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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23315
PRT GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware No. 13-3914972
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
342 Madison Avenue
New York, New York 10173
(212) 922-0800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of share outstanding of each of the issuer's classes of
common stock: Common Stock, par value $.001 per share, outstanding as of May 12,
1998 are 18, 183,473 shares.
2
PRT GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited): Page
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 1
Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings Not Applicable
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 9
ITEM 5. Other Information Not Applicable
ITEM 6. Exhibits and reports on Form 8-K 10
Signatures 11
3
PRT Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except number of shares)
DECEMBER 31 MARCH 31
1997 1998
----------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ 29,499 $ 7,119
Marketable debt securities 14,622 14,622
Accounts receivable, net of allowance of $334 in 1997 and $427 in 1998 14,493 20,430
Deferred income taxes 11 -
Prepaid expenses and other current assets 1,604 1,677
-------- --------
Total current assets 60,229 43,848
Fixed assets, net 8,738 9,726
Goodwill, net 6,615 18,688
Other assets 332 532
-------- --------
Total assets $ 75,914 $ 72,794
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation $ 3,479 $ 3,431
Accounts payable and other accrued expenses 4,411 5,872
Deferred income taxes - 113
Current portion of capital lease obligations 400 547
Deferred revenue 753 1,107
-------- --------
Total current liabilities 9,043 11,070
Deferred income taxes 44 44
Note payable 2,000 1,000
Capital lease obligations, net of current portion 738 734
-------- --------
Total liabilities 11,825 12,848
Common stockholders' equity:
Common stock, $.001 par value; authorized -- 50,000,000 shares;
issued and outstanding -- 18,229,063 in 1997 and 18,250,563
shares in 1998 18 18
Additional paid-in capital 86,324 86,407
Accumulated deficit (21,853) (26,079)
Treasury stock, 67,090 common shares at 1997 and 1998 (400) (400)
-------- --------
Total common stockholders' equity 64,089 59,946
-------- --------
Total liabilities and stockholders' equity $ 75,914 $ 72,794
======== ========
See accompanying notes.
1
4
PRT Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31
1997 1998
----------- ------------
Revenues $ 9,039 $ 18,852
Cost of revenues 6,621 15,317
------- --------
Gross profit 2,418 3,535
Selling, general and administrative expenses 3,838 8,701
------- --------
Loss from operations (1,420) (5,166)
Other income (expense):
Interest expense (86) (284)
Interest income 140 449
------- --------
Loss before income taxes (1,366) (5,001)
Income tax benefit (24) (775)
------- --------
Net loss $(1,342) $ (4,226)
======= ========
Basic and diluted net loss per share $ (.09) $ (.23)
======= ========
See accompanying notes.
2
5
PRT Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,342) $ (4,226)
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 273 940
Provision for doubtful accounts -- 31
Deferred income taxes (24) 124
Change in foreign exchange rate 11 --
Changes in operating assets and liabilities:
Accounts receivable (2,804) (3,949)
Prepaid expenses and other current assets (59) (73)
Other assets (189) (175)
Accrued compensation (2,123) (48)
Accounts payable and other accrued expenses 2,940 246
Deferred revenue (271) 354
-------- --------
Net cash used in operating activities (3,588) (6,776)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (926) (1,431)
Conversion of minority interest 7 --
Purchase of net assets of ACT, net of cash acquired -- (12,935)
-------- --------
Net cash used in investing activities (919) (14,366)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable -- (1,182)
Advances received from client 68 --
Issuance cost of initial public offering -- (91)
Exercise of stock options -- 174
Dividends paid (274) --
Principal payments under capital lease obligations (27) (139)
-------- --------
Net cash used in financing activities (233) (1,238)
-------- --------
Net decrease in cash and equivalents (4,740) (22,380)
Cash and equivalents at beginning of period 14,856 29,499
-------- --------
Cash and equivalents at end of period $ 10,116 $ 7,119
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 86 $ 284
======== ========
Income taxes paid $ 112 $ 150
======== ========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases $ 27 $ 20
======== ========
See accompanying notes.
3
6
PRT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. 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 operation for
the periods presented. The results of operations for the three month period
ended March 31, 1998 are necessarily indicative of the results that may be
expected for the year ended December 31, 1998. 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, 1997.
2 Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
3 Recently Issued Accounting Standard
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income. The
impact of implementing Statement 130 had no impact on the Company's
comprehensive loss in the first quarter of 1997 and 1998.
4
7
4 Related Party-Transaction
During the three months ended March 31, 1998, the Company agreed in
principal to purchase a database of software engineering names and resumes
from BJ Equities for approximately $300,000. PRT was currently paying a
software licensing fee of $60,000 annually. The agreement expired in twelve
years. BJ Equities is a partnership wholly-owned by the parents of the
Company's Chairman and Chief Operating Officer.
5 Acquisitions and Pro-Forma Financial Information
On January 31, 1998, the Company purchased substantially all of the assets
of Advanced Computing Techniques, Inc. ("ACT"), a Connecticut corporation,
for $12.9 million in cash. The acquisition of ACT was accounted for by the
purchase method of accounting, and accordingly, the acquired assets and
liabilities assumed were recorded at their fair values at the date of
purchase. The purchase price (including acquisition costs) and its
allocation are summarized below:
Allocation of Purchase Price:
Account Receivable $ 2,015
Prepaids and other current assets 28
Equipment and other assets 289
Goodwill 12,261
Liabilities (1,658)
--------
Total Purchase Price $ 12,935
========
Purchase Price
Cash $ 12,935
========
On July 1, 1997, the Company consummated the purchase of all the issued and
outstanding capital stock of Computer Management Resources, Inc. ("CMR"), a
Connecticut corporation, for approximately $6.3 million. The acquisition of
CMR was accounted for by the purchase method of accounting.
The following unaudited pro-forma financial information shows the results
of operations for the three months ended March 31, 1998 and 1997 assuming
consummation of the ACT and CMR acquisitions had occurred at the beginning
of the periods presented.
5
8
Three Months
Ended March 31
--------------
1998 1997
---- ----
Net Revenues $ 20,199 $ 14,137
Net Loss (4,313) (1,367)
Loss Per Share $ (.23) $ (.09)
6 Subsequent Events
Effective April 15, 1998, the Company purchased substantially all of the
assets of the Institute for Software Process Improvement ("ISPI") for an
aggregate cash purchase price of $2.5 million, subject to purchase price
adjustments, as defined.
6
9
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue. Revenues increased approximately 109% to $18.9 million in the three
months ended March 31, 1998 from $9.0 million in the three months ended March
31, 1997. This growth in revenue is primarily attributable to increases in the
size of the Company's IT professional workforce, expansion of the Company's
Software Engineering Center ("SEC") operations, additional services provided to
existing clients and, additional revenue obtained from the acquisition of
Computer Management Resources, Inc. in July 1997 and Advanced Computer
Techniques, Inc. in January 1998. The number of IT professionals in the first
quarter ended March 31, 1998 was (including subcontractors) 785 in comparison to
330 in the first quarter ended March 31, 1997. Revenues from SECs increased to
$5.6 million for the first quarter ended March 31, 1998 as compared to $3.4
million in the first quarter ended March 31, 1997.
Cost of Revenues. Cost of revenues increased approximately 131% to $15.3 million
in the first quarter ended March 31, 1998 from $6.6 million for the comparable
period in 1997. As a percentage of revenues, cost of revenues increased to 81%
in the first quarter ended March 31, 1998 from approximately 73% for the
comparable period in 1997. The increase in cost of revenues is primarily
attributable in increases in the number of the Company's IT professionals. In
1998, the increase in cost of revenues as a percentage of revenues reflects: the
continued expansion of the Company's SECs and lower utilization rates at the
Company's SECs in 1998 due to customer delays in the start-up of new projects as
well as changes in the ramp-up plan on certain existing projects.
Gross Profit. For the reasons set forth above, gross profit increased
approximately 46% to $3.5 million for the first quarter ended March 31, 1998
from $2.4 million for the comparable period in 1997. As a percentage of
revenues, gross profit decreased to approximately 19% for the first quarter
ended March 31, 1998 from 27% for the comparable period in 1997 due to lower
than expected utilization rates caused by delays in timing of client projects.
Selling, General & Administrative Expenses. SG&A expenses increased
approximately 127% to $8.7 million in the first quarter ended March 31, 1998
from $3.8 million for the comparable period in 1997. As a percentage of
revenues, SG&A expenses increased to approximately 46% in the three months ended
March 31, 1998 from approximately 42% for the comparable period in 1997. The
increase in SG&A expenses resulted from certain one-time charges of
approximately $1.0 million associated with severance expenses and termination of
excess employee housing. In addition, SG&A increased primarily from
7
10
expansion of the Company's sales, marketing and recruiting capabilities to
support a higher level of revenue.
Income (Loss) from Operations: For the reasons set forth above, loss from
operations for the first quarter ended March 31, 1998 was $4.2 million compared
to a loss of $1.3 million in the comparable period in 1997. As a percentage of
revenues, the loss from operations for the first quarter ended March 31, 1998
increased to 22% compared to approximately 15% in the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to approximately $32.8 million at March
31, 1998 from $51.2 million at December 31, 1997. Cash and equivalents and
marketable debt securities were $21.7 million at March 31, 1998 compared to
$44.1 million at December 31, 1997. The primary uses of cash during the three
months ended March 31, 1998 were to fund normal operating expenses and an
increase of accounts receivable of $4.0 million. The increase in account
receivable was attributed to slower than anticipated collection process due to
the delay of major customers receiving budget approval for 1998 expenditures.
Investing activities used cash of approximately $1.4 million mostly attributed
to additional purchase of property and equipment needed for the software
development centers and expansion of our corporate office. In addition, as of
January 31, 1998, the Company acquired substantially all of the assets of ACT
for approximately $12.9 million in cash.
Net cash of $1.2 million was used in repayment of debt in relation to the
acquisition of CMR and ACT.
As an additional source of liquidity, the Company has a $7 million credit
facility, expiring in June 1998. At March 31, 1998, there were no borrowings
under this line of credit.
The Company anticipates that existing cash and cash equivalents and highly
liquid marketable securities and available borrowings under the credit facility
will be adequate to meet its cash requirements for the next twelve months.
8
11
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.
(a) The Company's annual stockholder's meeting was held on May 4, 1998.
(b) Proxies were solicited for the election of directors pursuant to
Regulation 14 under the Securities Exchange Act of 1934 and
director's nominees were elected without opposing proxy
solicitation.
(c) 1. Jack L. Rivkin, was elected a Class I Director with 17,683,036
affirmative votes, 1,200 negative votes and 8,755 abstentions.
Issac Shapiro was elected a Class I Director with 17,684,036
affirmative votes, 200 negative votes and 7,755 abstentions.
Douglas K. Mellinger was elected a Class I Director with
17,681,886 affirmative votes, 2,350 negative votes and 9,905
abstentions.
2. The appointment of Ernst & Young LLP as the Company's
Independent Accountants for the year ending December 31, 1998 was
approved with 17,680,781 affirmative votes, 5,400 negative votes
and 5,610 abstentions.
ITEM 5. Other Information.
None.
9
12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2.1 Asset Purchase Agreement, dated as of January 31, 1998, by
and among PRT Group Inc. and Advanced Computing Techniques,
Inc., Daniel R. Walsh, Carol A. Anderson and
Timothy R. Cyr (1)
27.1 Financial Data Schedule - March 31, 1998
(1) Previously filed as an exhibit to the Form 8-K filed by the
Company on January 29, 1998.
(b) Reports on Form 8-K.
1. On January 30, 1998, the Company filed a Current Report on Form
8-K disclosing the acquisition of Advanced Computing Techniques,
Inc. by the Company.
2. On March 30, 1998, the Company filed a Current Report on Form 8-K
setting forth certain pro-forma financial information with respect
to the acquisition of Advanced Computing Techniques, Inc. by the
Company.
10
13
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 May 14, 1998 BY /s/ Douglas Mellinger
------------------ ---------------------------------------------------
Douglas Mellinger
Chairman / Chief Executive Officer
DATE May 14, 1998 BY /s/ Lowell Robinson
------------------ ---------------------------------------------------
Lowell Robinson
Executive Vice President, Finance & Administration,
Chief Financial Officer
11