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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the three and six month period ended: June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-22945
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THE A CONSULTING TEAM, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-3169913
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Park Avenue South
New York, New York 10003
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(Address of principal executive offices)
(212) 979-8228
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
As of August 12, 2002, there were 8,386,871 shares
of Common Stock, with $.01 par value per share, outstanding.
THE A CONSULTING TEAM, INC.
INDEX
Page
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Number
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Part I. Financial Information
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the three months
and the six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
2
Part I. Financial Information
Item 1. Financial Statements
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,415,370 $ 946,586
Accounts receivable, less allowance for doubtful accounts of
$428,640 at June 30, 2002 and $652,048 at December 31, 2001 4,198,414 5,293,390
Prepaid Expenses and other Current Assets 134,375 114,818
------------ ------------
Total Current Assets 5,748,159 6,354,794
Investments at cost 518,059 518,059
Property and equipment, at cost, less accumulated depreciation and
amortization 1,590,420 1,997,244
Deposits 75,326 86,498
------------ ------------
Total Assets $ 7,931,964 $ 8,956,595
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loan payable - banks $ 1,628,183 $ 1,873,293
Accounts payable and accrued expenses 1,297,601 2,554,129
Other current liabilities 290,517 345,729
Current portion of long-term debt 11,955 11,602
------------ ------------
Total current liabilities 3,228,256 4,784,753
Other long-term liabilities 46,693 52,760
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 as of June 30, 2002 and
December 31, 2001, respectively 71,169 71,169
Additional paid-in capital 33,086,689 33,086,689
Accumulated deficit (28,500,843) (29,038,776)
------------ ------------
Total shareholders' equity 4,657,015 4,119,082
------------ ------------
Total liabilities and shareholders' equity $ 7,931,964 $ 8,956,595
============ ============
See accompanying notes to condensed consolidated financial statements.
3
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Revenues $ 12,104,066 $ 21,541,481 $ 5,643,107 $ 9,393,396
Cost of revenues 8,541,337 17,334,465 3,907,025 7,481,099
------------ ------------ ------------ ------------
Gross profit 3,562,729 4,207,016 1,736,082 1,912,297
Operating expenses:
Selling, general & administrative 2,969,498 7,920,843 1,428,915 3,073,956
Provision for doubtful accounts -- 672,507 -- 450,066
Depreciation & amortization 429,922 693,017 212,826 264,597
Impairment of assets & restructuring charges -- 8,728,748 -- 7,190,748
------------ ------------ ------------ ------------
3,399,420 18,015,115 1,641,741 10,979,367
------------ ------------ ------------ ------------
Income (loss) from operations 163,309 (13,808,099) 94,341 (9,067,070)
------------ ------------ ------------ ------------
Interest (expense) net (78,863) (267,764) (32,849) (120,086)
------------ ------------ ------------ ------------
Income (loss) before income taxes and extraordinary item 84,446 (14,075,863) 61,492 (9,187,156)
Provision (benefit) for income taxes (404,772) -- 22,457 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 489,218 (14,075,863) 39,035 (9,187,156)
Extraordinary Item 48,715 -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 537,933 $(14,075,863) $ 39,035 $ (9,187,156)
============ ============ ============ ============
Net earnings per share of common stock:
Basic $ 0.08 $ (1.98) $ 0.01 $ (1.29)
============ ============ ============ ============
Diluted $ 0.07 $ (1.98) $ 0.01 $ (1.29)
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income/ loss $ 537,933 $(14,075,863)
Adjustments to reconcile net profit/loss to net cash
used in operating activities, net of acquired assets:
Depreciation and amortization 429,922 693,017
Impairment of assets and restructuring charges -- 8,728,748
Provision for doubtful accounts -- 672,507
Extraordinary item (48,715) --
Changes in operating assets and liabilities:
Accounts receivable 1,094,977 5,596,263
Prepaid or refundable income taxes -- 1,393,238
Prepaid expenses and other current assets (19,558) 26,264
Accounts payable and accrued expenses (1,247,225) (2,819,124)
Deferred revenue -- (166,015)
Other Long-term liabilities -- (62,139)
------------ ------------
Net cash (used in) provided by operating activities 747,334 (13,104)
Cash flows from investing activities:
Purchase of property and equipment (23,099) (107,292)
Deposits 11,173 101,044
------------ ------------
Net cash used in investing activities (11,926) (6,248)
Cash flows from financing activities:
Loan payable - Bank (245,109) 3,823
Repayment of long-term debt (5,715) --
Repayment of capital lease obligation (15,800) (211,727)
------------ ------------
Net cash (used in) provided by financing activities (266,624) (207,904)
------------ ------------
Net increase (decrease) in cash and cash equivalents 468,784 (227,256)
Cash and cash equivalents at beginning of period 946,586 837,946
------------ ------------
Cash and cash equivalents at end of period $ 1,415,370 $ 610,690
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 82,223 $ 260,066
============ ============
See accompanying notes to condensed consolidated financial statements.
5
THE A CONSULTING TEAM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with The A
Consulting Team, Inc. (the "Company") Form 10-K for the year ended December 31,
2001 filed with the SEC, and the accompanying financial statements and related
notes thereto. The accounting policies used in preparing these financial
statements are the same as those described in the Company's Form 10-K for the
year ended December 31, 2001.
2) INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial position as of June 30, 2002 and the consolidated results of
operations for the three months and the six months ended June 30, 2002 and 2001,
and cash flows for the six months ended June 30, 2002 and 2001.
The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date, but does not include
all the information and footnotes required by accounting principles generally
accepted in the United States, for complete financial statements. For further
information, refer to the audited consolidated financial statements and
footnotes thereto included in the Form 10-K filed by the Company for the year
ended December 31, 2001.
The consolidated results of operations for the three months and the six
months ended June 30, 2002 are not necessarily indicative of the results to be
expected for any other interim period or for the full year.
3) NET INCOME (LOSS) PER SHARE:
The following table set forth the computation of basic and diluted net
income (loss) per share for the six months and three months ended June 30, 2002
and 2001.
Six Months Ended Three Months Ended
June 30, 2002 June 30, 2002
--------- ------------ --------- -----------
2002 2001 2002 2001
--------- ------------ --------- -----------
Numerator for basic and diluted:
Income (loss) before extraordinary item $ 489,218 $(14,075,863) $ 39,035 $(9,187,156)
Extraordinary item 48,715 -- -- --
Net income (loss) 537,933 (14,075,863) 39,035 (9,187,156)
--------- ------------ --------- -----------
Numerator for basic and diluted
net (loss) per share $ 537,933 $(14,075,863) $ 39,035 $(9,187,156)
========= ============ ========= ===========
Denominator:
Denominator for basic income (loss) before
extraordinary item and net income (loss)
per share-weighted-average shares 7,116,871 7,116,871 7,116,871 7,116,871
========= ============ ========= ===========
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 7,193,357 7,116,871 7,237,946 7,116,871
========= ============ ========= ===========
Basic earning (loss) per share:
Income (loss) before extraordinary item $ 0.07 $ (1.98) $ 0.01 $ (1.29)
Extraordinary item 0.01 $ -- $ -- $ --
========= ============ ========= ===========
Net income (loss) $ 0.08 $ (1.98) $ 0.01 $ (1.29)
========= ============ ========= ===========
Diluted earnings income (loss) per share:
Income (loss) before extraordinary item $ 0.07 $ (1.98) $ 0.01 $ (1.29)
Extraordinary item 0.01 $ -- $ -- $ --
--------- ------------ --------- -----------
Net income (loss) $ 0.07 $ (1.98) $ 0.01 $ (1.29)
========= ============ ========= ===========
6
4) ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standard Board issued Statement
No. 145 "Rescission of FASB Statements No 4, 44, and 64, Amendment of FASB 13,
and Technical Corrections" ("FASB 145") - The new statement became effective for
fiscal years beginning after May 15, 2002. Upon adoption of SFAS 145, companies
will be required to apply the criteria in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions" in determining the classification of gains/losses resulting from
the extinguishment of debt. The Company is evaluating the impact of the
statement and intends to adopt FASB 145 in the first quarter of 2003.
In July 2002, the Financial Accounting Standard Board issued Statement
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
("FASB 146") - The new statement which becomes effective January 2003, requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment. The Company is
evaluating the impact of the statement and intends to adopt FASB 146 in the
first quarter of 2003.
5) INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of the assets and liabilities
for financial purposes and the amount used for income tax purposes.
In March of 2002, the Company recorded a tax benefit of approximately
$427,000 due to a $439,000 refund resulting from a 2002 change in tax law
allowing the carry-back of net operating losses for five years instead of the
two years previously allowed.
6) CONCENTRATION OF CREDIT RISK:
The revenues of two customers represented approximately 32%, and 22% of
the revenues for the three months ended June 30, 2002. Whereas, the revenues of
three customers represented approximately 24%, 16% and 10% of the revenues for
the same period in 2001.
7) IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES:
The Company began to restructure its operations in 2000 and has
continued to restructure its operations in 2002. The Company had restructuring
charge liabilities of approximately $161,000 at December 31, 2001. During the
six months ended June 30, 2002, the Company recorded no additions to its
restructuring liability, and recorded payments of approximately $161,000
consisting of $66,000 related to the reduction of leased office space in its New
York headquarters, and $95,000 in severance costs in the first quarter of 2002.
Accordingly, the Company has no restructuring charge liabilities as of June 30,
2002.
8) CREDIT FACILITY:
In June 2001, the Company entered into a new revolving credit facility
with Keltic Financial Partners, LP for a line of credit up to $4 million based
on the Company's accounts receivable balances. Loans under the credit line bear
interest at a rate of prime plus 2%, which rate was 6.75% at June 30, 2002. The
credit line as amended, has certain financial covenants, which the Company must
meet on a quarterly basis. The Company's Chief Executive Officer initially had
guaranteed $1 million of the line of credit. In July 2002, the credit line was
amended to reduce the guarantee of the Company's Chief Executive Officer to
$400,000, and to reflect the Company's acquisition of International Object
Technology, Inc. in July 2002, see Note 10.
9) EXTRAORDINARY ITEM:
For the six month period ended June 30, 2002, the Company recorded
income of $49,000 resulting from the extinguishments of debt associated with the
settlement of capital leases at less than their carrying value.
7
10) ACQUISITION:
On June 28, 2002, the Company entered into a definitive agreement to
acquire International Object Technology Inc. (IOT), which was completed on July
19, 2002. IOT is a privately owned, professional services firm that provides
data management and business intelligence solutions, technology consulting and
project management services. In connection with the acquisition, the Company
issued 1,270,000 shares of common stock to IOT shareholders and agreed to make
cash payments of $650,000 payable over the next 30 months. The acquisition will
be accounted for under the purchase method of accounting for business
combinations and operations of IOT will be included from the date of
acquisition.
The Company believes that the acquisition will fortify TACT's
management team with the addition of IOT's senior professionals. The combination
of the two companies will increase the depth of TACT's service and solution
offerings, as well as adding significant cross selling opportunities with
limited overlapping in the two companies' customer bases. Potential cost savings
opportunities are also expected.
11) ISSUANCE OF PREFERRED STOCK:
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. The Series A
Preferred Stock is convertible into common stock on a 1:1 basis subject to
adjustment for stock splits, consolidations and stock dividends. In addition,
the Series A Preferred Stock is entitled to a 7% cumulative dividend payable
semi-annually. The Company will use the proceeds from the sale of Series A
Preferred Stock for general working capital purposes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of significant factors affecting
the Company's operating results, liquidity and capital resources should be read
in conjunction with the accompanying financial statements and related notes.
Overview
Since 1983, TACT has provided Information Technology 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 with an
office in Clark, NJ.
TACT is an end-to-end IT Services and 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
predominantly include a broad range of Fortune 1000 companies and other large
organizations. TACT also provides the same markets with enterprise-wide
Information Technology consulting, software and solutions. Over 90% of the
Company's consulting services revenues during the six months ended June 30, 2002
were generated from the hourly billing of its consultants' services to its
clients under time and materials engagements, with the remainder generated under
fixed-price engagements.
TACT 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.
8
The Company's most significant operating cost is its personnel cost,
which is included in cost of revenues. As a result, the Company's operating
performance is primarily based upon billing margin (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During the first half of 2001, the Company's
margins were adversely affected by a decrease in billing rates, an increase in
consultant wages and a reduction in consultant utilization rate; however, this
trend began to reverse in the second half of 2001 and the first six months of
2002. Large portions of the Company's engagements are on a time and materials
basis. The Company historically had been able to pass on to its clients most of
the increases in cost of services; however, the Company was not able to do so in
the first half of 2001. Accordingly, such increases had a significant impact on
the Company's financial results. TACT also actively manages its personnel
utilization rates by constantly monitoring project requirements and timetables.
Utilization rates in the first half of 2001 were significantly lower than
historical utilization rates 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 in the second half of
2001, and the trend continued during the first half of 2002.
Historically, the Company has also generated revenues by selling
software licenses and providing training services. In addition to initial
software license fees, the Company also derives revenues from the annual renewal
of software licenses. Revenues from the sale of software licenses are recognized
upon delivery of the software to a customer, because future obligations
associated with such revenue are insignificant. Training service revenues are
recognized as the services are provided. Beginning in 1999 and extending through
June 30, 2002, the Company has limited its emphasis on software sales. This has
resulted in a significant reduction in software sales in the second half of 1999
through June 30, 2002. This trend is expected to continue for the remainder of
2002 with software sales only being ancillary to providing IT and e-Services
solutions to customers. In the second quarter of 2001, the Company wrote off
prepaid software licenses of $2.0 million due the economic downturn particularly
in the area of software resales. In addition, in the third quarter of 2001, the
Company discontinued training services.
On October 2, 1998, the Company made an investment in a Web integrator,
T3 Media, of $3 million for non-voting convertible preferred stock. On June 23,
1999, the Company converted its preferred stock into a 30% common stock
ownership interest and increased its ownership interest in T3 Media to
approximately 51% by an additional investment in T3 Media's common stock of
$370,000. The acquisition of T3 Media was accounted for using the purchase
method of accounting. Accordingly, the results of operations of T3 Media are
included in the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the estimated fair value of
the net identifiable assets acquired totaled $4.0 million and was recorded as
goodwill and was being amortized using the straight-line method over 7 years.
After extensive review of changing market conditions, it was determined that the
carrying value of the intangibles and certain other fixed assets was not
recoverable, resulting in a write-off of $3.9 million in the fourth quarter of
2000 and $371,000 in the first quarter of 2001. Due to the continued
deterioration in revenues and market conditions for T3 Media's services, the
operations of T3 Media were ceased in the second quarter 2001. Accordingly, the
Company recorded additional charges of $1.2 million related to the termination
of operations and liquidation, 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.
9
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.
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 what its accounts receivable reserve should
be.
Results of Operations
The following tables set forth the percentage of revenues of certain items
included in the Company's Statements of Operations:
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 70.6% 80.5% 69.2% 79.6%
------- ------- ------- -------
Gross profit 29.4% 19.5% 30.8% 20.4%
Operating expenses 28.1% 83.6% 29.1% 116.9%
------- ------- ------- -------
Income/Loss from operations 1.3% (64.1)% 1.7% (96.5)%
Income/Loss before Extraordinary Item 4.0% (65.3)% 0.7% 0.0%
Extraordinary Item 0.4% 0.0% 0.0% 0.0%
Net gain(loss) 4.4% (65.3)% 0.7% (97.8)%
======= ======= ======= =======
Comparison of Three Months Ended June 30, 2002 to Three Months Ended June 30,
2001
Revenues. Revenues for the Company decreased by $3.8 million from $9.4 million
for the three months ended June 30, 2001 to $5.6 million for the three months
ended June 30, 2002. The decrease was primarily attributable to a slowdown in
the IT industry, which resulted in the cessation of operations of T3 Media, the
closing of three of the Company's Solution Branches and bringing the Company
back to its core IT Services and e-Services businesses.
Revenues from software licensing represent less than 6% of total revenues and
are expected to remain ancillary to the Company's total revenue for the
remainder of this year.
Gross Profit. Gross profit for the three months decreased approximately 9% from
$1.9 million in 2001 to $1.7 million in 2002. However, as a percentage of total
revenues, gross margin for the three months increased from 20.4% in 2001 to
30.8% in 2002. Gross margin improved due to the Company's higher average hourly
billing rates and a higher consultant utilization rate.
Operating Expenses. Operating expenses consist 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 $9.4 million or 85% from $11million in 2001 to $1.6
million in 2002. The SG&A expenses decreased by $1.6 million from $3.1 million
in 2001 to $1.4 million in 2002. The decrease is primarily attributable to the
closing of T3 Media ($.3 million) and a decrease in the Company's payroll costs
($1.1 million). In addition, the Company wrote-off approximately $60,000 of T3
Media accounts payable from prior years. The Company did not record a provision
for doubtful accounts during the six months ended June 30, 2002 due to improved
collections and monitoring techniques. Depreciation and amortization expenses
decreased by $52,000 from $265,000 thousand in 2001 to $213,000 in 2002 as a
result of 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. In the second quarter of 2001, the Company recorded impairment of
assets and restructuring charges of $7.2 million related to the closing of T3
Media, and several of its solution branches.
10
Operating Income (Loss). The Company had income from operations of $94,000 in
the three months ending June 2002 compared to a loss from operations of $(9.1)
million in the three months ending June 2001.
Extraordinary Item. The Company recorded income of $49,000 during the first
quarter of 2002 as a result of the early extinguishments of capital leases.
Net Income (Loss). As a result of the above, the Company had a net income of
$39,000 for the three months ended June 30, 2002 compared to a net loss of
$(9.2) million for the three months ended June 30, 2001.
Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001
Revenues. Revenues for the Company decreased by $9.5 million from $21.6 million
for the six months ended June 30, 2001 to $12.1 million for the six months ended
June 30, 2002. The decrease was primarily attributable to a slowdown in the IT
industry, which resulted in the cessation of operations of T3 Media, the closing
of three of the Company's Solution Branches and bringing the Company back to its
core IT Services and e-Services businesses.
Revenues from software licensing represent less than 6% of total revenues and
are expected to remain ancillary to the Company's total revenue for the
remainder of this year.
Gross Profit. Gross profit for the six months decreased approximately 15.3% from
$4.2 million in 2001 to $3.6 million in 2002. However, as a percentage of total
revenues, gross margin for the six months increased from 19.5% in 2001 to 29.4%
in 2002. Gross margin improved due to the Company's higher average hourly
billing rates and a higher consultant utilization rate.
Operating Expenses. Operating expenses consist 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 $14.6 million or 81% from $18 million in 2001 to $3.4
million in 2002.
The SG&A expenses decreased by $5.0 million from $8.0 million in 2001 to $3.0
million in 2002. The decrease is primarily attributable to the closing of T3
Media ($1.1 million) and a decrease in the Company's payroll costs ($3.1
million). In addition, the Company wrote-off approximately $105,000 of T3 Media
accounts payable from prior years. The Company did not record a provision for
doubtful accounts during the six months ended June 30, 2002 due to improved
collections and monitoring techniques. Depreciation and amortization expenses
decreased by $263,000 from $693,000 in 2001 to $430,000 in 2002 as a result of
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. In the
six months ending June 2001, the Company recorded an impairment of assets and
restructuring charges of $8.7 million related to the closing of T3 Media, and
several of its solution branches.
Operating Income (Loss). The Company had income from operations of $163,000 in
2002 compared to a loss from operations of $(13.8) million in 2001.
Income Taxes. In the six months ending June 2002, the Company recorded a tax
refund of $439,000 resulting from a 2002 change in tax law allowing the Company
to carry-back its net operating losses for five years instead of the two years
previously allowed.
Income (Loss) Before Extraordinary Item. The Company had net income before
extraordinary item of $489,000 in 2002 compared to a loss of $(14.1) million for
2001.
11
Extraordinary Item. The Company recorded income of $49,000 during the six months
ending June 2002 as a result of the early extinguishments of capital leases.
Net Income (Loss). As a result of the above, the Company had a net income of
$538,000 for the six months ended June 30, 2002 compared to a net loss of
$(14.1) million for the six months ended June 30, 2001.
Liquidity and Capital Resources
The Company has a line of credit of $4.0 million, with $1.6 million
outstanding at June 30, 2002. The Company's Chief Executive Officer initially
guaranteed $1 million of the line of credit. The line of credit bears interest
at a variable rate based on prime plus 2% and the rate was 6.75% at June 30,
2002. In July 2002, the credit line was amended to reduce the guarantee of the
Company's Chief Executive Officer to $400,000, and to reflect the Company's
acquisition of International Objects Technology, Inc. T3 Media had entered into
a series of capital lease obligations, which the Company had guaranteed to
finance its expansion plans, covering leasehold improvements, furniture and
computer-related equipment. The amount outstanding under such leases was
approximately $291,000 at June 30, 2002. The Company is in the process of
negotiating buy-outs on all of these leases.
The Company's cash balances were approximately $1.4 million at June 30,
2002 and $947,000 at December 31, 2001. Net cash provided by (used for)
operating activities in 2002 was approximately $747,000 and ($13,000) for the
six months ended June 30, 2002 and 2001, respectively.
The Company's accounts receivable, less allowance for doubtful
accounts, at June 30, 2002 and December 31, 2001 were $4.2 million and $5.3
million, respectively, representing 68 and 68 days of sales outstanding,
respectively. The Company has provided an allowance for doubtful accounts at the
end of each of the periods presented. After giving effect to this allowance, the
Company does not anticipate any difficulty in collecting amounts due.
For the six months ended June 30, 2002, the Company had revenues from
two customers, which represented 35%, and 21% of revenues. The Company's work
for the customer, which represents 35% of the Company's revenues, declined in
the second quarter of 2002 and will continue to wind down in the second half of
2002. Accordingly, the Company is expecting a slight decline in the third
quarter 2002 revenues. For the six months ended June 30, 2001, the Company had
revenues from three customers, which represented 24%, 16% and 10% of the
revenues. No other customer represented greater than 10% of the Company's
revenues for such periods.
Net cash used in investing activities was approximately $12,000 and
$6,000 for the six months ended June 30, 2002 and 2001, respectively.
Net cash provided by (used for) financing activities was approximately
$267,000 and $208,000 for the six months ended June 30, 2002 and 2001,
respectively.
Pursuant to the Stock Purchase Agreement with International Object
Technology for the acquisition, the Company will be making cash payments in the
total amount of $650,000, which are payable over the next 30 months.
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. The Series A
Preferred Stock is convertible into common stock on a 1:1 basis subject to
adjustment for stock splits, consolidations and stock dividends. In addition,
the Series A Preferred Stock is entitled to a 7% cumulative dividend payable
semi-annually. The Company will use the proceeds from the sale of Series A
Preferred Stock for general working capital purposes.
In management's opinion, cash flows from operations and borrowing
capacity combined with cash on hand will provide adequate flexibility for
funding the Company's working capital obligations for the next twelve months.
There may be circumstances that would accelerate its use of liquidity sources,
including, but not limited to, its ability to implement a profitable business
model, which may include further restructuring charges. If this occurs, the
Company may, from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to us.
Inflation
The Company has not suffered material adverse affects from inflation in
the past. However, a substantial increase in the inflation rate in the future
may adversely affect customers' purchasing decisions, may increase the costs of
borrowing, or may have an adverse impact on the Company's margins and overall
cost structure.
12
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 21E of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission. Such forward-looking statements involve risk and
uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
Operating Losses
The Company has incurred operating losses 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. The remaining net
loss for the year is attributable to the Company and includes a certain one time
charge 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. In the six months ending June 30, 2002, the Company
had income from operations of $94,000 and net income of $538,000. 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 may require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. The Company may not be able to obtain such financing or obtain it on
acceptable terms. Without additional financing, the Company may be forced to
delay, scale back or eliminate some or all of its product and services
development, marketing and other corporate programs. If the Company is able to
obtain such financing, the terms may contain restrictive covenants that might
negatively affect its shares of common stock, such as limitations on payments of
dividends or, in the case of a debt financing, reduced earnings due to interest
expenses. Any further issuance of equity securities would have a dilutive effect
on the holders of its shares of common stock. Its business, operating results
and financial condition may be materially harmed if revenues do not develop or
grow slower than the Company anticipates, if operating expenses exceed its
expectations or cannot be reduced accordingly, or if the Company cannot obtain
additional financing.
Dependence on Limited Number of Clients
The Company derives a significant portion of its revenues from a
relatively limited number of clients primarily located in the New York/New
Jersey metropolitan area of the United States. Adverse economic conditions
affecting this region could have an adverse effect on the financial condition of
its clients located there, which in turn could adversely impact its business and
future growth. Revenues from its ten most significant clients accounted for a
majority of its revenues for each of the three years ended December 31, 2001 and
the six months ended June 30, 2002. In each of these periods, the Company has
had at least one customer with revenues exceeding 10% of the Company's revenues.
For the six months ended June 30, 2002, the Company had revenues from two
customers that represented 35%, and 21% of the revenues respectively. For the
six months ended June 30, 2001, the Company had revenues from three customers,
which represented 24%, 16% and 10% of the revenues. No other customer
represented greater than 10% of the Company's revenues in such periods. The
projects with the customer, which represented 35% of the Company's revenues
declined in the second quarter of 2002 and will continue to wind down in the
second half of 2002. Accordingly the Company expects a slight decrease in
revenues for the third quarter 2002 as compared to the second quarter 2002. In
any given year, the Company's ten most significant customers may vary based upon
specific projects for those clients during that year. There can be no assurance
that its significant clients will continue to engage us for additional projects
or do so at the same revenue levels. Clients engage the Company on an
assignment-by-assignment basis, and a client can generally terminate an
assignment at any time without penalties. The loss of any significant customer
could have a material adverse effect on its business, results of operations and
financial condition. A failure of the Company to develop relationships with new
customers could have a material adverse effect on its business, results of
operations and financial condition.
13
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. The
Company's failure to address these developments could have a material adverse
effect on our business, results of operations and financial condition.
e-Business Initiatives
The Company faces difficulties typically encountered by development
state companies in rapidly evolving markets because of its e-commerce
initiative. The Company provides e-commerce, strategic planning and marketing
strategy-consulting services and other related e-business services. Revenues
from its e-commerce services constituted 44% of revenues for the six months
ended June 30, 2002, and 46% of its revenues 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 offerings include the Company's and its strategic partners'
abilities to:
o create a customer base;
o respond to changes in a rapidly evolving and unpredictable
business environment;
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.
14
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 three 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 its consultants' services
and, to a lesser extent, from fixed-price projects. The Company's 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
gross margin increased for the six months ended June 30, 2002 principally due to
higher consultant utilization rate and higher average hourly billing rates,
resulting from the Company's aggressive cost containment and workforce
rationalization efforts. 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 pass along future 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 our services, hire and retain skilled
management, marketing, customer service and other personnel, and
successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality and service
controls, and
o if the Company consummates 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 if new
employees or consultants are unable to achieve anticipated performance levels,
our business, results of operations and financial condition could be materially
adversely affected.
Dependence on Chief Executive Officer
The Company's success is highly dependent upon the efforts and
abilities of Shmuel BenTov, its Chief Executive Officer and President. Mr.
BenTov has entered into an employment agreement with the Company, which
terminates on December 31, 2004. Although his employment agreement contains
non-competition, nondisclosure and non-solicitation covenants, this contract
does not guarantee that Mr. BenTov will continue his employment with the
Company. The loss of services of Mr. BenTov for any reason could have a material
adverse effect upon the Company's business, results of operations and financial
condition.
Fluctuations in Quarterly Operating Results
The Company's quarterly results of operations are variable. Variations
in its revenues and results of operations occur from time to time as a result of
a number of factors, such as the timing of closing of Solution Branch offices,
the size and significance of client engagements commenced and completed during a
quarter, the number of business days in a quarter, consultant hiring and
utilization rates and the timing of corporate expenditures. The timing of
revenues is difficult to forecast because our 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. In addition, our
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 our shares of Common Stock
could be adversely affected.
15
Volatility of Stock Price
The Common Stock may be subject to wide fluctuations in price in
response to variations in quarterly results of operations and other factors,
including acquisitions, technological innovations and general economic or market
conditions. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market price of many technology companies and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of our Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
Possible Removal From Quotation Of Common Stock On NASDAQ And Resulting Market
Illiquidity
On February 14, 2002, the Company was informed by Nasdaq that it had
failed to maintain a closing bid price of at least $1.00 per share and a market
value of publicly held shares of at least $5,000,000 for 30 consecutive trading
days, and therefore the Company did not comply with the requirements as set
forth in Nasdaq Marketplace Rules 4450(a)(5) and 4450(b)(2), respectively.
Pursuant to Nasdaq rules, the Company was provided with a 90-day grace period,
through May 15, 2002, to regain compliance with the minimum bid price and market
value of public float requirements. The Company did not regain compliance within
the proscribed time period. On May 23, the Company requested a hearing, which
stayed the delisting of the Company's common stock. On July 11, 2002, the
Company participated in a hearing before the Nasdaq Listing Qualifications Panel
(the "Nasdaq Panel"). On July 31, 2002, the Nasdaq Panel notified the Company
that the Nasdaq Panel had determined not to grant any further exception to the
minimum bid price and/or market value of publicly held shares requirements. The
Nasdaq Panel further determined to transfer listing of the Company's common
stock to The Nasdaq Small Cap Market, effective with the open of business on
August 5, 2002, pursuant to the following:
On or before August 13, 2002, the Company must demonstrate a
closing bid price of at least $1.00 per share; immediately thereafter,
the Company must evidence a closing bid price of at least $1.00 per
share for a minimum of ten consecutive trading days. In the event the
Company fails to evidence a closing bid price of at least $1.00 per
share upon the expiration of the exception, it may be eligible for an
additional 180-day grace period within which to regain compliance with
the $1.00 bid price requirement, provided it is able to demonstrate
shareholders' equity of at least $5,000,000, a market value of listed
securities of at least $50,000,000, or net income of at least $750,000
(in the most recently completed fiscal year or in two of the last three
fiscal years based upon the Company's most recently filed financial
statements). In the alternative, if the Company is not eligible for the
extended grace period as of August 13, 2002, the Company is hereby
granted an exception to effect a reverse stock split sufficient to
achieve and sustain a minimum bid price of $1.00 per share.
Specifically, under this alternative, on or before September 20, 2002,
the Company must file a proxy statement with the Securities and
Exchange Commission and Nasdaq evidencing its intent to seek
shareholder approval for the implementation of a reverse stock split.
Thereafter, on or before October 31, 2002, the Company must evidence a
closing bid price of at least $1.00 per share and, immediately
thereafter, a closing bid price of at least $1.00 per share for a
minimum of ten consecutive trading days.
On August 12, 2002, the Company sold 530,304 shares of Series A
Preferred Stock for an aggregate purchase price of $350,000. The Company filed a
Current Report on Form 8-K with the Securities and Exchange Commission and
Nasdaq on August 12, 2002 which included a proforma balance sheet as of June 30,
2002, after giving effect to sale of the shares of Series A Preferred Stock,
which the Company believes demonstrates that the Company has satisfied the
requirements set forth by the Nasdaq Panel to make the Company eligible for the
additional 180-day grace period during which to demonstrate a closing bid price
of at lease $1.00 per share. As of the date hereof, Nasdaq has not confirmed
that the Company is entitled to the additional 180-day grace period based upon
demonstration of shareholder's equity of at least $5,000,000.
16
The Company currently meets the requirements for continued listing on
The Nasdaq Small Cap Market, except for the $1.00 per share minimum bid
requirement. If the minimum bid price for the Company's Common Stock has not
increased to a minimum of $1.00 per share during the 180-day grace period, or if
the Company failed to meet each of the other applicable continued listing
requirements, the Company's Common Stock could be removed from The Nasdaq Small
Cap Market. 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 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.
The Nasdaq Listing and Hearing Review Council (the "Listing Council")
might, on its own motion, determine to review the Nasdaq Panel decision within
45 calendar days after issuance of the written decision. If the Listing Council
determines to review the Nasdaq Panel's decision, it may affirm, modify,
reverse, dismiss, or remand the decision to the Nasdaq Panel. The Company
understands that is will be immediately notified in the event the Listing
Council determines that this matter will be called for review.
Competition
The market for information technology services includes a large number
of competitors, is subject to rapid change and is highly competitive. Its
primary competitors include participants from a variety of market segments,
including the current and former consulting divisions of the "Big Five"
accounting firms, interactive advertising agencies, web development companies,
systems consulting and implementation firms, application software firms and
management consulting firms. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than the Company. In addition, the Company competes with its
clients' internal resources, particularly when these resources represent a fixed
cost to the client. In the future, such competition may impose additional
pricing pressures on us. The Company cannot assure you that it will compete
successfully with its existing competitors or with any new competitors.
Intellectual Property Rights
The Company's business includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to the client. The Company relies upon a
combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third parties from whom the Company licenses intellectual
property. The Company enters into confidentiality agreements with its employees
and limits distribution of proprietary information. However, the Company cannot
assure you that the steps taken by 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 us to spend significant sums in litigation, pay damages, develop
non-infringing intellectual property or acquire licenses to the intellectual
property, which is the subject of the asserted infringement. In addition, the
Company is aware of other users of the term "TACT" and combinations including "A
Consulting," which users may be able to restrict our ability to establish or
protect our right to use these terms. The Company has in the past been contacted
by other users of the term "TACT" alleging rights to the term. The Company has
completed filings with the U.S. Patent and Trademark Office in order to protect
certain marks, including "TACT" and "The A Consulting Team." Our inability or
failure to establish rights to these terms or protect its rights may have a
material adverse effect on our business, results of operations and financial
condition.
17
Going Concern
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the six months
ended June 30, 2002 the company reported a net profit of $538,000, but 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 $28.5 million as of June 30, 2002. The
Company believes that its continuing focus on cost reductions, together with a
number of other operational changes, has resulted in the attainment of
profitable operations during the second half of 2002. There can be no assurance
that the Company will remain profitable in future quarters.
18
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company has not entered into market risk sensitive transactions
required to be disclosed under this item.
Part II. Other Information
Item 1. Legal proceedings
None material.
Item 2. Changes in Securities and Use of Proceeds
Pursuant to a Stock Purchase Agreement dated as of June 28, 2002 among
the Company, International Object Technology, Inc. ("IOT") and the holders of
all the issued and outstanding capital stock of IOT (the "IOT Stockholders"),
the Company sold an aggregate of 1,270,000 shares of unregistered common stock
to the IOT Stockholders and agreed to pay an aggregate of $650,000 in cash in
deferred payments over the next 30 months in exchange for all the issued and
outstanding capital stock of IOT (the "Acquisition"). The Acquisition closed on
July 19, 2002. The Company relied 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, in issuing the stock to the IOT Stockholders. Based
upon discussions with and representations made by the IOT Stockholders, the
Company reasonably believed that such investors were accredited and/or
sophisticated investors. The Company granted to each investor access to
information on the Company necessary to make an informed investment decision.
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. The Company relied
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, in issuing
the stock to Shmuel BenTov. Based upon discussions with and representations made
by the investor, the Company reasonably believed that such investor was
accredited and a sophisticated investor. Mr. BenTov had access to information on
the Company necessary to make an informed investment decision. The shares of
Series A Preferred Stock are convertible into common stock on a 1:1 basis
subject to adjustment for stock splits, consolidations and stock dividends. In
addition, the shares of Series A Preferred Stock are entitled to a 7% cumulative
dividend payable semi-annually. The Company has also agreed to grant "piggyback"
registration rights to Mr. BenTov for the shares of common stock issuable upon
conversion of the Series A Preferred Stock.
The Company is prohibited from paying dividends on its capital stock
due to restrictions under the Loan and Security Agreement between the Company
and Keltic Financial Partners, L.P., dated June 27, 2001 and amended by the July
2002 Modification Agreement. Keltic has consented to the payment of dividends on
the Series A Preferred Stock, provided an event of default does not exist.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 2002, the Company held its annual meeting of shareholders
(the "Annual Meeting"). The shareholders approved by majority of votes the
election of Messrs. Shmuel BenTov, Steven S. Mukamal, Reuven Battat and Robert
E. Duncan as directors of the Company as follows:
Name In Favor Against Withheld
---- -------- ------- --------
Shmuel BenTov 5,053,669 2,750 0
--------- --------- ---------
Steven S. Mukamal 5,053,669 2,750 0
--------- --------- ---------
Reuven Battat 5,053,569 2,850 0
--------- --------- ---------
Robert E. Duncan 5,053,569 2,850 0
--------- --------- ---------
19
In addition, the Company's shareholders voted on the ratification by a
majority of votes present of the appointment of Ernst & Young LLP as independent
public accountants for the year ending December 31, 2002 as follows:
In Favor Against Withheld
-------- ------- --------
5,054,019 2,400 0
--------- ------- --------
There were not any broker non-votes and abstentions.
Subsequent to the Annual Meeting, the Audit Committee of the Board of
Directors of the Company dismissed Ernst & Young LLP as its principal
accountants, and engaged Grant Thornton LLP as principal accountants on June 27,
2002.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Stock Purchase Agreement dated as of June 28, 2002 among the
Registrant, International Object Technology, Inc. and the
Stockholders of International Object Technology, Inc.
incorporated by reference to Exhibit 2.1 to the Form 8-K, as
previously filed with the SEC on July 12, 2002.
3.1 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to the Form 10-Q for
the period ended June 30, 2001, as previously filed with the
SEC on August 10, 2001.
3.2 Certificate of Amendment of the Certificate of Incorporation
the Registrant dated August 8, 2002.
3.3 Amended and Restated By-Laws of the Registrant, incorporated
by reference to Exhibit 3.3 to the Registration Statement on
Form SB-2 as previously filed with the SEC on August 6, 1997.
4.1 Specimen Common Stock Certificate, incorporated by reference
to Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among
the Registrant and those persons listed on Schedule I attached
thereto, incorporated by reference to Exhibit 4.1 to the Form
8-K, as previously filed by the SEC on July 25, 2002.
10.1 Employment Agreement dated as of July 19, 2002 between the
Registrant and Dr. Piotr Zielczynski, incorporated by
reference to Exhibit 10.1 to the Form 8-K, as previously
filed by the SEC on July 25, 2002.
10.2 Employment Agreement dated as of July 19, 2002 between the
Registrant and Ilan Nachmani, incorporated by reference to
Exhibit 10.2 to the Form 8-K, as previously filed by the SEC
on July 25, 2002.
10.3 Employment Agreement dated as of July 19, 2002 between the
Registrant and Sanjeev Welling, incorporated by reference to
Exhibit 10.3 to the Form 8-K, as previously filed by the SEC
on July 25, 2002.
99.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, dated August 13, 2002.
20
99.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, dated August 13, 2002.
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
three month period ended June 30, 2002.
(i) The Registrant filed a Form 8-K with the SEC dated May 16,
2002 on May 30, 2002 regarding compliance with the Nasdaq
Listing Qualifications Panel's letter dated May 16, 2002 in
regards to minimum bid price, and minimum market value of
public float (MVPF).
The Company filed the following current reports on Form 8-K
subsequent to June 30, 2002.
(i) The Registrant filed a Form 8-K with the SEC dated June 28,
2002 on July 3, 2002 regarding the dismissal of Ernst & Young
LLP as its principal accountants and the engagement of Grant
Thornton LLP as its principal accountants.
(ii) The Registrant filed a Form 8-K with the SEC dated June 28,
2002 on July 12, 2002 regarding an agreement to acquire all
of the capital stock of International Object Technology, Inc.
(iii) The Registrant filed a Form 8-K with the SEC dated July 19,
2002 on July 25, 2002 regarding the consummation of the
acquisition of all of the capital stock of International
Object Technology, Inc.
(iv) The Registrant filed a Form 8-K with the SEC dated August 12,
2002 on August 12, 2002 regarding compliance with the Nasdaq
Listing Qualifications Panel Letter dated July 31, 2002 in
regards to transition and continued quotation on the Nasdaq
Small Cap Market.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
By: /s/ Shmuel BenTov
---------------------
Date August 12, 2002 Shmuel BenTov, President
and Chief Executive Officer
By: /s/ Richard D. Falcone
---------------------
Date August 12, 2002 Richard D. Falcone, Treasurer
and Chief Financial Officer
22