SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the six-month period ended: June 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-22945
THE A CONSULTING TEAM, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3169913
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10003
------------------------
(Address of principal executive offices)
(212) 979-8228
(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__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act) Yes___ No X
As of August 9, 2005, there were 2,330,583 shares of Common Stock, with $.01 par
value per share, outstanding.
THE A CONSULTING TEAM, INC.
INDEX
PART I. FINANCIAL INFORMATION.....................................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................................3
Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004..........................3
Condensed Consolidated Statement of Operations for the six months ended June 30, 2005 and 2004...........4
Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2005 and 2004...........5
Notes to Condensed Consolidated Financial Statements.....................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................20
ITEM 4. CONTROLS AND PROCEDURES..............................................................................20
PART II. OTHER INFORMATION.......................................................................................20
ITEM 1. LEGAL PROCEEDINGS....................................................................................21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..........................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................21
ITEM 5. OTHER INFORMATION....................................................................................21
ITEM 6. EXHIBITS.............................................................................................21
SIGNATURES.......................................................................................................24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2005 2004
-------------- --------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,045,209 $ 2,493,104
Accounts receivable- less allowance for doubtful accounts of $296,828 at
June 30, 2005, and December 31, 2004 4,576,742 3,810,759
Unbilled receivables 404,308 260,000
Prepaid expenses and other current assets 110,431 139,704
-------------- --------------
Total current assets 6,136,690 6,703,568
Investments, net 337,059 87,059
Property and equipment, net 512,899 556,896
Goodwill 1,140,964 1,140,964
Intangibles, net - 34,667
Deposits and other assets 120,363 126,363
-------------- --------------
Total assets $ 8,247,974 $ 8,649,515
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,176,046 $ 1,666,160
Capital lease obligation 290,517 290,517
Deferred income taxes 11,250 22,500
Current portion of long-term debt 14,306 233,962
-------------- --------------
Total current liabilities 2,492,119 2,213,139
Other long-term liabilities 6,218 13,479
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares
issued and outstanding as of June 30, 2005, and 571,615 shares issued and
outstanding as of December 31, 2004. - 5,716
Common stock, $.01 par value; 30,000,000 shares authorized; 2,329,458
issued and outstanding as of June 30, 2005; 2,122,647 issued and
outstanding as of December 31, 2004. 23,295 21,227
Paid-in capital 34,325,355 34,181,206
Accumulated deficit (28,599,014) (27,785,251)
-------------- --------------
Total shareholders' equity 5,749,637 6,422,898
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,247,974 $ 8,649,515
============== ==============
See accompanying notes to condensed consolidated financial statements
3
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -------------------------
2005 2004 2005 2004
------------- -------------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 12,819,166 $ 12,148,284 $ 6,704,056 $ 6,347,212
Cost of revenues 9,161,623 8,559,354 4,921,344 4,439,925
------------- ------------- ------------ ------------
Gross profit 3,657,543 3,588,930 1,782,712 1,907,287
OPERATING EXPENSES:
Selling, general & administrative 4,336,285 2,676,329 2,264,873 1,444,526
Provision for doubtful accounts - 75,000 - 20,000
Depreciation & amortization 121,463 226,530 61,274 106,257
------------- ------------- ------------ ------------
4,457,748 2,977,859 2,326,147 1,570,783
------------- ------------- ------------ ------------
Income (loss) from operations (800,205) 611,071 (543,435) 336,504
OTHER INCOME(EXPENSE):
Interest (expense) net 5,635 (13,513) 2,188 (9,775)
------------- ------------- ------------ ------------
5,635 (13,513) 2,188 (9,775)
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (794,570) 597,558 (541,247) 326,729
Provision (benefit) for income taxes 10,296 80,043 4,375 29,137
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (804,866) $ 517,515 $ (545,622) $ 297,592
============= ============= ============ ============
Net earnings per share of common stock:
Basic $ (0.37) $ 0.24 $ (0.24) $ 0.14
============= ============= ============ ============
Diluted $ (0.37) $ 0.22 $ (0.24) $ 0.13
============= ============= ============ ============
See accompanying notes to condensed consolidated financial statements.
4
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2005 2004
------------- ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) ($804,866) $517,515
Adjustments to reconcile net income(loss) to net cash provided by
(used in) operating activities, net of acquired assets:
Depreciation and amortization 121,463 226,530
Deferred income taxes (11,250) (11,250)
Provision for doubtful accounts - 75,000
Amortization of deferred financing cost 6,000 4,000
Changes in operating assets and liabilities:
Accounts receivable (765,982) (890,452)
Unbilled receivables (144,308) (173,790)
Prepaid or refundable income taxes - (18,760)
Prepaid expenses and other current assets 29,273 (72,581)
Accounts payable and accrued expenses 509,886 28,647
------------- ------------
Net cash (used in) operating activities (1,059,784) (315,140)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (42,800) (50,798)
Investments and advances (250,000) -
Proceeds from Sale of Investment - 212,000
Deposits - (38,489)
------------- ------------
Net cash provided by (used in) investing activities (292,800) 122,713
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from conversion of stock options 140,501 1,500
Payment of deferred financing cost - (40,000)
Dividend paid to Preferred Shareholders (8,897) (13,352)
Repayment of long-term debt (226,916) (126,965)
------------- ------------
Net cash (used in) financing activities (95,312) (178,816)
Net increase (decrease) in cash and cash equivalents (1,447,895) (371,243)
Cash and cash equivalents at beginning of period 2,493,104 1,409,623
------------- ------------
Cash and cash equivalents at end of period $ 1,045,209 $ 1,038,380
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $914 $17,097
============= ============
Cash paid during the period for income taxes $ 11,546 $ 104,041
============= ============
See accompanying notes to condensed consolidated financial statements
5
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.'s (the "Company") Form 10-K for the year ended December
31, 2004 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, 2004.
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, 2005 and the consolidated results of
operations for the three and six months ended June 30, 2005 and 2004, and cash
flows for the six months ended June 30, 2005 and 2004.
The condensed consolidated balance sheet at December 31, 2004 has been
derived from the audited financial statements at that date, but does not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America, 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, 2004.
The consolidated results of operations for the six months ended June
30, 2005 are not necessarily indicative of the results to be expected for any
other interim period or for the full year.
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 resources,
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 the
Company.
3) STOCK BASED COMPENSATION:
At June 30, 2005, the Company has a stock based compensation plan,
which is described as follows:
The Company adopted a Stock Option Plan (the "Plan") that provides for
the grant of stock options that are either "incentive" or "non-qualified" for
federal income tax purposes. The Plan provided for the issuance of up to a
maximum of 150,000 shares of common stock. On May 27, 1998, the shareholders
approved and ratified an increase to the Plan from 150,000 to 225,000 shares of
common stock and on May 24, 2001, the shareholders approved and ratified an
increase to the Plan from 225,000 to 300,000 shares of common stock (subject to
adjustment pursuant to customary anti-dilution provisions).
The exercise price per share of a stock option is established by the
Compensation Committee of the Board of Directors in its discretion, but may not
be less than the fair market value of a share of common stock as of the date of
grant. The aggregate fair market value of the shares of common stock with
respect to which "incentive" stock options are exercisable for the first time by
an individual to whom an "incentive" stock option is granted during any calendar
year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any
time after full vesting for a period not to exceed ten years from the date of
grant and terminate upon the date of termination of employment. Such period is
to be established by the Company in its discretion on the date of grant.
As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation", the Company accounts for stock-based compensation arrangements
with employees in accordance with provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation
expense for stock options issued to employees is based on the difference on the
date of grant, between the fair value of the Company's stock and the exercise
price of the option. No stock based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock at the date of grant. The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS 123. The Company expects to continue applying
provision of APB 25 for equity issuances to employees.
6
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock based compensation:
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
------------ ----------- ----------- -----------
Net income (loss) $ (804,866) $ 517,515 $ (545,622) $ 297,592
Preferred dividend 8,897 13,352 2,295 6,676
Net income (loss) available to ------------ ----------- ----------- -----------
common stockholders (813,763) 504,163 (547,917) 290,916
Deduct:
Total stock based compensation
expense determined under fair
value based method for all awards (2,000) (15,000) (1,000) (7,000)
------------ ----------- ----------- -----------
Pro forma net income (loss) $ (815,763) $ 489,163 $ (548,917) $ 283,916
============ =========== =========== ===========
Earnings per share:
Basic - as reported $ (0.37) $ 0.24 $ (0.24) $ 0.14
============ =========== =========== ===========
Diluted - as reported $ (0.37) $ 0.22 $ (0.24) $ 0.13
============ =========== =========== ===========
Basic - as pro forma $ (0.37) $ 0.23 $ (0.24) $ 0.13
============ =========== =========== ===========
Diluted - as pro forma $ (0.36) $ 0.22 $ (0.24) $ 0.13
============ =========== =========== ===========
7
4) NET INCOME (LOSS) PER SHARE:
The following table set forth the computation of basic and diluted net
income (loss) per share for the six months and the three months ended June 30,
2005 and 2004.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
---------------------------------------------------------
2005 2004 2005 2004
------------ ------------- ------------- ------------
Numerator for basic net income(loss) per share
Net income (loss) $ (804,866) $ 517,515 $ (545,622) $ 297,592
Preferred dividend 8,897 13,352 2,295 6,676
------------ ------------- ------------- ------------
Net income (loss) available to common stockholders $ (813,763) $ 504,163 $ (547,917) $ 290,916
============ ============= ============= ============
NUMERATOR FOR DILUTED NET INCOME(LOSS) PER SHARE
Net income (loss) available to common stockholders &
assumed conversion $ (813,763) $ 517,515 $ (547,917) $ 297,592
============ ============= ============= ============
DENOMINATOR:
Denominator for basic income (loss)
per share - weighted-average shares 2,214,539 2,108,386 2,284,715 2,108,805
============ ============= ============= ============
Effect of dilutive securities:
Preferred Shares - 142,903 - 142,903
Employee stock options - 52,197 - 57,092
------------ ------------- ------------- ------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 2,214,539 2,303,486 2,284,715 2,308,800
============ ============= ============= ============
BASIC EARNINGS INCOME (LOSS) PER SHARE:
------------ ------------- ------------- ------------
Net income (loss) $ (0.37) $ 0.24 $ (0.24) $ 0.14
============ ============= ============= ============
DILUTED EARNINGS INCOME (LOSS) PER SHARE:
------------ ------------- ------------- ------------
Net income (loss) $ (0.37) $ 0.22 $ (0.24) $ 0.13
============ ============= ============= ============
During the six months and the three months ended June 30, 2005, all options and
warrants outstanding were not included in the computation of net loss per share
because the effect would be antidilutive. During the six and three months ended
June 30, 2004, there were 122,300 and 120,737 options that were excluded from
the computation of diluted earnings per share.
8
5) ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board issued
Statement 123 (revised 2004), Share Based Payment (Statement 123 (R) ). This
Statement requires that the costs of employee share based payments be measured
at fair value on the awards' grant date using an option-pricing model and
recognized in the financial statements over the requisite service period. This
Statement does not change the accounting for stock ownership plans, which are
subject to American Institute of Certified Public Accountants SOP 93-6,
"Employer's Accounting for Employee Stock Ownership Plans." Statement 123 (R)
supersedes Opinion 25, Accounting for Stock Issued to Employees and its related
interpretations, and eliminates the alternative to use Opinion 25's intrinsic
value method of accounting, which the Company is currently using. Statement 123
(R) allows for two alternative transition methods. The first method is the
modified prospective application whereby compensation cost for the portion of
awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123 (R). The second method is
the modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The SEC amended the effective dates of Statement
123(R) for public companies by issuing Release 33-8568. The new rule allows
registrants to implement Statement 123(R) at the beginning of their next fiscal
year, instead of the next interim period, that begins after June 15, 2005 (after
December 15, 2005 for small business issuers). The Company is currently
determining which transition method it will adopt and is evaluating the impact
Statement 123 (R) will have on its financial position, results of operations,
EPS and cash flows when the Statement is adopted.
6) CONCENTRATION OF CREDIT RISK:
The revenues of three customers represented approximately 19%, 17% and
16% of the revenues for the six months ended June 30, 2005. The revenues of two
customers represented approximately 23% and 16% of revenues for the same period
in 2004.
7) CREDIT ARRANGEMENT:
The Company has a line of credit of $4.0 million with Keltic Financial
Partners, LP, (Keltic) based on the Company's eligible accounts receivable
balances. The line of credit has certain financial covenants, which the Company
must meet on a quarterly basis. On March 23, 2004, the line of credit was
amended and restated to include the following: an extension to June 2007, the
removal of the guarantee of the Chief Executive Officer and less restrictive
financial covenants. On March 23, 2005, the agreement was restated and amended,
again. Included in the restated and amended agreement is Keltic's consent for
the proposed transaction with Vanguard Info-Solutions Corporation, (as defined
in more detail in the Definitive Proxy Statement filed on June 27, 2005), and a
waiver to certain financial covenants that the Company failed to comply with in
the first and second quarter ending March 31 and June 30, 2005, respectively.
There was no outstanding balance at June 30, 2005 and December 31, 2004. The
line of credit bears interest at a variable rate based on prime plus 1.75% and
the rate was 8% at June 30, 2005.
The Company is prohibited from paying dividends on its common stock due
to restrictions under the restated and amended Loan and Security Agreement with
Keltic Financial Partners, L.P. Keltic has consented to the payment of dividends
on the Series A and Series B Preferred Stock, provided an event of default does
not exist.
8) CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has the following commitments as of June 30, 2005, which
are comprised of long term obligations of an automobile loan, and employment
contracts. In addition, there is a capital lease obligation and operating lease
obligation as well. The automobile loan is payable in monthly installments of
$1,262 including interest at 6%. As of June 30, 2005, the loan matures as
follows: 2005 - $7,047 and 2006 - $13,478. The employment contracts are payable
as follows: 2005 - $22,000. One of the Company's subsidiaries, T3 Media, which
ceased operations in 2001, had entered into a series of capital lease
obligations, which the Company had guaranteed. The Company continues the process
of negotiating buy-outs on these leases. The Company has two operating leases
for its corporate headquarters located in New York and its branch office in New
Jersey. The annual amounts due for both locations are as follows: 2005 -
$154,332, 2006 - $308,663 and 2007 - $191,100.
9
The Company's commitments at June 30, 2005, are comprised of the
following:
- ---------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS --------------------------------------------------------------------------
LESS THAN 1 1 - 3 3 - 5 MORE THAN
TOTAL YEAR YEAR YEAR 5 YEARS
- ---------------------------------------------------------------------------------------------------------
LONG TERM OBLIGATIONS
Automobile Loan $ 20,525 $ 7,047 $ 13,478 $ - $ -
Employment Contracts 22,000 22,000 - - -
- ---------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Capital Lease - Short Term 290,517 290,517 - - -
- ---------------------------------------------------------------------------------------------------------
OPERTATING LEASES
Rent 654,095 154,332 499,763 - -
- ---------------------------------------------------------------------------------------------------------
TOTAL $ 987,137 $ 473,896 $ 513,241 $ - $ -
- ---------------------------------------------------------------------------------------------------------
As of June 30, 2005, the Company does not have any "Off Balance Sheet
Arrangements".
9) SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange
Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions
Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders
and the authorized representative of the Vanguard shareholders named therein
providing for an exchange of 7,312,796 shares of the Company's common stock for
all of the issued and outstanding shares of capital stock of Vanguard (the
"Share Exchange"). Additionally, on January 21, 2005, the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance
Investments Limited ("Oak"), a British Virgin Islands company, providing for the
sale of between 625,000 and 1,250,000 shares of the Company's common stock to
Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The
Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement
under which he has agreed to sell all of his shares of TACT capital stock to Oak
in a separate transaction at $10.25 per share.
The Company originally scheduled its 2005 annual shareholders' meeting
for May 5, 2005. One of the proposals to be submitted to shareholders approval,
as discussed in the proxy statement relating to the shareholders' meeting, was
approval of the Share Issuance.
On May 5, 2005, the Company announced that its board of directors voted
to postpone its 2005 annual shareholders' meeting scheduled for May 5, 2005. The
Company's board of directors had determined that the disclosure in the proxy
statement relating to the shareholders' meeting should be amended to describe
certain terms and implications of the contemplated financing that Oak intends to
enter into in order to finance its commitments relating to the Share Issuance
and its purchase of Mr. BenTov's shares of TACT common stock. The Company held
its annual shareholders meeting on July 26, 2005 at which time the matters set
forth in the proxy statement were approved by the shareholders.
On August 4, 2005, the Company terminated the Share Exchange Agreement
and the Stock Purchase Agreement, pursuant to the terms of each agreement. The
Company's Board of Directors felt that this action was in the best interest of
the shareholders, employees and its clients. The Company has been advised that
Mr. BenTov terminated his stock purchase agreement with Oak as well.
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, liquidity and capital resources should be read
in conjunction with the accompanying financial statements and related notes.
10
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 SmallCap: TACX), headquartered in New York, NY. In addition, TACT has an
office in Clark, NJ.
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, accelerated the growth of the IT
industry through 2001. These advances included more powerful and less expensive
computer technology, the transition from predominantly centralized mainframe
computer systems to open and distributed computing environments and the advent
of capabilities such as relational databases, imaging, software development
productivity tools, electronic commerce ("e-commerce") applications and
web-enabled software. These advances expanded the benefits that users can derive
from computer-based information systems and improved the price-to-performance
ratios of such systems. As a result, an increasing number of companies were
employing IT in new ways, often to gain competitive advantages in the
marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems rendered the development and implementation of such systems
increasingly complex. In addition, there was a shortage of IT consultants
qualified to support these systems. Accordingly, organizations turned to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems. However, during 2002 and continuing into 2003 there
was a slowdown in IT spending coincident with the general economic slowdown.
This resulted in revenue decreases at many IT service companies, however, IT
spending increased in 2004. Industry analysts believe that this trend will
continue into 2005. Accordingly, the company will continue to expand its sales
and recruiting function in our effort to further increase its revenues in the
both short-term and long-term.
TACT is an end-to-end IT solutions and services provider focused on
leveraging existing systems and data. The Company's goal is to empower customers
through the utilization of technology to reduce costs, improve services and
increase revenues. The Company delivers migrations and conversions of legacy
systems, web enablement of existing systems, customer development, performance
optimization, migrations and conversions, outsourcing, strategic sourcing and
enterprise wide IT consulting, and software solutions.
Over 60% 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 for the second quarter of 2005. The Company expects that revenues
from fixed fee contracts will continue this trend.
TACT provides clients with enterprise-wide information technology
consulting 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 solutions, data warehousing, systems strategies,
application and database conversions, and application development services.
When TACT is engaged by its clients to implement IT solutions or
services it uses its Smart Approach. TACT's Smart Approach is a leading edge set
of end-to-end solutions and services that include Strategy, Methodology,
Architecture, Resources and Tools. The Strategy is developed together with the
client to ensure that the client's goals and objectives are met. The Methodology
is a Tried and True TACT Methodology that is followed in order to implement the
Strategy. The solutions and services are built on a robust Architecture. Utilize
highly qualified TACT Resources and Exploits best-of-breed Tools.
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.
Revenues from fixed fee contracts are recorded when work is performed on the
basis of the proportionate performance method, which is based on costs incurred
to date relative to total estimated costs.
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 margins (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). Large portions of the Company's engagements are
on a time and materials basis. While most of the Company's engagements allow for
periodic price adjustments to address, among other things, increases in
consultant costs, over the last four years and to date clients have been adverse
to accepting cost increases. 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. TACT carefully monitors consultants that are not utilized
and has established guidelines for the amount of non-billing time that it allows
before a consultant is terminated.
11
Historically, the Company has also generated revenues by selling
software licenses. 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. The revenues from the sales of software is ancillary to the
Company's total revenues.
On October 2, 1998, the Company made an investment in a Web integrator,
T3 Media, Inc., 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 $3.1 million of the intangibles and certain other fixed assets
could not be supported, resulting in an aggregate write-off of $3.9 million in
the fourth quarter of 2000. Due to the continued deterioration in revenues and
market conditions for T3 Media's services, the operations of T3 Media ceased in
the second quarter of 2001. Accordingly, the Company recorded additional charges
of $1.2 million related to termination costs and the settlement of the various
operating lease obligations, in the second quarter of 2001.
On July 19, 2002, the Company, acquired all of the common stock of
International Object Technology, Inc. (IOT) for a combination of deferred cash
consideration of $650,000 and 317,500 shares of TACT unregistered Common Stock,
which has been retroactively adjusted to reflect the one-for-four reverse stock
split that occurred on January 7, 2004 and was valued at $635,000. The
acquisition of IOT was accounted for using the purchase method of accounting.
Accordingly, the results of operations of IOT are included in the Company's
consolidated results of operation from the date of acquisition. The purchase
price of the acquisition exceeded the fair market value of the net assets
acquired, resulting in the recording of goodwill of $1,181,520 and other
identifiable intangibles of $312,000 with the identifiable intangible assets
being amortized over a three year period on a straight line basis. IOT was a
privately owned, professional services firm that provides data management and
business intelligence solutions, technology consulting and project management
services. The acquisition increased the depth of the Company's services and
solution offerings and provided the Company with cross-selling opportunities.
On January 21, 2005, the Company entered into a Share Exchange
Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions
Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders
and the authorized representative of the Vanguard shareholders named therein
providing for an exchange of 7,312,796 shares of the Company's common stock for
all of the issued and outstanding shares of capital stock of Vanguard (the
"Share Exchange"). Additionally, on January 21, 2005, the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance
Investments Limited ("Oak"), a British Virgin Islands company, providing for the
sale of between 625,000 and 1,250,000 shares of the Company's common stock to
Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The
Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement
under which he has agreed to sell all of his shares of TACT capital stock to Oak
in a separate transaction at $10.25 per share.
The Company originally scheduled its 2005 annual shareholders' meeting
for May 5, 2005. One of the proposals to be submitted to shareholders approval,
as discussed in the proxy statement relating to the shareholders' meeting, was
approval of the Share Issuance.
On May 5, 2005, the Company announced that its board of directors voted
to postpone its 2005 annual shareholders' meeting scheduled for May 5, 2005. The
Company's board of directors had determined that the disclosure in the proxy
statement relating to the shareholders' meeting should be amended to describe
certain terms and implications of the contemplated financing that Oak intends to
enter into in order to finance its commitments relating to the Share Issuance
and its purchase of Mr. BenTov's shares of TACT common stock. The Company held
its annual shareholders meeting on July 26, 2005 at which time the matters set
forth in the proxy statement were approved by the shareholders.
On August 4, 2005, the Company terminated the Share Exchange Agreement
and the Stock Purchase Agreement, pursuant to the terms of each agreement. The
Company's Board of Directors felt that this action was in the best interest of
the shareholders, employees and its clients. The Company has been advised that
Mr. BenTov terminated his stock purchase agreement with Oak as well.
12
On April 11, 2005, the Company completed an investment in an offshore
joint venture, TACT Global Services Private Limited, in the amount of $250,000,
which represents approximately a 68% ownership. The Company expects that this
investment will substantially enhance its offshore presence in its continuing
endeavor to stay competitive in the industry. The Company expects the operations
of this subsidiary to increase throughout the remainder of the year.
CERTAIN CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying our most
critical accounting polices have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements.
Goodwill and Intangible Assets
The Company's goodwill is evaluated and tested on a periodic basis by
an independent third party. If it is determined that goodwill has been impaired
it will be written down at that time.
The Company's useful life of its intangible assets has been evaluated
and it was determined that they will be amortized over a three year period.
Revenue Recognition
Consulting revenues are recognized as services are provided. The
Company primarily provides consulting services under time and material
contracts, whereby revenue is recognized as hours and costs are incurred.
Customers for consulting revenues are billed on a weekly, semi-monthly and
monthly basis. Revenues from fixed fee contracts are recorded when work is
performed on the basis of the proportionate performance method, which is based
on costs incurred to date relative to total estimated costs. Any anticipated
contract losses are estimated and accrued at the time they become known and
estimable. Unbilled accounts receivables represent amounts recognized as revenue
based on services performed in advance of customer billings. Revenue from sales
of software licenses is recognized upon delivery of the software to a customer
because future obligations associated with such revenue are insignificant.
Allowance for Doubtful Accounts
The Company monitors its accounts receivable balances on a monthly
basis to ensure that they are collectible. On a quarterly basis, the Company
uses its historical experience to accurately determine its accounts receivable
reserve. The Company's allowance for doubtful accounts is an estimate based on
specifically identified accounts as well as general reserves. The Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations. In these cases, management uses
its judgment, based on the best available facts and circumstances, and records a
specific reserve for that customer against amounts due to reduce the receivable
to the amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts the
amount reserved. The Company also establishes a general reserve for all
customers based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. If
circumstances change, the Company's estimate of the recoverability of amounts
due the Company could be reduced or increased by a material amount. Such a
change in estimated recoverability would be accounted for in the period in which
the facts that give rise to the change become known.
13
RESULTS OF OPERATIONS
The following table sets 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
--------------------------------------------------
2005 2004 2005 2004
----------- ------------ ---------- -----------
REVENUES 100.0% 100.0% 100.0% 100.0%
COST OF REVENUES 71.5% 70.5% 73.4% 70.0%
----------- ----------- ---------- -----------
GROSS PROFIT 28.5% 29.5% 26.6% 30.0%
OPERATING EXPENSES 34.8% 24.5% 34.7% 24.7%
----------- ----------- ---------- -----------
INCOME/LOSS FROM OPERATIONS (6.2)% 5.0% (8.1)% 5.3%
----------- ----------- ---------- -----------
NET INCOME(LOSS) (6.3)% 4.3% (8.1)% 4.7%
=========== =========== ========== ===========
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2005 TO THE THREE MONTHS ENDED
JUNE 30, 2004
REVENUES. Revenues of the Company increased by $357,000, or 5.6%, from
$6.3 million for the three months ended June 30, 2004 to $6.7 million for the
three months ended June 30, 2005. The increase was primarily attributable to an
upturn in the economy, which fostered increased spending in the IT industry.
Software licensing revenues increased by $19,000, or 4.7%, from
$408,000 in the second quarter of 2004 to $427,000 in the second quarter of
2005. Software sales are expected to be ancillary to the Company's total
revenues in future periods.
GROSS PROFIT. The gross profit for the three months ended June 30, 2005
decreased by $125,000, or 6.5%, from $1.9 million in the second quarter of 2004
to $1.8 million in the second quarter of 2005. As a percentage of total
revenues, gross margin for the quarter decreased from 30% in 2004 to 26.6% in
2005. The decrease in gross margin percentage was primarily due to costs
associated with additional technical and support staff who are scheduled to
start work on new projects.
OPERATING EXPENSES. Operating expenses are comprised of Selling,
General and Administrative ("SG&A") expenses, provision for doubtful accounts,
depreciation and amortization and impairment of assets and restructuring
charges. Operating expenses increased by $755,000, or 48.1%, from $1.6 million
in the second quarter of 2004 to $2.3 million in the second quarter of 2005. The
increase in operating expenses was primarily due to the recording of
approximately $617,000 in transaction expenses relating to the proposed
transaction with Vanguard, which was terminated on August 4, 2005 and an
increase in payroll costs due to increased sales and marketing staff.
Depreciation and amortization expenses decreased $45,000 or 42.3% from $106,000
to $61,000 in 2004 and 2005.
TAXES. Taxes decreased $25,000 from $29,000 from the second quarter in
2004 to $4,000 in the second quarter of
2005.
NET INCOME (LOSS). As a result of the above, the Company had a net loss
of ($546,000) or ($.24) per share in the second quarter of 2005 compared to a
net income of $298,000 or $0.14 per basic and $0.13 per diluted share in the
second quarter 2004. Excluding the expenses associated with the proposed
transaction the Company would have had a net income of approximately $71,000.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 TO THE SIX MONTHS ENDED JUNE
30, 2004
REVENUES. Revenues of the Company increased by $671,000, or 5.5%, from
$12.1 million for the six months ended June 30, 2004 to $12.8 million for the
six months ended June 30, 2005. The increase was primarily attributable to an
upturn in the economy, which fostered increased spending in the IT industry.
14
Software licensing revenues increased by $120,000, or 17.4%, from
$690,000 for the six months ended June 30, 2004 to $810,000 for the six months
ended June 30, 2005. Software sales are expected to be ancillary to the
Company's total revenues in future periods.
GROSS PROFIT. The gross profit increased by $69,000, or 1.9%, from $3.6
million for the six months ended June 30, 2004 to $3.7 million for the six
months ended June 30, 2005. As a percentage of total revenues, gross margin
decreased from 29.5% in 2004 to 28.5% in 2005. The decrease in gross margin
percentage of total revenues was primarily attributable to costs associated with
additional technical and support staff who are scheduled to start work on new
projects.
OPERATING EXPENSES. Operating expenses increased by $1.5 million or
49.7%, from $3.0 million for the six months ended June 30, 2004 to $4.5 million
for the six months ended June 30, 2005. The increase in operating expenses was
primarily due to recording of approximately $1,162,000 in transaction expenses
relating to the proposed transaction with Vanguard, which was terminated on
August 4, 2005, an increase in payroll costs due to increased sales and
marketing staff and an increase in insurance expenses across the board.
Depreciation and amortization expenses decreased $105,000 or 46.4% from $226,531
in 2004 compared to $121,464 in 2005.
TAXES. Taxes decreased $70,000 from $80,000 in the six months ended
June 30, 2004 to $10,000 in the six months ended June 30, 2005.
NET INCOME (LOSS). As a result of the above, the Company had a net loss
of ($805,000) or ($.37) per basic and diluted share for the six months ended
June 30, 2005 compared to a net income of $518,000 or $0.24 per basic and $0.22
per diluted share for the six months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit of $4.0 million with Keltic Financial
Partners, LP, (Keltic) based on the Company's eligible accounts receivable
balances. The line of credit has certain financial covenants, which the Company
must meet on a quarterly basis. On March 23, 2004, the line of credit was
amended and restated to include the following: an extension to June 2007, the
removal of the guarantee of the Chief Executive Officer and less restrictive
financial covenants. On March 23, 2005, the agreement was restated and amended,
again. Included in the restated and amended agreement is Keltic's consent for
the proposed transaction with Vanguard Info-Solutions Corporation, (as defined
in more detail in the Definitive Proxy Statement filed on June 27, 2005), and a
waiver to certain financial covenants that the Company failed to comply with in
the first and second quarter ending March 31, 2005 and June 30, 2005,
respectively. There was no outstanding balance at June 30, 2005and December 31,
2004. The line of credit bears interest at a variable rate based on prime plus
1.75% and the rate was 8% at June 30, 2005.
The Company is prohibited from paying dividends on its common stock due
to restrictions under the restated and amended Loan and Security Agreement with
Keltic Financial Partners, L.P. Keltic has consented to the payment of dividends
on the Series A and Series B Preferred Stock, provided an event of default does
not exist.
On August 4, 2005, the Company terminated the Share Exchange Agreement
and the Stock Purchase Agreement, pursuant to the terms of each agreement. The
Company's Board of Directors felt that this action was in the best interest of
the shareholders, employees and its clients. The Company has been advised that
Mr. BenTov terminated his stock purchase agreement with Oak as well.
T3 Media had entered into a series of capital lease obligations, which
the Company had guaranteed to finance its expansion plans, covering leasehold
improvements, furniture and computer-related equipment. The amount outstanding
under such leases was approximately $291,000 at June 30, 2005. The Company
continues the process of negotiating buy-outs on these leases.
The Company's cash balances were approximately $1 million at June 30,
2005 and $2.5 million at December 31, 2004. Net cash used in operating
activities for the six months ended June 30, 2005 was approximately ($1,060,000)
compared to ($315,000) for the six months ended June 30, 2004.
The Company's accounts receivable, less allowance for doubtful
accounts, at June 30, 2005 and December 31, 2004 were $4.6 million and $3.8
million, respectively, representing 60 and 54 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 because
improved collection techniques and daily monitoring of receivables and cash
balances have been implemented. Collection of receivables is one of the
Company's highest priorities.
15
The revenues of three customers represented approximately 19%, 17% and
16% of the revenues for the six months ended June 30, 2005. The revenues of two
customers represented 23% and 16% of revenues for the same period in 2004.
The Company has no restructuring charge liability as of June 30, 2005
and December 31, 2004.
Net cash (used in)/provided by investing activities was approximately
($293,000) and $123,000 for the six months ended June 30, 2005 and 2004. In each
of these periods additions to property and equipment was ($43,000) and
($51,000), respectively.
Net cash (used in) financing activities was approximately ($95,000) and
($179,000) at June 30, 2005 and 2004.
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 the
Company.
OFF BALANCE SHEET ARRANGEMENTS
As of June 30, 2005, the Company does not have any "Off Balance Sheet
Arrangements".
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
During the six months ended June 30, 2005, there were no material
changes outside the ordinary course of the Company's business to the Company's
contractual obligations and commitments, which were discussed in the table
appearing in the Liquidity and Capital Resources section, under the Contractual
Obligations header in Item 7 of the Company's Form 10-K for the year ended
December 31, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued
Statement 123 (revised 2004), Share Based Payment (Statement 123 (R) ). This
Statement requires that the costs of employee share based payments be measured
at fair value on the awards' grant date using an option-pricing model and
recognized in the financial statements over the requisite service period. This
Statement does not change the accounting for stock ownership plans, which are
subject to American Institute of Certified Public Accountants SOP 93-6,
"Employer's Accounting for Employee Stock Ownership Plans." Statement 123 (R)
supersedes Opinion 25, Accounting for Stock Issued to Employees and its related
interpretations, and eliminates the alternative to use Opinion 25's intrinsic
value method of accounting, which the Company is currently using. Statement 123
(R) allows for two alternative transition methods. The first method is the
modified prospective application whereby compensation cost for the portion of
awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123 (R). The second method is
the modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The SEC amended the effective dates of Statement
123(R) for public companies by issuing Release 33-8568. The new rule allows
registrants to implement Statement 123(R) at the beginning of their next fiscal
year, instead of the next interim period, that begins after June 15, 2005 (after
December 15, 2005 for small business issuers). The Company is currently
determining which transition method it will adopt and is evaluating the impact
Statement 123 (R) will have on its financial position, results of operations,
EPS and cash flows when the Statement is adopted.
16
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.
FACTORS THAT COULD AFFECT OPERATING RESULTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 21E 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 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.
OPERATING LOSSES
The Company incurred an operating loss in the six months ended June 30,
2005. In the six months ended June 30, 2004, the Company had operating income of
$611,000 and a net income of $517,500. There is no guarantee that the Company
can achieve 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 may require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. 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 likely 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.
17
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 the six months ended June 30, 2005 as well as for
each of the two years ended December 31, 2004. In each of these periods, the
Company had at least one customer with revenues exceeding 10% of the Company's
revenues. For the six months ended June 30, 2005, the Company had revenues from
three customers, which represented 19%, 17% and 16% of revenues. For the year
ended December 31, 2004, the Company had revenues from two customers, which
represented 20% and 19% of revenues. Besides these customers, 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 it 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. Its success will depend in part on its ability to
develop information technology solutions to meet client expectations, and offer
software services and 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. Its failure to address these
developments could have a material adverse effect on its business, results of
operations and financial condition.
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. 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. It
derives over 60% of its revenues primarily from the hourly billing of
consultants' services and, the remainder, from fixed-price projects. Its most
significant cost is project personnel cost, which consists of consultant
salaries and benefits. Thus, a significant portion its financial performance is
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). In the second quarter of 2005, the Company's gross margin decreased due
to costs associated with additional technical and support staff that are
scheduled to start work on new projects. 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's cost containment and workforce rationalization
effects will continue to provide positive results. In addition, during the past
two years the Company's clients have been adverse to increases in any costs of
the Company's services.
18
MANAGING GROWTH
The Company may have difficulty managing its growth. Its expansion is dependent
upon, among other things,
o its ability to hire and retain consultants as employees or
independent consultants,
o its ability to identify suitable new geographic markets with
sufficient demand for its 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 the Company's management is unable to manage growth or new employees
or consultants are unable to achieve anticipated performance levels, its
business, results of operations and financial condition could be materially
adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations are variable. Variations
in 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 the 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 it. 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 Company's 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 its Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
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 Four"
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 it. The Company cannot assure you that it will compete
successfully with its existing competitors or with any new competitors.
19
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 license 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 it 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 it 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 its ability to establish or
protect its right to use these terms. The Company has in the past been contacted
by other users of the term "TACT" alleging rights to the term. 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." Its inability or
failure to establish rights to these terms or protect its rights may have a
material adverse effect on its business, results of operations and financial
condition.
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 six months
ended June 30, 2005, the Company reported a net loss of ($805,000). For the year
ended December 31, 2004, the Company reported net income of $1.2 million.
Additionally, the Company has an accumulated deficit of $29 million at June 30,
2005. The Company believes that its continuing focus on cost reductions,
together with a number of other operational changes, has resulted in an improved
financial condition. There can be no assurance that the Company will be
profitable in future quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into market risk sensitive transactions
required to be disclosed under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report, had concluded that our disclosure
controls and procedures were effective and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to us by others within these entities.
Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting in connection with an
evaluation that occurred during our second fiscal quarter of 2005 that has
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None material.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On March 23, 2005, the Company entered into an amended and restated
Loan and Security Agreement with Keltic Financial Partners, L.P., which amended
and restated the Company's pre-existing Loan and Security Agreement with Keltic.
The amended and restated Loan and Security Agreement provides for a line of
credit of $4.0 million to the Company based on the Company's eligible accounts
receivable. The line of credit has certain financial covenants, which the
Company must meet on a quarterly basis. The line of credit bears interest at a
variable rate based on prime plus 1.75% and the rate was 8% at June 30, 2005.
Included in the amendments to the previous Loan and Security Agreement were
Keltic's consent for the proposed transaction with Vanguard Info-Solutions
Corporation and a waiver to certain financial covenants that the Company failed
to comply with in the second quarter ended June 30, 2005.
ITEM 6. EXHIBITS
(A) EXHIBITS
- --- --------
2.1 Stock Purchase Agreement dated as of June 28, 2002 among the
Registrant, International Object Technology, Inc. and the
Stockholders of International Object Technology, Inc.
incorporated by reference to Exhibit 2.1 to the Form 8-K, as
previously filed with the SEC on July 12, 2002.
3.1 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to the Form 10Q for the
period ended June 30, 2001, as previously filed with the SEC on
August 10, 2001.
3.2.1 Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated August 8, 2002 incorporated by reference to
Exhibit 3.2 to the Form 10-Q for the period ended June 30, 2001,
as previously filed with the SEC on August 14, 2002.
3.2.2 Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated November 12, 2002, incorporated by
reference to Exhibit 3.2.2 to the Form 10-Q for the period ended
September 30, 2002, as previously filed with the SEC on November
14, 2002.
3.2.3 Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated January 5, 2004, incorporated by reference
to Exhibit 3.2.3 to the Form 8-K dated January 8, 2004, as
previously filed with the SEC on January 8, 2004.
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 SEC on August 6, 1997.
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the
Registrant incorporated by reference to Exhibit 3.4 to the Form
10-Q for the period ended June 30, 2003, as previously filed
with the SEC on August 14, 2003.
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4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among
the Registrant and those persons listed on Schedule I attached
thereto, incorporated by reference to Exhibit 4.1 to the Form
8-K dated July 19, 2002, as previously filed by the SEC on July
25, 2002.
10.1.1 Stock Option and Award Plan of the Registrant and Form of
Nonqualified Stock Option Agreement, incorporated by reference
to Exhibit 10.1 to the Registration Statement on Form SB-2 as
previously filed with the SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Post-Effective Amendment No. 1 to
the Registration Statement on Form S-8 as previously filed with
the SEC on June 25, 1998.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the
Registrant, incorporated by reference to Exhibit C to the
Registrant's 2001 Proxy Statement on Schedule 14A, as previously
filed with the SEC on April 30, 2001.
10.2 Amended and restated Loan and Security Agreement between the
Registrant and Keltic Financial Partners, LP, dated March 23,
2005.
10.3 Employment Agreement, dated January 1, 2002, between the
Registrant and Shmuel BenTov, incorporated by reference to
Exhibit 10.5 to the Form 10-K for the fiscal year ended December
31, 2001, as previously filed with the SEC on April 1, 2002.
10.4 Employment Agreement, dated September 11, 2001, between the
Registrant and Richard Falcone, incorporated by reference to
Exhibit 10.8 to the Form 10-K/A for the fiscal year ended
December 31, 2001, as filed with the SEC on April 4, 2002.
10.5 Form of S Corporation Termination, Tax Allocation and
Indemnification Agreement, incorporated by reference to Exhibit
10.4 to the Registration Statement on Form SB-2, as previously
filed with the SEC on August 6, 1997.
10.6 Letter of Undertaking from the Registrant and Shmuel BenTov,
incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form SB-2, as previously filed with the SEC on July
23, 1997.
10.7 Shmuel BenTov Letter Commitment, dated March 29, 2001,
incorporated by reference to Exhibit 10.10 to the Form 10-K for
the fiscal year ended December 31, 2000, as previously filed
with the SEC on April 2, 2001.
10.8 Employment Agreement dated as of July 19, 2002 between the
Registrant and Dr. Piotr Zielczynski, incorporated by reference
to Exhibit 10.1 to the Form 8-K dated July 19, 2002, as
previously filed with the SEC on July 25, 2002.
10.9 Employment Agreement dated as of July 19, 2002 between the
Registrant and Ilan Nachmany, incorporated by reference to
Exhibit 10.2 to the Form 8-K dated July 19, 2002, as previously
filed with the SEC on July 25, 2002.
10.10 Employment Agreement dated as of July 19, 2002 between the
Registrant and Sanjeev Welling, incorporated by reference to
Exhibit 10.3 to the Form 8-K dated July 19, 2002, as previously
filed with the SEC on July 25, 2002.
10.11 Form of Indemnification Agreement between the Registrant and
each of its Directors and its Chief Executive Officer,
incorporated by reference to Exhibit 10.12 to the Form 10-Q for
the period ended September 30, 2003 as filed with the SEC on
November 11, 2003.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
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.
By: /s/ Shmuel BenTov
-----------------
DATE: AUGUST 11, 2005 Shmuel BenTov, Chairman,
Chief Executive Officer and President
By: /s/ Richard D. Falcone
-----------------
DATE: AUGUST 11, 2005 Richard D. Falcone, Treasurer
and Chief Financial Officer
23