SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One):
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to
___________
Commission file number: 0-22945
THE A CONSULTING TEAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-3169913
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Park Avenue South (212) 979-8228
New York, New York 10003 (Registrant's Telephone Number,
(Address of Principal Executive Offices) Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 13, 2000 was approximately $9,970,000 based on the
average of the high and low prices of the registrant's Common Stock on The
Nasdaq Stock Market SM on such date.
As of March 13, 2000, there were 5,485,000 shares of Common Stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, which will be filed on or before April 15, 2000, are
incorporated by reference into Part III of the Report.
TABLE OF CONTENTS
Page
Part I
Item 1. Business..............................................................1
Item 2. Properties............................................................6
Item 3. Legal Proceedings.....................................................6
Item 4. Submission of Matters to a Vote of Security Holders...................6
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...............................................................6
Item 6. Selected Financial Data...............................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........17
Item 8. Financial Statements and Supplementary Data..........................17
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................17
Part III
Item 10. Directors and Executive Officers of the Registrant...................18
Item 11. Executive Compensation...............................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management.......19
Item 13. Certain Relationships and Related Transactions.......................19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....19
PART I
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements due to risks and factors identified from time to time in the
Company's filings with the SEC including those discussed in this Report.
Item 1. Business
General
Incorporated in 1983, The A Consulting Team, Inc., a New York
corporation (the "Company" or "TACT") has provided a wide range of information
technology ("IT") consulting, software development and training services and
solutions to Fortune 1000 and other large organizations. In August of 1997, TACT
became a public company. Headquartered in New York, TACT has opened Solution
BranchesSM in strategic locations throughout the United States. Currently, there
are Solution Branches in New York, NY, Clark, NJ, Stamford, CT, Chicago, IL, and
Atlanta, GA. The Company supports all major computer technology platforms and
supports client IT projects by using a broad range of third-party software
applications.
The Company's shares are listed on The Nasdaq Stock MarketSM under the
symbol "TACX."
Industry Background
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, have accelerated the growth of the IT
industry in recent years. These advances include more powerful and less
expensive computer technology, the transition from predominantly centralized
mainframe computer systems to open and distributed computing environments and
the advent of capabilities such as relational databases, imaging, software
development productivity tools, electronic commerce ("e-commerce") applications
and web-enabled software. These advances have expanded the benefits that users
can derive from computer-based information systems and improved the
price-to-performance ratios of such systems. As a result, an increasing number
of companies are employing IT in new ways, often to gain competitive advantages
in the marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems have rendered the development and implementation of such
systems increasingly complex. In addition, there is a shortage of IT consultants
qualified to support these systems. Accordingly, organizations must turn to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems.
Growth Strategy
The Company's objective is to expand its position in the e-commerce
services industry by continuing to provide its clients with high quality,
technology-based business consulting services. The Company's strategies include
the following key components:
Cross-sell Additional Services to Existing Clients. By offering
existing clients additional IT consulting, software and training, TACT intends
to leverage its existing client base. The Company's relationships with current
clients provide opportunities to market additional services in current and new
geographical markets.
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Expand Client Base. The Company is developing additional client
relationships in geographic markets where the Company maintains Solution
Branches, through targeted marketing initiatives, participation in local and
national trade shows, user group meetings and conventions, referrals from
existing clients and direct mail.
Open Additional Solution Branches. The Company believes that
maintaining a local presence within its markets gives it a competitive advantage
by increasing name recognition and referral potential as well as reducing travel
expenses and attracting locally-based, skilled consultants. TACT supplemented
its three existing Solution Branches with the opening of a Solution Branch in
Chicago in 1998, and Atlanta in 1999.
Acquisitions. The Company is actively looking for companies and other
organizations that it may acquire. The Company has established certain
acquisition criteria. It is primarily interested in companies and organizations
that are (i) established in geographic locations that the Company is interested
in expanding into, or (ii) has a depth of service offerings that the Company
finds attractive. To date, the Company has acquired a 51% ownership in T3 Media,
Inc. ("T3 Media"), a Web strategy and Web design company with offices in New
York, NY, Seattle, WA and San Diego, CA. In addition, the Company has also
invested in LightPC.com, Inc., a consumer-based Application Service Provider
("ASP") company.
T3 Media
Among the key services provided by T3 Media Internet strategists are
business planning, strategic planning, and marketing strategy consulting. T3
Media offers web strategy that includes industry and competitive analysis,
market research, target audience definition, and marketing strategy. The T3
Media methodology, which utilizes extensive market research, rigorous
quantitative analyses, and myriad other tools, enables the design of an optimal
strategic plan for companies ranging in size from e-commerce start-ups to large
Fortune 1000 businesses.
T3 Media works across a large number of platforms and with all major
software tools. T3 Media's programmers and engineers develop Internet solutions
that combine innovative technologies with strategic vision and creative design.
T3 Media develops content publishing, e-commerce, intranet, and document
management systems using dynamic site-building technologies. T3 Media's
award-winning creative services team builds Web sites by employing information
architects and usability specialists along with graphic designers and content
specialists to develop expertly tailored Web branding. T3 Media personnel may be
engaged in creative development, information architecture design, usability
analysis/testing, graphic design/multimedia design, content management and
development services, and branding and corporate identity development.
LightPC and End-to-End E-Services
TACT's ownership interest in and strategic business relationship with
LightPC enables TACT to implement LightPC's expertise in various technologies,
including remote application hosting and off-site document storage. With LightPC
technology, TACT customers can make extended use of the power and capabilities
of the Internet. By structuring TACT business technology solutions with the
offerings of T3 Media and LightPC, TACT can provide customers with web strategy
and design, through web development and integration, to web application hosting.
This is the new TACT value proposition--TACT can assist customers with
implementation of strategic e-Services, helping customers move from outdated
legacy systems to the exploding opportunities of the Internet. The end-to-end
e-Services offered by TACT provide the tools to enable customers to decide, with
expert guidance, on the most efficient and cost-effective means to make use of
and enhance existing information technology and to bring customers' vital
information and products to the Web.
During 2000, TACT intends to continue focusing on growing the
e-Services business and TACT management anticipates continued growth of
e-Services revenues through new and expanded client engagements and development
of business relationships with the leaders in Internet and Web technologies.
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TACT Operations
TACT Consulting. TACT provides a wide range of IT consulting services,
including technology infrastructure advisory services and systems architecture
design for Fortune 1000 companies and other large organizations. The Company's
solutions are based on an understanding of each client's enterprise model. The
Company's accumulated knowledge may be applied to new projects such as planning,
designing and implementing enterprise-wide information systems, database
management services and systems integration.
TACT delivers its IT solutions through TACT Solution Teams composed of
Project Managers, Technical Practice Managers and Technical Specialists. These
professionals possess the project management skills, technical expertise and
industry experience to identify and effectively address a particular client's
technical needs in relation to its business objectives. TACT's focus on
providing highly qualified IT professionals allows the Company to identify
additional areas of the client's business which could benefit from the Company's
IT solutions, thereby facilitating the cross-marketing of multiple Company
services. The Company keeps its Solution Teams at the forefront of emerging
technologies through close interaction with TACT research personnel who identify
innovative IT tools and technologies. As a result, management believes that TACT
Solution Teams are prepared to anticipate client needs, develop appropriate
strategies and deliver comprehensive IT services, thereby allowing the Company
to deliver the highest quality IT services in a timely fashion.
A Solution Team is typically deployed from one of the Company's local
Solution Branches in order to provide solutions to its clients by utilizing
local resources. The Company maintains five Solution Branches - one in each of
New York, NY; Clark, NJ; Stamford, CT; Chicago, IL; and Atlanta, GA.
Management's experience has been that the local presence established by a
Solution Branch improves the Company's ability to attract local clients, as well
as its ability to attract, develop, motivate and retain locally-based IT
professionals. The Company's corporate headquarters supports each Solution
Branch and performs many functions which allow the Solution Branches to focus on
recruiting, sales and marketing. Management has developed the TACT Solution
Teams, as well as TACT's local Solution Branch structure, in an effort to
advance the Company's objective of establishing and maintaining long-term
relationships with its clients. Sixteen of the Company's top twenty clients
measured by revenue for the year ended December 31, 1999 had been clients for
over five years.
Solution Branch Managers are responsible for recruiting consultants,
assigning consultants to fulfill client requirements, implementing sales and
marketing programs, and managing client and employee relations. In employing new
Solution Branch Managers, the Company seeks candidates who have demonstrated IT
industry and local client knowledge, managerial and organizational skills,
initiative and strong interpersonal skills. In addition, a portion of the
Solution Branch Managers' compensation results from an incentive bonus package
based upon revenue and profit generated by the Solution Branch, fostering an
entrepreneurial culture throughout the Company.
TACT Software. TACT markets and distributes a number of software
products developed by independent software developers. The Company believes its
relationships with over 150 software clients throughout the country provide
opportunities for the delivery of additional TACT consulting and training
services. The software products offered by TACT Software are developed in the
United States, England and Finland and marketed primarily through trade shows,
direct mail, telemarketing, client presentations and referrals. TACT Software
personnel currently include sales and marketing personnel as well as 24-hour
technical support.
TACT Training. TACT offers an extensive selection of technical training
courses to large organizations at either TACT's Training Center or at a client's
site. These courses include classes in client/server and legacy technologies as
well as in recent technologies, such as JAVA, ActiveX, Active Server Pages and
HTML. In addition, the Company conducts presentations on specific topics, such
as co-existence of legacy and client/server systems, use of legacy mainframe
databases as servers, conversion/migration of legacy systems to new
architectures and performance monitoring/tuning. TACT
3
offers end-user training for both off-the-shelf software, such as Microsoft
Office and Lotus Notes, and customer specific applications.
The Company's training services are often included in total project
solutions for businesses, in retraining MIS personnel in new technologies, and
in software vendor product training. These courses may be customized to address
a client's specific needs and are taught at the client's site or at the TACT
Training Center. TACT utilizes computer labs to enable participants to gain
practical experience in the materials presented. TACT's training curriculum is
developed in-house by technicians with a working experience in the technologies
being taught. In addition, TACT provides a "Fast Track" program and a series of
"For Consultants Only" classes on evenings and weekends to train/re-train the
consultant community in new technologies. All classes are free of charge for
TACT employees. Consultants who are non-TACT employees pay a nominal fee which
is refunded if the consultant joins TACT within three months after completing
the training.
Management believes that TACT's training services are an important and
differentiating factor in attracting and retaining IT professionals. TACT
training courses introduce prospective consultants to the Company and provide
for technical advancement for the Company's existing consultants. TACT training
clients also represent an opportunity for the Company to market additional
services such as consulting services. The Company has been successful in
generating consulting business from its training clients and plans to continue
to identify situations where its knowledge of a training client's needs can lead
to other IT business.
Clients
The Company's clients consist primarily of Fortune 1000 companies and
other large organizations. Because of the diverse range of industries in which
the Company's clients operate, the Company believes that it is not dependent
upon any single industry or market. Sixteen of the Company's top twenty clients
measured by revenue for the year ended December 31, 1999 had been clients for
over five years. In 1999, the largest two customers represented 23% and 14% of
revenues, respectively. Besides these customers, no other customer represented
greater than 10% of the Company's revenues.
TACT Research
TACT continuously investigates new technologies developed by third
parties to determine their viability and potential acceptance in the Fortune
1000 marketplace. The Company's research and development staff work diligently
to identify those "bleeding-edge" technologies that will succeed as
"leading-edge" business solutions. TACT research personnel work closely with
TACT technical managers to predict future tools and technologies to be used by
corporate America so that TACT consultants can be trained in those emerging
technologies. TACT research personnel also prepare technology demonstrations and
pilot projects used in the Company's marketing and sales efforts and identify,
evaluate and recommend software products, including those to be marketed by
TACT's Software division. In addition, TACT research personnel participate in
short-term special projects requiring particular expertise for certain of the
Company's clients.
Sales and Marketing
TACT's marketing strategy is to develop long-term partnership
relationships with existing and new clients that will lead to the Company
becoming the preferred provider of IT services. The Company seeks to employ a
"cross selling" approach where appropriate to expand the number of services
utilized by a single client. Other sales and marketing methods include client
referrals, networking and attending trade shows. At December 31, 1999, the
Company employed 43 sales and marketing personnel. In addition to the Company's
primary marketing approach, the Company also produces The Tactician magazine,
which is regularly published in-house and distributed by TACT. The magazine
circulates both to existing and potential clients as well as existing
consultants and candidates. Another marketing resource, which has also served
the Company in its recruiting efforts, is the Company's web site at
http://www.tact.com. The web
4
site provides information about TACT consulting and training services and
software products to the IT community.
Competition
The market for IT consulting services is intensely competitive. It is
affected by rapid technological advances and includes a large number of
competitors. The Company's competitors include the consulting divisions of "Big
Five" accounting firms, systems consulting and implementation firms, application
software development firms, management consulting firms, divisions of large
hardware and software companies and niche providers of IT services. Many of
these competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its clients' internal resources, particularly when these
resources represent an existing cost to the client. Such competition may impose
additional pricing pressures on the Company.
The Company believes that the principal competitive factors in the IT
services market include breadth of services offered, technical expertise,
knowledge and experience in the industry, quality of service and responsiveness
to client needs. The Company believes it competes primarily on the basis of its
in-depth technical expertise, timely delivery of products and services and
quality of service.
A critical component of the Company's ability to compete in the
marketplace is its ability to attract, develop, motivate and retain skilled
professionals. Although highly skilled technical employees, particularly project
managers and technical specialists, are in great demand, the Company believes it
can compete favorably in hiring such personnel by offering competitive
compensation packages and attractive assignment opportunities.
Human Resources
At December 31, 1999, the Company (including T3 Media) had 418
personnel, of whom 267 were consultants, 20 were recruiting personnel, 43 were
sales and marketing personnel, 11 were technical and customer service personnel,
and 77 were executive and administrative personnel. None of the Company's
employees are represented by a labor union, and the Company has never incurred a
work stoppage. The Company utilizes the services of a significant number of
independent contractors to act as consultants. These independent contractors are
not employees of the Company, and there can be no assurance that the services of
these independent contractors will continue to be available to the Company on
terms acceptable to the Company.
Intellectual Property Rights
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company licenses intellectual property. The Company has entered into
confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance, however, that the steps
taken by the Company in this regard will be adequate to deter misappropriation
of proprietary information or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce its intellectual property
rights. In addition, the Company is aware of other users of the term "TACT" and
combinations including "A Consulting," which users may be able to restrict the
Company's ability to establish or protect its right to use these terms. The
Company has in the past been contacted by other users of the term "TACT"
alleging rights to the term. However, the Company has completed the application
process for protection of certain marks, including "TACT" and "The A Consulting
Team."
All ownership rights to software developed by the Company in connection
with a client engagement are typically assigned to the client. In limited
situations, the Company may retain ownership
5
or obtain a license from its client, which permits the Company or a third party
to market the software for the joint benefit of the client and the Company or
for the sole benefit of the Company.
Item 2. Properties
The Company's executive office is located at 200 Park Avenue South, New
York, NY 10003. The Company's executive office is located in a leased facility
with a term expiring in June 30, 2003. The leased premises of the principal
offices of the Company are approximately 23,375 square feet, including the
principal office and additional space of T3 Media in New York, NY. The Company
also has leased facilities in Clark, NJ, Stamford, CT, Chicago, IL and Atlanta,
GA, and T3 Media has additional leased facilities in Seattle, WA and San Diego,
CA.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock is currently traded on The Nasdaq National
Stock MarketSM ("Nasdaq") under the symbol "TACX". TACT completed an initial
public offering in August 8, 1997. Prior to that date, there was no market for
the Company's Common Stock.
The following table sets forth the quarterly range of high and low
sales prices of the Company's Common Stock since August 8, 1997 as reported by
Nasdaq:
1997 High Low
---- ---- ---
Third Quarter $14.125 $12.000
Fourth Quarter 12.875 9.250
1998 High Low
---- ---- ---
First Quarter $12.375 $8.750
Second Quarter 12.500 9.750
Third Quarter 11.125 7.125
Fourth Quarter 8.875 5.000
1999 High Low
---- ---- ---
First Quarter $8.500 $5.500
Second Quarter 9.500 6.875
Third Quarter 9.500 4.750
Fourth Quarter 6.000 3.750
Dividends
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
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Holders
The Company estimates that there were approximately 7 holders of record
of the Company's Common Stock on March 3, 2000. The Company believes that the
number of beneficial shareholders exceeds 400.
Use of Proceeds From Registered Securities
The effective date of the Company's registration statement on Form SB-2
was August 8, 1997. The Commission file number is 333-29233. Between the
effective date and December 31, 1999, the expenses incurred in connection with
the issuance and distribution of the securities registered were as follows:
As Previously Reported on
Form 10-K Additional Expenses Expenses Incurred to
Direct or Indirect Payments to for the Period Ending Incurred Through Date as of
Others: December 31, 1998 December 31, 1999 December 31, 1999
- -------------------------------------------------------- ------------------- ---------------------
Underwriting discounts and
commissions $ 1,512,000 $-- $ 1,512,000
Other expenses 518,300 -- 518,300
----------------------- ------------------- ---------------------
Total Expenses 2,030,300 -- 2,030,300
----------------------- ------------------- ---------------------
Net offering proceeds after
total expenses $21,071,000 $-- $21,071,000
======================= =================== =====================
Between the effective date and December 31, 1999, net offering proceeds
of $16,032,000 were used for the following purposes:
As Previously Reported on
Form 10-K for the Period Use of Proceeds
Direct or Indirect Payments to Ending Changes in Through
Others: December 31, 1998 Use of Proceeds December 31, 1999
- -------------------------------------------------------- ------------------- ---------------------
Repayment of loans to
shareholder $ 1,045,000 $-- $ 1,045,000
Distribution of S
Corporation earnings to
shareholder 2,007,000 -- 2,007,000
Repayment of debt 1,940,000 -- 1,940,000
Working capital and
general corporate
purposes 2,700,000 -- 11,040,000
----------------------- ------------------- ---------------------
Total use of proceeds $ 7,692,000 $-- $16,032,000
======================= =================== =====================
The use of proceeds does not represent a material change in the use of
proceeds described in the prospectus filed on August 8, 1997. There have been no
other changes to the information provided by the Company on Form SR for the
period ended April 30, 1997, on Form 10-Q for the period ended September 30,
1997, on Form 10-K for the period ended December 31, 1997, on Form 10-Q for the
periods ended March 31, 1998, June 30, 1998, and September 30, 1998, and on Form
10-K for December 31, 1998.
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Item 6. Selected Financial Data
The following table contains certain financial and operating data and
is qualified by the more detailed Financial Statements and Notes thereto
included herein. The selected financial data in the table are derived from the
Company's Financial Statements and Notes thereto. The selected financial data
should be read in conjunction with the Financial Statements and Notes thereto
and other financial information included herein.
Selected Financial Data
(in thousands, except number of shares and per share data)
Year ended December 31,
===============================================================
1999 1998 1997 1996 1995
===============================================================
Statement of Operations Data:
Revenues $ 53,517 $ 48,925 $ 35,216 $ 20,995 $ 16,023
Income (loss) from operations (3,203) 4,287 3,347 102 92
Net income (loss) (2,667) 2,785 2,524 8 190
Net income (loss) per share-basic
and dilutive $ (0.49) $ 0.51
Shares used in per share calculation 5,485,000 5,488,356
Unaudited Pro Forma Data (1)
Pro forma income from operations $ 3,310 $ 1,325
Pro forma net income 1,966 692
Pro forma net income per share-basic
and dilutive $ 0.45 $ 0.19
Weighted average shares outstanding 4,409,658 3,729,211
BALANCE SHEET DATA
Total Assets $ 28,582 $ 28,772 $ 25,467 $ 5,100 $ 3,196
Long-term debt 561 15 30 44 -
Stockholders' equity 22,516 25,183 22,398 811 803
Number of shares outstanding at
year end 5,485,000 5,485,000 5,485,000 3,550,000 3,550,000
=============================================================================================================
(1) The 1996 and 1997 amounts relating to income from operations, net income
and net income per share are shown on a pro forma basis. The pro forma
adjustments reflect (i) reduced executive compensation expense for the
CEO, partially offset by increased salary expense related to the
Company's hiring of a CFO and (ii) provision for federal and state
income taxes as if the Company had been subject to federal and state
income taxation as a C Corporation during each of the periods.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of significant factors affecting
the Company's operating results and liquidity and capital resources should be
read in conjunction with the accompanying financial statements and related
notes.
Overview
Since 1983, TACT has provided IT services and solutions to Fortune 1000
and other large organizations. In 1997, TACT became a public company (Nasdaq:
TACX). Headquartered in New York, the TACT growth strategy includes opening
Solution BranchesSM in strategic locations throughout the United States.
Currently, there are Solution Branches in New York, Clark, NJ, Stamford, CT,
Chicago, and Atlanta. TACT's presence in major metropolitan business centers
allows the use of regional resources, ensures face-to-face relationships and
accountability with clients, and keeps a finger on the pulse of local market
needs. Proven performance and public presence gives clients the confidence to
rely on TACT as a trusted long-term business partner.
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TACT is an end-to-end e-Services provider. The Company delivers
e-Services solutions from web strategy and design through web development and
integration, to web application hosting. Its clients include a broad range of
Fortune 1000 companies and other large organizations. TACT also provides the
same markets with enterprise-wide Information Technology consulting, software
and training services and solutions. Over 87% of the Company's consulting
services revenues were generated from the hourly billing of its consultants'
services to its clients under time and materials engagements, with the remainder
generated under fixed-price engagements.
The Company was recently named to the Deloitte & Touche Fast 50, which
recognizes the top 50 up-and-coming technology companies in the New York area,
based on percentage revenue growth over a five-year period. Substantial growth
is expected to continue as more organizations select TACT as a long-term partner
for complete, web-based business solutions.
TACT's primary focus is helping clients support their new business
imperatives by assisting these clients in the transition of their information
technologies from traditional mainframe and client/server environments to the
Internet and the Web. TACT offers to its clients the full scope of the
web-enabling process, and TACT provides partial or total solutions--from
strategy and design, to development, through conversions and integration, and
ending with application hosting and enterprise-scale deployment. TACT expertise
leverages clients' existing systems and data stores to significant business
advantage: TACT plays an integral role in taking clients "from bricks and mortar
to clicks and mortar."
For each client that engages TACT to assist in implementing e-commerce
or web-based initiatives, TACT uses a comprehensive, flexible methodology to
analyze the client's current IT assets. The analysis reveals how much of the IT
asset portfolio is ready for the Web, and what is required to web-enable
selected portfolio elements. With this information, TACT devises and executes a
customized web solution strategy that will ultimately enable the client to reach
their business objectives of reduced costs, increased sales and profits, and
improved customer services.
TACT also provides clients with enterprise-wide information technology
consulting, training services and software products. TACT solutions cover the
entire spectrum of IT needs, including applications, data, and infrastructure.
TACT provides complete project life-cycle services--from application and system
design, through development and implementation, to documentation and training.
Strategic alliances with leading software vendors ensure that TACT solutions are
dependable and within the mainstream of industry trends. These partnerships
allow TACT to provide a wide variety of business technology solutions such as
enterprise reporting applications, data warehousing, systems strategies, data
and database conversions, and application development services.
The Company establishes standard-billing guidelines for consulting
services based on the type of service offered. Actual billing rates are
established on a project-by-project basis and may vary from the standard
guidelines. The Company typically bills its clients for time and materials
services on a semi-monthly basis. Arrangements for fixed-price engagements are
made on a case-by-case basis. Consulting services revenues generated under time
and materials engagements are recognized as those services are provided, whereas
consulting services revenues generated under fixed-price engagements are
recognized according to the percentage of completion method.
The Company's most significant operating cost is its personnel cost,
which is included in cost of revenues. As a result, the Company's financial
performance is primarily based upon billing margin (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During the period presented, the Company has
been able to increase its billing margins by increasing its hourly billing rates
and through achieving a higher margin on a number of projects related to Year
2000 services. These increases, however, were partially offset by increases in
consultants' and employees' salaries and wages and reduction in the consultant
utilization rate. Because most of the Company's engagements are on a time and
materials basis, the Company generally has been able to pass on to its clients
most of the increases in cost of services. Accordingly, such increases have
historically not had a significant impact on the Company's financial results.
Further, most of the Company's engagements allow for periodic price
9
adjustments to address, among other things, increases in consultant costs. TACT
also actively manages its personnel utilization rates by constantly monitoring
project requirements and timetables. As projects are completed, consultants are
re-deployed either to new projects at the current client site or to new projects
at another client site, or are encouraged to participate in TACT's training
programs in order to expand their technical skill sets.
Historically, the Company has also generated revenues by selling
software licenses and providing training services. In addition to initial
software license fees, the Company also derives revenues from the annual renewal
of software licenses. Revenues from the sale of software licenses are recognized
upon delivery of the software to a customer, because future obligations
associated with such revenue are insignificant. Training service revenues are
recognized as the services are provided. During 1999, the Company began a
significant transition to providing e-Services solutions. As a result, less
emphasis was placed on software sales, resulting in a significant reduction in
software sales in the second half of the year. Software sales are expected to
continue to decrease in year 2000 and beyond and will only be ancillary to
providing e-Services solutions to customers.
The Company's revenue growth has been driven by three primary factors:
increasing the number of consultants on billing, managing the business to attain
higher average billing rates through the delivery of higher value-added services
to the Company's clients, and carefully managing consultant utilization rates.
The Company also has been successful in expanding existing client relationships
as well as establishing new client relationships. Such relationships are
established and maintained through the Company's local Solution Branch SM
offices.
The Company opened an additional Solution Branch in Atlanta, GA in
April 1999. Considering its limited experience with opening Solution Branches,
the Company cannot predict when Solution Branches will contribute to the
Company's net income. To date, new branches are taking between 12-24 months
before showing a break-even operation. Until break-even occurs, the Company
incurs the costs of salaries, marketing and occupancy.
On October 2, 1998, the Company made an investment in Web integrator,
T3 Media of $3 million, in return for non-voting convertible preferred stock. On
June 23, 1999, the Company converted its preferred stock into a 30% common stock
ownership interest and increased its ownership interest in T3 Media to
approximately 51% by an additional investment in T3 Media's common stock of
$370,000. The acquisition of T3 Media was accounted for using the purchase
method of accounting. Accordingly, the results of operations of T3 Media are
included in the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the estimated fair value of
the net identifiable assets acquired totaled $4.0 million and has been recorded
as intangibles.
In 1999, the Company made a minority investment in LightPC. In addition
to services that can be provided to business customers, LightPC is a pioneer in
the field of consumer-oriented ASP's. The company is a privately held company
based in New York, NY, with its development team located in New York and Israel,
and it will provide to the Internet consumer market on-line access to computer
applications and software. LightPC's strategy expands the services previously
provided by the ASP industry, which traditionally were confined to the hosting
of business applications. LightPC will serve the growing demand of Internet
users for access to consumer applications such as word processing, business
suites, tax preparation applications and others and will enable consumers and
businesses to make use of programs while they are connected to the World Wide
Web through LightPC. However, while LightPC has executed a number of business
development agreements with a number of prominent technology companies, LightPC
is in the preliminary start-up stage of its existence, and there is no guarantee
that the Company's investment in this enterprise will provide any returns to the
Company at any time, or if at all.
Results of Operations
The following tables set forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
10
Year Ended December 31,
1999 1998 1997
-------------- -------------- --------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 66.7 65.7 68.0
-------------- -------------- --------------
Gross profit 33.3 34.3 32.0
Selling, general and administrative expenses 39.3 25.5 22.6
Income (loss) from operations (6.0) 8.8 9.5
Net income (loss) (5.0) 5.7 7.2
Pro forma income from operations NA NA 9.4
Pro forma net income NA NA 5.6
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenues. Revenues of the Company increased by $4.6 million, or 9.4%,
from $48.9 million for the year ended December 31, 1998 to $53.5 million for the
year ended December 31, 1999. Revenues from consulting services increased by
$6.1 million, or 14.4%, from $42.4 million in 1998 to $48.5 million in 1999. The
increase in 1999 revenues from consulting services resulted from the inclusion
of T3 Media revenues, a slight increase in the average number of consultants
and, to a lesser extent, higher hourly billing rates, offset by a slight
decrease in the consultant utilization rate. The number of consultants engaged
by the Company increased during the first three quarters of the year by
approximate 31% in response to several significant projects involving Year 2000
remediation, project management and internet application development. Those
projects began winding down in the third and fourth quarters of 1999. This
resulted in a 21% decrease in the consultant headcount in the fourth quarter.
Software licensing revenues decreased by $1.5 million, or 24.2%, from
$6.2 million in 1998 to $4.7 million in 1999. This decrease is directly
attributable to reduced demand for Year 2000-related products due to the fact
that many of our customers licensed Y2K-related products during the last quarter
of 1998 and slower than expected sales of new products. Software sales are
expected to continue to decrease in year 2000 and beyond and will only be
ancillary to providing e-Services solutions to customers.
Revenues from training represented less than 1% of the Company's total
revenues in both 1999 and 1998 and are expected to remain immaterial in year
2000 and beyond.
Gross Profit. The resulting gross profit for 1999 increased by $1.1
million, or 6.4%, from $16.8 million in 1998 to $17.8 million in 1999. Gross
margin was adversely affected by the significant decrease in software revenues
in 1999 and a slight decrease in the consultant utilization rate as compared to
1998. As a percentage of total revenues, gross profit decreased from 34.3% of
revenues in 1998 to 33.3% of revenues in 1999.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased by $8.6 million, or 68.6%, from $12.5 million in 1998 to $21.0 million
in 1999. Expressed as a percentage of sales, SG&A expenses increased from 25.5%
of 1998 revenues to 39.3% of 1999 revenues. The increase is attributable to the
acquisition of T3 Media ($2.6 million), an increase in the number of salaried
personnel supporting new branch operations, marketing and sales functions ($2.0
million), increased occupancy costs, including the amortization of furniture,
equipment and leaseholds ($0.9 million), a provision for doubtful accounts ($1.3
million) and the amortization of goodwill associated with acquisitions ($0.3
million). These expenses are reflective of continued efforts to broaden the
Company's customer base, increase its geographic presence and transition to
being an e-Services service provider.
Net Income (Loss). As a result of the above-mentioned factors, the
Company had a net loss of approximately $2.7 million in 1999 compared to net
income of $2.8 million in 1998.
11
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Revenues. Revenues of the Company increased by $13.7 million, or 38.9%,
from $35.2 million for the year ended December 31, 1997 to $48.9 million for the
year ended December 31, 1998. Revenues from consulting services increased by
$9.9 million, or 30.6%, from $32.5 million in 1997 to $42.4 million in 1998. As
a percentage of total revenues, consulting services decreased to 86.7% of the
total in 1998 compared to 92.2% in 1997. The increase in 1998 revenues from
consulting services was primarily the result of an increased number of
consultants and, to a lesser extent, higher hourly billing rates and a slight
increase in consultant utilization rate. The number of consultants engaged by
the Company increased by approximately 18% from December 31, 1997 to December
31, 1998. The Company was engaged on several significant projects involving Year
2000 remediation, project management and Internet application development from
existing clients which resulted in higher billings.
Software licensing revenues increased by $3.7 million, or 148%, from
$2.5 million in 1997 to $6.2 million in 1998. This increase was related to an
increase in Year 2000 product sales and in license renewals as well as expanded
software offerings through a number of new strategic alliances. Management's
strategy was to have new software offerings replace the reduction of Y2K related
products. Consequently, the Company enhanced its testing tools so they are
non-Y2K specific, making them useful beyond the year 2000.
Revenues from training represented less than 1% of the Company's total
revenues in both 1998 and 1997.
Gross Profit. The resulting gross profit for 1998 increased by $5.5
million, or 48.7%, from $11.3 million in 1997 to $16.8 million in 1998.
Improvement in gross margin was attributable to both an increase in consulting
margins and a slight increase in software margins. As a percentage of total
revenues, gross profit increased slightly from 32.0% of revenues in 1997 to
34.2% of revenues in 1998.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased by $4.5 million, or 56.3%, from $8.0 million in 1997 to $12.5 million
in 1998. Expressed as a percentage of sales, SG&A expenses increased 25.5% of
total 1998 revenues as compared to 22.6% of total 1997 revenues. These expenses
were reflective of continued efforts to broaden the Company's customer base,
expand its service offerings, increase its geographic presence and capitalize on
new business opportunities.
Actual and Pro Forma Net Income. Actual net income increased by
approximately $0.3 million, from $2.5 million in 1997, to $2.8 million in 1998.
Pro forma net income was $2.0 million in 1997. Pro forma net income included an
adjustment for executive compensation to reflect the terms of contracts with the
Chief Executive Officer and Chief Financial Officer. In addition, it also
included an adjustment to provide for income taxes as if the Company had been a
C corporation for all of 1997. The per share amounts in 1998 were impacted by an
additional 1.8 million shares outstanding for the full year, as a result of the
public offering in August 1997.
Liquidity and Capital Resources
Prior to the Company's initial public offering, its operations and
geographic expansion were funded by cash flow generated from operations,
borrowings under the Company's credit line and borrowings from the principal
shareholder. The Company sold a total of 1,935,000 shares of Common Stock in the
Company's initial public offering, generating net proceeds to the Company of
approximately $21.1 million. The uses of these funds were as follows: a
distribution of $2.0 million (the "Distribution") was paid to the sole
shareholder of the Company prior to the initial public offering, $1.9 million
was paid to Citibank, N.A. to repay its line of credit, and $17.2 million was
made available to fund current operations.
The Company has a line of credit of $2.1 million, and no outstanding
borrowings at December 31, 1999. The Company's principal shareholder guarantees
the line of credit. The line of credit bears interest at a variable rate based
on prime plus 1%. The rate was 8.50% at December 31, 1999. The Company's
12
subsidiary, T3 Media, has entered into a series of capital lease obligations to
finance its expansion plans, covering leasehold improvements, furniture and
computer-related equipment. The amount outstanding under such leases was
$869,000 at December 31, 1999.
The Company's cash balances were $5.1 million at December 31, 1999, and
$13.0 million at December 31, 1998. Net cash used by operating activities in
1999 was $2.6 million compared to net cash provided by operating activities of
$1.1 million in 1998 and $944,000 in 1997. In accordance with investment
guidelines approved by the Company's Board of Directors, cash balances in excess
of those required to fund operations have been invested in short-term commercial
paper with a credit rating no lower than A1, P1.
The Company's accounts receivable, less allowance for doubtful
accounts, at December 31, 1999 and December 31, 1998 were $11.2 million and $8.8
million respectively, representing 84 and 61 days of sales outstanding,
respectively. The Company does not anticipate any difficulty in collecting
amounts due.
In each of the last three years, the Company has had at least one
customer with revenues exceeding 10% of the Company's revenues. Sales to two
customers represented approximately 37% of the Company's revenue in 1999. Sales
to three customers in 1998 represented approximately 43% of the Company's
revenue. Sales to one customer in 1997 represented 24% of the Company's revenue.
Net cash used in investing activities was approximately $3.5 million,
$5.1 million and $903,000 for the year ended December 31, 1999, 1998 and 1997,
respectively. In each of the three years, this represented additions to property
and equipment of $3.1 million, $2.0 million and $890,000, respectively, as the
Company continued to expand its Solution Branch locations and enhance the
Company's computing network and infrastructure. Also in 1999, cash was used for
a majority investment in and advances to T3 Media, net of cash acquired. For
1998, this represented the initial investment of $3.0 million in T3 Media's
non-voting convertible preferred stock.
In management's opinion, cash flows from operations and borrowing
capacity combined with cash on hand will provide adequate flexibility for
funding the Company's working capital obligations and expansion plans.
Growth of E-Commerce Business
Revenues derived from the Company's end-to-end e-Services solutions
grew 52%, to $10.7 million in the fourth quarter of 1999, compared to $7.1
million in the third quarter. The Company grew e-services revenues in the fourth
quarter to over 20% of the Company's overall revenue. The Company's net loss for
the fourth quarter reflected increased expenses related to TACT's ownership of
web integrator T3 Media as well as increased expenses related to TACT's
continuing transition to becoming an e-services provider. The increase in
selling, general and administrative expenses in the fourth quarter of 1999 is
attributable to the inclusion of T3 Media expenses, an increase in the number of
salaried personnel supporting new branch operations, marketing and sales
functions and increased occupancy costs. These expenses are reflective of
continued efforts to broaden the Company's customer base, increase its
geographic presence and transition to being an e-services provider.
Recent Investment in TACT
On March 20, 2000, the Company entered into an agreement with a group
of investors to purchase an aggregate 392,855 shares of Common Stock at $7.00
per share for a total of $2.75 million payable pursuant to a 30-day promissory
obligation. The closing price of TACT's Common Stock on March 17, 2000 was
$5.1875 per share. The investors also received a 60-day option to purchase up to
an additional 607,142 shares at $7.00 per share and a two-year option to
purchase up to 1,000,000 shares at $13.00 per share.
13
Inflation
The Company has not suffered material adverse affects from inflation in
the past. However, a substantial increase in the inflation rate in the future
may adversely affect customers' purchasing decisions, may increase the costs of
borrowing, or may have an adverse impact on the Company's margins and overall
cost structure.
Impact of Year 2000 in the Fourth Quarter of 1999
Except for the impact of diminished revenues from decreased sales of
Year 2000 compliance software licenses and the end of Year 2000 remediation
projects and services provided by the Company, TACT management believes that
Year 2000 issues will not have a material adverse affect on the Company. The
Company completed its program to ensure that the Company's computer systems
would accurately process transactions relating to the year 2000 and beyond. The
Company utilizes third party vendor network equipment, telecommunication
products, and other third party software products. A number of these third party
vendors provided information to the Company regarding their respective efforts
to be Year 2000 compliant. The failure of any critical components in these
products to operate properly in the year 2000 may have an adverse impact on
business operations and require the Company to incur unanticipated expenses. The
Company has a contingency plan in the event that an adverse impact is caused by
non-compliant critical systems. As of the end of the first quarter of 2000,
however, no issues of non-compliance have occurred. Nonetheless, third party
Year 2000 issues might still have a material impact on the operations and
financial condition of the Company.
The Company took all reasonable efforts to make its internal financial
and administrative systems Year 2000 compliant. Some modification or replacement
of portions of the Company's software was required. The Company is confident
that its computer systems will function properly with respect to date values for
the Year 2000 and thereafter. The Company presently believes that Year 2000
issues will not pose any significant operational problems for its computer
systems; no Year 2000 issues have arisen in the Company's systems as of the end
of the first quarter of 2000.
During the execution of the Year 2000 compliance process the Company
incurred minimal costs and expenses. The costs incurred by the Company during
1999 to address Year 2000 compliance were approximately $25,000. The expense of
the Year 2000 compliance process did not have a material effect on the Company's
financial position or results of operations. The Company's internal Year 2000
compliance process was completed in a timely fashion. No compliance issues have
arisen as of the end of March, 2000.
Finally, the Company licenses software developed by third parties to
end user clients. The Company requires its third party software developers to
represent that their products are Year 2000 compliant. The third party
developers have designed and tested their recent product offerings to be Year
2000 compliant. However, there is currently a small and diminishing minority of
the Company's end user clients utilizing product offerings that have not been
updated to meet the Year 2000 compliance specifications.
Despite the fact that the Company has purchased various insurance
policies, including general liability and errors and omissions policies, the
Company has limited insurance coverage with respect to Year 2000 non-compliance.
No assurances can be given that the Company can completely avoid all costs and
uncertainties arising from non-compliance that might materially affect future
financial results. However, as of the end of the first quarter of 2000, no Year
2000 problems or issues have arisen and none have been reported by the Company's
clients. The Company's management is confident that, as more time elapses, the
likelihood of occurrence of any material problems or issues will continue to
decrease.
14
Factors That Could Affect Operating Results
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission. Such forward-looking statements involve risk and
uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
Risk Associated With Growth Through Acquisitions
The Company's expansion is dependent upon, among other things, (i) the
availability of consultants as employees or independent contractors, (ii) the
Company's ability to identify suitable new geographic markets with sufficient
demand for the Company's services; to hire and retain skilled management,
marketing, customer service and other personnel; and to successfully manage
growth, including monitoring operations, controlling costs and maintaining
effective quality and service controls and (iii) if the Company consummates any
acquisitions, the Company's ability to successfully and profitably integrate any
acquired businesses into its operations. If the Company's management is unable
to manage growth or new employees are unable to achieve anticipated performance
levels, the Company's business, results of operations and financial condition
could be materially and adversely affected.
Dependence on Qualified Personnel
The Company's business involves the delivery of professional services
which depends in large part upon its ability to attract and retain highly
skilled executives, Solution Branch Managers, project managers, technical
specialists and independent contractor consultants. The Company continues to
utilize the services of a significant number of independent contractors that are
engaged as consultants. Since the Company typically does not have employment
agreements with these individuals for any specific term, there can be no
assurance that the services of these individuals will continue to be available
to the Company on terms acceptable to the Company.
Dependence on Limited Number of Clients
The Company derives a significant portion of its revenues from a
relatively limited number of clients primarily located in the New York/New
Jersey metropolitan area of the United States. Revenues from the Company's ten
most significant clients accounted for a majority of the Company's revenues in
1999. In each of the last three years, the Company has had at least one customer
with revenues exceeding 10% of the Company's revenues. In 1999, the largest two
customers represented 23% and 14% of revenues, respectively. In 1998, the
largest three customers represented 16%, 15% and 12% of revenues, respectively.
In 1997, the largest customer represented 24% of revenues. Besides these
customers, no other customer represented greater than 10% of the Company's
revenues. Clients engage the Company on an assignment-by-assignment basis, and a
client can generally terminate an assignment at any time without penalty. The
15
loss of, or reduction in revenue from, any significant customer could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Rapid Technological Change
The Company's success will depend in part on its ability to meet client
expectations, develop IT solutions, including e-commerce solutions, and offer
software products. TACT must keep pace with continuing changes in IT, evolving
industry standards, changing client preferences and a continuing shift to
outsourced solutions by clients. There can be no assurance that the Company will
be successful in adequately addressing the outsourcing market or other IT or
software developments on a timely basis or that, if addressed, the Company will
be successful in an extremely competitive marketplace. There can also be no
assurance that products or technologies developed by others will not render the
Company's services or products uncompetitive or obsolete. The Company's failure
to address these developments could have a material adverse effect on the
Company's business, results of operations and financial condition.
Fluctuations in Quarterly Operating Results
Variations in the Company's revenues and results of operations occur
from time to time as a result of a number of factors, such as the timing of new
Solution Branch openings, the size and significance of client engagements
commenced and completed during a quarter, the number of business days in a
quarter, consultant hiring and utilization rates and the timing of corporate
expenditures. The timing of revenues is difficult to forecast because the
Company's sales cycle can be relatively long, frequently spanning one or several
fiscal quarters, and may depend on such factors as the size and scope of
assignments, the influence and control of clients, and general economic
conditions. A variation in the number of client assignments or the timing of the
initiation or the completion of client assignments, particularly at or near the
end of any quarter, can cause significant variations in results of operations
from quarter to quarter and can result in losses to the Company. The Company has
also experienced, and may in the future experience, significant fluctuations in
the quarterly results of software sales. Software licensing activity is
difficult to forecast because the number and amount of particular license
transactions can vary significantly, the Company's sales incentive plans have an
unpredictable impact on the timing and size of orders, and client projects and
evaluations may be postponed as their fiscal quarter and fiscal year ends
approach. In the event that the Company's results of operations for any period
are below the expectation of market analysts and investors, the market price of
the Common Stock could be adversely affected.
The Company derives revenues primarily from the hourly billing of its
consultants' services and, to a lesser extent, from fixed-price projects. The
Company's most significant cost is project personnel cost, which consists of
consultant salaries and benefits. There can be no assurance, however, that the
Company's revenues will continue to be billed primarily on a time and materials
basis or that the Company will be able to continue to pass along increases in
its cost of services to is clients.
Competition
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. Many of these competitors
have significantly greater financial, technical and marketing resources and
greater name recognition than the Company. The market for e-commerce services,
in particular, is extremely competitive, with large interactive advertising
agencies, Big Five accounting firms, small and large web development companies,
and Internet start-up concerns occupying a crowded market space. In addition,
the Company competes with its clients' internal resources, particularly when
these resources represent a fixed cost to the client. Such competition may
impose additional pricing pressures on the Company.
Dependence on Senior Management
The success of the Company is highly dependent upon the efforts and
abilities of its executive officers, particularly Shmuel BenTov, the Company's
founder, Chairman of the Board, Chief Executive
16
Officer and President and Frank T. Thoelen, its Chief Financial Officer.
Although Mr. BenTov and Mr. Thoelen have entered into employment agreements
containing noncompetition, nondisclosure and nonsolicitation covenants, these
contracts do not guarantee that these individuals will continue their employment
with the Company. The loss of the services of either of these key executives for
any reason could have a material adverse effect upon the Company's business,
results of operations and financial condition. In August, 1999 Mr. BenTov's
employment agreement was renewed for an additional two-year term. Mr. Thoelen's
employment agreement is up for renewal in June, 2000.
Risks Associated With Intellectual Property
Ownership of software from the development of custom software
applications in connection with specific client engagements is generally
assigned to the client. The Company relies upon a combination of nondisclosure
and other contractual arrangements and trade secret, copyright and trademark
laws to protect its proprietary rights and the proprietary rights of third
parties from whom the Company licenses intellectual property. The Company enters
into confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. The Company is
subject to the risk of litigation alleging infringement of third-party,
intellectual property rights. Any such claims could require the Company to spend
significant sums in litigation, pay damages, develop non-infringing intellectual
property or acquire licenses to the intellectual property which is the subject
of the asserted infringement. In addition, the Company is aware of other users
of the term "TACT" and combinations including "A Consulting," which users may be
able to restrict the Company's ability to establish or protect its right to use
these terms. The Company has in the past been contacted by other users of the
term "TACT" alleging rights to the term. However, the Company has completed
filings with the U.S. Patent and Trademark Office in order to protect certain
marks, including "TACT" and "The A Consulting Team."
Volatility of Stock Price
The Common Stock may be subject to wide fluctuations in price in
response to variations in quarterly results of operations and other factors,
including acquisitions, technological innovations and general economic or market
conditions. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market price of many technology companies and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of our Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has not entered into the market risk sensitive transactions
required to be disclosed under this item.
Item 8. Financial Statements and Supplementary Data
See financial statements on pages F-3 through F-14 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
17
PART III
Item 10. Directors and Executive Officers of the Registrant
The following section sets forth information as to each Director and
Executive Officer of TACT, including his age, present principal occupation,
other business experience during the last five years, directorships in other
publicly-held companies, membership on committees of the Board of Directors and
period of service with TACT.
Shmuel BenTov, 48, is the founder of TACT and has been the Chairman of
the Board, Chief Executive Officer and President of the Company since its
establishment in 1983. Mr. BenTov received a B.Sc. in Economics and Computer
Science in 1979 from the Bar-Ilan University in Israel. From 1979 to 1983, Mr.
BenTov was a consultant Database Administrator and then an Account Manager with
Spiridellis & Associates. From 1972 to 1979, Mr. BenTov served with the Israeli
Defense Forces as a Programmer, Analyst, Project Manager, Database Administrator
and Chief Programmer.
Frank T. Thoelen, 51, has been the Chief Financial Officer and
Treasurer-Secretary of the Company since August 1997. Mr. Thoelen is a C.P.A.
and received a B.S. in Public Accounting in 1971 from the University at Albany,
New York. Prior to joining the Company in June 1997, Mr. Thoelen was President
of FTT Consulting Inc., his own consulting firm. From 1971 to 1996, Mr. Thoelen
was with Arthur Andersen LLP, an international consulting and business advisory
firm. From 1989 to 1996, he was the Division Head for the Business Systems
Consulting and Computer Risk Management Business Unit.
Joseph E. Imholz, 68, has been a director of the Company since August
1997. Mr. Imholz received a B.S. in Management in 1957 from Hofstra University.
From 1987 until his retirement in 1995, Mr. Imholz was Vice President and Chief
Information Officer of the Property and Casualty Division of Metropolitan Life
Insurance Co. ("MetLife").
Steven S. Mukamal, 60, has been a director of the Company since August
1997. Mr. Mukamal received a B.A. in 1962 from Michigan State University and a
J.D./L.L.B. in 1965 from Brooklyn Law School. Since 1965, he has been a member
and senior partner of the law firm Barst & Mukamal LLP. Mr. Mukamal specializes
in the areas of immigration and nationality law, consular law and real estate
and debt restructuring.
Reuven Battat, 44, has been a director of the Company since August
1997. Mr. Battat recently became President and CEO of ProcureNet Inc. Mr. Battat
was the Senior Vice President and General Manager of Global Marketing for
Computer Associates International, Inc. and from 1995 through 1999 was
responsible for Computer Associates' world-wide marketing activities and
long-term planning of product development in new and emerging markets.
Certain Filings
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities file with the Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors, officers and greater than ten
percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based on a review of such timely filed forms received by it and
representations by persons that would be required to file such forms, the
Company believes that all required filings by current executive officers and
directors have been timely filed, except that a Form 4 statement for September
1997 of Shmuel BenTov was filed late. The Form 4 statement of Mr. BenTov
reported one transaction.
18
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission on or before April 15,
2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission on or before April 15,
2000.
Item 13. Certain Relationships and Related Transactions.
The Company has a $2,100,000 line of credit with Citibank, N.A. Shmuel
BenTov, the Chairman, Chief Executive Officer and President of the Company, is a
personal guarantor of the line of credit. The Company had $0 outstanding under
this line of credit as of December 31, 1999. The line of credit bears interest
at a variable rate based on prime plus 1% (8.50% at December 31, 1999).
On August 7, 1997, the Company and Mr. BenTov entered into the S
Corporation Termination, Tax Allocation and Indemnification Agreement (the
"Termination Agreement") providing, among other things, that the Company will be
indemnified by Mr. BenTov with respect to any federal, state or local corporate
income taxes (plus interest and penalties) as a result of the Company's failure
to qualify as an S Corporation with respect to tax returns in which the Company
reported its income as an S Corporation. Mr. BenTov's liability under the
Termination Agreement will be limited to the aggregate amount of all
distributions received by Mr. BenTov from the Company during such S Corporation
reporting period, net of taxes paid or payable by Mr. BenTov with respect to
such distributions. The Termination Agreement provides that the Company will
indemnify Mr. BenTov on an after-tax basis with respect to any federal, state or
local income taxes (plus interest and penalties) paid or required to be paid by
Mr. BenTov, and Mr. BenTov will pay to the Company any refunds of federal, state
or local income taxes (including interest received thereon) received by (or
credited to) Mr. BenTov, as a result of a subsequent adjustment in income of the
Company with respect to any tax return in which the Company reported its income
as an S Corporation. The Termination Agreement provides that Mr. BenTov shall
have the option to control the filing of the current year's tax returns and
control or participate in audits and certain other matters for any period in
which the Company reported its income as an S Corporation.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report at F-1.
(a)(3) Listing of Exhibits
Exhibit
Number Description of Exhibits
1.1 Form of Underwriting Agreement by and among Registrant and the
Underwriters, incorporated by reference to Exhibit 1.1 to the
Registration Statement on Form SB-2 as previously filed with the
Securities and Exchange Commission on August 8, 1997.
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form SB-2
as previously filed with the Commission on August 6, 1997.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form SB-2
as previously filed with the Commission on August 6, 1997.
19
4 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as previously
filed with the Commission on July 23, 1997.
10.1.1 Stock Option and Award Plan of the Registrant and Form of
Nonqualified Stock Option Agreement, incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form SB-2 as
previously filed with the Commission on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Form S-8-Filed December 12, 1997.
10.2 Form of Employment Agreement, dated as of the Effective Date,
between the Registrant and Shmuel BenTov, incorporated by reference
to Exhibit 10.2 to the Registration Statement on Form SB-2 as
previously filed with the Commission on August 6, 1997.
10.3 Form of Employment Agreement, effective as of June 30, 1997, between
the Registrant and Frank T. Thoelen incorporated by reference to
Exhibit 10.3 to the Registration Statement on Form SB-2 as
previously filed with the Commission on August 6, 1997.
10.4 Form of S Corporation Termination, Tax Allocation and
Indemnification Agreement, incorporated by reference to Exhibit 10.4
to the Registration Statement on Form SB-2 as previously filed with
the Commission on August 6, 1997.
10.5 Demand Note (Multiple Advances), issued February 1997, between
Citibank, N.A. and the Registrant, incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form SB-2 as
previously filed with the Commission on June 13, 1997. 10.6
Promissory Note and Cross-Receipt in connection with the
Shareholder, incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form SB-2 as previously filed with the
Commission on August 6, 1997.
10.7 Joint Venture Agreement, dated April 11, 1994, between Kalanit
Center for Marketing Software & Hardware Ltd. and the Registrant,
incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form SB-2 as previously filed with the Commission on
June 13, 1997.
10.8 Form of Director and Executive Officer Indemnification Agreement,
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form SB-2 as previously filed with the Commission on
August 6, 1997. 10.9 Letter of Undertaking from the Registrant and
Shmuel BenTov, incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form SB-2 as previously filed with the
Commission on July 23, 1997.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
No reports on Form 8-K were filed in the quarter ended December 31,
1999.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Data Schedule - The response to this portion of Item 14 is
submitted as a separate section of this report.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
By: /s/ Shmuel BenTov
-----------------------
Shmuel BenTov, President
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------- -------------------------------------------------- ------------------------
/s/ Shmuel BenTov President, Chief Executive Officer and Director March 29, 2000
- --------------------
Shmuel BenTov (Principal Executive Officer)
/s/ Frank T Thoelen Chief Financial Officer and Director March 29, 2000
- --------------------
Frank T Thoelen (Principal Financial and Accounting Officer)
/s/ Reuven Battat Director March 29, 2000
- --------------------
Reuven Battat
/s/ Joseph Imholz Director March 29, 2000
- --------------------
Joseph Imholz
/s/ Steven Mukamal Director March 29, 2000
- --------------------
Steven Mukamal
21
FORM 10-K - ITEM 14 (a) (1) and (2)
THE A CONSULTING TEAM, INC.
The following consolidated financial statements and financial statement
schedule of The A Consulting Team, Inc. are included in Item 8:
Consolidated Balance Sheets at December 31, 1999 and 1998.................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997................F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997......F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................F-6
Notes to Consolidated Financial Statements................................................................F-7
The following consolidated financial statement schedule of The A Consulting Team, Inc. is included
in Item 14(d): Schedule II - Valuation and Qualifying Accounts............................................S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The A Consulting Team, Inc.
We have audited the accompanying consolidated balance sheets of The A
Consulting Team, Inc. (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The A Consulting Team, Inc. at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
January 31, 2000
F-2
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,082,519 $13,003,038
Accounts receivable, less allowance for doubtful accounts
of $682,424 at December 31, 1999 and $0 at December 31, 1998 11,234,140 8,848,932
Unbilled receivables 121,545 --
Prepaid income taxes 564,491 674,500
Prepaid expenses and other current assets 164,603 432,377
----------- -----------
Total current assets 17,167,298 22,958,847
Investment at cost 300,000 3,000,000
Property and equipment, at cost, less accumulated
depreciation and amortization 7,086,342 2,702,021
Intangibles, less accumulated amortization of $269,524 3,749,630 --
Deposits 279,184 111,263
----------- -----------
Total assets $28,582,454 $28,772,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loan payable - bank $ 325,000 $ --
Accounts payable and accrued expenses 4,613,460 2,876,945
Deferred revenue 97,536 --
Deferred income taxes 57,000 682,000
Current portion of capital lease obligation 307,950 --
Current portion of long-term debt 14,966 15,126
----------- -----------
Total current liabilities 5,415,912 3,574,071
Capital lease obligation 560,755 --
Long-term debt -- 14,966
Other long-term liabilities 89,329 --
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value; 10,000,000 shares authorized;
5,485,000 issued and outstanding 54,850 54,850
Additional paid-in capital 21,051,758 21,051,758
Retained earnings 1,409,850 4,076,486
----------- -----------
Total shareholders' equity 22,516,458 25,183,094
----------- -----------
Total liabilities and shareholders' equity $28,582,454 $28,772,131
=========== ===========
See accompanying notes to financial statements.
F-3
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Revenues $ 53,517,328 $ 48,924,603 $ 35,215,911
Cost of revenues 35,695,206 32,167,572 23,931,627
------------ ------------ ------------
Gross profit 17,822,122 16,757,031 11,284,284
Operating expenses:
Selling, general and administrative 21,025,144 12,469,658 7,950,091
Equity in net income from joint venture - - (13,253)
------------ ------------ ------------
Total operating expenses 21,025,144 12,469,658 7,936,838
------------ ------------ ------------
Income (loss) from operations (3,203,022) 4,287,373 3,347,446
Interest income 656,759 650,404 345,296
Interest expense (92,373) (3,020) (147,234)
------------ ------------ ------------
Income (loss) before income taxes (2,638,636) 4,934,757 3,545,508
Income taxes 28,000 2,150,000 1,022,000
------------ ------------ ------------
Net income (loss) $ (2,666,636) $ 2,784,757 $ 2,523,508
============ ============ ============
Net income (loss) per share - basic and diluted $ (0.49) $ 0.51
============ ============
Unaudited pro forma information:
Historical income from operations $ 3,347,446
Pro forma adjustment for executive compensation (37,500)
------------
Pro forma income from operations 3,309,946
Interest (expense) income, net 198,062
------------
Pro forma income before income taxes 3,508,008
Pro forma provision for income taxes 1,542,000
------------
Pro forma net income $ 1,966,008
============
Pro forma net income per share basic and dilutive $ 0.45
============
Weighted average number of common
shares outstanding 4,409,558
============
See accompanying notes to financial statements.
F-4
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Preferred Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- $ -- 3,550,000 $35,500 $ -- $ 775,184
Issuance of 1,935,000 shares of
common stock in an initial public
offering net of offering costs
of $2,148,892 -- -- 1,935,000 19,350 21,051,758 --
Distribution -- -- -- -- -- (2,006,963)
Net income -- -- -- -- -- 2,523,508
--------- --------- --------- ------- ----------- -----------
Balance, December 31, 1997 -- -- 5,485,000 54,850 21,051,758 1,291,729
Net income -- -- -- -- -- 2,784,757
--------- --------- --------- ------- ----------- -----------
Balance, December 31, 1998 -- -- 5,485,000 54,850 21,051,758 4,076,486
Net loss -- -- -- -- -- (2,666,636)
--------- --------- --------- ------- ----------- -----------
Balance, December 31, 1999 $ -- $ -- 5,485,000 $54,850 $21,051,758 $ 1,409,850
========= ========= ========= ======= =========== ===========
Total
------------
Balance, December 31, 1996 $ 810,684
Issuance of 1,935,000 shares of
common stock in an initial public
offering net of offering costs
of $2,148,892 21,071,108
Distribution (2,006,963)
Net income 2,523,508
------------
Balance, December 31, 1997 22,398,337
Net income 2,784,757
------------
Balance, December 31, 1998 25,183,094
Net loss (2,666,636)
------------
------------
Balance, December 31, 1999 $ 22,516,458
============
See accompanying notes to financial statements.
F-5
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (2,666,636) $ 2,784,757 $ 2,523,508
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,482,935 441,208 141,273
Deferred income taxes (625,000) 324,000 342,000
Equity in net income from joint venture -- -- (13,253)
Provision for doubtful accounts 1,294,507 -- --
Changes in operating assets and liabilities:
Accounts receivable (3,049,377) (1,611,027) (3,074,036)
Unbilled receivables 73,007 -- --
Prepaid income taxes 110,009 (674,500) --
Prepaid expenses and other current assets 297,002 (349,057) 79,230
Accounts payable and accrued expenses 508,743 737,394 426,204
Deferred revenue (112,251) -- --
Income taxes payable (10,829) (527,376) 519,269
Other liabilities 89,329 -- --
============ =========== ============
Net cash provided by (used in) operating activities (2,608,561) 1,125,399 944,195
Cash flows from investing activities:
Purchase of property and equipment (3,086,693) (2,018,833) (890,346)
Investment at cost (300,000) (3,000,000) --
Investment in and advances to T3 Media, Inc.,
net of cash acquired (95,591) -- --
Deposits (45,363) (34,571) (42,078)
Repayments from joint ventures -- -- 29,705
------------ ------------ ------------
Net cash used in investing activities (3,527,647) (5,053,404) (902,719)
Cash flows from financing activities:
Net proceeds from public offering -- -- 21,071,108
Proceeds from loan payable -- -- 1,215,000
Repayment of loan payable (1,674,820) -- (2,665,000)
Repayment of loan to shareholder -- -- (1,045,000)
Distribution of S Corporation earnings to shareholder -- -- (2,006,963)
Repayment of long-term debt (15,126) (13,967) (12,896)
Repayment of capital lease obligations (94,365) -- --
------------ ------------ ------------
------------
Net cash provided by (used in) financing activities (1,784,311) (13,967) 16,556,249
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (7,920,519) (3,941,972) 16,597,725
Cash and cash equivalents at beginning of year 13,003,038 16,945,010 347,285
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,082,519 $ 13,003,038 $ 16,945,010
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 92,692 $ 3,020 $ 211,591
============ ============ ============
Cash paid during the year for income taxes $ 610,800 $ 3,027,876 $ 160,731
============ ============ ============
Supplemental disclosure of non-cash investing
and financing activity:
Capital lease obligation $ 442,429 $ -- $ --
============ ============ ============
See accompanying notes to financial statements.
F-6
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
The A Consulting Team, Inc. (the "Company") was incorporated on
February 16, 1983, in the State of New York, for the purpose of providing
various computer consulting and training services and marketing software
products. The Company's customers are primarily located in the New York/New
Jersey metropolitan area.
In August 1997, the Company completed its initial public offering (the
"Offering") of 1,800,000 shares of Common Stock at an offering price of $12.00
per share, resulting in net proceeds to the Company of approximately $19.6
million. In September 1997, an over-allotment option of 135,000 shares of Common
Stock was exercised, generating an additional $1.5 million of net proceeds to
the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of The A
Consulting Team, Inc. and its 51% owned subsidiary, T3 Media, Inc., from its
date of acquisition in 1999 (see note 2). All material intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
Basic and diluted earnings per share is calculated in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings per Share.
Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment acquired after December 31, 1994 are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from five to ten years. Property and equipment acquired prior to
January 1, 1995 are depreciated using an accelerated method over the estimated
useful lives of the assets, which range from five to seven years.
Long-Lived Assets
When impairment indicators are present, the Company reviews the
carrying value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analyses expected to be
generated by the assets. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the asset
exceeds the future discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less cost to sell.
F-7
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates of
useful lives. If estimates are changed, the unamortized cost will be allocated
to the increased or decreased number of remaining periods in the revised lives.
Revenue and Accounts Receivable
Consulting and training revenues are recognized as services are
provided. Revenue from sales of software licenses is recognized upon delivery of
the software to a customer because future obligations associated with such
revenue are insignificant.
Fixed fee contracts are accounted for under the
percentage-of-completion method. Any anticipated contract losses are estimated
and accrued at the time they become known and estimable.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Provisions for
doubtful accounts are recorded when such losses are determined.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations with pro forma
disclosure of what net income and earnings per share would have been had the
Company adopted the new fair value method. The Company has elected to account
for its stock-based compensation plans in accordance with the provisions of APB
25.
Segment Information
The Company discloses information regarding segments in accordance with
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting of financial
information about operating segments in annual financial statements and requires
reporting selected information about operating segments in interim financial
reports. The disclosure of segment information was not required as the Company
operates in only one business segment.
2. ACQUISITION
On October 2, 1998, the Company made an investment in web integrator T3
Media of $3 million, in return for non-voting convertible preferred stock. On
June 23, 1999, the Company converted its preferred stock into 30% common stock
ownership and increased its ownership interest to approximately 51% by an
additional investment in T3 Media's common stock of $370,000. The acquisition of
T3 Media was accounted for using the purchase method of accounting. Accordingly,
the results of operations of T3 Media are included in the Company's consolidated
results of operations from the date of acquisition. The excess of the purchase
price over the estimated fair value of the net identifiable assets acquired
totaled $4.0 million and has been recorded as intangibles, which are being
amortized using the straight-line method over 7 years.
The following unaudited proforma consolidated results of operations for
the years ended December 31, 1999 and 1998 are presented as if the T3 Media
acquisition had been made on January 1, 1998:
F-8
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended December 31,
1999 1998
------------- ------------
Revenues $ 55,353,000 $52,067,000
Net income (loss) $ (5,007,000) $ 2,056,000
Net income (loss) per share - basic and diluted $ (.91) $ .37
The unaudited proforma consolidated results of operations information
is not necessarily indicative of the actual results that would have occurred had
the acquisition been consummated on January 1, 1998 or of future operations of
the combined companies.
3. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended December 31, 1999 and 1998. See
Note 13 for information regarding the computation of basic and diluted earnings
per share for the year ended December 31, 1997.
Year Ended December 31,
1999 1998
----------- ----------
Numerator:
Net income (loss) $(2,666,636) $2,784,757
----------- ----------
Numerator for basic and diluted net
income (loss) per share $(2,666,636) $2,784,757
=========== ==========
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares 5,485,000 5,485,000
Effect of dilutive securities:
Employee stock options -- 3,356
----------- ----------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 5,485,000 5,488,356
=========== ==========
Basic and diluted net income (loss) per share $ (0.49) $ 0.51
=========== ==========
All options outstanding during 1999 (see Note 12) were not included in
the computation of net loss per share because the effect would be antidilutive
and options to purchase 416,150 shares of common stock at $7.50 per share that
were outstanding during 1998 were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common shares, and therefore the effect would be
antidilutive.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
1999 1998
---------- ----------
Equipment and leasehold improvements $6,352,799 $2,388,459
Software 924,842 555,160
Furniture and fixtures 1,608,890 548,850
Automobiles 88,970 88,970
---------- ----------
Subtotal 8,975,501 3,581,439
Less accumulated depreciation and amortization 1,889,159 879,418
---------- ----------
Total $7,086,342 $2,702,021
========== ==========
F-9
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. LOANS PAYABLE AND CREDIT ARRANGEMENT
The Company has a line of credit of $2,100,000, and no outstanding
borrowings at December 31, 1999. The line of credit is guaranteed by the
Company's principal shareholder and bears interest at a variable rate based on
prime plus 1% (8.50% at December 31, 1999 and 7.75% at December 31, 1998).
Long-term debt is comprised of an automobile loan and is payable in
monthly installments of $1,415 including interest at 8%. The loan matures in
2000.
At December 31, 1999, T3 Media has a $325,000 note, payable upon demand
and renewable every ninety days, at the banks' option. This note is guaranteed
by the Company and an officer of T3 Media.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
1999 1998
---------- ----------
Accounts payable $1,974,462 $ 535,250
Commissions -- 209,858
Payroll 1,196,538 1,181,007
Bonuses 535,000 --
Other accrued expenses 907,460 950,830
---------- ----------
$4,613,460 $2,876,945
========== ==========
7. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
Effective January 1, 1995, the Company elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code for federal income
tax purposes. In addition, the Company elected to be treated as an S Corporation
for New Jersey and New York state income tax purposes. In New York and New
Jersey, S Corporations are subject to a minimum income tax. Because the sole
shareholder of the Company included the Company's income in his own personal
income tax return for the year ended December 31, 1996 and part of the fiscal
year ending December 31, 1997, the Company was not subject to federal income
taxes during that time. However, the Company was liable for New York City income
taxes for those periods because New York City does not recognize S Corporation
status.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets and (liabilities) consist of the following:
December 31,
1999 1998
----------- ---------
Licensing revenues $ (285,000) $(682,000)
Allowance for doubtful accounts 301,000 --
Depreciation and amortization 81,000 --
Net operating loss 1,720,000 --
----------- ---------
1,817,000 (682,000)
Valuation allowance (1,874,000) --
----------- ---------
$ (57,000) $(682,000)
=========== =========
F-10
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 1999, T3 Media has net operating loss carryforwards of
approximately $3,821,000 expiring in 2019. The full utilization of the losses in
the future is dependent upon T3 Media's ability to generate taxable income;
accordingly, a valuation allowance of an equal amount has been established. T3
Media had a valuation allowance of approximately $850,000 at the date of
acquisition.
Significant components of the provision for income taxes are as
follows:
Year Ended December 31,
1999 1998 1997
--------- ---------- ----------
Current:
Federal $ 420,000 $1,178,000 $ 338,000
State and local 233,000 648,000 342,000
--------- ---------- ----------
Total current 653,000 1,826,000 680,000
--------- ---------- ----------
Deferred:
Federal (398,000) 277,000 302,000
State and local (227,000) 47,000 40,000
--------- ---------- ----------
Total deferred (625,000) 324,000 342,000
--------- ---------- ----------
Total $ 28,000 $2,150,000 $1,022,000
========= ========== ==========
Effective August 12, 1997, the day before the Company completed its
Offering, the Company changed from S Corporation to C Corporation status. Upon
the change in status, under the provisions of SFAS 109, the Company recorded an
additional deferred income tax liability of $163,000 due to federal and state
income taxes being payable on the temporary differences.
A reconciliation between the federal statutory rate and the effective
income tax rate for the years ended December 31, 1999 and 1998 and the unaudited
pro forma income tax rate for the year ended December 31, 1997 is as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 34.0 % 34.0% 34.0%
State and local taxes net of federal tax benefit 0.2 9.3 9.6
Non-deductible expenses 6.1 0.5 0.4
Loss of T3 Media for which no benefit was received 28.8 -- --
---- ---- ----
Total 1.1 % 43.6% 44.0%
==== ==== ====
8. RETIREMENT PLAN
The Company sponsors a defined contribution plan under Section 401(k)
of the Internal Revenue Code for its employees. Participants can make elective
contributions subject to certain limitations. Under the plan, the Company can
make matching contributions on behalf of all participants. No such contributions
were made by the Company in 1999, 1998 and 1997.
9. JOINT VENTURE
The Company owned a 50% interest in Vianet, Inc. ("Vianet"), which was
located in New York and was engaged in the recruiting of international
consultants and software development for resale. Vianet had limited activity
during the three months ended March 31, 1997. On March 31, 1997, the Company
sold its 50% interest in Vianet to its joint venture partner for a nominal
amount. Vianet repaid the $29,705 advance to the Company during March 1997.
10. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains its cash balances on deposit with a limited number of
financial institutions.
F-11
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 1999, the two largest customers represented 23% and 14% of revenues,
in 1998, the three largest customers represented 16%, 15% and 12% of revenues,
and in 1997 the largest customer represented 24% of revenues. Besides these
customers, no other customer represented greater than 10% of the Company's
revenues. Two customers represented approximately 12% and 11% of accounts
receivable as of December 31, 1999 and one customer represented approximately
15% of accounts receivable as of December 31, 1998.
11. LEASES
T3 Media leases computer equipment under various agreements with
original terms of 38 months and accounts for these leases as capital leases. The
cost and accumulated depreciation of fixed assets held under capital leases are
$1,144,000 and $216,079, respectively, at December 31, 1999.
The Company leases office space under non-cancelable operating leases.
The future minimum payments for all non-cancelable operating and capital leases
as of December 31, 1999 are as follows:
Operating Leases Capital Leases
-------------------- -------------------
2000 $ 1,359,000 $ 426,000
2001 1,337,000 399,000
2002 1,343,000 191,000
2003 997,000 43,000
2004 136,000 23,000
-------------------- -------------------
Total minimum future rental payments $ 5,172,000 $ 1,082,000
====================
Less interest at 15.9% (213,000)
Less capital lease obligation - current
portion (308,000)
-------------------
Capital lease obligation - long-term $ 561,000
===================
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $991,000, $407,000, and $157,000 respectively.
12. STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") that provides for
the grant of stock options that are either "incentive" or "non-qualified" for
federal income tax purposes. The Plan provides for the issuance of up to a
maximum of 600,000 shares of common stock. On May 27, 1998, the shareholders
approved and ratified an increase to the Plan from 600,000 to 900,000 shares of
common stock. (subject to adjustment pursuant to customary anti-dilution
provisions).
The exercise price per share of a stock option is to be established by
the Executive Compensation Committee of the Board of Directors in its
discretion, but may not be less than the fair market value of a share of common
stock as of the date of grant. The aggregate fair market value of the shares of
common stock with respect to which "incentive" stock options are exercisable for
the first time by an individual to whom an "incentive" stock option is granted
during any calendar year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any
time after full vesting for a period not to exceed five years from the date of
grant and terminate upon the date of termination of employment. Such period is
to be established by the Company in its discretion on the date of grant.
F-12
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information with respect to options under the Company's Plan is as
follows:
Weighted Average
Number Exercise
of Shares Price
---------- ----------
Granted during 1997 561,200 $11.65
Forfeitures during 1997 (28,750) 12.00
----------
Balance - December 31,1997 532,450 11.63
Granted during 1998 141,000 7.00
Forfeitures during 1998 (116,300) 7.50
----------
Balance - December 31,1998 557,150 7.38
Granted during 1999 255,550 4.46
Forfeitures during 1999 (65,163) 7.41
----------
Balance - December 31, 1999 747,537 6.38
==========
Effective October 14, 1998, the Company changed the exercise price of
the stock options granted during 1997 (which ranged from $10.25 to $12.00) to
$7.50 per share, which was the market price per share on that date.
At December 31, 1999 and December 31, 1998, 228,613 and 111,537
options, respectively, were exercisable with weighted average exercise prices of
$7.43 and $7.50, respectively. At December 31, 1997 no options were exercisable.
The following table summarizes the status of the stock options
outstanding and exercisable at December 31, 1999:
Stock Options Outstanding
- --------------------------------------------------------------------------------
Weighted-Remaining Number of Stock
Exercise Prices Number of Options Contractual Life Options Exercisable
- --------------------------------------------------------------------------------
$ 3.875 191,900 9.9 years -
$ 4.875 34,700 9.8 years -
$ 7.00 121,750 9.0 years 30,426
$ 7.50 384,437 8.3 years 198,187
$ 8.00 14,750 9.5 years -
----------------- ----------------------
747,537 228,613
================= ======================
At December 31, 1999, the Company had 900,000 shares of Common Stock
reserved in connection with the Stock Option Plan.
In 1997, T3 Media adopted the T3 Media, Inc. 1997 Stock Option Plan
(the "1997 Plan") which provides for the granting of options to purchase up to
400,000 shares of T3 Media common stock.
During 1999, T3 Media granted 185,000 options with a weighted average
exercise price of $1.00, had 9,800 options exercised with a weighted average
exercise price of $1.00 and had forfeitures of 118,384 with a weighted average
exercise price of $1.44. At December 31, 1999, there were 437,906 options
outstanding with exercise prices ranging from $1.00 to $1.58. At December 31,
1999, there were 119,516 options exercisable with a weighted average exercise
price of $1.46. The weighted average contractual life remaining was 8.9 years
and the weighted average exercise price was $1.30.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation expense has been recognized for the stock option
plans. Had compensation costs for the Company's and T3 Media's stock option
plans been determined based on the fair value as of the grant date for awards in
1999, 1998 and 1997 consistent with the provision of SFAS 123, the Company's net
income (loss) and net income (loss) per share (see Note 13) would have been
reduced to the pro forma amounts as indicated below:
F-13
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999 1998 1997
---- ---- ----
Pro forma net income (loss)............................ $ (3,328,000) $ 2,346,000 $ 2,392,000
Pro forma net income (loss) per share-basic and diluted $ (.61) $ 0.43 $ 0.42
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions:
1999 1998 1997
---- ---- ----
Expected life (years)..... 4.0 4.0 4.0
Risk free interest rate.... 5.84% 6.0% 5.67%
Expected volatility ....... 0.80 0.84 0.70
Expected dividend yield.... 0.0 0.0 0.0
The weighted average fair value of options granted by the Company was
$4.40 in 1999, $4.50 in 1998 and $6.68 in 1997. The weighted average remaining
contractual life of options outstanding at December 31, 1999 is 4.0 years.
The fair value of T3 Media options at the date of grant was estimated
using the Black-Scholes model with the following assumptions: an expected life
of five years, a risk free interest rate of 6.07%, an expected volatility of 0%
and a dividend yield of 0%. The weighted average fair value of options granted
during the year ended December 31, 1999 was $0.26.
13. PRO FORMA ADJUSTMENTS (UNAUDITED)
Pro Forma Net Income
Pro forma net income for the year ended December 31, 1997 includes an
adjustment for executive compensation to reflect the terms of new contracts with
the Chief Executive Officer and Chief Financial Officer in connection with the
Offering. In addition, it also includes an adjustment to provide for income
taxes as if the Company had been a C corporation for all years presented.
Pro Forma Net Income Per Share
Pro forma net income per share, basic and diluted, for the year ended
December 31, 1997 was computed by dividing pro forma net income by the weighted
average number of common shares outstanding plus the estimated number of shares
assumed to be sold by the Company to pay the S Corporation distribution to the
shareholder, for the period prior to the Offering. The impact of including
outstanding stock options was anti-dilutive.
14. FOURTH QUARTER RESULTS
During the fourth quarter 1999, the Company wrote off approximately
$615,000 of accounts receivable from software sales and the allowance for
doubtful accounts was increased by approximately $565,000.
F-14
THE A CONSULTING TEAM, INC.
Schedule II - Valuation and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
(1) (2)
-----------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Accounts- Deductions - Balance at End
Description Period Expenses Describe Describe of Period
- ----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted
from asset accounts:
For the year ended December 31,
1999:
Allowance for doubtful accounts $-- $1,294,507 $-- $(610,083)(a) $684,424
For the year ended December 31,
1998:
Allowance for doubtful accounts $-- $-- $-- $-- $ --
For the year ended December 31,
1997:
Allowance for doubtful accounts $-- $-- $-- $-- $ --
(a) Uncollectable accounts written off of $615,456, offset by $5,373 allowance
for doubtful accounts as of acquisition date from business combination.
F-15