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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-22945
THE A CONSULTING TEAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-3169913
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Park Avenue South (212) 979-8228
New York, New York 10003 (Registrant's Telephone Number,
(Address of Principal Executive Offices) Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 2001 was approximately $4,434,000 based on the
average of the bid and asked prices of the registrant's Common Stock on The
Nasdaq Stock Market(SM) on such date.
As of March 22, 2001, there were 7,116,871 shares of Common Stock, $.01 par
value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders, which will be filed on or before April 15, 2001, are
incorporated by reference into Part III of the Report.
TABLE OF CONTENTS
Page
----
PART I.........................................................................1
Item 1. Business..............................................................1
Item 2. Properties............................................................5
Item 3. Legal Proceedings.....................................................5
Item 4. Submission of Matters to a Vote of Security Holders...................5
PART II .......................................................................5
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................5
Item 6. Selected Financial Data...............................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........20
Item 8. Financial Statements and Supplementary Data..........................20
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...........................................20
PART III .....................................................................20
Item 10. Directors and Executive Officers of the Registrant..................20
Item 11. Executive Compensation..............................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management......22
Item 13. Certain Relationships and Related Transactions......................22
PART IV ......................................................................22
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....22
PART I
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements due to risks and factors identified from time to time in the
Company's filings with the SEC including those discussed in this Report.
ITEM 1. BUSINESS
General
Incorporated in 1983, The A Consulting Team, Inc., a New York
corporation (the "Company" or "TACT") has provided a wide range of information
technology ("IT") consulting, custom application development and training
services and solutions to Fortune 1000 and other large organizations. In August
of 1997, TACT became a public company, headquartered in New York, NY. In
addition to its New York office, TACT has Solution BranchesSM in locations
throughout the United States in Clark, NJ, Stamford, CT, Chicago, IL, Atlanta,
GA, and Boston, MA. Currently, the Company is in the process of closing its
Atlanta, GA and Stamford, CT, Solution Branches and converting them into virtual
offices. The Company is also continuing to review its other Solution Branches
for possible restructuring into virtual offices in a continuing effort to strive
to effectuate the most cost efficient and effective operating structure for the
Company and its clients. The virtual office structure that is being implemented
will provide the Company with the ability to continue to have a presence in
these geographies by the use of wireless, mobile and other technologies. The
Company supports all major computer technology platforms and supports client IT
projects by using a broad range of third-party software applications.
The Company's shares are listed on The Nasdaq Stock MarketSM under the
symbol "TACX."
Industry Background
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, have accelerated the growth of the IT
industry in recent years. These advances include more powerful and less
expensive computer technology, the transition from predominantly centralized
mainframe computer systems to open and distributed computing environments and
the advent of capabilities such as relational databases, imaging, software
development productivity tools, electronic commerce ("e-commerce") applications
and web-enabled software. These advances have expanded the benefits that users
can derive from computer-based information systems and improved the
price-to-performance ratios of such systems. As a result, an increasing number
of companies are employing IT in new ways, often to gain competitive advantages
in the marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems have rendered the development and implementation of such
systems increasingly complex. In addition, there is a shortage of IT consultants
qualified to support these systems. Accordingly, organizations must turn to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems.
Strategy
The Company's objective is to continue to provide its clients with high
quality, technology-based consulting services in the areas of e-services and
enterprise-wide Information Technology consulting, software and training
services and solutions. The Company's strategies include the following key
components:
1
Cross-sell Additional Services to Existing Clients. By offering
existing clients additional IT consulting, software and training, TACT intends
to leverage its existing client base. The Company's relationships with current
clients provide opportunities to market additional services in current and new
geographical markets.
Expand Client Base. The Company is developing additional client
relationships in geographic markets where the Company maintains either a virtual
office or a Solution Branch, through targeted marketing initiatives,
participation in local and national trade shows, user group meetings and
conventions, referrals from existing clients and direct mail.
Acquisitions and Strategic Relationships. The Company continuously
looks for companies and other organizations that it may acquire or develop other
relationships with that are strategic to the Company's business. The Company has
established certain acquisition criteria. It is primarily interested in
companies and organizations that are (i) established in geographic locations of
the Company, or (ii) has a depth of service offerings that the Company finds
attractive.
Operational Efficiencies & Cost Reductions. The Company is in the
process of reducing its cost structure including physical, corporate and general
administrative expenses.
T3 Media
T3 Media, a majority-owned subsidiary of the Company, has restructured
its operations by reducing the number of physical locations and personnel and by
streamlining its operations. Currently, T3 Media is continuing to explore other
alternatives for its operations.
Always-On Software, Inc.
The Company has a minority ownership in Always-On Software, Inc.
Always-On Software is a global provider of software application services ("ASP")
based in the heart of New York's Silicon Alley. Their ASP technology allows the
customer to use common software applications, such as Microsoft Office, over the
Internet without having to buy or install it on their PC.
TACT Operations
TACT Consulting. TACT provides a wide range of IT consulting services,
including technology infrastructure advisory services and systems architecture
design for Fortune 1000 companies and other large organizations. The Company's
solutions are based on an understanding of each client's enterprise model. The
Company's accumulated knowledge may be applied to new projects such as planning,
designing and implementing enterprise-wide information systems, database
management services and systems integration.
TACT delivers its IT solutions through TACT Solution Teams composed of
Project Managers, Technical Practice Managers and Technical Specialists. These
professionals possess the project management skills, technical expertise and
industry experience to identify and effectively address a particular client's
technical needs in relation to its business objectives. TACT's focus on
providing highly qualified IT professionals allows the Company to identify
additional areas of the client's business which could benefit from the Company's
IT solutions, thereby facilitating the cross-marketing of multiple Company
services. The Company keeps its Solution Teams at the forefront of emerging
technologies through close interaction with TACT research personnel who identify
innovative IT tools and technologies. As a result, management believes that TACT
Solution Teams are prepared to anticipate client needs, develop appropriate
strategies and deliver comprehensive IT services, thereby allowing the Company
to deliver the highest quality IT services in a timely fashion.
A Solution Team is typically deployed from one of the Company's local
virtual offices or Solution Branches in order to provide solutions to its
clients by utilizing local resources. The Company maintains a combination of
2
virtual offices or Solution Branches in New York, NY; Clark, NJ; Stamford, CT;
Chicago, IL; Atlanta, GA, and Boston, MA. Management's experience has been that
the local presence established by either a virtual office or Solution Branch
improves the Company's ability to attract local clients, as well as its ability
to attract, develop, motivate and retain locally-based IT professionals. The
Company's corporate headquarters supports each virtual office or Solution Branch
and performs many functions, which allow the virtual offices or the Solution
Branches to focus on recruiting, sales and marketing. Management has developed
the TACT Solution Teams and TACT's virtual office/Solution Branch structure, in
an effort to advance the Company's objective of establishing and maintaining
long-term relationships with its clients. Eleven of the Company's top twenty
clients measured by revenue for the year ended December 31, 2000 had been
clients for over five years.
TACT Software. TACT markets and distributes a number of software
products developed by independent software developers. The Company believes its
relationships with over 80 software clients throughout the country provide
opportunities for the delivery of additional TACT consulting and training
services. The software products offered by TACT Software are developed in the
United States, England and Finland and marketed primarily through trade shows,
direct mail, telemarketing, client presentations and referrals. TACT Software
personnel currently include sales and marketing personnel as well as 24-hour
technical support.
TACT Training. TACT offers technical training courses to large
organizations at either TACT's Training Center or at a client's site. These
courses include classes in client/server and legacy technologies as well as in
recent technologies, such as JAVA, ActiveX, Active Server Pages and HTML. The
Company's training services are included on as "as needed" basis in total
project solutions for businesses, in retraining MIS personnel in new
technologies, and in software vendor product training. These courses may be
customized to address a client's specific needs and are taught at the client's
site or at the TACT Training Center.
Clients
The Company's clients consist primarily of Fortune 1000 companies and
other large organizations. The Company's clients operate in a diverse range of
industries with a concentration in the financial services industry. Eleven of
the Company's top twenty clients measured by revenue for the year ended December
31, 2000 had been clients for over five years. In 2000, the largest customer
represented 17% of revenues. Besides this one customer, no other customer
represented greater than 10% of the Company's revenues.
TACT Research
TACT continuously investigates new technologies developed by third
parties to determine their viability and potential acceptance in the Fortune
1000 marketplace. The Company's staff works diligently to identify those
"bleeding-edge" technologies that will succeed as "leading-edge" business
solutions. TACT personnel are trained in delivering these technical solutions.
Sales and Marketing
TACT's marketing strategy is to develop long-term partnership
relationships with existing and new clients that will lead to the Company
becoming a preferred provider of IT services. The Company seeks to employ a
"cross selling" approach where appropriate to expand the number of services
utilized by a single client. Other sales and marketing methods include client
referrals, networking and attending trade shows. On December 31, 2000, the
Company employed 28 sales and marketing personnel. Another marketing resource,
which has also served the Company in its recruiting efforts, is the Company's
web site at http://www.tact.com. The web site provides information about TACT
consulting and training services and software products to the IT community.
3
Competition
The market for IT consulting services is intensely competitive. It is
affected by rapid technological advances and includes a large number of
competitors. The Company's competitors include the current or former consulting
divisions of "Big Five" accounting firms, systems consulting and implementation
firms, application software development firms, management consulting firms,
divisions of large hardware and software companies, offshore outsourcing
companies and niche providers of IT services. Many of these competitors have
significantly greater financial, technical and marketing resources and greater
name recognition than the Company. In addition, the Company competes with its
clients' internal resources, particularly when these resources represent an
existing cost to the client. Such competition may impose additional pricing
pressures on the Company.
The Company believes that the principal competitive factors in the IT
services market include breadth of services offered, technical expertise,
knowledge and experience in the industry, quality of service and responsiveness
to client needs. The Company believes it competes primarily based on its
in-depth technical expertise, timely delivery of products and services and
quality of service.
A critical component of the Company's ability to compete in the
marketplace is its ability to attract, develop, motivate and retain skilled
professionals. Although highly skilled technical employees, particularly project
managers and technical specialists, are in great demand, the Company believes it
can compete favorably in hiring such personnel by offering competitive
compensation packages and attractive assignment opportunities.
Human Resources
On December 31, 2000, the Company had 365 personnel, of whom 259 were
consultants, 17 were recruiting personnel, 28 were sales and marketing
personnel, 5 were technical and customer service personnel, and 56 were
executive and administrative personnel. At December 31, 2000, T3 Media had 45
personnel. None of the Company's employees are represented by a labor union, and
the Company has never incurred a work stoppage. The Company utilizes the
services of a significant number of independent contractors to act as
consultants. These independent contractors are not employees of the Company, and
there can be no assurance that the services of these independent contractors
will continue to be available to the Company on terms acceptable to the Company.
The Company is currently in the process of reducing its corporate and general
administrative staff at all of its continuing operating locations..
Intellectual Property Rights
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company licenses intellectual property. The Company has entered into
confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance, however, that the steps
taken by the Company in this regard will be adequate to deter misappropriation
of proprietary information or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce its intellectual property
rights. In addition, the Company is aware of other users of the term "TACT" and
combinations including "A Consulting," which users may be able to restrict the
Company's ability to establish or protect its right to use these terms. The
Company has in the past been contacted by other users of the term "TACT"
alleging rights to the term. However, the Company has completed the application
process for protection of certain marks, including "TACT" and "The A Consulting
Team."
All ownership rights to software developed by the Company in connection
with a client engagement are typically assigned to the client. In limited
situations, the Company may retain ownership or obtain a license from its
client, which permits the Company or a third party to market the software for
the joint benefit of the client and the Company or for the sole benefit of the
Company.
4
ITEM 2. PROPERTIES
The Company's executive office is located at 200 Park Avenue South, New
York, NY 10003. The Company's executive office is located in a leased facility
with a term expiring in January 31, 2003. The leased premises of the principal
offices of the Company are approximately 31,000 square feet, including the
principal office and additional space of T3 Media in New York, NY. The Company
also has leased facilities in Clark, NJ, Stamford, CT, Chicago, IL, Atlanta, GA
and Boston, MA. The Company is in the process of restructuring a portion of
these leases for its Atlanta, GA and Stamford, CT Solution branches, and for its
subsidiary T3 Media. The Company will also continue to review its other leases
for its Solution Branches in Boston, MA, Clark, NJ and Chicago, IL, for other
potential cost savings.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock is currently traded on The Nasdaq National
Stock Market(SM) ("Nasdaq") under the symbol "TACX". TACT completed an initial
public offering in August 8, 1997. Prior to that date, there was no market for
the Company's Common Stock.
The following table sets forth the quarterly range of high and low
sales prices of the Company's Common Stock since August 8, 1997 as reported by
Nasdaq:
1999 High Low
---- ---- ---
First Quarter $8.500 $5.500
Second Quarter 9.500 6.875
Third Quarter 9.500 4.750
Fourth Quarter 6.000 3.750
2000 High Low
---- ---- ---
First Quarter $10.000 $4.625
Second Quarter 9.250 6.313
Third Quarter 8.063 6.250
Fourth Quarter 6.500 1.156
Dividends
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
5
Holders
The Company estimates that there were approximately 18 holders of
record of the Company's Common Stock on March 22, 2000. The Company believes
that the number of beneficial shareholders exceeds 600.
Recent Sales of Unregistered Securities
During 2000, the Company sold an aggregate of 1,624,996 shares of
common stock to investors, in each case in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act, relating to sales
by an issuer not involving a public offering, as set forth below. Based on
discussions with and representations made by such investors, the Company
reasonably believes that each such investor was an accredited and/or
sophisticated investor. The Company granted to each investor access to
information on the Company necessary to make an informed investment decision.
On March 19, 2000, Yosi Vardi, Rita Folger, DS Polaris Group, SFK Group
and Arison Investments Ltd. invested an aggregate of approximately $2.75 million
by purchasing an aggregate of 392,855 shares of common stock at $7.00 per share
with 60 day warrants (subsequently extended by an additional 14 days) to
purchase an aggregate of 607,142 additional shares of common stock at an
exercise price of $7.00 per share (one of which warrants was exercised in part
by Arison Investments on June 5, 2000 to purchase 142,857 shares of common stock
for an aggregate exercise price of approximately $1 million) and two year
warrants to purchase an aggregate of 1,000,000 additional shares of common stock
at an exercise price of $13.00 per share.
On June 5, 2000, Koonras Technologies, Eurocom Communications and
Poalim Capital Markets Technologies invested an aggregate of approximately $3.25
million by purchasing an aggregate of 464,284 shares of common stock at $7.00
per share with two year warrants to purchase an aggregate of 464,284 additional
shares of common stock at an exercise price of $13.00 per share.
On June 14, 2000, two investment trusts controlled by Michael G.
Jesselson invested $1 million by purchasing an aggregate of 125,000 shares of
common stock at $8.00 per share with two year warrants to purchase an aggregate
of 125,000 additional shares of common stock at an exercise price of $13.00 per
share.
On September 29, 2000, Level 8 Systems, Inc. invested $4 million by
purchasing 500,000 shares of common stock at $8.00 per share with two year
warrants to purchase an aggregate of 500,000 additional shares of common stock
at an exercise price of $13.00 per share.
Use of Proceeds From Registered Securities
The effective date of the Company's registration statement on Form SB-2
was August 8, 1997. The Commission file number of such registration statement is
333-29233. Between the effective date and December 31, 2000, the expenses
incurred in connection with the issuance and distribution of the securities
registered were as follows:
As Previously Reported on
Form 10-K Additional Expenses Expenses Incurred to
Direct or Indirect for the Period Ending Incurred Through Date as of
Payments to Others: December 31, 1999 December 31, 2000 December 31, 2000
- -------------------------------- ------------------------- -------------------- --------------------
Underwriting discounts and
commissions $1,512,000 $ - $ 1,512,000
Other expenses 518,300 - 518,300
----------- ------ -----------
Total Expenses 2,030,300 - 2,030,300
----------- ------ -----------
Net offering proceeds after
total expenses $21,071,000 $ - $21,071,000
=========== ====== ===========
6
Between the effective date and December 31, 2000, net offering proceeds
of $21,071,000 were used for the following purposes:
As Previously Reported on
Form 10-K for the Use of Proceeds
Direct or Indirect Period Ending Changes in Through
Payments to Others: December 31, 1999 Use of Proceeds December 31, 2000
- ------------------------- ------------------------- --------------- -----------------
Repayment of loans to
shareholder $ 1,045,000 $ - $ 1,045,000
Distribution of S
Corporation earnings to
shareholder 2,007,000 - 2,007,000
Repayment of debt 1,940,000 - 1,940,000
Working capital and
general corporate
purposes 11,040,000 5,039,000 16,079,000
----------- ---------- -----------
Total use of proceeds $16,032,000 $5,039,000 $21,071,000
=========== ========== ===========
The use of proceeds does not represent a material change in the use of
proceeds described in the prospectus filed on August 8, 1997. There have been no
other changes to the information provided by the Company on Form SR for the
period ended April 30, 1997, on Form 10-Q for the period ended September 30,
1997, on Form 10-K for the period ended December 31, 1997, on Form 10-Q for the
periods ended March 31, 1998, June 30, 1998, and September 30, 1998 and on Form
10-K for December 31, 1998, on Form 10-Q for the periods ended March 31, 1999,
June 30, 1999, and September 30, 1999 ,on Form 10-K for December 31, 1999 and on
Form 10-Q for the periods ended March 31, 2000, June 30, 2000 and September 30,
2000.
7
Item 6. Selected Financial Data
The following table contains certain financial and operating data and
is qualified by the more detailed Financial Statements and Notes thereto
included herein. The selected financial data in the table are derived from the
Company's Financial Statements and Notes thereto. The selected financial data
should be read in conjunction with the Financial Statements and Notes thereto
and other financial information included herein.
Selected Financial Data
(in thousands, except number of shares and per share data)
Year Ended December 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 55,021 $ 53,517 $ 48,925 $ 35,216 $ 20,995
Income (loss) from operations (18,124) (3,203) 4,287 3,347 102
Net income (loss) (16,798) (2,667) 2,785 2,524 8
Net income (loss) per share-basic
and dilutive $ (2.65) $ (0.49) $ 0.51
Shares used in per share calculation 6,329,927 5,485,000 5,488,356
Unaudited Pro Forma Data(1)
Pro forma income from operations $ 3,310 $ 1,325
Pro forma net income 1,966 692
Pro forma net income per share-
basic and dilutive $ 0.45 $ 0.19
Weighted average shares outstanding 4,409,658 3,729,211
Balance Sheet Data
Total Assets $ 27,038 $ 28,582 $ 28,772 $ 25,467 $ 5,100
Long-term debt 394 561 15 30 44
Stockholders' equity 17,770 22,516 25,183 22,398 811
Number of shares outstanding at
year end 7,116,872 5,485,000 5,485,000 5,485,000 3,550,000
- ----------------------------------------------------------------------------------------------------------------
(1) The 1996 and 1997 amounts relating to income from operations, net income
and net income per share are shown on a proforma basis. The pro forma
adjustments reflect (i) reduced executive compensation expense for the CEO,
partially offset by increased salary expense related to the Company's
hiring of a CFO and (ii) provision for federal and state income taxes as if
the Company had been subject to federal and state income taxation as a C
Corporation during each of the periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of significant factors affecting
the Company's operating results and liquidity and capital resources should be
read in conjunction with the accompanying financial statements and related
notes.
Overview
Since 1983, TACT has provided IT services and solutions to Fortune 1000
and other large organizations. In 1997, TACT became a public company (Nasdaq:
TACX), headquartered in New York, NY. In addition to its New York office, TACT
has Solution Branches(SM) in locations throughout the United States in Clark,
NJ, Stamford, CT, Chicago, IL, Atlanta, GA, and Boston, MA. Currently, the
Company is in the process of closing its Atlanta, GA, and Stamford, CT Solution
8
Branches and converting them into virtual offices. The Company is also
continuing to review its other Solution Branches for possible restructuring into
virtual offices in a continuing effort to strive to effectuate the most cost
efficient and effective operating structure for the Company and its clients. The
virtual office structure that is being implemented will provide the Company with
the ability to continue to have a presence in these geographies by the use of
wireless, mobile and other technologies. Proven performance and public presence
gives clients the confidence to rely on TACT as a trusted long-term business
partner.
TACT is an end-to-end e-Services provider. The Company delivers
e-Services solutions from web strategy and design through web development and
integration, to web application hosting. Its clients include a broad range of
Fortune 1000 companies and other large organizations. TACT also provides the
same markets with enterprise-wide Information Technology consulting, software
and training services and solutions. Over 85% of the Company's consulting
services revenues were generated from the hourly billing of its consultants'
services to its clients under time and materials engagements, with the remainder
generated under fixed-price engagements.
TACT's primary focus is helping clients support their business
objectives by assisting them in the transition of their information technologies
from traditional mainframe and client/server environments to the Internet and
the Web. TACT offers its clients the full scope of the web-enabling process.
TACT provides solutions ranging from strategy and design, to development,
through conversions and integration. TACT expertise leverages clients' existing
systems and data stores to significant business advantage: TACT plays an
integral role in taking clients "from bricks and mortar" to "clicks and mortar."
When TACT is engaged by its clients to implement e-commerce or
web-based initiatives, TACT uses a comprehensive methodology to analyze the
client's current IT assets. The analysis reveals how much of the IT asset
portfolio is ready for the Web, and what is required to web-enable selected
portfolio elements. With this information, TACT devises and executes a
customized web solution strategy that will ultimately enable the client to reach
their business objectives of reduced costs, increased sales and profits, and
improved customer services.
TACT also provides clients with enterprise-wide information technology
consulting, training services and software products. TACT solutions cover the
entire spectrum of IT needs, including applications, data, and infrastructure.
TACT provides complete project life-cycle services--from application and system
design, through development and implementation, to documentation and training.
Strategic alliances with leading software vendors ensure that TACT solutions are
dependable and within the mainstream of industry trends. These partnerships
allow TACT to provide a wide variety of business technology solutions such as
enterprise reporting solutions, data warehousing, systems strategies,
application and database conversions, and application development services.
The Company establishes standard-billing guidelines for consulting
services based on the type of service offered. Actual billing rates are
established on a project-by-project basis and may vary from the standard
guidelines. The Company typically bills its clients for time and materials
services on a semi-monthly basis. Arrangements for fixed-price engagements are
made on a case-by-case basis. Consulting services revenues generated under time
and materials engagements are recognized as those services are provided, whereas
consulting services revenues generated under fixed-price engagements are
recognized according to the percentage of completion method.
The Company's most significant operating cost is its personnel cost,
which is included in cost of revenues. As a result, the Company's operating
performance is primarily based upon billing margin (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During 2000, the Company's margins were
adversely affected by a decrease in billing rates, an increase in consultant
wages and a reduction in consultant utilization rate. Large portions of the
Company's engagements are on a time and materials basis. The Company
historically had been able to pass on to its clients most of the increases in
cost of services; however, the Company was not able to do so in 2000.
Accordingly, such increases historically have not had a significant impact on
the Company's financial results. While most of the Company's engagements allow
9
periodic price adjustments to address, among other things, increases in
consultant costs, there can be no guarantee that clients will continue to accept
cost increases. TACT also actively manages its personnel utilization rates by
constantly monitoring project requirements and timetables; however utilization
rates in 2000 were lower due to a trend in the Company's markets to delay IT
projects and slowing of growth rate in demand in e-Commerce and web-based
initiatives.. As projects are completed, consultants either are re-deployed to
new projects at the current client site or to new projects at another client
site, or are encouraged to participate in TACT's training programs in order to
expand their technical skill sets.
Historically, the Company has also generated revenues by selling
software licenses and providing training services. In addition to initial
software license fees, the Company also derives revenues from the annual renewal
of software licenses. Revenues from the sale of software licenses are recognized
upon delivery of the software to a customer, because future obligations
associated with such revenue are insignificant. Training service revenues are
recognized as the services are provided. Beginning in 1999 and extending through
2000, the Company has limited its emphasis on software sales. This has resulted
in a significant reduction in software sales in the second half of 1999 through
2000. This trend is expected to continue in 2001 and beyond with software sales
only being ancillary to providing IT and e-Services solutions to customers.
The Company's revenue growth has been driven by three primary factors:
increasing the number of consultants on billing, managing the business to attain
higher average billing rates through the delivery of higher value-added services
to the Company's clients, and carefully managing consultant utilization rates.
The Company also has been successful in expanding existing client relationships
as well as establishing new client relationships. Such relationships are
established and maintained through the Company's local Solution Branch(SM) and
virtual offices.
The Company opened an additional Solution Branch in Boston, MA in 2000.
Considering its limited experience with opening Solution Branches, the Company
cannot predict when Solution Branches will contribute to the Company's net
income. To date, new branches have not achieved break-even. Until break-even
occurs, the Company incurs the costs of salaries, marketing and occupancy.
Currently, the Company is in the process of closing its Atlanta, GA and
Stamford, CT Solution Branches and converting them into virtual offices. The
Company is also continuing to review its other Solution Branches for possible
restructuring into virtual offices in a continuing effort to strive to
effectuate the most cost efficient and effective operating structure for the
Company and its clients.
On October 2, 1998, the Company made an investment in a Web integrator,
T3 Media, of $3 million of non-voting convertible preferred stock. On June 23,
1999, the Company converted its preferred stock into a 30% common stock
ownership interest and increased its ownership interest in T3 Media to
approximately 51% by an additional investment in T3 Media's common stock of
$370,000. The acquisition of T3 Media was accounted for using the purchase
method of accounting. Accordingly, the results of operations of T3 Media are
included in the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the estimated fair value of
the net identifiable assets acquired totaled $4.0 million and was recorded as
goodwill and was being amortized using the straight-line method over 7 years.
After extensive review of changing market conditions, it was determined that the
carrying value of the intangibles and certain other fixed assets could no be
supported, resulting in a write-off of $3.9 million in the fourth quarter of
2000. T3 Media restructured its operations by reducing the number of physical
locations and personnel and by streamlining its operations. Currently, T3 Media
is continuing to explore other alternatives.
In 1999, the Company made a minority investment in LightPC.com (renamed
Always-On Software, Inc.). In 2000, the Company invested another $2.0 million.
At December 31, 2000, the Company owns approximately 10% of Always-On Software,
Inc. Always-On Software, Inc. is a global provider of software application
services ("ASP") based in the heart of New York's Silicon Alley. Their ASP
technology allows the customer to use common software applications, such as
Microsoft Office, over the Internet without having to buy or install it on their
PC. The Company's investment in Always-On is subject to periodic review to
ensure that its market value exceeds the carrying value on TACT(R)'s books. The
10
market conditions for companies operating in this sector have become
increasingly adverse over the past couple of quarters. There is a risk that
Always-On Software, Inc. will not be able to achieve profitability or positive
cash flow in the near term and that it may exhaust its capital resources before
achieving profitability and positive cash flow. If this were to occur, TACT(R)
might have to write-off a portion or all of its investment.
Results of Operations
The following tables set forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
Year Ended December 31,
-----------------------------------
2000 1999 1998
---------- ---------- -----------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 71.0% 66.7% 65.7%
------ ------ ------
Gross profit 29.0% 33.3% 34.3%
Operating expenses 61.9% 39.3% 25.5%
------ ------ ------
Income (loss) from operations (32.9)% (6.0)% 8.8%
------ ------ ------
Net income (loss) (30.5)% (5.0)% 5.7%
======= ====== ======
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Revenues. Revenues of the Company increased by $1.5 million, or 2.8%,
from $53.5 million for the year ended December 31, 1999 to $55.0 million for the
year ended December 31, 2000. Revenues from IT Services and e-Services increased
by $4.3 million, or 8.9%, from $48.5 million in 1999 to $52.9 million in 2000.
The increase in 2000 revenues from IT Services and e-Services resulted from the
inclusion of T3 Media's revenues for the whole year, an increase in the average
number of consultants offset by lower hourly billing rates and a decrease in the
consultant utilization rate. The number of consultants engaged by the Company
increased during the first two quarters of the year by approximate 21% and
decreased in the second half by about 12%. This reduction was almost entirely
attributable to the closing of T3 Media's offices in Seattle and San Diego in
the third quarter of 2000. Over the course of the year, the net increase in
consultant headcount was approximately 9%.
Software licensing revenues decreased by $2.8 million, or 59.1%, from
$4.7 million in 1999 to $1.9 million in 2000. This decrease is directly
attributable to the lack of any new products. Software sales are expected to
continue decreasing in year 2001 and beyond and will only be ancillary to
providing IT Services and e-Services to customers.
Revenues from training represented less than 1% of the Company's total
revenues in both 2000 and 1999 and are expected to remain immaterial in year
2001 and beyond.
Gross Profit. The resulting gross profit for 2000 decreased by $1.9
million, or 10.5%, from $17.8 million in 1999 to $16.0 million in 2000. Gross
margin was adversely affected by the significant decrease in software revenues
in 2000, lower hourly billing rates, increased consultant wages and the decrease
in the consultant utilization rate as compared to 1999 offset by increased
margin on additional IT Services and e-Services revenues. As a percentage of
total revenues, gross profit decreased from 33.3% of revenues in 1999 to 29.0%
of revenues in 2000.
Operating Expenses. Operating expenses are comprised of Selling,
General and Administrative ("SG&A") expenses, provision for doubtful accounts,
depreciation and amortization and impairment of goodwill and other related
charges. Operating expenses increased by $13.1 million, or 62.1%, from $21.0
million in 1999 to $34.1 million in 2000. SG&A expenses increased by $7.8
million or 42.8% from $18.2 million in 1999 to $26.1 million in 2000. The
increase is attributable to the inclusion of T3 Media's operating expenses with
the Company's operating expenses for the entire year ($5.1 million), an increase
11
in the number of salaried personnel supporting branch operations, marketing and
sales functions, e-Service initiatives ($2.1 million), increased commission plan
costs ($0.9 million) increased occupancy costs, including the depreciation of
furniture, equipment and leaseholds ($0.3 million), and an increase in outside
professional service fees in support of the numerous corporate transactions in
2000 ($0.7 million). These expenses are reflective of continued efforts to
broaden the Company's customer base. The provision for doubtful accounts
increased $377,000 or 29.1% from $1.3 million in 1999 to $1.7 million in 2000.
The increase was largely attributable to the Company's software business and T3
Media. Depreciation and amortization increased $988,000 or 66.6% from $1.5
million in 1999 to $2.5 million in 2000. Part of this increase is attributable
to having a full year of depreciation and amortization charges for the Company's
Solution Branches versus a partial year in 1999. Another portion is related to
the write-off of certain leaseholds and other fixed assets no longer in use at
T3 Media. Due to the change in market conditions and management's estimates of
future profitability of T3 Media, a one-time charge of $3.9 million was taken to
reflect the impairment of goodwill, together with other related charges.
Net Loss. As a result of the above-mentioned factors, the Company had a
net loss of approximately $16.8 million in 2000 compared to a net loss of $2.7
million in 1999.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenues. Revenues of the Company increased by $4.6 million, or 9.4%,
from $48.9 million for the year ended December 31, 1998 to $53.5 million for the
year ended December 31, 1999. Revenues from consulting services increased by
$6.1 million, or 14.4%, from $42.4 million in 1998 to $48.5 million in 1999. The
increase in 1999 revenues from consulting services resulted from the inclusion
of T3 Media revenues, a slight increase in the average number of consultants
and, to a lesser extent, higher hourly billing rates, offset by a slight
decrease in the consultant utilization rate. The number of consultants engaged
by the Company increased during the first three quarters of the year by
approximate 31% in response to several significant projects involving Year 2000
remediation, project management and internet application development. Those
projects began winding down in the third and fourth quarters of 1999. This
resulted in a 21% decrease in the consultant headcount in the fourth quarter.
Software licensing revenues decreased by $1.5 million, or 24.2%, from
$6.2 million in 1998 to $4.7 million in 1999. This decrease is directly
attributable to reduced demand for Year 2000-related products because many of
its customers licensed Y2K-related products during the last quarter of 1998 and
slower than expected sales of new products. Software sales are expected to
continue to decrease in year 2000 and beyond and will only be ancillary to
providing e-Services solutions to customers.
Revenues from training represented less than 1% of the Company's total
revenues in both 1999 and 1998.
Gross Profit. The resulting gross profit for 1999 increased by $1.1
million, or 6.4%, from $16.8 million in 1998 to $17.8 million in 1999. Gross
margin was adversely affected by the significant decrease in software revenues
in 1999 and a slight decrease in the consultant utilization rate as compared to
1998. As a percentage of total revenues, gross profit decreased from 34.3% of
revenues in 1998 to 33.3% of revenues in 1999.
Operating Expenses. Operating expenses increased by $8.6 million, or
68.6%, from $12.5 million in 1998 to $21.0 million in 1999. Expressed as a
percentage of sales, operating expenses increased from 25.5% of 1998 revenues to
39.3% of 1999 revenues. The increase is attributable to the acquisition of T3
Media ($2.6 million), an increase in the number of salaried personnel supporting
new branch operations, marketing and sales functions ($2.0 million), increased
occupancy costs, including the amortization of furniture, equipment and
leaseholds ($0.9 million), a provision for doubtful accounts ($1.3 million) and
the amortization of goodwill associated with acquisitions ($0.3 million). These
expenses are reflective of continued efforts to broaden the Company's customer
base, increase its geographic presence and transition to being an e-Services
service provider.
12
Net Income (Loss). As a result of the above-mentioned factors, the
Company had a net loss of approximately $2.7 million in 1999 compared to net
income of $2.8 million in 1998.
Liquidity and Capital Resources
The Company has a line of credit of $2.1 million, with $2.0 million
outstanding at December 31, 2000. The Company's principal shareholder guarantees
the line of credit. The line of credit bears interest at a variable rate based
on prime plus 1%. The rate was 9.5% at December 31, 2000. In addition, the
Company's subsidiary, T3 Media has a demand loan with a bank. The amount
outstanding at December 31, 2000 and 1999 is $170,000 and $325,000,
respectively. This loan bears interest at prime plus 3%. The rate was 11.5% at
December 31, 2000. T3 Media has entered into a series of capital lease
obligations to finance its expansion plans, covering leasehold improvements,
furniture and computer-related equipment. The amount outstanding under such
leases was $771,000 at December 31, 2000.
The Company's cash balances were $838,000 at December 31, 2000 and $5.1
million at December 31, 1999. Net cash used by operating activities in 2000 was
$14.4 million compared to net cash used of $2.6 million in 1999, compared to net
cash provided of $1.1 million in 1998. In accordance with investment guidelines
approved by the Company's Board of Directors, cash balances in excess of those
required to fund operations have been invested in short-term commercial paper
with a credit rating no lower than A1, P1.
The Company's accounts receivable, less allowance for doubtful
accounts, at December 31, 2000 and December 31, 1999 were $13.6 million and
$11.2 million, respectively representing 89 and 84 days of sales outstanding,
respectively. The Company has provided an allowance for doubtful accounts at the
end of each of the years presented. After giving effect to this allowance, the
Company does not anticipate any difficulty in collecting amounts due.
In each of the last three years, the Company has had at least one
customer with revenues exceeding 10% of the Company's revenues For the year
ended December 31, 2000, the Company had revenues from one customer, which
represented 17% of revenues. For the same period in 1999, the Company had
revenues from two customers, which represented 23% and 14% of revenues. Besides
these customers, no other customer represented greater than 10% of the Company's
revenues.
Net cash used in investing activities was approximately $3.4 million,
$3.5 million, and $5.1 million for the year ended December 31, 2000, 1999 and
1998, respectively. In each of the three years, this represented additions to
property and equipment of $890,000, $3.1 million and $2.0 million, respectively,
as the Company continued to expand its locations and enhance its computing
network and infrastructure. In 2000, $2.5 million in cash was used for making
minority investments in two different companies, Always-On Software, Inc.
("Always-On") (formerly known as Light PC.com) and Methoda, Ltd. In 1999, cash
was used for a majority investment in and advances to T3 Media, net of cash
acquired and a minority investment of $300,000 in Always-On. For 1998, this
represented the initial investment of $3.0 million in T3 Media's non-voting
convertible preferred stock.
Net cash provided by financing activities was approximately $13.6
million in 2000, while $1.8 million was used for financing activities in 1999.
During 2000, the Company sold an aggregate of 1,624,996 shares of common stock
to investors, in each case in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, relating to sales by an issuer not
involving a public offering, as set forth below.
On March 19, 2000, Yosi Vardi, Rita Folger, DS Polaris Group, SFK Group
and Arison Investments Ltd. invested an aggregate of approximately $2.75 million
by purchasing an aggregate of 392,855 shares of common stock at $7.00 per share
with 60 day warrants (subsequently extended by an additional 14 days) to
purchase an aggregate of 607,142 additional shares of common stock at an
exercise price of $7.00 per share (one of which warrants was exercised in part
by Arison Investments on June 5, 2000 to purchase 142,857 shares of common stock
for an aggregate exercise price of approximately $1 million) and two year
13
warrants to purchase an aggregate of 1,000,000 additional shares of common stock
at an exercise price of $13.00 per share.
On June 5, 2000, Koonras Technologies, Eurocom Communications and
Poalim Capital Markets Technologies invested an aggregate of approximately $3.25
million by purchasing an aggregate of 464,284 shares of common stock at $7.00
per share with two year warrants to purchase an aggregate of 464,284 additional
shares of common stock at an exercise price of $13.00 per share.
On June 14, 2000, two investment trusts controlled by Michael G.
Jesselson invested $1 million by purchasing an aggregate of 125,000 shares of
common stock at $8.00 per share with two year warrants to purchase an aggregate
of 125,000 additional shares of common stock at an exercise price of $13.00 per
share.
On September 29, 2000, Level 8 Systems, Inc. invested $4 million by
purchasing 500,000 shares of common stock at $8.00 per share with two year
warrants to purchase an aggregate of 500,000 additional shares of common stock
at an exercise price of $13.00 per share.
In addition, 6,875 shares of common stock were issued pursuant to the
exercise of options issued under the Company's stock option plan.
The Company borrowed $2 million under its revolving credit line. These
amounts were offset by payments on other bank borrowings, capital leases and
long-term debt in the amount of $300,000. The Company currently is negotiating
with several financial institutions to replace its line of credit with an
increased line. If it is unsuccessful in obtaining the new line with
satisfactory terms and needs funds to repay its current line, its principal
shareholder has committed to lend funds to the Company in order to repay up to
$2.0 million of its current line of credit.
In management's opinion, cash flows from operations and borrowing
capacity combined with cash on hand will provide adequate flexibility for
funding the Company's working capital obligations for the next twelve months.
There may be circumstances that would accelerate its use of liquidity sources,
including, but not limited to, its ability to implement a profitable business
model which may include further restructuring charges. If this occurs, the
Company may, from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to us.
Inflation
The Company has not suffered material adverse affects from inflation in
the past. However, a substantial increase in the inflation rate in the future
may adversely affect customers' purchasing decisions, may increase the costs of
borrowing, or may have an adverse impact on the Company's margins and overall
cost structure.
Factors that Could Affect Operating Results
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission. Such forward-looking statements involve risk and
uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
14
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
Operating Losses
The Company has incurred operating losses in the last two years and may
continue to incur net losses and negative cash flow in 2001. The Company
incurred net losses of $2.7 million for the year ended December 31, 1999, of
which $2.2 million was attributable to the inclusion of T3 Media's results of
operations for the six months that it was consolidated. In 2000, the Company had
a net loss of $16.8 million of which $5.5 million was attributable to T3 Media
(including certain one-time charges referred to below). The remaining loss of
$11.3 million was attributable to the Company's continuing investment in its
end-to-end e-Services business and higher expenses associated with its solution
branches and the expenses of closing certain operations and streamlining others.
In addition, in the fourth quarter, the Company recorded a $3.9 million charge
to reflect the impairment of goodwill and other related charges. The Company may
incur further operating losses and continue to make capital expenditures and, as
a result, may need to generate significant revenues to achieve profitability.
The Company cannot guarantee that the Company will achieve sufficient cost
reductions or revenues to achieve profitability. Even if it does achieve
profitability, there is no guarantee that the Company can sustain or increase
profitability on a quarterly or annual basis in the future. If revenues grow
slower than anticipated, or if operating expenses exceed expectations or cannot
be adjusted accordingly the Company will continue to experience losses and the
results of operations and financial condition will be materially and adversely
affected.
Capital Requirements
The Company may be unable to meet its future capital requirements. The
Company will require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. The Company currently is negotiating with a financial institution to
replace its line of credit with an increased line. The Company may not be able
to obtain such financing or obtain it on acceptable terms. Without additional
financing, the Company may be forced to delay, scale back or eliminate some or
all of its product and services development, marketing and other corporate
programs. If the Company is able to obtain such financing, the terms may contain
restrictive covenants that might negatively affect its shares of common stock,
such as limitations on payments of dividends or, in the case of a debt
financing, reduced earnings due to interest expenses. Any further issuance of
equity securities would 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.
Dependence on Limited Number of Clients
The Company derives a significant portion of its revenues from a
relatively limited number of clients primarily located in the New York/New
Jersey metropolitan area of the United States. Adverse economic conditions
affecting this region could have an adverse effect on the financial condition of
its clients located there, which in turn could adversely impact its business and
future growth. Revenues from its ten most significant clients accounted for a
majority of its revenues for each of the three years ended December 31, 2000. In
each of the last three years, the Company has had at least one customer with
revenues exceeding 10% of the Company's revenues. For the year ended December
31, 2000, the Company had revenues from one customer which represented 17% of
revenues. For the same period in 1999, the Company had revenues from two
customers which represented 23% and 14% 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
15
projects for those clients during that year. There can be no assurance that its
significant clients will continue to engage us for additional projects or do so
at the same revenue levels. Clients engage the Company on an assignment-by-
assignment basis, and a client can generally terminate an assignment at any time
without penalties. The loss of any significant customer could have a material
adverse effect on its business, results of operations and financial condition. A
failure of the Company to develop relationships with new customers could have a
material adverse effect on its business, results of operations and financial
condition.
Project Risk
The Company's projects entail significant risks. Many of its
engagements involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. The Company's
failure or inability to meet a client's expectations in the performance of the
Company's services could result in a material adverse change to the client's
operations and therefore could give rise to claims against the Company or damage
its reputation, adversely affecting its business, results of operations and
financial condition.
Rapid Technological Change
The Company's business is subject to rapid technological change and is
dependent on new solutions. Our success will depend in part on its ability to
develop information technology solutions to meet client expectations, including
e-commerce solutions, and offer software solutions that keep pace with
continuing changes in information technology, evolving industry standards,
changing client preferences and a continuing shift to outsourced solutions by
clients. The Company cannot assure you that it will be successful in adequately
addressing the outsourcing market or other information technology developments
on a timely basis or that, if addressed, the Company will be successful in the
marketplace. The Company also cannot assure you that products or technologies
developed by others will not render its services uncompetitive or obsolete. Our
failure to address these developments could have a material adverse effect on
its business, results of operations and financial condition.
e-Business Initiatives
The Company faces difficulties typically encountered by development
state companies in rapidly evolving markets because of its e-commerce
initiative. The Company provides e-commerce Web design and Web business
planning, strategic planning and marketing strategy-consulting services and
other related e-business services. The Company also provides remote application
hosting and off-site documentation storage to Web-based companies through a
strategic relationship with Always-On Software, Inc. Revenues from its
e-commerce services constituted 21% of its revenues for the year ended December
31, 1999 and 51% for the year ended December 31, 2000. The Company cannot assure
you that any products or services developed by it, or its strategic partners
will achieve market acceptance. The risks involved in these service offering
include the Company's and its strategic partners' abilities to:
o create a customer base;
o respond to changes in a rapidly evolving and unpredictable business
environment;
o maintain current and develop new strategic relationships;
o manage growth;
o continue to develop and upgrade technology; and
o attract, retain and motivate qualified personnel.
16
Possibility That Customers May Not Do Business With The Company
The Company's existing customers may decide not to continue to do
business with the Company, and potential customers may decide not to engage the
Company, or may conduct business with the Company on terms that are less
favorable than those currently extended, due to the Company's operating losses
in the past two years. In those events, the Company's net revenues would
decrease, and the Company's business would be adversely affected.
Billing Margins
The Company's ability to maintain billing margins is uncertain. We
derive revenues primarily from the hourly billing of its consultants' services
and, to a lesser extent, from fixed-price projects. Our most significant cost is
project personnel cost, which consists of consultant salaries and benefits.
Thus, our financial performance is primarily based upon billing margin (billable
hourly rate less the consultant's hourly cost) and personnel utilization rates
(number of days worked by a consultant during a two-week billing cycle divided
by the number of billing days in that cycle). The billing margin decreased in
2000 due principally to lower billing rates and lower utilization rates. There
can be no assurance, however, that its revenues will continue to be billed
primarily on a time and materials basis or that the Company will be able to
continue to pass along increases in its cost of services to its clients.
Managing Growth
The Company may have difficulty managing its growth. Our expansion is
dependent upon, among other things,
o our ability to hire and retain consultants as employees or
independent consultants,
o our ability to identify suitable new geographic markets with
sufficient demand for our services, hire and retain skilled
management, marketing, customer service and other personnel, and
successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality and service
controls, and
o if the Company consummates additional acquisitions, its ability to
successfully and profitably integrate any acquired businesses into
its operations.
If our management is unable to manage growth or new employees or
consultants are unable to achieve anticipated performance levels, our business,
results of operations and financial condition could be materially adversely
affected.
Dependence on Chief Executive Officer
The Company's success is highly dependent upon the efforts and
abilities of Shmuel BenTov, its Chief Executive Officer and President. Mr.
BenTov has entered into an employment agreement with the Company, which
terminates on December 31, 2001. Although his employment agreement contains
non-competition, nondisclosure and non-solicitation covenants, this contract
does not guarantee that Mr. BenTov will continue his employment with Company.
The loss of services of Mr. BenTov for any reason could have a material adverse
effect upon the Company's business, results of operations and financial
condition.
Fluctuations in Quarterly Operating Results
The Company's quarterly results of operations are variable. Variations
in its revenues and results of operations occur from time to time as a result of
a number of factors, such as the timing of closing of Solution Branch offices,
the size and significance of client engagements commenced and completed during a
quarter, the number of business days in a quarter, consultant hiring and
utilization rates and the timing of corporate expenditures. The timing of
17
revenues is difficult to forecast because its sales cycle can be relatively long
and may depend on such factors as the size and scope of assignments and general
economic conditions. A variation in the number of client assignments or the
timing of the initiation or the completion of client assignments, particularly
at or near the end of any quarter, can cause significant variations in results
of operations from quarter to quarter and can result in losses to us. In
addition, its engagements generally are terminable by the client at any time
without penalties. Although the number of consultants can be adjusted to
correspond to the number of active projects, The Company must maintain a
sufficient number of senior consultants to oversee existing client projects and
to assist with its sales force in securing new client assignments. An unexpected
reduction in the number of assignments could result in excess capacity of
consultants and increased selling, general and administrative expenses as a
percentage of revenues. The Company has also experienced, and may in the future
experience, significant fluctuations in the quarterly results of its software
sales as a result of the variable size and timing of individual license
transactions, competitive conditions in the industry, changes in customer
budgets, and the timing of the introduction of new products or product
enhancements. In the event that its results of operations for any period are
below the expectation of market analysts and investors, the market price of its
shares of common stock could be adversely affected.
Volatility of Stock Price
The Common Stock may be subject to wide fluctuations in price in
response to variations in quarterly results of operations and other factors,
including acquisitions, technological innovations and general economic or market
conditions. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market price of many technology companies and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of its Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
Possible Removal From Quotation Of Common Stock On NASDAQ And Resulting
Market Illiquidity
The Company's common stock is quoted on the NASDAQ National Market.
Continued quotation of its common stock on the NASDAQ National Market will
require, among other criteria, that (i) the minimum bid price for its common
stock be at least $1.00 per share and (ii) the public float, not including
shares held by affiliates of the Company, consists of at least 750,000 shares of
common stock, have an aggregate value of at least $5,000,000. On March 22, 2001,
the minimum bid price for the Company's common stock was $1.25, and the
aggregate value of the Company's public float, not including common stock held
by affiliates of the Company, was approximately $4,434,000, based on the average
of the bid and asked prices of the Company's common stock on such date. If the
aggregate value of the Company's public float, not including common stock held
by affiliates of the Company, continues to be less than $5,000,000, or if the
Company fails to meet each of the other applicable continued listing
requirements, the Company's common stock could be removed from quotation on the
NASDAQ National Market.
In such event, the Company could apply to have its common stock
included for quotation on the NASDAQ Small-Cap Market, which would require,
among other criteria, that the minimum bid price for the Company's common stock
be at least $1.00 per share. If the minimum bid price for the Company's common
stock decreased to less than $1.00 per share, or if the Company failed to meet
each of the other applicable continued listing requirements, the Company's
common stock could fail to be approved for quotation on the NASDAQ Small-Cap
Market or, if initially approved for quotation, could be removed from quotation
on the NASDAQ Small-Cap Market as well. In such event, any trading in the
Company's common stock would thereafter be conducted in the over-the-counter
market on the NASD's OTC Electronic Bulletin Board or in the "pink sheets."
As a result of the Company's common stock being removed from quotation
on the NASDAQ National Market or the NASDAQ Small-Cap Market, the liquidity of
the Company's common stock could be reduced and the coverage of the Company by
security analysts and media could be reduced, which could result in lower prices
18
for the Company's common stock than might otherwise prevail and could also
result in larger spreads between the bid and asked prices for the Company's
common stock. Additionally, certain investors will not purchase securities that
are not quoted on the NASDAQ National Market, which could materially impair the
Company's ability to raise funds through the issuance of its common stock or
other securities convertible into its common stock.
In addition, if the Company's common stock is removed from quotation on
NASDAQ and the trading price of its common stock is less than $5.00 per share,
trading in its common stock would also be subject to the requirements of Rule
15g-9 promulgated under the Securities Exchange Act of 1934, as amended. Under
that Rule, broker and dealers who recommend such low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the Securities and
Exchange Commission, any equity security not traded on an exchange or quoted on
NASDAQ or the OTC Bulletin Board that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Such requirements could severely
limit the market liquidity of the Company's common stock. There can be no
assurance that the Company's common stock will not be removed from quotation on
NASDAQ or treated as penny stock.
Competition
The market for information technology services includes a large number
of competitors, is subject to rapid change and is highly competitive. Its
primary competitors include participants from a variety of market segments,
including the current and former consulting divisions of the "Big Five"
accounting firms, interactive advertising agencies, web development companies,
systems consulting and implementation firms, application software firms and
management consulting firms. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than the Company. In addition, the Company competes with its
clients' internal resources, particularly when these resources represent a fixed
cost to the client. In the future, such competition may impose additional
pricing pressures on us. The Company cannot assure you that it will compete
successfully with its existing competitors or with any new competitors.
Intellectual Property Rights
The Company's business includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to the client. The Company relies upon a
combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third parties from whom the Company 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 us in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. The Company is subject to the risk of litigation alleging
infringement of third-party intellectual property rights. Any such claims could
require us to spend significant sums in litigation, pay damages, develop
non-infringing intellectual property or acquire licenses to the intellectual
property, which is the subject of the asserted infringement. In addition, the
Company is aware of other users of the term "TACT" and combinations including "A
Consulting," which users may be able to restrict our ability to establish or
protect our right to use these terms. The Company has in the past been contacted
by other users of the term "TACT" alleging rights to the term. The Company has
completed filings with the U.S. Patent and Trademark Office in order to protect
certain marks, including "TACT" and "The A Consulting Team." Our inability or
failure to establish rights to these terms or protect its rights may have a
material adverse effect on our business, results of operations and financial
condition.
19
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 years
ended December 31, 2000 and 1999, the Company reported net losses of $16.8
million and $2,7 million, respectively. Additionally, the Company has an
accumulated deficit of $15,4 million as of December 31, 2000. The Company
believes that its continuing focus on cost reductions, together with a number of
other operational changes, including the closing of certain branch offices and
the restructuring of its subsidiary, T3 Media, Inc. in 2001, will result in the
attainment of profitable operations. In addition, the Company currently is
negotiating with a financial institution to replace its line of credit with an
increased line. If it is unsuccessful in obtaining the new line with
satisfactory terms and needs additional funds to repay its current line or for
other working capital purposes, its principal shareholder has committed to lend
such funds to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into the market risk sensitive transactions
required to be disclosed under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements on pages F-3 through F-17 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following section sets forth information as to each Director and
Executive Officer of TACT, including his age, present principal occupation,
other business experience during the last five years, directorships in other
publicly-held companies, membership on committees of the Board of Directors and
period of service with TACT.
Shmuel BenTov, 49, is the founder of TACT and has been the Chairman of
the Board, Chief Executive Officer and President of the Company since its
establishment in 1983. Mr. BenTov received a B.Sc. in Economics and Computer
Science in 1979 from the Bar-Ilan University in Israel. From 1979 to 1983, Mr.
BenTov was a consultant Database Administrator and then an Account Manager with
Spiridellis & Associates. From 1972 to 1979, Mr. BenTov served with the Israeli
Defense Forces as a Programmer, Analyst, Project Manager, Database Administrator
and Chief Programmer.
Frank T. Thoelen, 52, has been the Chief Financial Officer and
Treasurer-Secretary of the Company since August 1997. Mr. Thoelen is a C.P.A.
and received a B.S. in Public Accounting in 1971 from the University at Albany,
New York. Before joining the Company in June 1997, Mr. Thoelen was President of
FTT Consulting Inc., his own consulting firm. From 1971 to 1996, Mr. Thoelen was
with Arthur Andersen LLP, an international consulting and business advisory
firm. From 1989 to 1996, he was the Division Head for the Business Systems
Consulting and Computer Risk Management Business Unit.
Joseph E. Imholz, 69, has been a director of the Company since August
1997. Mr. Imholz received a B.S. in Management in 1957 from Hofstra University.
From 1987 until his retirement in 1995, Mr. Imholz was Vice President and Chief
20
Information Officer of the Property and Casualty Division of Metropolitan Life
Insurance Co. ("MetLife").
Steven S. Mukamal, 61, has been a director of the Company since August
1997. Mr. Mukamal received a B.A. in 1962 from Michigan State University and a
J.D./L.L.B. in 1965 from Brooklyn Law School. Since 1965, he has been a member
and senior partner of the law firm Barst & Mukamal LLP. Mr. Mukamal specializes
in the areas of immigration and nationality law, consular law and real estate
and debt restructuring.
Reuven Battat, 45, has been a director of the Company since August
1997. Mr. Battat recently became President and CEO of ProcureNet Inc. Mr. Battat
was the Senior Vice President and General Manager of Global Marketing for
Computer Associates International, Inc. and from 1995 through 1999 was
responsible for Computer Associates' worldwide marketing activities and
long-term planning of product development in new and emerging markets.
Certain Filings
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities file with the Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors, officers and greater than ten
percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based on a review of such timely filed forms received by it and
representations by persons that would be required to file such forms, the
Company believes that all required filings by current executive officers and
directors have been timely filed, except as follows:
Joseph Judenberg became a Senior Vice President of the Company on May
3, 1999, and reported late on a Form 3 filed on May 15, 2000. Mr. Judenberg
reported one transaction late on a Form 4 filed on May 15, 2000.
Reuven Battat, a director of the Company, reported two transactions
late on two Forms 4, each filed on May 15, 2000.
Joseph Imholz, a director of the Company, reported two transactions
late on two Forms 4 each filed on May 15, 2000. Steven Mukamal, a director of
the Company, reported two transactions late on two Forms 4 each filed on May 15,
2000.
Frank Thoelen, a director and the Chief Financial Officer of the
Company, reported two transactions late on two Forms 4 each filed on May 17,
2000.
Shmuel BenTov, a director and the President and Chief Executive Officer
of the Company, reported one transaction late on a Form 4 filed on May 17, 2000.
Mr. BenTov also reported an aggregate of nine transactions by himself, his
spouse and his two minor children (for whom he acts as custodian) late on a Form
5 filed on February 14, 2001.
Global Credit Corp. (Overseas) Ltd. and Charles Ewert, 10% owners of
outstanding common stock of the Company, jointly reported one transaction late
on a Form 4 filed on August 31, 2000.
21
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission on or before April 15,
2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission on or before April 15,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a line of credit of $2,100,000 of which $2,000,000 was
outstanding at December 31, 2000 and $ 0 outstanding at December 31, 1999. The
line of credit is guaranteed by the Company's principal shareholder and bears
interest at a variable rate based on prime plus 1% (9.50% at December 31, 2000
and 8.50% at December 31, 1999). Also, if the Company needs funds to repay its
current line, its principal shareholder has committed to lend funds to the
Company in order to repay up to $2.0 million of its current line of credit.
At December 31, 2000, T3 Media has a $170,000 note, payable upon demand
and renewable every ninety days, at the banks' option. The Company and an
officer of T3 Media guarantee this note.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report at F-1.
(a)(3) Listing of Exhibits
Exhibit
Number Description of Exhibits
- ------- -----------------------
1.1 Form of Underwriting Agreement by and among Registrant and the
Underwriters, incorporated by reference to Exhibit 1.1 to the
Registration Statement on Form SB-2 as previously filed with the
Securities and Exchange Commission on August 8, 1997.
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form SB-2 as
previously filed with the Commission on August 6, 1997.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form SB-2 as
previously filed with the Commission on August 6, 1997.
4 Specimen Common Stock Certificate, incorporated by reference to Exhibit
4 to the Registration Statement on Form SB-2 as previously filed with
the Commission on July 23, 1997.
10.1.1 Stock Option and Award Plan of the Registrant and Form of Nonqualified
Stock Option Agreement, incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form SB-2 as previously filed with the
Commission on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Form S-8-Filed December 12, 1997.
10.2 Form of Employment Agreement, dated August 7, 1999, between the
Registrant and Shmuel BenTov.
22
10.3 Form of Employment Agreement, effective as of June 30, 1997, between
the Registrant and Frank T. Thoelen incorporated by reference to
Exhibit 10.3 to the Registration Statement on Form SB-2 as previously
filed with the Commission on August 6, 1997.
10.4 Form of S Corporation Termination, Tax Allocation and Indemnification
Agreement, incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form SB-2 as previously filed with the
Commission on August 6, 1997.
10.5 Demand Note (Multiple Advances), issued February 1997, between
Citibank, N.A. and the Registrant, incorporated by reference to Exhibit
10.5 to the Registration Statement on Form SB-2 as previously filed
with the Commission on June 13, 1997.
10.6 Promissory Note and Cross-Receipt in connection with the Shareholder,
incorporated by reference to Exhibit 10.6 to the Registration Statement
on Form SB-2 as previously filed with the Commission on August 6, 1997.
10.7 Joint Venture Agreement, dated April 11, 1994, between Kalanit Center
for Marketing Software & Hardware Ltd. and the Registrant, incorporated
by reference to Exhibit 10.7 to the Registration Statement on Form SB-2
as previously filed with the Commission on June 13, 1997.
10.8 Form of Director and Executive Officer Indemnification Agreement,
incorporated by reference to Exhibit 10.8 to the Registration Statement
on Form SB-2 as previously filed with the Commission on August 6, 1997.
10.9 Letter of Undertaking from the Registrant and Shmuel BenTov,
incorporated by reference to Exhibit 10.9 to the Registration Statement
on Form SB-2 as previously filed with the Commission on July 23, 1997.
10.10 Shmuel BenTov Letter Commitment, dated March 29, 2001.
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
A report on Form 8-K regarding Level 8 Systems, Inc.'s purchase of
common stock and warrants to purchase common stock of the Company was filed on
October 11, 2000. No other reports on Form 8-K were filed during the quarter
ended December 31, 2000.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
By: /s/ Shmuel BenTov
-----------------------
Shmuel BenTov, President
Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------ ----------------------------------------------- --------------
/s/ Shmuel BenTov President, Chief Executive Officer and Director March 30, 2001
- -------------------------- (Principal Executive Officer)
Shmuel BenTov
/s/ Frank T Thoelen Chief Financial Officer and Director March 30, 2001
- -------------------------- (Principal Financial and Accounting Officer)
Frank T Thoelen
/s/ Reuven Battat Director March 30, 2001
- --------------------------
Reuven Battat
/s/ Joseph Imholz Director March 30, 2001
- --------------------------
Joseph Imholz
/s/ Steven Mukamal Director March 30, 2001
- --------------------------
Steven Mukamal
24
ITEM 14 (a) (1) and (2)
THE A CONSULTING TEAM, INC.
The following consolidated financial statements and financial statement schedule
of The A Consulting Team, Inc. are included in Item 8:
Consolidated Balance Sheets at December 31, 2000 and 1999....................F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998...........................................F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998.....................................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998.....................................F-6
Notes to Consolidated Financial Statements...................................F-7
The following consolidated financial statement schedule of
The A Consulting Team, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts............................S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The A Consulting Team, Inc.
We have audited the accompanying consolidated balance sheets of The A
Consulting Team, Inc. (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The A
Consulting Team, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 21, 2001
F-2
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 837,946 $ 5,082,519
Accounts receivable, less allowance for doubtful accounts of
$948,397 and $682,424 at December 31, 2000 and 1999, respectively 13,596,875 11,234,140
Unbilled receivables - 121,545
Prepaid software licenses 2,000,000 -
Prepaid or refundable income taxes 1,575,510 564,491
Prepaid expenses and other current assets 132,423 164,603
----------- -----------
Total current assets 18,142,754 17,167,298
Investments, at cost 2,820,638 300,000
Property and equipment, at cost, less accumulated
depreciation and amortization 5,847,092 7,086,342
Goodwill (net) - 3,749,630
Deposits 227,055 279,184
----------- -----------
Total assets $27,037,539 $28,582,454
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable - banks $ 2,170,000 $ 325,000
Accounts payable and accrued expenses 6,098,951 4,613,460
Deferred revenue 166,015 97,536
Deferred income taxes - 57,000
Current portion of capital lease obligation 376,288 307,950
Current portion of long-term debt - 14,966
----------- -----------
Total current liabilities 8,811,254 5,415,912
Capital lease obligation 394,379 560,755
Other long-term liabilities 62,139 89,329
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 10,000,000 shares authorized;
7,116,871 (2000) and 5,485,000 (1999) issued and outstanding 71,169 54,850
Additional paid-in capital 33,086,689 21,051,758
Retained earnings (accumulated deficit) (15,388,091) 1,409,850
----------- -----------
Total shareholders' equity 17,769,767 22,516,458
----------- -----------
Total liabilities and shareholders' equity $27,037,539 $28,582,454
=========== ===========
See accompanying notes to financial statements
F-3
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
------------ ----------- -----------
Revenues $ 55,021,679 $53,517,328 $48,924,603
Cost of revenues 39,069,237 35,695,206 32,167,572
------------ ----------- -----------
Gross profit 15,952,442 17,822,122 16,757,031
Operating expenses:
Selling, general and administrative 26,057,606 18,247,702 12,028,450
Provision for doubtful accounts 1,671,457 1,294,507 -
Depreciation and amortization 2,470,723 1,482,935 441,208
Impairment of goodwill and other related charges 3,876,547 - -
------------ ----------- -----------
34,076,333 21,025,144 12,469,658
------------ ----------- -----------
Income (loss) from operations (18,123,891) (3,203,022) 4,287,373
Interest income 94,248 656,759 650,404
Interest expense (300,581) (92,373) (3,020)
------------ ----------- -----------
Interest income (expense), net (206,333) 564,386 647,384
------------ ----------- -----------
Income (loss) before income taxes (18,330,224) (2,638,636) 4,934,757
Income taxes (1,532,283) 28,000 2,150,000
------------ ----------- -----------
Net income (loss) ($16,797,941) ($2,666,636) $ 2,784,757
============ =========== ===========
Net income (loss) per share - basic and diluted ($2.65) ($0.49) $0.51
============ =========== ===========
See accompanying notes to financial statements
F-4
THE A CONSULTING TEAM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Additional Earnings
Preferred Stock Common Stock Paid-In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
--------------------------------------------------------------------------------------------
Balance, January 1, 1998 - $ - 5,485,000 $54,850 $21,051,758 $1,291,729 $22,398,337
Net income - - - - - 2,784,757 2,784,757
---------- ---------- ----------- --------- ------------- -------------- -------------
Balance, December 31, 1998 - - 5,485,000 54,850 21,051,758 4,076,486 25,183,094
Net loss - - - - - (2,666,636) (2,666,636)
---------- ---------- ----------- --------- ------------- -------------- -------------
Balance, December 31, 1999 - - 5,485,000 54,850 21,051,758 1,409,850 22,516,458
Investment by new shareholder's 1,624,996 16,250 11,983,750 12,000,000
Exercise of employee stock options 6,875 69 51,181 51,250
Net loss - - - - - (16,797,941) (16,797,941)
---------- ---------- ----------- --------- ------------- -------------- -------------
Balance, December 31, 2000 - $ - 7,116,871 $71,169 $33,086,689 ($15,388,091) $17,769,767
========== ========== =========== ========= ============= ============== =============
See accompanying notes to financial statements
F-5
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
--------------- ------------ -----------
Cash flows from operating activities:
Net income (loss) ($16,797,941) ($2,666,636) $2,784,757
Adjustments to reconcile net income (loss) to net cash
used in operating activities, net of acquired assets:
Depreciation and amortization 2,470,723 1,482,935 441,208
Impairment of goodwill and other related charges 3,876,547 - -
Deferred income taxes (57,000) (625,000) 324,000
Provision for doubtful accounts 1,671,457 1,294,507 -
Changes in operating assets and liabilities:
Accounts receivable (4,034,192) (3,049,377) (1,611,027)
Unbilled receivables 121,545 73,007 -
Prepaid software licenses (2,000,000) - -
Prepaid or refundable income taxes (1,011,019) 110,009 (674,500)
Prepaid expenses and other current assets 32,180 297,002 (349,057)
Accounts payable and accrued expenses 1,263,409 508,743 737,394
Deferred revenue 68,479 (112,251) -
Income taxes payable - (10,829) (527,376)
Other long-term liabilities (27,190) 89,329 -
------------ ----------- ----------
Net cash (used in) provided by operating activities (14,423,002) (2,608,561) 1,125,399
Cash flows from investing activities:
Purchase of property and equipment (890,341) (3,086,693) (2,018,833)
Investment and advances to T3 Media, Inc., net of
cash acquired - (95,591) (3,000,000)
Investments at cost (2,520,638) (300,000) -
Deposits (1,871) (45,363) (34,571)
------------ ----------- ----------
Net cash used in investing activities (3,412,850) (3,527,647) (5,053,404)
Cash flows from financing activities:
Proceeds from sale of common stock 12,051,250 - -
Proceeds from loan payable 2,000,000 - -
Repayment of loan payable (155,000) (1,674,820) -
Repayment of long-term debt (14,966) (15,126) (13,967)
Repayment of capital lease obligation (290,005) (94,365) -
------------ ----------- ----------
Net cash provided by (used in) financing activities 13,591,279 (1,784,311) (13,967)
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents (4,244,573) (7,920,519) (3,941,972)
Cash and cash equivalents at beginning of year 5,082,519 13,003,038 16,945,010
------------ ----------- ----------
Cash and cash equivalents at end of year $837,946 $5,082,519 $13,003,038
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $178,596 $92,692 $3,020
============ =========== ===========
Cash paid during the period for income taxes $ - $610,800 $3,027,876
============ =========== ===========
Supplemental disclosure of non-cash investing
and financing activity:
Capital lease obligation $191,967 $442,429 $ -
============ =========== ===========
See accompanying notes to financial statements.
F-6
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
The A Consulting Team, Inc. (the "Company") was incorporated on
February 16, 1983, in the State of New York and provides information technology
consulting, custom application development and training services and solutions
to Fortune 1000 companies. The Company's customers are primarily located in the
New York/New Jersey metropolitan area.
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 years
ended December 31, 2000 and 1999, the Company reported net losses of $16,797,941
and $2,666,636, respectively. Additionally, the Company has an accumulated
deficit of $15,388,091 as of December 31, 2000. The Company believes that its
continuing focus on cost reductions, together with a number of other operational
changes, including the closing of certain branch offices and the restructuring
of its subsidiary, T3 Media, Inc. in 2001, will result in the attainment of
profitable operations. In addition, the Company currently is negotiating with
several financial institutions to replace its line of credit (see Note 6) with
an increased line. If it is unsuccessful in obtaining the new line with
satisfactory terms and needs to repay its current line, its principal
shareholder has committed to lend such funds to the Company in order to repay up
to $2.0 million of its current line of credit.
Principles of Consolidation
The consolidated financial statements include the accounts of The A
Consulting Team, Inc. and its 51% owned subsidiary, T3 Media, Inc., from its
date of acquisition in 1999 (see Note 2). All material intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
Basic and diluted earnings per share is calculated in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings per Share."
Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment acquired after December 31, 1994 are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. Property and equipment acquired prior to
January 1, 1995 are depreciated using an accelerated method over the estimated
useful lives of the assets, which range from five to seven years.
F-7
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Prepaid Software Licenses
Prepaid software licenses represent the amounts paid during 2000 for
the right to resell certain licensed software products. Such amounts will be
charged to cost of sales when revenue from the sale of the software products is
recognized. The Company expects to generate sufficient revenues to utilize all
the prepaid licenses during 2001.
Long-Lived Assets
When impairment indicators are present, the Company reviews the
carrying value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analyses expected to be
generated by the assets. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the asset
exceeds the future discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less cost to sell.
The Company evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates of
useful lives. If estimates are changed, the unamortized cost will be allocated
to the increased or decreased number of remaining periods in the revised lives.
In the fourth quarter of 2000, after extensive review of changing
market conditions, the Company wrote off approximately $3.9 million, which
related to the permanent impairment of goodwill, write-down of fixed assets no
longer in use and other related charges. These charges relate to the Company's
majority-owned subsidiary, T3 Media, Inc.
Revenue and Accounts Receivable
Consulting and training revenues are recognized as services are
provided. Revenue from sales of software licenses is recognized upon delivery of
the software to a customer because future obligations associated with such
revenue are insignificant.
Fixed fee contracts are accounted for under the
percentage-of-completion method. Any anticipated contract losses are estimated
and accrued at the time they become known and estimable.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Provisions for
doubtful accounts are recorded when such losses are determined.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations with pro forma
disclosure of what net income and earnings per share would have been had the
Company adopted the new fair value method. The Company has elected to account
for its stock-based compensation plans in accordance with the provisions of APB
25.
Segment Information
The disclosure of segment information in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" was not
required as the Company operates in only one business segment.
F-8
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impact of Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standard Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FASB
133"). The new statement, which becomes effective in 2001, establishes new
financial statement disclosures and requires that all derivatives be recorded on
the balance sheet at fair value. Management does not believe that FASB 133 will
have a material effect on the Company's financial condition or results of
operations.
2. ACQUISITION
On October 2, 1998, the Company made an investment in web integrator T3
Media of $3 million, in return for non-voting convertible preferred stock. On
June 23, 1999, the Company converted its preferred stock into 30% common stock
ownership and increased its ownership interest to approximately 51% by an
additional investment in T3 Media's common stock of $370,000. The acquisition of
T3 Media was accounted for using the purchase method of accounting. Accordingly,
the results of operations of T3 Media are included in the Company's consolidated
results of operations from the date of acquisition. The excess of the purchase
price over the estimated fair value of the net identifiable assets acquired
totaled $4.0 million and was recorded as goodwill and was being amortized using
the straight-line method over 7 years. During 2000, the Company wrote-off the
net carrying value of the goodwill which amounted to $3.1 million.
The following unaudited proforma consolidated results of operations for
the years ended December 31, 1999 and 1998 are presented as if the T3 Media
acquisition had been made on January 1, 1998:
Year Ended December 31,
1999 1998
------------- ------------
Revenues $ 55,353,000 $ 52,067,000
Net income (loss) $ (5,007,000) $ 2,056,000
Net income (loss) per share - basic and diluted $ (.91) $ .37
The unaudited proforma consolidated results of operations information
is not necessarily indicative of the actual results that would have occurred had
the acquisition been consummated on January 1, 1998 or of future operations of
the combined companies.
3. INVESTMENTS
The Company invested approximately $2,000,000 and $300,000 in Always-On
Software, Inc. ("Always-On") during 2000 and 1999, respectively, and the Company
invested $500,000 in Methoda Computers Ltd. ("Methoda") during 2000. The Company
owns less than 20 percent of each of these companies and does not have the
ability to exercise significant influence over operating and financial policies
of these companies. Accordingly, the Company carries its investments in these
companies at cost.
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended December 31, 2000, 1999 and 1998.
F-9
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
------------- ------------ -----------
Numerator:
Net income (loss) $ (16,797,941) $ (2,666,636) $ 2,784,757
------------- ------------ -----------
Numerator for basic and diluted
net income (loss) per share $ (16,797,941) $ (2,666,636) $ 2,784,757
============= ============ ===========
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares 6,329,927 5,485,000 5,485,000
Effect of dilutive securities:
Employee stock options - - 3,356
------------- ------------ -----------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 6,329,927 5,485,000 5,488,356
============= ============ ===========
Basic and diluted earnings (loss) per share $ (2.65) $ (0.49) $ 0.51
============= ============ ===========
All options and warrants outstanding during 2000 and 1999 (see Notes 12
and 13) were not included in the computation of net loss per share because the
effect would be antidilutive and options to purchase 416,150 shares of common
stock at $7.50 per share that were outstanding during 1998 were not included in
the computation of diluted earnings per share because the exercise price was
greater than the average market price of the common shares, and therefore the
effect would be antidilutive.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
----------------------------
2000 1999
----------- ----------
Equipment and leaseholds $ 7,339,084 $6,352,799
Software 1,034,096 924,842
Furniture and fixtures 1,593,695 1,608,890
Automobiles 88,970 88,970
----------- ----------
10,055,845 8,975,501
Less accumulated depreciation and amortization 4,208,753 1,889,159
----------- ----------
$ 5,847,092 $7,086,342
=========== ==========
6. LOANS PAYABLE AND CREDIT ARRANGEMENT
The Company has a line of credit of $2,100,000 of which $2,000,000 was
outstanding at December 31, 2000 and none was outstanding at December 31, 1999.
The line of credit is guaranteed by the Company's principal shareholder and
bears interest at a variable rate based on prime plus 1% (9.50% at December 31,
2000 and 8.50% at December 31, 1999). The borrowings are payable on demand.
At December 31, 2000, T3 Media has a $170,000 note, payable upon demand
and renewable every ninety days, at the banks' option. This note is guaranteed
by the Company and an officer of T3 Media and bears interest at a variable rate
based on prime plus 3% (11.5% at December 31, 2000).
F-10
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
----------------------------
2000 1999
----------- ----------
Accounts payable $2,870,250 $1,974,462
Payroll 1,164,436 1,196,538
Bonuses 424,750 535,000
Other accrued expenses 1,639,515 907,460
---------- ----------
$6,098,951 $4,613,460
========== ==========
8. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets and (liabilities) consist of the following:
December 31,
----------------------------
2000 1999
----------- ----------
Licensing revenues ($11,000) ($285,000)
Allowance for doubtful accounts 530,000 301,000
Depreciation and amortization 33,000 81,000
Net operating losses 6,068,000 1,720,000
----------- ----------
6,620,000 1,817,000
Valuation allowance (6,620,000) (1,874,000)
----------- ----------
$ - ($57,000)
=========== ==========
At December 31, 2000, the Company has net operating loss carryforwards
of approximately $8 million for state and local tax purposes and $3 million for
Federal tax purposes, expiring in 2020. In addition, T3 Media has net operating
loss carryforwards of approximately $9.2 million expiring from 2019 to 2020. The
full utilization of the losses in the future is dependent upon the Company's and
T3 Media's ability to generate taxable income; accordingly, a valuation
allowance of an equal amount has been established. T3 Media had a valuation
allowance of approximately $850,000 at the date of acquisition.
F-11
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant components of the provision for income taxes are as
follows:
Year Ended December 31,
2000 1999 1998
----------- -------- ----------
Current:
Federal ($1,475,000) $420,000 $1,178,000
State and local - 233,000 648,000
----------- -------- ----------
Total current (1,475,000) 653,000 1,826,000
----------- -------- ----------
Deferred:
Federal (44,000) (398,000) 277,000
State and local (13,000) (227,000) 47,000
----------- -------- ----------
Total deferred (57,000) (625,000) 324,000
----------- -------- ----------
Total ($1,532,000) $ 28,000 $2,150,000
=========== ======== ==========
A reconciliation between the federal statutory rate and the effective
income tax rate for the years ended December 31, 2000, 1999 and 1998.
2000 1999 1998
--------- --------- ---------
Federal statutory rate (34.0)% (34.0)% 34.0%
State and local taxes net of federal tax benefit - 0.2 9.3
Non-deductible expenses 7.6 6.1 0.3
Losses for which no benefit was received (including T3
Media) 18.0 28.8 -
------- ------- -------
Total (8.4)% 1.1% 43.6%
======= ======= =======
9. RETIREMENT PLAN
The Company sponsors a defined contribution plan under Section 401(k)
of the Internal Revenue Code for its employees. Participants can make elective
contributions subject to certain limitations. Under the plan, the Company can
make matching contributions on behalf of all participants. No such contributions
were made by the Company in 2000, 1999 and 1998.
10. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains its cash balances on deposit with a limited number of
financial institutions.
In 2000, the largest customer represented 17% of revenues, in 1999, the
two largest customers represented 23% and 14% of revenues and in 1998, the three
largest customers represented 16%, 15% and 12% of revenues. Besides these
customers, no other customer represented greater than 10% of the Company's
revenues. Two customers represented approximately 18% and 18% of accounts
receivable as of December 31, 2000 and two customers represented approximately
12% and 11% of accounts receivable as of December 31, 1999.
11. LEASES
T3 Media leases computer equipment under various agreements with
original terms of 34 months and accounts for these leases as capital leases. The
cost and accumulated depreciation of fixed assets held under capital leases are
approximately $1,335,000 and $431,000, and $1,144,000 and $216,000,
respectively, at December 31, 2000 and 1999.
F-12
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company leases office space under non-cancelable operating leases.
The future minimum payments for all non-cancelable operating and capital leases
as of December 31, 2000 are as follows:
Operating Leases Capital Leases
---------------- --------------
2001 $ 1,130,000 $ 479,000
2002 1,132,000 295,000
2003 774,000 136,000
2004 81,000 23,000
---------
-----------
Total minimum future lease payments $ 3,117,000 933,000
===========
Less interest at 14.3% (163,000)
Less capital lease obligation-current portion (376,000)
---------
Capital lease obligation-long-term $ 394,000
=========
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $1,524,000, $991,000 and $407,000, respectively.
12. STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") that provides for
the grant of stock options that are either "incentive" or "non-qualified" for
federal income tax purposes. The Plan provides for the issuance of up to a
maximum of 600,000 shares of common stock. On May 27, 1998, the shareholders
approved and ratified an increase to the Plan from 600,000 to 900,000 shares of
common stock. (subject to adjustment pursuant to customary anti-dilution
provisions).
The exercise price per share of a stock option is to be established by
the Executive Compensation Committee of the Board of Directors in its
discretion, but may not be less than the fair market value of a share of common
stock as of the date of grant. The aggregate fair market value of the shares of
common stock with respect to which "incentive" stock options are exercisable for
the first time by an individual to whom an "incentive" stock option is granted
during any calendar year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any
time after full vesting for a period not to exceed five years from the date of
grant and terminate upon the date of termination of employment. Such period is
to be established by the Company in its discretion on the date of grant.
F-13
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information with respect to options under the Company's Plan is as
follows:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Balance - December 31, 1997 532,450 $11.63
Granted during 1998 141,000 7.00
Forfeitures during 1998 (116,300) 7.50
--------
Balance - December 31, 1998 557,150 7.38
Granted during 1999 255,550 4.46
Forfeitures during 1999 (65,163) 7.41
--------
Balance - December 31, 1999 747,537 6.38
Granted during 2000 86,330 5.48
Exercised during 2000 (6,875) 7.45
Forfeitures during 2000 (152,625) 6.59
-------
Balance - December 31, 2000 674,367 $6.20
=======
Effective October 14, 1998, the Company changed the exercise price of
the stock options granted during 1997 (which ranged from $10.25 to $12.00) to
$7.50 per share, which was the market price per share on that date.
At December 31, 2000, 1999 and 1998, 333,570, 228,613 and 111,537
options, respectively, were exercisable with weighted average exercise prices of
$6.94, $7.43 and $7.50, respectively.
The following table summarizes the status of the stock options
outstanding and exercisable at December 31, 2000:
Stock Options Outstanding
- --------------------------------------------------------------------------------
Weighted- Number of Stock
Exercise Number of Remaining Options
Prices Options Contractual Life Exercisable
---------- ----------- ------------------ -----------------
$1.156 22,630 10.0 years -
$3.875 157,562 8.9 years 40,110
$4.875 30,125 8.7 years 7,524
$5.813 24,400 9.8 years -
$7.000 90,700 8.0 years 45,525
$7.500 340,375 8.6 years 238,669
$8.000 6,225 8.4 years 1,742
$8.563 2,350 9.3 years -
------- -------
674,367 333,570
======= =======
At December 31, 2000, the Company had 893,125 shares of Common Stock
reserved in connection with the Stock Option Plan.
In 1997, T3 Media adopted the T3 Media, Inc. 1997 Stock Option Plan
(the "1997 Plan"), which provides for the granting of options to purchase up to
1,000,000 shares of T3 Media common stock.
F-14
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information with respect to options under T3 Media's 1997 Plan is as
follows:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Balance - December 31, 1998 381,090 $1.48
Granted during 1999 135,000 1.00
Exercised during 1999 (9,800) 1.00
Forfeitures during 1999 (118,384) 1.44
----------
Balance - December 31, 1999 387,906 1.34
Granted during 2000 523,802 3.00
Exercised during 2000 (21,170) 1.14
Forfeitures during 2000 (203,038) 1.24
----------
Balance - December 31, 2000 687,500 $2.44
==========
The following table summarizes the status of the T3 Media stock options
outstanding and exercisable at December 31, 2000:
At December 31, 2000 and 1999, 133,500 and 132,878 options,
respectively, were exercisable with weighted average exercise prices of $1.67
and $1.40, respectively.
Stock Options Outanding
- --------------------------------------------------------------------------------
Weighted Average Number of Stock
Exercise Number of Remaining Options
Price Options Contractual Life Exercisable
- ---------------- --------------- ---------------------- ------------------
$1.00 50,000 8.5 17,500
$1.58 200,000 7.5 100,000
$3.00 437,500 9.5 16,000
------- -------
687,500 133,500
======= =======
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation expense has been recognized for the stock option
plans. Had compensation costs for the Company's and T3 Media's stock option
plans been determined based on the fair value as of the grant date for awards in
2000, 1999 and 1998 consistent with the provision of SFAS 123, the Company's net
income (loss) and net income (loss) per share would have been reduced to the pro
forma amounts as indicated below:
2000 1999 1998
---- ---- ----
Pro forma net income (loss) ($17,682,000) $(3,328,000) $2,346,000
Pro forma net income (loss) per share-basic and diluted ($2.79) ($0.61) $0.43
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions:
2000 1999 1998
----- ----- -----
Expected life (years) 4.0 4.0 4.0
Risk free interest rate 5.96% 5.84% 6.0%
Expected volatility 1.0 0.80 0.84
Expected dividend yield 0.0 0.0 0.0
F-15
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The weighted average fair value of options granted by the Company was
$4.16 in 2000, $4.40 in 1999 and $4.50 in 1998. The weighted average remaining
contractual life of options outstanding at December 31, 2000 is 8.6 years.
The fair value of T3 Media options at the date of grant was estimated
using the Black-Scholes model with the following assumptions: an expected life
of four years, a risk free interest rate of 5.96%, an expected volatility of 0%
and a dividend yield of 0%. The weighted average fair value of options granted
during the year ended December 31, 2000 was $0.64
13. SALES OF UNREGISTERED SECURITES
During 2000, the Company sold an aggregate of 1,624,996 shares of
Common Stock to a variety of investors through the private placement of the
Company's Common Stock, as described below.
On March 19, 2000, a group of Israeli investors purchased an aggregate
392,855 shares of Common Stock at $7.00 per share for a total of $2.75 million
with a 60-day option to purchase up to an additional 607,142 shares at $7.00 per
share and a two-year option to purchase up to 1,000,000 shares at $13.00 per
share. On June 5, 2000 a group of Israeli investors invested approximately
$4.25 million by purchasing an aggregate of 607,141 shares (including the
exercise of 142,857 shares related to the $7.00 warrants) of Common Stock at
$7.00 per share with warrants to purchase additional shares of Common Stock at
$13.00 per share exercisable through March 20, 2002. These investors are closely
affiliated with the group of Israeli investors who purchased share of Common
Stock in March 2000.
On June 14, 2000, Michael G. Jesselson, through two investment trusts
he controls invested $1 million to purchase an aggregate of 125,000 shares of
Common Stock at $8.00 per share with two-year warrants to purchase an aggregate
of 125,000 additional shares of Common Stock at $13.00 exercisable through July
7, 2002.
On September 29, 2000 Level 8 Systems, Inc. purchased 500,000 shares of
Common Stock at $8.00 per share. In addition, Level 8 received warrants for the
purchase of 500,000 shares of Common Stock with an exercise price of $13.00 per
share exercisable through September 29, 2002.
In addition, the Company had 2,089,284 shares reserved for the exercise
of warrants.
14. QUARTERLY RESULTS (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2000 and 1999.
F-16
THE A CONSULTING TEAM, INC.
Quarter Ended
---------------------------------------------------------------------------------
(in thousands, except per share amounts) March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
Revenues $13,151 $15,027 $12,809 $14,035
Gross profit 3,920 4,985 2,871 4,176
Income (loss) from operations (1) (2,533) (2,740) (5,830) (7,021)
Net income (loss) (1,451) (1,794) (6,386) (7,167)
Net income (loss) per share-basic
and dilutive ($0.26) ($0.30) ($0.95) ($1.14)
Quarter Ended
---------------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
Revenues $12,552 $14,533 $14,207 $12,225
Gross profit 4,340 5,402 4,870 3,210
Income (loss) from operations (2) 913 1,319 (1,067) (4,368)
Net income (loss) 635 887 (821) (3,368)
Net income (loss) per share-basic
and dilutive $0.12 $0.16 ($0.15) ($0.62)
- --------------------------------------------------------------------------------
(1) During the fourth quarter of 2000, the Company wrote-off approximately $3.9
million, which related to the permanent impairment of goodwill, write-down
of fixed assets no longer in use and other related charges. These charges
relate to the Company's majority-owned subsidiary, T3 Media, Inc.
(2) During the fourth quarter of 1999, the Company wrote-off approximately
$615,000 of accounts receivable from software sales and the allowance for
doubtful accounts was increased by approximately $565,000.
F-17
THE A CONSULTING TEAM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
- ----------- ---------- -------------------------- ----------- ----------
Additions
--------------------------
(1) (2)
--------------------------
Charged to
Balance of Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Description of Period Expenses Describe Describe Period
- ----------- ---------- ---------- ---------- ----------- ----------
Reserves and allowances deducted from
asset accounts:
For the year ended December 31, 2000
Allowance for doubtful accounts $ 682,424 $ 1,671,457 $ - $ (1,405,484)(a) $ 948,397
For the year ended December 31, 1999
Allowance for doubtful accounts $ - $ 1,294,507 $ - $ (612,083)(b) $ 682,424
For the year ended December 31, 1998
Allowance for doubtful accounts $ - $ - $ - $ - $ -
(a) Uncollectable accounts written off during 2000.
(b) Uncollectable accounts written off of $615,456, offset by $5,373 allowance
for doubtful accounts as of acquisition date from business combination.
S-1