UNITED STATES
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 quarterly period ended: June 30, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes No X
--- ---
As of August 9, 2006, there were 2,382,301 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, 2006 and December 31, 2005.................................3
Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2006 and 2005........4
Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2006 and 2005..................5
Notes to Condensed Consolidated Financial Statements............................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................................18
ITEM 4. CONTROLS AND PROCEDURES.........................................................................................18
PART II. OTHER INFORMATION..............................................................................................18
ITEM 1. LEGAL PROCEEDINGS...............................................................................................18
ITEM 1A. RISK FACTORS...................................................................................................18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....................................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................................19
ITEM 5. OTHER INFORMATION...............................................................................................19
ITEM 6. EXHIBITS........................................................................................................19
SIGNATURES...............................................................................................................21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2006 2005
--------------------- ---------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,293,085 $ 2,156,867
Accounts receivable- less allowance for doubtful accounts of $277,613
at June 30, 2006, and $320,804 at December 31, 2005 4,972,914 3,918,371
Unbilled receivables 168,921 434,563
Prepaid expenses and other current assets 109,541 160,413
--------------------- ---------------------
Total current assets 7,544,461 6,670,214
Investment, net 87,059 87,059
Property and equipment, net 462,729 480,845
Goodwill 1,140,964 1,140,964
Deposits and other assets 108,561 114,363
--------------------- ---------------------
Total assets $ 9,343,774 $ 8,493,445
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,108,079 $ 1,764,647
Capital lease obligation 290,517 290,517
Deferred revenue 114,055 220,005
Current portion of long-term debt 6,218 13,479
--------------------- ---------------------
Total current liabilities 2,518,869 2,288,648
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares
issued and outstanding as of June 30, 2006, and December 31, 2005. - -
Common stock, $.01 par value; 30,000,000 shares authorized; 2,382,301
issued and outstanding as of June 30, 2006; 2,361,333 issued and
outstanding as of December 31, 2005. 23,823 23,614
Paid-in capital 34,544,147 34,462,262
Accumulated other comprehensive loss - foreign currency translation (7,413) (2,927)
Accumulated deficit (27,735,652) (28,278,152)
--------------------- ---------------------
Total shareholders' equity 6,824,905 6,204,797
--------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,343,774 $ 8,493,445
===================== =====================
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,
---------------------------------------- ----------------------------------------
2006 2005 2006 2005
------------------- ------------------- ------------------- -------------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 12,648,493 $ 12,819,166 $ 6,737,842 $ 6,704,056
Cost of revenues 9,223,831 9,161,623 4,925,055 4,921,344
------------------- ------------------- ------------------- -------------------
Gross profit 3,424,662 3,657,543 1,812,787 1,782,712
OPERATING EXPENSES:
Selling, general & administrative 2,804,240 4,336,285 1,088,695 2,264,873
Depreciation & amortization 77,482 121,463 40,798 61,274
------------------- ------------------- ------------------- -------------------
2,881,722 4,457,748 1,129,493 2,326,147
------------------- ------------------- ------------------- -------------------
Income/(Loss) from operations 542,940 (800,205) 683,294 (543,435)
OTHER INCOME(EXPENSE):
Interest income-net 17,060 5,635 11,276 2,188
------------------- ------------------- ------------------- -------------------
17,060 5,635 11,276 2,188
------------------- ------------------- ------------------- -------------------
INCOME/(LOSS) BEFORE INCOME TAXES 560,000 (794,570) 694,570 (541,247)
Provision for income taxes 17,500 10,296 12,800 4,375
------------------- ------------------- ------------------- -------------------
NET INCOME/(LOSS) 542,500 (804,866) 681,770 (545,622)
Other comprehensive loss -
foreign currency adjustment (4,486) - (2,321) -
------------------- ------------------- ------------------- -------------------
Comprehensive income/(loss) $ 538,014 $ (804,866) $ 679,449 $ (545,622)
=================== =================== =================== ===================
Net income/(loss) per share
Basic $ 0.23 $ (0.37) $ 0.29 $ (0.24)
=================== =================== =================== ===================
Diluted $ 0.23 $ (0.37) $ 0.28 $ (0.24)
=================== =================== =================== ===================
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,
2006 2005
-------------------- --------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 542,500 $ (804,866)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 77,481 121,463
Deferred income taxes - (11,250)
Provision for doubtful accounts 117,249 -
Stock based compensation 52,890 -
Amortization of deferred financing cost - 6,000
Changes in operating assets and liabilities:
Accounts receivable (1,171,792) (765,982)
Unbilled receivables 265,642 (144,308)
Prepaid expenses and other current assets 50,872 29,273
Accounts payable and accrued expenses 343,432 509,886
Deferred revenue (105,950) -
-------------------- --------------------
Net cash provided by/(used in) operating activities 172,324 (1,059,784)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (59,365) (42,800)
Investments and advances - (250,000)
Deposits 5,802 -
-------------------- --------------------
Net cash used in investing activities (53,563) (292,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from conversion of stock options 29,203 140,501
Dividend paid to Preferred Shareholders - (8,897)
Repayment of long-term debt (7,261) (226,916)
-------------------- --------------------
Net cash provided by/(used in) financing activities 21,942 (95,312)
-------------------- --------------------
Effect of foreign currency exchange rate changes on cash
and cash equivalents (4,486) -
-------------------- --------------------
Net increase/(decrease) in cash and cash equivalents 136,218 (1,447,895)
Cash and cash equivalents at beginning of period 2,156,867 2,493,104
-------------------- --------------------
Cash and cash equivalents at end of period $ 2,293,085 $ 1,045,209
==================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,132 $ 914
==================== ====================
Cash paid during the period for income taxes $ 18,574 $ 11,546
==================== ====================
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, 2005 filed with the SEC, and the accompanying financial statements and
related notes thereto. Except for the accounting for stock based compensation,
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, 2005.
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, 2006 and the consolidated results of
operations for the three and six months ended June 30, 2006 and 2005, and cash
flows for the six months ended June 30, 2006 and 2005.
The condensed consolidated balance sheet at December 31, 2005 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, 2005.
The consolidated results of operations for the six months ended June
30, 2006 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, 2006, 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, on May 24, 2001, the shareholders approved and ratified an
increase to the Plan from 225,000 to 300,000 shares of common stock, and on July
26, 2005, the shareholders approved and ratified an increase to the plan from
300,000 to 1,200,000 shares of common stock and on June 5, 2006, the Board of
Directors approved and ratified a decrease to the plan from 1,200,000 to 460,000
shares of common stock (subject to adjustment pursuant to customary
anti-dilution provisions). Stock options generally vest over a period between
one to four years.
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 in connection with the termination of employment. Such
period is to be established by the Company in its discretion on the date of
grant.
6
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 used through December 31, 2005.
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. Effective January 1, 2006, the Company adopted
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 is based on the
grant-date fair value of those awards as calculated 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). For the three months ended June
30, 2006, the Company recorded stock based compensation expense under the
provisions of Statement 123 (R) of $21,195.
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 2005
---------------------- ----------------------
Net loss $ (804,866) $ (545,622)
Deduct:
Total stock based compensation
expense determined under fair
value based method for all awards (2,000) (1,000)
---------------------- ----------------------
Pro forma net loss $ (806,866) $ (546,622)
====================== ======================
Loss per share:
Basic - as reported $ (0.37) $ (0.24)
====================== ======================
Diluted - as reported $ (0.37) $ (0.24)
====================== ======================
Basic - as pro forma $ (0.36) $ (0.24)
====================== ======================
Diluted - as pro forma $ (0.36) $ (0.24)
====================== ======================
7
The fair value of options at the date of grant was calculated in 2006
and estimated in 2005 using the Black-Scholes model with the following
assumptions:
SIX MONTHS ENDED JUNE 30,
2006 2005
---------------- ---------------
Expected life (years) 4.00 4.00
Risk free interest rate 4.50% 4.50%
Expected volatility 0.91 0.95
Expected dividend yield 0.00 0.00
Weighted average fair value per option $3.44 $4.83
Information with respect to options under the Company's Plan is as
follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------- -----------------
Balance - December 31, 2005 206,093 $4.36
Granted 15,250 4.29
Exercised (20,968) 1.39
Forfeitures (16,719) 4.06
-------------
Balance - March 31, 2006 183,656 $4.72
Granted 20,500 5.79
Exercised 0 0.00
Forfeitures (4,500) 4.59
-------------
Balance - June 30, 2006 199,656 $4.84
=============
The following table summarizes the status of the stock options
outstanding and exercisable at June 30, 2006:
STOCK OPTIONS OUTSTANDING
- ----------------------------------------------------------------------------------------------------
NUMBER OF
WEIGHTED WEIGHTED- STOCK
EXERCISE PRICE AVERAGE NUMBER OF REMAINING OPTIONS
RANGE EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISABLE
- -------------------- ------------------ ------------- ------------------- ------------------
$0.00 - $4.80 $3.188 115,656 5.1 years 70,437
$4.80 - $9.60 $5.881 74,250 5.2 years 13,750
$9.60 - $14.40 $9.620 750 4.1 years 750
$14.40 - $19.20 $15.504 8,000 3.4 years 8,000
$24.00 - $28.80 $28.000 500 2.5 years 500
$28.80 - $33.60 $30.000 500 2.3 years 500
------------- ------------------
199,656 93,937
============= ==================
At June 30, 2006, 93,937 were exercisable with a weighted average
exercise price of $4.78
8
4) NET INCOME (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted net
income (loss) per share for the six months and the three months ended June
30, 2006 and 2005.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------
2006 2005 2006 2005
--------------- ---------------- ---------------- ---------------
NUMERATOR FOR BASIC NET INCOME(LOSS) PER SHARE
Net income (loss) $ 542,500 $ (804,866) $ 681,770 $ (545,622)
Preferred dividend - 8,897 - 2,295
--------------- ---------------- ---------------- ---------------
Net income (loss) available to common stockholders $ 542,500 $ (813,763) $ 681,770 $ (547,917)
=============== ================ ================ ===============
NUMERATOR FOR DILUTED NET INCOME(LOSS) PER SHARE
Net income (loss) available to common
stockholders & assumed conversion $ 542,500 $ (813,763) $ 681,770 $ (547,917)
=============== ================ ================ ===============
DENOMINATOR:
Denominator for basic income (loss)
per share - weighted-average shares 2,378,817 2,214,539 2,382,301 2,284,715
=============== ================ ================ ===============
Effect of dilutive securities:
Preferred Shares - - - -
Employee stock options 26,214 - 28,603 -
--------------- ---------------- ---------------- ---------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 2,405,031 2,214,539 2,410,904 2,284,715
=============== ================ ================ ===============
BASIC EARNINGS INCOME (LOSS) PER SHARE:
--------------- ---------------- ---------------- ---------------
Net income (loss) $ 0.23 $ (0.37) $ 0.29 $ (0.24)
=============== ================ ================ ===============
DILUTED EARNINGS INCOME (LOSS) PER SHARE:
--------------- ---------------- ---------------- ---------------
Net income (loss) $ 0.23 $ (0.37) $ 0.28 $ (0.24)
=============== ================ ================ ===============
During the six and three months ended June 30, 2006, there were 129,219
and 118,594 options that were excluded from the computation of diluted earnings
per share since such options have an exercise price in excess of the Company's
stock price. During the six and three months ended June 30, 2005, all preferred
shares, options and warrants outstanding were excluded from the computation of
net loss per share because the effect would have been antidilutive.
5) CONCENTRATION OF CREDIT RISK:
The revenues of three customers represented approximately 18%, 14%, and
12% of the revenues for the six months ended June 30, 2006. The revenues of
three customers represented approximately 19%, 17% and 16% of revenues for the
same period in 2005.
6) 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. There was no outstanding balance at June 30,
2006 and December 31, 2005. 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 to,
among other things, include a waiver to certain financial covenants that the
Company failed to comply with in the first quarter ending March 31, 2005. On
December 1, 2005, the agreement was further amended to reset the EBITDA covenant
effective as of October 1, 2005. On March 28, 2006, the agreement was further
amended to allow Mr. Shmuel BenTov and his family to sell their stock ownership
in the Company to Helios and Matheson Information Technology Ltd. ("H&M") and to
waive the default provision that required Mr. BenTov's ownership in the
Company's outstanding shares not to fall below a level of 10%. The Company
failed to comply with the amended EBITDA covenant for the first quarter ending
March 31, 2006 and a waiver was obtained from Keltic. The Company was in
compliance with the financial covenants for the second quarter ending June 30,
2006. The line of credit bears interest at a variable rate based on a prime plus
1.75% and the rate was 10% at June 30, 2006.
9
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.
The Series A and Series B Preferred Stock was fully converted into
common stock during 2005. As a result, there were no outstanding shares of
Series A or Series B Preferred Stock as of June 30, 2006 and December 31, 2005,
respectively.
7) CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The Company has the following commitments as of June 30, 2006, which
are comprised of long term obligations of an automobile loan and employment
contracts, a capital lease obligation and an operating lease obligation as well.
The automobile loan is payable in monthly installments of $1,262 including
interest at 6%. 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 has two operating leases for its
corporate headquarters located in New York and its branch office in New Jersey.
The Company's commitments at June 30, 2006, are comprised of the
following:
- ---------------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------------------
MORE THAN
TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM OBLIGATIONS
Automobile Loan $ 6,218 $ 6,218 $ - $ - $ -
Employment Contracts 960,000 540,000 420,000 - -
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Capital Lease - Short Term 290,517 290,517 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING LEASES
Rent - office space - NY/NJ 345,432 308,663 36,769 - -
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,602,167 $ 1,145,398 $ 456,769 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2006, the Company does not have any "Off Balance Sheet
Arrangements".
8) VANGUARD RELEASE
As of June 1, 2006, the Company and Mr. BenTov (the "TACT Releasors")
entered into and delivered general releases and covenants not to sue, pursuant
to which the TACT Releasors released and covenanted not to sue Vanguard and
certain Vanguard-related persons, including (without limitation) its directors,
officers, agents and certain advisors of Vanguard (the "Vanguard Released
Parties"), in connection with any and all claims existing as of the date of such
releases and covenants, including, without limitation, any claims that were
related to the terminated Vanguard transaction. In connection therewith, the
Company received an aggregate of $1,100,000 (without giving the affect to the
Company's payment of fees and costs incurred of $219,000 in connection with this
recovery), and the Company and certain related persons, including (without
limitation) Mr. BenTov, received general releases and covenants not to sue from
certain of the Vanguard Released Parties. Selling, General & Administrative
expenses have been reduced by net proceeds of $881,000 from the release of
claims relating to the terminated Vanguard transaction for both the six and
three months ended June 30, 2006.
9) PROVISION FOR INCOME TAXES
The provision for income taxes as reflected in the condensed
consolidated statements of operations varies from the expected statutory rate
primarily due to the utilization of net operating loss carry forwards. The
Company maintains a valuation allowance against additional deferred tax assets
arising from net operating loss carry forwards since, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
10
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.
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.
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 Capital Market(CM): TACX), headquartered in New York, NY. In addition,
TACT has an office in Clark, NJ.
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.
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, custom development, performance
optimization, migrations and conversions, outsourcing, strategic sourcing and
enterprise wide IT consulting, and software solutions. In addition, TACT
established TACT Global Services Private Limited (TGS), an offshore subsidiary,
in order to enhance its offshore presence in its continuing effort to stay
competitive in the industry. Growth in IT services has become more price
competitive. The Company's ability to blend more offshore work into its pricing
will allow it to be more price competitive.
11
Rapid technological advances, and the wide acceptance and use of the
Internet as a driving force in commerce, accelerated the growth of the IT
industry. These advances, including more powerful and less expensive computer
technology, fuel 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, and web-enabled software. These advances expand the benefits
that users can derive from computer-based information systems and improve the
price-to-performance ratios of such systems. As a result, an increasing number
of companies are employing IT in new ways, often to gain competitive advantages
in the marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems rendered the development and implementation of such systems
increasingly complex. In addition, there is a shortage of IT consultants
qualified to support these systems. Accordingly, organizations turned to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems. The Company experienced a delay in the start of
projects from existing customers during the first quarter of 2006. This
situation began to improve in the second quarter of 2006. The Company continued
to expand its sales and recruiting function in its effort to further increase
its revenues in both the short-term and the long-term. The Company has
experienced extended lead times in closing new projects which is impacting
revenue growth.
Approximately, 69% 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 2006. The Company has
established 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 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 Company
views software sales as ancillary to its core consulting services business. The
Company understands that revenue generated from software sales will vary from
period to period.
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). Gross margins improved through 2005, primarily
due to improved utilization rates and decreases in consultant costs. Through the
second quarter of 2006, while utilization rates remained relatively constant,
gross margin decreased. The decrease in gross margin was attributable to a
change in the mix of time and material work to fixed price projects due to the
completion of two major fixed price contracts at the end of 2005 and the
increased salary costs of consultants. 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, 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. Through the Company's
cost containment and work force rationalization efforts, TACT's recent
utilization rates remain above 85%. 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.
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 (subsequently
adjusted to $1,140,964) and other identifiable intangibles of $312,000 with the
identifiable intangible assets being amortized over a three year period on a
straight line basis. These intangible assets were fully amortized during 2005.
IOT was a privately owned, professional services firm that provided data
management and business intelligence solutions, technology consulting and
project management services. During the first quarter of 2006, IOT's operations
were fully integrated into TACT.
12
On April 11, 2005, the Company completed an investment in an offshore
joint venture, TACT Global Services Private Limited (TGS), in the amount of
$250,000, which represented approximately a 68% ownership. A minority partner
invested $100,000 for the remaining 32% ownership. From April 11, 2005 to
September 2005, the Company recorded its proportionate ownership share of the
results of TGS. In September 2005, the Company increased its ownership to 100%
by purchasing the minority partners investment for $100,000. From September 2005
to June 30, 2006, the Company has consolidated the results of TGS in its
financial statements.
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
On August 4, 2005, the Company terminated the Share Exchange Agreement
with Vanguard Info-Solutions Corporation and its stockholders and the Stock
Purchase Agreement with Oak Finance Investments Limited, pursuant to the terms
of each agreement.
As of June 1, 2006, the Company and Mr. BenTov (the "TACT Releasors")
entered into and delivered general releases and covenants not to sue, pursuant
to which the TACT Releasors released and covenanted not to sue Vanguard and
certain Vanguard-related persons, including (without limitation) its directors,
officers, agents and certain advisors of Vanguard (the "Vanguard Released
Parties"), in connection with any and all claims existing as of the date of such
releases and covenants, including, without limitation, any claims that were
related to the terminated Vanguard transaction. In connection therewith, the
Company received an aggregate of $1,100,000 (without giving the affect to the
Company's payment of fees and costs incurred of $219,000 in connection with this
recovery), and the Company and certain related persons, including (without
limitation) Mr. BenTov, received general releases and covenants not to sue from
certain of the Vanguard Released Parties. Selling, General & Administrative
expenses have been reduced by net proceeds of $881,000 from the release of
claims relating to the terminated Vanguard transaction for both the six and
three months ended June 30, 2006.
CERTAIN CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments the Company uses in applying its
most critical accounting polices have a significant impact on the results the
Company reports in its consolidated financial statements. The Company evaluates
its estimates and judgments on an on-going basis. Estimates are based on
historical experience and on assumptions that the Company believes to be
reasonable under the circumstances. The Company's experience and assumptions
form the basis for its judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
vary from what is anticipated and different assumptions or estimates about the
future could change reported results. The Company believes the following
accounting policies are the most critical to it, in that they are important to
the portrayal of its financial statements and they require the most difficult,
subjective or complex judgments in the preparation of the consolidated financial
statements.
Goodwill and Intangible Assets
Goodwill acquired in a purchase and determined to have an indefinite
useful life is not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. If it is determined
by the Company that goodwill has been impaired it will be written down at that
time.
13
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.
Valuation of Deferred Tax Assets
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of the Company, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The Company assesses the
recoverability of deferred tax assets at least annually based upon the Company's
ability to generate sufficient future taxable income and the availability of
effective tax planning strategies.
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
----------------------------------------------------------------
2006 2005 2006 2005
-------------- --------------- -------------- ---------------
REVENUES 100.0% 100.0% 100.0% 100.0%
COST OF REVENUES 72.9% 71.5% 73.1% 73.4%
-------------- --------------- -------------- ---------------
GROSS PROFIT 27.1% 28.5% 26.9% 26.6%
OPERATING EXPENSES 22.8% 34.8% 16.8% 34.7%
-------------- --------------- -------------- ---------------
INCOME/(LOSS) FROM OPERATIONS 4.3% (6.2)% 10.1% (8.1)%
-------------- --------------- -------------- ---------------
NET INCOME(LOSS) 4.3% (6.3)% 10.1% (8.1)%
============== =============== ============== ===============
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2006 TO THE THREE MONTHS ENDED
JUNE 30, 2005
REVENUES. Revenues for the three months ended June 30, 2006 were $6.7
million, a $34,000 increase over the comparable 2005 period. Consulting revenues
declined by almost $500,000 primarily due to the completion of a number of
projects towards the end of 2005 that were not replaced in 2006. Offsetting this
was software revenue, which increased as a number of software related sales were
closed during the quarter.
14
GROSS PROFIT. The gross profit for the three months ended June 30, 2006
was $1.8 million, an increase of $30,000 from the second quarter of 2005. As a
percentage of total revenues, gross margin for the three months ended June 30,
2006 and for the three months ended June 30, 2005 was just under 27%.
OPERATING EXPENSES. Operating expenses are comprised of Selling,
General and Administrative ("SG&A") expenses, and, depreciation and
amortization. SG&A expenses decreased by $1.2 million, or 51.9%, from $2.3
million in the second quarter of 2005 to $1.1 million in the second quarter of
2006. SG&A for the three months ended June 30, 2006 has been reduced by $881,000
of net proceeds received in connection with the release of claims relating to
the terminated Vanguard transaction (discussed in "-Overview" above), while the
comparable 2005 period included $617,000 of Vanguard transaction related costs.
Excluding these transaction related items, SG&A increased by $321,000 primarily
due to increases in compensation primarily associated with increases in sales
and marketing staff and an increase in legal and other professional fees.
Depreciation and amortization expenses decreased $20,000 or 33.4% from $61,000
to $41,000 in 2005 and 2006, respectively as a result of the IOT intangible
assets becoming fully amortized in 2005.
TAXES. Taxes increased $9,000 from $4,000 from the second quarter in
2005 to $13,000 in the second quarter of 2006. The increase is primarily due to
the Company generating pre-tax income during the second quarter of 2006. The
full impact of taxes associated with the pre-tax income was minimized by the
utilization of a portion of the Company's net loss carry over. In addition,
deferred taxes were not impacted by the pre-tax income during the second quarter
of 2006 since such amounts are fully reserved as of June 30, 2006 and December
31, 2005.
NET INCOME (LOSS). As a result of the above, the Company had a net
income of $682,000 or $.29 per basic and $0.28 per diluted share in the second
quarter of 2006 compared to a net loss of ($546,000) or ($0.24) per share in the
second quarter 2005.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2006 TO THE SIX MONTHS ENDED JUNE
30, 2005
REVENUES. Revenues for the six months ended June 30, 2006 were $12.6
million, a decrease of $171,000 from the comparable 2005 period. Consulting
revenues declined by almost $700,000 primarily due to the completion of a number
of projects during the end of 2005 that were not replaced in 2006. The Company
also experienced a delay in the start up of projects from existing customers
during the first quarter of 2006. This situation began to improve in the second
quarter of 2006. The Company continued to expand its sales and marketing
function in its effort to further increase its revenues in both the short and
the long term. The Company experienced extended lead times in closing new
projects which has impacted revenue growth. Offsetting the decline in consulting
revenues was an increase in software revenue related to sales that were
primarily closed during the second quarter in 2006.
GROSS PROFIT. The gross profit decreased by $233,000, or 6.4%, from
$3.7 million for the six months ended June 30, 2005 to $3.4 million for the six
months ended June 30, 2006. As a percentage of total revenues, gross margin
decreased from 28.5% in 2005 to 27.1% in 2006. Gross margins improved through
2005, primarily due to improved utilization rates and decreases in consultant
costs. Through the second quarter of 2006, while utilization rates remained
above 85%, gross margin decreased. The decrease in gross margin percentage was
attributable to a change in the mix of time and material work to fixed price
projects due to the completion of a number of fixed priced contracts at the end
of 2005 that were not replaced in 2006 and the increased salary costs of
consultants which the Company was not able to pass along to its clients.
OPERATING EXPENSES. Operating expenses are comprised of Selling,
General and Administrative ("SG&A") expenses, and, depreciation and
amortization. SG&A expenses decreased by $1.5 million or 35.3%, from $4.3
million for the six months ended June 30, 2005 to $2.8 million for the six
months ended June 30, 2006. SG&A for the six months ended June 30, 2006 has been
reduced by $881,000 of net proceeds received in connection with the release of
claims relating to the terminated Vanguard transaction (discussed in "-Overview"
above), while the comparable 2005 period included $1.2 million of Vanguard
transaction related costs. Excluding these transaction related items, SG&A
increased by $511,000 as a result of increases in compensation primarily
associated with increases in sales and marketing staff and an increase in other
professional fees. Depreciation and amortization expenses decreased $44,000 or
36.2% from $121,000 in 2005 compared to $77,000 in 2006, respectively as a
result of the IOT intangible assets becoming fully amortized.
TAXES. Taxes increased $7,000 from $10,000 in the six months ended June
30, 2005 to $17,000 in the six months ended June 30, 2006. The increase is
primarily due to the pre-tax income the Company generated during the second
quarter of 2006. The full impact of taxes associated with the pre-tax income was
minimized by the utilization of a portion of the Company's net loss carryover.
In addition, deferred taxes were not impacted by the pre-tax income during the
second quarter of 2006 since such amounts are fully reserved as of June 30, 2006
and December 31, 2005.
15
NET INCOME (LOSS). As a result of the above, the Company had net income
of $543,000 or $.23 per basic and diluted share for the six months ended June
30, 2006 compared to a net loss of ($805,000) or ($0.37) per basic and diluted
share for the six months ended June 30, 2005.
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. There was no outstanding balance at June 30,
2006 and December 31, 2005. 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 to,
among other things, include a waiver to certain financial covenants that the
Company failed to comply with in the first quarter ending March 31, 2005. On
December 1, 2005, the agreement was further amended to reset the EBITDA covenant
effective as of October 1, 2005. On March 28, 2006, the agreement was further
amended to allow Mr. Shmuel BenTov and his family to sell their stock ownership
in the Company to Helios and Matheson Information Technology Ltd. ("H&M") and to
waive the default provision that required Mr. BenTov's ownership in the
Company's outstanding shares not to fall below a level of 10%. The Company
failed to comply with the amended EBITDA covenant for the first quarter ending
March 31, 2006 and a waiver was obtained from Keltic. The Company was in
compliance with the financial covenants for the second quarter ending June 30,
2006. The line of credit bears interest at a variable rate based on prime plus
1.75% and the rate was 10% at June 30, 2006.
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.
The Series A and Series B Preferred Stock was fully converted into
common stock during 2005. As a result, there were no outstanding shares of
Series A or Series B Preferred Stock as of June 30, 2006 and December 31, 2005,
respectively.
The Company acquired a 51% ownership interest in T3 Media as a result
of several investments in 1998 and 1999. Due to deterioration in performance and
market conditions for T3 Media's services, the operations of T3 Media ceased in
the second quarter of 2001. 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, 2006
and December 31, 2005.
The Company's cash balances were approximately $2.3 million at June 30,
2006 and $2.2 million at December 31, 2005. Net cash provided by operating
activities for the six months ended June 30, 2006 was approximately $172,000
which included $881,000 of net proceeds received in connection with the release
of claims relating to the terminated Vanguard transaction compared to $1.1
million of net cash used in operating activities for the six months ended June
30, 2005 which included $1.2 million of Vanguard transaction related costs.
Excluding these transaction related items, net cash used in operating
activities, primarily related to the increase in working capital, for the six
months ended June 30, 2006 was approximately $709,000 compared to $100,000 of
net cash provided by operating activities for the six months ended June 30,
2005.
The Company's accounts receivable, less allowance for doubtful
accounts, at June 30, 2006 and December 31, 2005 were $5.1 million and $4.4
million, respectively, representing 61 and 53 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.
Net cash used in investing activities was approximately $54,000 and
$293,000 for the six months ended June 30, 2006 and 2005. In each of these
periods, additions to property and equipment were $59,000 and $43,000,
respectively.
Net cash provided by/ (used in) financing activities was approximately
$22,000 and ($95,000) at June 30, 2006 and 2005.
16
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. 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.
The Company incurred operating income in the six months ended June 30,
2006 of $543,000 and net income of $543,000. In the six months ended June 30,
2005, the Company had an operating loss of ($800,000) and a net loss of
($805,000). 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.
OFF BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, the Company does not have any "Off Balance Sheet
Arrangements".
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
During the six months ended June 30, 2006, 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, 2005. Effective as of May 1, 2006, the Company entered into a two
year employment agreement with Mr. Salvatore M. Quadrino as Chief Financial
Officer of the Company at an initial annual base salary of $180,000 and Mr.
Shmuel BenTov's employment agreement was extended from December 31, 2007 until
March 31, 2008 on the same terms and conditions.
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 used through December 31, 2005.
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. Effective January 1, 2006, the Company adopted
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 is based on the
grant-date fair value of those awards as calculated for pro forma disclosures
under Statement 123 (R), 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).
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.
17
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 its disclosure
controls and procedures were effective and designed to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to it 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 its second fiscal quarter of 2006 that has
materially affected or is reasonably likely to materially affect its internal
control over financial reporting.
The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, does not expect that the Company's
disclosure controls or its internal controls will prevent all errors and all
fraud. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefit of controls must be considered.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Company's 2005 Annual Report on Form 10-K includes a detailed
discussion of risk factors. The information presented below updates and should
be read in conjunction with the risk factors and information disclosed in the
Company's Form 10-K.
On March 30, 2006, H&M acquired 1,024,697 shares of the Company's
common stock. Based upon 2,382,301 shares of common stock outstanding as of
August 9, 2006, the 1,024,697 shares of Common Stock acquired by H&M represent
43.0% of the issued and outstanding voting securities of the Company. To the
Company's knowledge, H&M does not beneficially own directly or indirectly any
other shares of Common Stock of the Company. H&M has no contractual right to
appoint directors or officers of the Company or to cause the resignation of any
existing directors or officers of the Company. In connection with the next
annual shareholders meeting, H&M requested the appointment or nomination of a
majority of directors to the Board of Directors of the Company. H&M requested
that the Board of Directors nominate the following five nominees: Messrs.
Shankar N. Ram, Daniel L. Thomas, Shri S. Jambanathan, Kishan Gramma Ananthram
and Ms. Divya Ramachandran. These five individuals have been nominated by the
Board of Directors as director nominees in the Company's proxy statement dated
July 25, 2006 in connection with the Company's next annual shareholders meeting.
If these five nominees are elected to the Board of Directors they will
constitute a majority of the Board of Directors. At the request of H&M, Mr. Ram
and Mr. Thomas were appointed to the Board on June 5, 2006. As the holder of 43%
of the Company's outstanding voting securities, H&M will have significant
influence on matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
The Company is prohibited from paying dividends on its common stock due
to restrictions under the restated and amended Loan Agreement with Keltic
Financial Partners, L.P.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) EXHIBITS
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.
10.1 Letter Agreement by and between the Registrant and Shmuel BenTov
dated May 1, 2006, incorporated by reference to Exhibit 10.2 to the
current report on Form 8-K, as previously filed with the SEC on May
1, 2006.
10.2 Employment Agreement, dated May 1, 2006, between the Registrant and
Salvatore Quadrino, incorporated by reference to Exhibit 10.1 to
the current report on Form 8-K, as filed with the SEC on May 1,
2006.
10.3 Form of Release and Covenant Not to Sue entered into by the
Registrant releasing certain parties, incorporated by reference to
Exhibit 10.1 on Form 8-K, as filed with the SEC on June 2, 2006.
10.4 Form of Release and Covenant Not to Sue entered into by certain
parties releasing the Registrant, incorporated by reference to
Exhibit 10.2 on Form 8-K, as filed with the SEC on June 2, 2006.
10.5 Employment Agreement, dated as of September 16, 1998, by and
between the Registrant and Michael Prude, incorporated by reference
to Exhibit 10.1 on Form 8-K, as filed with the SEC on June 9, 2006.
10.6 Amendment No. 1 to the Registrant's Amended and Restated 1997 Stock
Option and Award Plan, incorporated by reference to Exhibit 10.2 on
Form 8-K, as filed with the SEC on June 9, 2006.
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10.7 Key-Person Life Insurance Premium Sharing Agreement effective as of
July 1, 2006 by and among the Registrant, Helios & Matheson
Information Technology Ltd. and Mr. Shmuel BenTov, incorporated by
reference to Exhibit 10.1 on Form 8-K, as filed with the SEC on
June 30, 2006.
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.
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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, 2006 ---------------------
----------------- Shmuel BenTov, Chairman,
Chief Executive Officer and President
By: /s/ Salvatore M. Quadrino
DATE: AUGUST 11, 2006 -----------------------------
----------------- Salvatore M. Quadrino
Chief Financial Officer
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