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 period ended: March 31, 2001
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
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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
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(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 May 12, 2000, there were 7,116,871 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
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Item 1. Condensed Consolidated Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 2
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation 6
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
Part II. Other Information
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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
1
Part I. Financial Information
Item 1. CondensedConsolidated Financial Statements
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
------------ ------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ -- $ 837,946
Accounts receivable, less allowance for doubtful accounts of
$777,317 at March 31, 2001 and $948,397 at December 31, 2000 10,735,097 13,596,875
Prepaid software licenses 2,000,000 2,000,000
Prepaid or refundable income taxes 1,500,170 1,575,510
Prepaid expenses and other current assets 77,330 132,423
------------ ------------
Total current assets 14,312,597 18,142,754
Investments, at cost 2,820,638 2,820,638
Property and equipment, at cost, less accumulated
depreciation and amortization 4,532,852 5,847,092
Deposits 159,684 227,055
------------ ------------
Total assets $ 21,825,771 $ 27,037,539
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable - banks $ 2,224,376 $ 2,170,000
Accounts payable and accrued expenses 6,099,492 6,098,951
Deferred revenue -- 166,015
Current portion of capital lease obligation 372,334 376,288
Current portion of long-term debt -- --
------------ ------------
Total current liabilities 8,696,202 8,811,254
Capital lease obligation 246,242 394,379
Other long-term liabilities 2,267 62,139
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;
7,116,871 issued and outstanding 71,169 71,169
Additional paid-in capital 33,086,689 33,086,689
Retained earnings (accumulated deficit) (20,276,798) (15,388,091)
------------ ------------
Total shareholders' equity 12,881,060 17,769,767
------------ ------------
Total liabilities and shareholders' equity $ 21,825,771 $ 27,037,539
============ ============
See accompanying notes to financial statements.
2
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
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2001 2000
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(unaudited) (unaudited)
Revenues $ 12,148,085 $ 13,150,662
Cost of revenues 9,853,366 9,231,100
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Gross profit 2,294,719 3,919,562
Operating expenses:
Selling, general & administrative 4,846,887 5,875,030
Provision for doubtful accounts 222,441 7,475
Depreciation & amortization 428,420 569,828
Restructuring charges 1,538,000 --
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7,035,748 6,452,333
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Loss from operations (4,741,029) (2,532,771)
Interest income 6,256 48,993
Interest expense (153,934) (42,374)
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Interest income (expense), net (147,678) 6,619
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Loss before income taxes (4,888,707) (2,526,152)
Income taxes -- (1,075,000)
------------ ------------
Net loss $ (4,888,707) $ (1,451,152)
============ ============
Loss per share - basic
and dilutive $ (0.69) $ (0.26)
============ ============
See accompanying notes to financial statements.
3
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
2001 2000
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Cash flows from operating activities:
Net loss ($4,888,707) ($1,451,152)
Adjustments to reconcile net loss to net cash
used in operating activities, net of acquired assets:
Depreciation and amortization 428,420 569,828
Restructuring charges 1,538,000 (7,475)
Provision for doubtful accounts 222,441 --
Changes in operating assets and liabilities:
Accounts receivable 2,639,337 (1,609,703)
Unbilled receivables -- (1,036,988)
Prepaid or refundable income taxes 75,340 (1,075,866)
Prepaid expenses and other current assets 55,093 (86,837)
Accounts payable and accrued expenses (572,834) 550,985
Deferred revenue (166,015) 65,906
Other long-term liabilities (59,872) (6,798)
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Net cash used in operating activities (728,797) (4,088,100)
Cash flows from investing activities:
Purchase of property and equipment (78,805) (623,718)
Investments at cost -- (203,638)
Deposits 67,371 3,976
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Net cash used in investing activities (11,434) (823,380)
Cash flows from financing activities:
Proceeds from sale of common stock -- 890,000
Proceeds from loan payable and overdrafts 143,120 1,500,000
Repayment of loan payable (88,744) --
Repayment of long-term debt -- (3,974)
Repayment of capital lease obligation (152,091) 4,755
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Net cash (used in) provided by financing activities (97,715) 2,390,781
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Net decrease in cash and cash equivalents (837,946) (2,520,699)
Cash and cash equivalents at beginning of period 837,946 5,082,519
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Cash and cash equivalents at end of period $ -- $ 2,561,820
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 89,000 $ 3,333
=========== ===========
Supplemental disclosure of non-cash investing
and financing activity:
Capital lease obligation $ -- $ 4,755
=========== ===========
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") Form 10-K for the year ended December 31,
2000 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, 2000.
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 March 31, 2001and the consolidated results of
operations and cash flows for the three months ended March 31, 2001 and 2000,
respectively.
The condensed consolidated balance sheet at December 31, 2000 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, 2000.
The consolidated results of operations for the three months ended March
31, 2001 are not necessarily indicative of the results to be expected for any
other interim period or for the full year.
3) EARNINGS NET LOSS PER SHARE:
The following table sets forth the computation of basic and diluted
loss for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31, 2001
--------------------------
2001 2000
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Numerator:
Net (loss) $(4,888,707) $(1,451,152)
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Numerator for basic and diluted
net (loss) per share $(4,888,707) $(1,451,152)
=========== ===========
Denominator:
Denominator for basic and diluted net loss per
share - weighted-average shares 7,116,871 5,500,401
=========== ===========
Basic and diluted earnings loss per share $ (0.69) $ (0.26)
=========== ===========
All options and warrants outstanding during 2001 and 2000 were not
included in the computation of net loss per share because the effect would be
antidilutive.
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
5) CONCENTRATION OF CREDIT RISK:
Revenues to two customers represented approximately 25% and 15% of the
Company's revenues for the three months ended March 31, 2001. Revenues to two
customers for the same period in 2000 represented approximately 13% and 11% of
the Company's revenues. No other customers represented greater than 10% of the
Company's revenues.
6) RESTRUCTURING CHARGES:
The Company began to restructure its operation in 2000 and has
continued in 2001 and has taken a charge of $1,538,000 consisting of a $371,000
write-off of leaseholds and other fixed assets related to the wind down of
operations of its T-3 Media Inc. subsidiary, a $979,000 charge related to the
closing of several of its Solution Branches and converting them into virtual
offices and the reduction of its staff resulting in severance costs of $188,000.
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.
Overview
Since 1983, TACT has provided IT services and solutions to Fortune 1000
companies and other large organizations. In 1997, TACT became a public company
(Nasdaq: TACX), headquartered in New York, NY. In addition to its New York
office, TACT has Solution Branches(SM) in Clark, NJ, Chicago, IL, and Boston,
MA. During the first quarter of 2001, the Company closed its Stamford, CT and
Atlanta, GA branches and converted them into virtual offices. The Company is
also continuing to review its other Solution Branches for possible restructuring
into virtual offices in a continuing effort to strive to effectuate the most
cost efficient and effective operating structure for the Company and its
clients. The company will be closing other Solution Branches in the second and
third quarter. The virtual office structure that is being implemented will
provide the Company with the ability to continue to have a presence in these
geographies by the use of wireless, mobile and other technologies. Proven
performance and a 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 90% of the Company's consulting
services revenues during the three months ended March 31, 2001 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 business
objectives by assisting them in the transition of their information technologies
from traditional mainframe and client/server environments to the Internet and
the Web. TACT offers its clients the full scope of the web-enabling process.
TACT provides solutions ranging from strategy and design, to development,
through conversions and integration. TACT expertise leverages clients' existing
systems and data stores to significant business advantage.
When TACT is engaged by its clients to implement e-commerce or
web-based initiatives, TACT uses a comprehensive 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.
6
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 alliances allow
TACT to provide a wide variety of business technology solutions such as
enterprise reporting solutions, data warehousing, systems strategies,
application 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 operating
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 2000 and the first quarter of 2001, the
Company's margins were adversely affected by a decrease in billing rates, an
increase in consultant wages and a reduction in consultant utilization rate.
Large portions of the Company's engagements are on a time and materials basis.
The Company historically had been able to pass on to its clients most of the
increases in cost of services; however, the Company was not able to do so in the
first quarter of 2001. Accordingly, such increases have had a significant impact
on the Company's financial results. While most of the Company's engagements
allow periodic price adjustments to address, among other things, increases in
consultant costs, there can be no guarantee that clients will continue to accept
cost increases. TACT also actively manages its personnel utilization rates by
constantly monitoring project requirements and timetables; however utilization
rates in the first quarter of 2001were lower due to a trend in the Company's
markets to delay IT projects and slowing of growth rate in demand in e-Commerce
and web-based initiatives.
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. Beginning in 1999 and extending through
March 31, 2001, the Company has limited its emphasis on software sales. This has
resulted in a significant reduction in software sales in the second half of 1999
through March 31, 2001. This trend is expected to continue for the remainder of
2001 and beyond with software sales only being ancillary to providing IT and
e-Services solutions to customers.
On October 2, 1998, the Company made an investment in a Web integrator,
T3 Media, of $3 million of 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 was recorded as
goodwill and was being amortized using the straight-line method over 7 years.
After extensive review of changing market conditions, it was determined that the
carrying value of the intangibles and certain other fixed assets was not
recoverable , resulting in a write-off of $3.9 million in the fourth quarter of
2000 and $ 371,000 in the first quarter of 2001. T3 Media is restructuring its
operations by reducing the number of physical locations and personnel and by
streamlining its operations and personnel. The Company plans to incorporate the
remaining operations and personnel of T3 Media's operations with its own during
the second and third quarters of 2001.
7
In 1999, the Company made a minority investment in LightPC.com (renamed
Always-On Software, Inc.). In 2000, the Company invested another $2.0 million.
At March 31, 2001, the Company owns approximately 10% of Always-On Software,
Inc. Always-On Software, Inc. is a global provider of software application
services ("ASP") based in the heart of New York's Silicon Alley. Their ASP
technology allows the customer to use common software applications, such as
Microsoft Office, over the Internet without having to buy or install it on their
PC. The Company's investment in Always-On is subject to periodic review to
ensure that its market value exceeds the carrying value on the Company books.
The market conditions for companies operating in this sector have become
increasingly adverse over the past couple of quarters. There is a risk that
Always-On Software, Inc. will not be able to achieve profitability or positive
cash flow in the near term and that it may exhaust its capital resources before
achieving profitability and positive cash flow. If this were to occur, the
Company might have to write-off a portion or all of its investment.
Results of Operations
The following tables set forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
Three Months Ended
March 31
-----------------------------
2000 1999
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Revenues 100.0% 100.0%
Cost of revenues 81.1% 70.2%
------------ ------------
Gross profit 18.9% 29.8%
Operating expenses 57.9% 49.1%
------------ ------------
Loss from operations (39.0)% (19.3)%
Net loss (40.2)% (11.0)%
============ ============
Comparison of the Three Months Ended March 31, 2001 to the Three Months Ended
March 31, 2000
Revenues. Revenues of the Company decreased by $1.1 million, or 7.6% from $13.2
million for the three months ended March 31, 2000 to $12.1 million for the three
months ended March 31, 2001. The decrease is attributable to a decrease of $2.0
million in T3 Media Inc.'s revenues from $2.7 million to $700,000 which was
partially offset by an increase of $800,000 in the Company's consulting services
revenues.
Revenues from T3 Media Inc. are expected to continue to decline and the
remaining operations and personnel of T3 will absorbed by the Company in the
second and third quarters of 2001.
Revenues from software licensing and training represent less than 5% of the
Company's total revenues in 2001 and are expected to remain at this level or
lower in the future.
Gross Profit. Gross profit for the first three months decreased by approximately
$1.6 million from $3.9 million in 2000 to $2.3 million in 2001. As a percentage
of revenues, gross profit was 18.9% compared to 29.8% for the three months ended
March 31, 2001 and 2000, respectively. Gross margin was adversely effected
primarily by the decline in T3 Media, Inc.'s revenues, a different mix of
consulting projects a lack of revenues in the companies Solution Branches and a
lack of traction in several business initiatives which the Company began in
previous years.
8
Operating Expenses
Operating expenses are comprised of Selling, General and Administrative ("SG&A")
expenses, provision for doubtful accounts, depreciation and amortization and
restructuring charges. Operating expenses increased by $.6 million or 9.0% from
$6.5 million in 2000 to $7.0 million in 2001.
SG&A expenses decreased by $1.0 million or 17.5% from $5.9 million in 2000 to
$4.8 million in 2001. The decrease is primarily attributable to a decrease in T3
Media's SG&A, resulting from a wind down in its operations. The provision for
doubtful accounts increased by approximately $215,000 from $7,000 in 2000 to
$222,000 in 2001. The increase was primarily attributable to the aging of some
of the Company's accounts receivable. Depreciation and amortization expenses for
the quarter decreased as a result of writing off the goodwill associated with T3
Media in the fourth quarter of 2000.. As a further part of the Company's
restructuring, it has decided to close several of its branch offices and convert
them into virtual offices and to reduce its staff.This resulted in a one-time
write offs of leasehold improvements and fixed assets at T3 Media of $371,000
and for the Company's Solution Branches of$595,000. In addition, the Company
took other one-time charges related to closing Solution Branches of $384,000 and
for severance costs related to staff reductions of $188,000.
Income Taxes. The Company has a net loss for the three months ended March 31,
2001 therefore did not record a provision for income taxes. The Company believes
that net loss carry forwards will offset future income, if any, in 2001.
Net (Loss). As a result of the above-mentioned factors, the Company had a net
loss of approximately $4.9 million in 2001 compared to a net loss of $1.5
million in 2000.
Liquidity and Capital Resources
The Company has a line of credit with $2.0 million outstanding at March
31, 2001. 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 8.5% at March 31, 2001. In addition, the Company's subsidiary, T3 Media
has a demand loan with a bank. The amount outstanding at March 31, 2001 and
December 31, 2000 is $80,000 and $170,000, respectively. This loan bears
interest at the bank's prime rate plus 3%. The rate was 10.5% at March 31, 2001.
T3 Media had 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 $619,000 at March 31,
2001. The Company and T3 Media is in the process of negotiating buy-outs on all
of these leases.
The Company's cash balances were an overdraft of $144,000 at March 31,
2001 and $838,000 at December 31, 2000. Net cash used by operating activities in
2001 were $729,000 and $4.1 million for the three months ended March 31, 2001
and 2000, respectively.
The Company's accounts receivable, less allowance for doubtful
accounts, at March 31, 2001 and December 31, 2000 were $10.7 million and $13.6
million, respectively representing 81 and 89 days of sales outstanding,
respectively. The Company has provided an allowance for doubtful accounts at the
end of each of the periods presented. After giving effect to this allowance, the
Company does not anticipate any difficulty in collecting amounts due.
For the three months ended March 31, 2001, the Company had revenues
from two customers which represented 25% and 15% of revenues. For the same
period in 2000, the Company had revenues from two customers, which represented
13% and 11% of revenues. , No other customer represented greater than 10% of the
Company's revenues.
9
Net cash used in investing activities was approximately $11,000 and
$823,000 for the three months ended March 31, 2001 and 2000, respectively. In
each of these periods, this primarily represented additions to property and
equipment as the Company continued to enhance its computing network and
infrastructure.
Net cash (used in) provided by financing activities was ($98,000) and
$2.4 million for the three months ended March 31, 2001 and 2000 respectively.
On March 19, 2000, Yosi Vardi, Rita Folger, DS Polaris Group, SFK Group
and Arison Investments Ltd. invested an aggregate of approximately $2.75 million
by purchasing an aggregate of 392,855 shares of common stock at $7.00 per share
with 60 day warrants (subsequently extended by an additional 14 days) to
purchase an aggregate of 607,142 additional shares of common stock at an
exercise price of $7.00 per share (one of which warrants was exercised in part
by Arison Investments on June 5, 2000 to purchase 142,857 shares of common stock
for an aggregate exercise price of approximately $1.0 million) and two year
warrants to purchase an aggregate of 1,000,000 additional shares of common stock
at an exercise price of $13.00 per share.
On June 5, 2000, Koonras Technologies, Eurocom Communications and
Poalim Capital Markets Technologies invested an aggregate of approximately $3.25
million by purchasing an aggregate of 464,284 shares of common stock at $7.00
per share with two year warrants to purchase an aggregate of 464,284 additional
shares of common stock at an exercise price of $13.00 per share.
On June 14, 2000, two investment trusts controlled by Michael G.
Jesselson invested $1 million by purchasing an aggregate of 125,000 shares of
common stock at $8.00 per share with two year warrants to purchase an aggregate
of 125,000 additional shares of common stock at an exercise price of $13.00 per
share.
On September 29, 2000, Level 8 Systems, Inc. invested $4 million by
purchasing 500,000 shares of common stock at $8.00 per share with two year
warrants to purchase an aggregate of 500,000 additional shares of common stock
at an exercise price of $13.00 per share.
The Company borrowed $2.0 million under its revolving credit line. The
Company currently is negotiating with several financial institutions to replace
its line of credit with an increased line. If it is unsuccessful in obtaining
the new line with satisfactory terms and needs funds to repay its current line,
its principal shareholder has committed to lend such funds to the Company in
order to repay up to $2.0 million of its current line of credit.
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 for the next twelve months.
There may be circumstances that would accelerate its use of liquidity sources,
including, but not limited to, its ability to implement a profitable business
model which may include further restructuring charges. If this occurs, the
Company may, from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to us.
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.
10
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.
Operating Losses
The Company has incurred operating losses for the last two years and
continued to incur losses for the three months ended March 31, 2001 and may
continue to incur net losses and negative cash flow for the remainder of 2001.
The Company has a net loss of $4.9 million for the three months ended March 31,
2001. Approximately $1.4 million of this loss was attributable to T3 Media. In
2000, the Company had a net loss of $16.8 million of which $5.5 million was
attributable to T3 Media (including certain one-time charges referred to below).
The remaining loss of $11.3 million was attributable to the Company's continuing
investment in its end-to-end e-Services business and higher expenses associated
with its Solution Branches and the expenses of closing certain operations and
streamlining others. In addition, in the fourth quarter, the Company recorded a
$3.9 million charge to reflect the impairment of goodwill and other related
charges. The Company may incur further operating losses and continue to make
capital expenditures and, as a result, may need to generate significant revenues
to achieve profitability. The Company cannot guarantee that the Company will
achieve sufficient cost reductions or revenues to achieve profitability. Even if
it does achieve profitability, there is no guarantee that the Company can
sustain or increase profitability on a quarterly or annual basis in the future.
If revenues grow slower than anticipated, or if operating expenses exceed
expectations or cannot be adjusted accordingly the Company will continue to
experience losses and the results of operations and financial condition will be
materially and adversely affected.
Capital Requirements
The Company may be unable to meet its future capital requirements. The
Company will require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. The Company currently is negotiating with several financial
institutions to replace its line of credit with an increased line. The Company
may not be able to obtain such financing or obtain it on acceptable terms.
Without additional financing, the Company may be forced to delay, scale back or
eliminate some or all of its product and services development, marketing and
other corporate programs. If the Company is able to obtain such financing, the
terms may contain restrictive covenants that might negatively affect its shares
of common stock, such as limitations on payments of dividends or, in the case of
a debt financing, reduced earnings due to interest expenses. Any further
issuance of equity securities would have a dilutive effect on the holders of its
shares of common stock. Its business, operating results and financial condition
may be materially harmed if revenues do not develop or grow slower than the
Company anticipates, if operating expenses exceed its expectations or cannot be
reduced accordingly, or if the Company cannot obtain additional financing.
11
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. Adverse economic conditions
affecting this region could have an adverse effect on the financial condition of
its clients located there, which in turn could adversely impact its business and
future growth. Revenues from its ten most significant clients accounted for a
majority of its revenues for each of the three years ended December 31, 2000 and
the three months ended March 31, 2001. In each of these periods, the Company has
had at least one customer with revenues exceeding 10% of the Company's revenues.
For the period ended March 31, 2001, the Company had revenues from two customers
which represented 25% and 15% of revenues. For the three months ended March 31,
2000, the Company had revenues from two customer which represented 13% and 11%
of revenues. No other customer represented greater than 10% of the Company's
revenues. In any given year, its ten most significant customers may vary based
upon specific projects for those clients during that year. There can be no
assurance that its significant clients will continue to engage us for additional
projects or do so at the same revenue levels. Clients engage the Company on an
assignment-by- assignment basis, and a client can generally terminate an
assignment at any time without penalties. The loss of any significant customer
could have a material adverse effect on its business, results of operations and
financial condition. A failure of the Company to develop relationships with new
customers could have a material adverse effect on its business, results of
operations and financial condition.
Project Risk
The Company's projects entail significant risks. Many of its
engagements involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. The Company's
failure or inability to meet a client's expectations in the performance of the
Company's services could result in a material adverse change to the client's
operations and therefore could give rise to claims against the Company or damage
its reputation, adversely affecting its business, results of operations and
financial condition.
Rapid Technological Change
The Company's business is subject to rapid technological change and is
dependent on new solutions. Our success will depend in part on its ability to
develop information technology solutions to meet client expectations, 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. The Company cannot assure you that it will be successful in adequately
addressing the outsourcing market or other information technology developments
on a timely basis or that, if addressed, the Company will be successful in the
marketplace. The Company also cannot assure you that products or technologies
developed by others will not render its 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.
e-Business Initiatives
The Company faces difficulties typically encountered by development
state companies in rapidly evolving markets because of its e-commerce
initiative. The Company provides e-commerce Web design and Web business
planning, strategic planning and marketing strategy-consulting services and
other related e-business services. The Company also provides remote application
hosting and off-site documentation storage to Web-based companies through a
strategic relationship with Always-On Software, Inc. Revenues from its
e-commerce services constituted 46% of revenues for the three months ended, 51%
of its revenues for the year ended December 31, 2000 and 21% for the year ended
December 31, 1999 . The Company cannot assure you that any products or services
developed by it, or its strategic partners will achieve market acceptance. The
risks involved in these service offerings include the Company's and its
strategic partners' abilities to:
o create a customer base;
o respond to changes in a rapidly evolving and unpredictable
business environment;
12
o maintain current and develop new strategic relationships;
o manage growth;
o continue to develop and upgrade technology; and
o attract, retain and motivate qualified personnel.
Possibility That Customers May Not Do Business With The Company
The Company's existing customers may decide not to continue to do
business with the Company, and potential customers may decide not to engage the
Company, or may conduct business with the Company on terms that are less
favorable than those currently extended, due to the Company's operating losses
in the past two years. In those events, the Company's net revenues would
decrease, and the Company's business would be adversely affected.
Billing Margins
The Company's ability to maintain billing margins is uncertain. We
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). The billing margin decreased for
the three months ended March 31, 2001 and for the year ended December 31, 2000
due principally to lower billing rates and lower utilization rates and higher
consultants wages. There can be no assurance, however, that its revenues will
continue to be billed primarily on a time and materials basis or that the
Company will be able to to pass along additional increases in its cost of
services to its clients.
Managing Growth
The Company may have difficulty managing its growth. Our expansion is
dependent upon, among other things,
o our ability to hire and retain consultants as employees or
independent consultants,
o 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
o if the Company consummates additional acquisitions, its
ability to successfully and profitably integrate any acquired
businesses into its 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.
Dependence on Chief Executive Officer
The Company's success is highly dependent upon the efforts and
abilities of Shmuel BenTov, its Chief Executive Officer and President. Mr.
BenTov has entered into an employment agreement with the Company, which
terminates on December 31, 2001. Although his employment agreement contains
non-competition, nondisclosure and non-solicitation covenants, this contract
does not guarantee that Mr. BenTov will continue his employment with Company.
The loss of services of Mr. BenTov for any reason could have a material adverse
effect upon the Company's business, results of operations and financial
condition.
13
Fluctuations in Quarterly Operating Results
The Company's quarterly results of operations are variable. Variations
in its revenues and results of operations occur from time to time as a result of
a number of factors, such as the timing of closing of Solution Branch offices,
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 its 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, its engagements generally are terminable by the client at any time
without penalties. Although the number of consultants can be adjusted to
correspond to the number of active projects, the Company must maintain a
sufficient number of senior consultants to oversee existing client projects and
to assist with its 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. The Company has also experienced, and may in the future
experience, significant fluctuations in the quarterly results of its 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 its results of operations for any period are
below the expectation of market analysts and investors, the market price of its
shares of common stock could be adversely affected.
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.
Possible Removal From Quotation Of Common Stock On NASDAQ And Resulting Market
Illiquidity
The Company's common stock is quoted on the NASDAQ National Market.
Continued quotation of its common stock on the NASDAQ National Market will
require, among other criteria, that (i) the minimum bid price for its common
stock be at least $1.00 per share and (ii) the public float, not including
shares held by affiliates of the Company, consists of at least 750,000 shares of
common stock and have an aggregate value of at least $5,000,000. On May 12,
2001, the minimum bid price for the Company's common stock was $0.63, and the
aggregate value of the Company's public float, not including common stock held
by affiliates of the Company, was approximately $2,235,000, based on the average
of the bid and asked prices of the Company's common stock on such date. The
Company has received notice from the NASDAQ National Market that it has 90 days
from May 3, 2000 to cure a deficiency in its public float or be removed from
quotation on the NASDAQ National Market. In addition, the Company stock price is
trading below $1.00 per share.
If of the Company's common stock is removed from quotation on the
NASDAQ National Market or the NASDAQ Small-Cap Market, the liquidity of the
Company's common stock could be reduced and the coverage of the Company by
security analysts and media could be reduced, which could result in lower prices
for the Company's common stock than might otherwise prevail and could also
result in larger spreads between the bid and asked prices for the Company's
common stock. Additionally, certain investors will not purchase securities that
are not quoted on the NASDAQ National Market, which could materially impair the
Company's ability to raise funds through the issuance of its common stock or
other securities convertible into its common stock.
14
In addition, if the Company's common stock is removed from quotation on
NASDAQ and the trading price of its common stock is less than $5.00 per share,
trading in its common stock would also be subject to the requirements of Rule
15g-9 promulgated under the Securities Exchange Act of 1934, as amended. Under
that Rule, broker and dealers who recommend such low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the Securities and
Exchange Commission, any equity security not traded on an exchange or quoted on
NASDAQ or the OTC Bulletin Board that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Such requirements could severely
limit the market liquidity of the Company's common stock. There can be no
assurance that the Company's common stock will not be removed from quotation on
NASDAQ or treated as penny stock.
Competition
The market for information technology services includes a large number
of competitors, is subject to rapid change and is highly competitive. Its
primary competitors include participants from a variety of market segments,
including the current and former 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 the Company. In addition, the Company competes with its
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. The Company cannot assure you that it will compete
successfully with its existing competitors or with any new competitors.
Intellectual Property Rights
The Company's business includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software 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. However, the Company cannot
assure you that the steps taken by us 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 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 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 our ability to establish or
protect our 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. 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." Our inability or
failure to establish rights to these terms or protect its rights may have a
material adverse effect on our business, results of operations and financial
condition.
15
Going Concern
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the three
months ended March 31, 2001 and the years ended December 31, 2000 and 1999, the
Company reported net losses of $4.9 million, $16.8 million and $2.7 million,
respectively. Additionally, the Company has an accumulated deficit of $20.3
million as of March 31, 2001. The Company believes that its continuing focus on
cost reductions, together with a number of other operational changes, including
the closing of certain branch offices and the restructuring of its subsidiary,
T3 Media, Inc. in 2001, will result in the attainment of profitable operations.
In addition, the Company currently is negotiating with a financial institution
to replace its line of credit with an increased line. If it is unsuccessful in
obtaining the new line with satisfactory terms and needs additional funds to
repay its current line or for other working capital purposes, its principal
shareholder has committed to lend up to $2.0 million to the Company to repay the
line of credit.
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 material.
Item 2. Changes in Securities and Use of Proceeds
There were no changes in securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
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.
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.
May 14, 2001 By: /s/ Shmuel BenTov
- ------------ ------------------------------------
Date Shmuel BenTov, President
and Chief Executive Officer
May 14, 2001 By: /s/ Frank T Thoelen
- ------------ -------------------------------------
Date Frank T Thoelen, Treasurer
and Chief Financial Officer