**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K/A**

**Amendment No. 1**

 

**For Annual and Transition ReportsPursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934**

 

**ý****        ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(**d**) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2003**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(**d**) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom          to          **

 

**Commission file number 0-23315**

 

**enherent Corp.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **13-3914972**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **80  Lamberton  Road,  Windsor, Connecticut**             |   | **06095**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code:** (860) 687-2200**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

** **

| **Title of each class** |   | **Name of each exchange on which  registered** |
|-------------------------|--------|------------------------------------------------|
| None                    |   | None                                           |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, $.001 par value**

 

Indicate by checkmark whether 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 the past90 days.  Yes ý  No o

 

Indicate by checkmark whether the registrant is an accelerated file (as defined in Rule 12b-2 ofthe Act). Yes o  No ý

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

 

The aggregatemarket value of the registrant’s Common Stock held by non-affiliates of theregistrant as of June 30, 2003, was approximately $371,513.

 

The number ofshares outstanding of each of the registrant’s classes of Common Stock, as ofMarch 15, 2004 was approximately 17,718,854 shares.

 

**DocumentsIncorporated by Reference**

 

Portions of theregistrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders, to beheld on May 5, 2004, are incorporated by reference into Part III hereof.

 

 

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EXPLANATORY NOTE

 

This amendment to the Annual Report on Form 10-K forthe fiscal year ended December 31, 2003 of enherent Corp. (“the Company” or“enherent”) is being filed to include a change in Note 8 of the Notes toConsolidated Financial Statements.  TheAnnual Report on Form 10-K filed with the SEC on March 30, 2004 stated that theCompany’s net operating loss carryforwards was approximately $45.9million.  This figure should have been$46.3 million.  This change was madebefore the 10-K was printed and distributed to the Company’s stockholders.  In accordance with Rule 12b-15 under theSecurities and Exchange Act of 1934, as amended, the text of the amended itemis set forth in its entirety in the pages attached hereto.

 

A consent of Ernst &Young LLP, independent accountants for enherent, is being filed as an exhibithereto.

 

**Item8.  *Financial Statements and Supplementary Data***

 

The following consolidated Financial Statements can befound on the pages referenced below:

 
| Index to  Consolidated Financial Statements                                                                 |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Report of Independent  Auditors                                                                             |   |
|                                                                                                        |   |
| Consolidated Balance Sheets  as of December 31, 2002 and 2003                                               |   |
|                                                                                                        |   |
| Consolidated  Statements of Operations for the years ended  December 31, 2001, 2002 and 2003                |   |
|                                                                                                        |   |
| Consolidated  Statements of Stockholders’ Equity for the  Years ended December 31, 2001, 2002 and 2003 |   |
|                                                                                                        |   |
| Consolidated  Statements of Cash Flows for the years ended  December 31, 2001, 2002, and 2003               |   |
|                                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

**PART IV**

 

**Item 15.  *Exhibits,Financial Statement Schedules and Reports on Form 8-K***

 

(a) (1) FinancialStatements

 

See Index to Consolidated Financial Statements of enherent Corp. andSubsidiaries, on page F-1.

 

(2) FinancialStatement Schedules

 

See Valuation andQualifying Accounts.

 

All otherschedules for which provision is made in the applicable accounting regulationof the Securities and Exchange Commission are not required under the relatedinstructions or are inapplicable and therefore have been omitted.

 

(3) Exhibits

 

----

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                              |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Restated Certificate of  Incorporation (Incorporated by referenced 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 as of April 13, 2000, by and among PRT Group Inc. and the  Investors named therein (Incorporated by reference to Exhibit 99.1 of the  Company’s Current Report on 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  Current Report on 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 James C. Minerly and the Company dated December 1, 2003 (Incorporated  by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K  filed March 30, 2004).                                   |
| 10.2             |   | Employment Agreement  between Douglas A. Catalano and the Company dated February 16, 2004, with  Exhibit A and Amendment (Incorporated by reference to Exhibit 10.2 of the  Company’s Annual Report on Form 10-K filed March 30, 2004). |
| 10.3             |   | Amended and Restated  1996 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of the  Company’s Form S-8 filed January 22, 1998).                                                                                          |
| 14.1             |   | Code of Ethics and  Business Conduct for Officers, Directors and Employees of enherent Corp.  (Incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on  Form 10-K filed March 30, 2004).                            |
| 21.1             |   | List of Subsidiaries  (Incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on  Form 10-K filed March 30, 2004).                                                                                                    |
| 23.1             |   | Consent of Ernst &  Young LLP, dated April 8, 2004(filed herewith).                                                                                                                                                                      |
| 31.1             |   | Section 302  Certification of Chief Executive Officer (certification required pursuant to  Rule 13a-14(a) and 15d-14(a)) (filed herewith).                                                                                                   |
| 31.2             |   | Section 302  Certification of Senior Financial Officer (certification required pursuant to  Rule 13a-14(a) and 15d-14(a)) (filed herewith).                                                                                                  |
| 32.1             |   | Section 906  Certification of Chief Executive Officer (certification required pursuant to  18 U.S.C. 1350) (filed herewith).                                                                                                                 |
| 32.2             |   | Section 906  Certification of Senior Financial Officer (certification required pursuant to  18 U.S.C. 1350) (filed herewith).                                                                                                                |

 

**SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                 | enherent Corp.                                   |
|----------------------|--------------------------------------------------|
|                 |                                             |
|                 |                                             |
|                 | By:/s/ DOUGLAS A.  CATALANO                      |   |
| Date: April 14, 2004 | Douglas A. Catalano                              |
|                 | Chairman, Chief  Executive Officer and President |

 

3

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enherent Corp. andSubsidiaries

 

Index to ConsolidatedFinancial Statements

 
| Report of Independent  Auditors                                                                             |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets  as of December 31, 2002 and 2003                                               |   |
| Consolidated  Statements of Operations for the years ended  December 31, 2001, 2002 and 2003                |   |
| Consolidated  Statements of Stockholders’ Equity for the  years ended December 31, 2001, 2002 and 2003 |   |
| Consolidated  Statements of Cash Flows for the years ended  December 31, 2001, 2002 and 2003                |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

F-1

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**Reportof Independent Auditors**

 

 

The Board of Directorsand Stockholders

enherent Corp.

 

We have audited theaccompanying consolidated balance sheets of enherent Corp. and Subsidiaries asof December 31, 2002 and 2003, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for each of the three years inthe period ended December 31, 2003. Our audits also included the financialstatement schedule listed in the Index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of enherent Corp. andSubsidiaries at December 31, 2002 and 2003, the consolidated results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2003, in conformity with accounting principles generally acceptedin the United States. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

 
|   | /s/ ERNST & YOUNG  LLP |
|--------|----------------------------|

 

 

Hartford, Connecticut

March 19, 2004

 

F-2

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enherent Corp. andSubsidiaries

Consolidated Balance Sheets

*(In thousands, except number of shares)*

* *
|                                                                                                                                                                                                                                                        |   | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                        |   | **2002**          |   | **2003** |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| **Assets**                                                                                                                                                                                                                                                  |   |              |   |   |   |
| Current assets:                                                                                                                                                                                                                                             |   |              |   |   |   |
| Cash and equivalents                                                                                                                                                                                                                                        |   | $                 | 3,067  |   | $ | 2,669 |   |
| Accounts receivable, net of allowance of $57 in 2002  and $16 in 2003                                                                                                                                                                                       |   | 1,926             |   | 1,263 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                   |   | 259               |   | 141 |   |
| Total current assets                                                                                                                                                                                                                                        |   | 5,252             |   | 4,073 |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| Fixed assets, net                                                                                                                                                                                                                                           |   | 477               |   | 159 |   |
| Other assets                                                                                                                                                                                                                                                |   | 69                |   | 50 |   |
| Total assets                                                                                                                                                                                                                                                |   | $                 | 5,798  |   | $ | 4,282 |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                                              |   |              |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                        |   |              |   |   |   |
| Accrued compensation                                                                                                                                                                                                                                        |   | $                 | 283    |   | $ | 302 |   |
| Accounts payable                                                                                                                                                                                                                                            |   | 470               |   | 327 |   |
| Accrued expenses                                                                                                                                                                                                                                            |   | 294               |   | 362 |   |
| Current portion of capital lease obligations                                                                                                                                                                                                                |   | 14                |   | 5 |   |
| Deferred revenue                                                                                                                                                                                                                                            |   | 171               |   | 57 |   |
| Total current liabilities                                                                                                                                                                                                                                   |   | 1,232             |   | 1,053 |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| Capital lease obligations, net of current portion                                                                                                                                                                                                           |   | 5                 |   | — |   |
| Deferred rent                                                                                                                                                                                                                                               |   | 58                |   | 27 |   |
| Total liabilities                                                                                                                                                                                                                                           |   | 1,295             |   | 1,080 |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| 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 issued and outstanding at December 31, 2002 and  December 31, 2003                |   | 5,553             |   | 6,124 |   |
|                                                                                                                                                                                                                                                        |   |              |   |   |   |
| 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 December 31, 2002; issued—19,401,311 shares,  outstanding—17,552,188 shares at  December  31, 2003 |   | 19                |   | 19 |   |
| Additional paid-in capital                                                                                                                                                                                                                                  |   | 94,411            |   | 94,423 |   |
| Treasury stock, at cost—1,849,123 shares in 2002 and  2003                                                                                                                                                                                             |   | (366              | )      | (366 | ) |
| Accumulated deficit                                                                                                                                                                                                                                         |   | (95,114           | )      | (96,998 | ) |
| Total common stockholders’ deficit                                                                                                                                                                                                                     |   | (1,050            | )      | (2,922 | ) |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                            |   | $                 | 5,798  |   | $ | 4,282 |   |

 

*See accompanying notes to consolidated financial statements*

 

F-3

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enherentCorp. and Subsidiaries

Consolidated Statementsof Operations

*(In thousands, except per sharedata)*

 
|                                                                           |   | **Years  ended December 31,** |    |
|--------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                           |   | **2001**                      |    | **2002** |   | **2003** |   |
|                                                                           |   |                          |    |   |   |   |   |
| Revenues                                                                       |   | $                             | 29,684  |   | $ | 20,812 |   | $ | 12,144 |   |
| Cost of revenues                                                               |   | 21,760                        |    | 16,389 |   | 9,409 |   |
| Gross profit                                                                   |   | 7,924                         |    | 4,423 |   | 2,735 |   |
|                                                                           |   |                          |    |   |   |   |   |
| Selling, general and administrative expenses                                   |   | 14,717                        |    | 8,230 |   | 4,058 |   |
| Impairment of goodwill                                                         |   | 14,974                        |    | — |   | — |   |
| Loss from operations                                                           |   | (21,767                       | )       | (3,807 | ) | (1,323 | ) |
|                                                                           |   |                          |    |   |   |   |   |
| Other income (expense):                                                        |   |                          |    |   |   |   |   |
| Miscellaneous income (expense)                                                 |   | (154                          | )       | 16 |   | 4 |   |
| Interest expense                                                               |   | (23                           | )       | (9 | ) | (3 | ) |
| Interest income                                                                |   | 206                           |    | 33 |   | 9 |   |
| Net loss                                                                       |   | (21,738                       | )       | (3,767 | ) | (1,313 | ) |
| Preferred stock dividends and accretion net of  benefit to common shareholders |   | (511                          | )       | 16 |   | (571 | ) |
| Net loss available to common stockholders                                      |   | $                             | (22,249 | ) | $ | (3,751 | ) | $ | (1,884 | ) |
|                                                                           |   |                          |    |   |   |   |   |
| Basic and diluted net loss per share                                           |   | $                             | (1.26   | ) | $ | (.21 | ) | $ | (.11 | ) |
|                                                                           |   |                          |    |   |   |   |   |
| Number of shares used in computing basic and diluted  net loss per share       |   | 17,708                        |    | 17,502 |   | 17,514 |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-4

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enherent Corp. andSubsidiaries

Consolidated Statementsof Stockholders’ Equity (Deficit)

Years ended December 31,2001, 2002 and 2003

*(In thousands, except number ofshares)*

 
|                                                                |   |              |   |                 |   | **Additional**           |   |                |    |       |      |      |      |    |   |
|---------------------------------------------------------------------|--------|-------------------|--------|----------------------|--------|--------------------------|--------|---------------------|---------|------------|-----------|-----------|-----------|---------|--------|
|                                                                |   | **Common  Stock** |   | **Paid-In  Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |    |       |      |
|                                                                |   | **Shares**        |   | **Amount**           |   |                     |   | **Shares**          |    | **Amount** |      | **Total** |      |
| Balance at December 31, 2000                                        |   | 18,351,311        |   | $                    | 18     |                     | $      | 94,212              |    | $          | (69,114   | )         | —    |    | $      | — |   | $ | 25,116 |   |
| Net loss                                                            |   | —            |   | —               |   | —                   |   | (21,738             | )       | —     |      | —    |      | (21,738 | )      |
| Purchase of treasury stock                                          |   | —            |   | —               |   | —                   |   | —              |    | 849,123    |      | (166      | )         | (166    | )      |
| Accretion of preferred stock                                        |   | —            |   | —               |   | —                   |   | (511                | )       | —     |      | —    |      | (511    | )      |
| Balance at December 31, 2001                                        |   | 18,351,311        |   | 18                   |   | 94,212                   |   | (91,363             | )       | 849,123    |      | (166      | )         | 2,701   |   |
| Net loss                                                            |   | —            |   | —               |   | —                   |   | (3,767              | )       | —     |      | —    |      | (3,767  | )      |
| Conversion of   preferred shares to common shares              |   | 1,000,000         |   | 1                    |   | 199                      |   | —              |    | —     |      | —    |      | 200     |   |
| Purchase of treasury stock                                          |   | —            |   | —               |   | —                   |   | —              |    | 1,000,000  |      | (200      | )         | (200    | )      |
| Accretion of preferred stock net of benefit to  common shareholders |   | —            |   | —               |   | —                   |   | 16                  |    | —     |      | —    |      | 16      |   |
| Balance at December 31, 2002                                        |   | 19,351,311        |   | 19                   |   | $                        | 94,411 |                | (95,114 | )          | 1,849,123 |      | (366      | )       | (1,050 | ) |
| Net loss                                                            |   | —            |   |                 |   |                     |   | (1,313              | )       | —     |      | —    |      | (1,313  | )      |
| Stock option exercise                                               |   | 50,000            |   | —               |   | 1                        |   | —              |    | —     |      | —    |      | 1       |   |
| Stock option compensation                                           |   | —            |   | —               |   | 11                       |   | —              |    | —     |      | —    |      | 11      |   |
| Accretion of preferred stock                                        |   | —            |   | —               |   | —                   |   | (571                | )       | —     |      | —    |      | (571    | )      |
| Balance at December 31, 2003                                        |   | 19,401,311        |   | $                    | 19     |                     | $      | 94,423              |    | $          | (96,998   | )         | 1,849,123 |    | $      | (366 | ) | $ | (2,922 | ) |

 

*See accompanying notes to consolidated financial statements.*

 

F-5

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enherent Corp. andSubsidiaries

Consolidated Statements of Cash Flows

*(In thousands)*

 
|                                                                                                  |   | **Years  ended December 31,** |    |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                  |   | **2001**                      |    | **2002** |   | **2003** |   |
| **Cash flows from operating  activities**                                                             |   |                          |    |   |   |   |   |
| Net loss                                                                                              |   | $                             | (21,738 | ) | $ | (3,767 | ) | $ | (1,313 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities net of business acquired: |   |                          |    |   |   |   |   |
| Depreciation and amortization                                                                         |   | 2,345                         |    | 809 |   | 294 |   |
| (Gain) loss on disposal  of fixed assets                                                         |   | 450                           |    | (72 | ) | 17 |   |
| Loss on the sale of marketable securities                                                             |   | —                        |    | — |   | — |   |
| Provision   (credit) for doubtful accounts                                                       |   | 1,369                         |    | (199 | ) | 38 |   |
| Goodwill impairment                                                                                   |   | 14,974                        |    | — |   | — |   |
| Deferred rent                                                                                         |   | (30                           | )       | (33 | ) | (32 | ) |
| Stock option compensation                                                                             |   | —                        |    | — |   | 11 |   |
| Changes in operating assets and liabilities:                                                          |   |                          |    |   |   |   |   |
| Accounts receivable                                                                                   |   | 2,820                         |    | 1,481 |   | 625 |   |
| Prepaid expenses and other current assets                                                             |   | 116                           |    | 201 |   | 118 |   |
| Other assets                                                                                          |   | 6                             |    | 26 |   | 19 |   |
| Accrued compensation                                                                                  |   | (60                           | )       | (397 | ) | 19 |   |
| Accounts payable                                                                                      |   | (630                          | )       | (23 | ) | (143 | ) |
| Accrued expenses                                                                                      |   | (536                          | )       | (201 | ) | 68 |   |
| Deferred revenue                                                                                      |   | 47                            |    | 27 |   | (114 | ) |
| Net cash used in operating activities                                                                 |   | (867                          | )       | (2,148 | ) | (393 | ) |
|                                                                                                  |   |                          |    |   |   |   |   |
| **Cash flows from investing  activities**                                                             |   |                          |    |   |   |   |   |
| Purchases of fixed assets                                                                             |   | (18                           | )       | (19 | ) | — |   |
| Sales of marketable securities                                                                        |   | 728                           |    | — |   | — |   |
| Proceeds from sale of fixed assets                                                                    |   | —                        |    | 187 |   | 7 |   |
| Net cash provided by investing activities                                                             |   | 710                           |    | 168 |   | 7 |   |
|                                                                                                  |   |                          |    |   |   |   |   |
| **Cash flows from financing  activities**                                                             |   |                          |    |   |   |   |   |
|                                                                                                  |   |                          |    |   |   |   |   |
| Exercise of stock options                                                                             |   | —                        |    | — |   | 1 |   |
| Purchase of   treasury stock                                                                     |   | (166                          | )       | (200 | ) | — |   |
| Principal payments under capital lease obligations                                                    |   | (36                           | )       | (22 | ) | (13 | ) |
|                                                                                                  |   |                          |    |   |   |   |   |
| Net cash (used in) provided by financing activities                                                   |   | (202                          | )       | (222 | ) | (12 | ) |
| Net (decrease) increase in cash and equivalents                                                       |   | (359                          | )       | (2,202 | ) | (398 | ) |
| Cash and equivalents at beginning of period                                                           |   | 5,628                         |    | 5,269 |   | 3,067 |   |
| Cash and equivalents at end of period                                                                 |   | $                             | 5,269   |   | $ | 3,067 |   | $ | 2,669 |   |
|                                                                                                  |   |                          |    |   |   |   |   |
| **Supplemental disclosure of cash  flow information**                                                 |   |                          |    |   |   |   |   |
| Interest paid                                                                                         |   | $                             | 23      |   | $ | 9 |   | $ | 9 |   |
|                                                                                                  |   |                          |    |   |   |   |   |
| **Noncash financing activities**                                                                      |   |                          |    |   |   |   |   |
| Acquisition of fixed assets through capital leases                                                    |   | $                             | 33      |   | $ | — |   | $ | — |   |

 

*See accompanying notes to consolidated financial statements.*

 

F-6

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enherent Corp. andSubsidiaries

Notes to ConsolidatedFinancial Statements

Years ended December 31,2001, 2002 and 2003

 

**1.****              Descriptionof Business**

 

The accompanyingconsolidated financial statements include the accounts of enherent Corp.(“enherent”) and its wholly owned subsidiaries (collectively, the “Company”),formerly PRT Group Inc. and subsidiaries (“PRT”). enherent is a provider ofinformation technology services including strategic consulting, projectsolutions and staff augmentation, principally to industries includinginsurance, financial services, banking and capital markets.

 

In 2002 the Companyannounced that its Windsor, Connecticut office would serve as the Company’s newcorporate headquarters and a transition from the existing Dallas, Texaslocation was initiated.  The transitionwas completed in December 2002 and the Dallas, Texas office was closed in July2003. All management and sales offices are now located in Connecticut.  The Company closed its solution center inBarbados, West Indies in 2002.

 

The Company anticipatesthat its primary uses of working capital in the near term will be to fund theCompany’s operations.  Managementbelieves that the existing cash and cash equivalents are sufficient to fund operationsthrough at least December 31, 2004.  Ifavailable cash and cash generated from operations is insufficient to satisfythe Company’s liquidity requirements, including redemption of the preferredstock in April 2005, the Company may be required to seek additional financingsources in the future. If the Company is unsuccessful in obtaining additionalsources of financing, it could experience difficulty meeting its currentobligations as they become due.

 

**2.  Summary ofSignificant Accounting Policies**

 

## **Principles of Consolidation**

 

The consolidated financial statements include theaccounts of enherent and its wholly-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.

 

**Use ofEstimates**

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts in the financialstatements and accompanying notes. While management believes that the estimatesand related assumptions used in the preparation of these financial statementsare appropriate, actual results could differ from those estimates.

 

**Revenue Recognition**

 

Revenue is primarilyderived from placing consultants on engagements with clients for a specified periodof time.  The Company recognizes revenueas related services are performed, on a time-and-materials basis as  calculated from a consultant’s time sheetand expense report using agreed-upon hourly rates. The Company also recognizesrevenues from fees earned on recruiting individuals for full-time positions inclient companies (permanent placements). Revenues from permanent placements arerecognized when the candidate has satisfied any guarantee period, which rangesfrom 30 to 90 days. From time to time, project development work with a definedscope and a detailed budget is sold at a fixed price. Revenue for fixed priceproject development contracts is recognized in the period earned using theproportional performance method with revenues being recognized ratably over theperformance period. From time to time, the Company also enters into fixedpriced software development contracts. The Company recognizes revenue from fixed-price software contracts usingthe percentage of completion method of accounting based on hours to date incomparison to total hours projected at completion. Financial reporting of theseagreements depends on estimates, which are assessed continually during the termof the agreement (including overruns and additional charges for scope changes),as such estimated amounts are subject to revisions as the project

 

F-7

----

 

progresses.  Anticipated losses on fixed-price contractsare recognized when estimable. Cash payments received but unearned arerecognized as deferred revenue. In 2003 the Company did not perform any fixedprice contract work. In 2002, less than two percent of the Company’s revenueswere from fixed-price contracts.

 

## **Accounts Receivable – Allowance for Doubtful Accounts**

 

## **TheCompany generally records receivables when the related revenue isrecognized.  Based on certainpre-negotiated contract terms billing may not coincide with revenuerecognition, in which case, amounts due from customers are captured in unbilledreceivables until the customer is actually invoiced, in accordance with thecontract terms and amounts received in advance of the related services beingperformed are recorded as deferred revenue.**

## ** **

## **TheCompany’s accounts receivable balance is reported net of allowances for amountsnot expected to be collected from clients. Because the accounts receivabletypically are unsecured, the Company periodically evaluates the collectabilityof these accounts based on a combination of factors, including a particularcustomer’s ability to pay, as well as, the age of the receivable balances,which is based on when the customer invoice was issued.  To evaluate a specific customer’s ability topay, the Company analyzes financial statements, payment history and third-partycredit analysis reports.  In cases wherethe evidence suggests a customer may not be able to satisfy its obligations,the Company sets up a specific reserve in an amount determined to beappropriate for the perceived risk.  TheCompany writes-off the receivable balances against the allowance only when theamount is deemed to be uncollectible and all efforts to collect the balancehave been exhausted.**

 

**Fair Value of Financial Instruments**

 

The carrying values offinancial instruments approximate their estimated fair value as a result ofvariable market interest rates and the short-term maturity of theseinstruments.

 

**Cash andEquivalents**

 

Cash and equivalents include all cash, demanddeposits, money market accounts and debt instruments purchased with an originalmaturity of three months or less.

 

**FixedAssets**

 

Fixed assets are stated at cost, less accumulateddepreciation. 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 is amortized using the straight-linemethod over the shorter of the lease term or estimated useful life of theasset.

 

#### **Asset Impairment**

 

As part of an ongoing review of the valuation oflong-lived assets, the Company assesses the carrying value of such assets, iffacts and circumstances suggest they may be impaired.  If this review indicates that the carrying value of these assetsmay not be recoverable, as determined by non-discounted cash flow analysis overthe remaining useful life of the asset, the carrying value would be reduced toits estimated fair value.  There havebeen no material impairments recognized in these financial statements

 

**IncomeTaxes**

 

The Company accounts forincome taxes on the liability method. Under this method, deferred tax assetsand liabilities are recognized with respect to the future tax consequencesattributable to differences between the financial statement carrying values andtax bases of existing assets and liabilities and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inthe period that includes the enactment date.

 

F-8

----

 

**Goodwill**

 

Goodwill consists of theexcess of cost over the fair value of identifiable net assets of businessesacquired.  As of January 1, 2002, theCompany adopted Financial Accounting Standards Board Statement No. 142, *Goodwill andOther Intangible Assets (FAS 142)*and as such no longer amortizesgoodwill, but rather tests it annually for impairment. Goodwill was beingamortized over 20 years using the straight-line method. The Companysystematically reviewed the recoverability of its goodwill by comparing theunamortized carrying value to anticipated undiscounted future cash flows. Itwas determined that impairment existed, and the future cashflows werediscounted to determine the impairment amount. Based on the results of thisanalysis in 2001, it was determined that goodwill was impaired and a chargeof  $14,974,000 was recorded (Note 7).

 

**Net Loss Per Share**

 

The Company calculatesearnings per share in accordance with Statement of Financial AccountingStandards No. 128 (“SFAS 128”), “Computation of Earnings Per Share.” Accordingly,basic loss per share is computed using the weighted average number of commonshares outstanding during the period. Dilutive shares consist of theincremental common shares issuable upon the conversion of the RedeemableConvertible Preferred Stock (using the if-converted method) and relatedwarrants and shares issuable upon the exercise of stock options (using thetreasury stock method); such additional shares are excluded from thecalculation as the effect of including such shares is anti-dilutive.

 

The following is a summary of the calculation of lossper share (in thousands, except per share data):

 
|                                       |   | **Years  ended December 31** |    |
|--------------------------------------------|--------|------------------------------|---------|
|                                       |   | **2001**                     |    | **2002** |   | **2003** |   |
| Numerator:                                 |   |                         |    |   |   |   |   |
| Net loss applicable to common shareholders |   | $                            | (22,249 | ) | $ | (3,751 | ) | $ | (1,884 | ) |
| Denominator:                               |   |                         |    |   |   |   |   |
| Weighted average shares outstanding        |   | 17,708                       |    | 17,502 |   | 17,514 |   |
| Basic and diluted loss per share           |   | $                            | (1.26   | ) | $ | (.21 | ) | $ | (.11 | ) |

 

**Stock-BasedCompensation**

 

At December 31, 2003, theCompany had a stock option plan, which is described more fully in Note 6.  The Company accounts for stock options usingthe intrinsic value method set forth in Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees” and accordingly,recognizes compensation expense only if the fair value of the underlying CommonStock exceeds the exercise price of the stock option on the date of grant. Aspermitted by Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), the Company continues to accountfor stock-based compensation in accordance with APB Opinion No. 25 and haselected the pro forma disclosure alternative of SFAS No. 123.

 

The following table illustrates the effect on net lossand loss per share if we applied the fair value recognition provisions of SFAS123, instead of the intrinsic value method of APB Opinion No. 25 to account forstock-based employee compensation (in thousands, except per share amounts):

 
|                                                           |   | **December  31,** |    |
|----------------------------------------------------------------|--------|-------------------|---------|
|                                                           |   | **2001**          |    | **2002** |   | **2003** |   |
| Net loss available to common stockholders, as  reported        |   | $                 | (22,249 | ) | $ | (3,751 | ) | $ | (1,884 | ) |
| Total stock option expense determined under fair  value method |   | (1,656            | )       | (835 | ) | (170 | ) |
| Pro forma net loss                                             |   | $                 | (23,905 | ) | $ | (4,586 | ) | $ | (2,054 | ) |
| Net loss per common share, as reported: basic and  diluted     |   | $                 | (1.26   | ) | $ | (.21 | ) | $ | (.11 | ) |
| Net loss per common share, pro forma: basic and  diluted       |   | $                 | (1.35   | ) | $ | (.26 | ) | $ | (.12 | ) |

 

F-9

----

 

Pro forma information regarding net loss and loss pershare is required by SFAS No. 123 and has been determined as if the Company hadaccounted for its employees’ stock options under the fair value method providedby that Statement. The fair value of the options was estimated at the date ofgrant using the Black-Scholes option pricing model with the followingassumptions for vested and non-vested options:

** **

|                                                                               |   | **December  31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------|--------|
| **Assumption**                                                                     |   | **2001**          |   | **2002** |   | **2003** |   |
|                                                                               |   |              |   |   |   |   |   |
| Risk-free interest rate                                                            |   | 4.77              | %      | 2.99 | % | 2.00 | % |
| Dividend yield                                                                     |   | 0                 | %      | 0 | % | 0 | % |
| Volatility factor of the expected market price of  the Company’s Common Stock |   | 1.28              |   | 1.40 |   | 1.40 |   |
| Average life                                                                       |   | 5 years           |   | 5 years |   | 5 years |   |

 

**Concentrationof Credit Risk**

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprincipally of cash and accounts receivable. Concentrations of credit risk withrespect to accounts receivable are limited due to the creditworthiness ofcustomers comprising the Company’s customer base. Management regularly monitorsthe creditworthiness of its customers and generally requires no collateral.Management believes that it has adequately provided for any exposure topotential credit losses.

 

**3.  Recent Accounting Pronouncements**

 

On January 1, 2003, the Company adopted SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.  This standard addresses financial accountingand reporting for costs associated with exit or disposal activities andrequires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  This standardnullifies EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*. Adoption of this standard did not have an impact on the Company’sconsolidated financial position, at December 31, 2003 or results of operationsfor the year then ended.

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“SFAS 150”). Thisstatement establishes standards for classifying and measuring, as liabilities,certain financial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity. SFAS 150 generally requiresliability classification for financial instruments, including mandatoryredeemable equity instruments and other non-equity instruments requiring, frominception, the repurchase by the issuer of its equity shares. The Companyadopted this statement effective the quarter ended September 30, 2003.  Adoption of this Statement did not have asignificant effect on the Company’s financial position as of December 31, 2003or on the results of operations for the year ended December 31, 2003.

 

In December 2003, theFASB issued SFAS Interpretation No. 46, *Consolidation of Variable Interest Entities*,an Interpretation of ARB No. 51, which effectively modified and clarifiedcertain provisions of FIN 46, as originally issued.   The Company is required to adopt the provisions of this guidancefor the quarter ending March 31, 2004, as it relates to all variable interestsheld, except that adoption is required by December 31, 2004 for all variableinterest held in entities that are considered to be special purposeentities.  The adoption of thisStatement did not have a significant effect on the Company’s December 31, 2003financial statements and is not expected to have a significant impact uponadoption in the first quarter of 2004.

 

F-10

----

 

**4.  Fixed Assets**

 

Fixed assets consist of the following (in thousands):

 

|                                           |   | **December  31** |     |
|------------------------------------------------|--------|------------------|----------|
|                                           |   | **2002**         |     | **2003** |   |
|                                           |   |             | * * |   | * * |
| Furniture and equipment                        |   | $                | 1,204    |   | $ | 1,190 |   |
| Computer equipment and software                |   | 3,540            |     | 3,524 |   |
| Leasehold improvements                         |   | 302              |     | 302 |   |
|                                           |   | 5,046            |     | 5,016 |   |
| Less accumulated depreciation and amortization |   | (4,569           | )        | (4,857 | ) |
|                                           |   | $                | 477      |   | $ | 159 |   |

 

Depreciation expense wasapproximately $1,433,000, $809,000, and $294,000 for the years ended December31, 2001, 2002 and 2003, respectively.

 

Fixed assets includeassets under capital lease aggregating approximately $541,000 at December 31,2002 and 2003. The accumulated amortization related to assets under capitalleases is approximately $503,000 and $516,000 at December 31, 2002 and 2003,respectively. All leased assets are classified as furniture and equipment.Amortization of assets recorded under capital leases is included indepreciation expense.

 

**5.  Series A Senior Participating RedeemableConvertible Preferred Stock**

 

On April 13, 2000, theCompany issued 8,000,000 shares of its Series A Senior Participating RedeemableConvertible Preferred Stock (“Preferred Stock”) for $8,000,000. The Companyalso issued a Warrant to the Preferred Stock investors to purchase 4,000,000shares of the Company’s Common Stock at an initial exercise price of $1.00 pershare subject to adjustment, as defined. The Preferred Stock is convertible,subject to adjustment, as defined, into Common Stock on a one-for-one basis atany time, and is redeemable after April 12, 2005 at the option of the holder atits liquidation value plus accrued and unpaid dividends and contains voting rightson an as-converted basis. Each Warrant entitles the holder to purchase oneshare of Common Stock prior to April 14, 2005. The Preferred Stock and relatedWarrants were sold below the then-market value of the Company’s Common Stock.Accordingly, the guaranteed discount on the conversion of the Preferred Stockand the value of the Warrants, aggregating approximately $5,200,000, was deemedto be a dividend for purpose of calculating loss per share. The Preferred Stockis being accreted to its liquidation value at April 12, 2005. Accretion was$511,000, $511,000 and $571,000 for the years ended December 31, 2001, 2002 and2003, respectively.

 

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 the terms of the StockPurchase Agreement, The Travelers then sold the 1,000,000 shares of CommonStock to enherent for $200,000. enherent has retired the 1,000,000 shares of Series A Senior ParticipatingRedeemable Convertible Preferred Stock. 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.

 

**6.  Stockholders’ Equity**

 

In August 2000, the Boardof Directors approved the buy-back of up to 2,000,000 shares of the Company’soutstanding Common Stock.  In 2001, theCompany repurchased approximately 849,000 shares of its outstanding

 

F-11

----

 

Common Stock forapproximately $166,000. In October 2002, the Board of Directors increased thisbuy-back figure to 4,000,000 shares of the Company’s outstanding Common Stock.

 

In June 1996, the Companyestablished a Stock Option Plan (the “Option Plan”) for officers, employees,consultants and non-employee directors to purchase shares of the Company’sCommon Stock. The Option Plan requires the Company to reserve a sufficientnumber of authorized shares for issuance upon the exercise of all options thatmay be granted under the Option Plan. In January 2000, the Board of Directorsapproved an amendment to the Option Plan that increased the shares reserved by1,000,000. At December 31, 2003, the Company had reserved 4,058,425 shares ofCommon Stock for the exercise and future grants of stock options under suchOption Plan.

 

The CompensationCommittee of the Board of Directors is responsible for determining the type ofaward, when and to whom awards are granted, the number of shares and terms ofthe awards and the exercise price. The exercise price shall not be less thanthe fair market value of the Company’s Common Stock at the date the option isgranted. As such, the Company has not recorded compensation expense inconnection with these awards. The options are exercisable for a period not toexceed ten years from the date of the grant. Vesting periods range fromimmediate vesting to five years.

 

Activity in the Option Plan is summarized as follows(in shares):

 

|                                     |   | **Shares** |   | **Weighted  Average  Exercise price** |   |
|------------------------------------------|--------|------------|--------|---------------------------------------|--------|
| Outstanding at December 31, 2000         |   | 3,315,687  |   | $                                     | 1.89   |   |
| Granted                                  |   | 250,500    |   | $                                     | .40    |   |
| Canceled and expired                     |   | (792,783   | )      | $                                     | 1.59   |   |
| Outstanding at December 31, 2001         |   | 2,773,404  |   | $                                     | 1.82   |   |
| Granted                                  |   | 1,080,000  |   | $                                     | .03    |   |
| Canceled and expired                     |   | (800,782   | )      | $                                     | 1.52   |   |
| Outstanding at December 31, 2002         |   | 3,052,622  |   | $                                     | 1.22   |   |
| Granted                                  |   | 460,000    |   | $                                     | .08    |   |
| Exercised                                |   | (50,000    | )      | $                                     | .03    |   |
| Canceled and expired                     |   | (1,773,405 | )      | $                                     | .82    |   |
| Outstanding at December 31, 2003         |   | 1,689,217  |   | $                                     | 1.22   |   |
| Exercisable at December 31, 2001         |   | 1,553,610  |   |                                  |   |
| Exercisable at December 31, 2002         |   | 1,842,924  |   |                                  |   |
| Exercisable at December 31, 2003         |   | 1,247,048  |   |                                  |   |
|                                     |   |       |   |                                  |   |
| Available for grant at December 31, 2003 |   | 2,369,208  |   |                                  |   |

 

The weighted average fairvalue of options granted during the years ended December 31, 2001, 2002 and2003 was $0.35, $0.03, and $0.08 respectively.

 

F-12

----

 

Information regarding the options outstanding underthe Option Plan at December 31, 2003 is as follows:

** **
| **Exercise Price  Range** |   | **Number of  Options  Currently  Outstanding** |      | **Weighted-  Average  Exercise Price** |   | **Weighted-  Average  Contractual  Life** |   | **Number  Exercisable** |      | **Weighted-  Average  Exercise  Price** |   |
|---------------------------|--------|------------------------------------------------|-----------|----------------------------------------|--------|-------------------------------------------|--------|-------------------------|-----------|-----------------------------------------|--------|
| $                         | .03    | -                                              | $         |  .03                              |   | 396,666                                   |   | $                       | .03       |                                    | 5.1    |   | 296,664 |   | $ | .03 |   |
| $                         | .08    | -                                              | $         |  .12                              |   | 527,166                                   |   | $                       | .08       |                                    | 8.6    |   | 197,166 |   | $ | .09 |   |
| $                         | .63    | -                                              | $         |  .69                              |   | 166,000                                   |   | $                       | .66       |                                    | 6.0    |   | 164,333 |   | $ | .66 |   |
| $                         | 1.13   | -                                              | $         |  1.19                             |   | 103,385                                   |   | $                       | 1.18      |                                    | 5.7    |   | 103,385 |   | $ | 1.18 |   |
| $                         | 2.19   | -                                              | $         |  2.75                             |   | 426,850                                   |   | $                       | 2.41      |                                    | 5.3    |   | 416,350 |   | $ | 2.40 |   |
| $                         | 3.63   | -                                              | $         |  5.00                             |   | 64,850                                    |   | $                       | 4.00      |                                    | 4.7    |   | 64,850 |   | $ | 4.00 |   |
| $                         | 5.63   | -                                              | $         |  5.63                             |   | 4,300                                     |   | $                       | 5.63      |                                    | 3.0    |   | 4,300 |   | $ | 5.63 |   |
|                      |   |                                           | 1,689,217 |                                   |   |                                      |   |                    | 1,247,048 |                                    |   |   |
|                           |        |                                                |           |                                        |        |                                           |        |                         |           |                                         |        |  |  |  |  |  |  |  |

 

On September 30,2003, the Company eliminated an employee’s position.  As a result of the elimination, the employee’s October 28, 2002stock option award vested entirely.  Theemployee exercised options to purchase 50,000 shares of common stock in acashless exercise.

 

On October 15,2003, concurrent with the voluntary termination of the former Chairman, Presidentand Chief Executive Officer Robert Merkl, the Company agreed to allow the firstthird of Mr. Merkl’s October 28, 2002 stock option grant to vest early.  Therefore, options to purchase 166,666shares of common stock vested and Mr. Merkl proceeded to exercise those stockoptions in a cashless exercise subsequent to December 31, 2003.

 

**7. Impairment of Goodwill**

 

Due to significantnegative industry and economic trends affecting the Company’s current andexpected future revenues, management performed an analysis of the undiscountedcash flow from the Computer Management Resources (“CMR”) and Advance ComputerTechniques (“ACT”) acquisitions and concluded that the related goodwill wasimpaired.  Based on the analysis of thediscounted cash flow, an impairment charge of approximately $15.0 million wasrecorded in the fourth quarter of 2001.

 

**8.  Income Taxes**

 

For financial reporting purposes, loss before taxesincludes the following components (in thousands):

 
|         |   | **2001** |    | **2002** |   | **2003** |   |
|--------------|--------|----------|---------|----------|--------|----------|--------|
| Pre-tax loss |   |     |    |     |   |     |   |
| U.S.         |   | $        | (20,062 | )        | $      | (2,482   | )      | $ | (1,244 | ) |
| Foreign      |   | (1,676   | )       | (1,285   | )      | (69      | )      |
| Net loss     |   | $        | (21,738 | )        | $      | (3,767   | )      | $ | (1,313 | ) |

 

There were no current ordeferred federal or state and local taxes for the years ended December 31,2001, 2002 and 2003.

 

F-13

----

 

The actual income tax expense (benefit) differs from the “expected” taxexpense computed by applying the U.S. Federal corporate tax rate of 34% toincome taxes, as follows**(in thousands):

 

|                                                                            |   | **December  31,** |   |
|---------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                            |   | **2001**          |   | **2002** |   | **2003** |   |
|                                                                            |   |              |   |   |   |   |   |
| Computed “expected” tax expense/(benefit)                             |   | $                 | (7,391 | ) | $ | (1,281 | ) | $ | (446 | ) |
| Non-deductible losses of foreign subsidiaries                                   |   | 413               |   | 848 |   | 23 |   |
| Non-deductible U.S. expenses                                                    |   | 7                 |   | 4 |   | (83 | ) |
| Valuation allowance relating primarily to U.S. net operating  losses            |   | 7,033             |   | 589 |   | 565 |   |
| State tax expense/(benefit), net of federal tax  effect at state statutory rate |   | (734              | )      | (149 | ) | (59 | ) |
| Other                                                                           |   | 672               |   | (11 | ) | — |   |
|                                                                            |   | $                 | — |   | $ | — |   | $ | — |   |

 

The Company has netoperating loss carryforwards of approximately $46.3 million to offset futuretaxable income which begin to expire in 2018. Deferred tax assets arerecognized if realization of such assets is more likely than not. Based on theweight of available evidence, which included the Company’s historical operatingperformance and the reported cumulative net losses in all prior years, theCompany has provided a full valuation allowance against its net deferred taxassets.  The change in the valuationallowance totaled $589 and $565, in 2002 and 2003, respectively.

 

The tax effects of temporary differences that giverise to significant portions of the deferred tax assets and deferred taxliabilities are as follows (in thousands):

 
|                             |   | **December  31,** |   |
|----------------------------------|--------|-------------------|--------|
|                             |   | **2002**          |   | **2003** |   |
| Deferred tax assets:             |   |              |   |   |   |
| Accounts receivable allowances   |   | $                 | 18     |   | $ | 6 |   |
| Accrued vacation                 |   | 28                |   | 28 |   |
| Accrued bonuses                  |   | 8                 |   | — |   |
| Net operating loss carryforwards |   | 16,951            |   | 17,444 |   |
| Amortization expense             |   | 163               |   | 171 |   |
| Deferred rent expense            |   | 22                |   | 12 |   |
| Other                            |   | 8                 |   | 8 |   |
|                             |   |              |   |   |   |
| Total gross deferred assets      |   | $                 | 17,198 |   | $ | 17,669 |   |
|                             |   |              |   |   |   |
| Net deferred tax asset           |   | $                 | 17,198 |   | $ | 17,669 |   |
| Valuation allowance              |   | (17,198           | )      | (17,669 | ) |
| Net deferred tax asset           |   | $                 | — |   | $ | — |   |

 

**9.  Significant Clients**

 

During the years ended December 31, 2001, 2002 and2003, approximately 68%, 72%, and 80% of revenue was derived from the Company’sfive largest clients, respectively. Three clients accounted for 20%, 15% and11% of total revenues for the year ended December 31, 2001. Three clientsaccounted for 30%, 16% and 11% of total revenues for the year ended December31, 2002.  Three clients accounted for30%, 18% and 12% of total revenues for the year ended December 31, 2003.

 

F-14

----

 

**10.  Commitments**

 

The Company is obligated under capital leases forcomputer and office equipment that expire at various dates through July 2004with interest ranging from 8% to 10%. Future minimum lease payments relating tooffice space under noncancelable operating leases expiring through 2005 andfuture minimum capital lease payments as of December 31, 2003 are as follows(in thousands):

 
|                                                           |   | **Capital  Leases** |   | **Operating  Leases** |   |
|----------------------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
| December 31:                                                   |   |                |   |                  |   |
| 2004                                                           |   | $                   | 5      |                  | $      | 152 |   |
| 2005                                                           |   | —              |   | 4                     |   |
| Total minimum lease payments                                   |   | 5                   |   | $                     | 156    |   |
| Less amount representing interest-                             |   | —              |   |                  |   |
| Present value of net minimum capital lease payments            |   | 5                   |   |                  |   |
| Less current installments of obligations under  capital leases |   | 5                   |   |                  |   |
| Obligations under capital leases, net of current  installments |   | $                   | — |                  |   |   |

 

Rent expense wasapproximately $939,000, $445,000, and $185,000 for the years ended December 31,2001, 2002 and 2003, respectively.

 

The Company vacated itsoffice space at 342 Madison Ave. in New York upon the expiration of its leaseon April 30, 2001, exercised a termination clause and vacated a portion ofits leased space at 80 Lamberton Road in Windsor, Connecticut.  The termination clause for the Connecticutspace required a nine-month notification period prior to the termination of thelease.  In conjunction with thistermination clause, the Company recorded a charge in the quarter ended March31, 2001 of $120,000.  In conjunctionwith vacating these offices, the Company recorded a charge in the quarter endedMarch 31, 2001 of approximately $355,000 for the losses incurred upon thedisposal of office furniture and abandonment of leasehold improvements.

 

The Company announced onJune 3, 2002 its intentions to close its Barbados based solution center toreduce costs and improve operating efficiency. The Company implemented a planto close its Barbados based solutions 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 and the Barbados based solution center was closed onOctober 15, 2002.

 

 In 2002 the Company announced thatits Connecticut office would serve as the Company’s corporate headquarters andthat transition was completed in December 2002. During 2003, additionaladministrative and finance functions were relocated from the Dallas office andthe office was closed at the end of the lease term, August 31, 2003. The totalpretax charge for the Dallas closure, including $26,000 accrued as of December31, 2003 was approximately $215,000. The total pre-tax charge included $106,000for severance and other employee costs and approximately $109,000 to coverother costs.

 

**11.  DeferredCompensation Plan**

 

The Company maintains a401(k) plan (the “Plan”) covering all its eligible employees. The Plan iscurrently funded by voluntary salary deductions by plan participants and islimited to the maximum amount that can be deducted for federal income taxpurposes. Effective January 1, 2000 the Plan was modified providing a 100%Company match of up to 3% of eligible employee contributions. For the yearsended December 31, 2001, 2002 and 2003, the Company recognized contributions ofapproximately $323,000, $205,000 and $105,000 respectively.

 

F-15

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**12.  Related PartyTransactions**

 

During the years endedDecember 31, 2001, 2002, and 2003, there were no transactions with relatedparties.

 

**13.  Geographic Areas**

 

The Company operates in one industry segment,providing information technology solutions to its clients. In 2003, the Companyhad only domestic operations.  Prior to2003, in addition to its domestic operations, which include the United States,the Company had operations in the West Indies through October 15, 2002.  Effective October 15, 2002, the Companyceased operation in the West Indies. Geographic information is as follows (inthousands):

 

|              |   | **December  31,** |   |
|-------------------|--------|-------------------|--------|
|              |   | **2001**          |   | **2002** |   | **2003** |   |
|              |   | **Domestic**      |   | **Foreign** |   | **Domestic** |   | **Foreign** |   | **Domestic** |   | **Foreign** |   |
|              |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Revenues          |   | $                 | 26,812 |   | $ | 2,872 |   | $ | 19,184 |   | $ | 1,628 |   | $ | 12,144 |   | $ | — |   |
| Long-lived assets |   | $                 | 977    |   | $ | 405 |   | $ | 470 |   | $ | 17 |   | $ | 159 |   | $ | — |   |
| Total assets      |   | $                 | 8,375  |   | $ | 2,039 |   | $ | 5,469 |   | $ | 330 |   | $ | 4,275 |   | $ | 7 |   |

 

**14.  Litigation**

 

On September 10,2001 enherent filed a lawsuit in Federal District Court in Virginia for breachof contract to recover monies owed to it by Interior Systems, Inc. (“ISI”) forservices provided by enherent in the amount of approximately $785,000.  On October 12, 2001, ISI filed acounterclaim against enherent claiming that enherent breached the contract andinflated invoices during the performance of those services in the amount ofapproximately $1,153,000.  enherentdenied these allegations.  In December2001 the parties reached a settlement agreement whereby ISI agreed to pay$250,000 to enherent. Through December 31, 2003 the Company received $243,500of this amount, including $18,500 in the current year. As collection of theremaining balance was not likely, the Company now considers the matter closed.

 

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.

 

F-16

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**VALUATIONAND QUALIFYING ACCOUNTS**

**(InThousands)**

**[Item15(a)]**

 
| **Column A**                                         |   | **Column B**                         |   | **Column C**                                   |   | **Column D**      |   | **Column E**                   |   |
|------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|-------------------|--------|--------------------------------|--------|
| **Description**                                      |   | **Balance at  Beginning of  Period** |   | **Additions  Charged to  Costs and  Expenses** |   | **Deductions(a)** |   | **Balance at  End of  Period** |   |
| **Year ended December 31, 2001**                     |   |                                 |   |                                           |   |              |   |                           |   |
| Allowances deducted from assets to which they apply: |   |                                 |   |                                           |   |              |   |                           |   |
| Allowance for doubtful accounts                      |   | $                                    | 700    |                                           | $      | 1,369             |   | $                              | 1,813  |   | $ | 256 |   |
|                                                 |   |                                 |   |                                           |   |              |   |                           |   |
| **Year ended December 31, 2002**                     |   |                                 |   |                                           |   |              |   |                           |   |
| Allowances deducted from assets to which they apply: |   |                                 |   |                                           |   |              |   |                           |   |
| Allowance for doubtful accounts                      |   | $                                    | 256    |                                           | $      | (179              | )      | $                              | 20     |   | $ | 57 |   |
|                                                 |   |                                 |   |                                           |   |              |   |                           |   |
| **Year ended December 31, 2003**                     |   |                                 |   |                                           |   |              |   |                           |   |
| Allowances deducted from assets to which they apply: |   |                                 |   |                                           |   |              |   |                           |   |
| Allowance for doubtful accounts                      |   | $                                    | 57     |                                           | $      | 38                |   | $                              | 79     |   | $ | 16 |   |

 

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(a) Uncollectible receivables written off.

 

F-17

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