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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-22945
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 20, 2002 was approximately $1,086,000 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 20, 2002, there were 7,116,871 shares of the registrant's Common
Stock, $.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders, which will be filed on or before April 30, 2002, are
incorporated by reference into Part III of this Report. See Item 14 for a list
of exhibits incorporated by reference into this Report.
TABLE OF CONTENTS
Page
----
PART I .................................................................... 1
Item 1. Business .......................................................... 1
Item 2. Properties ........................................................ 4
Item 3. Legal Proceedings ................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders ............... 4
PART II ................................................................... 5
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 5
Item 6. Selected Financial Data ........................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 18
Item 8. Financial Statements and Supplementary Data ....................... 18
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .................................... 19
PART III .................................................................. 19
Item 10. Directors and Executive Officers of the Registrant ............... 19
Item 11. Executive Compensation ........................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 20
Item 13. Certain Relationships and Related Transactions ................... 20
PART IV ................................................................... 21
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 21
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" or the "Registrant") has provided a wide
range of information technology ("IT") consulting, custom application
development and solutions to Fortune 1000 companies and other large
organizations. In August of 1997, TACT became a public company, headquartered in
New York, NY. In addition, TACT has an office in Clark, NJ. 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 National 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. However, during 2001 and the first quarter of 2002
there has been a slowdown in IT spending coincident with the general economic
slowdown.
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 IT consulting, software and solutions. The Company's strategies
include the following key components:
Cross-sell Additional Services to Existing Clients. By offering
existing clients additional IT consulting and software, 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 offices (New
York, NY and Clark, NJ) through targeted marketing initiatives, participation in
local trade shows, user group meetings and conventions and referrals from
existing clients.
1
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 and Cost Reductions. The Company has
restructured its operations and reduced its cost structure including physical,
corporate and general administrative expenses.
T3 Media
T3 Media, a majority-owned subsidiary of the Company, has ceased
operations.
Always-On Software, Inc.
The Company has written down its minority ownership in Always-On
Software, Inc. during the second quarter of 2001. Always-On Software was a
global provider of software application services ("ASP") based in New York City.
Always-On Software was merged with Veracicom, Inc. in the fourth quarter of
2001.
TACT Operations
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 offices
in order to provide solutions to its clients by utilizing local resources.
Management's experience has been that the presence established by local office
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 its Clark, NJ office and performs many
functions, which allow the office to focus on recruiting, sales and marketing.
Eleven of the Company's top twenty clients measured by revenue for the year
ended December 31, 2001 had been clients for over five years.
Software. TACT markets and distributes a number of software products
developed by independent software developers. The Company believes its
relationships with over 74 software clients throughout the country provide
opportunities for the delivery of additional TACT consulting and training
services. The software products offered by TACT are developed in the United
States, England and Finland and marketed primarily through trade shows, direct
mail, telemarketing, client presentations and referrals.
2
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, 2001 had been clients for over five years. In 2001, the Company's three
largest customers are Mellon Investor Services, EquiServe, and BMW NA and they
represented 19%, 19% and 13% of revenues, respectively. Besides these three
customers, no other customer represented greater than 10% of the Company's
revenues.
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. At December 31, 2001, the
Company employed 12 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 services and software products to the IT community.
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. The Company believes it can compete favorably in hiring such
personnel by offering competitive compensation packages and attractive
assignment opportunities.
3
Human Resources
At December 31, 2001, the Company had 110 personnel, of whom 63 were
consultants, 3 were recruiting personnel, 12 were sales and marketing personnel,
4 were technical and customer service personnel and 28 were executive and
administrative personnel. None of the Company's employees are represented by a
labor union, and the Company has never incurred a work stoppage. In addition to
the Company's 110 personnel, the Company was utilizing the services of 77
independent contractors at December 31, 2001. These independent contractors act
as consultants and they 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.
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. The Company's business has not been affected by seasonality.
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, 2004. The leased premises of the principal
and executive offices are approximately 10,100 square feet. The Company also
leases approximately 7,000 square feet in a facility in Clark, NJ.
ITEM 3. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings at March
20, 2002.
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, 2001.
4
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 listed on The Nasdaq National
MarketSM ("Nasdaq") under the symbol "TACX." TACT completed an initial public
offering of its Common Stock 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 bid
prices of the Company's Common Stock since January 1, 2000 as reported by
Nasdaq:
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
2001 High Low
---- ---- ---
First Quarter $2.375 $1.000
Second Quarter 1.031 .330
Third Quarter .580 .330
Fourth Quarter .650 .220
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. There are also certain restrictions on the payment of dividends within
the current line of credit agreement the Company has with Keltic Financial
Partners, LP.
Holders
The Company estimates that there were approximately 23 holders of
record of the Company's Common Stock on March 20, 2002. The Company believes
that the number of beneficial shareholders exceeds 600.
Recent Sales of Unregistered Securities
The Company made no unregistered sales of its securities in 2001. In
2001, the Company issued an aggregate of 740,000 stock options, each with a term
of 10 years from the date of grant, pursuant to its Stock Option and Award Plan.
The options had initial exercise prices that range from $0.30 to $0.45 per share
and they had vesting periods that range from immediately vesting to vesting over
up to 4 years.
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.
5
Selected Financial Data
(in thousands, except number of shares and per share data)
Year Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 36,227 $ 55,022 $ 53,517 $ 48,925 $ 35,216
Income (loss) from operations (13,472) (18,124) (3,203) 4,287 3,347
Income (loss) before extraordinary item (13,900) (16,798) (2,667) 2,785 2,524
Extraordinary item 249 -- -- -- --
Net income (loss) (13,651) (16,798) (2,667) 2,785 2,524
Income (loss) per share-basic and dilutive
before extraordinary item $ (1.95) $ (2.65) $ (0.49) $ 0.51
Extraordinary item 0.03 -- -- --
Net income (loss) per share-basic
and dilutive $ (1.92) $ (2.65) $ (0.49) $ 0.51
Weighted average shares used in per
share calculation 7,116,871 6,329,927 5,485,000 5,488,356
Unaudited Pro Forma Data(1)
Pro forma income from operations $ 3,310
Pro forma net income 1,966
Pro forma net income per share-
basic and dilutive $ 0.45
Weighted average shares outstanding 4,409,658
Balance Sheet Data
Total assets $ 8,957 $ 27,038 $ 28,582 $ 28,772 $ 25,467
Long-term liability 53 457 561 15 30
Stockholders' equity 4,119 17,770 22,516 25,183 22,398
Number of shares outstanding at
year end 7,116,871 7,116,871 5,485,000 5,485,000 5,485,000
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The 1997 amounts relating to income from operations, net income and net
income per share are shown on a pro foma 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
the period.
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
companies and other large organizations. In 1997, TACT became a public company
(Nasdaq: TACX), headquartered in New York, NY. In addition, TACT has an office
in Clark, NJ.
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 IT consulting and software solutions.
6
Approximately 93% of the Company's consulting services revenues were
generated from the hourly billing of its consultants' services to its clients
under time and materials engagements, with the remainder generated under
fixed-price engagements for 2001.
TACT provides clients with enterprise-wide information technology
consulting services and software products. TACT solutions cover the entire
spectrum of IT needs, including applications, data, and infrastructure. TACT
provides complete project life-cycle services--from application and system
design, through development and implementation, to documentation and training.
Strategic alliances with leading software vendors ensure that TACT solutions are
dependable and within the mainstream of industry trends. These partnerships
allow TACT to provide a wide variety of business technology solutions such as
enterprise reporting solutions, data warehousing, systems strategies,
application and database conversions, and application development services.
When TACT is engaged by its clients to implement 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.
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 margins (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During 2000 and the first half of 2001, the
Company's margins were adversely affected by a decrease in billing rates and a
reduction in consultant utilization rate; however, gross margins began to
improve in the second half of 2001, primarily due to improved utilization rates
and decreases in consultant costs. Large portions of the Company's engagements
are on a time and materials basis. While most of the Company's engagements allow
periodic price adjustments to address, among other things, increases in
consultant costs, there can be no guarantee that clients will continue to accept
cost increases. TACT also actively manages its personnel utilization rates by
constantly monitoring project requirements and timetables; however utilization
rates in the first half of 2001 were lower than 2000 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. Through the Company's cost containment and
work force rationalization efforts TACT's utilization rates increased and
consultant costs decreased during the second half of 2001. As projects are
completed, consultants either are re-deployed to new projects at the current
client site or to new projects at another client site or are encouraged to
participate in TACT's training programs in order to expand their technical skill
sets. TACT carefully monitors consultants that are not utilized and has
established guidelines for the amount of non-billing time that it allows before
a consultant is terminated.
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. In 2001, the Company has decreased its
emphasis on training services and expects minimal revenues from these services
in the future. Beginning in 1999 and extending through 2001, the Company
decreased its emphasis on software sales. This trend is expected to continue
with software sales only being ancillary to providing IT and e-Services
solutions to customers.
7
In the first half of 2001, the Company closed its Stamford, CT,
Atlanta, GA, Boston, MA and Chicago, IL offices. The Company is also continuing
to review its operations to achieve the most 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 $3.1 million and certain other fixed assets
could not be supported, resulting in an aggregate write-off of $3.9 million in
the fourth quarter of 2000. Due to the continued deterioration in revenues and
market conditions for T3 Media's services, the operations of T3 Media ceased in
the second quarter of 2001. Accordingly, the Company recorded additional charges
of $1.2 million related to termination costs and the settlement of the various
operating lease obligations, in the second quarter of 2001.
In 1999 and 2000, the Company made a minority investment in LightPC.com
(renamed Always-On Software, Inc.) in the aggregate amount of $2.3 million. At
December 31, 2000, the Company owned approximately 10% of Always-On Software,
Inc. Always-On Software, Inc. was a global provider of ASP based in New York
City. The Company's investment in Always-On was subject to periodic review to
ensure that its market value exceeded its carrying value. The market conditions
for companies operating in this sector became increasingly adverse in 2001. Due
to the deteriorating conditions of the ASP market and deteriorating cash
reserves, Always-On Software, Inc. ceased operations in July 2001. As a result,
the Company recorded a charge of $2.3 million to reflect the impairment in the
value of its investment in the second quarter of 2001. In the fourth quarter of
2001, Always-On Software Inc. merged with Veracicom, Inc. and the Company
received warrants in this transaction. The Company considers these warrants to
have a nominal value, if any.
Certain Critical Accounting Policies
The methods, estimates and judgments we use in applying our most
critical accounting polices have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements.
Recoverability of Long-Lived Assets
The Company's management is required to estimate the useful lives of
its long-lived assets at the time they are acquired. These estimates are
evaluated on an on-going basis to determine if their carrying value has been
impaired. If it is determined that the remaining useful lives differ from our
original estimates, revisions to the estimated fair values would be required.
8
Reserve For Receivables
The Company monitors its accounts receivable balances on a monthly
basis to ensure that they are collectible. On a quarterly basis, the Company
uses its historical experience to determine its accounts receivable reserve
should be.
Results of Operations
The following table sets forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
Year Ended December 31,
------------------------------------- -----------------
2001 2000 1999
----------------- ----------------- -----------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 75.5% 71.0% 66.7%
----------------- ----------------- -----------------
Gross profit 24.5% 29.0% 33.3%
Operating expenses 61.7% 61.9% 39.3%
----------------- ----------------- -----------------
Loss from operations ( 37.2)% ( 32.9)% ( 6.0)%
----------------- ----------------- -----------------
Loss before extraordinary item ( 38.4)% ( 30.5)% ( 5.0)%
Extraordinary item 0.7% 0.0% 0.0%
----------------- ----------------- -----------------
Net loss ( 37.7)% ( 30.5)% ( 5.0)%
================= ================= =================
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
Revenues. Revenues of the Company decreased by $18.8 million, or 34.2%,
from $55.0 million for the year ended December 31, 2000 to $36.2 million for the
year ended December 31, 2001. The decrease was primarily attributable to a
slowdown in the IT industry, which resulted in the cessation of operations of T3
Media ($7.0 million) and bringing the Company back to its core IT Services and
e-services businesses ($11.3 million).
Software licensing revenues decreased by $500,000, or 26.3%, from $1.9
million in 2000 to $1.4 million in 2001. This decrease is directly attributable
to the economic slowdown. Software sales are expected to be ancillary to the
Company's total revenues in future years.
Revenues from training represented less than 1% of the Company's total
revenues in both 2001 and 2000 and are expected to remain insignificant in year
2002 and beyond.
Gross Profit. The resulting gross profit for 2001 decreased by $7.1
million, or 44.4%, from $16.0 million in 2000 to $8.9 million in 2001. Gross
margin was adversely affected, primarily during the first half of the year, by a
decrease in billing rates and a reduction in consultant utilization rate;
however, this trend began to reverse in the second half of 2001. Gross profit
margins significantly improved in the second half of 2001, which averaged 31.8%,
compared to the first half, which averaged 19.7%. As a percentage of total
revenues, gross profit decreased from 29.0% of revenues in 2000 to 24.5% of
revenues in 2001.
Operating Expenses. Operating expenses are comprised of Selling,
General and Administrative ("SG&A") expenses, provision for doubtful accounts,
depreciation and amortization and impairment of assets and restructuring
charges. Operating expenses decreased by $11.7 million, or 34.4%, from $34.1
million in 2000 to $22.3 million in 2001. SG&A expenses decreased by $14.5
million or 55.7% from $26.1 million in 2000 to $11.5 million in 2001. The
decrease is primarily attributable to T3 Media's cessation of operations ($5.8
million) and a decrease in the Company's payroll costs ($4.6 million) due to its
restructuring efforts. The provision for doubtful accounts decreased $729,000 or
43.6% from $1.7 million in 2000 to $943,000 in 2001. The decrease was largely
attributable to improvement in the Company's collection techniques and daily
monitoring of receivables and cash balances. Depreciation and amortization
decreased $1.3 million or 53.2% from $2.5 million in 2000 to $1.2 million in
2001. This decrease is attributable to the closing of T3 Media, the closing of
several of the Company's Solution Branches and the reduction in office space in
its New York headquarters. Impairment of assets and restructuring charges
increased by $4.8 million, or 124.7% from $3.9 million in 2000 to $8.7 million
in 2001. The 2001 charge related to the following: the Company closing four of
its Solution Branches ($832,000), reducing its office space in its New York
headquarters by approximately 50% ($867,000), closing of T3 Media ($1.6
million), the write-down of its investment in Always-On Software, Inc. due to
the termination of Always-On's operations ($2.3 million), the write-off of
prepaid software licenses resulting from lack of sales due to the economic
down-turn and the determination that the software no longer had any value ($2.0
million), severance costs due to staff reductions ($699,000) and other
associated costs ($394,000). The 2000 charge primarily related to the write-off
of T3 Media's goodwill and fixed assets no longer in use.
9
Loss Before Extraordinary Item. As a result of the above-mentioned
factors, the Company had a loss before extraordinary item of approximately $13.9
million in 2001 compared to a loss of $16.8 million in 2000.
Extraordinary Item. The Company recorded income of $249,000 resulting
from the extinguishments of debt associated with the settlement of T3 Media's
capital leases at less than their carrying value.
Net Loss. The Company had a net loss of approximately $13.7 million in
2001 compared to a net loss of $16.8 million in 2000.
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.
10
Operating Expenses. Operating expenses are comprised of "SG&A"
expenses, provision for doubtful accounts, depreciation and amortization and
impairment of goodwill and restructuring 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 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.
Liquidity and Capital Resources
In June 2001, the Company entered into a line of credit agreement with
Keltic Financial Partners, LP for a line of credit of up to $4.0 million based
on the Company's accounts receivable balances. The Company's Chairman and Chief
Executive Officer has guaranteed $1.0 million of the $4.0 million line of
credit. The $4.0 million line of credit bears interest at a variable rate based
on prime plus 2%. At December 31, 2001, the rate of interest on the $4.0 million
line of credit was 6.75% and $1.9 million was outstanding. This is a decrease of
approximately $100,000 compared to $2.0 million outstanding balance at December
31, 2000 under a previous line of credit. The previous line of credit was for
$2.1 million and was fully guaranteed by the Company's Chairman and Chief
Executive Officer.
The Company's subsidiary, T3 Media, has a demand loan with a bank. The
amount outstanding on T3 Media's demand loan at December 31, 2001 and 2000 was
$4,700 and $170,000, respectively. The T3 Media demand loan bears interest at
prime plus 3%. The interest rate on the T3 Media demand loan was 7.75% at
December 31, 2001. The Company and a former officer of T3 Media have guaranteed
the T3 Media demand loan.
In 2001, T3 Media stopped paying its capital lease obligations. The
Company was a guarantor of the majority of these obligations and is in the
process of negotiating buy-outs of all of the leases. $346,000 of T3 Media's
capital lease obligations remained outstanding at December 31, 2001.
The Company's cash balances were $947,000 at December 31, 2001 and
$838,000 at December 31, 2000. Net cash provided by operating activities in 2001
was $575,000 compared to net cash used of $14.4 million in 2000 and compared to
net cash used of $2.6 million in 1999. In accordance with investment guidelines
approved by the Company's Board of Directors, cash balances in excess of those
required to fund operations have been invested in short-term commercial paper
with a credit rating no lower than A1, P1.
The Company's accounts receivable, less allowance for doubtful
accounts, at December 31, 2001 and December 31, 2000 were $5.3 million and $13.6
million, respectively representing 69 and 89 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 because
improved collection techniques and daily monitoring of receivables and cash
balances has been implemented. Collection of receivables is one of the Company's
highest priorities and improved collections was one of the primary reasons for
the improvement in cash provided by operations.
11
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, 2001, the Company had revenues from three customers, which
represented 19%, 19% and 13% of revenues, respectively. For the same period in
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, respectively. Besides
these customers, no other customer represented greater than 10% of the Company's
revenues.
During the first half of 2001, after extensive review of changing
market conditions, the Company restructured its operations and took a charge of
approximately $8,711,000. This charge consisted of $2,303,000 for the write-off
of the Company's investment in Always-On Software, Inc., $2,000,000 for the
write off of prepaid software licenses because it was determined that it no
longer had any value, $1,616,000 for lease expenses, write-off of leaseholds and
other fixed assets due to the cessation of T3 Media, Inc.'s operations, $832,000
for lease expenses, write-off of leaseholds and other fixed assets related to
the closing of several of its Solution Branches, $867,000 for lease expenses,
write-off of leaseholds and other fixed assets related to the reduction of
office space in its New York headquarters, $699,000 for severance costs and
$394,000 for other associated costs. The Company had restructuring charge
liabilities of approximately $161,000 at December 31, 2001. In 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 related to the Company's
majority-owned subsidiary, T3 Media, Inc.
Net cash used in investing activities was approximately $59,000, $3.4
million, and $3.5 million for the year ended December 31, 2001, 2000 and 1999,
respectively. In each of the three years, this represented additions to property
and equipment of $199,000, $890,000 and $3.1 million, respectively. In 2000,
$2.5 million in cash was used for making minority investments in two different
companies, Always-On Software, Inc. 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.
Net cash used in financing activities was approximately $408,000 in
2001, while $13.6 million was provided by financing activities in 2000 and $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 for aggregate proceeds of approximately $12.0 million,
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. The Company has not sold any equity securities in 2001.
In 2000, 6,875 shares of Common Stock were issued pursuant to the
exercise of options issued under the Company's stock option plan. No shares of
Common Stock were issued pursuant to the exercise of options issued under the
Company's stock option plan in 2001.
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 it.
12
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 SEC. Such
forward-looking statements involve risk and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements may include, without
limitation, statements made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to the following factors, among other risks and factors
identified from time to time in the Company's filings with the SEC. Among the
important factors on which such statements are based are assumptions concerning
the anticipated growth of the information technology industry, the continued
needs of current and prospective customers for the Company's services, the
availability of qualified professional staff, and price and wage inflation.
Operating Losses
The Company has incurred operating losses in the last three years. 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). In addition,
in the fourth quarter of 2000, the Company recorded a $3.9 million charge to
reflect the impairment of goodwill and other related charges relating to T3
Media. The Company had a net loss of $13.7 million for the year ended December
31, 2001, of which $1.0 million was attributable to T3 Media (including certain
expenses associated with the close down of T3 Media's operations ($1.6
million)). The remaining net loss for the year is attributable to the Company
and includes certain one time charges of $7.1 million associated with the
impairment of assets and restructuring charges. The Company may incur further
increases in operating expenses 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 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.
13
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, 2001. In
each of the last three years, the Company had at least one customer with
revenues exceeding 10% of the Company's revenues. For the year ended December
31, 2001, the Company had revenues from three customers which represented 19%,
19% and 13% of revenues, respectively. For the same period in 2000, the Company
had revenues from one customer which represented 17% of revenues. For the year
ended December 31, 1999, the Company had revenues from two customers which
represented 23% and 14% of revenues, respectively. Besides these customers, no
other customer represented greater than 10% of the Company's revenues. In any
given year, its ten most significant customers may vary based upon specific
projects for those clients during that year. There can be no assurance that its
significant clients will continue to engage it for additional projects or do so
at the same revenue levels. Clients engage the Company on an
assignment-by-assignment basis, and a client can generally terminate an
assignment at any time without penalties. The loss of any significant customer
could have a material adverse effect on its business, results of operations and
financial condition. A failure of the Company to develop relationships with new
customers could have a material adverse effect on its business, results of
operations and financial condition.
Project Risk
The Company's projects entail significant risks. Many of its
engagements involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. The Company's
failure or inability to meet a client's expectations in the performance of the
Company's services could result in a material adverse change to the client's
operations and therefore could give rise to claims against the Company or damage
its reputation, adversely affecting its business, results of operations and
financial condition.
Rapid Technological Change
The Company's business is subject to rapid technological change and is
dependent on new solutions. Its success will depend in part on its ability to
develop information technology solutions to meet client expectations, 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. Its
failure to address these developments could have a material adverse effect on
its business, results of operations and financial condition.
14
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. Revenues from its e-commerce services
constituted 21% of revenues for the year ended December 31, 1999, 51% of
revenues for the year ended December 31, 2000 and 46% for the year ended
December 31, 2001. 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.
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. It
derives revenues primarily from the hourly billing of consultants' services and,
to a lesser extent, from fixed-price projects. Its most significant cost is
project personnel cost, which consists of consultant salaries and benefits.
Thus, its 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
2001 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. Its expansion is
dependent upon, among other things,
o its ability to hire and retain consultants as employees or
independent consultants,
o its ability to identify suitable new geographic markets with
sufficient demand for its services, hire and retain skilled
management, marketing, customer service and other personnel,
and successfully manage growth, including monitoring
operations, controlling costs and maintaining effective
quality and service controls, and
15
o if the Company consummates additional acquisitions, its
ability to successfully and profitably integrate any acquired
businesses into its operations.
If the Company's management is unable to manage growth or new employees
or consultants are unable to achieve anticipated performance levels, its
business, results of operations and financial condition could be materially
adversely affected.
Dependence on Chief Executive Officer
The Company's success is highly dependent upon the efforts and
abilities of Shmuel BenTov, its Chairman and Chief Executive Officer. Mr. BenTov
has entered into an employment agreement with the Company, which terminates on
December 31, 2004. Although his employment agreement contains non-competition,
non-disclosure 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 revenues and results of operations occur from time to time as a result of a
number of factors, such as the timing of closing of Solution Branch offices, the
size and significance of client engagements commenced and completed during a
quarter, the number of business days in a quarter, consultant hiring and
utilization rates and the timing of corporate expenditures. The timing of
revenues is difficult to forecast because the sales cycle can be relatively long
and may depend on such factors as the size and scope of assignments and general
economic conditions. A variation in the number of client assignments or the
timing of the initiation or the completion of client assignments, particularly
at or near the end of any quarter, can cause significant variations in results
of operations from quarter to quarter and can result in losses to it. In
addition, its engagements generally are terminable by the client at any time
without penalties. Although the number of consultants can be adjusted to
correspond to the number of active projects, the Company must maintain a
sufficient number of senior consultants to oversee existing client projects and
to assist with its sales force in securing new client assignments. An unexpected
reduction in the number of assignments could result in excess capacity of
consultants and increased selling, general and administrative expenses as a
percentage of revenues. The Company has also experienced, and may in the future
experience, significant fluctuations in the quarterly results of its software
sales as a result of the variable size and timing of individual license
transactions, competitive conditions in the industry, changes in customer
budgets, and the timing of the introduction of new products or product
enhancements. In the event that its results of operations for any period are
below the expectation of market analysts and investors, the market price of its
shares of Common Stock could be adversely affected.
Volatility of Stock Price
The Company's Common Stock may be subject to wide fluctuations in price
in response to variations in quarterly results of operations and other factors,
including acquisitions, technological innovations and general economic or market
conditions. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market price of many technology companies and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of its Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
16
Possible Removal From Quotation Of Common Stock On Nasdaq And Resulting
Market Illiquidity
On February 14, 2002, the Company received a Nasdaq Staff Determination
indicating that the Company failed to comply with the Minimum Bid Price and
Market Value of Public Float requirements for continued listing of its Common
Stock and, therefore, is subject to delisting from The Nasdaq National Market.
Continued quotation of its Common Stock on The Nasdaq National Market will
require, among other criteria, that (i) the minimum bid price for its Common
Stock be at least $1.00 per share and (ii) the public float, not including
shares held by affiliates of the Company, consists of at least 750,000 shares of
Common Stock and have an aggregate value of at least $5,000,000. On March 20,
2002, the minimum bid price for the Company's Common Stock was $0.30, and the
aggregate value of the Company's public float, not including Common Stock held
by affiliates of the Company, was approximately $1,086,000, based on the average
of the bid and asked prices of the Company's Common Stock on such date. If the
minimum bid price for the Company's Common Stock continues to be less than $1.00
per share or 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
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 SEC, 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.
17
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 it. 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 it in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. The Company is subject to the risk of litigation alleging
infringement of third-party intellectual property rights. Any such claims could
require it to spend significant sums in litigation, pay damages, develop
non-infringing intellectual property or acquire licenses to the intellectual
property, which is the subject of the asserted infringement. In addition, the
Company is aware of other users of the term "TACT" and combinations including "A
Consulting," which users may be able to restrict its ability to establish or
protect its right to use these terms. The Company has in the past been contacted
by other users of the term "TACT" alleging rights to the term. The Company has
completed filings with the U.S. Patent and Trademark Office in order to protect
certain marks, including "TACT" and "The A Consulting Team." Its inability or
failure to establish rights to these terms or protect its rights may have a
material adverse effect on its business, results of operations and financial
condition.
Going Concern
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the years
ended December 31, 2001, 2000 and 1999, the Company reported net losses of $13.7
million, $16.8 million and $2.7 million, respectively. Additionally, the Company
has an accumulated deficit of $29.0 million as of December 31, 2001. The Company
believes that its continuing focus on cost reductions, together with a number of
other operational changes, will result in the Company achieving profitability,
as it did for the third and fourth quarters of 2001.
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.
18
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 or her 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, 47, is the founder of TACT and has been the Chairman of
the Board and Chief Executive Officer 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.
Richard D. Falcone, 49, has been the Chief Financial Officer and
Treasurer of the Company since July 2001 and was an advisor to the Company from
January 2001 to July 2001. Mr. Falcone is a C.P.A. and is a graduate of the
University of Vermont. Prior to joining the Company, Mr. Falcone was the CFO for
Acuent from January 1999 to July 2000 and Chief Operating Officer of
Netgrocer.com from January 1997 to December 1998.
Lori L. Stanley, Esq., 36, has been the Corporate Counsel and Secretary
of the Company since November 2000. In April 2001, Ms. Stanley also took on the
role of Vice President of Human Resources. Ms. Stanley received a B.S. from St.
John's University and a J.D. from Seton Hall School of Law. Prior to joining the
Company in November 2000, Ms. Stanley was Vice President of Legal Operations &
Human Resources at Netplex Group, Inc. from July 1999 to October 2000. Prior to
joining Netplex Group, Inc., Ms. Stanley was General Counsel, Solutions
Division, of Computer Horizons Corp., from January 1997 to June 1999.
Joseph E. Imholz, 70, has been a director of the Company since August
1997. Mr. Imholz is retiring from the Board of Directors at the end of his
current term in May 2002. 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 Information Officer of the Property and Casualty Division of
Metropolitan Life Insurance Co.
Steven S. Mukamal, 62, 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, 46, has been a director of the Company since August
1997. Mr. Battat has been the President and Chief Executive Officer of
ProcureNet Inc. since January 2000. Mr. Battat was the Senior Vice President and
General Manager of Global Marketing for Computer Associates International, Inc.
and from 1995 through 1999. Mr. Battat was responsible for Computer Associates'
worldwide marketing activities and long-term planning of product development in
new and emerging markets.
19
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 SEC 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 SEC 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.
Shmuel BenTov, the Chairman and Chief Executive Officer of the Company,
reported an aggregate of two transactions by himself, and his two minor children
(for whom he acts as custodian) late on a Form 5 filed on January 17, 2002.
Richard D. Falcone, the Chief Financial Officer of the Company,
reported his Form 3 holdings and a Form 4 transaction late on a Form 5 filed on
March 29, 2002.
Lori L. Stanley, the Corporate Counsel, Secretary and Vice President of
Human Resources of the Company, reported her Form 3 holdings and two Form 4
transactions late on a Form 5 filed on March 29, 2002.
Pamela Fredette was appointed President of the Company in October 2001.
Ms. Fredette did not file a Form 3 regarding her holdings as an executive
officer of the Company. Ms. Fredette resigned as President of the Company in
February 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2002 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2002.
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 2002 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a line of credit of $4.0 million of which $1.9 million
was outstanding at December 31, 2001. The Company's Chairman and Chief Executive
Office has guaranteed $1 million of the $4.0 million line of credit. The $4.0
million line of credit bears interest at a variable rate based on prime plus 2%.
At December 31, 2001, the rate of interest on the $4.0 million line of credit
was 6.75%. The Company previously had a $2.1 million line of credit of which
$2.0 million was outstanding at December 31, 2000.
The Company's subsidiary, T3 Media, has a demand loan with a bank. The
amount outstanding on T3 Media's demand loan at December 31, 2001 was $4,700.
The T3 Media demand loan bears interest at prime plus 3%. The interest rate on
the T3 Media demand loan was 7.75% at December 31, 2001. The Company and a
former officer of T3 Media have guaranteed the T3 Media demand loan.
20
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
SEC on August 8, 1997.
3.1 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to the Form 10Q for the
period ended June 30, 2001, as previously filed with the SEC on
August 10, 2001.
3.2 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form
SB-2 as previously filed with the SEC on August 6, 1997.
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the SEC on July 23, 1997.
10.1.1 Stock Option and Award Plan of the Registrant and Form of
Nonqualified Stock Option Agreement, incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form SB-2 as
previously filed with the SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to the Registration Statement on Form
S-8 as previously filed with the SEC on December 12, 1997.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the
Registrant, incorporated by reference to Exhibit C to the
Registrant's 2001 Proxy Statement on Schedule 14A, as previously
filed with the SEC on April 30, 2001.
10.2 Loan and Security Agreement between the Registrant and Keltic
Financial Partners, LP, dated June 27, 2001, incorporated by
reference to Exhibit 10.1.1 to the Form 10Q for the period ended
June 30, 2001, as previously filed with the SEC on August 10,
2001.
10.3 Guaranty of Payment and Performance between Shmuel BenTov, the
Chairman and Chief Executive Officer of the Registrant, and
Keltic Financial Partners, LP, dated June 27, 2001, incorporated
by reference to Exhibit 10.2 to the Form 10Q for the period ended
June 30, 2001, as previously filed with the SEC on August 10,
2001.
10.5 Employment Agreement, dated January 1, 2002, between the
Registrant and Shmuel BenTov.
10.6 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 SEC on August 6, 1997.
10.7 Form of S Corporation Termination, Tax Allocation and
Indemnification Agreement, incorporated by reference to Exhibit
10.4 to the Registration Statement on Form SB-2, as previously
filed with the SEC on August 6, 1997.
10.8 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 SEC on June 13, 1997.
10.9 Promissory Note and Cross-Receipt between the Registrant and
Shmuel BenTov, incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form SB-2, as previously filed with the
SEC on August 6, 1997.
10.10 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 SEC on June
13, 1997.
21
10.11 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 SEC on
August 6, 1997.
10.12 Letter of Undertaking from the Registrant and Shmuel BenTov,
incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form SB-2, as previously filed with the SEC on July
23, 1997.
10.13 Shmuel BenTov Letter Commitment, dated March 29, 2001,
incorporated by reference to Exhibit 10.10 to the Form 10-K for
the fiscal year ended December 31, 2000, as previously filed with
the SEC on April 2, 2001.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K filed in the fourth quarter of 2001:
The Company filed a report on Form 8-K with the SEC on December 21,
2001 regarding compliance with the Nasdaq Listing Qualifications Panel's
November 26, 2001 $4.0 million net tangible assets . The Company did not file
any other reports on Form 8-K during the quarter ended December 31, 2001.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is
submitted as a separate section of this report at S-1.
22
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,
Chief Executive Officer
Date: April 1, 2002
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 Chief Executive Officer and Director April 1, 2002
- ---------------------- (Principal Executive Officer)
Shmuel BenTov
/s/ Richard D. Falcone Chief Financial Officer April 1, 2002
- ---------------------- (Principal Financial and
Richard D. Falcone Accounting Officer)
/s/ Reuven Battat Director April 1, 2002
- ----------------------
Reuven Battat
/s/ Joseph Imholz Director April 1, 2002
- ----------------------
Joseph Imholz
/s/ Steven Mukamal Director April 1, 2002
- ----------------------
Steven Mukamal
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 .............................................. F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Shareholders' Equity .......................... F-5
Consolidated Statements of Cash Flows .................................... 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 SEC 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, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, 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 15, 2002
F-2
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
-------------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 946,586 $ 837,946
Accounts receivable, less allowance for doubtful accounts of
$652,048 at December 31, 2001 and $948,397 at December 31, 2000 5,293,390 13,596,875
Prepaid software licenses - 2,000,000
Prepaid or refundable income taxes - 1,575,510
Prepaid expenses and other current assets 114,818 132,423
-------------------- -----------------
Total current assets 6,354,794 18,142,754
Investments at cost 518,059 2,820,638
Property and equipment, at cost, less accumulated
depreciation and amortization 1,997,244 5,847,092
Deposits 86,498 227,055
-------------------- -------------------
Total assets $ 8,956,595 $ 27,037,539
==================== ===================
Liabilities and Shareholders' Equity
Current Liabilities:
Loan payable - banks $ 1,873,293 $ 2,170,000
Accounts payable and accrued expenses 2,554,129 6,098,951
Deferred revenue - 166,015
Other current liabilities 345,729 376,288
Current portion of long-term debt 11,602 -
-------------------- -------------------
Total current liabilities 4,784,753 8,811,254
Capital lease obligation - 394,379
Other long-term liabilities 52,760 62,139
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 30,000,000 shares authorized:
7,116,871 issued and outstanding 71,169 71,169
Additional paid-in capital 33,086,689 33,086,689
Accumulated deficit (29,038,776) (15,388,091)
-------------------- -------------------
Total shareholders' equity 4,119,082 17,769,767
-------------------- -------------------
Total liabilities and shareholders' equity $ 8,956,595 $ 27,037,539
==================== ===================
See accompanying notes to financial statements
F-3
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Revenues $ 36,226,716 $ 55,021,679 $ 53,517,328
Cost of revenues 27,357,278 39,069,237 35,695,206
--------------------- --------------------- ---------------------
Gross profit 8,869,438 15,952,442 17,822,122
Operating expenses:
Selling, general and administrative 11,531,291 26,057,606 18,247,702
Provision for doubtful accounts 942,507 1,671,457 1,294,507
Depreciation and amortization 1,157,219 2,470,723 1,482,935
Impairment of assets and
restructuring charges 8,710,690 3,876,547 -
--------------------- --------------------- ---------------------
22,341,707 34,076,333 21,025,144
--------------------- --------------------- ---------------------
Loss from operations (13,472,269) (18,123,891) (3,203,022)
Interest income 16,077 94,248 656,759
Interest expense (415,095) (300,581) (92,373)
--------------------- --------------------- ---------------------
Interest (expense), net (399,018) (206,333) 564,386
--------------------- --------------------- ---------------------
Loss before income taxes (13,871,287) (18,330,224) (2,638,636)
Provision (benefit) for income taxes 28,628 (1,532,283) 28,000
--------------------- --------------------- ---------------------
Loss before extraordinary item (13,899,915) (16,797,941) (2,666,636)
Extraordinary item - gain on
extinguishment of debt 249,230 - -
--------------------- --------------------- ---------------------
Net loss $ (13,650,685) $ (16,797,941) $ (2,666,636)
===================== ===================== =====================
Loss per share - basic and diluted:
Loss before extraordinary item $ (1.95) $ (2.65) $ (0.49)
Extraordinary item 0.03 - -
--------------------- --------------------- ---------------------
Net loss $ (1.92) $ (2.65) $ (0.49)
===================== ===================== =====================
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, 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
Net loss - - - - - (13,650,685) (13,650,685)
--------- ---------- ------------- ------------- -------------- ---------------- ---------------
Balance, December 31, 2001 - $ - 7,116,871 $ 71,169 $ 33,086,689 $ (29,038,776) $ 4,119,082
========= ========== ============= ============= ============== ================ ===============
See accompanying notes to financial statements
F-5
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
------------------ ---------------- ----------------
Cash flows from operating activities:
Net loss ($13,650,685) ($16,797,941) ($2,666,636)
Adjustments to reconcile net loss to net cash provided by
(used) in operating activities, net of acquired assets:
Depreciation and amortization 1,157,219 2,470,723 1,482,935
Impairment of assets and restructuring charges 8,710,690 3,876,547 -
Deferred income taxes - (57,000) (625,000)
Provision for doubtful accounts 942,507 1,671,457 1,294,507
Extraordinary item (249,230) - -
Changes in operating assets and liabilities:
Accounts receivable 7,360,978 (4,034,192) (3,049,377)
Unbilled receivables - 121,545 73,007
Prepaid software licenses - (2,000,000) -
Prepaid or refundable income taxes 1,575,510 (1,011,019) 110,009
Prepaid expenses and other current assets 17,605 32,180 297,002
Accounts payable and accrued expenses (5,060,966) 1,263,409 508,743
Deferred revenue (166,015) 68,479 (112,251)
Income taxes payable - - (10,829)
Other long-term liabilities (62,139) (27,190) 89,329
------------------ ---------------- ----------------
Net cash provided by (used in) operating activities 575,474 (14,423,002) (2,608,561)
Cash flows from investing activities:
Purchase of property and equipment (199,337) (890,341) (3,086,693)
Investments and advances to T3 Media, Inc., net of
cash acquired - - (95,591)
Investments at cost - (2,520,638) (300,000)
Deposits 140,557 (1,871) (45,363)
------------------ ---------------- ----------------
Net cash used in investing activities (58,780) (3,412,850) (3,527,647)
Cash flows from financing activities:
Proceeds from sale of common stock - 12,051,250 -
Proceeds from long-term debt 65,298 - -
Proceeds from loan payable - 2,000,000 -
Repayment of loan payable - (155,000) (1,674,820)
Notes payable - banks (296,707) - -
Repayment of long-term debt (937) (14,966) (15,126)
Repayment of capital lease obligation (175,708) (290,005) (94,365)
------------------ ---------------- ----------------
Net cash (used in) provided by financing activities (408,054) 13,591,279 (1,784,311)
------------------ ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 108,640 (4,244,573) (7,920,519)
Cash and cash equivalents at beginning of period 837,946 5,082,519 13,003,038
------------------ ---------------- ----------------
Cash and cash equivalents at end of period $ 946,586 $ 837,946 $5,082,519
================== ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 328,094 $ 178,596 $ 92,692
================== ================ ================
Cash paid during the period for income taxes $ - $ - $ 610,800
================== ================ ================
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, 2001, 2000 and 1999, the Company reported net losses of
$13,650,685, $16,797,941 and $2,666,636, respectively. Additionally, the Company
has an accumulated deficit of $29,038,776 as of December 31, 2001. The Company
has implemented a plan whereby it is actively managing its personnel utilization
rates and it is constantly monitoring project requirements and timetables.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of The A
Consulting Team, Inc. and its 51% owned subsidiary, T3 Media, Inc. which ceased
operations in 2001, 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.
Prepaid Software Licenses
Prepaid software licenses represented the amounts paid during 2000 for
the right to resell certain licensed software products. Such amounts were to be
charged to cost of sales when revenue from the sale of the software products was
recognized. In the second quarter of 2001, after extensive review of changing
market conditions, the Company determined that there was no value remaining and
wrote-off the $2.0 million.
F-7
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
During 2001, the Company recorded a restructuring charge of
approximately $8,711,000 (see Note 14).
In the fourth quarter of 2000, after extensive review of changing
market conditions, the Company wrote-off approximately $3,877,000, 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" is 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 August 2001, the Financial Accounting Standard Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FASB 144"). The new statement, which becomes effective in 2002,
addresses how impairment or disposal of long-lived assets are to be accounted
for. Management does not believe that FASB 144 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 year ended December 31, 1999 is presented as if the T3 Media acquisition had
been made on January 1, 1999:
Year Ended
December 31,
1999
-------------
Revenues $ 55,353,000
Net income (loss) $ (5,007,000)
Net income (loss) per share - basic and diluted $ (.91)
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, 1999 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. during 2000 and 1999, respectively, and the Company invested
$500,000 in Methoda Computers Ltd. during 2000. Due to the deteriorating
conditions of the ASP market and deteriorating cash reserves, Always-On
Software, Inc. ceased operations in July 2001. As a result, the Company
wrote-down its investment by $2.3 million to reflect the impairment in the value
of its investment in the second quarter of 2001. In the fourth quarter of 2001,
Always-On Software Inc. merged with Veracicom, Inc. and the Company received
warrants in this transaction. The Company considers these warrants to have a
nominal value, if any. 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, adjusted for other than
temporary impairments.
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, 2001, 2000 and 1999.
F-9
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Numerator for basic and diluted:
Loss before extraordinary item $ (13,899,915) $ (16,797,941) $ (2,666,636)
Extraordinary item 249,230 -- --
--------------- --------------- ---------------
Net loss $ (13,650,685) $ (16,797,941) $ (2,666,636)
=============== =============== ===============
Denominator:
Denominator for basic and diluted loss before
extraordinary item and net loss per share
- weighted-average shares 7,116,871 6,329,927 5,485,000
=============== =============== ===============
Basic and diluted loss per share:
Loss before extraordinary item $ (1.95) $ (2.65) $ (0.49)
Extraordinary item 0.03 -- --
--------------- --------------- ---------------
Net loss $ (1.92) $ (2.65) $ (0.49)
=============== =============== ===============
All options and warrants outstanding during 2001, 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.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
---------------------------------
2001 2000
--------------- ---------------
Equipment and leaseholds $ 5,307,549 $ 7,339,084
Software 943,379 1,034,096
Furniture and fixtures 1,107,272 1,593,695
Automobiles 158,769 88,970
--------------- ---------------
7,516,969 10,055,845
Less accumulated depreciation and amortization 5,519,725 4,208,753
--------------- ---------------
$ 1,997,244 $ 5,847,092
=============== ===============
6. LOANS PAYABLE AND CREDIT ARRANGEMENT
In June 2001, the Company entered into a line of credit agreement with
Keltic Financial Partners, LP for a line of credit of up to $4.0 million based
on the Company's eligible accounts receivable balances. The line of credit has
certain financial covenants, which the Company must meet on a quarterly basis.
The Company's Chairman and Chief Executive Officer has guaranteed $1.0 million
of the $4.0 million line of credit. The $4.0 million line of credit bears
interest at a variable rate based on prime plus 2%. At December 31, 2001, the
rate of interest on the $4.0 million line of credit was 6.75% and approximately
$1.9 million was outstanding. The previous line of credit was for $2.1 million
and was fully guaranteed by the Company's Chairman and Chief Executive Officer.
The Company's subsidiary, T3 Media which ceased operations in 2001, has a demand
loan with a bank. The amount outstanding on T3 Media's demand loan at December
31, 2001 and 2000 was $4,700 and $170,000, respectively. The T3 Media demand
loan bears interest at prime plus 3%. The interest rate on the T3 Media demand
loan was 7.75% at December 31, 2001 and 11.5% at December 31, 2000. The Company
and a former officer of T3 Media have guaranteed the T3 Media demand loan.
F-10
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt is classified as other long-term liabilities at December
31, 2001, and is comprised of an automobile loan and is payable in monthly
installments of $1,262 including interest at 6%. As of December 31, 2001, the
loan matures as follows: 2002 - $11,603; 2003 - $12,318; 2004 - $13,078; 2005 -
$13,885 and 2006 - $13,478.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
-----------------------------------
2001 2000
---------------- ----------------
Accounts payable $ 973,396 $ 2,870,250
Payroll 704,091 1,164,436
Bonuses 243,750 424,750
Restructuring 160,679 240,000
Other accrued expenses 472,213 1,399,515
---------------- ----------------
$ 2,554,129 $ 6,098,951
================ ================
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,
--------------------------------
2001 2000
------------ -----------
Licensing revenues $ 322,000 ($ 11,000)
Accounts receivable reserve 378,000 530,000
Depreciation and amortization 57,000 33,000
Investments 1,023,000 --
Other (3,000) --
Net operating losses 11,352,000 6,068,000
------------ -----------
13,129,000 6,620,000
Valuation allowance (13,129,000) (6,620,000)
------------ -----------
$ -- $ --
============ ===========
At December 31, 2001, the Company has net operating loss carryforwards
of approximately $18.5 million for state and local tax purposes and $14.1
million for Federal tax purposes, expiring in 2020. In addition, T3 Media has
net operating loss carryforwards of approximately $10.3 million expiring from
2019 to 2021. The full utilization of the losses in the future is dependent upon
the Company's ability to generate taxable income; accordingly, a valuation
allowance of an equal amount has been established. During the years ended
December 31, 2001, 2000 and 1999, the valuation allowance increased by
$6,509,00, $4,746,000 and $1,874,000 (including $850,000 related to T3 Media as
of the date of acquisition), respectively.
F-11
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In March 2002, new legislation was enacted that will allow for losses
incurred in 2001 to be carried back five years. The tax effect relating to this
legislation, estimated at approximately $350,000, will be recorded as a refund
in the first quarter of 2002.
Significant components of the provision for income taxes are as
follows:
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Current:
Federal $ -- ($1,475,000) $ 420,000
State and local 29,000 -- 233,000
----------- ----------- -----------
Total current 29,000 (1,475,000) 653,000
----------- ----------- -----------
Deferred:
Federal -- (44,000) (398,000)
State and local -- (13,000) (227,000)
----------- ----------- -----------
Total deferred -- (57,000) (625,000)
----------- ----------- -----------
Total $ 29,000 ($1,532,000) $ 28,000
=========== =========== ===========
A reconciliation between the federal statutory rate and the effective
income tax rate for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
------ ------ ------
Federal statutory rate (34.0)% (34.0)% (34.0)%
State and local taxes net of federal tax benefit 0.1 -- 0.2
Non-deductible expenses 0.5 7.6 6.1
Losses for which no benefit was received (including T3
Media) 33.6 18.0 28.8
------ ------ ------
Total 0.2% (8.4)% 1.1%
====== ====== ======
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 2001, 2000 and 1999.
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 2001, the Company's three largest customers represented 19%, 19% and
13% of revenues, respectively, in 2000, the largest customer represented 17% of
revenues and in 1999, the two largest customers represented 23% and 14% of
revenues. Besides these customers, no other customer represented greater than
10% of the Company's revenues. Three customers represented approximately 33%,
12% and 13% of accounts receivable as of December 31, 2001, and two customers
represented approximately 18% and 18% of accounts receivable as of December 31,
2000.
F-12
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. LEASES
The Company leases office space under non-cancelable operating leases.
The future minimum payments for all non-cancelable operating leases as of
December 31, 2001 are as follows:
2002 $ 459,000
2003 361,000
2004 35,000
-----------------
Total minimum future lease payments $ 855,000
=================
Rent expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $710,000, $1,524,000 and $991,000, respectively.
In 2001, T3 Media stopped paying its capital lease obligations. The
Company was a guarantor of the majority of these obligations and is in the
process of negotiating buy-outs of all of the remaining leases. $346,000 of T3
Media's capital lease obligations remained outstanding at December 31, 2001.
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 provided 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 and on May 24, 2001, the shareholders approved and ratified an
increase to the Plan from 900,000 to 1,200,000 shares of common stock (subject
to adjustment pursuant to customary anti-dilution provisions).
The exercise price per share of a stock option is established by the
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.
Information with respect to options under the Company's Plan is as
follows:
F-13
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Weighted
Number of Average
Shares Exercise Price
----------------- ----------------
Balance - January 1, 1999 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
Granted during 2001 740,000 0.36
Forfeitures during 2001 (392,699) 6.19
----------------
Balance - December 31, 2001 1,021,668 $1.98
================
At December 31, 2001, 2000 and 1999, 385,481, 333,570 and 228,613
options, respectively, were exercisable with weighted average exercise prices of
$3.93, $6.94 and $7.43, respectively.
The following table summarizes the status of the stock options
outstanding and exercisable at December 31, 2001:
Stock Options Outstanding
- ----------------------------------------------------------------------------------------------------
Number of
Weighted Weighted- Stock
Exercise Price Average Number of Remaining Options
Range Exercise Price Options Contractual Life Exercisable
- ---------------- -------------------- ------------- -------------------- ---------------
$0.00 - $1.20 $0.362 740,510 9.8 years 166,794
$3.60 - $4.80 $3.875 75,100 7.0 years 39,050
$4.81 - $6.00 $5.132 28,671 6.5 years 12,698
$6.01 - $7.20 $7.000 34,687 5.7 years 26,746
$7.21 - $8.40 $7.508 142,525 5.4 years 140,150
$8.41 - $9.60 $8.563 175 8.3 years 43
------------- ---------------
1,021,668 385,481
============= ===============
At December 31, 2001, the Company had 1,193,125 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 - January 1, 1999 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
Forfeitures during 2001 (687,500) 2.44
----------------
Balance - December 31, 2000 - -
================
There are no T3 Media stock options outstanding and exercisable at
December 31, 2001. At December 31, 2000 and 1999, 133,500 and 132,878 options,
respectively, were exercisable with weighted average exercise prices of $1.67
and $1.40, respectively.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation expense has been recognized for the stock option
plans. Had compensation costs for the Company's stock option plans been
determined based on the fair value as of the grant date for awards in 2001, 2000
and 1999 consistent with the provision of SFAS 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts as
indicated below:
2001 2000 1999
------------- ------------- -------------
Pro forma net loss ($ 13,797,000) ($ 17,682,000) ($ 3,328,000)
Pro forma net loss per share-basic and diluted ($ 1.94) ($ 2.79) ($ 0.61)
F-15
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions:
2001 2000 1999
------- ------- -------
Expected life (years) 4.0 4.0 4.0
Risk free interest rate 4.37% 5.96% 5.84%
Expected volatility 1.25 1.00 0.80
Expected dividend yield 0.0 0.0 0.0
The weighted average fair value of options granted by the Company was
$0.26 in 2001, $4.16 in 2000 and $4.40 in 1999.
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 private placements of the
Company's Common Stock, as described 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
60-day warrants (subsequently extended by an additional 14 days) to purchase an
aggregate of 607,142 additional shares of Common Stock at $7.00 per share (one
of which warrants was exercised in part by Arison Investments Ltd. on June 5,
2001 to purchase 142,857 shares of Common Stock for an an aggregate exercise
price of approximately $1,000,000) and two-year warrants to purchase an
aggregate of 1,000,000 additional shares of Common Stock at $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 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 $4.0 million by
purchasing 500,000 shares of Common Stock at $8.00 per sharewith two year
warrants to an aggregate of 500,000 additional shares of Common Stock with an
exercise price of $13.00 per share.
The Company had 2,089,284 shares reserved for the exercise of warrants
at December 31, 2001.
14. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
The Company began to restructure its operations in 2000 and has
continued to restructure its operations in 2001 taking a charge of approximately
$8,711,000 for the year ended December 31, 2001, consisting of following:
F-16
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Write-off of the investment in Always-On Software, Inc. $ 2,303,000
Write-off of prepaid software licenses 2,000,000
Lease expense and write-off of leaseholds and other fixed
assets:
* due to the closing of the operations and liquidation
of T3 Media, Inc. 1,616,000
* related to the closing of locations 832,000
* related to the reduction of office space in the
New York headquarters 867,000
Severance costs 699,000
Other associated costs 394,000
--------------
$ 8,711,000
==============
The Company had restructuring charge liabilities of approximately
$161,000 and $240,000 at December 31, 2001 and December 31, 2000, respectively.
During the year ended December 31, 2001, the Company recorded additions to its
restructuring liability of approximately $1,153,000, consisting of $537,000
related to leases, lease buy-outs of office space no longer utilized by the
Company and other associated costs and the reduction of its staff resulting in
termination costs of $616,000. The Company paid approximately $1,232,000 during
the year, consisting of $616,000 for space no longer utilized and $616,000 for
termination costs.
During 2000, the Company recorded a charge of $3.9 million related to
the permanent impairment of goodwill of T3 Media, the write-down of fixed assets
no longer in use and other related charges.
15. EXTRAORDINARY ITEM
The 2001 extraordinary item resulted from the early extinguishments of
T3 Media's capital lease obligations. The Company was a guarantor of the
majority of these obligations and was able to settle $523,000 of the leases
including interest expense of $98,000 for $176,000 resulting in an extraordinary
item of $249,000.
16. QUARTERLY RESULTS (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2001 and 2000.
F-17
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quarter Ended
-------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
(in thousands, except per share amounts) 2001 2001 2001 2001
-------------- ------------ ------------------ ----------------
Revenues $12,148 $ 9,393 $ 7,350 $ 7,336
Gross profit 2,295 1,912 2,373 2,289
Income (loss) from operations (4,741) (1) (9,067) (2) 134 202
Income (loss) before extraordinary item (4,889) (9,187) 49 127
Extraordinary item - - 187 62
Net income (loss) (4,889) (9,187) 236 189
Net income (loss) per share-basic
and dilutive ($0.69) ($1.29) $0.03 $0.03
Quarter Ended
-------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
-------------- ------------ ------------------ ----------------
Revenues $13,151 $15,027 $12,809 $14,035
Gross profit 3,920 4,985 2,871 4,176
Loss from operations (2,533) (2,740) (5,830) (7,021)(3)
Net loss (1,451) (1,794) (6,386) (7,167)
Net loss per share-basic
and dilutive ($0.26) ($0.30) ($0.95) ($1.14)
- --------------------------------------------------------------------------------
(1) During the first quarter of 2001, the Company wrote-off approximately $1.5
million consisting of $371,000 write-off of leaseholds and fixed assets
related to the wind down of operations of the Company's majority-owned
subsidiary, T3 Media, Inc.and $1.1 million related to the closing of
several of its Solution Branches and converting them into virtual offices
and severance costs related to the reduction of its staff.
(2) During the second quarter of 2001, the Company wrote-off approximately $7.2
million related to the write-off its investment in Always-On Software,
Inc., prepaid software licenses, fixed assets related to the reduction of
office space in its New York headquarters, severance costs and other
associated costs.
(3) 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.
F-18
THE A CONSULTING TEAM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Schedule II - Valuation and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------- ---------------------------------------------------------------
Additions
------------------------------
(1) (2)
------------- --------------
Balance at Charged to Charged to
Beginning of Costs and Other Accounts Deductions - Balance at
Description Period Expenses Describe Describe End of Period
- ------------------------------------------------------- ------------- -------------- -------------- -------------
Reserves and allowances deducted from
asset accounts:
For the year ended December 31, 2001
Allowance for doubtful accounts $ 948,397 $ 942,507 $ - $(1,238,856) (a) $ 652,048
For the year ended December 31, 2000
Allowance for doubtful accounts $ 682,424 $1,671,457 $ - $(1,405,484) (b) $ 948,397
For the year ended December 31, 1999
Allowance for doubtful accounts $ - $1,294,507 $ - $ (612,083) (c) $ 682,424
(a) Uncollectable accounts written off during 2001.
(b) Uncollectable accounts written off during 2000.
(c) Uncollectable accounts written off of $615,456, offset by $5,373 allowance
for doubtful accounts as of acquisition date from business combination.
S-1
EXHIBIT INDEX
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
SEC on August 8, 1997.
3.1 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to the Form 10-Q for the
period ended June 30, 2001, as previously filed with the SEC on
August 10, 2001.
3.2 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form
SB-2 as previously filed with the SEC on August 6, 1997.
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the SEC on July 23, 1997.
10.1.1 Stock Option and Award Plan of the Registrant and Form of
Nonqualified Stock Option Agreement, incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form SB-2 as
previously filed with the SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to the Registration Statement on Form
S-8 as previously filed with the SEC on December 12, 1997.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the
Registrant, incorporated by reference to Exhibit C to the
Registrant's 2001 Proxy Statement on Schedule 14A, as previously
filed with the SEC on April 30, 2001.
10.2 Loan and Security Agreement between the Registrant and Keltic
Financial Partners, LP, dated June 27, 2001, incorporated by
reference to Exhibit 10.1.1 to the Form 10-Q for the period ended
June 30, 2001, as previously filed with the SEC on August 10,
2001.
10.3 Guaranty of Payment and Performance between Shmuel BenTov, the
Chairman and Chief Executive Officer of the Registrant, and
Keltic Financial Partners, LP, dated June 27, 2001, incorporated
by reference to Exhibit 10.2 to the Form 10-Q for the period
ended June 30, 2001, as previously filed with the SEC on August
10, 2001.
10.5 Employment Agreement, dated January 1, 2002, between the
Registrant and Shmuel BenTov.
10.6 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 SEC on August 6, 1997.
10.7 Form of S Corporation Termination, Tax Allocation and
Indemnification Agreement, incorporated by reference to Exhibit
10.4 to the Registration Statement on Form SB-2, as previously
filed with the SEC on August 6, 1997.
10.8 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 SEC on June 13, 1997.
10.9 Promissory Note and Cross-Receipt between the Registrant and
Shmuel BenTov, incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form SB-2, as previously filed with the
SEC on August 6, 1997.
10.10 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 SEC on June
13, 1997.
10.11 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 SEC on
August 6, 1997.
10.12 Letter of Undertaking from the Registrant and Shmuel BenTov,
incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form SB-2, as previously filed with the SEC on July
23, 1997.
10.13 Shmuel BenTov Letter Commitment, dated March 29, 2001,
incorporated by reference to Exhibit 10.10 to the Form 10-K for
the fiscal year ended December 31, 2000, as previously filed with
the SEC on April 2, 2001.
23.1 Consent of Ernst & Young LLP.