SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
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.
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(Exact name of Registrant as specified in its charter)
New York 13-3169913
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Park Avenue South
New York, New York 10003
------------------------
(Address of principal executive offices)
(212) 979-8228
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 10, 2000, there were 6,609,997 shares
of Common Stock, with $.01 par value per share, outstanding.
THE A CONSULTING TEAM, INC.
INDEX
Page Number
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 2
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation 7-15
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 27 Financial Data Schedule 18
1
Part I. Financial Information
Item 1. Consolidated Financial Statements
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 December 31,
2000 1999
---------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,731,271 $ 5,082,519
Accounts receivable 13,580,673 11,234,140
Unbilled receivables 602,167 121,545
Notes receivable 203,638 -
Prepaid or refundable income taxes 2,670,357 564,491
Prepaid expenses and other current assets 411,670 164,603
----------- -----------
Total current assets 23,199,776 17,167,298
Investment at cost 637,000 300,000
Property and equipment, at cost, less accumulated
depreciation and amortization 7,169,018 7,086,342
Intangibles (net) 3,462,548 3,749,630
Deposits 283,175 279,184
----------- -----------
Total assets $34,751,517 $28,582,454
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loan payable - bank $ 1,292,000 $ 325,000
Accounts payable and accrued expenses 5,182,769 4,670,460
Deferred revenue 156,547 97,536
Capital lease obligation 191,474 307,950
Current portion of long-term debt 5,569 14,966
----------- -----------
Total current liabilities 6,828,359 5,415,912
Capital lease obligation 576,605 560,755
Other long-term liabilities 75,734 89,329
Commitments
Shareholders' equity:
Preferred stock, $.O1 par value; 2,000,000 shares
authorized; no shares issued or outstanding -
Common stock, $.O1 par value; 10,000,000 shares authorized;
6,609,997 (2000) and 5,485,000 (1999) issued and outstanding 66,100 54,850
Additional paid-in capital 29,040,508 21,051,758
Retained earnings (accumulated deficit) (1,835,789) 1,409,850
----------- -----------
Total shareholders' equity 27,270,819 22,516,458
----------- -----------
Total liabilities and shareholders' equity $34,751,517 $28,582,454
=========== ===========
See accompanying notes to financial statements.
2
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Three Months Ended
June 30 June 30
------------------------------------- ------------------------------
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues $ 28,177,422 $ 27,085,451 $ 15,026,760 $14,532,822
Cost of revenues 19,273,280 17,343,690 10,042,180 9,131,101
------------ ---------------- --------------- -----------
Gross profit 8,904,142 9,741,761 4,984,580 5,401,721
Operating expenses:
Selling, general & administrative 14,176,832 7,509,338 7,724,499 4,082,222
------------ ---------------- --------------- -----------
Income (loss) from operations (5,272,690) 2,232,423 (2,739,919) 1,319,499
Interest income (expense), net (44,677) 430,119 (51,296) 226,255
------------ ---------------- --------------- -----------
Income (loss) before income taxes (5,317,367) 2,662,542 (2,791,215) 1,545,754
Income taxes (2,071,728) 1,140,000 (996,728) 659,000
------------ ---------------- --------------- -----------
Net income (loss) $ (3,245,639) $ 1,522,542 $ (1,794,487) $ 886,754
============ ================ =============== ===========
Net income (loss) per share - basic
and dilutive $ (0.56) $ 0.28 $ (0.30) $ 0.16
============ ================ =============== ===========
See accompanying notes to financial statements.
3
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
--------------------------------
2000 1999
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (3,245,639) $ 1,522,242
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 1,152,736 400,304
Deferred income taxes -- (197,000)
Changes in operating assets and liabilities:
Accounts receivable (2,346,533) (6,156,497)
Unbilled receivables (480,622) --
Prepaid or refundable income taxes (2,105,866) 674,500
Prepaid expenses and other current assets (247,067) 126,946
Accounts payable and accrued expenses 512,309 1,642,741
Deferred revenue 59,011 --
Income taxes payable -- 351,703
Other liabilities (13,595) --
------------ ------------
Net cash used in operating activities (6,715,266) (1,635,061)
Cash flows from investing activities:
Purchase of property and equipment (948,330) (1,811,392)
Investment and advances to T3 Media, Inc., net of cash acquired -- (87,030)
Investments and advances (540,638) (150,000)
Deposits (3,991) (26,832)
------------ ------------
Net cash used in investing activities (1,492,959) (2,075,254)
Cash flows from financing activities:
Proceeds from sale of common stock 8,000,000 --
Proceeds from loan payable 1,000,000 --
Repayment of loan payable (33,000) --
Repayment of long-term debt (9,397) (7,412)
Net change in capital lease obligation (100,626) --
------------ ------------
Net cash provided by (used in) financing activities 8,856,977 (7,412)
------------ ------------
Net increase (decrease) in cash and cash equivalents 648,752 (3,717,727)
Cash and cash equivalents at beginning of period 5,082,519 13,003,038
------------ ------------
Cash and cash equivalents at end of period $ 5,731,271 $ 9,285,311
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 87,700 $ 1,081
============ ============
Cash paid during the period for income taxes $ -- $ 310,797
============ ============
Supplemental disclosure of non-cash investing and financing activity:
Capital lease obligation $ 26,661 $ --
============ ============
See accompanying notes to financial statements.
4
THE A CONSULTING TEAM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) General:
These financial statements should be read in conjunction with The A
Consulting Team, Inc. (the "Company" or "TACT(R)") Form 10-K for the year ended
December 31, 1999 filed with the SEC, and the accompanying financial statements
and related notes thereto. The accounting policies used in preparing these
financial statements are the same as those described in the Company's Form 10-K
for the year ended December 31, 1999.
2) Interim financial statements:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial position as of June 30, 2000, the consolidated results of operations
for the three months and six months ended June 30, 2000 and 1999, and cash flows
for the six months ended June 30, 2000 and 1999, respectively.
The condensed consolidated balance sheet at December 31, 1999 has been
derived from the audited financial statements at that date, but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the audited consolidated financial statements and footnotes thereto included in
the Form 10-K filed by the Company for the year ended December 31, 1999.
The consolidated results of operations for the three and six months
ended June 30, 2000 are not necessarily indicative of the results to be expected
for any other interim period or for the full year.
3) Income per share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which was required to be
adopted on December 31, 1997. Under the new requirements for calculating primary
(basic) earnings per share, the dilutive effect of stock options is excluded.
Options outstanding during the six months ended June 30, 2000 were not
included in the computation of diluted net loss per share because the effect
would be antidilutive. For 1999, all outstanding options were included in the
computation of diluted earnings per share because the options' exercise price
was less than the average market price of the common shares and, therefore, the
effect would be dilutive.
5
The following table sets forth the computation of basic and diluted
earnings per share for the six and three months ended June 30, 2000 and 1999.
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Net (loss) income $ (3,245,639) $ 1,522,542 $ (1,794,487) $ 886,754
------------- ------------ ------------ ----------
Numerator for basic and diluted
earnings per share $ (3,245,639) $ 1,522,542 $ (1,794,487) $ 886,754
============= ============ ============ ==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 5,753,035 5,485,000 5,999,879 5,485,000
Effect of dilutive securities:
Employee stock options - 25,781 - 46,214
------------- ------------ ------------ ----------
Denominator for diluted earnings per
share - adjusted weighted-average shares 5,753,035 5,510,781 5,999,879 5,531,214
============= ============ ============ ==========
Basic and Diluted earnings per share $ (0.56) $ 0.28 $ (0.30) $ 0.16
------------- ------------ ------------ ----------
4) 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"). Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of the assets and liabilities
for financial purposes and the amount used for income tax purposes.
5) Concentration of credit risk:
Sales to one customer represented approximately 14% of the Company's
revenue for the six months ended June 30, 2000. Sales to two customers for the
same period in 1999 represented approximately 45% of the Company's revenue.
6) Sale of Common Stock
On June 20, 2000, the Company sold 607,141 shares of common stock at
$7.00 per share with warrants to purchase additional shares of TACT's common
stock at $13.00 per share. On July 7, 2000, the Company sold 125,000 shares of
common stock at $8.00 per share with warrants to purchase additional shares of
TACT's common stock at $13.00 per share.
7) Acquisition:
On October 2, 1998, the Company made an investment in web integrator
T3 Media, Inc. ("T3 Media") of $3 million, in return for non-voting convertible
preferred stock. On June 23, 1999, the Company increased its ownership interest
in T3 Media to approximately 51% by an additional investment in T3 Media's
common stock of $370,000 and conversion of the preferred stock to common stock.
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 preliminary estimate of fair value of
the net identifiable assets acquired totaled $4 million and has been recorded as
intangibles.
6
Item 2. 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.
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.
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 95% 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.
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
7
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's billing margins decreased because of a different mix of
consulting projects and a shift away from higher margin software sales. 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 periodic price 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 either are re-deployed 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 goodwill.
In 1999, the Company made a minority investment in Always-On, Inc.
(formerly LightPC.com, Inc.). In addition to services that can be provided to
business customers, Always-On 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.
Always-On's strategy expands the services previously provided by the ASP
industry, which traditionally were confined to the hosting of business
applications. Always-on 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
Always-on. However, while Always-on has executed a number of business
development agreements with a number of prominent technology companies,
Always-on is in the preliminary start-up stage of its existence, and there is
8
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:
Six Months Ended Three Months Ended
June 30, June 30,
------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 68.4% 64.0% 66.8% 62.8%
----- ----- ----- -----
Gross profit 31.6% 36.0% 33.2% 37.2%
Selling, general and administrative expenses 50.3% 27.7% 51.4% 28.1%
----- ----- ----- -----
Income (loss) from operations -18.7% 8.2% -18.2% 9.1%
Net income (loss) -11.5% 5.6% -11.9% 6.1%
----- ----- ----- -----
Comparison of Six Months Ended June 30, 2000 to the Six Months Ended June 30,
1999
Revenues. Revenues of the Company increased by $1.1 million, or 4.0%,
from $27.1 million for the six months ended June 30, 1999 to $28.2 million for
the six months ended June 30, 2000. This increase continues to result from
increased e-Services revenues and a greater number of consultants, offset by
lower utilization rates and a slight decrease in the average billing rate.
Revenues from software licensing and training represented less than 5%
of the Company's total revenues in 2000 and are expected to remain at this level
or lower in the future.
Gross Profit. Gross profit for the first six months decreased 8.6 %
from $9.7 million in 1999 to $8.9 million in 2000. As a percentage of total
revenues, gross profit was 31.6% versus 36.0% for the six months ended June 30,
2000 and 1999, respectively. Gross margin was adversely affected by the shift
away from higher margin software business, a different mix of consulting
projects, and the absence of higher margin Year 2000 projects in the current
period.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased by $6.7 million, or 88.8%, from $7.5 million in 1999 to $14.2 million
in 2000. Expressed as a percentage of sales, SG&A expenses increased from 27.7%
of 1999 revenues to 50.3% of 2000 revenues. The inclusion of T3 Media adds about
12 percentage points ($3.3 million) to the amount from last year. The increase
related to the TACT operations is attributable to increased salary expense
associated with e-Services personnel ($0.8 million), expenses associated with
the start-up of TACT's accelerator ($0.4 million), expenses associated with
internally incubated products ($0.6 million), increased occupancy costs,
including the amortization of furniture, equipment and leaseholds ($0.2
million), and the amortization of goodwill associated with acquisitions ($0.2
million). These expenses are reflective of transitioning to being an end-to-end
e-Services provider, broadening its customer base, and increasing its geographic
presence.
Net Income (Loss). As a result of the above-mentioned factors, the
Company had a net loss of approximately $3.2 million in 2000 compared to net
income of $1.5 million in 1999.
9
Comparison of the Three Months Ended June 30, 2000 to the Three Months Ended
June 30, 1999
Revenues. Revenues of the Company increased by approximately $494,000,
or 3.4%, from $14.5 million for the three months ended June 30, 1999 to $15.0
million for the three months ended June 30, 2000. This increase continues to
result from increased e-Services revenues and a greater number of consultants,
offset by lower utilization rates and a slight decrease in the average billing
rate.
Gross Profit. Gross profit for the three months ended June 30, 2000
decreased 7.7% from $5.4 million, or 37.2%, in 1999 to $5.0 million, or 33.2% in
2000. Gross margin was adversely affected by the shift away from higher margin
software business, a different mix of consulting projects, and the absence of
higher margin Year 2000 projects in the current period. When compared with the
first quarter of 2000, however, there was a margin improvement of over 3
percentage points. This resulted from continued management focus on improving
utilization rates.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased by $3.6 million, or 89.2%, from $4.1 million in 1999 to $7.7 million
in 2000. Expressed as a percentage of sales, SG&A expenses increased from 28.1%
of 1999 revenues to 51.4% of 2000 revenues. The inclusion of T3 Media adds about
11 percentage points ($1.9 million) to the amount from last year. The increase
related to the TACT operations is attributable to increased salary expense
associated with e-Services personnel ($0.6 million), expenses associated with
the start-up of TACT's accelerator ($0.2 million), expenses associated with
internally incubated products ($0.3 million), increased occupancy costs,
including the amortization of furniture, equipment and leaseholds ($0.1
million), and the amortization of goodwill associated with acquisitions ($0.1
million). These expenses are reflective of transitioning to being an end-to-end
e-Services provider, broadening its customer base, and increasing its geographic
presence.
Net Income (loss). As a result of the above-mentioned factors, the
Company had a net loss of approximately $1.8 million in 2000 compared to net
income of $887,000 in 1999.
Liquidity and Capital Resources
Before 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 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
operations.
The Company has a line of credit of $2.1 million, with $1.0 million
outstanding at June 30, 2000. 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 10.5% at June 30, 2000. The Company's 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 $768,000 at June 30,
2000.
The Company's cash balances were $5.7 million at June 30, 2000, and
$5.1 million at December 31, 1999. Net cash used in operating activities in 2000
was $6.7 million and $1.6 million in 1999. 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 June 30, 2000 and December 31, 1999 were $13.6 million and $11.2
million respectively, representing 82 and 84 days of sales outstanding,
respectively. The June 30, 2000 days of sales outstanding represent an
improvement of about six days compared to the amounts outstanding on March 31,
2000. The Company does not anticipate any difficulty in collecting remaining
amounts due.
10
For the six months ended June 30, 2000, the Company had revenues from
one customer, which represented 14% of revenues. For the same period in 1999,
the Company had revenues from two customers, which represented 28% and 17% of
revenues. Besides these customers, no other customer represented greater than
10% of the Company's revenues.
Net cash used in investing activities was approximately $1.6 million
and $2.1 million for the six months ended June 30, 2000 and 1999, respectively.
In each of these periods, this primarily represented additions to property and
equipment as the Company continued to enhance it's computing network and
infrastructure, and the investment in T3 Media, net of cash acquired in 1999.
Net cash provided by financing activities of $8.9 million for the six
months ended June 30, 2000 includes $1.0 million borrowing on its credit line
and the purchase of an aggregate of 1,124,997 shares of common stock by a group
of investors totaling $8,000,000 at June 30, 2000. The purchasers also received
a two-year option to purchase up to 1,589,284 shares at $13.00 per share.
Growth of E-Commerce Business
Revenues derived from the Company's end-to-end e-Services solutions
totaled to $7.5 million in the second quarter of 2000, compared to $5.2 million
in the first quarter of 2000, and $3.7 million in the fourth quarter of last
year.
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 Second Quarter of 2000
In prior years, TACT discussed the nature of its plans related to Year
2000 compliance. As a result of those planning efforts, TACT experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the year 2000 date change. TACT will continue to monitor the
situation throughout the year to ensure that any latent year 2000 issues are
addressed properly.
RISKS RELATED TO OUR BUSINESS
We have incurred operating losses from time to time and expect to incur
net losses and negative cash flow for the foreseeable future. We incurred net
losses of $2,667,000 for the year ended December 31, 1999, due in part to
$2,600,000 in expenses attributable to the acquisition of our majority ownership
interest in T3 Media and an increase in the number of salaried personnel
supporting new Solution Branch offices, and a net loss of $3,246,000 for the six
months ended June 30, 2000 for the same reasons. We expect to incur operating
and capital expenditures and, as a result, we will need to generate significant
revenues to achieve and maintain profitability. We cannot guarantee that we will
achieve sufficient revenues for profitability. Even if we do achieve
profitability, we cannot guarantee that we can sustain or increase profitability
on a quarterly or annual basis in the future. If revenues grow slower than we
anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, our business, results of operations and financial
condition will be materially and adversely affected. Because our strategy
includes acquisitions of other businesses and opening additional Solution Branch
offices, acquisition expenses, any cash used to make these acquisitions and
increased operating expenses will reduce our available cash.
Client Revenue and Geographic Concentrations. We derive a significant
portion of our revenues from a relatively limited number of clients primarily
located in the New York/New Jersey metropolitan area of the United States.
Adverse economic conditions affecting this region could have an adverse effect
on the financial condition of our clients located there, which in turn could
adversely affect
11
our business and future growth. Revenues from our ten most significant clients
accounted for a majority of our revenues during the year ended December 31,
1999. In each of the last three years, we have had at least one customer who
represented at least 10% of our revenues for that year. During the year ended
December 31, 1997, our largest customer represented 24% of our revenues. During
the year ended December 31, 1998, our three largest customers represented 16%,
15% and 12% of our revenues. During the year ended December 31, 1999, our two
largest customers represented 23% and 14% of revenues. During the six months
ended June 30, 2000, our largest customer represented 14%. Besides this
customer, no other customer represented greater than 10% of our revenues. In any
given year, our ten most significant customers may vary based upon specific
projects for those clients during that year. There can be no assurance that our
significant clients will continue to engage us for additional projects or do so
at the same revenue levels. Clients engage us on an assignment-by- assignment
basis, and a client can generally terminate an assignment at any time without
penalty. The loss of any significant customer could have a material adverse
effect on our business, results of operations and financial condition. Our
failure to develop relationships with new customers could have a material
adverse effect on our business, results of operations and financial condition.
Our projects entail significant risks. Many of our engagements involve
projects that are critical to the operations of our clients' businesses and
provide benefits that may be difficult to quantify. Our failure or inability to
meet a client's expectations in the performance of our services could result in
a material adverse change to the client's operations and therefore could give
rise to claims against us or damage our reputation, adversely affecting our
business, results of operations and financial condition.
Our business is subject to rapid technological change and is dependent
on new solutions. Our success will depend in part on our ability to meet client
expectations, develop information technology solutions, including e-commerce
solutions, and offer software solutions that keep pace with continuing changes
in information technology, evolving industry standards, changing client
preferences and a continuing shift to outsourced solutions by clients. We cannot
assure you that we will be successful in adequately addressing the outsourcing
market or other information technology developments on a timely basis or that,
if addressed; we will be successful in the marketplace. We also cannot assure
you that products or technologies developed by others will not render our
services uncompetitive or obsolete. Our failure to address these developments
could have a material adverse effect on our business, results of operations and
financial condition.
We face difficulties typically encountered by development stage
companies in new and rapidly evolving markets because of our new e-commerce
initiative. We recently began to provide e-commerce Web design and Web business
planning, strategic planning and marketing strategy consulting services through
our majority-owned subsidiary, T3 Media, Inc. We also provide remote application
hosting and off-site documentation storage to Web-based companies through a
strategic relationship with Always-On, Inc. (formerly LightPC.com, Inc.)
Revenues from our e-commerce services constituted 21% of our revenues for the
year ended December 31, 1999 and 39% for the three months ended March 31, 2000,
and 50% for the three months ended June 30, 2000. These risks involve our and
our subsidiary and strategic partners' abilities to:
/ / create a customer base;
/ / respond to changes in a rapidly evolving and unpredictable
business environment;
/ / maintain current and develop new strategic relationships;
/ / manage growth;
/ / continue to develop and upgrade technology; and
/ / attract, retain and motivate qualified personnel.
We cannot assure you that any products or services developed by us, our
subsidiary or our strategic partners will achieve market acceptance. Our ability
to maintain billing margins is uncertain. We
12
derive revenues primarily from the hourly billing of our consultants' services
and, to a lesser extent, from fixed-price projects. Our most significant cost is
project personnel cost, which consists of consultant salaries and benefits.
Thus, our financial performance is primarily based upon billing margin (billable
hourly rate less the consultant's hourly cost) and personnel utilization rates
(number of days worked by a consultant during a two-week billing cycle divided
by the number of billing days in that cycle). To date, we have been able to
maintain our billing margins by offsetting increases in employee salaries with
increases in our hourly rates. There can be no assurance, however, that our
revenues will continue to be billed primarily on a time and materials basis or
that we will be able to continue to pass along increases in our cost of services
to our clients.
We may have difficulty managing our growth. Our expansion is dependent
upon, among other things,
/ / our ability to hire and retain consultants as employees or
independent consultants,
/ / our ability to identify suitable new geographic markets with
sufficient demand for our services, hire and retain skilled
management, marketing, customer service and other personnel, and
successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality and service
controls, and
/ / if we consummate additional acquisitions, our ability to
successfully and profitably integrate any acquired businesses into
our operations.
If our management is unable to manage growth or new employees or
consultants are unable to achieve anticipated performance levels, our business,
results of operations and financial condition could be materially adversely
affected.
We rely on key executives. Our success is highly dependent upon the
efforts and abilities of our executive officers, particularly Shmuel BenTov, our
Chief Executive Officer and President. In addition, we are dependent upon the
services of Frank T. Thoelen, our Chief Financial Officer. Although Mr. BenTov
has entered into an employment agreement, which terminates on December 31, 2001,
containing non-competition, nondisclosure and non-solicitation covenants, this
contract does not guarantee that Mr. BenTov will continue his employment with
us. Mr. Thoelen currently does not have an employment agreement with us. The
loss of the services of either of these key executives for any reason could have
a material adverse impact.
Our quarterly results of operations are variable. Variations in our
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 our sales cycle can be relatively long and may
depend on such factors as the size and scope of assignments 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 us. In addition, our
engagements generally are terminable by the client at any time without penalty.
Although the number of consultants can be adjusted to correspond to the number
of active projects, we must maintain a sufficient number of senior consultants
to oversee existing client projects and to assist with our sales force in
securing new client assignments. An unexpected reduction in the number of
assignments could result in excess capacity of consultants and increased
selling, general and administrative expenses as a percentage of revenues. We
have also experienced, and may in the future experience, significant
fluctuations in the quarterly results of our software sales as a result of the
variable size and timing of individual license transactions, competitive
conditions in the industry, changes in customer budgets, and the timing of the
introduction of new products or product enhancements. In the event that our
results of operations for any period are below the expectation of market
analysts and investors, the market price of our shares of common stock could be
adversely affected.
13
Our President and Chief Executive Officer currently owns more than 50%
of our shares of common stock. Shmuel BenTov, our President and Chief Executive
Officer, beneficially owns 52.0% of shares of common stock. Mr. BenTov would be
able to control the outcome of any matter requiring shareholder approval.
We have anti-takeover provisions that could prevent an acquisition of
our business at a premium price. Some of the provisions of our certificate of
incorporation could discourage, delay or prevent an acquisition of our company
at a premium price or at all. For example, these provisions authorize the
issuance of preferred stock in one or more series. Moreover, Section 912 of the
New York Business Corporation Law prohibits a domestic corporation from engaging
in a business combination with an interested shareholder (defined as the
beneficial owner of 20% or more of the stock of the corporation) for a period of
five years from the time the shareholder acquired the stock unless certain
conditions are met. These provisions are intended to encourage any person
interested in acquiring our company to negotiate with and obtain the approval of
our board of directors in connection with the transaction.
Our common stock is volatile. The market price of our common stock may
be highly volatile. The market prices of securities of other technology-based
companies currently are highly volatile. Factors that could cause volatility in
our ordinary share price include:
/ / fluctuations in our quarterly operating results;
/ / deviations in our results of operations from the estimates of
securities analysts;
/ / changes in the market valuations of other technology companies and
stock market price and volume fluctuations generally;
/ / economic conditions specific to the information technology and
e-commerce industries;
/ / announcements by us or our competitors relating to new services or
technologies, significant acquisitions, strategic relationships,
joint ventures or capital commitments;
/ / regulatory developments; and
/ / additions or departures of our key personnel.
Competition. The market for information technology services includes a
large number of competitors, is subject to rapid change and is highly
competitive. Our primary competitors include participants from a variety of
market segments, including consulting divisions of the "Big Five" accounting
firms, interactive advertising agencies, web development companies, systems
consulting and implementation firms, application software firms and management
consulting firms. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
we do. In addition, we compete with our clients' internal resources,
particularly when these resources represent a fixed cost to the client. In the
future, such competition may impose additional pricing pressures on us. We
cannot assure you that we will compete successfully with our existing
competitors or with any new competitors.
Intellectual Property Rights. Our business includes the development of
custom software applications in connection with specific client engagements.
Ownership of such software is generally assigned to the client. We rely 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 we license intellectual property.
We enter into confidentiality agreements with our employees and limit
distribution of proprietary information. However, we cannot assure you that the
steps taken by us in this regard will be adequate to deter misappropriation of
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. We are
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require us 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
14
infringement. In addition, we are aware of other users of the term "TACT" and
combinations including "A Consulting," which users may be able to restrict our
ability to establish or protect our right to use these terms. We have in the
past been contacted by other users of the term "TACT" alleging rights to the
term. We have completed filings with the U.S. Patent and Trademark Office in
order to protect certain marks, including "TACT" and "The A Consulting Team."
Our inability or failure to establish rights to these terms or protect our
rights may have a material adverse effect on our business, results of operations
and financial condition.
Forward Looking Statements
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 ("SEC"). 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.
15
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company has not entered into market risk sensitive transactions
required to be disclosed under this item.
Part II. Other Information
Item 1. Legal proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 25, 2000, the Company held it's annual meeting of shareholder's.
The shareholder's approved by a plurality of votes the election of directors of
the Company; votes for the directors were 5,153,275 for, 5,300 authority
withheld. The shareholder's also ratified by a majority of votes present the
appointment of Ernst & Young LLP, as independent public accountants for the year
ending December 31, 2000; votes for this matter were 5,151,475 for, 6,100
against and 1,000 abstained.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule: Information Provided Pursuant to Article 5
of Regulation S-X.
(b) Reports on Form 8-K
The company filed the following Current Reports on Form 8-K during the three
month period ended June 30, 2000.
(i) Current Report on Form 8-K, dated July 5, 2000.
We filed a report on Form 8-K on July 5, 2000 announcing that on June
20, 2000, a group of Israeli investors had invested approximately $4.25 million
by purchasing an aggregate of 607,141 shares of TACT's common stock at $7.00 per
share with warrants to purchase additional shares of TACT's common stock at
$13.00 per share.
(ii)Current Report on Form 8-K, dated July 18, 2000.
We filed a report on Form 8-K on July 18, 2000, announcing that on July
7, 2000, Michael G. Jesselson, through two investment trusts he controls, had
invested $1 million in TACT by purchasing 125,000 shares of TACT common stock at
$8.00 per share with two-year warrants to purchase an aggregate of 125,000
additional shares of TACT's common stock at $13.00.
16
SIGNATURES
Pursuant to the requirements 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.
August 14, 2000 By: /s/ Shmuel BenTov
- ---------------- ----------------------------------------
Date Shmuel BenTov, President
and Chief Executive Officer
August 14, 2000 By: /s/ Frank T Thoelen
- ---------------- ----------------------------------------
Date Frank T Thoelen, Secretary-Treasurer
and Chief Financial Officer
17