnel, in particular, Dan Woodward, Chief Executive Officer, and
Jack Mullinax, Chief Financial Officer and Executive Vice President of Corporate
Services, each of whom has entered into an employment agreement with the
Company. Mr. Mullinax was promoted to his current position as CFO and EVP of
Corporate Services in September of this year. 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. Woodward or
Mullinax could have a material adverse effect on the Company's business,
operating results and financial condition.
9
<PAGE> 12
PART II. OTHER INFORMATION
(continued)
CONTROL BY PRINCIPAL STOCKHOLDERS
As of September 30, 2000, the Mellinger family owned approximately 25.3% of the
Company's outstanding shares of voting Common and Preferred Stock. The Mellinger
family is comprised of: a) Douglas K. Mellinger, Non-Executive Chairman of the
Board of Directors and former Chief Executive Officer of the Company. Douglas K.
Mellinger beneficially owns approximately 7% of the Company's outstanding
shares; b) Gregory S. Mellinger, former Chief Operating Officer and Director.
Gregory S. Mellinger beneficially owns approximately 6.2% of the Company's
outstanding shares; c) Paul L. Mellinger, brother of Douglas and Gregory
Mellinger, who is not and never has been an employee of the Company. Paul
Mellinger owns approximately 7.7% of the Company's outstanding shares; d) Jerome
and Barbara Mellinger, parents of Douglas, Gregory and Paul Mellinger, who
beneficially own approximately 3.4% of the Company's outstanding shares; and e)
the wives and children of Douglas and Gregory Mellinger, who own approximately
1% of the Company's outstanding shares.
In April 2000 the Company issued 8,000,000 shares of Series A Senior
Participating Redeemable Convertible Preferred Stock ("Preferred Stock") for
$8,000,000. At this time the Company also issued a warrant to the Preferred
Stock investors to purchase 4,000,000 shares of the Company's common stock at an
initial exercise price of $1.00 per share subject to adjustment. The Preferred
Stock, which has the same voting rights as the Company's common stock, is
convertible, subject to adjustment, into common stock on a one-for-one basis at
any time and is redeemable, after April 14, 2005, at the option of the holder at
its liquidation value plus accrued and unpaid dividends. The investors in this
private placement were The Travelers Indemnity Company, Tudor BVI Global
Portfolio Ltd., Raptor Global Portfolio Ltd., and Tudor Arbitrage Partners L.P.,
EFG Eurofinancial Investment Company (collectively the "The Preferred Stock
Investors"). The Preferred Stock Investors own approximately 35.4% of the
Company's outstanding shares of voting Common and Preferred Stock excluding
Warrants convertible into Common Stock. With fully exercised Warrants the
Preferred Stock Investors would own approximately 44% of the Company's
outstanding voting shares. Mr. Jack Rivkin is a director of the Company and an
employee of Citigroup, the parent company of The Travelers Indemnity Company.
Mr. Rivkin does not own any of the Company's shares. Mr. Robert Forlenza is a
director of the Company and an employee of Tudor Investment Corporation. Mr.
Forlenza owns options to purchase 20,000 shares of common stock.
The Mellinger family and Preferred Stock Investors own approximately 60.7% of
the Company's outstanding voting shares. Such control may discourage certain
types of transactions involving an actual or potential change of control of the
Company, including transactions in which the holders of Common Stock might
receive a premium for their shares over prevailing market prices.
10
<PAGE> 13
PART II. OTHER INFORMATION
(continued)
RISK OF DE-LISTING OF COMPANY'S SHARES FROM THE NASDAQ NATIONAL MARKET SYSTEM
The Company's shares listed on the Nasdaq National Market System ("NMS") have
frequently traded below $1 per share since April 2000. According to the rules of
the Nasdaq exchange the Company's shares could be de-listed and no longer traded
on this exchange if they fail to close with a minimum bid price above $1 per
share for 30 or more consecutive trading days. The Company would have 90 days
from the date of a de-listing notification from Nasdaq to meet listing
requirements.
In August of this year, the Company announced that its Board of Directors had
authorized a buy-back of up to 2,000,000 shares of the Company's Common Stock
through open market purchases, to be made from time to time at prevailing market
prices. The Company believes the buy-back plan will help it: a) maintain
adherence to Nasdaq listing requirements and b) prevent a de-listing of the
Company's shares. At the present time the Company has not bought back any of its
shares. The Company cannot guarantee that the buy-back plan will prevent its
shares from being de-listed.
A de-listing could adversely impact the value of the Company's shares and may
result in a halt in trading of its shares. In the event of a de-listing from
Nasdaq NMS, the Company could apply to the Nasdaq Small Cap. Market or OTC
Bulletin Board to continue trading. There is no guarantee that the Company's
shares would be accepted by these exchanges for listing.
ADDITIONAL FACTORS TO CONSIDER WHEN INVESTING IN THE COMPANY'S SHARES
For additional factors that may effect the Company's share price, investors
should refer to the section "Factors That May Affect Future Results" in Item 7
of the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
11
<PAGE> 14
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.
DATE November 14, 2000 BY /s/ Dan S. Woodward
------------------------ ---------------------------------------
Dan S. Woodward
President and Chief Executive Officer
DATE November 14, 2000 BY /s/ Jack D. Mullinax
------------------------ ---------------------------------------
Jack D. Mullinax
Chief Financial Officer
12
