**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

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**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 June 30, 2003** |
|                                              |
| **OR**                                            |
|                                              |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934** |   |

 

**Forthe transition period from                    to                    **

 

**CommissionFile Number 0-23315**

 

**enherent Corp.**

(Exact name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                                               |   | **No.  13-3914972**                   |
|------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation)            |   | (I.R.S. Employer  Identification No.) |
|                                                       |   |                                  |
| **80  Lamberton Road  Windsor, CT 06095**                  |
| (Address of  Principal Executive Offices)                  |
|                                                       |   |                                  |
| **(860)  687-2200**                                        |
| (Registrant’s  Telephone Number, Including Area Code) |

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  YES  o  NO  ý

 

Indicate the number ofshare outstanding of each of the issuer’s classes of common stock as of thelatest practicable date:

 
| **Class**                      |   | **Shares  outstanding as of August 7, 2003** |
|--------------------------------|--------|----------------------------------------------|
| Common stock,  par value $.001 |   | 17,502,188                                   |

 

 

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**enherent Corp. and Subsidiaries**

 

## **INDEX**

 

**PART I.  FINANCIALINFORMATION**

 
| **Item 1.  Financial Statements.**                                                                         |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| **Condensed  Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002**                            |   |
|                                                                                                            |   |
| **Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2003 and 2002** |   |
|                                                                                                            |   |
| **Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2003  and 2002**           |   |
|                                                                                                            |   |
| **Notes to Condensed 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.  4.  Submission of Matters to a Vote of  Security Holders**                                        |   |
|                                                                                                            |   |
| **Item 5.  Other Information**                                                                             |   |
|                                                                                                            |   |
| **Item  6.  Exhibits and Reports on Form 8-K**                                                             |   |
|                                                                                                            |   |
| **Signatures**                                                                                                  |   |
|                                                                                                            |   |
| **Exhibit  Index**                                                                                              |   |

 

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**Item 1****. Financial Statements**

 

enherent Corp. andSubsidiaries

Condensed ConsolidatedBalance Sheets

*(In thousands, except number ofshares)*

* *
|                                                                                                                                                                                                        |   | **June 30,  2003** |       | **December  31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                        |   | **(unaudited)**    |       | **(Note 1)**            |       |
| **Assets**                                                                                                                                                                                                  |   |               | ** ** |                    | ** ** |
| Current  assets:                                                                                                                                                                                            |   |               | ** ** |                    | ** ** |
| Cash  and equivalents                                                                                                                                                                                       |   | $                  | 2,730      |                    | $          | 3,067 |   |
| Accounts  receivable, net of allowance of $18 at June 30, 2003 and $57 at December 31,  2002                                                                                                                |   | 1,395              |       | 1,926                   |       |
| Prepaid  expenses and other current assets                                                                                                                                                                  |   | 156                |       | 259                     |       |
| Total  current assets                                                                                                                                                                                       |   | 4,281              |       | 5,252                   |       |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| Fixed  assets, net                                                                                                                                                                                          |   | 255                |       | 477                     |       |
| Other  assets                                                                                                                                                                                               |   | 63                 |       | 69                      |       |
| Total  assets                                                                                                                                                                                               |   | $                  | 4,599      |                    | $          | 5,798 |   |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                              |   |               |       |                    |       |
| Current  liabilities:                                                                                                                                                                                       |   |               |       |                    |       |
| Accounts  payable                                                                                                                                                                                           |   | $                  | 111        |                    | $          | 470 |   |
| Accrued  compensation                                                                                                                                                                                       |   | 331                |       | 283                     |       |
| Accrued  expenses                                                                                                                                                                                           |   | 500                |       | 294                     |       |
| Current  portion of capital lease obligations                                                                                                                                                               |   | 7                  |       | 14                      |       |
| Deferred  revenue                                                                                                                                                                                           |   | 44                 |       | 171                     |       |
| Total  current liabilities                                                                                                                                                                                  |   | 993                |       | 1,232                   |       |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| Capital  lease obligations, net of current portion                                                                                                                                                          |   | 3                  |       | 5                       |       |
| Deferred  rent                                                                                                                                                                                              |   | 42                 |       | 58                      |       |
| Total  liabilities                                                                                                                                                                                          |   | 1,038              |       | 1,295                   |       |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| Commitments  and contingencies                                                                                                                                                                              |   |               |       |                    |       |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| Series  A senior participating redeemable convertible preferred stock, $0.001 par  value; authorized - 10,000,000 shares; issued and outstanding - 7,000,000  shares at June 30, 2003 and December 31, 2002 |   | 5,830              |       | 5,553                   |       |
|                                                                                                                                                                                                        |   |               |       |                    |       |
| Common  stockholders’ equity (deficit):                                                                                                                                                                |   |               |       |                    |       |
| Common  stock, $0.001 par value; authorized - 50,000,000 shares; issued - 19,351,311  shares; outstanding - 17,502,188 shares at June 30, 2003 and December 31, 2002                                        |   | 19                 |       | 19                      |       |
| Additional  paid-in capital                                                                                                                                                                                 |   | 94,411             |       | 94,411                  |       |
| Treasury  stock, at cost - 1,849,123 shares at June 30, 2003 and December 31, 2002                                                                                                                          |   | (366               | )          | (366                    | )          |
| Accumulated  deficit                                                                                                                                                                                        |   | (96,333            | )          | (95,114                 | )          |
| Total  common stockholders’ deficit                                                                                                                                                                    |   | (2,269             | )          | (1,050                  | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                           |   | $                  | 4,599      |                    | $          | 5,798 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

1

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enherent Corp. andSubsidiaries

Condensed ConsolidatedStatements of Operations

*(In thousands, except per sharedata)*

(Unaudited)

 
|                                                                                               |   | **Three  Months  Ended June 30** |   | **Six Months  Ended June 30** |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|-------------------------------|--------|
|                                                                                               |   | **2003**                         |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                                               |   |                             |   |                          |   |   |   |   |   |
| Revenues                                                                                           |   | $                                | 3,166  |                          | $      | 5,551 |   | $ | 6,819 |   | $ | 11,467 |   |
| Cost  of revenues                                                                                  |   | 2,369                            |   | 4,333                         |   | 5,284 |   | 9,057 |   |
| Gross  profit                                                                                      |   | 797                              |   | 1,218                         |   | 1,535 |   | 2,410 |   |
|                                                                                               |   |                             |   |                          |   |   |   |   |   |
| Selling,  general and administrative expenses                                                      |   | 1,236                            |   | 2,254                         |   | 2,484 |   | 5,242 |   |
| Loss  from operations                                                                              |   | (439                             | )      | (1,036                        | )      | (949 | ) | (2,832 | ) |
|                                                                                               |   |                             |   |                          |   |   |   |   |   |
| Other  income (expense):                                                                           |   |                             |   |                          |   |   |   |   |   |
| Miscellaneous  income                                                                              |   | 2                                |   | 3                             |   | 5 |   | 3 |   |
| Interest  expense                                                                                  |   | (1                               | )      | (2                            | )      | (3 | ) | (7 | ) |
| Interest  income                                                                                   |   | 2                                |   | 9                             |   | 5 |   | 25 |   |
| Net  loss                                                                                          |   | (436                             | )      | (1,026                        | )      | (942 | ) | (2,811 | ) |
| Preferred  stock accretion and income applicable to common stockholders                            |   | (141                             | )      | (124                          | )      | (277 | ) | 276 |   |
| Net  loss applicable to common stockholders                                                        |   | $                                | (577   | )                             | $      | (1,150 | ) | $ | (1,219 | ) | $ | (2,535 | ) |
|                                                                                               |   |                             |   |                          |   |   |   |   |   |
| Basic  and diluted net loss per share applicable to common stockholders                            |   | $                                | (.03   | )                             | $      | (.07 | ) | $ | (.07 | ) | $ | (.14 | ) |
| Number  of shares used in computing  basic and  diluted  net loss per share (000’s) |   | 17,502                           |   | 17,502                        |   | 17,502 |   | 17,502 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

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enherent Corp. andSubsidiaries

Condensed ConsolidatedStatements of Cash Flows

*(In thousands)*

(Unaudited)

 
|                                                                         |   | **Six Months  Ended June 30** |   |
|------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                         |   | **2003**                      |   | **2002** |   |
| **Cash  flows from operating activities**                                    |   |                          |   |   |   |
| Net  loss                                                                    |   | $                             | (942   | ) | $ | (2,811 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                          |   |   |   |
| Depreciation  and amortization                                               |   | 205                           |   | 605 |   |
| Provision  (credit) for doubtful accounts                                    |   | 33                            |   | (126 | ) |
| Loss  on disposal of fixed assets                                            |   | 10                            |   | 1 |   |
| Deferred  rent                                                               |   | (16                           | )      | (17 | ) |
| Changes  in operating assets and liabilities:                                |   |                          |   |   |   |
| Accounts  receivable                                                         |   | 498                           |   | 775 |   |
| Prepaid  expenses and other current assets                                   |   | 103                           |   | 10 |   |
| Other  assets                                                                |   | 6                             |   | 29 |   |
| Accrued  compensation                                                        |   | 48                            |   | 30 |   |
| Accounts  payable and other accrued expenses                                 |   | (153                          | )      | 325 |   |
| Deferred  revenue                                                            |   | (127                          | )      | (24 | ) |
| Net  cash used in operating activities                                       |   | (335                          | )      | (1,203 | ) |
|                                                                         |   |                          |   |   |   |
| **Cash  flows from investing activities**                                    |   |                          |   |   |   |
|                                                                         |   |                          |   |   |   |
| Purchases  of fixed assets                                                   |   | —                        |   | (20 | ) |
| Proceeds  from sale of fixed assets                                          |   | 7                             |   | — |   |
| Net  cash provided by (used in) investing activities                         |   | 7                             |   | (20 | ) |
|                                                                         |   |                          |   |   |   |
| **Cash  flows from financing activities**                                    |   |                          |   |   |   |
| Purchase  of treasury stock                                                  |   | —                        |   | (200 | ) |
| Principal  payments under capital lease obligations                          |   | (9                            | )      | (11 | ) |
| Net  cash used in financing activities                                       |   | (9                            | )      | (211 | ) |
|                                                                         |   |                          |   |   |   |
| Net  decrease in cash and equivalents                                        |   | (337                          | )      | (1,434 | ) |
| Cash  and equivalents at beginning of period                                 |   | 3,067                         |   | 5,269 |   |
| Cash  and equivalents at end of period                                       |   | $                             | 2,730  |   | $ | 3,835 |   |
|                                                                         |   |                          |   |   |   |
| **Supplemental  disclosure of cash flow information**                        |   |                          |   |   |   |
| Interest  paid                                                               |   | $                             | 3      |   | $ | 7 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

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**enherent Corp.**

**NOTES****TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.               Basis ofPresentation

 

The unaudited condensedconsolidated financial statements presented herein have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Item 10-01 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, the accompanying condensed consolidatedfinancial statements include all adjustments (consisting only of normalrecurring entries, except as disclosed) considered necessary for a fairpresentation of the financial condition and results of operations for theperiods presented.  The results ofoperations for the three-month and six-month periods ended June 30, 2003 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003. The condensed consolidated balance sheet as ofDecember 31, 2002 was derived from the audited consolidated balance sheet as ofthat date. The statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the enherentCorp. (the “Company”) Annual Report on Form 10-K for the year ended December31, 2002.

 

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.If the Company is unsuccessful in obtaining additional sources of financing,the Company could experience difficulty meeting its current obligations as theybecome due.

 

2.               Principles ofConsolidation

 

The accompanyingfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries.  All significantintercompany balances and transactions have been eliminated in consolidation.

 

3.               Series A SeniorParticipating Redeemable Convertible Preferred Stock

 

On January 30, 2002, withthe approval of its Board of Directors, enherent entered into a Stock PurchaseAgreement (the “Stock Purchase Agreement”) with The Travelers Indemnity Company(“The Travelers”), pursuant to which The Travelers converted 1,000,000 sharesof its Series A Senior Participating Redeemable Convertible Preferred Stockinto 1,000,000 shares of enherent Common Stock. Under

 

4

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the terms of the Stock PurchaseAgreement, The Travelers then sold the 1,000,000 shares of Common Stock toenherent for $200,000, with such shares considered treasury shares.  The Preferred Stock was carried atapproximately $720,000 at the date of the transaction.  Because the Common Stock was purchased belowthe carrying value of the Preferred Stock, a benefit to common shareholders ofapproximately $527,000 was recorded.

 

The remaining PreferredStock is being accreted to its liquidation value at April 12, 2005. Accretionof approximately $141,000 and $124,000 was recognized in the three-monthperiods ending June 30, 2003 and 2002, respectively. In the six- month periodsending June 30, 2003 and 2002, accretion of approximately $277,000 and $251,000, respectively, was recognized.

 

4.               Loss Per Share

 

The following sets forththe computation of basic and diluted loss per share (in thousands, except pershare data):

 
|                                       |   | **Three  months ended  June 30** |   | **Six months  ended  June 30** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                       |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Numerator:                                 |   |                             |   |                           |   |   |   |   |   |
| Net  loss available to common stockholders |   | $                                | (577   | )                              | $      | (1,150 | ) | $ | (1,219 | ) | $ | (2,535 | ) |
| Denominator:                               |   |                             |   |                           |   |   |   |   |   |
| Weighted  average of shares outstanding    |   | 17,502                           |   | 17,502                         |   | 17,502 |   | 17,502 |   |
| Basic  and diluted loss per share          |   | $                                | (.03   | )                              | $      | (.07 | ) | $ | (.07 | ) | $ | (.14 | ) |

 

The Company has excludedthe impact of the redeemable convertible preferred stock and related warrantsand stock options outstanding under the Company’s stock option plan as theeffect would be anti-dilutive.

 

5.               Stock-BasedCompensation

 

The Company accounts forstock options using the intrinsic value method set forth in AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” and accordingly, recognizes compensation expense only if the fairvalue of the underlying Common Stock exceeds the exercise price of the stockoption on the date of grant. As permitted by Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), theCompany continues to account for stock-based compensation in accordance withAPB Opinion No. 25 and has elected the pro forma disclosure alternative of SFASNo. 123.

 

The following tableillustrates the effect on net loss and loss per share if the Company hadapplied the fair value recognition provisions of SFAS 123 instead of APB

 

5

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Opinion No. 25’sintrinsic value method to account for stock-based employee compensation (inthousands, except per share amounts):

 
|                                                                |   | **Three  months ended  June 30** |   | **Six months  ended  June 30** |   |
|---------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net  loss available to common stockholders as reported              |   | $                                | (577   | )                              | $      | (1,150 | ) | $ | (1,219 | ) | $ | (2,535 | ) |
| Total  stock option expense determined under fair value base method |   | (49                              | )      | (266                           | )      | (136 | ) | (609 | ) |
| Pro  forma net loss                                                 |   | $                                | (626   | )                              | $      | (1,416 | ) | $ | (1,355 | ) | $ | (3,144 | ) |
| Net  loss per common share as reported: basic and diluted           |   | $                                | (.03   | )                              | $      | (.07 | ) | $ | (.07 | ) | $ | (.14 | ) |
| Net  loss per common share pro forma: basic and diluted             |   | $                                | (.04   | )                              | $      | (.08 | ) | $ | (.08 | ) | $ | (.18 | ) |

 

Pro forma information regardingnet loss and loss per share is required by SFAS No. 123 and has been determinedas if the Company had accounted for its employees’ stock options under the fairvalue method provided by that Statement. The fair value of the options wasestimated at the date of grant using the Black-Scholes option pricing modelwith the following assumptions for vested and non-vested options:

 
|                                                                               |   | **June 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------|--------|
| **Assumption**                                                                     |   | **2003**     |   | **2002** |   |
|                                                                               |   |         |   |   |   |
| Risk-free  interest rate                                                           |   | 0            | %      | 2.99 | % |
| Dividend  yield                                                                    |   | 0            | %      | 0 | % |
| Volatility  factor of the expected market price of the Company’s Common Stock |   | 1.29         |   | 1.40 |   |
| Average  life                                                                      |   | 5 years      |   | 5 years |   |

 

6.               Office Closure

 

To reduce costs andincrease efficiency, the Company has closed its Dallas, Texas office andcentralized that office’s administrative and financial functions at theCompany’s Windsor, Connecticut corporate office. The closure and relocation waseffectively completed in the second quarter of 2003.

 

In accordance withStatement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accountingfor Costs Associated with Exit or Disposal Activities,” costs associated withtraining personnel, travel, moving expenses and duplicate facility costs areexpensed as incurred and are expected to total approximately $101,000.  Benefits costs, for which employees arerequired to render services until they are terminated consisting of severanceand stay bonuses for six administrative personnel,

 

6

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are recognized over theservice period. The total benefit costs associated with the closure will beapproximately $103,000. The total costs of the closure will be approximately$204,000.In the six months ended June 30, 2003 the Company has incurredapproximately $172,000 in costs, including $56,000 incurred in the quarterended March 31, 2003 and $22,000 of additional costs accrued as of June 30,2003. Estimated costs of $32,000 related to the final stage of the relocationare expected to be incurred, and will be expensed in the third and fourthquarter of 2003.

 

7.               Contingencies

 

In the normal course ofbusiness, 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.

 

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

 

**CriticalAccounting Policies**

 

Use of Estimates

 

As described in Note 1,the condensed consolidated financial statements presented elsewhere in thisdocument, have been prepared in conformity with generally accepted accountingprinciples for interim financial information and with instructions to Form 10-Qand Rule 10 of Regulation S-X. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

Revenue Recognition

 

Revenues are primarilyderived from consultants on engagements with clients for a period of time. Therevenues from these time and materials contracts are recognized during theperiod in which the related services are provided.

 

Accounts Receivable andAllowance for Doubtful Accounts

 

The Company’s accountsreceivable balance is reported net of estimated allowances for balances notexpected to be collectible.  The Companyregularly evaluates the collectabilty of amounts owed to it based on the abilityof the debtor to make payments. When the Company’s evaluation indicates that acustomer will be unable to satisfy its obligation, the Company will record areserve to reflect this anticipated loss. The Company periodically reviews the requirements for, and adequacy ofthe reserve for doubtful accounts.

 

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Fixed Assets

 

Fixed assets are statedat cost and depreciation on furniture and equipment, computer equipment andsoftware is calculated on the straight-line method over the estimated usefullives of the assets ranging from three to seven years. Equipment held undercapital leases and leasehold improvements are amortized using the straight-linemethod over the shorter of the lease term or estimated useful life of theasset.  The Company evaluates long-livedassets for impairment and records charges for long-lived assets used inoperations when events and circumstances indicate that assets may be impaired.The impairment charge is determined based upon the amount by which the net bookvalue of the asset exceeds its estimated fair market value or undiscounted cashflow.

 

**Results of Operations**

 

*Revenue.* Revenues decreased $2.4 million during the three-month period ended June30, 2003 to $3.2 million compared to $5.6 million for the three-month period ended June 30, 2002. Revenuesdecreased  $4.7 million during thesix-month period ended June 30, 2003 to $6.8 million compared to $11.5 millionfor the six-month period ended June 30, 2002. 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 $1.9 million forthe three-month period ended June 30, 2003 to $2.4 million compared to $4.3million for the three-month period ended June 30, 2002. Cost of revenuesdecreased $3.8 million for the six-month period ended June 30, 2003 to $5.3million compared to $9.1 million for the six-month period ended June 30, 2002.The decrease in cost of revenues was attributable to the overall decrease inrevenues. Cost of revenues as a percentage of revenues decreased from 78.1% forthe three-month period ended June 30, 2002 to 74.8% for the three-month periodended June 30, 2003. Cost of revenues as a percentage of revenues decreasedfrom 79.0% for the six-month period ended June 30, 2002 to 77.5% for thesix-month period ended June 30, 2003.

 

*Gross Profit.*  Gross profit as a percentage of revenues for the three-monthperiod ended June 30, 2003 was 25.2% versus 21.9% in the comparable prior yearperiod. In the six-month period ended June 30, 2003 the gross profit as apercentage of revenues was 22.5% compared to the 21% gross profit as apercentage of revenues for the six-month period ended June 30, 2002.  The increase in gross profit as a percentageof revenues for the three and six month periods ended June 30, 2003 versus thecomparable periods of 2002 is primarily due to three contributing factors.  First, the Company has completed low marginand unprofitable contracts.  Second, theCompany has managed its billable workforce to attempt to minimize the expenseof non-billed time. Third, where engagement renewals result in lower billingrates for consultants, the Company has in turn reduced the consultant’s rate ofcompensation.

 

8

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*Selling, General & Administrative (SG&A)**Expenses. *SG&A expenses decreasedapproximately 45.2% to $1.2 million in the three-month period ended June 30,2003 from $2.3 million for the comparable period in 2002.  In the six-month period ended June 30, 2003SG&A expenses of $2.5 million was $2.7 million or 52.6% lower than the $5.2million for the comparable period in the prior year. SG&A expenses as apercentage of revenue was 39.0% and 36.4% for the three month and six monthperiods ended June 30, 2003, respectively. These amounts are favorable to the40.6% and 45.7% rates for comparable periods of 2002. The decrease in SG&Aexpenses for the six-month period ended June 30, 2003 compared to the six-monthperiod ended June 30, 2002 is primarily the result of eliminating expensesassociated with the closure of the Barbados Solution Center accounting forapproximately $1,272,000 of the reduction, the settlement of a lawsuit in May,2002, which resulted in the payment of approximately $275,000, and othercost-cutting measures, including non-billing staffing reductions, which accountfor approximately $920,000.

 

*Loss from Operations.* Loss from operationsfor the three-month period ended June 30, 2003 decreased to $439,000 ascompared to a loss from operations of $1,036,000 in the comparable period in2002.  As a percentage of revenues, theloss from operations for the three-month period ended June 30, 2003 decreasedto 13.9% as compared to approximately 18.7% in the comparable period in 2002.

 

Loss from operations forthe six-month period ended June 30, 2003 decreased to $949,000 as compared to aloss from operations of $2,832,000 in the comparable period in 2002.  As a percentage of revenues, the loss fromoperations for the six-month period ended June 30, 2003 decreased to 13.9% ascompared to approximately 24.7% in the comparable period in 2002.

 

*Preferred Stock Dividends and Accretion Net of Benefit toCommon Stockholders*. Accretion on the preferred stock ofapproximately $141,000 and $124,000 was recognized in the three-month periodended June 30, 2003 and 2002, respectively. In the six-month period ended June30, 2003 and 2002, accretion of approximately $277,000 and $251,000,respectively, was recognized.  In thequarter ended March 31, 2002, the Company recorded a benefit to commonstockholders of approximately $527,000 related to the stock purchase agreementwith the Travelers (see Note 3 to the accompanying financial statements).

 

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# **Liquidity and Capital Resources**

 

*Working Capital:* The Company’s workingcapital decreased to approximately $3.3 million at June 30, 2003 from $4.0million at December 31, 2002.  Cash andcash equivalents were $2.7 million at June 30, 2003 compared to $3.1 million atDecember 31, 2002.  The primary useof cash during the six-month period ended June 30, 2003 was to fund operatingactivities of approximately $0.4 million. The Company’s accounts receivableswere $1.4 million at June 30, 2003 and $1.9 million at December 31, 2002.Billed days sales outstanding, net of allowance for doubtful accounts, were 41days at June 30, 2003 and 40 days at December 31, 2002.

 

The Company anticipatesthat its primary uses of cash in the near term will be to fund the Company’soperations.  Management believes thatthe cash equivalents at June 30, 2003 are sufficient to fund operations for thenext 12 months and satisfy all obligations under capital and non-cancelableoperating leases. As of June 30, 2003 the Company’s obligations under capitalleases total $10,000, including $3,000 due after June 30, 2004, and obligationsunder non-cancelable operating leases total $260,000, including $63,000 dueafter June 30, 2004.  If cash generatedfrom operations is insufficient to satisfy the Company’s liquidityrequirements, the Company may be required to seek additional sources offinancing in the future. If the Company is unsuccessful in obtaining additionalsources of financing, it could experience difficulty meeting its currentobligations as they become due.

 

# **Forward-looking and Cautionary Statements**

 

Forward-lookingstatements in this report, including without limitation, statements related tothe Company’s plans, strategies, objectives, expectations, intentions andadequacy of resources, are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Investors are cautioned that such forward-looking statementsinvolve risks and uncertainties including without limitation thefollowing:  (i) the Company’s plans,strategies, objectives, expectations and intentions are subject to change atany time at the discretion of the Company; (ii) the Company’s plans and resultsof operations will be affected by the Company’s ability to manage its growthand resources; and (iii) other risks and uncertainties indicated from time totime in the Company’s filings with the Securities and Exchange Commission.

 

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**Item 3****. Quantitativeand Qualitative Disclosures About Market Risk**

 

For the period ended June30, 2003, the Company did not experience any material changes in market riskexposures that affect the quantitative and qualitative disclosures presented inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2002.

 

**Item 4****. Controlsand Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in its Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer andSenior Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.  Such controls andprocedures, by their nature, can provide only reasonable assurance regardingmanagement’s control objectives.

 

The Company carried outan evaluation, under the supervision and with the participation of itsmanagement, including its Chief Executive Officer and Senior Financial Officer,on the effectiveness of the design and operation of its disclosure controls andprocedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of June 30,2003.  Based upon that evaluation, theCompany’s Chief Executive Officer and Senior Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s ExchangeAct reports.

 

While the Companybelieves that its existing disclosure controls and procedures have beeneffective to accomplish their objectives, the Company intends to continue toexamine, refine and formulize its disclosure controls and procedures and tomonitor ongoing developments in this area.

 

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**PARTII****.  OTHERINFORMATION**

 

**Item 1.  Legal Proceedings.**

 

In the normal course ofbusiness, various claims are made against the Company. At this time, in theopinion of management, there are no pending claims the outcome of which areexpected to result in a material adverse effect on the consolidated financialposition or results of operations of the Company.

 

**Item. 4.  Submission of Mattersto a Vote of Security Holders.**

 

The Company held itsannual meeting of stockholders on May 9, 2003. Robert P. Forlenza and Irwin J.Sitkin were elected as Class II directors at the annual meeting with termsexpiring in 2006.

 

Director ElectionResults.

 

| **Class II Director** |   | **Affirmative  Votes** |   | **Withheld  Votes** |   |
|-----------------------|--------|------------------------|--------|---------------------|--------|
| Robert  P. Forlenza   |   | 13,163,908             |   | 653,025             |   |
| Irwin  J. Sitkin      |   | 13,163,908             |   | 653,025             |   |

 

Other directors whoseterms continued after the annual meeting and their term expiration date.

 

| **Director**          |   | **Class** |   | **Term**     |   |
|-----------------------|--------|-----------|--------|--------------|--------|
| Douglas  K. Mellinger |   | I         |   | Expires 2004 |   |
| Issac  Shapiro        |   | I         |   | Expires 2004 |   |
| Robert  D. Merkl      |   | III       |   | Expires 2005 |   |

 

The only other mattervoted upon by the Company’s stockholders at the 2003 annual meeting was aproposal to ratify the appointment of Ernst & Young LLP as the Company’sauditors for 2003.  Holders of13,177,308 shares voted for this proposal, holders of 634,625 shares votedagainst or withheld authority to vote with respect to this proposal and holdersof 5,000 shares abstained or did not vote with respect to this proposal.

 

**Item. 5.  Other Information.**

 

Effective May 30, 2003,James C. Minerly replaced the Company’s Chief Financial Officer, George Warman,as the Company’s Senior Financial Officer, Controller and Treasurer.  Mr. Warman’s employment terminated on June30, 2003, pursuant to the terms of his Employment Agreement.

 

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Mr. Minerly and theCompany are not parties to an Employment Agreement.  Pursuant to the terms of Mr. Minerly’s offer letter, he earns abase salary of $105,000 and is eligible to participate in the Company’s StockOption Plan.  As of the date of thisreport, Mr. Minerly has not received a stock option grant.

 

Effective August 7, 2003,Isaac Shapiro resigned from the Board of Directors of the Company for personalreasons.

 

Effective August 7, 2003,the Board of Directors of the Company elected Douglas A. Catalano as a Directorof the Company to fill the vacancy created by the resignation of IsaacShapiro.  Douglas A. Catalano was alsoelected as a member of the Audit Committee.

 

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**Item 6. Exhibits and Reportson Form 8-K**

 

(a)           Exhibits

 

The following is a listof exhibits filed as part of this quarterly report on Form 10-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).                                                                                             |
| 31.1             |   | Certification of the  Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                  |
| 31.2             |   | Certification of the  Senior Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                 |
| 32.1             |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                  |
| 32.2             |   | Certification of the  Senior Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                 |

 

(b)          Reports on Form 8-K

 

On May 16, 2003, theCompany filed a Current Report on Form 8-K with the Securities and ExchangeCommission that included disclosure under Items 7 and 9 related to FinancialStatement and Regulation FD Disclosures regarding a press release disclosingthe Company’s preliminary results for the quarter ended March 31, 2003.  This Current Report on Form 8-K

 

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included financial statements consisting of a balance sheet andstatement of operations for the three-month period ended March 31, 2003 inexhibit 99.1.

 

On June 6, 2003, theCompany filed a Current Report on Form 8-K with the Securities and ExchangeCommission that included disclosure under Item 5 related to naming James C.Minerly Senior Financial Officer and Treasurer replacing George Warman who leftthe Company on June 30, 2003.  ThisCurrent Report on Form 8-K did not include financial statements.

 

 

**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |   |                      |   | **enherent  Corp.** |
|--------|--------|---------------------------|--------|---------------------|
|   |   |                      |   |                |
|   |   |                      |   |                |
| DATE   |   | August 12, 2003           |   | BY                  | /S/  ROBERT D. MERKL |   |
|   |   | Robert  D. Merkl          |
|   |   | Chief Executive Officer   |
|   |   |                      |
|   |   |                      |
| DATE   |   | August 12, 2003           |   | BY                  | /S/  JAMES C. MINERLY |   |
|   |   | James C. Minerly          |
|   |   | Senior Financial  Officer |

 

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###### Exhibit Index:

 
| **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).                                                                                             |
| 31.1             |   | Certification of the  Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                  |
| 31.2             |   | Certification of the  Senior Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                 |
| 32.1             |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                  |
| 32.2             |   | Certification of the  Senior Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                                 |

 

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