**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| **[Mark One]**                                                                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                      |
| **ý****    QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |
|                                                                                                                                                                      |
| **For the quarterly period ended September  30, 2002**                                                                                                                    |
|                                                                                                                                                                      |
| **OR**                                                                                                                                                                    |
|                                                                                                                                                                      |
| **o****    TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                |
|                                                                                                                                                                      |   |
| **For the transition period  from           to           ** |
|                                                                                                                                                                      |   |
| **Commission File Number 0-23315**                                                                                                                                        |

 

| **enherent  Corp.**                                 |
|-----------------------------------------------------|
|                                                |
| **Delaware**                                        |   | **No. 13-3914972** |
| (State or other jurisdiction of  incorporation)     |   | (I.R.S. Employer Identification Number) |
|                                                |   |   |
| **12300 Ford Road, Suite 450  Dallas, Texas 75234** |
| (Address of principal executive offices)            |
|                                                |   |   |
| **(972) 243-8345**                                  |
| (Telephone number, including area code)             |

 

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Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| YES  ý         NO  o |
|--------------------------------------------------------------------------------------------|

 

Indicate the number of share outstanding of each of the issuer’sclasses of common stock:

 

| **Class**                     |   | **Shares  outstanding as of November 8, 2002** |
|-------------------------------|--------|------------------------------------------------|
|                          |   |                                           |
| Common stock, par value $.001 |   | 17,502,188                                     |

 

 

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**enherentCorp. and Subsidiaries**

 

## **INDEX**

 

 
| **PART  I.   FINANCIAL INFORMATION**                                                            |
|----------------------------------------------------------------------------------------------------------------|
|                                                                                                           |
| **Item 1.  Financial Statements.**                                                                        |
|                                                                                                           |
| Consolidated Balance Sheets as of September 30, 2002 and December 31,  2001                                    |
|                                                                                                           |
| Consolidated Statements of Operations for  the three and nine months ended September 30, 2002 and 2001         |
|                                                                                                           |
| Consolidated Statements of Cash Flows for  the three and nine months ended September 30, 2002 and 2001         |
|                                                                                                           |
| Notes to  Consolidated Financial Statements                                                                    |
|                                                                                                           |
| **Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations.** |
|                                                                                                           |
| **Item 3.  Quantitative and Qualitative Disclosures about Market Risk.**                                  |
|                                                                                                           |
| **Item  4.  Controls and Procedures.**                                                                    |
|                                                                                                           |
| **PART II.  OTHER INFORMATION**                                                                           |
|                                                                                                           |
| **Item 1.  Legal Proceedings**                                                                            |
|                                                                                                           |
| **Item 5.  Other Information**                                                                            |
|                                                                                                           |
| **Item 6.   Exhibits and Reports on Form 8-K**                                                            |
|                                                                                                           |
| **Signatures**                                                                                                 |
|                                                                                                           |
| **CEO  Certification**                                                                                         |
|                                                                                                           |
| **CFO Certification**                                                                                          |
|                                                                                                           |
| **Exhibit Index**                                                                                              |

 

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#####  

##### **Item1. Financial Statements**

 

enherent Corp. and Subsidiaries

Consolidated Balance Sheets

*(In thousands, except number of shares)*

* *
|                                                                                                                                                                                                                                                       |   | **September  30  2002** |       | **December  31  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                                                                                                                                                                                                       |   | **(unaudited)**         |       |                   |       |
| **Assets**                                                                                                                                                                                                                                                 |   |                    | ** ** |                   | ** ** |
| Current assets:                                                                                                                                                                                                                                            |   |                    | ** ** |                   | ** ** |
| Cash and equivalents                                                                                                                                                                                                                                       |   | $                       | 2,567      |                   | $          | 5,269 |   |
| Accounts receivable, net of allowance of  $76 at September 30, 2002 and $256 at December 31, 2001                                                                                                                                                          |   | 2,544                   |       | 3,208                  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                  |   | 367                     |       | 460                    |       |
| Total current assets                                                                                                                                                                                                                                       |   | 5,478                   |       | 8,937                  |       |
|                                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| Fixed assets, net                                                                                                                                                                                                                                          |   | 578                     |       | 1,382                  |       |
| Other assets                                                                                                                                                                                                                                               |   | 80                      |       | 95                     |       |
| Total assets                                                                                                                                                                                                                                               |   | $                       | 6,136      |                   | $          | 10,414 |   |
|                                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                                              |   |                    |       |                   |       |
| Current liabilities:                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| Accrued compensation                                                                                                                                                                                                                                       |   | $                       | 427        |                   | $          | 680 |   |
| Accounts payable and other accrued expenses                                                                                                                                                                                                                |   | 977                     |       | 988                    |       |
| Current portion of capital lease  obligations                                                                                                                                                                                                              |   | 18                      |       | 21                     |       |
| Deferred revenue                                                                                                                                                                                                                                           |   | 80                      |       | 144                    |       |
| Total current liabilities                                                                                                                                                                                                                                  |   | 1,502                   |       | 1,833                  |       |
|                                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| Capital lease obligations, net of current  portion                                                                                                                                                                                                         |   | 7                       |       | 20                     |       |
| Deferred rent                                                                                                                                                                                                                                              |   | 66                      |       | 91                     |       |
| Total liabilities                                                                                                                                                                                                                                          |   | 1,575                   |       | 1,944                  |       |
|                                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| Series A senior participating redeemable  convertible preferred stock, $0.001 par value; authorized—10,000,000 shares,  7,000,000 shares issued and outstanding at September 30, 2002 and 8,000,000  shares issued and outstanding December 31, 2001  |   | 5,421                   |       | 5,769                  |       |
|                                                                                                                                                                                                                                                       |   |                    |       |                   |       |
| Common stockholders’ equity:                                                                                                                                                                                                                          |   |                    |       |                   |       |
| Common stock, $0.001 par value;  authorized—50,000,000 shares; issued-19,351,311 shares,  outstanding—17,502,188 shares at September 30, 2002 and issued—18,351,311  shares, outstanding—17,502,188 shares at   December 31, 2001 |   | 19                      |       | 18                     |       |
| Additional paid-in capital                                                                                                                                                                                                                                 |   | 94,412                  |       | 94,212                 |       |
| Treasury stock, at cost—1,849,123 shares                                                                                                                                                                                                              |   | (366                    | )          | (166                   | )          |
| Accumulated deficit                                                                                                                                                                                                                                        |   | (94,925                 | )          | (91,363                | )          |
| Total common stockholders’ equity                                                                                                                                                                                                                     |   | (860                    | )          | 2,701                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                            |   | $                       | 6,136      |                   | $          | 10,414 |   |

 

*See accompanyingnotes.*

 

1

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enherent Corp. and Subsidiaries

Consolidated Statements of Operations

*(In thousands, except per share data)*

(Unaudited)

 

 
|                                                                     |   | **Three  Months  Ended September 30** |   | **Nine  Months  Ended September 30** |   |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                     |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Revenues                                                                 |   | $                                     | 4,944  |                                 | $      | 7,262 |   | $ | 16,411 |   | $ | 22,828 |   |
| Cost of revenues                                                         |   | 3,908                                 |   | 5,431                                |   | 12,965 |   | 16,683 |   |
| Gross profit                                                             |   | 1,036                                 |   | 1,831                                |   | 3,446 |   | 6,145 |   |
|                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Selling, general and administrative  expenses                            |   | 1,940                                 |   | 3,026                                |   | 7,182 |   | 12,179 |   |
| Loss from operations                                                     |   | (904                                  | )      | (1,195                               | )      | (3,736 | ) | (6,034 | ) |
|                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Other income (expense):                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Miscellaneous income                                                     |   | 2                                     |   | 24                                   |   | 5 |   | (169 | ) |
| Interest expense                                                         |   | (2                                    | )      | (2                                   | )      | (8 | ) | (21 | ) |
| Interest income                                                          |   | 5                                     |   | 33                                   |   | 30 |   | 182 |   |
| Net loss                                                                 |   | (899                                  | )      | (1,140                               | )      | (3,709 | ) | (6,042 | ) |
| Preferred stock accretion and income applicable to  common shareholders  |   | (128                                  | )      | (130                                 | )      | 147 |   | (377 | ) |
| Net loss applicable to common shareholders                               |   | $                                     | (1,027 | )                                    | $      | (1,270 | ) | $ | (3,562 | ) | $ | (6,419 | ) |
|                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share  applicable to common shareholders  |   | $                                     | (.06   | )                                    | $      | (.07 | ) | $ | (.20 | ) | $ | (.36 | ) |
| Number of shares used in computing basic and diluted  net loss per share |   | 17,502                                |   | 17,525                               |   | 17,502 |   | 17,777 |   |

 

*See accompanyingnotes.*

 

2

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enherent Corp. and Subsidiaries

Consolidated Statements of Cash Flows

*(In thousands)*

(Unaudited)

 
|                                                                         |   | **Nine  Months Ended September 30** |   |
|------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                         |   | **2002**                            |   | **2001** |   |
| **Cash flows from operating activities**                                     |   |                                |   |   |   |
| Net loss                                                                     |   | $                                   | (3,709 | ) | $ | (6,042 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                |   |   |   |
| Depreciation and amortization                                                |   | 707                                 |   | 1,883 |   |
| Provision (credit) for doubtful accounts                                     |   | (180                                | )      | 1,207 |   |
| Loss on disposal of fixed assets                                             |   | 1                                   |   | 386 |   |
| Deferred rent                                                                |   | (25                                 | )      | (23 | ) |
| Changes in operating assets and  liabilities:                                |   |                                |   |   |   |
| Accounts receivable                                                          |   | 844                                 |   | 1,309 |   |
| Prepaid expenses and other current assets                                    |   | 93                                  |   | 267 |   |
| Other assets                                                                 |   | 15                                  |   | (112 | ) |
| Accrued compensation                                                         |   | (253                                | )      | 301 |   |
| Accounts payable and other accrued expenses                                  |   | (11                                 | )      | (638 | ) |
| Deferred revenue                                                             |   | (64                                 | )      | — |   |
| Net cash provided by (used in) operating  activities                         |   | (2,582                              | )      | (1,462 | ) |
|                                                                         |   |                                |   |   |   |
| **Cash flows from investing activities**                                     |   |                                |   |   |   |
| Sale of marketable securities                                                |   | —                              |   | 728 |   |
| Purchases of fixed assets                                                    |   | (110                                | )      | (103 | ) |
| Proceeds from sale of fixed assets                                           |   | 206                                 |   | 12 |   |
| Net cash provided by (used in) investing  activities                         |   | 96                                  |   | 637 |   |
|                                                                         |   |                                |   |   |   |
| **Cash flows from financing activities**                                     |   |                                |   |   |   |
| Purchase of treasury stock                                                   |   | (200                                | )      | (166 | ) |
| Principal payments under capital lease  obligations                          |   | (16                                 | )      | (30 | ) |
| Net cash provided by (used in) financing  activities                         |   | (216                                | )      | (196 | ) |
|                                                                         |   |                                |   |   |   |
| Net decrease in cash and equivalents                                         |   | (2,702                              | )      | (1,021 | ) |
| Cash and equivalents at beginning of period                                  |   | 5,269                               |   | 5,628 |   |
| Cash and equivalents at end of period                                        |   | $                                   | 2,567  |   | $ | 4,607 |   |
|                                                                         |   |                                |   |   |   |
| **Supplemental disclosure of cash flow  information**                        |   |                                |   |   |   |
| Interest paid                                                                |   | $                                   | 8      |   | $ | 21 |   |

 

*See accompanyingnotes.*

 

3

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**enherentCorp.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.               Basis of Presentation

 

The unaudited consolidated financial statements presented herein havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Rule10 of Regulation S-X.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, theaccompanying consolidated financial statements include all adjustments(consisting only of normal recurring entries, except as disclosed) considerednecessary for a fair presentation of the financial condition and results ofoperations for the periods presented. The results of operations for the three-month and nine-month periodsended September 30, 2002 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2002. The statements should beread in conjunction with the audited consolidated financial statements andnotes thereto included in the enherent Corp. (the “Company”) Annual Report onForm 10-K for the year ended December 31, 2001.

 

The Company anticipatesthat its primary uses of working capital in the near term will be to fund theCompany’s operations.  Managementbelieves that the cash equivalents are sufficient to fund operations for thenext 12 months.  If cash generated fromoperations is insufficient to satisfy the Company’s liquidity requirements, theCompany may in the future be required to seek additional sources of financing,including borrowing and/or the sale of equity securities which may result infurther dilution to shareholders.  Noassurance can be given that any such additional sources of financing will beavailable on acceptable terms. If the Company is unsuccessful in obtainingadditional sources of financing , the Company could experience difficultymeeting its current obligations as they become due.

 

In August 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS No. 144), which is effectivefor the Company beginning January 1, 2002, and supersedes “Accounting for theImpairment or Disposal of Long-Lived Assets and for Long-Lived Assets to BeDisposed of” (SFAS No. 121).  SFAS No.144 provides a single method of accounting for long-lived assets to be disposedof and retains requirements found in SFAS No. 121 with regards to theimpairments of long-lived assets.  Theimplementation of SFAS No. 144 did not have a material effect on the Company’sresults of operations, cash flows or financial position in the three-month andnine-month periods ended September 30, 2002.

 

4

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In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit of Disposal Activities.” SFAS 146 addresses financialaccounting and reporting for costs associated with exit or disposal activities,such as restructurings, involuntarily terminating employees and consolidatingfacilities.  SFAS No. 146 excludes fromits scope exit and disposal activities conducted in connection with a businesscombination and those activities to which SFAS Nos. 143 and 144 areapplicable.  SFAS No. 146 is effectivefor exit and disposal activities  thatare initiated after December 31, 2002. We do not expect the adoption of this statement to have a material effecton our consolidated financial position or results of operations.

 

2.               Principles of Consolidation

 

The accompanying financial statements include the accounts of theCompany and its wholly owned subsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

3.               Revenue Recognition

 

On January 1, 2002, the Company adopted FASB Staff Announcement TopicNo. D-103, “Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred.”  Asa result, the Company began recording revenue and a related cost of revenue inits statement of operations for reimbursements of out-of-pocket expenses suchas airfare, hotel lodging, meals, auto rental and other charges related toproviding services to the Company’s out-of-town customers.

 

For the three and nine months ended September 30, 2002 the ConsolidatedStatement of Operations includes approximately $15,000 and $51,000 ofreimbursable expenses recorded as revenue and cost of revenue, respectively.  Reimbursable expenses for the three and ninemonths ended September 30, 2001 were not significant.

 

4.               Conversion ofPreferred Stock

 

On January 30, 2002, with theapproval of its Board of Directors, enherent entered into a Stock PurchaseAgreement with The Travelers Indemnity Company (“The Travelers”). The Travelersconverted 1,000,000 shares of its Series A Senior Participating RedeemableConvertible Preferred Stock to 1,000,000 shares of enherent common stock. Underthe terms of the Stock Purchase Agreement, The Travelers then sold the1,000,000 shares of common stock to enherent for $200,000.  enherent has retired the 1,000,000 shares ofSeries A Senior Participating Redeemable Convertible Preferred Stock. Thepreferred stock was carried at approximately $720,000 at the date of thetransaction.  Because the common stockwas purchased below the carrying value of the preferred stock, a benefit tocommon shareholders of approximately $527,000 was recorded.

 

5

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The remaining preferred stock isbeing accreted to its liquidation value at April 12, 2005. Accretion ofapproximately $128,000 and $380,000 was recorded in the three- and nine-monthperiods ended September 30, 2002, respectively.

 

5.               Loss Per Share

 

The followingsets forth the computation of basic and diluted loss per share (in thousands,except per share data):

 
|                                       |   | **Three months ended  September 30** |   | **Nine months ended  September 30** |   |
|--------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                       |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Numerator:                                 |   |                                 |   |                                |   |   |   |   |   |
| Net loss  available to common shareholders |   | $                                    | (1,027 | )                                   | $      | (1,270 | ) | $ | (3,562 | ) | $ | (6,419 | ) |
| Denominator:                               |   |                                 |   |                                |   |   |   |   |   |
| Weighted  average of shares outstanding    |   | 17,502                               |   | 17,525                              |   | 17,502 |   | 17,777 |   |
| Basic and  diluted loss per share          |   | $                                    | (.06   | )                                   | $      | (.07 | ) | $ | (.20 | ) | $ | (.36 | ) |

 

The Companyhas excluded the impact of the redeemable convertible preferred stock andrelated warrants and stock options outstanding under the Company’s stock optionplan as the effect would be anti-dilutive.

 

6.               Office Closure

 

The Companyannounced on June 3, 2002 its intentions to close the Company’s BarbadosSolution Center to reduce costs and improve operating efficiency. The Companyimplemented a plan to close the Barbados Solution Center and recorded a pretaxcharge of approximately $440,000 in the period ended June 30, 2002.  The Company recorded a liability ofapproximately $200,000 for severance and other employee costs for 28 supportstaff and $95,000 for facility-related costs. The pretax charge includes approximately $145,000 to write the fixedassets down to their market value.  Theliability has been paid as of September 30, 2002.  The Barbados Solution Center was closed on October 15, 2002.

 

7.               Contingencies

 

In the normalcourse of business, various claims are made against the Company.  At this time, in the opinion of management,there are no pending claims the outcome of which are expected to result in amaterial adverse effect on the consolidated financial position or results ofoperations of the Company.

 

8.               Related Party Transaction

 

On September 13,2002, the Company entered into a Separation Agreement and Release with Dan S.Woodward, the Company’s former Chief Executive Officer, in 

 

6

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order toamicably resolve the terms of Mr. Woodward’s separation from the Company.  Under the terms of the Separation andRelease Agreement, the Company agreed to pay Mr. Woodward $306,000 paid out asfollows:  $256,000 paid immediately, lessall applicable state and federal taxes, and two payments of $25,000 each to bepaid on August 1, 2003 and September 1, 2003, less all applicable state andfederal taxes.  In addition to theabove, Mr. Woodward’s non-vested Incentive Stock Options (ISOs) vested onSeptember 13, 2002 in accordance with the terms of the original award. Mr.Woodward has 90 days following September 13, 2002, to exercise all vestedISOs. All non-vested Non Qualified Stock Options (NQs) were cancelled effectiveSeptember 13, 2002. Vested NQs, as of September 13, 2002 shall continue to beexercisable in accordance with their original terms.  Mr. Woodward also received the cash equivalent of his currentwelfare benefits for the remainder of the employment term pursuant to Mr.Woodward’s Employment Agreement of $10,976, which was paid concurrently withthe execution of the Separation Agreement and Release.

 

**Item 2.   Management’sDiscussion and Analysis****of Financial Condition and Results of Operations.**

 

**Results of Operations**

 

*Revenue.*  Revenues decreased $2.3 million during thethree-month period ended September 30, 2002 to $4.9 million compared to $7.3million for the three-month period ended September 30, 2001. Revenues decreased$6.4 million for the nine-month period ended September 30, 2002 to $16.4million compared to $22.8 for the nine-month period ended September 30,2001.  The decrease in revenue was aresult of the completion of client projects, non-renewal of certain clientassignments and billing rate reductions.

 

*Cost of Revenues.*  Cost of revenues decreased $1.5 million to$3.9 million for the three-month period ended September 30, 2002 from $5.4million in the comparable period in 2001. Cost of revenues decreased $3.7 million for the nine-month period endedSeptember 30, 2002 to $13.0 million compared to $16.7 million for thenine-month period ended September 30, 2001. The decrease in cost of revenues was attributable to the overalldecrease in revenues.  Cost of revenuesas a percentage of revenues increased to approximately 79% for the three-monthperiod ended September 30, 2002 from 75% for the three-month period endedSeptember 30, 2001.  Cost of  revenues as a percentage of revenuesincreased to approximately 79% for the nine-month period endedSeptember 30, 2002 from approximately 73% for the nine-month period endedSeptember 30, 2001.  The increase in thecost of revenues as a percentage of revenues is due to higher personnel costsand lower billing rates.

 

*Gross Profit.*  Gross profit decreased as a percentage ofrevenues to approximately 21% in the three-month period ended September 30,2002 from 25% for the comparable period 

 

7

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in2001.  Gross profit decreased as apercentage of revenues to approximately 21% in the nine-month period endedSeptember 30, from 27% for the comparable period in 2001.  The decrease in gross profit wasattributable to the overall decrease in revenues, higher personnel costs andlower billing rates.

 

*Selling, General &Administrative Expenses (SG&A).* SG&A expensesdecreased approximately 36% to $1.9 million in the three-month period endedSeptember 30, 2002 from $3.0 million for the comparable period in 2001.  SG&A as a percentage of revenuedecreased to 39% for the three-month period ended September 30, 2002 from 42%for the comparable period in 2001. SG&A expenses decreased 41% to $7.2 million in the nine-month periodended September 30, 2002 from $12.2 million in the comparable period in2001.  SG&A as a percentage ofrevenue decreased to 44% for the nine-month period ended September 30, 2002from 53% for the comparable period in 2001. The decrease in SG&A expenses resulted due to cost-cutting measuresand a reduction in bad debt expense, partially offset by the costs associatedwith the settlement of litigation, the closure of the Barbados Solution Centerand severance paid to former CEO Dan Woodward. The Company implemented a planto close the Barbados Solution Center and recorded a pretax charge ofapproximately $440,000 in the period ended June 30, 2002.  The Company recorded a liability ofapproximately $200,000 for severance and other employee costs for 28 supportstaff and $95,000 for facility-related costs. The pretax charge includes approximately $145,000 to write the fixedassets down to their market value.  Theliability has been paid as of September 30, 2002, and the office was closed onOctober 15, 2002. The Company recorded a charge of approximately $340,000 inconnection with the severance paid to the former CEO.

 

*Loss from Operations:*  For the reasons set forth above, loss fromoperations for the three months ended September 30, 2002 decreased to $.9million as compared to a loss from operations of $1.2 million in the comparableperiod in 2001.  As a percentage ofrevenues, the loss from operations for the three months ended September 30,2002 increased to 18% as compared to approximately 16% in the comparable periodin 2001.  Loss from operations for thenine months ended September 30, 2002 decreased to $3.7 million as compared to aloss from operations of $6.0 million in the comparable period in 2001.  As a percentage of revenues, the loss fromoperations for the nine months ended September 30, 2002 decreased to 23% ascompared to approximately 26% in the comparable period in 2001.

 

8

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# **Liquidityand Capital Resources**

 

*Working Capital:*The Company’s working capital decreased to approximately $4.0 million atSeptember 30, 2002 from $7.1 million at December 31, 2001.  Cash and equivalents and marketable debtsecurities were $2.6 million at September 30, 2002 compared to $5.3 million atDecember 31, 2001.  The primary use ofcash during the nine months ended September 30, 2002 was to fund operatingactivities of approximately $2.6 million and to purchase one million shares ofthe Company’s common stock for $200,000. The Company’s accounts receivables were $2.5 million at September 30,2002 and $3.2 million at December 31, 2001. Billed days sales outstanding, net of allowance for doubtful accounts,was 47 days at September 30, 2002 and 39 days at December 31, 2001.

 

OnApril 13, 2000, the Company issued 8,000,000 shares of its Series A SeniorParticipating Redeemable Convertible Preferred Stock (“Preferred Stock”) for$8,000,000. The Company also issued a warrant to the Preferred Stock investorsto purchase 4,000,000 shares of the Company’s Common Stock at an initialexercise price of $1.00 per share subject to adjustment, as defined. ThePreferred Stock is convertible, subject to adjustment, as defined, into CommonStock on a one-for-one basis at any time, and is redeemable after April 12,2005 at the option of the holder at its liquidation value plus accrued andunpaid dividends and contains voting rights on an as-converted basis. Eachwarrant entitles the holder to purchase one share of Common Stock prior to April14, 2005. On January 30, 2002, The Travelers Indemnity Company converted1,000,000 shares of its Series A Senior Participating Redeemable ConvertiblePreferred Stock to 1,000,000 shares of enherent common stock.

 

TheCompany anticipates that its primary uses of working capital in the near termwill be to fund the Company’s operations. Management believes that the cash equivalents are sufficient to fundoperations for the next 12 months.  Ifcash generated from operations is insufficient to satisfy the Company’sliquidity requirements, the Company may in the future be required to seekadditional sources of financing, including borrowing and/or the sale of equitysecurities which may result in further dilution to shareholders.  No assurance can be given that any suchadditional sources of financing will be available on acceptable terms. If theCompany is unsuccessful in obtaining additional sources of financing, theCompany could experience difficulty meeting its current obligations as theybecome due.

 

**Significant AccountingPolicies**

 

In August 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS No. 144), which is effectivefor the Company beginning January 1, 2002, and supersedes “Accounting for theImpairment or Disposal of Long-Lived Assets and for Long-Lived Assets to BeDisposed of” (SFAS No. 121).  SFASNo. 144 provides a single method of accounting for long-lived assets to bedisposed of and retains requirements found in SFAS No. 121 with regards to theimpairments of long-

 

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lived assets.  The implementation of SFAS No. 144 did nothave a material effect on the Company’s results of operations, cash flows orfinancial position in the three-month and nine-month periods ended September30, 2002.

 

In July 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit of DisposalActivities.” SFAS 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities, such as restructurings,involuntarily terminating employees and consolidating facilities.  SFAS No. 146 excludes from its scope exitand disposal activities conducted in connection with a business combination andthose activities to which SFAS Nos. 143 and 144 are applicable.  SFAS No. 146 is effective for exit anddisposal activities  that are initiatedafter December 31, 2002.  We do notexpect the adoption of this statement to have a material effect on ourconsolidated financial position or results of operations.

 

**Item 3****. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

For the period ended September30, 2002, the Company did not experience any material changes in market riskexposures that affect the quantitative and qualitative disclosures presented inthe Company’s 2001 Annual Report on Form 10-K.

 

**Item 4****. Controls and Procedures.**

 

Evaluation of DisclosuresControls and Procedures

 

The Company’s Chief ExecutiveOfficer and Chief Financial Officer, after evaluating the Company’s “disclosurecontrols and procedures” (as defined in Securities Exchange Act Rules 13a-14(c)and 15d-14(c)) as of September 30, 2002 (the “Evaluation Date”), each hasconcluded that as of the Evaluation Date, the Company’s disclosure controls andprocedures were adequate and designed to ensure that material informationrelating to the Company and its consolidated subsidiaries would be made knownto them by others within those entities.

 

Changes in Internal Controls

 

There were no significantchanges in the Company’s internal controls or, to the Company’s knowledge, inother factors that could significantly affect the Company’s disclosure controlsand procedures subsequent to the Evaluation Date.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

In the normal course of business, various claims are madeagainst the Company. At this time, in the opinion of management, there are nopending claims the outcome of which are expected to result in a materialadverse effect on the consolidated financial position or results of operationsof the Company.

 

**Item. 5. Other Information.**

 

On August 1, 2002, Felicia A. Norvell was named CorporateCounsel and elected Corporate Secretary by the Board of Directors effectiveimmediately.

 

On September 10, 2002, Robert D. Merkl was named Chairman ofthe Board, President and Chief Executive Officer of the Company effectiveimmediately.

 

On September 13, 2002, the Company entered into a SeparationAgreement and Release with Dan S. Woodward, the Company’s former ChiefExecutive Officer, in order to amicably resolve the terms of Mr. Woodward’sseparation from the Company.  Under theterms of the Separation and Release Agreement, the Company agreed to pay Mr.Woodward $306,000 paid out as follows: $256,000 paid immediately, less all applicable state and federal taxes,and two payments of $25,000 each to be paid on August 1, 2003 and September 1,2003, less all applicable state and federal taxes.  In addition to the above, Mr. Woodward’s non-vested IncentiveStock Options (ISOs) vested on September 13, 2002 in accordance with the termsof the original award. Mr. Woodward has 90 days following September 13,2002, to exercise all vested ISOs. All non-vested Non Qualified Stock Options(NQs) were cancelled effective September 13, 2002. Vested NQs, as of September13, 2002 shall continue to be exercisable in accordance with their originalterms.  Mr. Woodward also received thecash equivalent of his current welfare benefits for the remainder of theemployment term pursuant to Mr. Woodward’s Employment Agreement of $10,976,which was paid concurrently with the execution of the Separation Agreement andRelease.

 

Mr. Woodward released the Company, its officers, directors,stockholders, corporate affiliates, attorneys, agents and employees from anyand all claims of every kind which he ever had or now has, including, but notlimited to, claims arising out of his employment, any claims of violation ofTitle VII of the Civil Rights Act of 1964, the Employee Retirement IncomeSecurity Act of 1974, the Fair Credit Reporting Act, the Americans withDisabilities Act or any claims brought under the Age Discrimination inEmployment Act.  Mr. Woodward alsoagreed not to compete with the Company for a period of two years and not tosolicit employees of the Company for one year.

 

Mr. Woodward will continue to serve as a member of the Boardof Directors.

 

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On October 5, 2002, Isaac Shapiro resigned as a member of theAudit Committee of the Board of Directors of the Company.  He continues to serve as a member of theBoard of Directors.

 

On October 28, 2002, the Board of Directors increased the August 22,2000, Board of Directors’ approval to repurchase up to two million shares ofenherent common stock to four million shares. The Board authorized the Company’s officers to implement the repurchaseof common stock through open-market purchases to be made from time to time andat prevailing market prices.

 

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** **

**Item6. Exhibits and Reports on Form 8-K**

 

(a)           Exhibits

 

Thefollowing is a list of exhibits filed as part of this quarterly report on Form10-Q:

 
| **Exhibit No.** |   | **Description  of Exhibits**                                                                                                                                                                                              |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Restated Certificate of Incorporation (Incorporated by reference to  Exhibit 4.1 of the Company’s Form S-8 filed January 22, 1998).                                                                                  |
| 3.2             |   | Certificate of Amendment of Restated Certificate of Incorporation of  enherent Corp. (Incorporated by reference to Exhibit 3.1 of the Company’s  Annual Report on Form 10-K filed April 4, 2001).                    |
| 3.3             |   | Amended and Restated Bylaws (Incorporated by reference to Exhibit 4.2  of the Company’s Form S-8 filed January 22, 1998).                                                                                            |
| 4.1             |   | Form of Certificate of Common Stock (Incorporated by reference to  Exhibit 4.1 of the Company’s Annual Report on Form 10-K filed March 22,  2002).                                                                   |
| 4.2             |   | Securities Purchase Agreement dated April 13, 2000, by and among PRT  Group Inc. and the Investors named therein (Incorporated by reference to  Exhibit 99.1 of the Company’s  Form  8-K filed April 14, 2000). |
| 4.3             |   | Form of Certificate of Designations (Incorporated by reference to  Exhibit 99.2 of the Company’s Form 8-K filed April 14, 2000).                                                                                     |
| 4.4             |   | Form of Warrant  (Incorporated  by reference to Exhibit 99.3 of the Company’s  form 8-K filed April 14, 2000).                                                                                             |
| 10.1            |   | Employment Agreement between Dan Woodward and the Company dated April  30, 2002 (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly  Report on Form 10-Q filed May 14, 2002).                      |
| 10.2            |   | Separation Agreement and Release between Dan W. Woodward and the  Company dated September 13, 2002 (Filed herewith).                                                                                                      |
| 99.1            |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 of CFO and CEO (Filed  herewith).                                                                 |

 

(b)          Reports on Form 8-K

 

OnSeptember 11, 2002, the Company filed a Current Report on Form 8-K with theSecurities and Exchange Commission that included disclosure under Item 5 relatedto Dan S. Woodward, former Chairman and Chief Executive Officer, resigning asChairman of the Board and Chief Executive Officer and the naming of Robert D.Merkl as Chairman, President and CEO of the Company.  This Current Report on Form 8-K did not include financialstatements.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | **enherent Corp.** |
|--------|--------------------|
|   |               |   |
|   |               |   |
|   |               |   |
| DATE   | November 13, 2002  |   | BY | /s/ Robert D. Merkl |   |
|   |               | Robert  D. Merkl |
|   |               | Chief Executive Officer |
|   |               |   |
|   |               |   |
|   |               |   |
| DATE   | November 13, 2002  |   | BY | /s/ George Warman |   |
|   |               | George Warman |
|   |               | Chief Financial Officer |

 

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**CERTIFICATION**

 

I, Robert D. Merkl, certifythat:

 

1.               Ihave reviewed this Quarterly Report on Form 10-Q of enherent Corp.,

 

2.               Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this Quarterly Report is being prepared;

 

b.              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this Quarterly Report (the“Evaluation Date”); and

 

c.               presentedin this Quarterly Report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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6.               Theregistrant’s other certifying officers and I have indicated in this QuarterlyReport whether or not there were significant changes in internal controls or inother factors that could significantly affect controls subsequent to the dateof our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| /s/ Robert  D. Merkl                                                           |   |   |
|--------------------------------------------------------------------------------|--------|--------|
| Robert D.  Merkl                                                               |   |
| Chairman of  the Board, President and  Chief Executive Officer  enherent Corp. |   |
| November 13,  2002                                                             |   |

 

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**CERTIFICATION**

 

I, George Warman, certify that:

 

1.               Ihave reviewed this Quarterly Report on Form 10-Q of enherent Corp.;

 

2.               Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this Quarterly Report is being prepared;

 

b.              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this Quarterly Report (the“Evaluation Date”); and

 

c.               presentedin this Quarterly Report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent functions):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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6.               Theregistrant’s other certifying officers and I have indicated in this QuarterlyReport whether or not there were significant changes in internal controls or inother factors that could significantly affect controls subsequent to the dateof our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| /s/ George  Warman                                       |   |   |
|----------------------------------------------------------|--------|--------|
| George  Warman

Chief  Financial Officer  enherent Corp. |   |
| November 13,  2002                                       |   |

 

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Exhibit Index:

 
| **Exhibit No.** |   | **Description  of Exhibit**s                                                                                                                                                                                              |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Restated Certificate of Incorporation (Incorporated by reference to  Exhibit 4.1 of the Company’s Form S-8 filed January 22, 1998).                                                                                  |
| 3.2             |   | Certificate of Amendment of Restated Certificate of Incorporation  of enherent Corp. (Incorporated by reference to Exhibit 3.1 of the Company’s  Annual Report on Form 10-K filed April 4, 2001).                    |
| 3.3             |   | Amended and Restated Bylaws (Incorporated by reference to Exhibit 4.2  of the Company’s Form S-8 filed January 22, 1998).                                                                                            |
| 4.1             |   | Form of Certificate of Common Stock (Incorporated by reference to  Exhibit 4.1 of the Company’s Annual Report on Form 10-K filed March 22,  2002).                                                              |
| 4.2             |   | Securities Purchase Agreement dated April 13, 2000, by and among PRT  Group Inc. and the Investors named therein (Incorporated by reference to  Exhibit 99.1 of the Company’s  Form  8-K filed April 14, 2000). |
| 4.3             |   | Form of Certificate of Designations (Incorporated by reference to  Exhibit 99.2 of the Company’s Form 8-K filed April 14, 2000).                                                                                     |
| 4.4             |   | Form of Warrant  (Incorporated  by reference to Exhibit 99.3 of the Company’s  form 8-K filed April 14, 2000).                                                                                             |
| 10.1            |   | Employment Agreement between Dan Woodward and the Company dated April  30, 2002 (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly  Report on Form 10-Q filed May 14, 2002).                      |
| 10.2            |   | Separation Agreement and Release between Dan W. Woodward and the  Company dated September 13, 2002 (Filed herewith).                                                                                                      |
| 99.1            |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 of CFO and CEO (Filed  herewith).                                                                 |

 

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