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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23315
PRT GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914972
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
342 MADISON AVENUE, 11TH FLOOR,
NEW YORK, NEW YORK 10173
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 922-0800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value Nasdaq NMS
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates of the registrant as of March 19, l999, was
approximately $36,363,000.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 19, 1999 was approximately 18,245,571 shares.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated herein by reference the registrant's Proxy Statement
for the 1999 Annual Meeting of Stockholders, expected to be filed with the
Securities and Exchange Commission on or before March 31, 1999, in Part III
hereof.
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PART I
ITEM 1. BUSINESS
The following description of the business of PRT Group Inc. ("PRT" or the
"Company") contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this section and elsewhere in this Form
10-K Annual Report, the words "anticipate," "believe," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, such forward-looking statements. Factors that could cause or
contribute to such differences include, without limitation, those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below.
GENERAL
PRT Group Inc. was incorporated under the laws of the State of Delaware in
1996. The Company was first incorporated as PRT Corp. of America, a New York
corporation, in 1989. The Company maintains its principal executive offices at
342 Madison Avenue, 11th Floor, New York, New York 10173. The Company's
telephone number is (212) 922-0800.
PRT was founded in 1989 to provide information technology ("IT") solutions
and services internationally, primarily to Fortune 500-sized companies. PRT
provides a number of services in three primary categories: Strategic Consulting,
Project Solutions and Professional Services, also referred to as staff
augmentation. These services include: application development and management,
Internet/e-commerce, data warehousing, data mining, year 2000 renovation and
testing and "Quality Journey" software quality management. PRT offers full life
cycle software engineering solutions, for both client server and main frame
systems, beginning with the understanding of the client's business issues and
continuing through: (i) problem analysis, (ii) solution architecture and design,
and (iii) coding, (iv) testing and (v) ongoing maintenance. Project solutions
are rendered according to rigorous software engineering principles built upon
the Software Engineering Institute ("SEI") capability maturity model ("CMM") and
can be provided at a client location or at one of PRT's Software Engineering
Centers ("SECs"). This life cycle approach, supported by strict software
engineering principles embodied in the Company's Process Asset Library ("PAL")
software engineering framework, a knowledge bank of processes, methodologies,
tools and reusable work product developed by PRT, as well as an internal,
independent software quality assurance function, allows the Company to provide
high-quality, effective IT solutions. As of December 31, 1998, PRT employed or
had subcontracting arrangements with over 867 personnel, including 698 IT
professionals, of whom 110 were subcontractors. Approximately 50% worked in
SECs.
PRT offers its services to clients at their site or off-site. The Company
has eleven offices in Connecticut, Illinois, Colorado, New York, Pennsylvania,
Mumbai, formerly Bombay, India and Lausanne, Switzerland. In addition, the
Company has SECs in Barbados, West Indies, Chennai, India and the Hartford,
Connecticut area. SECs are the key sites where PRT's Project Solutions are
designed, engineered, constructed, tested and supported in accordance with the
PAL software engineering framework. Each SEC has a number of project teams
dedicated to clients and separate quality assurance groups to ensure
high-quality, cost-effective solutions. The SECs have common infrastructure,
organizational units and human resource practices that are designed to allow
projects and personnel to be shifted among the SECs to maximize utilization
rates while meeting client requirements.
PRT's Strategic Consulting services include management consulting,
strategic IT planning, and "Quality Journey" software quality management
strategies and implementations, in which PRT helps clients develop internal
software engineering quality control mechanisms, processes and organizational
units. PRT's Project Solutions services include application development and
management such as custom application development, maintenance and production
support, platform migrations and conversions, quality assurance and testing.
Specialized Project Solution areas include Internet/e-commerce, data
warehousing, data mining and year 2000 renovation and testing. Project solutions
are rendered according to rigorous software engineering
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principles built upon the SEI CMM and can be provided at a client location or at
one of PRT's SECs. PRT's Professional Services group offers team or individual
staffing for a full spectrum of IT services, ranging from traditional systems
analysis through testing to high value-added IT consulting and project
management.
PRT focuses its marketing efforts on large businesses, primarily Fortune
500-sized companies, with significant IT budgets and recurring software and
maintenance development needs. PRT's client base includes companies primarily in
the financial services, consumer products, communications and healthcare
industries. The Company's five largest clients in the twelve months ended
December 31, 1998, in alphabetical order, were Chase Manhattan Bank, N.A, J.P.
Morgan & Co. Inc., Philip Morris Companies, Inc., Prudential Insurance Company
of America and The Travelers Insurance Company.
The Company's sales have increased to $85.6 million in 1998 from $13.9
million in 1994 representing a compound annual growth rate ("CAGR") of
approximately 57.5%. For the twelve month periods ended December 31, 1998 and
1997, the Company's revenues were $85.6 million and $59.8 million, respectively,
representing an increase of 43.1%.
THE IT SERVICES INDUSTRY
OVERVIEW
Worldwide competition, heightened by deregulation, globalization and rapid
technological advancement, is placing increasing demands on corporations to: (i)
improve the quality of products and services, (ii) reduce costs and time to
market of new products and services, (iii) improve operating efficiencies and
(iv) strengthen client relationships. The rapid rate of advancement in IT
capabilities, as well as the greater complexities and costs to an organization
of maintaining the IT function, is transforming the role of in-house IT
department. The ability to integrate and deploy improved IT in a cost-effective
manner has become critical to an organization's success. As a result,
organizations are increasingly viewing the IT function as less of a support
center and more as an integral component of corporate strategy.
Faced with: (i) an increased strategic reliance on IT, (ii) a shortage of
skilled IT personnel, (iii) escalating costs of maintaining in-house IT
departments and (iv) an inability to effectively handle mass change issues,
organizations are increasingly outsourcing IT functions to third-party vendors.
Gartner Group, an independent research organization which provides information
concerning the IT services industry, estimates that the market for IT services
related to consulting, development, integration, management, education and
training will reach $472 billion by 2002, representing an approximate CAGR of
16.7% from 1997 to 2002.
INDUSTRY TRENDS
The Company believes that the following key industry trends will continue
to have a major influence on the worldwide IT services market.
Shortage of IT Professionals. There is a growing shortage of IT
professionals in the United States, Western Europe and Japan. This shortage of
IT professionals is rising due to the need for many organizations to maintain
legacy systems, the migration to new applications architectures and the
relatively small population of trained IT professionals.
Mass Change Problems. Substantial growth opportunities for IT services
companies exist due to problems inherent in implementing mass changes to
application systems and their associated databases. Examples of mass change
problems include the Year 2000 problem, and the extension of the number of
digits and other characters in zip codes, product codes and account numbers. The
Gartner Group, an independent research organization which provides information
concerning the IT services industry, has conservatively estimated that the
worldwide cost to resolve the Year 2000 problem alone could be up to $300
billion and that the typical Fortune 100 company could spend up to $50 million
for Year 2000 services.
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The need to fix these problems prior to the advent of the Year 2000 may
cause these companies to reallocate IT spending from external to internal
resources to in the latter part of 1999 and the beginning of 2000.
Offshore Software Engineering. Due to the increasing shortage of qualified
IT professionals in developed countries and the rising domestic costs of
applications development and support, an increasing number of organizations are
turning to offshore. Offshore software engineering offers a number of benefits,
including lower costs and access to a larger pool of skilled IT professionals.
India is widely acknowledged as the leader in offshore software engineering due
to its large numbers of highly educated, lower cost, English-speaking IT
professionals.
Software Engineering Challenges. Software engineering organizations face a
number of challenges in completing applications projects consistently, on-time
and on-budget. The Standish Group, an independent research organization which
provides information concerning the IT services industry, estimates
approximately one-third of software engineering projects will be cancelled
before completion and over one-half will have significant cost overruns. Because
software engineering is plagued with these problems, standards and benchmarks,
such as the Capability Maturity Model ("CMM") developed by the Software
Engineering Institute at Carnegie Mellon University have been established. This
model serves as a base to deliver, reliable, high-quality software solutions
on-time and on-budget. The Company has achieved CMM Level 3 certification at its
Barbados SEC and is driving to achieve this certification at its Hartford SEC.
Internet Demand. With the growth in the use of the Internet, companies are
increasingly seeking to improve their business practices through Internet-based
solutions. Forrester Research, Inc., an independent research organization which
provides information concerning the IT services industry, projects that the size
of the worldwide Internet professional services market will grow from $2.4
billion in 1997 to $32.8 billion in 2002, a compound annual growth rate of
68.7%.
THE PRT GLOBAL SOLUTION
The PRT Global Solution enables the Company's clients to outsource a broad
range of business and technology needs. PRT's international fulfillment
capability offers a high-quality alternative to traditional onsite consulting.
The Company strives to reliably and predictably provide flexible technical and
business solutions to a broad range of issues encountered by Fortune 500-sized
companies. In this highly competitive and rapidly changing business environment,
the Company offers a cost-effective, reliable solution. The following are key
attributes of PRT's Global Solution: (i) expansion of strategic solutions
offerings, (ii) replication of SECs, (iii) utilization of a disciplined software
engineering approach and (iv) emphasis on recruitment and training of IT
professionals.
Expand Strategic Solutions Offerings. PRT maintains active communication
between its clients, its IT professionals, and leading industry research
organizations, such as Gartner Group to understand the issues facing large
scale, complex organizations. As trends are identified and researched, PRT
leverages its core competencies to develop new solution capabilities it then
markets to existing and potential clients. As an example, with the growth in the
use of the Internet, companies are increasingly seeking to improve their
business practices through Internet-based solutions. Forrester Research, Inc.,
an independent research organization which provides information concerning the
IT services industry, projects that the size of the worldwide Internet
professional services market will grow from $2.4 billion in 1997 to $32.8
billion in 2002, a compound annual growth rate of 68.7%. To meet this demand,
PRT expanded it's Internet/e-commerce service offering to focus on four areas;
Internet and intranet application development and legacy integration,
procurement and transaction processing, mobile technology development and
delivery, and technology outsourcing for venture capital funded Internet
companies.
In addition to Internet/Intranet technologies, PRT continues to develop
it's capabilities in the following areas: (i) data mining (finding hidden
patterns in vast databases), (ii) data warehousing (assembling massive amounts
of data for aggregate analysis), (iii) client/server technologies, (iv)
object-oriented technologies (development of reusable software object building
blocks), (v) usability engineering (making computer interfaces more
understandable and easier to use), (vi) decision support (ad hoc query,
reporting and analysis
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capabilities that enable strategic decision making) tools from leading vendors
such as SAS(R) Institute and (vii) software quality management (applying quality
management techniques to improve the software development process).
Replicate Software Engineering Centers. The Company intends to increase
its investment in an integrated global network of onshore, near-shore and
offshore SECs and offices to facilitate offsite development of high quality
software on a cost effective basis. PRT opened its first SEC in September 1995,
near-shore in Barbados, West Indies. A second SEC is located onshore in the
Hartford, Connecticut area. The Company's SECs are directly linked by high-speed
dedicated communications lines to all other PRT locations. Management believes
the SECs will boost PRT's ability to leverage the capabilities of its workforce
on behalf of its clients while maintaining the common PAL approach, regardless
of the location of the SEC. In the first quarter of 1999, the company has opened
a third SEC in Chennai, India.
Utilize Disciplined Software Engineering Approach. To address the industry
challenges inherent in developing high-quality, complex, mission-critical
software on time and within budget, PRT has developed proprietary software tools
and processes. These tools and processes are embodied within the PAL software
engineering framework based upon the CMM model. PAL is a knowledge bank of
software engineering life cycle processes, methodologies, tools and reusable
work product developed by PRT. As processes are refined, PAL is continuously
updated. PAL is available to all PRT Project Solutions and Strategic Consulting
personnel, wherever located, through the Company's integrated computer network.
The PAL software engineering framework enables the Company to deliver
consistent, predictable, reliable, high-quality solutions to its clients on a
flexible, cost-effective basis.
In addition, PRT's Barbados SEC achieved CMM Level 3 certification based on
an independent assessment in November, 1997. According to Software Engineering
Institute data, only approximately 18% of the over 700 organizations worldwide
that have launched a process improvement program have achieved Level 3
certification and above. The CMM model consists of 5 levels of maturity, which
mark increasing value in terms of predictability, control and effectiveness. A
Level 3 assessment is known as "Defined" and indicates that software engineering
processes are well defined, implemented effectively and consistently throughout
an organization, while the infrastructure in the organization supports
continuous learning and improvement of these processes.
Emphasize Recruitment and Training of IT Professionals. PRT maintains
active recruiting operations in the United States in New York, Connecticut,
Pennsylvania, and Colorado, as well as in the Caribbean and India. The company
also works with local recruiters in South Korea, the Phillippines and the United
Kingdom. PRT continuously searches for new sources of experienced professionals
and qualified graduates of educational institutions around the world. Many of
PRT's non-U.S. employees seek opportunities that provide competitive
compensation, career growth potential, intellectual challenge and diverse work
locations. All newly graduated PRT SEC employees are trained on the PAL software
engineering framework through a 12 week training program. In addition, all
employees undergo continuous training as new technologies emerge and as the PAL
software engineering framework is enhanced. As PRT replicates the SEC model in
new locations, additional opportunities for geographic relocation and career
advancement for PRT employees may arise. The Company believes this may provide a
competitive advantage in attracting and retaining IT professionals.
PRT SERVICES OFFERED
OVERVIEW
PRT's understanding of the IT marketplace has resulted in its development
of capabilities in three primary categories: (i) Strategic Consulting, (ii)
Project Solutions and (iii) Professional Services. The Company views its
long-term success as dependent upon its ability to maintain and expand its
relationships with its existing clients and attract new clients. PRT transfers
strategic knowledge to clients while building long-term relationships through
its service offerings, causing many clients to view PRT as an extension of their
in-house IT organizations.
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Strategic Consulting
PRT works with its clients to develop a technological vision and IT
services strategy that helps its clients achieve corporate objectives and
enhance competitiveness. Because PRT is not limited to any particular product
platform, technology or vendor, the Company brings valued objectivity to its
clients when advising on technology assessment and selection. PRT's strategic
consulting services include management consulting, strategic IT planning, and
"Quality Journey" software quality management strategies and implementations, in
which PRT helps clients develop internal software engineering quality control
mechanisms, processes and organizational units.
Project Solutions
PRT offers full life-cycle software engineering Project Solutions for both
client server and mainframe systems. Project Solutions include application
development and management services such as custom application development,
maintenance, production support, platform migrations and conversions, and
quality assurance and testing. Specialized Project Solution areas include
Internet/e-commerce, data warehousing, data mining and Year 2000 renovation and
testing. Project solutions are rendered according to rigorous software
engineering principles built upon the SEI CMM and can be provided at a client
location or at one of PRT's SECs.
Professional Services
Due to the shortage of trained IT professionals, PRT's clients often lack
the in-house personnel or skills necessary to accomplish IT objectives. PRT
provides flexible Professional Services to fill short-and long-term or
specialized technology skill set needs, generally providing qualified candidates
generally within 48 to 72 hours of notification. For most of the Company's
clients, PRT assigns an account management team comprised of a senior account
manager, an account associate and a recruiting coordinator to provide responsive
and timely service. In addition, in order to ensure consistency, quality and
cost effectiveness, many organizations are limiting the number of outside IT
consulting and staff augmentation firms they work with to certain preferred
vendors. PRT serves as a preferred vendor to numerous clients including J.P.
Morgan & Co. Inc., Philip Morris Companies Inc., The Prudential Insurance
Company of America and Mass Mutual Life Insurance Company. The professional
services business accounted for approximately 60% of revenue in 1998 and
approximately 53% in 1997.
SOFTWARE ENGINEERING CENTERS
SECs are the key sites where PRT Project Solutions are designed,
engineered, constructed, tested and supported in accordance with the Company's
PAL software engineering framework. Each SEC has a number of project teams
dedicated to clients and separate quality assurance groups to ensure
high-quality, cost-effective solutions. The SECs have common infrastructure,
organizational units and human resource practices that allow projects and
personnel to be shifted among the SECs to maximize utilization rates while
meeting client requirements. The SECs accounted for approximately 35% of revenue
in 1998 and approximately 30% in 1997.
As a response to client demands, PRT has opened three SECs. In 1995, PRT
determined that opening an SEC near-shore in Barbados, West Indies met all of
its requirements, including: (i) access to trained IT professionals from around
the world with no governmental limitations on work visas, (ii) a favorable wage
structure, (iii) a low tax rate, (iv) a stable political and economic system
with a currency fixed to the U.S. dollar, (v) a modern communications
infrastructure, (vi) an English-speaking population, (vii) a convenient location
with direct flight access from major United States and European cities (in the
same time zone as many PRT clients) and (viii) an exceptional educational
system.
A second SEC was opened in the Hartford, Connecticut area in 1997 in
response to a perceived increase in client demands for mainframe programming
skills and Year 2000 services. The Hartford area affords the SEC access to a
community of mainframe programmers and insurance industry expertise catering to
the needs of the large corporations clustered in the northeast United States.
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The Company has opened a third SEC in Chennai, India in the first quarter
of 1999. The Indian SEC affords the Company access to highly skilled, cost
effective software engineers and programmers.
RECRUITING AND TRAINING
PRT employs 26 recruitment personnel, including 21 in the United States and
5 in India. PRT makes use of a proprietary database with the resumes of
approximately 50,000 IT professionals to aid in recruiting high-quality
personnel to meet both Project Solutions and Professional Services needs in
terms of skill set and geographic proximity. The Company selects staff based on
appropriate technical skill levels and an assessment of work style compatibility
with PRT and client management and staff.
The Human Resources Department recruits IT professionals globally through
traditional advertisements, the Internet, job fairs, networking through
seminars, user group meetings, expositions and other forums where technical
discussions and/or exhibitions take place. The group utilizes 12 different
subcontractor firms and 10 finders to provide it with additional IT
professionals when necessary. Additionally, the Company has a referral program
providing rewards to PRT's internal staff for locating IT professionals.
PRT evaluates and qualifies candidates prior to placing them with clients
through a computerized technical assessment system. PRT also recognizes the need
to certify its IT professionals in various areas and sponsors certification as
needed. The Company uses its Barbados SEC to develop and test procedures for
assessing and hiring new technical personnel and is also working with the
University of the West Indies to improve its curriculum to ensure that PRT has
qualified local talent to hire.
PRT currently has employment agreements with substantially all of its IT
professionals that are employees as well as with all of the firms it uses to
subcontract non-employee IT professionals. Each of the employment agreements
contains covenants that the employee or subcontractor will not compete with the
Company at the accounts to which the employee or subcontractor was introduced
for a period of typically six to twelve months after termination of employment
or subcontractor arrangement with PRT. The employment agreements also contain
provisions as to the ownership by the Company of work product and
confidentiality covenants which apply during and after employment with the
Company.
SALES AND MARKETING
The Company focuses its marketing efforts on large businesses, primarily
Fortune 500-sized companies, with significant IT budgets and recurring software
engineering needs. PRT's clients include companies primarily in the financial
services, consumer products, communications and healthcare industries.
PRT gathers market research by communicating with employees, clients and
consultants and by monitoring business and industry sources. Such resources also
serve as a prospecting and networking mechanism for locating key decision
makers, securing quality referrals and introductions for PRT's account team and
assessing the competitive circumstances and barriers to entry at prospective or
established clients.
PRT generally employs a top-down approach to account penetration and
development. The Company endeavors to establish contacts with Chief Executive
Officers, Chief Information Officers and other senior management through
professional contacts of PRT's senior management, referrals by the Company's
Board of Directors and existing clients, and through client contacts who move to
new employers. The Company has sales and account management locations in
Connecticut, New York, Pennsylvania, Illinois, India and Switzerland and employs
27 sales and marketing personnel. Salespeople are compensated on a salary plus
commission basis.
CLIENTS
The Company serves clients in diverse industries which helps to mitigate
cyclical effects in any one industry or market. The Company derives an
additional level of diversification by working with many different operating
divisions within a given client. As of December 31, 1998, the Company provided
services to approximately 75 clients in a range of industries including, among
others, financial services, consumer products, telecommunications and
healthcare.
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The Company has historically derived, and expects in the future to derive,
a significant percentage of its revenues from a relatively small number of
clients. In 1998, approximately 58.1% of the Company's revenue was derived from
its five largest clients with one client accounting for approximately 25.6% of
revenues. In 1997, approximately 78.6% of the Company's revenue was derived from
its five largest clients, with one client accounting for approximately 30.3% of
revenues.
For the year ended December 31, 1997, The Prudential Insurance Company of
America, J.P. Morgan & Co. Inc. and Philip Morris Companies Inc., and for the
year ended December 31, 1998, J.P. Morgan & Co. Inc., and The Prudential
Insurance Company of America each accounted for over 10% of PRT's revenues.
CERTAIN ACQUISITION TRANSACTIONS
ADVANCED COMPUTING TECHNIQUES, INC. ("ACT")
Effective January 31, 1998, PRT acquired substantially all of the assets of
ACT, headquartered in Glastonbury, Connecticut, for an aggregate purchase price
of approximately $13.0 million. 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, PRT acquired substantially all of the assets of
ISPI headquartered in Pittsburgh, Pennsylvania for an aggregate purchase price
of approximately $2.7 million. ISPI provides 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.
COMPETITION
The IT services industry is highly competitive and served by numerous
international, national, regional and local firms, all of which are either
existing or potential competitors of the Company. Primary competitors of PRT
include "Big 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 PRT's clients. The
Company believes that the principal competitive factors in the IT services
industry include the range of services offered, cost, technical expertise,
responsiveness to client needs, speed in delivering IT solutions, quality of
service and perceived value.
INTELLECTUAL PROPERTY RIGHTS
The Company believes that its success and ability to compete is dependent
upon its proprietary systems and technology. The Company relies on a combination
of copyright, trademark and trade secret laws as well as confidentiality
agreements with its employees, subcontractors, key suppliers and customers and
other measures to establish and protect its technology and other proprietary
rights. The Company does not have any patents. The Company has copyright
protection with respect to certain of its proprietary software, its Web site and
certain marketing materials. In addition, the laws of some foreign countries may
not permit the protection of the Company's proprietary rights to the same extent
as the laws of the United States. While the Company relies on trademark, trade
secret and copyright laws to protect its proprietary rights, the Company
believes that the technical and creative skills of its personnel, high-quality
service standards, continued 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 generally enters
into agreements with its employees, subcontractors and certain clients which
limit access to and distribution of its software,
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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
135,000 square feet of space in 11 locations. PRT currently operates in four
types of facilities: (i) SECs, (ii) sales and account management offices, (iii)
training and recruiting centers and (iv) administration and operations offices
in New York, New York, the Hartford, Connecticut area and Hawthorne, New York.
PRT has sales and account management offices located in Connecticut, New York,
Pennsylvania, Illinois and Colorado. Currently, the Company operates three SECs,
located in Barbados, West Indies; Chennai, India, and in the Hartford,
Connecticut area. The Company also operates a recruiting and training center in
Mumbai, India. The Company expects that additional space may be required as it
expands its business and believes that it will be able to obtain suitable space
as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its officers and directors and certain allegedly
controlling shareholders of the Company have been named as defendants in a
purported securities class action lawsuit filed in the United States District
Court for the Southern District of New York, captioned Steinberg v. PRT Group
Inc., Douglas K. Mellinger, Lowell W. Robinson, Gregory S. Mellinger and The
Mellinger Group, 98 Civ 6550. The complaint purports to be brought on behalf of
all shareholders who purchased the Company's common stock from November 21, 1997
through March 5, 1998. The complaint asserts that defendants violated Sections
11, 12(a)(2) and/or 15 of the Securities Act of 1933 by purportedly
misrepresenting and/or omitting material information concerning PRT's business
and operations in the registration statement and prospectus issued in connection
with PRT's initial public offering on or about November 21, 1997. The lawsuit
seeks unquantified compensatory damages, pre-and post-judgment interest,
attorneys' fees, expert witness fees and other costs, rescission, equitable
relief and such other and further relief as the Court may find proper.
The Company has retained counsel for itself and the named officers and
directors. The Company intends to vigorously defend itself against the lawsuit.
In the normal course of business, various claims may be made against the
Company. At this time, in the opinion of management, there are no pending
claims, aside from the above mentioned shareholder suit, the outcome of which
are expected to result in a material adverse effect on the consolidated
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
("Nasdaq") under the symbol "PRTG." The Common Stock commenced trading on Nasdaq
on November 20, 1997 in connection with the underwritten initial public offering
of shares of the Company's Common Stock at an initial price to the public of
$13.00 per share (the "Offering").
Set forth below are the high and low sales prices for shares of the Common
Stock commencing November 20, 1997:
FISCAL PERIOD HIGH LOW
- ------------- ------ ------
1997
November 20, 1997 through December 31, 1997................ $21.00 $11.00
1998
First Quarter.............................................. 20.19 9.56
Second Quarter............................................. 12.00 8.75
Third Quarter.............................................. 11.63 3.88
Fourth Quarter............................................. 3.50 2.63
The number of stockholders of record of the Common Stock as of March 19,
1999 was approximately 2,277 based on transfer agent reports; the closing price
of the Common Stock on Nasdaq on March 19, 1999 was $3.00.
During the years ended December 31, 1997, 1996 and 1995, the Company
declared dividends of $724,000, $0 and $0, respectively. The 1997 dividends
represented dividends paid to the former holders of the Company's Series A
Convertible Preferred Stock (the "Convertible Preferred Stock") and
distributions paid to the former holder of certain of the Company's Unit
Warrants (as hereinafter defined) at the time of the Company's initial public
offering. (See below, Note 6 to Consolidated Financial Statements under Item 8,
Financial Statements and Supplementary Data.) 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.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands, Except Per Share Data)
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 13,876 $ 20,346 $ 23,801 $ 59,816 $ 85,607
Cost of revenues..................... 10,851 15,594 17,965 40,898 64,096
---------- ---------- ---------- ---------- ----------
Gross profit......................... 3,025 4,752 5,836 18,918 21,511
Selling, general and administrative
expenses........................... 2,572 4,110 9,235 19,332 34,214
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ $ 453 $ 642 $ (3,399) $ (414) $ (12,703)
========== ========== ========== ========== ==========
Net income (loss).................... $ 251 $ 115 $ (3,269) $ (553) $ (12,040)
========== ========== ========== ========== ==========
Basic and Diluted income (loss) per
share.............................. $ 0.02 $ 0.01 $ (0.23) $ (.04) $ (.66)
========== ========== ========== ========== ==========
Weighted average common shares and
equivalents outstanding............ 14,511,359 14,469,691 14,310,155 14,728,087 18,213,252
========== ========== ========== ========== ==========
DECEMBER 31
-------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- -------
BALANCE SHEET DATA:
Working capital............................ $ 564 $1,277 $13,923 $51,253 $23,577
Total assets............................... 3,595 4,860 23,960 75,914 62,782
Total stockholders' equity (deficit)....... 666 781 (2,081) 64,089 52,387
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operation" contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this section or
elsewhere in this Form 10-K Annual Report, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below under the caption "Certain Factors that May Affect Future
Results".
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
-----------------------
1996 1997 1998
----- ----- -----
Revenues............................................ 100.0% 100.0% 100.0%
Cost of Revenues.................................... 75.5 68.4 74.9
Gross Profit........................................ 24.5 31.6 25.1
SG&A................................................ 38.8 32.3 39.9
----- ----- -----
Loss from operations................................ (14.3)% (0.7)% (14.8)%
===== ===== =====
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FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues. Revenues increased approximately 43.1% to $85.6 million in
fiscal year 1998 from $59.8 million in fiscal year 1997. This growth in revenue
is primarily attributable to acquisitions as well as increased business from a
major insurance client and the ramp-up of a new pharmaceutical client in the
second half of 1998. The number of IT professionals (including subcontractors)
remained essentially flat year over year at 698 consultants. Revenues from SECs
increased to $29.3 million for the year ended December 31, 1998 from $19.9
million for the comparable period in 1997. For the year ended December 31, 1998
and 1997, revenues generated from two clients who are also stockholders were
approximately $12.8 million and $18.1 million and $21.9 million and $13.7
million, respectively for these clients. The decrease from 1997 to 1998 is
associated with the completion of Y2K projects.
Cost of Revenues. Cost of revenues increased approximately 56.7% to $64.1
million in fiscal year 1998 from $40.9 million for the comparable period in
1997. As a percentage of revenues, cost of revenues increased to approximately
74.9% in fiscal year 1998 from approximately 68.4% for fiscal year 1997. In
1998, the increase in cost of revenues as a percentage of revenues reflects
lower than anticipated utilization levels in PRT's Barbados and Hartford SEC's,
as well as a lower percentage of revenue in the higher margin Y2K work.
Gross Profit. For the reasons set forth above, gross profit decreased as a
percentage of revenues to approximately 25.1% for the fiscal year 1998 from
31.6% for the comparable period in 1997.
SG&A Expenses. SG&A expenses increased approximately 77.0% to $34.2
million in fiscal year 1998 from $19.3 million for the comparable period in
1997. As a percentage of revenues, SG&A expenses increased to approximately
39.9% in fiscal year 1998 from approximately 32.3% for the comparable period in
1997. The increase in SG&A expenses is a function of (i) severance expenses and
termination of excess employee housing in Barbados (ii) overhead from the ACT
and ISPI acquisitions; (iii) build out and expansion of the Hartford SEC; (iv)
write-off of certain receivables and assets.
Loss from Operations. For the reasons set forth above, loss from
operations for fiscal year 1998 was $12.7 million compared to a loss of $414,000
in the comparable period in 1997. As a percentage of revenues, the loss from
operations for the fiscal year 1998 was (14.8)% compared to approximately (.7%)
in the comparable period in 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenues. Revenues increased approximately 151.3% to $59.8 million in
fiscal year 1997 from $23.8 million in fiscal year 1996. This growth in revenue
is primarily attributable to increases in the size of the Company's IT
professional workforce, expansion of the Company's SEC operations, additional
services provided to existing clients and, to a lesser extent, increases in
billing rates. The number of IT professionals (including subcontractors)
increased to 693 on December 31, 1997 from 308 as of December 1996. Revenues
from SECs increased to $19.9 million for the year ended December 31, 1997 from
$3.5 million for the comparable period in 1996. For the year ended December 31,
1997 and 1996, revenues generated from a client who is also a stockholder were
approximately $18.1 million and $4.0 million, respectively.
Cost of Revenues. Cost of revenues increased approximately 127.2% to $40.9
million in fiscal year 1997 from $18.0 million for the comparable period in
1996. As a percentage of revenues, cost of revenues decreased to approximately
68.4% in fiscal year 1997 from approximately 75.5% for fiscal year 1996. The
increase in cost of revenues is primarily attributable in increases in the
number of the Company's IT professionals. In 1997, the decrease in cost of
revenues as a percentage of revenues reflects: (i) the continued expansion of
the Company's SECs, (ii) the continued strategic shift of its business toward
higher-margin service offerings and (iii) higher utilization rates at the
Company's SECs in 1997.
Gross Profit. For the reasons set forth above, gross profit increased
approximately 224.2% to $18.9 million for fiscal year 1997 from $5.8 million for
the comparable period in 1996. As a percentage of revenues, gross profit
increased to approximately 31.6% for the fiscal year 1997 from 24.5% for the
comparable period in 1996.
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SG&A Expenses. SG&A expenses increased approximately 109.3% to $19.3
million in fiscal year 1997 from $9.2 million for the comparable period in 1996.
As a percentage of revenues, SG&A expenses decreased to approximately 32.3% in
fiscal year 1997 from approximately 38.8% for the comparable period in 1996. The
increase in SG&A expenses resulted from (i) the continued expansion of the
Company's sales and account management efforts, (ii) further enhancements of the
Company's SECs, (iii) depreciation of infrastructure, (iv) increased
telecommunications costs, (v) addition of management personnel and (vi) other
corporate overhead cost increases necessary to support the Company's continued
and anticipated revenue growth.
Loss from Operations. For the reasons set forth above, loss from
operations for fiscal year 1997 was $414,000 compared to a loss of $3.4 million
in the comparable period in 1996. As a percentage of revenues, the loss from
operations for the fiscal year 1997 decreased to (.7)% compared to approximately
(14.3%) in the comparable period in 1996.
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, 1998. 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
---------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- -------- -------- ------- ------- -------- -------- -------
STATEMENT OF INCOME DATA:
Revenues....................... $ 9,039 $12,275 $18,720 $19,782 $18,852 $22,669 $22,552 $21,534
Cost of revenues............... 6,621 8,596 12,658 13,023 15,317 16,530 16,011 16,238
------- ------- ------- ------- ------- ------- ------- -------
Gross Profit................... 2,418 3,679 6,062 6,759 3,535 6,139 6,541 5,296
SG&A........................... 3,838 4,372 5,522 5,600 8,701 7,731 8,065 9,717
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................... $(1,420) $ (693) $ 540 $ 1,159 $(5,166) $(1,592) $(1,524) $(4,421)
======= ======= ======= ======= ======= ======= ======= =======
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............... 73.2 70.0 67.6 65.8 81.2% 72.9% 71.0% 75.4%
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 26.8 30.0 32.4 34.2 18.8 27.1 29.0 24.6
SG&A........................... 42.5 35.6 29.5 28.3 46.2 34.1 35.8 45.1
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................... (15.7)% (5.6)% 2.9% 5.9% (27.4)% (7.0)% (6.8)% (20.5)%
======= ======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, the Company consummated their initial public offering
("IPO") and realized approximately $44,826,000 upon the sale of 3,850,000 shares
of common stock.
The Company's working capital decreased to $23.6 million at December 31,
1998 from $51.3 million at December 31, 1997. Cash and equivalents and
marketable debt securities were $15.4 million at December 31, 1998 compared to
$44.1 million at December 31, 1997. The primary uses of cash during the years
ended December 31, 1998 were to fund a net loss of $12.1 million, a decrease of
accounts receivable of $1.8 million, offset by an increase in accrued
compensation, accounts payable and accrued expenses of $1.8 million. Cash and
equivalents of $5.2 million were used to purchase additional fixed assets during
fiscal year ended December 31, 1998. In addition, the Company purchased the net
assets of ACT and ISPI for approximately $13.0 million and $2.7 million,
respectively, in 1998. For the year ended December 31, 1998, the Company used
$1.1 million in cash from financing activities, primarily relating to the
repayment of debt.
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The Company's working capital increased to $51.3 million at December 31,
1997 from $13.9 million at December 31, 1996. Cash and equivalents and
marketable debt securities were $44.1 million at December 31, 1997 compared to
$14.9 million at December 31, 1996. The primary uses of cash during the years
ended December 31, 1997 were to fund a net loss of $553,000, an increase of
accounts receivable of $9.4 million, offset by an increase in accrued
compensation, accounts payable and accrued expenses of $3.3 million. Cash and
cash equivalents of $6.9 million were used to purchase additional fixed assets
during fiscal year ended December 31, 1997. For the year ended December 31,
1997, the Company generated $44.6 million in cash from financing activities. The
primary source of cash was $44.9 million generated from the Company's IPO.
On February 9, 1998, the Company announced that it expects first quarter
1999 revenue to be below fourth quarter 1998 revenue due to the decrease in
revenue from its Solutions Business in Barbados and decrease in number of
consultants in its Professional Service Group. The Company expects to reduce the
number of consultants at the Barbados Software Engineering Center by 25 and the
number of support staff by 13. The Company expects to record a charge of $2-3
million in the 1999 first quarter primarily related to the work force and
administrative support reductions and the recruitment of the new President/Chief
Operating Officer as well as new sales people.
The Company anticipates that its primary uses of working capital in the
near term will be the expansion of SECs, the development of new facilities and
funding growth through acquisitions and otherwise, and the accounts receivable
related thereto. The cash generated from working capital may not be adequate to
fund such uses and accordingly, the Company may in the future be required to
seek additional sources of financing, including borrowing and/or sale of equity
securities resulting in further dilution to shareholders. No assurance can be
given that any such additional sources of financing will be available on
acceptable terms.
The Company opened a third SEC in Chennai, India during the first quarter
of 1999. The Indian SEC affords the Company access to highly skilled, cost
effective engineers and programmers
YEAR 2000 DISCLOSURE
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. As a result, those computer programs have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations. Causing disruptions
of operation, including among other things a temporary inability to process
transactions, send incorrect invoices or engage in similar normal business
activities.
The Company's internal computer information systems are substantially Year
2000 compliant. PRT Group implemented new application systems effective during
1998, to satisfy all finance, accounting, human resources, sales and recruiting
requirements. All internal computer hardware, operating systems, utilities and
tools have been tested and made compliant. Accordingly, the Company does not
currently anticipate that internal systems failures will result in any material
adverse effect to its operations or financial condition.
PRT's costs associated with Year 2000 compliance have been approximately
$750,000 of which $525,000 was capitalized in relation to new application
software purchased and $225,000 expensed as internal costs.
LITIGATION
The Company, certain of its officers and directors and certain allegedly
controlling shareholders of the Company have been named as defendants in a
purported securities class action lawsuit filed in the United States District
Court for the Southern District of New York, captioned Steinberg v. PRT Group
Inc., Douglas K. Mellinger, Lowell R. Robinson, Gregory S. Mellinger and The
Mellinger Group, 98 Civ 6550. The complaint purports to be brought on behalf of
all shareholders who purchased the Company's common stock from November 21, 1997
through March 5, 1998. The complaint asserts that defendants violated Sections
11, 12(a)(2) and/or 15 of the Securities Act of 1933 by purportedly
misrepresenting and/or omitting material information concerning PRT's business
and operations in the registration statement and prospectus issued in
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connection with PRT's initial public offering on or about November 21, 1997. The
lawsuit seeks unquantified compensatory damages, pre- and post-judgment
interest, attorneys' fees, expert witness fees and other costs, rescission,
equitable relief and such other and further relief as the Court may find proper.
The Company has retained counsel for itself and the named officers and
directors. The Company intends to vigorously defend itself against the lawsuit.
In the normal course of business, various claims may be made against the
Company. At this time, in the opinion of management, there are no pending
claims, aside from the above mentioned shareholder suit, 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business is labor-intensive. The Company's success depends
upon its ability to attract, develop, motivate and retain IT 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 PRT
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.
INCREASING SIGNIFICANCE OF AND RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company will increase its investment in international operations over
the next several years with an increasing percentage of its revenues generated
by operations in countries outside of the United States. During the years ended
December 31, 1996, 1997 and 1998, the percentage of revenue generated outside
the United States was 15%, 29% and 21%, respectively. There were no revenues
generated outside the United States prior to 1995. The Company's international
operations depend greatly upon business, immigration and technology transfer
laws in those countries and upon the continued development of the local
technology infrastructure. As a result, the Company's business is subject to the
risks generally associated with non-United States operations including, among
other things: (i) unexpected changes in regulatory environments; (ii)
difficulties in managing international operations; (iii) potential adverse
foreign tax consequences, including impact upon repatriation of earnings; (iv)
tariffs and other trade barriers and (v) political unrest and changing
conditions in countries in which the Company's services are provided or
facilities are located. In addition, although nearly all of the Company's
foreign sales are payable in U.S. Dollars, there can be no assurance that of the
Company's future contracts will be payable in U.S. Dollars; to the extent that
the Company's future contracts are payable in foreign currencies, the Company
could be exposed to fluctuations in currency exchange rates. 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.
PRT has operated its Barbados SEC for approximately three years. PRT
believes Barbados is one of the most stable countries in the Caribbean, has a
long tradition of democracy and that the Company currently has good relations
with the government of Barbados. While PRT (Barbados) Ltd. ("PRT Barbados") is
an international business company under Barbadian law, PRT has negotiated
special incentives with the Barbadian government including, among other things,
certain advantageous tax rates, an exclusivity and non-compete agreement (which
expires in 2000) and the ability to secure an unlimited number of employee work
permits and visas. There is no guarantee that this relationship will continue or
that these special incentives will not be curbed or eliminated. While the
Company believes that the expiration of the non-compete agreement will not have
a material adverse effect on PRT's business, operating results or financial
condition, there can be
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no assurance that this will be the case. If the Barbadian government were to
take any such action in the future, it could have a material adverse effect on
the Company's business, operating results and financial condition.
A significant element of the Company's business strategy is to continue to
open and develop SECs, sales and account management offices and training and
recruiting centers. PRT currently has a recruiting center in Mumbai, India and
an SEC in Chennai, India. The Indian government exerts significant influence
over its economy. In the recent past, the Indian government has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to encourage foreign investment in certain sectors of the economy, including the
IT industry. Certain of these benefits that could directly affect the Company
include, among others: (i) tax holidays, (ii) liberalized import and export
duties and (iii) preferential rules with respect to foreign investment and
repatriation of earnings. Changes in the business, political or regulatory
climate of India could have a material adverse effect on the Company's business,
operating results and financial condition. Additionally, although wage costs in
India are significantly lower than in the United States and elsewhere for
comparably skilled IT professionals, wages in India are increasing at a faster
rate than in the United States. In the past, India has experienced significant
inflation and shortages of foreign exchange, and has been subject to political
unrest. Changes in inflation, interest rates, taxation or other social,
political, economic or diplomatic developments affecting India in the future
could have a material adverse effect on the Company's business, operating
results and financial condition.
LIMITED OPERATING HISTORY; LOSSES
The Company has a limited operating history and has incurred losses from
the year ended December 31, 1995 until the year ended December 1998. In order to
operate profitably in the future, the Company must accomplish some of the
following objectives: (i) increase the amount of services rendered to existing
clients and develop new clients, (ii) develop and realize additional revenue
sources and (iii) reduce costs of providing services. There can be no assurance
that the Company will be successful in meeting these objectives or that the
Company will be able to sustain profitability.
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including,
but not limited to: (i) the timing and number of client projects commenced (or
delayed by the client) and completed during the quarter, (ii) the number of
working days in a quarter and (iii) employee hiring, attrition and utilization
rates. Because a high percentage of the Company's expenses, in particular
personnel and facilities costs, is relatively fixed, variations in revenues may
cause significant variations in operating results. Additionally, the Company
periodically incurs cost increases due to both the hiring of new employees and
strategic investments in its infrastructure in anticipation of future projects
and opportunities for revenue growth. Quarterly results are likely to fluctuate,
which may cause a material adverse effect on the market price of PRT's Common
Stock.
ABILITY TO SUSTAIN AND MANAGE GROWTH
The Company's business has grown rapidly during the past several years due
to the increased demand for its services from existing clients, the addition of
new clients and the increased number of Company sales and account management
offices and SECs. The Company's continued growth is dependent upon a number of
factors, including, but not limited to: (i) the continued growth of the Barbados
and Hartford area SECs; (ii) the ability to continue to replicate SECs in the
future; (iii) the ability to cultivate additional business from existing
clients; (iv) the ability to obtain new clients; (v) the ability to locate and
hire IT professionals within new and existing markets; (vi) the continued
identification and training of corporate personnel to staff new and recently
opened or acquired sales and account management offices and SECs; (vii) the
successful performance of recently opened or acquired offices, (viii) the
ability to anticipate, acquire, master and exploit new technologies as they
develop, (ix) the ability to anticipate the ramp-up rate of client projects and
(x) the ability to manage expenses in anticipation of expected project revenue
ramp-up. There can be no assurance that recently opened or acquired offices will
achieve and sustain any level of profitability or that the Company's historical
revenue growth will continue. Further, the Company's rapid growth and expansion
has
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placed and could continue to place a significant strain on the Company's
management, personnel and resources. The Company's ability to continue to manage
its growth successfully will require it to further enhance its management,
financial and information systems and controls. Finally, the Company's
management has no demonstrated experience in managing the Company during times
of economic downturn, and there can be no assurance that management can maintain
profitability or growth levels at such times. The failure to manage growth
effectively would have a material adverse effect on the Company's business,
operating results and financial condition.
CONCENTRATION OF REVENUES
In fiscal year 1998, approximately 58% of the Company's revenues were
derived from five clients with one client, Prudential Insurance Company of
America, accounting for approximately 25% of the Company's revenues in 1998 and
30% of revenues in 1997. During fiscal year 1997, approximately 79% of the
Company's revenues was derived from its largest five clients. J.P. Morgan
accounted for approximately 23% of the Company's revenues in 1997 and 17% of the
Company's revenues in 1996. Most of PRT's larger clients are comprised of a
number of subsidiaries or divisions, each of which PRT considers to be a
separate client because they make their own purchasing decisions. The loss of a
significant client could have a material adverse effect on the Company's
business, operating results and financial condition.
Certain stockholders of the Company are significant PRT clients. Although
the Company has no reason to expect it, a client-stockholder could be less
inclined to maintain the same volume of business with the Company in the future
if such client-stockholder were to sell most or all of its shares of PRT Common
Stock.
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements, including Year 2000 projects, involve
services that are critical to the operations of its clients' businesses and
provide benefits that may be difficult to quantify. Although the Company
attempts to contractually limit its liability for damages arising from errors,
mistakes, omissions or negligent acts in rendering its services, there can be no
assurance that its attempts to limit liability will be successful. The Company's
failure or inability to meet a client's expectations in the performance of its
services could result in a material adverse effect on the client's operations
and, therefore, could give rise to claims against the Company or damage the
Company's reputation, which could have a material adverse effect on the
Company's business, operating results and financial condition.
RELIANCE ON KEY PERSONNEL
The Company's future success depends on the continued services of certain
key management personnel, in particular, Douglas K. Mellinger, Chief Executive
Officer, and Srinivasan Viswanathan, President of the Solutions Business and PRT
Barbados, each of whom has entered into an employment agreement with PRT. While
the Company retains a "key man" life insurance policy in the amount of $2.5
million on Mr. Mellinger, there can be no assurance that such amount would
adequately compensate the Company for a loss of his services. In addition, the
Company's continued growth depends on its ability to attract and retain capable
management personnel. Failure to do so or the loss of either of Messrs.
Mellinger or Viswanathan could have a material adverse effect on the Company's
business, operating results and financial condition.
POTENTIAL DECREASES IN DEMAND FOR YEAR 2000 SERVICES
In 1998 Year 2000 revenues were below 10% of the Company's total revenues.
After the year 2000, the Company believes that demand for Year 2000 solutions
will continue; however, such demand is expected to begin to diminish as many
Year 2000 solutions are implemented and tested.
CONTRACT RISK
Most of the Company's contracts are terminable by the client following
limited notice and without significant penalty. In addition, each stage of a
project often represents a separate contractual commitment at the end of which
the client may elect to delay or not to proceed to the next stage of the
project. While, to date,
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none of the Company's clients has terminated a material contract or materially
reduced the scope of a large project, there can be no assurance that one or more
of the Company's clients will not take such actions in the future. In the first
quarter of 1999, the Company experienced a decrease in revenues from its
solutions business performed in Barbados. As a result of this decrease in the
Barbados SEC revenue, the Company expects to report a net loss for the first
quarter of 1999. The delay, cancellation or significant reduction in the scope
of a large project or number of projects could have a material adverse effect on
the Company's business, operating results and financial condition.
FIXED-PRICE ENGAGEMENTS
The Company principally bills for its services on a time and materials or
line of code basis; however, some of the Company's contracts contain a cap on
the amount of fees the Company can charge. The Company occasionally has entered
into fixed-price billing engagements and may in the future enter into additional
engagements billed on a fixed-price basis. While the Company's business,
operating results and financial condition have not been materially adversely
affected by any failure of the Company to complete a fixed-price engagement
within budget in the past and the Company does not anticipate any such failure
in the future, any such failure could expose the Company to risks associated
with cost overruns, which could have a material adverse effect on the Company's
business, operating results and financial condition.
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The IT services industry is characterized by rapid technological change,
shifting client preferences and new product developments. The introduction of
competitive IT solutions embodying new technologies and the emergence of new
industry standards may render the Company's existing IT solutions, skills base
or underlying technologies obsolete or unmarketable. As a result, the Company
will be dependent in large part upon its ability to develop new IT solutions and
capabilities that address the increasingly sophisticated needs of its clients
and keep pace with new competitive service and product offerings and emerging
industry standards to achieve broad market acceptance. There can be no assurance
that: (i) the Company will be successful in developing and marketing new IT
solutions that respond to technological changes, shifting client requirements or
evolving industry standards; (ii) that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new IT solutions or (iii) its IT solutions
will adequately meet the requirements of the marketplace and achieve market
acceptance. Any failure to respond to technological change or evolving industry
standards could have a material adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
The Company experiences intense competition. The market for services such
as those PRT offers is very broad and such services are offered by a large
number of private and public companies, many of which are significantly larger
than, and have greater financial, technical and marketing resources than, PRT.
Additionally, in certain sectors of the Company's business, particularly
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, PRT's ability to compete effectively will
increasingly depend upon the quality and price of its services. Competition
could have a material adverse effect on the Company's business, operating
results and financial condition.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company has expanded and expects to continue to expand its operations
through the acquisition of additional businesses. See "Business -- Certain
Acquisition Transactions." There can be no assurance that the Company will be
able to identify, acquire or profitably manage additional businesses or
successfully integrate acquired businesses into the Company without substantial
expenses, delays or other operational or financial difficulty. Furthermore,
acquisitions may involve a number of special risks, including, but not limited
to: (i) diversion of management's attention, (ii) possible failure to retain key
acquired personnel, (iii) unanticipated events or circumstances, (iv) risks of
entering markets in which the Company has no or
17
19
limited prior experience or (v) legal liabilities and amortization of acquired
intangible assets. Client satisfaction or performance problems at a single
acquired business could have a material adverse effect on the reputation of the
Company as a whole. In addition, there can be no assurance that acquired
businesses will achieve anticipated financial performance. While the Company
from time to time considers acquisition opportunities, it has no existing
binding agreements, understandings or commitments to effect any material
acquisition. The failure of the Company to manage its acquisition strategy
successfully could have a material adverse effect on the Company's business,
operating results and financial condition.
UNITED STATES GOVERNMENT REGULATION OF IMMIGRATION
The Company recruits employees from around the world. Some of these
employees work in the United States under H-1B temporary work permits. As of
December 31, 1998, approximately 12.6% of PRT's worldwide workforce was working
under H-1B temporary work permits in the United States. Although, to date, PRT
has not experienced difficulties in obtaining sufficient H-1B work permits, in
the future the Company may be unable to obtain H-1B work permits to bring
necessary employees to the United States for any number of reasons including,
without limitation, limits set by the United States Immigration and
Naturalization Service. Continued compliance with existing United States or
foreign immigration laws, or changes in such laws making it more difficult to
hire foreign nationals or limiting the ability of the Company to retain H-1B
employees in the United States or employees working under work permits in other
countries, could increase the Company's cost of recruiting and retaining the
requisite number of IT professionals which could have a material adverse effect
on the Company's business, operating results and financial condition.
INTELLECTUAL PROPERTY RIGHTS
In order to protect its proprietary rights in its various intellectual
properties, the Company currently relies on copyrights, trade secrets and
unpatented proprietary know-how which may be duplicated by others. The Company
employs various methods, including nondisclosure agreements and other
contractual arrangements with employees and suppliers and technical protective
measures to protect its proprietary know-how. As a signatory to the Berne
Convention, an international treaty, the government of Barbados has agreed to
recognize protections on copyrighted materials conferred under the laws of
foreign countries, including the laws of the United States. The Company believes
that laws, rules, regulations and treaties in effect in the United States and
Barbados are adequate to protect it from misappropriation or unauthorized use of
its intellectual property. However, there can be no assurance that such laws
will not change and, in particular, that the laws of Barbados will not change in
ways that may prevent or restrict the transfer of software components, libraries
and toolsets from Barbados to the United States. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate to deter misappropriation of its intellectual property, or that the
Company will be able to deter unauthorized use and take appropriate steps to
enforce its rights. In addition, the failure of such protective measures could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that other persons will not
independently develop such know-how or obtain access to it, or independently
develop technologies that are substantially equivalent or superior to PRT's
technology. The Company presently holds no patents or registered copyrights. A
competitor of the Company recently announced the filing with the United States
Patent and Trademark Office of three patent applications relating to Year 2000
processes. The Company does not know the proprietary features of the processes
covered by such patent applications since United States patent applications are
not publicly available until the patents, if any, are issued. Although the
Company believes that its intellectual property rights, including intellectual
property rights licensed from third parties by the Company, do not infringe on
the intellectual property rights of others, there can be no assurance that: (i)
such a claim will not be asserted against the Company in the future, (ii)
assertion of such claims will not result in litigation or that the Company would
prevail in such litigation or be able to obtain a license for the use of any
infringed intellectual property from a third party on commercially reasonable
terms or (iii) any of PRT's software could be redesigned on an economical basis
or at all, or that any such redesigned software would be competitive with the
software of the Company's competitors. The Company expects that the risk of
infringement claims against the Company will increase if more of PRT's
competitors are able to successfully obtain patents for software products and
processes. Any such claims, regardless of their outcome, could result
18
20
in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated By-Laws and the Delaware General Corporation Law include provisions
that may be deemed to have anti-takeover effects and may delay, deter or prevent
a takeover attempt that stockholders might consider in their best interests.
These include provisions under which only the Board of Directors, the Chairman
of the Board or the President may call meetings of stockholders and certain
advance notice procedures for nominating candidates for election to the Board of
Directors. Directors of the Company are divided into three classes and are
elected to serve staggered three-year terms. The Board of Directors of the
Company is empowered to issue up to 10,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares without
any further stockholder action. The existence of this "blank-check" preferred
stock could render more difficult or discourage an attempt to obtain control of
the Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, this "blank-check" preferred stock, and any issuance thereof, may have
an adverse effect on the market price of the Company's Common Stock.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of March 19, 1999, the Mellinger family owned approximately 39.5% of the
outstanding shares of Common Stock and effectively controlled the vote on all
matters submitted to a vote of the Company's stockholders, including
extraordinary transactions such as mergers, sales of all or substantially all of
the Company's assets or going-private transactions. Such control may discourage
certain types of transactions involving an actual or potential change of control
of the Company, including transactions in which the holders of Common Stock
might receive a premium for their shares over prevailing market prices.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced extreme price and volume
fluctuations that have often been unrelated to the operating performance of
particular companies. In addition, factors such as announcements of acquisitions
of businesses, technological innovations, new products or services or new client
engagements by the Company or its competitors or third parties, as well as
market conditions in the IT services industry or the flow of Company business,
may have a significant impact on the market price of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
As of December 31, 1997, the Company had an aggregate of 18,229,063 shares
of Common Stock and Non-Voting Common Stock outstanding, 4,600,000 of which were
freely tradeable without restriction or further registration under the
Securities Act of 1933 and the rules and regulations promulgated thereunder, as
amended (the "Securities Act"), except those shares, if any, owned or acquired
by affiliates of the Company. The remaining 13,629,063 shares in the aggregate
of Common Stock and Non-Voting Common Stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. The Company
and certain of the Company's stockholders have agreed not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or Furthermore, on January 22,
1998 the Company filed a registration statement on Form S-8 registering
4,302,000 shares of Common Stock reserved for issuance pursuant to stock options
granted, or to be granted, under the Company's Amended and Restated 1996 Stock
Option Plan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of PRT Group Inc. and Subsidiaries,
Exhibit 1.1 hereto, and the Independent Auditors' Report included therein, are
each incorporated by reference herein as Exhibit 1.1 hereto.
19
21
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information called for by Item 10 with respect to identification of
directors of the Company is included in the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders which is expected to be filed with the
Securities and Exchange Commission on or before March 31, 1999 (the "1998 Proxy
Statement").
(b) The following table sets forth the executive officers of the Company
and their ages as of December 31, 1998 (collectively, the "Management").
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Douglas K. Mellinger(1).............. 34 Chairman and Chief Executive Officer
Srinivasan Viswanathan............... 48 President, PRT Barbados and President Solutions
Business
Gregory S. Mellinger(1).............. 32 President, Professional Services Group, Secretary and
Director
Lowell W. Robinson................... 49 Executive Vice President, Global Business Services
and Chief Financial Officer
Greg D. Adams(2)..................... 37 Senior Vice President, Finance
- ---------------
(1) Member of Company's Board of Directors
(2) Mr. Adams resigned from the Company as of April 1, 1999.
Douglas K. Mellinger has been Chairman and Chief Executive Officer of PRT
since 1989 and was President of PRT from September 1997 to February, 1998. Mr.
Mellinger founded PRT Corp. of America, PRT's predecessor company, in August of
1989. Prior to starting PRT, Mr. Mellinger was the National and International
Director of the Association of Collegiate Entrepreneurs. Mr. Mellinger is
currently the International President of the Young Entrepreneurs' Organization
and serves on the International Board of the Young Presidents' Organization. Mr.
Mellinger graduated from Syracuse University in 1988 with a B.S. in
Entrepreneurial Science.
Srinivasan Viswanathan has been President of PRT Barbados since October
1995 and is President of the Company's Solutions Business. Mr. Viswanathan is
responsible for all of PRT's SECs and Solutions Business. From January 1986 to
October 1995, Mr. Viswanathan held various positions at Citicorp Overseas
Software Limited, most recently as Chief Executive Officer. Mr. Viswanathan
spent over seven years from April 1979 to January 1986 working with Tata
Consulting Services in Mumbai, India. Mr. Viswanathan graduated from the Indian
Institute of Management in Ahmedabad in 1977 with an M.B.A. and graduated from
the Indian Institute of Technology in Madras in 1972 with a Bachelor of
Technology in Electrical Engineering.
Gregory S. Mellinger is President of PRT's Professional Services Group and
responsible for M&A activities, and has been a Director of PRT since 1995 and an
employee since 1992. Prior to working with PRT, Mr. Mellinger was a Combat Arms
Officer in the United States Army. Mr. Mellinger graduated from the United
States Military Academy at West Point in 1989 with a B.A. in History.
Lowell W. Robinson has been Executive Vice President, Global Business
Services and Chief Financial Officer of PRT since November 1997. Prior to
joining PRT, Mr. Robinson was Executive Vice President and Chief Financial
Officer at ADVO, Inc. since 1994. From 1991 to 1993, he was Vice President and
Chief Financial Officer for The Traveler's Managed Care and Employee Benefits
Operations. Mr. Robinson spent five years at Citicorp where he was Chief
Financial Officer for Citicorp's Global Insurance and Capital Investments
Divisions from 1988 to 1991. From 1986 to 1988, Mr. Robinson was Controller for
Citicorp's
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Consumer Services Group -- International. Prior to joining Citicorp, Mr.
Robinson was Director of Finance and Operations from 1983 to 1986 for Uncle
Ben's Inc., the domestic and international rice subsidiary of Mars, Inc. During
1973 to 1983, Mr. Robinson held senior financial positions at General Foods. Mr.
Robinson graduated from the Harvard University Graduate School of Business
Administration in 1973 with an M.B.A. and the University of Wisconsin in 1971
with a B.A. in Economics.
Greg D. Adams has been the Senior Vice President, Finance, since October
1997. Mr. Adams was the Chief Financial Officer of PRT from May 1996 to October
1997. Prior to joining PRT, Mr. Adams was the Chief Financial Officer of the
Blenheim Group Inc., a publicly held information technology exposition and
conference management company from June 1994 to May 1996. Mr. Adams worked at
KPMG Peat Marwick as a Senior Manager from August 1983 to May 1994 in New York
and Australia in the areas of audit and business advisory services. Mr. Adams
graduated from the College of William & Mary in 1983 with a B.B.A. in
Accounting. He is a member of the New York State Society of Certified Public
Accountants and the American Institute of Certified Public Accountants. Mr.
Adams resigned as of April 1, 1999.
The Company announced on February 10, 1999, that they have commenced a
search for a President and Chief Operating Officer. At this time, the Company
also announced that Srinivasan Viswanathan has assumed the position of President
of the Solutions Business and Gregory S. Mellinger will serve as President of
the Professional Services Group.
Except for Douglas K. Mellinger and Gregory S. Mellinger, who are brothers,
there are no family relationships among any of the directors and executive
officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Certain Holders of Voting Securities" in the
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 1999 Proxy
Statement.
21
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Consolidated Financial Statements of PRT Group Inc. and
Subsidiaries, Exhibit 1.1 hereto.
(2) Financial Statement Schedules
See Valuation and Qualifying Accounts.
(3) Exhibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement dated April 15, 1998 by and among
PRT Group Inc., Institute for Software Process Improvement,
Inc., a wholly-owned subsidiary of PRT, Timothy C. Kasse,
Jeffrey R. Perdue and Institute for Software Process
Improvement, Inc. (1)
2.2 Asset Purchase Agreement dated January 31, 1998 by and among
PRT Group Inc. and Advanced Computing Techniques, Inc.,
Daniel R. Walsh, Carol A. Anderson and Timothy R. Cyr. (2)
3.1 Employment Agreement of Lowell W. Robinson.
- ---------------------------
(1) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 15,
1998. (File No. 0-23315)
(2) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on January
29, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRT GROUP INC.
Date: March 19, 1999 By: /s/ DOUGLAS K. MELLINGER
----------------------------------------------
Douglas K. Mellinger
Chairman of the Board 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: March 19, 1999 By: /s/ DOUGLAS K. MELLINGER
------------------------------------------
Douglas K. Mellinger
Chairman of the Board and Chief Executive
Officer
Date: March 19, 1999 By: /s/ LOWELL ROBINSON
------------------------------------------
Lowell Robinson
Chief Financial Officer
Date: March 19, 1999 By: /s/ ESTHER DYSON
------------------------------------------
Esther Dyson
Director
Date: March 19, 1999 By: /s/ MICHAEL ENTHOVEN
------------------------------------------
Michael Enthoven
Director
Date: March 19, 1999 By: /s/ ROBERT P. FORLENZA
------------------------------------------
Robert P. Forlenza
Director
Date: March 19, 1999 By: /s/ CRAIG D. GOLDMAN
------------------------------------------
Craig D. Goldman
Director
Date: March 19, 1999 By: /s/ GREGORY S. MELLINGER
------------------------------------------
Gregory S. Mellinger
Director
Date: March 19, 1999 By: /s/ ISAAC SHAPIRO
------------------------------------------
Isaac Shapiro
Director
Date: March 19, 1999 By: /s/ IRWIN J. SITKIN
------------------------------------------
Irwin J. Sitkin
Director
Date: March 19, 1999 By: /s/ JACK L. RIVKIN
------------------------------------------
Jack L. Rivkin
Director
23
25
EXHIBIT 1.1
CONSOLIDATED FINANCIAL STATEMENTS OF PRT GROUP INC. AND SUBSIDIARIES
26
EXHIBIT 1.1
PRT GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRT GROUP INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PRT Group Inc.
We have audited the accompanying consolidated balance sheets of PRT Group
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimate made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PRT Group Inc. and Subsidiaries at December 31, 1998 and 1997, the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
February 4, 1999
New York, New York
F-2
28
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
DECEMBER 31
--------------------
1997 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents...................................... $ 29,499 $ 14,772
Marketable securities..................................... 14,622 609
Accounts receivable, net of allowance of $334 in 1997 and
$539 in 1998........................................... 14,211 14,639
Deferred income taxes..................................... 11 --
Prepaid expenses and other current assets................. 1,886 2,106
-------- --------
Total current assets.............................. 60,229 32,126
Fixed assets, net........................................... 8,738 9,936
Goodwill, net............................................... 6,615 20,504
Other assets................................................ 332 216
-------- --------
Total assets...................................... $ 75,914 $ 62,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued compensation...................................... $ 3,479 $ 3,610
Accounts payable and other accrued expenses............... 4,344 3,972
Current portion of capital lease obligations.............. 400 456
Deferred revenue.......................................... 753 511
-------- --------
Total current liabilities......................... 8,976 8,549
Deferred income taxes....................................... 44 --
Note payable................................................ 2,000 1,000
Capital lease obligations, net of current portion........... 738 424
Deferred rent............................................... 67 422
-------- --------
Total liabilities................................. 11,825 10,395
Commitments................................................. -- --
Series A redeemable preferred stock, $0.01 par value;
authorized -- 5,000,000 shares; none issued and
outstanding at December 31, 1997 and 1998................. -- --
Common stockholders' equity:
Common stock, $.001 par value; authorized -- 50,000,000
shares; issued and outstanding -- 18,229,063 shares at
December 31, 1997 and 18,245,571 shares at December 31,
1998................................................... 18 18
Additional paid-in capital................................ 86,324 86,262
Accumulated deficit....................................... (21,853) (33,893)
Treasury stock, 67,090 common shares at December 31,
1997................................................... (400) --
-------- --------
Total common stockholders' equity................. 64,089 52,387
-------- --------
Total liabilities and stockholders' equity........ $ 75,914 $ 62,782
======== ========
See accompanying notes.
F-3
29
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED DECEMBER 31
------------------------------
1996 1997 1998
------- ------- --------
Revenues.................................................... $23,801 $59,816 $ 85,607
Cost of revenues............................................ 17,965 40,898 64,096
------- ------- --------
Gross profit................................................ 5,836 18,918 21,511
Selling, general and administrative expenses................ 9,235 19,332 34,214
------- ------- --------
Loss from operations........................................ (3,399) (414) (12,703)
Other income (expense):
Interest expense.......................................... (254) (577) (455)
Interest income........................................... 78 613 1,118
------- ------- --------
Loss before income taxes.................................... (3,575) (378) (12,040)
Income tax expense (benefit)................................ (306) 175 --
------- ------- --------
Net loss.................................................... $(3,269) $ (553) $(12,040)
======= ======= ========
Basic net loss per share.................................... $ (.23) $ (.04) $ (.66)
======= ======= ========
See accompanying notes.
F-4
30
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except number of shares)
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE COMPREHENSIVE
------------------- PAID-IN EARNINGS TRANSLATION TREASURY INCOME
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL (LOSS)
---------- ------ ---------- --------- ----------- -------- -------- -------------
Balance at December 31, 1995... 10,260,620 $10 $ 5 $ 769 $ -- $ (3) $ 781 $ --
Net loss..................... -- -- -- (3,269) -- -- (3,269) (3,269)
Issuance of shares in
connection with acquisition
of minority interest in a
subsidiary................. 526,880 1 642 -- -- -- 643
Retirement of treasury
stock...................... (250,000) -- (3) -- -- 3 --
Purchase of treasury
stock -- 67,090 shares..... -- -- -- -- -- (400) (400)
Sale of common stock
warrants................... -- -- 292 -- -- -- 292
Accretion of redeemable
preferred stock............ -- -- -- (23) -- -- (23)
Dividends on redeemable
preferred stock and common
stock warrants............. -- -- -- (94) -- -- (94)
Foreign currency translation
adjustment................. -- -- -- -- (11) -- (11) (11)
---------- --- ------- -------- ---- ----- -------- --------
Balance at December 31, 1996... 10,537,500 11 936 (2,617) (11) (400) (2,081) $ (3,280)
========
Net loss..................... -- -- -- (553) -- -- (553) (553)
Exercise of stock options.... 19,000 -- 82 -- -- -- 82
Issuance of common stock for
compensation............... 7,407 -- 100 -- -- -- 100
Accretion of redeemable
preferred stock............ -- -- -- (17,925) -- -- (17,925)
Dividends on redeemable
preferred stock and common
stock warrants............. -- -- -- (758) -- -- (758)
Issuance of common stock in
connection with acquisition
of CMR..................... 119,181 -- 1,430 -- -- -- 1,430
Issuance of common stock, net
of issuance costs.......... 3,850,000 3 44,919 44,922
Exchange of subsidiary
warrants................... -- -- 551 -- -- -- 551
Issuance of common stock in
connection with exercise of
common stock warrants...... 936,365 1 3,524 -- -- -- 3,525
Conversion of redeemable
preferred stock............ 2,759,610 3 34,782 -- -- -- 34,785
Foreign currency translation
adjustment................. -- -- -- -- 11 -- 11 11
---------- --- ------- -------- ---- ----- -------- --------
Balance at December 31, 1997... 18,229,063 18 86,324 (21,853) -- (400) 64,089 $ (542)
========
Net loss..................... -- -- -- (12,040) -- -- (12,040) (12,040)
Exercise of stock options.... 88,125 -- 478 -- -- -- 478
Shares transferred into
treasury................... -- -- -- -- -- (44) (44)
Additional costs related to
the initial public
offering................... -- -- (96) -- -- -- (96)
Retirement of treasury
stock...................... (71,617) -- (444) -- -- 444 --
---------- --- ------- -------- ---- ----- -------- --------
Balance at December 31, 1998... 18,245,571 $18 $86,262 $(33,893) $ -- $ -- $ 52,387 $(12,040)
========== === ======= ======== ==== ===== ======== ========
See accompanying notes.
F-5
31
PRT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31
-------------------------------
1996 1997 1998
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(3,269) $ (553) $(12,040)
Adjustments to reconcile net loss to net cash used in
operating activities net of business acquired:
Depreciation and amortization............................. 424 1,988 4,688
Compensation expense...................................... -- 100 --
Amortization of debt discount............................. 163 231 --
Assets written off........................................ -- -- 633
Provision for doubtful accounts........................... 80 212 205
Deferred income taxes..................................... (475) (56) (33)
Change in foreign exchange rate........................... (11) 11 --
Deferred rent............................................. -- 25 355
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,256) (9,410) 1,770
Prepaid expenses and other current assets.............. (111) (1,456) (172)
Other assets........................................... (8) (245) 141
Accrued compensation................................... 1,018 1,356 (347)
Accounts payable and other accrued expenses............ 1,722 1,961 (1,423)
Deferred revenue....................................... 190 108 (460)
------- -------- --------
Net cash used in operating activities....................... (2,533) (5,728) (6,683)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................................... (2,123) (6,855) (5,193)
Purchases of marketable securities.......................... -- (14,622) (108)
Sales of marketable securities.............................. -- -- 14,121
Purchase of treasury stock.................................. (400) -- --
Purchase of net assets of CMR, net of cash acquired......... -- (2,750) --
Purchase of net assets of ACT, net of cash acquired......... -- -- (13,010)
Purchase of net assets of ISPI, net of cash acquired........ -- -- (2,745)
------- -------- --------
Net cash used in investing activities....................... (2,523) (24,227) (6,935)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit............................. 2,488 3,850 --
Repayments under line of credit............................. (2,623) (3,850) --
Advances received from client............................... 2,000 632 --
Repayment of note payable................................... -- -- (1,182)
Issuance of common stock, net of issuance costs of
$1,720,000................................................ -- 44,922 (96)
Exercise of stock options................................... -- 82 478
Dividends paid.............................................. -- (852) --
Issuance of preferred shares and common stock warrants, net
of issuance costs of $1,277,000........................... 17,128 -- --
Principal payments under capital lease obligations.......... (187) (186) (309)
------- -------- --------
Net cash provided by (used in) financing activities......... 18,806 44,598 (1,109)
------- -------- --------
Net increase (decrease) in cash and equivalents............. 13,750 14,643 (14,727)
Cash and equivalents at beginning of period................. 1,106 14,856 29,499
------- -------- --------
Cash and equivalents at end of period....................... $14,856 $ 29,499 $ 14,772
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 92 $ 275 $ 307
======= ======== ========
Income taxes paid........................................... $ 188 $ 569 $ 244
======= ======== ========
NONCASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital leases.......... $ 713 $ 732 $ 39
======= ======== ========
See accompanying notes.
F-6
32
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
PRT Group Inc. ("PRT"), incorporated in the State of Delaware in September 1996,
and its wholly-owned subsidiaries, (collectively, the "Company"). The
predecessor corporation to PRT (PRT Corp. of America) was incorporated in the
State of New York in and merged into PRT on November 7, 1996. The merger was
accounted for as a merger of entities under common control. PRT is a provider of
information technology solutions including; Strategic Consulting, Project
Solutions and Professional Services.
The Company has sales and account management offices located in
Connecticut, New York, Pennsylvania, Illinois, and Colorado; software
development centers in Barbados, Connecticut and India; and a recruitment and
training center in Mumbai, India. The Company's operation in Asia are not
individually material and are included in foreign operations.
In November 1997, the Company consummated their Initial Public Offering
("IPO") and realized approximately $44,826,000, net of issuance costs of
$1,720,000, upon the sale of 3,850,000 shares of common stock. In addition,
750,000 shares were sold by existing shareholders. On December 23, 1997, an
additional 140,000 shares were sold by existing shareholders upon exercise of
the underwriter's over-allotment option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from time and materials contracts are recognized during the period
in which the related services are provided. Revenue from fixed price contracts
is recognized using the percentage-of-completion method. Cash payments received
but unearned are recorded as deferred revenue.
Principles of Consolidation
The consolidated financial statements include the accounts of PRT and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Through October 1996, minority shareholders'
proportionate share of the equity of the Company's consolidated subsidiaries and
income and losses allocable to such minority interests in excess of their
investments have been reflected in the consolidated statements of operations
(see Note 8).
Research and Software Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes costs incurred to develop new software
products upon determination that technological feasibility has been established
for the product, whereas costs incurred prior to the establishment of
technological feasibility are charged to expense. Research and software
development costs of approximately $43,000 in 1997 have been expensed by the
Company and are included in selling, general and administrative expenses.
In 1997, the Company capitalized $160,000 of software development costs.
During 1998, the Company determined that no future benefit would be derived from
such assets and expensed the unamortized balance in 1998. No software
development costs were capitalized in 1998.
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
33
PRT GROUP INC. 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 $190,000 and $1,188,000 as of December 31, 1997 and
1998 respectively.
Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted income (loss) per share with basic and diluted income (loss) per
share. Unlike primary income (loss) per share, basic income (loss) per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted income (loss) per share is very similar to the previously reported fully
diluted income (loss) per share. All income (loss) per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
Statement 128
F-8
34
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements. In addition, the income (loss) per share amounts in the
consolidated statements of operations have been computed in accordance with
Staff Accounting Bulletin 83 and the revisions thereto pursuant to Staff
Accounting Bulletin 98 of the Securities and Exchange Commission ("SEC").
Accordingly, in computing basic income (loss) per share, common stock, options
and warrants issued at amounts below the public offering price within a twelve
month period prior to the IPO of common stock have been reflected in a manner
similar to a stock split or stock dividend. Loss per share for the years ended
December 31, 1996, 1997 and 1998 excludes the effect of options to purchase
common stock as their inclusion is antidilutive during each period.
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 Company's consolidated balance sheet at December 31,
1997 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, 1997
CASH EQUIVALENTS:
Commercial Paper............................... $21,897 $-- $-- $21,897
Corporate Obligations.......................... 2,995 2 -- 2,997
------- -- --- -------
24,892 2 -- 24,894
MARKETABLE DEBT SECURITIES:
Commercial Paper............................... $14,622 -- -- $14,622
------- -- --- -------
Total.................................. $39,514 $2 $-- $39,516
======= == === =======
DECEMBER 31, 1998
CASH EQUIVALENTS:
Commercial Paper............................... $13,353 $-- $-- $13,353
MARKETABLE DEBT SECURITIES:
Corporate Obligation........................... 502 -- 1 501
Common Stock................................... 152 -- 44 108
------- -- --- -------
$ 654 $-- $45 $ 609
======= == === =======
Total.................................. $14,007 $-- $45 $13,962
======= == === =======
F-9
35
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the Company's investments in debt securities are classified as
held-to-maturity and, at December 31, 1998, have scheduled maturities of less
than one year. There were no gross realized gains or losses on sales of
marketable securities during 1998 or 1997.
4. FIXED ASSETS
Fixed assets consist of the following (in thousands):
DECEMBER 31
------------------
1997 1998
------- -------
Furniture and equipment.................................. $ 3,612 $ 5,064
Computer equipment and software.......................... 6,993 9,898
Leasehold improvements................................... 493 859
------- -------
11,098 15,821
Less accumulated depreciation and amortization........... (2,360) (5,885)
------- -------
$ 8,738 $ 9,936
======= =======
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. As such, the Company expensed the unamortized asset balance,
aggregating of $473,000.
Fixed assets include assets under capital lease aggregating approximately
$1,518,000 and $1,569,000 at December 31, 1997 and 1998, respectively. The
accumulated amortization related to assets under capital leases is approximately
$321,000 and $722,000 at December 31, 1997 and 1998, respectively.
5. ADVANCE PAYABLE TO CLIENT
On August 15, 1995, a subsidiary of the Company entered into an agreement
with a client to perform services for which a cash advance of approximately
$1,050,000 was received. During 1996, additional advances totaling approximately
$2,000,000 were received. During 1997, additional advances totaling $632,000
were received and the repayment period was extended. No interest was payable on
these outstanding advances. Repayment was to commence in February 1998 in nine
equal monthly installments and to be credited to the client against actual
monthly charges pursuant to the agreement.
In connection with the 1996 advances, the subsidiary issued warrants that
entitled the client to purchase approximately 24% of the total outstanding
shares of such subsidiary on a fully diluted basis, for approximately
$3,050,000, at any time between July 1996 and January 1999. In connection with
the 1997 advance, additional warrants were granted, allowing the client to
maintain their effective 24% interest in the subsidiary. The fair value of the
1996 and 1997 warrants was determined to be $496,000 and $55,000, respectively.
Such amounts were recorded as a discount to the cash advances received and
minority interest in the subsidiary. The fair value of the warrants was
determined based upon the advances received and the loan rates available to the
Company under its line of credit. The advances were being accreted up to the
face value of $3,682,000 using the interest method over the period the advances
were outstanding. For the years ended December 31, 1996 and 1997, the amount
accreted was approximately $163,000 and $176,000, respectively.
During the first quarter of 1997, the Company and the client agreed to,
among other matters, exchange the subsidiary warrants for warrants to purchase
936,365 shares of PRT's Common Stock (the "JPMVC PRT Warrant") with an aggregate
exercise price of $3,682,000. The JPMVC PRT Warrant was only exercisable by
forgiveness of the amounts outstanding under the advances payable to the client
in their entirety and was required to be exercised upon a consummation of an
IPO. The exchange was consummated in September
F-10
36
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997. Upon the consummation of the IPO in November 1997, the client exercised
the warrant and the amounts outstanding under the advances payable to the client
were forgiven.
6. STOCKHOLDERS' EQUITY
Non-Voting Common Stock
Of the total shares of Common Stock issued and outstanding at December 31,
1997, 46,500 shares are non-voting. Each share of non-voting Common Stock is
convertible into one share of Voting Common Stock at any time at the option of
the holder.
Stock Split
In October 1996, the Company effected a five-for-one stock split of Common
Stock. In addition, the Company amended its Certificate of Incorporation to
increase its authorized shares of Common Stock from 200,000 to 5,000,000 shares
with a par value of $0.01 per share. In August 1997, the Company effected a ten-
for-one stock split of Common Stock and amended its certificate of incorporation
to increase its authorized shares from 5,000,000 to 50,000,000 shares with a par
value of $0.001 per share. All outstanding share amounts in the accompanying
financial statements have been adjusted to reflect the aforementioned stock
splits.
Private Placement of Securities
In November 1996, the Company issued 2,759,610 shares, after giving effect
to the ten-for-one Common Stock split, of its Series A Redeemable Preferred
Stock ("Convertible Preferred Stock") for a split-adjusted price of $6.56 per
share and 486,310 Warrants (the "Warrants") for a split-adjusted price of $.60
per warrant in a private placement. The Company incurred approximately
$1,277,000 of fees and related expenses in this transaction. The difference
between the net proceeds received from the sale of the Convertible Preferred
Stock and the liquidation value was being accreted over the earliest possible
liquidation date via a charge to stockholders' equity.
Series A Redeemable Preferred Stock
The Convertible Preferred Stock was convertible into Common Stock of the
Company at any time at the option of the holder or automatically upon the sale
of the Company's Common Stock in a qualifying IPO, as defined. Upon a request by
a holder of the Convertible Preferred Stock on or after November 21, 2002, the
Company was to redeem the requested number of shares if not previously converted
into shares of Common Stock. The redemption price was to be the greater of the
liquidation value of $6.56 per share plus accrued dividends or the current
market value, as defined, of the shares on the redemption date. Accordingly, the
Company adjusted the value of the Convertible Preferred Stock to reflect the
greater of the accreted value or the estimated fair value. The redemption
obligation of the Convertible Preferred Stock ceased upon the consummation of
the Company's IPO in November 1997, as the holders of the Convertible Preferred
Stock agreed to exercise their rights to convert each share of outstanding
Convertible Preferred Stock into one share of the Company's Common Stock. At the
date of exercise the estimated fair value of the convertible preferred stock was
approximately $34,785,000 based upon the IPO market price. As a result,
$17,925,000 was recorded as a charge to retained earnings in 1997.
Holders of the Convertible Preferred Stock were entitled to receive
cumulative dividends at the annual rate of 4%. Such dividends were payable
quarterly in cash if, as and when declared by the Company's Board of Directors
or otherwise upon conversion of the Convertible Preferred Stock into Common
Stock, redemption of the Convertible Preferred Stock or liquidation of the
Company. Upon consumption of the IPO, dividends in arrears aggregating
approximately $724,000 were paid.
F-11
37
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
The Warrants were designed to give the holder certain benefits that holders
of the Company's Convertible Preferred Stock received. The Warrants entitled the
holder to receive cumulative distributions at the annual rate of 4% of $65.62
(or $6.56 on a split-adjusted basis). These distributions were payable in cash,
if as and when declared by the Board of Directors of the Company. Such
distributions could be paid in cash or Common Stock at the Company's option upon
the sale of the Company's Common Stock in an IPO or liquidation of the Company.
A holder of a Warrant was entitled to receive shares of Common Stock upon an
exercise only if the Company did not attain certain specified operating results
in fiscal 1997, subject to further adjustment, as defined, or issued Common
Stock or securities convertible or exchangeable for Common Stock at a price per
share of less than $6.56 per share. Upon consummation of the IPO, these Warrants
expired and were not converted into any shares of the Company's Common Stock.
Upon consummation of the IPO, dividends in arrears of approximately $128,000
were paid.
Stock Option Plan
In June 1996, the Company established a Stock Option Plan (the "Option
Plan") for officers, employees, consultants and 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. At
December 31, 1998, the Company had reserved 4,302,000 shares of Common Stock for
the exercise and future grants of stock options under such Option Plan.
The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and terms of the awards and the exercise price. The exercise price
shall not be less than the fair market value of the Company's Common Stock at
the date the option is granted. As such, the Company has not recorded
compensation expense in connection with these awards. The options are
exercisable for a period not to exceed ten years from the date of the grant.
Vesting periods range from immediate vesting to five years.
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-12
38
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the Option Plan is summarized as follows (in shares):
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Granted in 1996.................................... 517,600 $ 4.55
Exercised.......................................... -- --
Cancelled and expired.............................. -- --
---------- ------
Outstanding at December 31, 1996................... 517,600 $ 4.55
Granted............................................ 1,150,450 $12.42
Exercised.......................................... (19,000) 4.38
Canceled and expired............................... (83,250) 7.68
---------- ------
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
========== ======
Exercisable at December 31, 1996................... 16,350
==========
Exercisable at December 31, 1997................... 419,814
==========
Exercisable at December 31, 1998................... 658,210
==========
Available for grant at December 31, 1998........... 2,054,852
==========
The weighted average fair value of options granted during the years ended
December 31, 1996, 1997 and 1998 was $3.22, $8.75, and $8.05, respectively. At
December 31, 1998 there were 123,966, 93,297, and 440,947 of 1996, 1997 and 1998
options exercisable, respectively.
Information regarding the options outstanding under the Option Plan at
December 31, 1998 is as follows:
NUMBER OF WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE AVERAGE AVERAGE
EXERCISE CURRENTLY EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICE RANGE OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- -------------- ----------- --------- ----------- ----------- ---------
$2.75 - $ 2.75 1,642,299 $ 2.75 9.0 years 440,947 $ 2.75
$4.38 - $ 5.63 309,097 $ 4.58 7.7 years 123,966 $ 4.56
$9.50 - $12.00 188,627 $10.84 8.8 years 93,297 $12.00
--------- -------
2,140,023 658,210
========= =======
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
F-13
39
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of grant using the Black-Scholes option pricing model with the following
assumptions for vested and non-vested options:
DECEMBER 31
-----------------------------
ASSUMPTION 1996 1997 1998
---------- ------- ------- -------
Risk-free interest rate......................... 6.36% 6.28% 7.26%
Dividend yield.................................. 0% 0% 0%
Volatility factor of the expected market price
of the Company's common stock................. .843 .843 .923
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, 1996, 1997 and 1998, pro forma net loss under
SFAS 123 amounted to approximately $(3,511,000), $(3,974,000), and
$(15,937,000), respectively. The pro forma net loss per share under SFAS 123
amounted to $(.24), $(.26), and $(.87) respectively, for the years ended
December 31, 1996, 1997 and 1998, respectively.
7. 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 is secured by a $1,000,000 letter of credit, bears
interest at 9.75% per annum with the principal balance due no later than July
18, 2002. Payment of the CMR Note, in part or in full prior to its maturity, is
subject to a prepayment premium, as defined. In 1998, the Company repaid
$1,000,000 of the CMR note.
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.
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.
The table below sets forth the unaudited pro forma results of operations
for the years ended December 31, 1997 and 1998 assuming consummation of the CMR,
ACT, and ISPI acquisitions as of January 1, 1997 and 1998, respectively.
F-14
40
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31
-----------------------
1997 1998
--------- ----------
Revenues................................................ $80,142 $ 87,441
Net loss................................................ (656) (12,144)
Pro forma net loss per share............................ $ (.04) $ (.67)
8. ACQUISITION OF MINORITY INTERESTS
In October 1996, the Company acquired in exchange for 421,500 shares of its
Common Stock, the 20% interest in the outstanding shares of a subsidiary that
was owned by a non-operating holding company that was owned by certain
controlling stockholders of the Company. In addition, the Company acquired, in
exchange for 105,380 shares of its Common Stock, the 5% interest in the
outstanding shares of the subsidiary that were owned by the president of the
subsidiary, who was not previously a stockholder of the Company.
The Company recorded the Common Stock issued to the related entity at that
entity's carrying value of its investment in the subsidiary of approximately
$15,000. The Company recorded the Common Stock issued to the president of the
subsidiary at the estimated value of $5.96 per share, or approximately $625,000,
based on the price at which shares of the Company's Common Stock were sold by
certain investors to third parties in November 1996 (see Note 6). At the time of
this transaction, the subsidiary's liabilities exceeded the value of its
tangible assets. This additional investment by the Company was attributable to
goodwill and recorded as such in the accompanying consolidated financial
statements.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
CURRENT DEFERRED TOTAL
------- -------- -----
DECEMBER 31, 1996
U.S. Federal............................................. $ 86 $(369) $(283)
State and local.......................................... 83 (106) (23)
---- ----- -----
$169 $(475) $(306)
==== ===== =====
DECEMBER 31, 1997
U.S. Federal............................................. $194 $ (42) $ 152
State and local.......................................... 37 (14) 23
---- ----- -----
$231 $ (56) $ 175
==== ===== =====
DECEMBER 31, 1998
U.S. Federal............................................. -- -- --
State and local.......................................... 33 (33) --
---- ----- -----
TOTAL.......................................... 33 (33) --
==== ===== =====
F-15
41
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) computed by applying the U.S. Federal corporate tax rate of
34% to income taxes, as follows (in thousands):
DECEMBER 31
---------------------------
1996 1997 1998
------- ----- -------
Computed "expected" tax expense (benefit)............... $(1,215) $(129) $(4,093)
Nondeductible losses of foreign subsidiaries............ 949 250 2,175
Valuation allowance relating primarily to U.S. net
operating losses...................................... -- -- 2,278
State and local income taxes, net of Federal income tax
expense (benefit)..................................... (51) 15 0
Other................................................... 11 39 (360)
------- ----- -------
$ (306) $ 175 --
======= ===== =======
The Company has net operating loss carryforwards of approximately $5.7
million to offset future taxable income expiring 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
----------------
1997 1998
----- -------
Deferred tax assets:
Accounts receivable allowances.......................... $ 107 $ 41
Net operating loss carryforwards........................ 37 2,497
Amortization expense.................................... -- 73
Deferred rent expense................................... -- 164
Other................................................... -- 7
----- -------
Total gross deferred assets............................... 144 2,782
----- -------
Deferred tax liabilities:
Depreciation of fixed assets............................ $ (44) $ (332)
Prepaid expenses........................................ (133) (172)
----- -------
Total gross deferred liabilities.......................... (177) (504)
----- -------
Net deferred tax asset (liability)........................ (33) 2,278
Valuation allowance....................................... -- (2,278)
----- -------
Net deferred tax liability................................ $ (33) $ --
===== =======
10. SIGNIFICANT CLIENTS
Three clients accounted for 28%, 17% and 15% of total revenues for the year
ended December 31, 1996. Three clients accounted for 30%, 23% and 12% of total
revenues for the year ended December 31, 1997. Two clients accounted for 25% and
15% of total revenues for the year ended December 31, 1998.
11. COMMITMENTS
The Company is obligated under capital leases for computer and office
equipment that expire at various dates through July 2001 with interest ranging
from 10% to 15%. Future minimum lease payments relating to
F-16
42
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
office space under noncancelable operating leases and future minimum capital
lease payments as of December 31, 1998 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
December 31:
1999................................................... $ 559 $2,271
2000................................................... 295 1,741
2001................................................... 51 1,254
2002................................................... 42 1,174
2003................................................... 42 801
Thereafter............................................... 52 620
------ ------
Total minimum lease payments............................. 1,041 $7,861
======
Less amount representing interest........................ 161
------
Present value of net minimum capital lease payments...... 880
Less current installments of obligations under capital
leases................................................. 456
------
Obligations under capital leases, net of current
installments........................................... $ 424
======
Rent expense was approximately $526,000, $1,380,000, and $2,278,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
12. DEFERRED COMPENSATION PLAN
The Company maintains a 401(k) plan (the "Plan") covering all its eligible
employees. The Plan is currently funded by voluntary salary deductions by plan
members and is limited to the maximum amount that can be deducted for Federal
income tax purposes. The Company is not required to make contributions to the
Plan, however, employer contributions may be made on a discretionary basis. For
the years ended December 31, 1996, 1997, and 1998, the Company recognized
contributions of $42,000, $94,000, and $242,000, respectively.
13. RELATED PARTY TRANSACTIONS
Revenue generated from a client who is also a stockholder was approximately
$4,000,000, $18,100,000, and $12,500,000 for the years ended December 31, 1996,
1997 and 1998, 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 Chairman and former Chief Operating Officer for approximately
$300,000. The Company was paying a licensing fee of $60,000 annually to access
the database.
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
finders 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 finders fees related to these
consultants. Forum is owned 57% by the father of the Company's Chairman and
former Chief Operating Officer and 43% by a stockholder of the Company. Finders
F-17
43
PRT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fees paid to Forum were approximately $388,000, $318,000 and $122,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
14. GEOGRAPHIC AREAS
The Company operates in one industry segment; providing information
technology solutions to its clients. In addition to its domestic operations,
which include the United States, the Company has operations in the West Indies
and Asia. The Company's operations in Asia are not individually material and are
included in foreign operations along with the West Indies.
Geographic information is as follows (in thousands):
DECEMBER 31
------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- ------- -------- -------
Total identifiable assets........... $19,480 $ 4,480 $64,742 $11,172 $54,669 $ 8,113
======= ======= ======= ======= ======= =======
Revenues............................ $20,310 $ 3,491 $42,618 $17,198 $67,871 $17,736
======= ======= ======= ======= ======= =======
Income (loss) before income taxes... $ (783) $(2,792) $ 337 $ (715) $(5,728) $(6,312)
======= ======= ======= ======= ======= =======
Depreciation and amortization
expense........................... $ 159 $ 265 $ 714 $ 1,274 $ 2,551 $ 2,137
======= ======= ======= ======= ======= =======
Capital expenditures................ $ 976 $ 1,860 $ 2,998 $ 4,589 $ 4,685 $ 547
======= ======= ======= ======= ======= =======
15. LITIGATION
The Company, certain of its officers and directors and certain allegedly
controlling shareholders of the Company have been named as defendants in a
purported securities class action lawsuit filed in the United States District
Court for the Southern District of New York. The complaint purports to be
brought on behalf of all shareholders who purchased the Company's common stock
from November 21, 1997 through March 5, 1998. The complaint asserts that
defendants violated certain sections of the Securities Act of 1933 by
purportedly misrepresenting and/or omitting material information concerning
PRT's business and operations in the registration statement and prospectus
issued in connection with PRT's initial public offering on or about November 21,
1997. The lawsuit seeks unquantified compensatory damages, pre-and post-judgment
interest, attorneys' fees, expert witness fees and other costs, rescission,
equitable relief and such other and further relief as the Court may find proper.
The Company has retained counsel for itself and the named officers and
directors. The Company intends to vigorously defend itself against the lawsuit.
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, aside from the above mentioned shareholder suit, 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-18
44
PRT GROUP INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- --------- ---------- ---------- --------
BALANCE ADDITIONS BALANCE
AT CHARGED TO AT
BEGINNING COSTS AND (A) END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- ---------- ---------- --------
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from assets to which they
apply:
Allowance for doubtful accounts................ $ 42 $ 80 $ -- $122
YEAR ENDED DECEMBER 31, 1997
Allowances deducted from assets to which they
apply:
Allowance for doubtful accounts................ $122 $212 $ -- $334
YEAR ENDED DECEMBER 31, 1998
Allowances deducted from assets to which they
apply:
Allowance for doubtful accounts................ $334 $926 $721 $539
- ---------------
(a) Uncollectible receivables written off.
F-19
45
EXHIBITS INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement dated April 15, 1998 by and among
PRT Group Inc., Institute for Software Process Improvement,
Inc., a wholly-owned subsidiary of PRT, Timothy C. Kasse,
Jeffrey R. Perdue and Institute for Software Process
Improvement, Inc. (1)
2.2 Asset Purchase Agreement dated January 31, 1998 by and among
PRT Group Inc. and Advanced Computing Techniques, Inc.,
Daniel R. Walsh, Carol A. Anderson and Timothy R. Cyr. (2)
3.1 Employment Agreement of Lowell W. Robinson.
27 Financial Data Schedule
- ---------------------------
(1) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 15,
1998. (File No. 0-23315)
(2) Incorporated by reference to the Current Report on Form 8-K filed with the Commission on January
29, 1998.
22