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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
|_| 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
enherent Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3914972
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12300 Ford Road, Suite 450
Dallas, Texas 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 243-8345
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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. |_|
The aggregate market value of the registrant's voting and non-voting
Common Stock held by non-affiliates of the registrant as of March 16, 2001, was
approximately $3,008,000.
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of March 16, 2001 was approximately 18,351,311 shares.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 2001 Annual Meeting
of Stockholders, to be held on May 3, 2001, are incorporated by reference into
Part III hereof.
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PART I
Item 1. Business
The following description of the business of enherent Corp. ("enherent" 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," "estimate,"
"predict," "plan," "will," "should," "intend" 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
enherent Corp. (f/k/a PRT Group Inc.) was first incorporated as PRT Corp.
of America, a New York corporation, in 1989. The Company was reincorporated in
Delaware in 1996. The Company maintains its principal executive offices at 12300
Ford Road, Suite 450, Dallas, Texas 75234. The Company's telephone number is
(972) 243-8345.
enherent provides scalable information technology ("IT") and e-business
innovations. In partnership with its clients and through the utilization of its
Balanced Development Methodology(SM), enherent accelerates design, development
and delivery of discrete and seamless end-to-end solutions along the application
development lifecycle. enherent addresses cross-industry business needs by
focusing on the critical disciplines of project management, business
requirements management and e-business technologies, while leveraging its
intellectual capital to deliver scalable solutions that create value for its
clients. The Company has approximately 300 employees in Solution Centers in
Windsor, Connecticut, Barbados, West Indies and in client-site operations
throughout the Mid-Atlantic and Northeastern United States.
enherent provides its services through two primary lines of business. The
first--Solutions Outsourcing--enables clients to turn over to enherent
management of an IT project, application development project, application
maintenance project, application production support function or an entire IT
department--improving efficiency and maximizing results. The second--IT
Staffing--provides clients with access to a wide range of IT professionals to
augment their staffing needs.
Solution Centers. enherent's Solution Centers in Windsor, Connecticut and
Barbados, West Indies provide centralized and comprehensive IT services that
combine skilled IT professionals, proven quality processes and knowledge
management systems. The Centers, operating as a Virtual Application Development
Environment, have parallel technology infrastructures, organizational units and
human resource practices that enable enherent to shift projects and personnel to
meet client requirements and maximize staff productivity.
Quality Processes. enherent's Balanced Development Methodology(SM) ensures
that its solutions meet industry standards while reflecting the realities of the
client's business priorities. The Methodology is a dynamic approach that draws
on four sources for setting and meeting quality goals for each solution
component: rigorous quality principles based on the Software Engineering
Institute's Capability Maturity Model (CMM); iRAD, enherent's own iterative
rapid application development process; project management principles based on
the Project Management Institute's Project Management Book of Knowledge (PMBOK);
and the business value of the function as stated by the client.
To ensure quality measurement and control, enherent keeps its quality
assurance teams independent from project management teams. It also maintains a
proprietary, Lotus Notes-based Knowledge Asset Database(SM) with best-practice
methods, tool sets and work products that are available to all project teams.
IT Staffing
enherent's IT Staffing delivers individual or team staffing with a focus
on the critical disciplines of project management, business requirements
management and e-technologies for the full spectrum of IT application
development and maintenance services, from legacy systems and client server to
Internet and network solutions. The Company provides specific industry expertise
in the insurance,
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financial services, pharmaceutical and high-tech industry sectors. To keep
skills sharp, the Company provides computer-based and classroom training for
employees and subcontractors.
Solutions Outsourcing - e-Technologies
Through Solutions Outsourcing - e-Technologies, enherent provides the
rapid development of focused, flexible solutions that address its clients'
business goals. enherent solutions allow for easy implementation of new
applications, integration with existing platforms and communication and
interaction with the client's supply chain and customers.
enherent begins each e-business project with excelerator(SM), which
explores the client's current situation and e-business goals and creates a clear
picture of the scope of the project, how work will proceed and how much the
solution will cost--both to develop and operate. excelerator(SM) results
include: concept design, the proposed architectural model, a high-level use case
model, an iteration schedule, a quality overview, high-risk sequence diagrams, a
risk assessment and a detailed project plan as well as a budget. After
excelerator(SM) is complete, the project team and client move into
iRAD--enherent's iterative process for rapid application development. The
project team focuses on the most complex, high-risk functional components of the
solution first. Members construct, implement and test the first set of
components. As they add components, they revisit each previous set to ensure
compatibility and functionality. The overall development process includes three
phases: 1) elaborate--define and design, 2) build--model and build; and 3)
deliver--improve, test, deploy and document.
enherent's iRAD process provides clients several major benefits, including
clear, accurate information up front about schedules and costs. It also provides
clients with early validation and less risk because the most complex components
are built first. Clients also benefit from flexible, scalable solutions that are
built to industry standards.
After development is complete, enherent offers technical operations
support to manage and maintain the solution.
Solutions Outsourcing - IT
enherent's Solutions Outsourcing - IT provides clients access to expert
technical support without the expense and administrative burden of maintaining
IT facilities and technology or adding full-time personnel. Solutions
Outsourcing - IT services include application development and maintenance,
application support, networking, call centers and help desks, systems management
and Internet communications. enherent can manage an outsourced project in the
customer's facility or in one of its Solution Centers. enherent's Solutions
Outsourcing - IT services encompass: 1) resources--the acquisition, deployment
and use of people, facilities, technology, equipment, support functions and
supplies; 2) integration--the linking of business processes, including the
development of interfaces, with related processes and applications; and 3)
performance--shared commitments for setting, measuring and achieving optimal
service.
Target Markets
enherent supports cross-industry platforms and technologies with targeted
industry sectors including insurance, financial services, banking and capital
markets, pharmaceuticals, health care and high-tech. The Company recently
announced alliances with BEA Systems, Inc., Business Objects and Mercury
Interactive to complement the services it provides by selecting these leading
products and technologies as areas of specialization.
enherent is active in several geographic markets, including the Northeast
Area, from Washington, D.C to Maine; the South Area from Texas to Georgia and
the Caribbean and Latin America through enherent Solutions International in
Barbados, West Indies.
enherent focuses its marketing efforts primarily at Fortune 1000-sized
companies with significant IT and business needs. For the 12 months ending Dec.
31, 2000, enherent's largest clients, listed alphabetically, were Aetna,
AirMedia, Cigna, Guy Carpenter, Hartford Insurance, Interior Systems, Inc., J.P.
Morgan, Pfizer and Prudential Insurance.
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THE IT SERVICES INDUSTRY
enherent believes that a number of key industry trends will continue to
have a major influence on the worldwide IT services market.
Shortage of IT Professionals
Top-level IT professionals continue to be in short supply. Despite the
economic slowdown and IT Services Industry slowdown that began in the second
half of 2000, the population of well-trained and highly skilled IT specialists
is small--and increasingly, they are finding the best career opportunities with
IT professional services companies. This is creating a growing gap inside
corporations between what people can do in-house and why they have to secure
outside IT help to accomplish their mission.
As corporations move more and more to e-business, there is more complex
work to be done--integration of legacy systems, creation of and migration to new
applications architectures--and fewer skilled internal resources to accomplish
it. We believe this growing capability gap should generate more demand for the
Company's services once the general economic slowdown moves towards a recovery.
e-Business Demand
We believe, in the next three to five years, firms struggling to reinvent
business processes and reach more online consumers will continue to invest
heavily in e-business consulting and support.
The need for e-business help will grow as Internet initiatives increase in
complexity. Companies are moving away from stand-alone commerce sites toward
Internet-enabled supply chains and customer service systems. They are seeking
help to create new business models, smooth out site architecture, reach
consumers and link with the middle market.
Forrester Research identifies four key e-business services--strategy,
marketing, design and technical services. Marketing and technical services are
in the highest demand. More than 63 percent of outsourcing dollars will go to
marketing, application development and commerce package implementation according
to Forrester. A growing number of IT service companies will compete for these
services.
Few companies use vendors for end-to-end web solutions, instead using on
average at least three service providers to get results. enherent is well
positioned to compete in this compartmentalized market. The Company's Solutions
Outsourcing - e-Technologies services focuses on two of the most in-demand
categories: design and technical services for the Internet, Intranets and
Extranets. For clients who need additional assistance, enherent is poised to
respond through a growing strategic network of alliances and partnerships with
firms like BEA Systems, Inc., Business Objects SA and Mercury Interactive Corp.
Software Engineering Challenges
Software engineering organizations face significant challenges in
delivering high-quality applications on time and on budget. Because software
development is plagued with problems, the push for standards and benchmarks will
intensify. One system--the Capability Maturity Model (CMM) developed by the
Software Engineering Institute at Carnegie Mellon University--is gaining
momentum in the industry. As Leon A. Kappleman stated in the June 26, 2000,
Information Week, "Specify, measure and demand software quality. The evidence is
also clear that good software-quality practices reduce costs and time to market.
Companies are committing to CMM as the blueprint for their improvement. It's
noteworthy ... that Citicorp, Computer Sciences, IBM Global Services and Perot
Systems own CMM level-five shops."
CMM documents best practices for software development and provides an
orderly plan for improving software development methods gradually. CMM defines a
set of five maturity levels for software development organizations and details
the attributes of each level. Level 1, the entry level, covers any software
development process in existence. Level 5 characterizes a sophisticated software
development shop that consistently produces high-quality results, on time and in
budget. Level 5 organizations systematically improve themselves by
self-examination and internal process tuning. Levels 2, 3 and 4 define various
steps along the road to improvement. enherent has achieved Level 3 certification
at its Barbados Solutions Center.
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Offshore and Near-shore Software Engineering
International Data Corporation ("IDC"), an independent research firm,
cites a number of reasons IT services firms are creating offshore and
near-shore service providers: industry-wide skills shortage, rapidly
escalating cost of domestic or onshore labor, proliferation of Internet
technologies, urgency of IT projects driven by the euro and globalization of
industries across global markets.
India, Mexico and the Caribbean and South Africa are three of the most
active offshore regions. India is growing rapidly in the IT services sector due
to access to skilled people, quality of workforce, lower costs, rapid time to
market, government support and fluency in English. Mexico and the Caribbean
offer similar advantages--as well as proximity to the U.S. market and support of
the NAFTA agreement among Mexico, Canada and the U.S.
IDC predicts that "the offshore model will evolve to become a serious
competitor to both U.S.-based services firms and also for large global
outsourcing vendors." enherent is taking advantage of the benefits of
offshore and near-shore operations through its Solutions Center in Barbados,
West Indies.
enherent SERVICES OFFERED
IT Staffing
enherent employs a wide range of experienced IT professionals available to
help customers with their IT staffing needs and goals. Our expertise includes
programming languages, operating systems, databases, applications and tools.
Technology environments served are mainframe, client server, Internet and
network.
enherent has built its reputation on the capabilities of its experienced
project managers skilled in the use of its Knowledge Asset Database(SM). This
proprietary resource includes software quality assurance; software configuration
management; project initiation, planning, tracking and closure; peer review; and
customer interaction allowing for the creation and use of best practices by all
of our project managers.
enherent provides IT staffing to meet a range of client needs--including
application development and implementation, project management and other IT
support, including business analysis, quality assurance, usability analysis,
documentation and help desk support.
Solutions Outsourcing - e-Technologies
enherent's Solutions Outsourcing - e-Technologies focuses on two of the
most critically needed services for companies striving to harness the Internet
and leverage the advantages of Intranet- and Extranet-based communications:
design and technical services.
enherent's Solutions Outsourcing - e-Technologies objective is to create
and integrate web applications that enable customers to maximize business value,
protect their investment in legacy systems and communicate and transact
effectively with customers, trading partners and employees. Typical customers
include Fortune 1000 and dot.com companies in the commercial and government
sectors.
enherent begins its interactive process with the customer with
excelerator(SM), a fixed-price engagement that enables the client to evaluate
and define its commitment and phase its e-business development. After
excelerator(SM) is complete, the project moves through three consulting phases:
elaboration, building and testing and deployment.
enherent's proprietary Balanced Development Methodology(SM) guides both
excelerator(SM) and the consulting phases. This Methodology includes four
components--business value determined by clients; enherent's iRAD engineering
process, the Software Engineering Institute's CMM process and project management
disciplines based upon the Project Management Institute's Project Management
Book of Knowledge. The Balanced Development Methodology(SM) is dynamic and high
impact. Based on industry standards--and balanced by the client's own business
priorities--the Methodology enables enherent to deliver well-engineered,
affordable solutions. Best practices are captured and reused by enherent's
experienced development teams.
enherent's iRAD process is based on the industry-standard Unified Modeling
Language (UML). During the excelerator(SM) engagement, the project team breaks
down the functionality required by the customer into use cases. Use case
definition allows
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enherent to assess how the eventual system will work based upon the components
of the business model. This component analysis enables the team to validate the
architecture, isolate changes required and clearly identify software change
issues.
The project team prioritizes each use case and focuses on the most
complex, high-risk functional components of the solution first. Members
construct, implement and test the first set of components. As they add
components, they revisit each previous set to ensure compatibility and
functionality.
enherent's iRAD process unifies best practices from project management,
business modeling, requirements management, analysis and design, testing and
change control into one, consistent, full-life cycle process. The benefits of
the enherent approach include: shorter development cycles through controlled
iterative development; increased developer productivity through model-driven
development; improved software quality through use-case and business-focused
development; significant software reuse through a focus on software architecture
and components and enhanced team communication through use of UML.
enherent has developed a Lotus Notes-based Knowledge Asset Database(SM)
based on CMM and critical to the Company's ongoing learning and improvement
efforts. The Knowledge Asset Database(SM) is a collaborative tool used by the
development staff, project managers, business analysts and graphic designers.
The database includes the following components: software quality assurance, data
center library, project initiation, site administration, customer interaction,
configuration management, voice and data LAN/WAN/MAN connections, planning,
tracking and closure, as well as peer review. enherent's project management
model is based on principles from the Project Management Institute. Clients can
choose from three management models--customer-managed, collaboratively managed
and enherent-managed. For all of these models, enherent supports knowledge
transfer to the client and the use of our tools and technology.
enherent's engagement model focuses on customer requirements and allows
for development to be done at the client's site or in enherent's Solution
Centers in Windsor, Connecticut, or Barbados, West Indies. Client contact begins
with an enherent sales representative and is transferred to a project manager as
a project gets under way. The project manager is responsible for translating the
customer needs to the developers, business analyst, coders and graphic designer.
The production and development teams report to a resource manager. For large
projects, these teams are augmented with additional developers. All escalation
issues are handled by enherent's geographic vice president and general manager,
who oversees all sales and delivery resources for a given geography.
Solutions Outsourcing - IT
enherent's Solutions Outsourcing - IT services include application
development and maintenance, networking, call centers and help desks, systems
management and Internet communications. enherent can manage outsourced projects
at the client's site or from one of its Solution Centers.
IT Solutions Outsourcing encompasses: 1) resources--the acquisition,
deployment and use of people, facilities, technology, equipment, support
functions and supplies; 2) integration--the linking of business processes,
including the development of interfaces, with related processes and
applications; and 3) performance--the responsibility for service-level metrics
and agreements.
For each outsourcing project, enherent completes a six-phase consulting
process that includes assessment, solution definition, transition planning,
implementation, testing and support.
In application development and maintenance, enherent's outsourcing
services include: application development, project management consulting,
application infrastructure integration, system simulation, testing services,
applications maintenance and software performance improvement.
In network support, enherent's outsourcing services include: managed
network solutions, network connectivity, network collaboration services and
premise data services.
In systems management, enherent's outsourcing services include: data
center management, mid-range management, data transfer services as well as
testing services.
In call center and help desk support, enherent's outsourcing services
include call center support and management.
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In Internet communications, enherent's outsourcing services include:
legacy and Internet connectivity, remote access service and web hosting.
Foreign Operations
In addition to its domestic operations, which include the United States,
the Company has operations in the West Indies and Asia (discontinued during
1999). The Company's operations in Asia were not individually material and are
included in foreign operations along with the West Indies. (For additional
information, see Footnote 15 in the Notes to Consolidated Financial Statements.)
CERTAIN ACQUISITION TRANSACTIONS
Computer Management Resources, Inc. ("CMR")
Effective July 1, 1997, the Company purchased all of the issued and
outstanding capital stock of Computer Management Resources, Inc. for
approximately $6,294,000. CMR was a provider of information technology services.
The excess of costs over net assets acquired, was approximately $6,180,000. 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"), which was paid in full in 2000.
Advanced Computing Techniques, Inc. ("ACT")
Effective January 31, 1998, enherent acquired substantially all of the
assets of ACT, headquartered in Glastonbury, Connecticut, for an aggregate
purchase price of approximately $13.0 million in cash. ACT provided IT software
engineering and staffing solutions on the East Coast through its staff of
approximately 175 experienced consultants. ACT provided a wide range of IT
solutions and professional services to Fortune 500-sized companies. ACT's
operations are now part of the Company's Professional Services and Project
Solutions groups.
Institute For Software Process Improvement ("ISPI")
Effective April 15, 1998, enherent acquired substantially all of the
assets of ISPI, headquartered in Pittsburgh, Pennsylvania, for an aggregate
purchase price of approximately $2.7 million in cash. ISPI provided
comprehensive quality management and process improvement services, with an
emphasis on the software engineering CMM, including consulting and
implementation support, software engineering training and mentoring and
assessments and evaluations through its staff of approximately 20 experienced
consultants.
enherent discontinued operation of its ISPI subsidiary in June 1999.
Effective September, 1999 enherent sold all course materials and related
intellectual property rights of ISPI to Aimware Ltd. In addition, enherent
agreed to waive certain non-competition obligations of certain former enherent
employees so that Aimware could hire these employees to provide ISPI services.
In exchange for the sale of these ISPI assets, enherent received a royalty
payment equal to 5% of all Aimware revenues generated from the assets sold
during the first 18 months after the sale.
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
enherent include "Big Five" 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 enherent'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.
INTELLECTUAL PROPERTY RIGHTS
The Company believes that its success and ability to compete is dependent
in part 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
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employees, subcontractors, key suppliers and customers 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, as well as
U.S. trademark registration for many of its trade and service marks. 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 software development
and maintenance needs of its proprietary systems and technology, and brand-name
recognition are more important to establish and maintain a leadership position
and strengthen its brand.
As part of its confidentiality procedures, the Company typically 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 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 approximately
63,000 square feet of space in four locations. enherent currently operates in
three types of facilities: (i) Computer Software Engineering Centers (CSECs),
(ii) sales and account management offices and (iii) administration and
operations offices in Dallas, Texas; New York, New York; Windsor, Connecticut;
and Barbados, West Indies. enherent has sales and account management offices
located in Texas, Connecticut and New York. Currently, the Company operates two
CSECs, located in Barbados, West Indies and Windsor, Connecticut. It is expected
that no additional space will be required at this time, but that operations may
relocate in order to be closer to their customer base. In 2000, the Company was
able to end the lease on a portion of its Windsor and Barbados facilities,
reducing its leased square footage by approximately 37,000 square feet.
Item 3. Legal Proceedings
A former Chief Financial Officer of the Company filed a Demand for Arbitration
on or about October 27, 2000, claiming that at the time of his termination, he
was entitled to stock options worth $3,000,000 or the stock option value in
cash. enherent has filed a Motion for Summary Judgment that has not been ruled
on by the Arbitrator. No ruling on this motion has been made to date. There is
no hearing date for the arbitration.
In the normal course of business, various claims are made against the
Company. At this time, in the opinion of management, there are no pending
claims, including the above mentioned Demand for Arbitration, 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.
9
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Common Stock of the Company is currently traded on the Nasdaq National
Market ("Nasdaq") under the symbol "ENHT." 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 for the last two fiscal years:
Fiscal Period High Low
------------- -------- ------
1999
First Quarter ................ $5.56 $2.42
Second Quarter ............... $3.50 $2.00
Third Quarter ................ $2.89 $1.75
Fourth Quarter ............... $2.64 $1.75
2000
First Quarter ................ $6.50 $1.39
Second Quarter ............... $1.89 $0.85
Third Quarter ................ $1.25 $0.64
Fourth Quarter ............... $1.14 $0.28
The number of stockholders of record of the Common Stock as of March 16,
2001 was approximately 3,000 based on transfer agent reports; the closing price
of the Common Stock on Nasdaq on March 16, 2001 was $.25.
On February 21, 2001, Nasdaq notified the Company that it failed to meet
the continued listing requirement of maintaining a minimum bid price of $1 per
share during the last 30 consecutive trading days. enherent has until May 22,
2001 to regain compliance and avoid having its securities delisted. The Company
has the right to appeal Nasdaq's decision.
During the year ended December 31, 1997, the Company declared dividends of
$724,000. 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 certain 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 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.
In August 2000, the Board of Directors approved the buy-back of up to
$2,000,000 of the Company's outstanding Common Stock. As of December 31, 2000
the Company had not purchased any of its outstanding Common Stock. However,
in the first quarter of 2001, the Company purchased 223,000 shares of its
outstanding common stock.
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Item 6. Selected Financial Data
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
Years Ended December 31
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Revenues .............................. $ 23,801 $ 59,816 $ 85,607 $ 65,359 $ 43,697
Cost of revenues ...................... 17,965 40,898 64,096 47,815 30,753
------------ ------------ ------------ ------------ ------------
Gross profit .......................... 5,836 18,918 21,511 17,544 12,944
Selling, general and administrative
expenses ............................ 9,235 19,332 34,214 31,441 21,787
Restructuring charges ................. -- -- -- 7,483 --
------------ ------------ ------------ ------------ ------------
Loss from operations .................. $ (3,399) $ (414) $ (12,703) $ (21,380) $ (8,843)
------------ ------------ ------------ ------------ ------------
Net loss .............................. $ (3,269) $ (553) $ (12,040) $ (21,215) $ (8,532)
------------ ------------ ------------ ------------ ------------
Preferred stock dividends and accretion 117 18,683 -- -- 5,474
------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders ........................ $ (3,386) $ (19,236) $ (12,040) $ (21,215) $ (14,006)
============ ============ ============ ============ ============
Basic and Diluted loss per
Common share ......................... $ (0.24) $ (1.31) $ (.66) $ (1.16) $ (.76)
============ ============ ============ ============ ============
Weighted average common shares and
equivalents outstanding ............. 14,310,155 14,728,087 18,213,252 18,274,705 18,347,244
============ ============ ============ ============ ============
December 31
-----------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital ................................. $ 13,923 $ 51,253 $ 23,577 $ 9,034 $ 11,322
Total assets .................................... 23,960 75,914 62,782 40,535 33,530
Current portions of long-term obligations ....... 1,133 400 456 227 16
Long-term obligations, less current portions .... 2,177 2,738 1,424 1,135 28
Total liabilities ............................... 8,606 11,825 10,395 9,264 3,156
Series A redeemable convertible preferred stock . 16,939 -- -- -- 5,258
Total stockholders' equity (deficit) ............ (2,081) 64,089 52,387 31,271 25,116
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," "estimate," "predict," "plan," "will," "should," "intend"
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."
Results of Operations
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
Years ended December 31
----------------------------------
1998 1999 2000
------ ------ ------
Revenues ............ 100.0% 100.0% 100.0%
Cost of Revenues .... 74.9 73.2 70.4
------ ------ ------
Gross Profit ........ 25.1 26.8 29.6
SG&A ................ 39.9 48.1 49.9
Restructuring charges -- 11.4 --
------ ------ ------
Loss from operations (14.8)% (32.7)% (20.3)%
====== ====== ======
11
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues. Revenues decreased approximately 33.1% to $43.7 million in
fiscal year 2000 from $65.4 million in fiscal year 1999. The decrease in revenue
was a result of the continuing effects in 2000 of shedding low-margin business
in 1999, the reduced number of billable consultants, a general slowdown in the
industry and the completion of certain assignments.
Cost of Revenues. Cost of revenues decreased approximately 35.7% to $30.8
million in fiscal year 2000 from $47.8 million for the comparable period in
1999. As a percentage of revenues, cost of revenues decreased to approximately
70.4% in fiscal year 2000 from approximately 73.2% for fiscal year 1999. The
decrease in cost of revenues was due to higher utilization and billable rates
for e-business assignments offset partially from lower margins in the
outsourcing solutions business.
Gross Profit. For the reasons set forth above, gross profit increased as a
percentage of revenues to approximately 29.6% from 26.8% for the comparable
period in 1999.
SG&A Expenses. SG&A expenses decreased approximately 30.7% to $21.8
million in fiscal year 2000 from $31.4 million for the comparable period in
1999. As a percentage of revenues, SG&A expenses increased to approximately
49.9% in fiscal year 2000 from approximately 48.1% for the comparable period
in 1999. In 2000, enherent incurred $1.8 million in charges related to the
relocation of its Hawthorne, New York office to Dallas, Texas and the
reduction of its delivery capabilities in its computer software engineering
centers, offset by $700,000, the unused portion of the $7.5 million
restructuring charge in 1999. The year-to-year reduction was due primarily to
personnel and facility cost reductions.
Restructuring. In 1999 the Company incurred $7.5 million in restructuring
charges 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
acquisition of the Institute for Software Process Improvement, Inc. Furthermore,
the Company moved its headquarters to Windsor, Connecticut and converted its
former Manhattan headquarters to a smaller sales office and sublet the excess
space in the former headquarters. In 1999, the Company was unable to sublet the
unproductive portion of the Hartford Software Engineering Center and estimated
that it would take 18-24 months to sublease, which accounted for a provision of
approximately $786,000 remaining at December 31, 1999. Additional provisions for
restructuring charges remained as of December 31, 1999 consisting of legal and
brokers' fees related to the sublease of the Hartford space of approximately
$213,000, continuing severance and related costs of approximately $520,000,
closure of India operations of approximately $59,000 and sublease of a portion
of the New York City office of approximately $81,000. The Company completed
the planned restructuring, however, approximately $700,000 of the amount
accrued in 1999 was not required and has been included in Selling, General and
Administrative expenses in 2000.
Loss from Operations. For the reasons set forth above, loss from
operations for the fiscal year 2000 was $8.8 million compared to a loss of $21.4
million in the comparable period in 1999. As a percentage of revenues, the loss
from operations for the fiscal year 2000 was approximately (20.3)% compared to
approximately (32.7)% in the comparable period in 1999.
Other Income. Interest income increased 41.6% to $521,000 from $368,000
due to the investing of the cash received in the issuance of the 8,000,000
shares of Series A Senior Participating Redeemable Convertible Preferred Stock.
Preferred Stock Dividends and Accretion. The 8,000,000 share of Series A
Senior Participating Redeemable Convertible Preferred Stock was sold below the
then market price of the Company's common stock. This discount, aggregating
approximately $5.2 million was deemed a dividend on Preferred Stock.
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenues. Revenues decreased approximately 23.6 % to $65.4 million in
fiscal year 1999 from $85.6 million in fiscal year 1998. The decrease in revenue
was the result of several projects coming to an end and the non-renewal of
certain client assignments further compounded by a slowdown during the fourth
quarter 1999 related to the approach of the Year 2000. Additionally, revenue
decreased as a result of the restructuring during the second quarter of 1999
which included the discontinuance of operations of the ISPI division.
Cost of Revenues. Cost of revenues decreased approximately 25.4% to $47.8
million in fiscal year 1999 from $64.1 million for the comparable period in
1998. As a percentage of revenues, cost of revenues decreased to approximately
73.2% in fiscal year 1999 from approximately 74.9% for fiscal year 1998. The
decrease in cost of revenues was in direct proportion to the decrease in
revenues, together with a reduction in professionals and a discontinuation of
relocation packages to the United States from the Barbados CSEC.
Gross Profit. For the reasons set forth above, gross profit increased as a
percentage of revenues to approximately 26.8% from 25.1% for the comparable
period in 1998.
SG&A Expenses. SG&A expenses decreased approximately 8.1% to $31.4 million
in fiscal year 1999 from $34.2 million for the comparable period in 1998. As a
percentage of revenues, SG&A expenses increased to approximately 48.1% in fiscal
year 1999 from approximately 39.9% for the comparable period in 1998. The
decrease in SG&A expenses resulted from (i) cost-cutting measures undertaken
offset by increases from costs associated with the hiring of a new Chief
Executive Officer and new management team, (ii)
12
increased marketing and promotional expenditures and (iii) increased legal fees
in connection with the class action suit. In addition, the SG&A expenses as a
function of revenues were negatively affected by the lower revenue base.
Restructuring. In 1999 the Company incurred $7.5 million in restructuring
charges 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
acquisition of ISPI. Furthermore, the Company moved its headquarters to Windsor,
Connecticut and converted its former Manhattan headquarters to a smaller sales
office and sublet the excess space in the former headquarters. In 1999, the
Company was unable to sublet the unproductive portion of the Hartford Software
Engineering Center and estimated that it would take 18-24 months to sublease,
which accounted for a provision of approximately $786,000 remaining at December
31, 1999. Additional provisions for restructuring charges remained as of
December 31, 1999 consisting of legal and brokers' fees related to the sublease
of the Hartford space of approximately $213,000, continuing severance and
related costs of approximately $520,000, closure of India operations of
approximately $59,000 and sublease of a portion of the New York City office of
approximately $81,000.
Loss from Operations. For the reasons set forth above, loss from
operations for the fiscal year 1999 was $21.4 million compared to a loss of
$12.7 million in the comparable period in 1998. As a percentage of revenues, the
loss from operations for the fiscal year 1999 was approximately (32.7)% compared
to approximately (14.8)% in the comparable period in 1998.
Quarterly Results
The following table sets forth certain unaudited quarterly operation
information for the most recent eight quarters ending with the quarter ended
December 31, 2000. This information has been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management, 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 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.
Three Months Ended
(in Thousands)
---------------------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- --------- ---------
STATEMENT OF INCOME DATA:
Revenues ................ $ 18,541 $ 18,468 $ 15,909 $ 12,441 $ 12,057 $ 11,739 $ 10,587 $ 9,314
Cost of revenues ........ 14,902 14,072 10,098 8,743 8,713 8,439 7,268 6,333
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Profit ............ 3,639 4,396 5,811 3,698 3,344 3,300 3,319 2,981
SG&A .................... 10,513 8,601 6,899 5,428 6,456 7,090 4,113 4,128
Restructuring charges ... -- 7,483 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations .... $ (6,874) $ (11,688) $ (1,088) $ (1,730) $ (3,112) $ (3,790) $ (794) $ (1,147)
========= ========= ========= ========= ========= ========= ========= =========
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 ........ 80.4% 76.2% 63.5% 70.3% 72.3% 71.9% 68.7% 68.0%
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ............ 19.6 23.8 36.5 29.7 27.7 28.1 31.3 32.0
SG&A .................... 56.7 46.6 43.3 43.6 53.5 60.4 38.8 44.3
Restructuring charges ... -- 40.5 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations .... (37.1)% (63.3)% (6.8)% (13.9)% (25.8)% (32.3)% (7.5)% (12.3)%
========= ========= ========= ========= ========= ========= ========= =========
Liquidity and Capital Resources
The Company's working capital increased to $11.3 million at December 31,
2000 from $9.0 million at December 31, 1999. Cash and equivalents and
marketable debt securities were $6.4 million at December 31, 2000 compared to
$6.9 million at December 31, 1999. The primary uses of cash during the year
ended December 31, 2000 were to fund a net operating loss of $8.5 million and
a decrease in accounts payable, accrued compensation and other accrued
expenses of $4.0 million. The Company also retired the outstanding $1 million
note payable related to the purchase of CMR. These uses of cash were offset by
the issuance of 8,000,000 shares of redeemable convertible preferred stock for
$7.4 million, net of expenses and the selling of marketable securities for
$1.0 million.
13
In August 1999, enherent entered into a loan and security agreement
with Bank of America, the proceeds of which may be used for general working
capital. The initial maturity date of the loan is August 4, 2001; however,
enherent may terminate prior to that date on 30 days written notice to Bank
of America, plus an early termination fee of 1% of the Maximum Facility
Amount. The maximum loan facility is based on the amount of eligible accounts
receivable of the Company. This loan is secured by a security interest in all
of enherent's tangible and intangible personal property and a first-and-only
security interest in and lien on all of enherent's fixed assets; and a
first-and-only security interest in and pledge of all of enherent's stock of
its foreign subsidiaries. The maximum loan amount is $13,500,000; however;
the actual amount the Company may borrow is substantially less due to
restrictions on its eligible accounts receivable. These limitations on
borrowing include, but are not limited to, discounting of eligible accounts
receivable of the Company's largest customer, exclusive of accounts
receivable over 90 days old from the borrowing base and exclusive of
customers who have not contractually waived their right to off set and set
off payment based on customer claims. In addition, the enherent cumulative
net loss before interest, taxes, depreciation and amortization for the period
from July 1, 1999 through August 4, 2001 cannot exceed $4,500,000. As of
December 31, 2000 enherent had exceeded the net loss provision of $4,500,000.
The Company had no borrowing outstanding under this credit facility as of
December 31, 2000. On April 4, 2001 Bank of America terminated this credit
facility.
On April 13, 2000, the Company issued 8,000,000 shares of its Series A
Senior Participating Convertible Preferred Stock ("Preferred Stock") for
$8,000,000 ($7,400,000 net of expenses). 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 is convertible
into one share of Common Stock prior to April 14, 2005 at the option of the
holder. The guaranteed discount on the conversion of the Preferred Stock and the
value of the Warrants, aggregating approximately $5,200,000, was deemed to be a
dividend for purposes of calculating loss per share. Accordingly, such deemed
dividend was recorded as a reduction to amounts available to common shareholders
during the quarter ending June 30, 2000.
The Company anticipates that its primary uses of working capital in the
near term will be the expansion of its current business. The Company continues
to review the costs associated with operating its business. We believe that
our current cash and equivalents will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or establish an additional credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to
our stockholders. The incurrence of additional indebtedness would result in
increased fixed obligations and could result in operating covenants that would
restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
14
FACTORS THAT MAY AFFECT FUTURE RESULTS
General Economic Slowdown and IT Services Sector Economic Impact
The current economic slowdown and general market recession could cause
demand for the Company's services and IT Services in general to slow
dramatically. The Company's business could be impacted by customer actions to
delay, reduce in scope or cancel orders for the Company's services. There can be
no assurance that there will be continued demand for the Company's services,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
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 consultants and IT
sales professionals who possess the necessary technical skills and experience or
can be trained to deliver the Company's services. Qualified IT consultants and
IT sales professionals are in high demand worldwide and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that
enherent will continue to have access to qualified IT and IT sales
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.
Risks Associated with International Operations
During the years ended December 31, 1998, 1999 and 2000, the percentage of
revenue generated outside the United States was 20.7%, 8.3% and 8.6%,
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 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. Although the Company does not 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.
enherent has operated its Barbados CSEC for approximately four years.
enherent 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 enherent (Barbados) Ltd.
("enherent Barbados") is an international business company under Barbadian law,
enherent 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 2011) 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 enherent'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.
Limited Operating History; Losses
The Company has a limited operating history and has incurred losses from
the year ended December 31, 1995 until the year ended December 31, 2000. In
order to operate profitably in the future, the Company must accomplish some or
all 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 or (iii) reduce costs of providing services.
15
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 enherent's
Common Stock.
Concentration of Revenues
In fiscal year 2000, approximately 53% of the Company's revenues were
derived from five clients with one client, J.P. Morgan, accounting for
approximately 14% of the Company's revenues in 2000, 11% of the Company's
revenue in 1999 and 15% of the Company's revenue in 1998. During fiscal years
1999 and 1998, approximately 53% and 58% were derived from its five largest
clients, respectively.
Certain stockholders of the Company are significant enherent 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
enherent 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. Additionally,
the Company's attempts to contractually reduce liability with many of its
largest clients have met with limited success. 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.
Reliance on Key Personnel
The Company's future success depends on the continued services of certain
key management personnel, in particular, Dan S. Woodward, Chief Executive
Officer and Jack D. Mullinax, Chief Financial Officer and EVP Corporate
Services, each of whom has entered into an employment agreement with enherent.
In addition, the Company's 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.
Contract Risk
Most of the Company's contracts are terminable by the client following
limited notice and without early termination payments or liquidated damages due
to enherent. 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. 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.
16
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 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 enherent 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,
enherent. Additionally, in certain sectors of the Company's business,
particularly Professional Services, 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, enherent'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.
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, L-1 or TN temporary work
permits. As of December 31, 2000, approximately 32% of enherent's worldwide
workforce was working under such temporary work permits in the United States.
Although, to date, enherent has not experienced difficulties in obtaining
sufficient H-1B work permits, in the future the Company may be unable to obtain
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 work permit 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.
17
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 enherent's
technology. The Company presently holds no patents or registered copyrights, but
enherent has several registered trademarks for "enherent" and the enherent logo.
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 enherent'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 enherent'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 December 29, 2000, the Mellinger family owned approximately 23% of
the outstanding shares of voting equity securities and therefore had significant
control of 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 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.
The Mellinger family is comprised of: a) Douglas K. Mellinger, former
Chairman of the Board of Directors and former Chief Executive Officer of
enherent. Douglas K. Mellinger beneficially owns approximately 7% of the
Company's voting equity securities; b) Gregory S. Mellinger, former Chief
Operating Officer, Director and President of the Company's Professional Services
division. Gregory S. Mellinger beneficially owns approximately 7% of the
Company's voting equity securities; c) Paul L. Mellinger, brother of
18
Douglas and Gregory Mellinger, who is not and never has been an employee of the
Company. Paul Mellinger owns approximately 8% of the Company's voting equity
securities.
In March 2000, the Company received an exemption from the Nasdaq Stock
Market pursuant to NASD Rule 4460 to permit the Company to issue Common Stock
equivalents in excess of 20% of enherent's outstanding shares in the investment
described herein without shareholder approval.
enherent accepted the proposal of two existing shareholders of the
Company, Tudor Investment Corporation and The Travelers Indemnity Company, which
was designed to allow enherent to receive an immediate infusion of equity
capital to meet its working capital needs.
enherent entered into a Securities Purchase Agreement with Tudor
Investment Corporation, The Travelers Indemnity Company and EGF Eurofinancial
Investment Company for $8,000,000 in working capital funding in exchange for the
private placement of enherent Series A Senior Participating Convertible
Preferred Stock and Warrants. Under the terms of the Agreement, the Company's
Series A Senior Participating Convertible Preferred Stock was purchased at a
price per share of $1.00. The Preferred Stock is convertible into an equal
number of shares of the Company's Common Stock, subject to adjustment under
certain circumstances. The Company would further issue to the investors Warrants
to purchase four million shares of Common Stock, subject to adjustment under
certain circumstances, at an exercise price of $1.00 per share.
As a consequence of the Tudor Investment Corporations purchase of Series A
Senior Participating Convertible Preferred Stock and Tudor's ownership of Common
Stock, Tudor collectively owns approximately 17% of the Company's voting equity
securities. Tudor's Series A preferred shares vote on an as-converted basis,
representing approximately 14% of the Company's voting equity securities.
The Travelers (through its ownership of Common Stock and purchase of
Series A Senior Participating Convertible Preferred Stock) collectively owns
approximately 17% of the Company's voting equity securities. The Travelers'
Series A preferred shares vote on an as-converted basis, representing
approximately 14% of the Company's voting equity securities.
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, 2000, the Company had an aggregate of 18,351,311 shares
of Common Stock and Non-Voting Common Stock outstanding, 4,600,000 of which were
freely tradable 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 13,751,311 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. Furthermore, on January
27, 2000, the Company filed a registration statement on Form S-8 registering
1,000,000 shares of Common Stock reserved for issuance to employees who elect to
purchase such Common Stock as an investment option under the Company's 401(k)
Plan.
Tudor owns approximately 27% of the Company's Common Stock and Common Stock
equivalents outstanding (through its ownership of Common Stock, Warrants and
Convertible Preferred Stock). The shares of Common Stock issuable upon
conversion of the Preferred Stock have been registered under an effective
registration statement and can be resold upon conversion of the Preferred Stock.
Similarly, The Travelers owns approximately 26% of the Company's Common Stock
and Common Stock equivalents outstanding (through its ownership of Common Stock,
Warrants and Convertible Preferred Stock). Again, the shares of Common Stock
issuable upon conversion of the Preferred Stock have been registered under an
effective registration statement and can be resold upon conversion of the
Preferred Stock. The Company cannot predict the effect that future sales of
stock, especially by Tudor or Travelers, will have on the market price of
enherent Common Stock prevailing from time to time. Sales of substantial amounts
of
19
enherent Common Stock (including shares issued upon the conversion of Preferred
Stock or the exercise of stock options or Warrants), and even the perception
that such sales could occur, may adversely affect prevailing market prices for
enherent Common Stock.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our accounts receivable are subject, in the normal course of business, to
collection risks. The Company regularly assesses these risks and has established
policies and business practices to protect against the adverse effects of
collection risks. As a result, we do not anticipate any material losses in this
area.
Interest Rate Risk
Our investments are classified as cash and cash equivalents with original
maturities of three months or less. Therefore, changes in the market's interest
rates do not affect the value of the investments as recorded by us.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of enherent Corp. and Subsidiaries,
Exhibit 1.1 hereto, and the Independent Auditors' Report included therein, are
each incorporated by reference herein as Exhibit 1.1 hereto.
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
PART III
Item 10. Directors and Executive Officers of the Registrant
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
2001 Annual Meeting of Stockholders which is expected to be filed with the
Securities and Exchange Commission on or before April 4, 2001 (the "2001 Proxy
Statement").
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 2001 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
2001 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
The information called for by Item 13 with respect to transactions between
the Company and certain related entities is incorporated herein by reference to
the material under the caption "Certain Transactions" in the 2001 Proxy
Statement.
On June 30, 1999, enherent announced that Douglas K. Mellinger, Chairman
and Chief Executive Officer of enherent (i) resigned his positions as Chairman
of the Board of Directors (the "Board") and Chief Executive Officer of the
Company and all other offices of and its affiliates and (ii) was appointed to
the newly created position of Non-Executive Chairman of the Board. Douglas
Mellinger continues to serve as a director of the Company. The Company further
announced that Gregory S. Mellinger, former Chief Operating Officer and former
President of enherent's Professional Services Group business unit resigned his
positions as an officer and director of enherent and all other offices of
enherent and its affiliates. Both Douglas Mellinger and Gregory Mellinger
remained employees of enherent, consulting with the senior management of
enherent until October 1, 2000.
Under the agreements with enherent and until October 1, 1999, Douglas
Mellinger and Gregory Mellinger continued to receive payment of their salaries
at the time of their resignations from the Company and were entitled during the
Salary Continuation Period to (i) participate in the Company's 401(k) plan and
receive a $1,500 per month automobile allowance. As part of the agreement with
Messrs. Mellinger, the Company paid $25,000 of their legal fees and forgave
$14,700 of outstanding loans due from each former officer. No other employee
benefits were available to Douglas Mellinger and Gregory Mellinger.
Also on June 30, 1999, enherent entered into a Nomination Agreement with
Douglas Mellinger, Gregory Mellinger and certain members of the Mellinger
family, pursuant to which the Mellinger family has certain rights to nominate up
to three persons acceptable to the Board for appointment and election to the
Board, which included Douglas Mellinger and initially included Ronald Weinberg.
These nomination rights will diminish to two and one nomination as the aggregate
holdings of the Mellinger family decrease, and such rights will terminate at the
earlier to occur of (i) such time as the Mellinger family collectively holds
less than 10% of the outstanding Common Stock of enherent and (ii) June 30,
2005, unless the Nomination Agreement is earlier terminated at any time at the
option of the Mellinger family. In addition, pursuant to the Nomination
Agreement, for so long as the Mellinger family shall have the above-described
nomination rights, the Mellinger family has agreed to vote for the slate of
directors nominated by enherent. The Nomination Agreement also contains certain
preemptive rights.
21
The Company entered into a three-year employment agreement with Dan S.
Woodward ("Woodward Agreement") commencing on May 17, 1999. Under the agreement,
Mr. Woodward shall serve as President and Chief Executive Officer, earning a
base salary of $318,000, with a target bonus opportunity of 100% of the base
salary under the annual incentive award plan determined by the Board of
Director's Compensation Committee. For 1999, Mr. Woodward was guaranteed
$150,000 performance bonus. The Company agreed to pay Mr. Woodward a sign-on
bonus in the aggregate sum (net of all payroll taxes) of $200,000 in cash within
three business days of the start of Mr. Woodward's employment with the Company
and a additional sign-on bonus of the cash equivalent of 40,000 shares of the
Company's stock--as of the date of the date he joined the Company--such
additional sign-on bonus to be paid on or before January 15, 1999. In addition,
the Company awarded Mr. Woodward 710,000 stock options, the strike prices of
which were 460,000 at $2.4375 and 250,000 at $2.1875, and agreed to pay over the
term of the Woodward Agreement up to a total of $125,000 as reimbursement for
all reasonable and documented costs associated with his relocating his
residence, traveling to and from his residence, local housing, automobile costs
and other costs directly related to his relocation, housing or travel. Future
raises and other compensation will be determined by the Board of Directors'
Compensation Committee.
If Mr. Woodward's employment is terminated Without Cause (as defined in
the Woodward Agreement), enherent shall continue to pay Mr. Woodward (i) the
annual base salary at the date of termination for the greater of one (1) year or
remainder of the term and (ii) any earned performance bonus prorated as of the
date of termination. enherent shall also continue to pay the premiums for any
employee benefits including relocation allowance and vacation time for the
greater of one (1) year or remainder of the term. Any stock options granted to
Mr. Woodward shall be exercisable as per the original vesting schedule of the
applicable option grant and the Common Stock acquired pursuant to such exercise
may be sold by Mr. Woodward subject to no restrictions by enherent (other than
those imposed by the enherent's then current insider trading policy or by
federal and state securities laws).
Mr. Jack Mullinax is a party to an employment agreement with the Company
pursuant to which he serves as Chief Financial Officer, Treasurer, Secretary and
Executive Vice President Corporate Services, earning a base salary of $180,000,
with future raises and other compensation to be determined by the Board of
Directors' Compensation Committee. He has a two-year Term that commenced on
August 1, 1999. Mr. Mullinax was also awarded stock options to purchase 70,000
shares of Common Stock at a strike price of $2.1875.
Mr. Gerard J. Roszak serves as Executive Vice President/General Manager,
North Area, earning a base salary of $150,000, and Mr. George O. Warman serves
as Vice President & Controller, earning a base salary of $125,000, in each case
with future raises and other compensation to be determined by the Board of
Director' Compensation Committee. Each serves for a two-year Term, commencing
November 1, 2000, under their respective employment agreements.
If an Officer's employment is terminated Without Cause (as defined in the
applicable employment agreements) during the Term, each Officer will be entitled
to receive one (1) year salary continuation of base salary and any performance
bonus pro-rated to the date of termination. In addition, all options of each
Officer vest immediately upon a termination Without Cause.
22
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 enherent Corp. and
Subsidiaries, Exhibit 1.1 hereto.
(2) Financial Statement Schedules
See Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable
and therefore have been omitted.
(3) Exhibits
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of
enherent Corp. (filed herewith).
3.2 Amended and Restated Bylaws (Incorporated by reference
to Exhibit 4.2 of the Company's' Form S-8 filed January
22, 1998).
4.1 Form of Certificate of Common Stock (Incorporated by
reference to Exhibit 4.1 of the Company's S-1/A filed
October 29, 1997).
4.2 Securities Purchase Agreement dated as of April 13,
2000, by and among PRT Group Inc. and the Investors
named therein (Incorporated by reference to Exhibit 99.1
of the Company's Form 8-K filed April 14, 2000).
4.3 Form of Certificate of Designations. (Incorporated by
reference to Exhibit 99.2 of the Company's Form 8-K
filed April 14, 2000).
4.4 Form of Warrant (Incorporated by reference to Exhibit
99.3 of the Company's Form 8-K filed April 14, 2000).
10.1 Employment Agreement between Dan Woodward and the
Company dated May 17, 1999 (filed herewith).
10.2 Employment Agreement between Jack Mullinax and the
Company dated August 1, 1999 (filed herewith).
10.3 Employment Agreement between Gerry Rosak and the Company
dated November 1, 2000 (filed herewith).
10.4 Employment Agreement between George Warman and the
Company dated November 1, 2000 (filed herewith).
10.5 Amended and Restated 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the
Company's' Form S-8 filed January 22, 1998).
10.6 Loan and Security Agreement dated August 5, 1999 between
the Company and Bank of America f/k/a Nations Credit
Commercial Corporation (filed herewith).
23.1 Consent of Ernst & Young LLP, dated April 4, 2001
(filed herewith).
23
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.
enherent CORP.
By: /s/ DAN S. WOODWARD
Date: April 4, 2001 Dan S. Woodward
President and Chief Executive Officer
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:
Date: April 4, 2001 By: /s/ DAN S. WOODWARD
Dan S. Woodward
President and Chief Executive Officer
Date: April 4, 2001 By: /s/ JACK D. MULLINAX
------------------------
Jack D. Mullinax
Chief Financial Officer
Date: April 4, 2001 By: /s/ MICHAEL ENTHOVEN
------------------------
Michael Enthoven
Director
Date: April 4, 2001 By: /s/ ROBERT P. FORLENZA
--------------------------
Robert P. Forlenza
Director
Date: April 4, 2001 By: /s/ DOUGLAS K. MELLINGER
----------------------------
Douglas K. Mellinger
Director
Date: April 4, 2001 By: /s/ ISAAC SHAPIRO
---------------------
Isaac Shapiro
Director
Date: April 4, 2001 By: /s/ IRWIN J. SITKIN
-----------------------
Irwin J. Sitkin
Director
Date: April 4, 2001 By: /s/ JACK L. RIVKIN
----------------------
Jack L. Rivkin
Director
Date: April 4, 2001 By: /s/ RONALD E. WEINBERG
--------------------------
Ronald Weinberg
Director
24
enherent Corp. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.................F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000...........................................F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000...............................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000...........................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
enherent Corp.
We have audited the accompanying consolidated balance sheets of enherent
Corp. and Subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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
enherent Corp. and Subsidiaries at December 31, 1999 and 2000, the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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
New York, New York
April 4, 2001
F-2
enherent Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except number of shares)
December 31
1999 2000
--------------------------------------
Assets
Current assets:
Cash and equivalents $ 5,052 $ 5,628
Marketable securities 1,810 728
Accounts receivable, net of allowance of $529 in 1999 and $700 in 2000 8,712 7,397
Prepaid expenses and other current assets 1,203 576
--------------------------------------
Total current assets 16,777 14,329
Fixed assets, net 6,507 3,214
Goodwill, net 16,863 15,886
Other assets 388 101
--------------------------------------
Total assets $ 40,535 $ 33,530
======================================
Liabilities and stockholders' equity
Current liabilities:
Accrued compensation $ 2,350 $ 740
Accounts payable and other accrued expenses 4,534 2,154
Current portion of capital lease obligations 227 16
Deferred revenue 632 97
--------------------------------------
Total current liabilities 7,743 3,007
Note payable 1,000 --
Capital lease obligations, net of current portion 135 28
Deferred rent 386 121
--------------------------------------
Total liabilities 9,264 3,156
Commitments -- --
Series A redeemable convertible preferred stock, $0.001 par value;
authorized--10,000,000 shares; 8,000,000 issued and outstanding at December
31, 2000 -- 5,258
Common stockholders' equity:
Common stock, $0.001 par value; authorized--50,000,000 shares; issued and
outstanding--18,283,642 shares at December 31, 1999 and 18,351,311 shares
at December 31, 2000 18 18
Additional paid-in capital 86,361 94,212
Accumulated deficit (55,108) (69,114)
--------------------------------------
Total common stockholders' equity 31,271 25,116
--------------------------------------
Total liabilities and stockholders' equity $ 40,535 $ 33,530
======================================
See accompanying notes.
F-3
enherent Corp. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Years ended December 31
1998 1999 2000
-----------------------------------------------------------
Revenues $ 85,607 $ 65,359 $ 43,697
Cost of revenues 64,096 47,815 30,753
-----------------------------------------------------------
Gross profit 21,511 17,544 12,944
Selling, general and administrative expenses 34,214 31,441 21,787
Restructuring charges -- 7,483 --
-----------------------------------------------------------
Loss from operations (12,703) (21,380) (8,843)
Other income (expense):
Interest expense (455) (203) (210)
Interest income 1,118 368 521
-----------------------------------------------------------
Net loss (12,040) (21,215) (8,532)
Preferred stock dividends and accretion -- -- 5,474
-----------------------------------------------------------
Net loss available to common stockholders $ (12,040) $ (21,215) $ (14,006)
===========================================================
Basic and diluted net loss per share $ (.66) $ (1.16) $ (.76)
===========================================================
Number of shares used in computing basic and
diluted net loss per share 18,213,252 18,274,705 18,347,244
===========================================================
See accompanying notes.
F-4
enherent Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1999 and 2000
(In thousands, except number of shares)
Additional
Common Stock Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
-----------------------------------------------------------------------------------
Balance at December 31, 1997 18,229,063 $ 18 $ 86,324 $ (21,853) $ (400) $ 64,089
Net loss -- -- -- (12,040) -- (12,040)
Exercise of stock options 88,125 -- 478 -- -- 478
Shares transferred into treasury -- -- -- -- (44) (44)
Retirement of treasury stock (71,617) -- (444) -- 444 --
Additional costs related to initial public
offering -- -- -- (96) -- (96)
-----------------------------------------------------------------------------------
Balance at December 31, 1998 18,245,571 18 86,262 (33,893) -- 52,387
Net loss -- -- -- (21,215) -- (21,215)
Exercise of stock options 38,071 -- 99 -- -- 99
-----------------------------------------------------------------------------------
Balance at December 31, 1999 18,283,642 18 86,361 (55,108) -- 31,271
Net loss -- -- -- (8,532) -- (8,532)
Exercise of stock options 67,669 -- 210 -- -- 210
Issuance of preferred shares and common
stock warrants, net of issuance costs -- -- 2,475 -- -- 2,475
Dividends on preferred stock -- -- 5,166 (5,166) -- --
Accretion of preferred stock -- -- -- (308) -- (308)
-----------------------------------------------------------------------------------
Balance at December 31, 2000 18,351,311 $ 18 $ 94,212 $ (69,114) $ -- $ 25,116
===================================================================================
See accompanying notes.
F-5
enherent Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31
1998 1999 2000
--------------------------------------
Cash flows from operating activities
Net loss $(12,040) $(21,215) $ (8,532)
Adjustments to reconcile net loss to net cash used in operating
activities net of business acquired:
Depreciation and amortization 4,688 4,840 3,694
Loss on disposal of fixed assets 633 1,719 1,231
Loss on the sale of marketable securities -- -- 56
Provision for doubtful accounts 926 411 581
Loss on disposal of fixed assets 633 1,729 1,231
Goodwill impairment -- 2,517 --
Deferred income taxes (33) -- --
Deferred rent 355 (36) (265)
Changes in operating assets and liabilities:
Accounts receivable 1,049 5,516 734
Prepaid expenses and other current assets (172) 903 627
Other assets 141 98 287
Accrued compensation (347) (1,260) (1,610)
Accounts payable and other accrued expenses (1,423) 562 (2,380)
Deferred revenue (460) 121 (535)
--------------------------------------
Net cash used in operating activities (6,683) (5,824) (6,112)
--------------------------------------
Cash flows from investing activities
Purchases of fixed assets (4,893) (2,423) (679)
Purchases of marketable securities (108) (1,756) --
Sales of marketable securities 14,121 555 1,026
Proceeds from sale of fixed assets -- 67 24
Purchase of net assets of ACT, net of cash acquired (13,010) -- --
Purchase of net assets of ISPI, net of cash acquired (2,745) -- --
Return of cash paid for ISPI acquisition -- 80 --
Other assets (300)
--------------------------------------
Net cash (used in) provided by investing activities (6,935) (3,477) 371
--------------------------------------
Cash flows from financing activities
Repayment of note payable (1,182) -- (1,000)
Issuance cost in connection with 1997 issuance of common stock (96) -- --
Exercise of stock options 478 99 210
Principal payments under capital lease obligations (309) (518) (318)
Issuance of preferred shares and common stock warrants, net of issuance
costs -- -- 7,425
--------------------------------------
Net cash (used in) provided by financing activities (1,109) (419) 6,317
--------------------------------------
Net (decrease) increase in cash and equivalents (14,727) (9,720) 576
Cash and equivalents at beginning of period 29,499 14,772 5,052
--------------------------------------
Cash and equivalents at end of period $ 14,772 $ 5,052 $ 5,628
======================================
Supplemental disclosure of cash flow information
Interest paid $ 307 $ 191 $ 210
======================================
Income taxes paid $ 244 $ 98 $ --
======================================
Noncash financing activities
Acquisition of fixed assets through capital leases $ 39 $ -- $ --
======================================
See accompanying notes.
F-6
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1999 and 2000
1. Description of Business
The accompanying consolidated financial statements include the accounts of
enherent Corp. ("enherent") and its wholly owned subsidiaries (collectively, the
"Company"), formerly PRT Group Inc. and subsidiaries ("PRT"). enherent is a
provider of information technology services including strategic consulting,
project solutions and staff augmentation.
On July 2, 2000, PRT 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.
The Company has sales and account management offices located in Connecticut, New
York and Texas and software development centers in Barbados, W.I. and
Connecticut. During 2000, the Company relocated its corporate headquarters to
Dallas, Texas.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue from time and materials contracts is 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 are recorded as deferred revenue.
Principles of Consolidation
The consolidated financial statements include the accounts of enherent and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Research and Software Development Costs
The Company expenses as incurred or capitalizes costs incurred to develop new
software products in accordance with the Statement of Position 98-1, "Accounting
for the Cost of Computer Software Development or Obtained for Internal Use"
("SOP 98-1"). SOP 98-1 requires that costs incurred in the preliminary and
post-implementation stages of an internal use software project are expensed as
incurred and that certain costs incurred in the application development stage of
the project be capitalized.
In 1997, the Company capitalized $160,000 of research and software development
costs. During 1998 the Company determined that no future benefit would be
derived from such assets and expensed the unamortized balance. No research and
software development costs were capitalized in 1998, 1999 and 2000.
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
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Cash and Equivalents and Marketable 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 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 sheets. The purchase cost of such securities is included in
either cash and equivalents or marketable debt securities.
The Company's investment in common stock is classified as trading securities and
stated at fair market value. Gains and losses, both realized and unrealized, are
included as a component of current earnings. Realized gains and losses are
determined based on specific identification of securities sold.
Fixed Assets
Fixed assets are stated at cost and depreciation on furniture and equipment,
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 was $2,070,000 and $3,047,000 as of December 31, 1999
and 2000, respectively.
Net Loss Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share." Accordingly basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Dilutive shares consist of the incremental common shares isssuable
upon the conversion of the Preferred Stock (using the if converted method) and
shares issuable upon the exercise of stock options (using the treasury stock
method); such additional shares are excluded from the calculation if their
effect is anti-dilutive.
F-8
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes compensation expense only if the fair
value of the underlying Common Stock exceeds the exercise price of the stock
option on the date of grant. As permitted by SFAS No. 123, the Company continues
to account for stock-based compensation in accordance with APB Opinion No. 25
and has elected the pro forma disclosure alternative of SFAS No. 123.
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.
Segment Information
The Company discloses information regarding segments in accordance with SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for reporting of financial information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports. The
disclosure of segment information was not required as the Company operates in
only one business segment.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, marketable 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.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
3. Cash Equivalents and Marketable Securities
The following is a summary of the Company's marketable securities, which are
classified as cash equivalents and marketable securities (in thousands):
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
December 31, 1999
Cash Equivalents $ 4,653 $ -- $ -- $ 4,653
Marketable Debt Securities:
Commercial Paper 732 -- -- 732
Corporate Obligation 1,025 -- -- 1,025
Common Stock 128 -- 75 53
---------- ---------- ---------- ----------
Total $ 6,538 $ -- $ 75 $ 6,463
========== ========== ========== ==========
December 31, 2000
Cash Equivalents $ 4,039 $ -- $ -- $ 4,039
Marketable Debt Securities:
Commercial Paper 728 -- -- 728
---------- ---------- ---------- ----------
Total $ 4,767 $ -- $ -- $ 4,767
========== ========== ========== ==========
All of the Company's investments in debt securities are classified as
held-to-maturity and, at December 31, 2000, have scheduled maturities of less
than one year. There were no gross realized gains or losses on sales of
marketable securities during 1999. The gross realized loss on the sale of
marketable securities was $56,000 in 2000.
F-9
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Fixed Assets
Fixed assets consist of the following (in thousands):
December 31
1999 2000
---------------------------
Furniture and equipment $ 4,509 $ 3,183
Computer equipment and software 10,540 9,027
Leasehold improvements 670 665
---------------------------
15,719 12,875
Less accumulated depreciation
and amortization (9,212) (9,661)
---------------------------
$ 6,507 $ 3,214
===========================
During 1998, the Company capitalized approximately $568,000 of costs related to
the establishment of a new software testing service. In December 1998, the
Company determined that the asset would provide no future benefit to the Company
and the Company expensed the unamortized asset balance, aggregating $473,000.
Fixed assets include assets under capital lease aggregating approximately
$1,378,000 and $827,000 at December 31, 1999 and 2000, respectively. The
accumulated amortization related to assets under capital leases is approximately
$982,000 and $520,000 at December 31, 1999 and 2000, respectively.
5. Credit Facility
In August 1999, enherent entered into a loan and security agreement with Bank
of America, the proceeds of which are to be used for general working capital.
The initial maturity date of the loan is August 4, 2001, however, enherent
may terminate prior to that date upon 30 days written notice to Bank of
America, plus an early termination fee of 1% of the Maximum Facility Amount.
The maximum loan facility is based on the amount of eligible accounts
receivable of the Company. This loan is secured by a security interest in all
of enherent's tangible and intangible personal property and a first and only
security interest in and lien on all of enherent's fixed assets; and a first
and only security interest in and pledge of all of enherent's stock of its
foreign subsidiaries. The maximum loan amount is $13,500,000, however; the
actual amount the Company may borrow is substantially less due to
restrictions on its eligible accounts receivable. These limitations on
borrowing include, but are not limited to, eligible accounts receivable, as
defined. In addition, the enherent cumulative net loss before interest,
taxes, depreciation and amortization for the period from July 1, 1999 through
August 4, 2001 cannot exceed $4,500,000. As of December 31, 2000, enherent
has exceeded the $4,500,000 net loss restrictions. The Company had no
borrowing outstanding under this credit facility as of December 31, 2000. On
April 4, 2001 Bank of America terminated this credit facility.
6. 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 12,
2005 at the option of the holder at its liquidation value plus accrued and
unpaid dividends and contains voting rights on an as-converted basis. 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 value 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 $5,200,000, was deemed to be a dividend
for purpose of calculating loss per share. The Preferred Stock is being
accreted to its liquidation value at April 12, 2005.
F-10
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity
In August 2000, the Board of Directors approved the buy-back of up to $2,000,000
of the Company's outstanding Common Stock.
In June 1996, the Company established a Stock Option Plan (the "Option Plan")
for officers, employees, consultants and non-employee 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. In January 2000, the
Board of Directors approved an amendment to the Option Plan that increased the
shares reserved by 1,000,000. At December 31, 2000, the Company had reserved
4,108,425 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.
On December 15, 1998, the Company canceled substantially all options with
exercise prices greater than $6.50 and replaced them with options having an
exercise price of $2.75 per share, the fair market value at such date. The
vesting period for the newly granted options remained consistent with the
canceled options except for certain options which either vest upon the Company's
stock price reaching certain goals or after seven years from the date of grant.
F-11
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Activity in the Option Plan is summarized as follows (in shares):
Weighted Average
Shares Exercise price
------------------------------------
Outstanding at December 31, 1997 1,565,800 $ 10.22
Granted 3,467,017 $ 8.05
Exercised (88,125) $ 5.31
Canceled and expired (2,804,669) $ 12.65
------------------------------------
Outstanding at December 31, 1998 2,140,023 $ 3.68
Granted 2,837,453 $ 2.52
Exercised (38,071) $ 2.75
Canceled and expired (1,976,813) $ 3.43
------------------------------------
Outstanding at December 31, 1999 2,962,592 $ 2.75
Granted 1,618,301 $ 1.09
Exercised (67,669) $ 3.10
Canceled and expired (1,197,537) $ 2.84
------------------------------------
Outstanding at December 31, 2000 3,315,687 $ 1.89
====================================
Exercisable at December 31, 1998 658,210
=================
Exercisable at December 31, 1999 413,647
=================
Exercisable at December 31, 2000 791,090
=================
Available for grant at December 31, 2000 772,838
=================
The weighted average fair value of options granted during the years ended
December 31, 1998, 1999 and 2000 was $8.05, $1.81 and $.90, respectively.
Information regarding the options outstanding under the Option Plan at December
31, 2000 is as follows:
Number of Options
Currently Weighted-Average Weighted-Average Weighted-Average
Exercise Price Range Outstanding Exercise Price Contractual Life Number Exercisable Exercise Price
- --------------------------- -------------------- -------------------- -------------------- -------------------- -----------------
$ .38 -$ .38 20,500 $ .38 9.9 -- $ --
$ .63 -$ .69 460,500 $ .68 9.7 -- $ --
$ 1.13 -$ 1.19 827,408 $ 1.18 9.3 -- $ --
$ 1.88 -$ 2.75 1,819,338 $ 2.32 8.4 710,828 $ 2.37
$ 3.63 -$ 5.00 178,066 $ 3.87 7.8 71,163 $ 3.91
$ 5.63 -$ 5.63 7,550 $ 5.63 6.0 7,550 $ 5.63
$ 9.50 -$ 12.00 2,325 $ 10.79 6.8 1,549 $10.79
-------------------- --------------------
3,315,687 791,090
==================== ====================
F-12
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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:
December 31
Assumption 1998 1999 2000
---------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 7.26% 5.58% 6.22%
Dividend yield 0% 0% 0%
Volatility factor of the expected market price of the
Company's Common Stock .923 .85 1.12
Average life 5 years 5 years 5 years
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 years ended December 31, 1998, 1999 and 2000, pro forma net loss available
to common shareholders under SFAS 123 amounted to approximately $(15,937,000),
$(23,747,000) and $(16,936,000), respectively. The pro forma net loss per
share under SFAS 123 amounted to $(.87), $(1.30) and $(.93) respectively, for
the years ended December 31, 1998, 1999 and 2000, respectively.
8. Acquisitions
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 excess of
costs over net assets acquired, was approximately $6,180,000. 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 was 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.
In 1999, the Company repaid $1,000,000 of the CMR note and in 2000 the Company
repaid the entire outstanding balance.
On January 31, 1998, the Company purchased substantially all of the assets of
Advanced Computing Techniques, Inc. ("ACT"), a Connecticut corporation, for
approximately $13,010,000, including acquisition costs, in cash. The excess of
cost over net assets acquired was approximately $12,129,000.
On April 15, 1998, the Company consummated the purchase of substantially all the
assets of Institute For Software Process Improvements, Inc. ("ISPI"), a
Pennsylvania corporation, for approximately $2,745,000, including acquisition
costs, in cash. The excess of cost over net assets acquired was approximately
$2,758,000. During the quarter ended June 30, 2000, the Company wrote-off the
unamortized balance of the ISPI goodwill (see Note 9).
The aforementioned acquisitions were accounted for by the purchase method of
accounting and the results of operations are included in the Company's results
of operations since the respective dates of acquisition.
F-13
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Restructuring Charges
On June 30, 1999, the Company announced a restructuring, the purpose of which
was to refocus the Company's efforts on its core business and reduce costs. In
connection with the restructuring, the Company recorded aggregate charges of
approximately $7,500,000 relating to $2,000,000 in severance costs, $3,000,000
in office closures and the write-off of goodwill related to the ISPI acquisition
of $2,500,000. The Company completed the planned restructuring, however,
approximately $700,000 of the amount accrued in 1999 was not required and has
been included in Selling, General and Administrative expenses in 2000.
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 $2,500,000. The aforementioned restructure and impairment charges
were recorded in the quarter ending June 30, 1999.
10. Income Taxes
For financial reporting purposes, income before taxes includes the following
components (in thousands):
1998 1999 2000
--------------------------------------------------
Pre-tax income
U.S. $ (5,642) $ (14,853) $ (5,581)
Foreign (6,398) (6,362) (2,951)
--------------------------------------------------
Net loss $ (12,040) $ (21,215) $ (8,532)
==================================================
The provision (benefit) for income taxes consists of the following (in
thousands):
Current Deferred Total
-------------------------------------------------------------------
December 31, 1998
U.S. Federal $ -- $ -- $ --
State and local 33 (33) --
-------------------------------------------------------------------
$ 33 $ (33) $ --
===================================================================
There were no current or deferred federal or state and local taxes for the years
ended December 31, 1999 and 2000.
F-14
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The actual income tax expense differs from the "expected" tax expense computed
by applying the U.S. Federal corporate tax rate of 34% to income taxes, as
follows (in thousands):
December 31
1998 1999 2000
-----------------------------------
Computed "expected" tax benefit $(4,093) $(7,213) $(2,901)
Nondeductible losses of foreign subsidiaries 2,175 2,163 1,003
Non-deductible U.S. expenses -- 189 122
Valuation allowance relating primarily to U.S. net operating
losses 2,278 4,885 2,064
State tax benefit, net of federal tax effect at state statutory
rate -- -- (215)
Other (360) (24) (73)
-----------------------------------
$ -- $ -- $ --
===================================
The Company has net operating loss carryforwards of approximately $26 million to
offset future taxable income which begin to expire in 2018.
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):
December 31
1999 2000
-------------------------
Deferred tax assets:
Accounts receivable allowances $ 44 $ 201
Accrued restructuring charge 691 --
Net operating loss carryforwards 8,147 9,617
Amortization expense -- 59
Deferred rent expense 89 --
Other 32 --
-------------------------
Total gross deferred assets 9,003 9,877
-------------------------
Deferred tax liabilities:
Depreciation of fixed assets $ (230) $ (271)
Prepaid expenses -- (29)
Amortization expense (42) --
Section 481(a) adjustment (66) --
-------------------------
Total gross deferred liabilities (338) (300)
-------------------------
Net deferred tax asset 8,665 9,577
Valuation allowance (8,665) (9,577)
-------------------------
Net deferred tax asset $ -- $ --
=========================
11. Significant Clients
F-15
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During the years ended December 31, 1998, 1999 and 2000, approximately 58%, 53%
and 53% of revenue was derived from the Company's five largest clients,
respectively. Two clients accounted for 25% and 15% of total revenues for the
year ended December 31, 1998. Two clients accounted for 19% and 11% of total
revenues for the year ended December 31, 1999. Three clients accounted for 14%,
13% and 13% of total revenues for the year ended December 31, 2000,
respectively.
12. Commitments
The Company is obligated under capital leases for computer and office equipment
that expire at various dates through July 2004 with interest ranging from 10% to
15%. Future minimum lease payments relating to office space under noncancelable
operating leases and future minimum capital lease payments as of December 31,
2000 are as follows (in thousands):
Capital Operating
Leases Leases
--------------------------------------------
December 31:
2001 $ 19 $ 832
2002 12 372
2003 12 352
2004 12 278
2005 -- 4
-------------------- -------------------
Total minimum lease payments 55 $ 1,837
===================
Less amount representing interest (11)
--------------------
Present value of net minimum capital lease payments 44
Less current installments of obligations under capital leases (16)
--------------------
Obligations under capital leases, net of current installments $ 28
====================
Rent expense was approximately $2,278,000, $1,341,000 and $1,082,000 for the
years ended December 31, 1998, 1999 and 2000, respectively.
13. 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 were made on a discretionary basis for
plan years 1998 and 1999. Effective January 1, 2000 the Plan was modified
providing a 100% Company match of up to 3% of eligible employee contributions.
For the years ended December 31, 1998, 1999 and 2000, the Company recognized
contributions of $242,000, $215,000 and $402,000, respectively.
14. Related Party Transactions
Revenue generated from a client who is also a stockholder was approximately
$12,500,000, $7,100,000 and $6,100,000 for the years ended December 31, 1998,
1999 and 2000, respectively.
On April 30, 1998, the Company purchased a database of software engineering
names and resumes from a partnership wholly owned by the parents of the
Company's former CEO and Chairman of the Board of Directors for approximately
$300,000. The Company was paying a licensing fee of $60,000 annually to access
the database.
F-16
enherent Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On May 1, 1998, the Company agreed to pay Forum Computer Services, Inc.
("Forum") a one-time fee of $200,000 in lieu of all past or future unpaid
finder's fees relating to certain consultant contracts placed with Forum's
marketing assistance. In exchange for this one-time payment, Forum agreed to
release the Company from all claims for finder's fees related to these
consultants. Forum is owned 57% by the father of the Company's former CEO and
Chairman of the Board of Directors and 43% by a stockholder of the Company.
Finder's fee paid to Forum was approximately $122,000 for the year ended
December 31, 1998.
15. 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
(discontinued during 1999). The Company's operations in Asia were not
individually material and are included in foreign operations along with the West
Indies.
Geographic information is as follows (in thousands):
December 31
1998 1999 2000
----------------------------------------------------------------------------------------------
Domestic Foreign Domestic Foreign Domestic Foreign
----------------------------------------------------------------------------------------------
Revenues $ 67,871 $ 17,736 $ 59,915 $ 5,444 $ 39,943 $ 3,754
----------------------------------------------------------------------------------------------
Long-lived assets $ 7,477 $ 2,219 $ 4,422 $ 2,085 $ 2,366 $ 848
==============================================================================================
16. Litigation
A former Chief Financial Officer of the Company filed a Demand for Arbitration
on or about October 27, 2000 claiming that at the time of his termination, he
was entitled to stock options worth $3,000,000 or the stock option value in
cash. enherent has filed a Motion for Summary Judgment that has not been ruled
on by the Arbitrator. No ruling on this motion has been made to date. There is
no hearing date for the arbitration.
In the normal course of business, various claims are made against the Company.
At this time, in the opinion of management, there are no pending claims,
including the above mentioned Demand for Arbitration, 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.
F-17
enherent Corp. and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------------------
Balance at Additions
Beginning of Charged to Costs (a) Balance at End
Description Period and Expenses Deductions of Period
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Allowances deducted from assets
to which they apply:
Allowance for doubtful accounts $ 334 $ 926 $ 721 $ 539
Year ended December 31, 1999
Allowances deducted from assets
to which they apply:
Allowance for doubtful accounts $ 539 $ 411 $ 421 $ 529
Year ended December 31, 2000
Allowances deducted from assets
to which they apply:
Allowance for doubtful accounts $ 529 $ 606 $ 435 $ 700
(a) Uncollectible receivables written off.
F-18