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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, 2003
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. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 2004 was approximately $4,306,431 based on the
average of the bid and asked prices of the registrant's Common Stock on The
Nasdaq SmallCap Stock Market (SM) on such date.
As of March 23, 2004, there were 2,107,967 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 2004 Annual
Meeting of Shareholders, which will be filed on or before April 30, 2004, are
incorporated by reference into Part III of this Report. See Item 16 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..........................................................................................................4
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................4
Item 6. Selected Financial Data.................................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................18
Item 8. Financial Statements and Supplementary Data............................................................19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................19
Item 9A. Controls and Procedures...............................................................................19
PART III........................................................................................................19
Item 10. Directors and Executive Officers of the Registrant....................................................19
Item 11. Executive Compensation................................................................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................21
Item 13. Certain Relationships and Related Transactions........................................................21
Item 14. Principal Accountant Fees And Services................................................................22
PART IV.........................................................................................................22
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................22
PART I
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements due to risks and factors identified from time to time in the
Company's filings with the SEC including those discussed in this Report.
ITEM 1. BUSINESS
General
Incorporated in 1983, The A Consulting Team, Inc., a New York
corporation (the "Company" or "TACT" 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 SmallCap Market(SM) under
the symbol "TACX."
Industry Background
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, accelerated the growth of the IT
industry through 2001. These advances included more powerful and less expensive
computer technology, the transition from predominantly centralized mainframe
computer systems to open and distributed computing environments and the advent
of capabilities such as relational databases, imaging, software development
productivity tools, electronic commerce ("e-commerce") applications and
web-enabled software. These advances expanded the benefits that users can derive
from computer-based information systems and improved the price-to-performance
ratios of such systems. As a result, an increasing number of companies were
employing IT in new ways, often to gain competitive advantages in the
marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems rendered the development and implementation of such systems
increasingly complex. In addition, there was a shortage of IT consultants
qualified to support these systems. Accordingly, organizations turned to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems. However, during 2002 and continuing into 2003 there
has been a slowdown in IT spending coincident with the general economic
slowdown. This has resulted in revenue decreases at many IT service companies,
however, industry analysts believe that IT spending will increase during 2004.
Strategy
The Company's objective is to continue to provide its clients with high
quality, technology-based consulting services in the areas of migrations and
conversions of legacy systems, performance optimization, web enhancements,
custom development, strategic sourcing and enterprise-wide IT consulting,
outsourcing and software solutions. The Company's strategies include the
following key components:
Cross-sell Additional Services to Existing Clients. By offering
existing clients additional IT consulting services 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.
Acquisitions and Strategic Relationships. On July 19, 2002, the Company
consummated the acquisition of all of the issued and outstanding capital stock
of International Object Technology, Inc. (IOT). IOT was a privately owned,
professional services firm that provides data management and business
intelligence solutions, technology consulting and project management services.
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 or (iii) a customer base that the company can
cross sell its services into.
1
Operational Efficiencies and Cost Reductions. The Company has
restructured its operations and reduced its cost structure by migrating to a
flexible workforce and reducing corporate and general administrative expenses.
T3 Media, Inc.
T3 Media, Inc. a majority-owned subsidiary of the Company, ceased
operations during the second quarter of 2001.
Always-On Software, Inc.
The Company wrote off 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.
Methoda Computers Ltd.
The Company has written down its minority investment in Methoda
Computer Ltd. during the third quarter of 2002 from $500,000 to $368,000. In
January of 2004, the Company sold approximately 75 percent of its investment in
Methoda for $200,000 in cash and $81,000 payable over the next twenty months.
The remaining investment has a carrying value of $87,000. Methoda Computer Ltd.
is a leading methodology provider and knowledgebase for IT management and
software engineering based in Israel.
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, performance optimization, migrations and conversions,
strategic sourcing, outsourcing 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 a 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.
Software. TACT markets and distributes a number of software products
developed by independent software developers. The Company believes its
relationships with over 70 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. Revenue from the sale
of software is ancillary to the Company's total revenues.
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, automotive and
insurance industries. Ten of the Company's top twenty clients measured by
revenue for the year ended December 31, 2003 had been clients for over five
years. In 2003, the Company's largest customer was BMW NA, who represented 28%
of revenues. Besides this customer, no other customer represented greater than
10% of the Company's revenues. During 2004, the Company expects that a
significant portion of its revenues will continue to come from BMW NA.
New Technologies
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 highly qualified 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, 2003, the
Company employed 11 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.
Human Resources
At December 31, 2003, the Company had 86 personnel, of whom 58 were
consultants, 2 were recruiting personnel, 11 were sales and marketing personnel,
4 were technical and customer service personnel and 11 were executive, financial
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 86 personnel, the Company was utilizing the services of 56
independent contractors at December 31, 2003. These independent contractors act
as consultants and they are not employees of the Company. 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.
3
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.
Seasonality
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 approximately 6,000 square
feet and is located in a leased facility with a term expiring in July 31, 2007.
The Company also leases approximately 7,000 square feet in a facility in Clark,
NJ. The lease on this facility expires on July 31, 2007.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2003.
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 SmallCap
Market(SM) ("Nasdaq") under the symbol "TACX." TACT completed an initial public
offering of its Common Stock on August 8, 1997 and was listed on the Nasdaq
National Market. Prior to that date, there was no market for the Company's
Common Stock. In August 2002, the Company's common stock transitioned to the
Nasdaq SmallCap Market.
On January 7, 2004, the Company effected a one-for-four reverse stock
split of its common stock. Accordingly, the share and per share data throughout
this document have been retroactively adjusted to reflect the reverse stock
split.
4
The following table sets forth the quarterly range of high and low bid
prices of the Company's Common Stock since January 1, 2002 as reported by
Nasdaq:
2002 High Low
First Quarter $2.40 $1.12
Second Quarter 2.76 1.00
Third Quarter 3.08 1.24
Fourth Quarter 2.00 0.84
2003 High Low
First Quarter $1.96 $0.80
Second Quarter 2.24 1.00
Third Quarter 3.20 1.80
Fourth Quarter 4.64 1.80
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.
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, amended by the July
2002 Modification Agreement and amended by the restated and amended Loan and
Security Agreement dated March 23, 2004. Keltic has consented to the payment of
dividends on the Series A and Series B Preferred Stock, provided an event of
default does not exist.
Holders
The Company estimates that there were approximately 10 holders of
record of the Company's Common Stock on March 20, 2004. The Company believes
that the number of beneficial shareholders exceeds 600. There was one holder of
the Company's Series A Preferred Stock and one holder of the Company's Series B
Preferred Stock on March 20, 2004.
Recent Sales of Unregistered Securities
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. On November 12,
2002, the Company issued 41,311 shares of Series B Preferred Stock to Mr. Yosi
Vardi in exchange for $27,265.26. 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 and Yosi Vardi. Based upon discussions with and representations made by
the investors, the Company reasonably believed that such investors were
accredited and sophisticated investors. Mr. BenTov and Mr. Vardi had access to
information on the Company necessary to make an informed investment decision.
The shares of Series A and Series B Preferred Stock are convertible into Common
Stock on a 4:1 basis, which reflects the company's one-for-four reverse stock
split that occurred on January 7, 2004 and are subject to further adjustment for
stock splits, consolidations and stock dividends. In addition, the shares of
Series A and Series B 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 and Mr. Vardi for the shares of Common Stock
issuable upon conversion of the Series A and Series B Preferred Stock. The
Company will use the proceeds from the sale of Series A and Series B Preferred
Stock for general working capital purposes.
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 317,500 shares of unregistered common stock,
which has been retroactively adjusted to reflect the one-for-four reverse stock
split that occurred on January 7, 2004, 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 IOT
Stockholders were accredited and/or sophisticated investors. The Company granted
to each IOT Stockholder access to information on the Company necessary to make
an informed investment decision.
5
In 2003, the Company issued an aggregate of 1,000 stock options to
non-employee members of its Board of Directors, which has been retroactively
adjusted to reflect the one-for-four reverse stock split that occurred on
January 7, 2004, each with a term of 5 years from the date of grant, pursuant to
its Stock Option and Award Plan. The options have an initial exercise price of
$1.80 per share, which has been retroactively adjusted to reflect the
one-for-four reverse stock split that occurred on January 7, 2004. The options
become fully vested and exercisable one year after the grant date. The Company
did not issue any other options for the year ended December 31, 2003.
In 2002, the Company issued an aggregate of 99,500 stock options, which
has been retroactively adjusted to reflect the one-for-four reverse stock split
that occurred on January 7, 2004, with terms ranging between 5 to 10 years from
the date of grant, pursuant to its Stock Option and Award Plan. The options have
initial exercise prices that range from $1.24 to $1.72 per share, which has been
retroactively adjusted to reflect the one-for-four reverse stock split that
occurred on January 7, 2004 and they have vesting periods that range from
immediately vesting to vesting over 4 years. In addition, 1,250 of the options
issued were to non-employee members of its Board of Directors, each with a term
of 5 years from the date of grant, pursuant to its Stock Option and Award Plan.
The options have an initial exercise price of $1.32 to $1.64 per share. The
options become fully vested and exercisable one year after the grant date.
In 2001, the Company issued an aggregate of 185,750 stock options,
which has been retroactively adjusted to reflect the one-for-four reverse stock
split that occurred on January 7, 2004, with terms ranging between 5 to 10 years
from the date of grant, pursuant to its Stock Option and Award Plan. The options
have initial exercise prices that range from $1.20 to $1.80 per share, which has
been retroactively adjusted to reflect the one-for-four reverse stock split that
occurred on January 7, 2004 and they have vesting periods that range from
immediately vesting to vesting over 4 years. In addition, 750 of the options
issued were to non-employee members of its Board of Directors, each with a term
of 5 years from the date of grant, pursuant to its Stock Option and Award Plan.
The options have an initial exercise price of $1.32. The options become fully
vested and exercisable one year after the grant date.
6
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial and operating data and
is qualified by the more detailed Consolidated Financial Statements and Notes
thereto included herein. The selected financial data in the table is derived
from the Company's Consolidated Financial Statements and Notes thereto, which
includes financial data from IOT from the date of acquisition on July 19, 2002.
The selected financial data should be read in conjunction with the Financial
Statements and Notes thereto and other financial information included herein.
Selected Financial Data
(in thousands, except number of shares and per share data)
Year Ended December 31,
--------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 21,646 $ 24,009 $ 36,227 $ 55,022 $ 53,517
Income (loss) from operations (42) (130) (13,472) (18,124) (3,203)
Other income(expense):
Gain from extinguishment of debt - 49 249 - -
Net income (loss) (123) 204 (13,651) (16,798) (2,667)
Net income (loss) per share
Basic $ (0.07)(1) $ 0.10 (1) $ (7.67)(1) $ (10.61)(1) $ (1.94)(1)
Diluted $ (0.07)(1) $ 0.10 (1) $ (7.67)(1) $ (10.61)(1) $ (1.94)(1)
Weighted average shares used in per
share calculation -basic 2,098,810 (1) 1,923,615 (1) 1,779,217 (1) 1,582,481 (1) 1,371,250 (1)
Weighted average shares used in per
share calculation -diluted 2,098,810 (1) 1,996,672 (1) 1,779,217 (1) 1,582,481 (1) 1,371,250 (1)
Balance Sheet Data
Total assets $ 7,374 $ 8,046 $ 8,957 $ 27,038 $ 28,582
Long-term liabilities 231 386 53 457 561
Stockholders' equity 5,193 5,325 4,119 17,770 22,516
Number of shares outstanding at
year end 2,107,967 (1) 2,096,717 (1) 1,779,217 (1) 1,779,217 (1) 1,371,250 (1)
(1) All share and per share amounts have been restated to reflect the one
for four reverse stock split of the Company's common stock, which
occurred on January 7, 2004
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 consolidated 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 SmallCap: TACX), headquartered in New York, NY. In addition, TACT has an
office in Clark, NJ.
7
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, accelerated the growth of the IT
industry through 2001. These advances included more powerful and less expensive
computer technology, the transition from predominantly centralized mainframe
computer systems to open and distributed computing environments and the advent
of capabilities such as relational databases, imaging, software development
productivity tools, electronic commerce ("e-commerce") applications and
web-enabled software. These advances expanded the benefits that users can derive
from computer-based information systems and improved the price-to-performance
ratios of such systems. As a result, an increasing number of companies were
employing IT in new ways, often to gain competitive advantages in the
marketplace, and IT services have become an essential component of their
long-term growth strategies. The same advances that have enhanced the benefits
of computer systems rendered the development and implementation of such systems
increasingly complex. In addition, there was a shortage of IT consultants
qualified to support these systems. Accordingly, organizations turned to
external IT services organizations such as TACT to develop, support and enhance
their internal IT systems. However, during 2002 and continuing into 2003 there
has been a slowdown in IT spending coincident with the general economic
slowdown. This has resulted in revenue decreases at many IT service companies,
however, industry analysts believe that IT spending will increase during 2004.
TACT is an end-to-end IT solutions and services provider focused on
leveraging existing systems and data. The Company's goal is to empower customers
through the utilization of technology to reduce costs, improve services and
increase revenues. The Company delivers migrations and conversions of legacy
systems, web enablement of existing systems, customer development, performance
optimization, migrations and conversions, outsourcing, strategic sourcing and
enterprise wide IT consulting, and software solutions.
Over 90% 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 2003. During 2004, the Company expects that revenue from fixed
fee contracts will be similar to the previous year.
TACT provides clients with enterprise-wide information technology
consulting services and software products. TACT solutions cover the entire
spectrum of IT needs, including applications, data, and infrastructure. TACT
provides complete project life-cycle services--from application and system
design, through development and implementation, to documentation and training.
Strategic alliances with leading software vendors ensure that TACT solutions are
dependable and within the mainstream of industry trends. These partnerships
allow TACT to provide a wide variety of business technology solutions such as
enterprise reporting solutions, data warehousing, systems strategies,
application and database conversions, and application development services.
When TACT is engaged by its clients to implement IT solutions or
services it uses its Smart Approach. TACT's Smart Approach is a leading edge set
of end-to-end solutions and services that include Strategy, Methodology,
Architecture, Resources and Tools. The Strategy is developed together with the
client to ensure that the client's goals and objectives are met. The Methodology
is a Tried and True TACT Methodology that is followed in order to implement the
Strategy. The solutions and services are built on a robust Architecture. Utilize
highly qualified TACT Resources and Exploits best-of-breed Tools.
The Company establishes standard-billing guidelines for consulting
services based on the type of service offered. Actual billing rates are
established on a project-by-project basis and may vary from the standard
guidelines. The Company typically bills its clients for time and materials
services on a semi-monthly basis. Arrangements for fixed-price engagements are
made on a case-by-case basis. Consulting services revenues generated under time
and materials engagements and under fixed-price engagements are recognized as
those services are provided.
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
for periodic price adjustments to address, among other things, increases in
consultant costs, during 2001, 2002 and 2003 clients have been adverse to
accepting cost increases. TACT also actively manages its personnel utilization
rates by constantly monitoring project requirements and timetables. Through the
Company's cost containment and work force rationalization efforts TACT's
utilization rates began to improve in the second half of 2001, continued in 2002
and remained stable in 2003. 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.
8
Historically, the Company has also generated revenues by selling
software licenses. In addition to initial software license fees, the Company
also derives revenues from the annual renewal of software licenses. Revenues
from the sale of software licenses are recognized upon delivery of the software
to a customer, because future obligations associated with such revenue are
insignificant. The revenues from the sale of software is ancillary to the
Company's total revenues.
On October 2, 1998, the Company made an investment in a Web integrator,
T3 Media, Inc., of $3 million of non-voting convertible preferred stock. On June
23, 1999, the Company converted its preferred stock into a 30% common stock
ownership interest and increased its ownership interest in T3 Media to
approximately 51% by an additional investment in T3 Media's common stock of
$370,000. The acquisition of T3 Media was accounted for using the purchase
method of accounting. Accordingly, the results of operations of T3 Media are
included in the Company's consolidated results of operations from the date of
acquisition. The excess of the purchase price over the estimated fair value of
the net identifiable assets acquired totaled $4.0 million and was recorded as
goodwill and was being amortized using the straight-line method over 7 years.
After extensive review of changing market conditions, it was determined that the
carrying value of $3.1 million of the intangibles and certain other fixed assets
could not be supported, resulting in an aggregate write-off of $3.9 million in
the fourth quarter of 2000. Due to the continued deterioration in revenues and
market conditions for T3 Media's services, the operations of T3 Media ceased in
the second quarter of 2001. Accordingly, the Company recorded additional charges
of $1.2 million related to termination costs and the settlement of the various
operating lease obligations, in the second quarter of 2001.
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 no value. In the third quarter of 2002, the Company wrote off the balance
of its minority investment in Always-On Software Inc.
On July 19, 2002, the Company, acquired all of the common stock of
International Object Technology, Inc. (IOT) for a combination of deferred cash
consideration of $650,000 and 317,500 shares of TACT unregistered Common Stock,
which has been retroactively adjusted to reflect the one-for-four reverse stock
split that occurred on January 7, 2004 and is valued at $635,000. The
acquisition of IOT was accounted for using the purchase method of accounting.
Accordingly, the results of operations of IOT are included in the Company's
consolidated results of operation from the date of acquisition. The purchase
price of the acquisition exceeded the fair market value of the net assets
acquired, resulting in the recording of goodwill of $1,181,520 and other
identifiable intangibles of $312,000 with the identifiable intangible assets
being amortized over a three year period on a straight line basis. IOT was a
privately owned, professional services firm that provides data management and
business intelligence solutions, technology consulting and project management
services. The acquisition increased the depth of the Company's services and
solution offerings and provided the Company with cross-selling opportunities.
Certain Critical Accounting Policies
The methods, estimates and judgments we use in applying our most
critical accounting polices have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements.
Goodwill and Intangible Assets
The Company's goodwill is evaluated and tested on a periodic basis by
an independent third party. If it is determined that goodwill has been impaired
it will be written down at that time.
9
The Company's useful life of its intangible assets has been evaluated
and it was determined that they will be amortized over a three year period.
Revenue Recognition
Consulting revenues are recognized as services are provided. The
Company primarily provides consulting services under time and material
contracts, whereby revenue is recognized as hours and costs are incurred.
Customers for consulting revenues are billed on a weekly, semi-monthly and
monthly basis. Revenues from fixed fee contracts are recorded when work is
performed on the basis of the proportionate performance method, which is based
on costs incurred to date relative to total estimated costs. Any anticipated
contract losses are estimated and accrued at the time they become known and
estimable. Unbilled accounts receivables represent amounts recognized as revenue
based on services performed in advance of customer billings. Revenue from sales
of software licenses is recognized upon delivery of the software to a customer
because future obligations associated with such revenue are insignificant.
Allowance for Doubtful Accounts
The Company monitors its accounts receivable balances on a monthly
basis to ensure that they are collectible. On a quarterly basis, the Company
uses its historical experience to accurately determine its accounts receivable
reserve. The Company's allowance for doubtful accounts is an estimate based on
specifically identified accounts as well as general reserves. The Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations. In these cases, management uses
its judgment, based on the best available facts and circumstances, and records a
specific reserve for that customer against amounts due to reduce the receivable
to the amount that is expected to be collected. These specific reserves are
reevaluated and adjusted as additional information is received that impacts the
amount reserved. The Company also establishes a general reserve for all
customers based on a range of percentages applied to aging categories. These
percentages are based on historical collection and write-off experience. If
circumstances change, the Company's estimate of the recoverability of amounts
due the Company could be reduced or increased by a material amount. Such a
change in estimated recoverability would be accounted for in the period in which
the facts that give rise to the change become known.
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,
-------------------------------
2003 2002 2001
--------- --------- ---------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.1% 70.2% 75.5%
--------- --------- ---------
Gross profit 26.9% 29.8% 24.5%
Operating expenses 27.1% 30.3% 61.7%
--------- --------- ---------
Income/Loss from operations ( .2)% ( .5)% ( 37.2)%
--------- --------- ---------
Gain from extinguishment of debt 0.0% 0.2% 0.7%
--------- --------- ---------
Net loss ( .6)% 0.8% ( 37.7)%
========= ========= =========
Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002
Revenues. Revenues of the Company decreased by $2.4 million or 9.8%,
from $24 million for the year ended December 31, 2002 to $21.6 million for the
year ended December 31, 2003. The decrease was primarily attributable to a
slowdown in spending in the IT industry, which resulted in bringing the Company
back to its core IT services, which was partially offset by an increase in
revenue of $4,129,000 as a result of the acquisition of IOT.
Software licensing revenues increased by $353,000, or 26.3%, from $1.3
million in 2002 to $1.7 million in 2003. Software sales are expected to remain
ancillary to the Company's total revenues in future years.
10
Gross Profit. The resulting gross profit for 2003 decreased by $1.3
million, or 18.6%, from $7.1 million in 2002 to $5.8 million in 2003. As a
percentage of total revenues, gross margin for the year decreased from 29.8% in
2002 to 26.9% in 2003. Gross margin decreased due to a lower consultant
utilization rate (79% in 2003 compared to 81% in 2002), lower gross margin on
IOT revenues and a lower gross margin on a fixed price contract due to higher
front loaded costs (the Company expects that over the next year this contract
will have a normal gross margin).
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 $1.4 million, or 19.5%, from $7.3
million in 2002 to $5.9 million in 2003. The decrease is primarily attributable
to a decrease in the Company's payroll costs ($800,000) and a reduction in the
Company's telecommunication cost and professional fees ($234,000). Depreciation
and amortization decreased $121,000 or 13.9% from $873,000 in 2002 to $752,000
in 2003. This decrease is attributable to certain leaseholds and office
equipment becoming fully depreciated. Impairment of assets and restructuring
charges decreased by $150,000 due to the fact that the Company wrote down a
portion of its investment in Methoda Computer Ltd. in 2002.
Taxes. Taxes in 2003 were $24,000 in comparison to a ($431,000) income
tax benefit recorded in 2002, which resulted from a tax refund of $439,000 due
to 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.
Gain from Extinguishment of Debt. In 2002, the Company recorded one
time income of $49,000 resulting from the extinguishments of debt associated
with the settlement of capital leases at less than these carrying values.
Net (Loss) Income. As a result of the above, the Company had a net loss
of ($123,000) in 2003 compared to net income of $204,000 in 2002.
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001
Revenues. Revenues of the Company decreased by $12.2 million, or 33.7%,
from $36.2 million for the year ended December 31, 2001 to $24 million for the
year ended December 31, 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 solutions and services businesses, which was
partially offset by an increase in revenues of $1,689,000 as a result of the
acquisition of IOT.
Software licensing revenues decreased by $100,000, or 7%, from $1.4
million in 2001 to $1.3 million in 2002. This decrease is attributable to the
Company placing less emphasis on software sales. Software sales are expected to
remain ancillary to the Company's total revenues in future years.
Revenues from training represented less than 1% of the Company's total
revenues in 2001. Training services were terminated in 2001.
Gross Profit. The resulting gross profit for 2002 decreased by $1.8
million, or 19%, from $8.9 million in 2001 to $7.1 million in 2002. As a
percentage of total revenues, gross margin for the year increased from 24.5% in
2001 to 29.8% in 2002. Gross margin improved due to the Company's lower
consultant costs, a higher utilization rate, and software revenues, which have a
higher gross margin than consulting services, being a larger percentage of total
revenues compared to the prior year, which was partially offset by a lower gross
margin from IOT revenues.
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 $15 million, or 67%, from $22.3 million
in 2001 to $7.3 million in 2002. The SG&A expenses decreased by $5.3 million or
46% from $11.5 million in 2001 to $6.2 million in 2002. The decrease is
primarily attributable to T3 Media's cessation of operations ($1.1 million) and
a decrease in the Company's payroll costs ($3.8 million) due to its
restructuring efforts. In addition, the Company wrote off approximately $272,000
of T3 Media's accounts payable from prior years. The provision for doubtful
accounts decreased $918,000 or 97% from $943,000 in 2001 to $25,000 in 2002. The
decrease was largely attributable to improvement in the Company's collections
and daily monitoring of receivables and cash balances. Depreciation and
amortization decreased $284,000 or 28% from $1.2 million in 2001 to $873,000 in
2002. 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
decreased by $8.55 million, or 98%, from $8.7 million in 2001 to $150,000 in
2002. The 2002 charge primarily related to the write-down of the Company's
investment in Methoda Computer Ltd. 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).
11
Taxes. During the first quarter of 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.
Gain from Extinguishment of Debt. During the first quarter of 2002, the
Company recorded income of $49,000 resulting from the extinguishments of debt
associated with the settlement of T3 Media's capital leases at less than their
carrying value.
Net Income (Loss). As a result of the above, the Company had net income
of $204,000 in 2002 compared to a net loss of $13.7 million in 2001.
Liquidity and Capital Resources
The Company has a line of credit of $4.0 million with Keltic Financial
Partners, LP, based on the Company's eligible accounts receivable balances. The
line of credit has certain financial covenants, which the Company must meet on a
quarterly basis. There was no outstanding balance at December 31, 2003 or 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% at December 31, 2003. 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.
In March 2004, the line of credit was amended and restated to include
the following: an extension to June 2007, the removal of the guarantee of the
Chief Executive Officer and less restrictive financial covenants.
One of the Company's subsidiaries, T3 Media, which ceased operations in
2001, had a demand loan with a bank. The T3 Media demand loan, which was
guaranteed by the Company, was paid down and cancelled in January of 2002.
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 December 31, 2003 and 2002. The
Company continues the process of negotiating buy-outs on these leases.
The Company's cash balances were approximately $1.4 million at December
31, 2003 and $1.8 million at December 31, 2002. Net cash used in operating
activities in 2003 was approximately ($88,000) compared to net cash provided by
operating activities of $2.8 million in 2002 and 575,000 in 2001.
The Company's accounts receivable, less allowance for doubtful
accounts, at December 31, 2003 and December 31, 2002 were $3.6 million and $3.1
million, respectively, representing 54 and 49 days of sales outstanding,
respectively. The accounts receivable at December 31, 2003 included $134,000 of
unbilled revenue. The Company has provided an allowance for doubtful accounts at
the end of each of the periods presented. After giving effect to this allowance,
the Company does not anticipate any difficulty in collecting amounts due because
improved collection techniques and daily monitoring of receivables and cash
balances have been implemented. Collection of receivables is one of the
Company's highest priorities and improved collections was one of the primary
reasons for the improvement in cash provided by operations.
For the twelve months ended December 31, 2003, the Company had revenues
from one customer, which represented 28% of revenues. For the year ended
December 31, 2002, the Company had revenues from two customers, which
represented 25% and 24% of revenues, respectively. No other customer represented
greater than 10% of the Company's revenues for such periods.
12
During 2002, the Company continued the restructuring of its operations
and took a charge of $150,000. This charge consisted of $18,000 for the
write-off of the remaining balance of the Company's investment in Always-On
Software, Inc., and $132,000 write-down of the Company's investment in Methoda
Computer Ltd. During 2001, the Company restructured its operations and took a
charge of approximately $8,711,000. This charge consisted of $2,303,000 for the
write-down for substantially all of the Company's investment in Always-On
Software, Inc., $2,000,000 for the write off of all 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. During 2000, the Company wrote-off approximately $3.9 million, which
related to the impairment of goodwill, write-down of fixed assets no longer in
use and other charges. These charges related to the Company's majority-owned
subsidiary, T3 Media, Inc.
Net cash used in investing activities was approximately ($10,000),
($291,000), and ($59,000) for the year ended December 31, 2003, 2002 and 2001,
respectively. In each of the three years, this represented additions to property
and equipment of ($23,000), ($47,000), and ($199,000) respectively.
On July 19, 2002, the Company acquired all of the Common Stock of IOT
for a combination of cash consideration of $650,000 and 317,500 shares of TACT
unregistered Common Stock, which has been retroactively adjusted to reflect the
one-for-four reverse stock split that occurred on January 7, 2004 and is valued
at $635,000.
The schedule of payment of the cash consideration of $650,000 is as
follows: $140,000 on September 2, 2002; $210,000 on April 1, 2003; $100,000 on
April 1, 2004 and $200,000 on January 2, 2005. The excess of the purchase price
over the estimated fair value of the net identifiable assets acquired totaled
$1,494,000 and was allocated as follows; $312,000 to intangible assets which is
being amortized on a straight line basis over thirty six months, and $1,182,000
to goodwill. The three majority shareholders of IOT received employment
agreements for a three-year period at an annual salary of $160,000 per year
each. During the second quarter of 2003, one of the former IOT principals left
the Company, a buyout of his contract was negotiated and a portion of the
intangible asset was written down ($23,000). From the date of acquisition
through the end of year 2002, the Company recorded revenue in the amount of
$1,689,000. In 2003, the Company recorded revenue attributable to IOT in the
amount of $4.1 million.
Net cash used in financing activities was approximately ($267,000) in
2003, and ($1.7 million) in 2002 and ($408,000) in 2001.
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. On November 12,
2002, the Company issued 41,311 shares of Series B Preferred Stock to Mr. Yosi
Vardi in exchange for $27,265.26. 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 and Yosi Vardi. Based upon discussions with and representations made by
the investors, the Company reasonably believed that such investors were
accredited and sophisticated investors. Mr. BenTov and Mr. Vardi had access to
information on the Company necessary to make an informed investment decision.
The shares of Series A and Series B Preferred Stock are convertible into Common
Stock on a 4:1 basis, which reflects the Company's one-for-four reverse stock
split that occurred on January 7, 2004 and are subject to further adjustment for
stock splits, consolidations and stock dividends. In addition, the shares of
Series A and Series B 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 and Mr. Vardi for the shares of Common Stock
issuable upon conversion of the Series A and Series B Preferred Stock. The
Company used the proceeds from the sale of Series A and Series B Preferred Stock
for general working capital purposes.
In the year 2003 and 2002, the Company did not sell any other equity
securities.
In 2003, 11,250 shares of Common Stock, which has been retroactively
adjusted to reflect the one-for-four reverse stock split that occurred on
January 7, 2004, 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 2002
or 2001.
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, 2003, 2002, and 2001, the Company reported a net loss of
$123,305, net income of $203,613, and a net loss of $13,650,685, respectively.
Additionally, the Company has an accumulated deficit of $28,995,106 as of
December 31, 2003. The Company has implemented a plan whereby it is actively
managing its personnel utilization rates and is constantly monitoring project
requirements and timetables.
13
In management's opinion, cash flows from operations and borrowing
capacity combined with cash on hand will provide adequate flexibility for
funding the Company's working capital obligations for the next twelve months.
There may be circumstances that would accelerate its use of liquidity resources,
including but not limited to, its ability to implement a profitable business
model, which may include further restructuring charges. If this occurs, the
Company, may from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to the
Company.
Off-Balance Sheet Arrangements
The Company did not have any "Off Balance Sheet Arrangements" in 2003,
2002 and 2001.
Contractual Obligations
The Company has the following contractual obligations as of December
31, 2003:
- -----------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
----------------------------------------------------------------------------------
Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years
- -----------------------------------------------------------------------------------------------------------------------
Long Term Obligations
Automobile Loan $ 40,441 $ 13,078 $ 27,363 $ - $ -
Shareholder Loan 78,062 57,985 20,077 - -
Acquisition Note 300,000 100,000 200,000 - -
Employment Contracts 771,000 639,000 132,000 - -
- --------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations
Capital Lease - Short Term 290,517 290,517 - - -
- --------------------------------------------------------------------------------------------------------------------
Operating Leases
Rent 1,116,324 307,898 808,426 - -
- --------------------------------------------------------------------------------------------------------------------
Total $2,596,343 $1,408,477 $1,187,866 $ - $ -
- --------------------------------------------------------------------------------------------------------------------
In management's opinion, cash flows from operations and borrowing
capacity combined with cash on hand will provide adequate flexibility for
funding the Company's working capital obligations for the next twelve months.
There may be circumstances that would accelerate its use of liquidity resources,
including, but not limited to, its ability to implement a profitable business
model, which may include further restructuring charges. If this occurs, the
Company may, from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to the
Company.
Recent Accounting Pronouncements
See page F-12 of the consolidated financial statements for a discussion
of the impact of recent accounting standards.
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.
14
Factors that Could Affect Operating Results
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this document
that do not relate to present or historical conditions are "forward-looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934,
as amended. Additional oral or written forward-looking statements may be made by
the Company from time to time, and such statements may be included in documents
that are filed with the SEC. Such forward-looking statements involve risk and
uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
Operating Losses
The Company has incurred operating losses in the last three years. In
the year ended December 31, 2003, the Company had an operating loss of $42,000
and net loss of $123,000. In the year ended December 31, 2002, the Company had
an operating loss of $130,000 and net income of $204,000. In the year ended in
December 31, 2001, the Company had an operating loss of $13.5 million and a net
loss of $13.7 million, 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 was attributable
to the Company and includes certain one-time charges of $7.1 million associated
with the impairment of assets and restructuring charges. There is no guarantee
that the Company can achieve or sustain profitability on a quarterly or annual
basis in the future. If revenues grow slower than anticipated, or if operating
expenses exceed expectations or cannot be adjusted accordingly the Company will
continue to experience losses and the results of operations and financial
condition will be materially and adversely affected.
Capital Requirements
The Company may be unable to meet its future capital requirements. The
Company may require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. The Company may not be able to obtain such financing or obtain it on
acceptable terms. Without additional financing, the Company may be forced to
delay, scale back or eliminate some or all of its product and services
development, marketing and other corporate programs. If the Company is able to
obtain such financing, the terms may contain restrictive covenants that might
negatively affect its shares of Common Stock, such as limitations on payments of
dividends or, in the case of a debt financing, reduced earnings due to interest
expenses. Any further issuance of equity securities would likely have a dilutive
effect on the holders of its shares of Common Stock. Its business, operating
results and financial condition may be materially harmed if revenues do not
develop or grow slower than the Company anticipates, if operating expenses
exceed its expectations or cannot be reduced accordingly, or if the Company
cannot obtain additional financing.
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, 2003. 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, 2003, the Company had one customer which represented 28% of revenues. For
the year ended December 31, 2002, the Company had revenues from two customers
which represented 25% and 24% of revenues, respectively. For the year ended
December 31, 2001, the Company had revenues from three customers which
represented 19%, 19% and 13% 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.
15
Project Risk
The Company's projects entail significant risks. Many of its
engagements involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. The Company's
failure or inability to meet a client's expectations in the performance of the
Company's services could result in a material adverse change to the client's
operations and therefore could give rise to claims against the Company or damage
its reputation, adversely affecting its business, results of operations and
financial condition.
Rapid Technological Change
The Company's business is subject to rapid technological change and is
dependent on new solutions. Its success will depend in part on its ability to
develop information technology solutions to meet client expectations, and offer
software services and solutions that keep pace with continuing changes in
information technology, evolving industry standards, changing client preferences
and a continuing shift to outsourced solutions by clients. The Company cannot
assure you that it will be successful in adequately addressing the outsourcing
market or other information technology developments on a timely basis or that,
if addressed, the Company will be successful in the marketplace. The Company
also cannot assure you that products or technologies developed by others will
not render its services uncompetitive or obsolete. Its failure to address these
developments could have a material adverse effect on its business, results of
operations and financial condition.
e-Business Initiatives
The Company faces difficulties typically encountered by development
stage companies in rapidly evolving markets because of its e-commerce
initiative. The Company provides web enablement services and solutions and other
related e-business services. Revenues from its e-business services constituted
38% of revenues for the year ended December 31, 2003 and 40% of revenues for the
year ended December 31, 2002. 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 gross margin decreased in 2003
due to a lower consultant utilization rate (79% in 2003 compared to 81% in
2002), lower gross margin on IOT revenues and a lower gross margin on a fixed
price contract due to higher front loaded costs (the Company expects that over
the next year this contract will have a normal gross margin). The gross margin
increased in 2002 due principally to a higher consultant utilization rate,
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's cost containment and workforce rationalization effects will continue
to provide positive results. In addition, during the past two years the
Company's clients have been adverse to increases in any costs of the Company's
services.
16
Managing Growth
The Company may have difficulty managing its growth. Its expansion is
dependent upon, among other things,
o its ability to hire and retain consultants as employees or
independent consultants,
o its ability to identify suitable new geographic markets with
sufficient demand for its services, hire and retain skilled
management, marketing, customer service and other personnel,
and successfully manage growth, including monitoring
operations, controlling costs and maintaining effective
quality and service controls, and
o if the Company consummates additional acquisitions, its
ability to successfully and profitably integrate any acquired
businesses into its operations.
If the Company's management is unable to manage growth or new employees
or consultants are unable to achieve anticipated performance levels, its
business, results of operations and financial condition could be materially
adversely affected.
Dependence on Chief Executive Officer
The Company's success is highly dependent upon the efforts and
abilities of Shmuel BenTov, its Chairman, 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, 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.
17
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 as set forth
in Nasdaq Market Place Rule 4450 (a) (5). The Company was granted several
extensions by the Nasdaq Listing Qualification Panel in order to regain
compliance with the minimum bid price requirement to remain listed with the last
extension expiring on January 9, 2004.
On January 7, 2004, the Company effected a one-for-four reverse stock
split in order to regain compliance with the minimum bid price requirement.
On January 23, 2004, the Company was informed by Nasdaq that the
Company evidenced compliance with the minimum bid price requirement.
Accordingly, Nasdaq determined to continue the listing of the Company's
securities on The Nasdaq SmallCap Market.
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 year ended
December 31, 2003, the Company reported a net loss of $123,000. For the year
ended December 31, 2002, the Company reported net income of $204,000. For the
year ended December 31, 2001, the Company reported net losses of $13.7 million.
Additionally, the Company has an accumulated deficit of $29 million at December
31, 2003. The Company believes that its continuing focus on cost reductions,
together with a number of other operational changes, has resulted in an improved
financial condition. There can be no assurance that the Company will become
profitable in future quarters.
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.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements on pages F-1 through F-24 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Ernst & Young LLP was previously the principal accountants for The A
Consulting Team, Inc. The A Consulting Team, Inc. dismissed Ernst & Young LLP on
June 28, 2002.
The decision to dismiss Ernst & Young LLP was approved by the Audit
Committee of the Board of Directors of The A Consulting Team, Inc.
In connection with the audits of the two fiscal years ended December
31, 2001, and the subsequent interim period through June 28, 2002, there were no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement. During the two most recent fiscal years and through June 28, 2002,
there have been no reportable events (as defined in Regulation S-K 304(a)(1).
The audit report of Ernst & Young LLP on the financial statements of
The A Consulting Team, Inc. for the year ended December 31, 2001 did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.
The A Consulting Team, Inc. engaged Grant Thornton LLP as principal
accountants on June 28, 2002. The decision to hire Grant Thornton LLP was
approved by the Audit Committee of the Board of Directors of The A Consulting
Team, Inc.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report, have concluded that our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to us by others within these entities.
Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting that occurred during our
fourth fiscal quarter of 2003 that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
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, 49, 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, 51, 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 Certified Public Accountant 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.
19
Steven S. Mukamal, 64, has been a director of the Company since August
1997. Mr. Mukamal is the Chairman of the Compensation Committee as well as a
member of the Audit Committee and the Nominating Committee. 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, 48, has been a director of the Company since August
1997. Mr. Battat is a member of the Compensation Committee, the Audit Committee
and the Nominating Committee. In 2003, Mr. Battat became the Chief Executive
Officer of Actimize, LTD. Mr. Battat was the President and Chief Executive
Officer of ProcureNet Inc. from 2000 through 2003. 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.
Robert E. Duncan, 56, has been a director of the Company since May
2002. Mr. Duncan is a member of the Compensation Committee and the Nominating
Committee. Mr. Duncan received a BBA in Finance and Accounting from Iona College
in 1970. Since 1991, Mr. Duncan has been the Principal of Duncan Consulting, a
management, consulting firm. Since 1998, he also has been the chairman of two
area groups of The Executive Committee (TEC), an International Organization of
Chief Executive Officers. From 1978 to 1991, Mr. Duncan held various management
positions including President and Chief Operating Officer of General Bearing
Corporation, a manufacturer and distributor of bearings, automotive products and
industrial products.
William Miller, 66, has been a director of the Company since July 2002.
Mr. Miller is the Chairman of the Audit Committee, as well as a member of the
Nominating Committee. Mr. Miller is a private investor. He is a Certified Public
Accountant and an Attorney. He was affiliated for eight years with Cantor
Fitzgerald, an Investment Banking Firm, as Executive Vice President responsible
for corporate finance, real estate, and retail sales. Subsequent to that he was
with Telerate, a computer information services company.
Audit Committee
The Company's Audit Committee is comprised of three independent
directors as follows: Mr. William Miller, Chairman, Mr. Steven S. Mukamal and
Mr. Reuven Battat. Mr. William Miller, Chairman of the Audit Committee is
considered an "audit committee financial expert" as defined in SEC Release Nos.
33-8177 and 33-8177A.
Audit Committee Financial Expert
The Board of Directors has affirmatively determined that the Company
has at least one Audit Committee Financial Expert as defined by Section 407 of
the Sarbanes-Oxley Act of 2002 serving on our audit committee. The directors
have determined that Mr. William Miller is independent, as that term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934 and
has all of the following five attributes due to his experience overseeing and
assessing the performance of companies with respect to the preparation and
evaluation of financial statements:
o An understanding of GAAP and financial statements;
o The ability to assess the general application of such
principles in connection with the accounting for estimates,
accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable
to the breadth and complexity of issues that can reasonably be
expected to be raised by the Company's financial statements,
or experience actively supervising one or more persons engaged
in such activities;
o An understanding of internal controls and procedures for
financial reporting; and
o An understanding of audit committee functions.
Nominating Committee
The Company's Nominating Committee is comprised of four independent
directors as follows: Mr. Reuven Battat, Chairman, Mr. William Miller, Mr.
Steven S. Mukamal and Mr. Robert Duncan.
20
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and certain beneficial owners of the
Company's equity securities (the "Section 16 Reporting Persons") to file reports
of holdings of and transactions in the Company's equity securities with the
Securities and Exchange Commission ("SEC"), and to furnish the Company with all
copies of Section 16(a) forms they file. Based solely on the Company's review of
the copies of such forms that the Company has received, or written
representations from the Section 16 Reporting Persons, to the Company's
knowledge, all transactions in the Company's equity securities by the Company's
Section 16 Reporting Persons during the Company's last fiscal year were reported
on-time, except as follows:
William Miller, a director of the Company, reported a transaction late
on a Form 4 filed on March 5, 2004.
Steven Mukamal, a director of the Company reported a transaction late
on a Form 4 filed on March 5, 2004.
Robert Duncan, a director of the Company reported a transaction late on
a Form 4 filed on March 5, 2004.
Reuven Battat, a director of the Company reported a transaction late on
a Form 4 filed on March 5, 2004.
Code of Ethics
The Board of Directors has adopted a code of ethics designed, in part,
to deter wrongdoing and to promote honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships, full, fair, accurate, timely and understandable
disclosure in reports and documents that the Company files with or submit to the
Securities and Exchange Commission and in the Company's other public
communications, compliance with applicable governmental laws, rules and
regulations, the prompt internal reporting of violations of the code to an
appropriate person or persons, as identified in the code and accountability for
adherence to the code. The code of ethics applies to all directors, executive
officers and employees of the Company. The Company will provide a copy of the
code to any person without charge, upon request to Mr. Richard D. Falcone, Chief
Financial Officer by calling 732-499-8228 or writing to Mr. Falcone's attention
at The A Consulting Team, Inc., 77 Brant Avenue, Suite 320, Clark, NJ, 07066.
The Company intends to disclose any amendments to or waivers of its
code of ethics as it applies to directors or executive officers by filing them
on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2004 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2004.
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 2004 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a line of credit of $4.0 million with Keltic Financial
Partners, LP, based on the Company's eligible accounts receivable balances. The
line of credit has certain financial covenants, which the Company must meet on a
quarterly basis. There was no outstanding balance at December 31, 2003 and 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% at December 31, 2003. 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.
The Company's subsidiary, T3 Media, which ceased operations in 2001,
had a demand loan with a bank. The T3 Media demand loan, which was guaranteed by
the Company, was paid down and cancelled in January of 2002. The amount
outstanding on T3 Media's demand loan at December 31, 2001 was $4,700.
21
The Company presently employs, Victoria Bentov, the sister of the Chief
Executive Officer and President, as a billable consultant. On February 1, 2004
her salary was increased from $80,000 to $88,000 and she was paid a $7,000
bonus.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. During the year ended December 31, 2003, the aggregate fees
paid to Grant Thornton, LLP for the audit of the Company's financial statements
for such year and the review of the Company's interim financial statements for
each quarter of 2003 were $249,472. During the year ended December 31, 2002, the
aggregate fees paid to Grant Thornton LLP for the audit of the Company's
financial statements for such year and for the reviews of the Company's interim
financial statements for the second, third and fourth quarter were $92,409.
During the year ended December 31, 2003, the aggregate fees paid to
Ernst & Young LLP for the work related to the consent to the use of previously
audited financial statements was $3,600. During the year ended December 31,
2002, the aggregate fees paid to Ernst & Young LLP for the audit of the
Company's financial statements were $141,000.
Audit Related Fees. During the year ended December 31, 2003 and 2002,
there were no fees paid to Grant Thornton for audit related fees.
During the year ended December 31, 2003 and 2002, there were no fees
paid to Ernst & Young LLP for audit related fees.
Tax Fees. During the years ended December 31, 2003 and 2002, the
aggregate fees paid to Grant Thornton, LLP for tax compliance, tax advice and
tax planning were $41,020 and $30,000.
During the year ended December 31, 2003, the Company did not pay any
fees to Ernst & Young LLP for tax services. During the year ended December 31,
2002, the aggregate fees paid to Ernst & Young LLP for tax compliance, tax
advice and tax planning were $52,795.
All Other Fees. There were no fees paid to Grant Thornton, LLP for
professional services other than audit and tax for the year ended December 31,
2003. During the year ended December 31, 2002, the aggregate fees paid to Grant
Thornton, LLP for professional services other than audit were related to the
filing of Form 8-K and a special project requested by the Audit Committee, were
$26,200.
During the year ended December 31, 2003 and 2002, there were no fees
paid to Ernst & Young LLP for professional services other than audit.
Audit Committee-Policies & Procedures. The Audit Committee reviews the
independence of the Company's auditors on an annual basis and has determined
that Grant Thornton, LLP is independent. In addition, the Audit Committee
pre-approves all work and fees, which are performed by the Company's independent
auditors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to this portion of Item 15 is submitted as a
separate section of this report at F-1.
(a)(3) Listing of Exhibits
Exhibit
Number Description of 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.
22
3.1 Restated Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 3.1 to the Form 10Q for the period ended June
30, 2001, as previously filed with the SEC on August 10, 2001.
3.2.1 Certificate of Amendment of the Certificate of Incorporation of the
Registrant dated August 8, 2002 incorporated by reference to Exhibit
3.2 to the Form 10-Q for the period ended June 30, 2001, as previously
filed with the SEC on August 14, 2002.
3.2.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant dated November 12, 2002, incorporated by reference to
Exhibit 3.2.2 to the Form 10-Q for the period ended September 30, 2002,
as previously filed with the SEC on November 14, 2002.
3.2.3 Certificate of Amendment of the Certificate of Incorporation of the
Registrant dated January 5, 2004, incorporated by reference to Exhibit
3.2.3 to the Form 8-K dated January 8, 2004, as previously filed with
the SEC on January 8, 2004.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form SB-2 as
previously filed with the SEC on August 6, 1997.
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Registrant
incorporated by reference to Exhibit 3.4 to the Form 10-Q for the
period ended June 30, 2003, as previously filed with the SEC on August
14, 2003.
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit
4 to the Registration Statement on Form SB-2 as previously filed with
the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among the
Registrant and those persons listed on Schedule I attached thereto,
incorporated by reference to Exhibit 4.1 to the Form 8-K dated July 19,
2002, as previously filed by the SEC on July 25, 2002.
10.1.1 Stock Option and Award Plan of the Registrant and Form of Nonqualified
Stock Option Agreement, incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form SB-2 as previously filed with the
SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 as previously filed with the SEC on
June 25, 1998.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Exhibit C to the Registrant's 2001 Proxy
Statement on Schedule 14A, as previously filed with the SEC on April
30, 2001.
10.2 Amended and restated Loan and Security Agreement between the Registrant
and Keltic Financial Partners, LP, dated March 23, 2004.
10.3 Employment Agreement, dated January 1, 2002, between the Registrant and
Shmuel BenTov, incorporated by reference to Exhibit 10.5 to the Form
10-K for the fiscal year ended December 31, 2001, as previously filed
with the SEC on April 1, 2002.
10.4 Employment Agreement, dated September 11, 2001, between the Registrant
and Richard Falcone, incorporated by reference to Exhibit 10.8 to the
Form 10-K/A for the fiscal year ended December 31, 2001, as filed with
the SEC on April 4, 2002.
10.5 Form of S Corporation Termination, Tax Allocation and Indemnification
Agreement, incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form SB-2, as previously filed with the SEC
on August 6, 1997.
10.6 Letter of Undertaking from the Registrant and Shmuel BenTov,
incorporated by reference to Exhibit 10.9 to the Registration Statement
on Form SB-2, as previously filed with the SEC on July 23, 1997.
23
10.7 Shmuel BenTov Letter Commitment, dated March 29, 2001, incorporated by
reference to Exhibit 10.10 to the Form 10-K for the fiscal year ended
December 31, 2000, as previously filed with the SEC on April 2, 2001.
10.8 Employment Agreement dated as of July 19, 2002 between the Registrant
and Dr. Piotr Zielczynski, incorporated by reference to Exhibit 10.1 to
the Form 8-K dated July 19, 2002, as previously filed with the SEC on
July 25, 2002.
10.9 Employment Agreement dated as of July 19, 2002 between the Registrant
and Ilan Nachmany, incorporated by reference to Exhibit 10.2 to the
Form 8-K dated July 19, 2002, as previously filed with the SEC on July
25, 2002.
10.10 Employment Agreement dated as of July 19, 2002 between the Registrant
and Sanjeev Welling, incorporated by reference to Exhibit 10.3 to the
Form 8-K dated July 19, 2002, as previously filed with the SEC on July
25, 2002.
10.11 Form of Indemnification Agreement between the Registrant and each of
its Directors and its Chief Executive Officer, incorporated by
reference to Exhibit 10.12 to the Form 10-Q for the period ended
September 30, 2003 as filed with the SEC on November 11, 2003.
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Grant Thornton, LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed in the fourth quarter of 2003:
The Company filed the following Current Reports on Form 8-K during the
quarter ended December 31, 2003.
(i) The Registrant filed a Form 8-K with the SEC dated November 6,
2003 on November 6, 2003 regarding the third quarter of 2003
financial results.
(c) Exhibits - The response to this portion of Item 16 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 16 is
submitted as a separate section of this report at S-1.
24
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: March 26, 2004
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 March 26, 2004
- --------------------------------- (Principal Executive Officer)
Shmuel BenTov
/s/ Richard D. Falcone Chief Financial Officer March 26, 2004
- --------------------------------- (Principal Financial and Accounting Officer)
Richard D. Falcone
/s/ Reuven Battat Director March 26, 2004
- ---------------------------------
Reuven Battat
/s/ Robert Duncan Director March 26, 2004
- ---------------------------------
Robert Duncan
/s/ Steven Mukamal Director March 26, 2004
- ---------------------------------
Steven Mukamal
/s/ William Miller Director March 26, 2004
- ---------------------------------
William Miller
25
ITEM 15 (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-4
Consolidated Statements of Operations.....................................................................F-5
Consolidated Statements of Shareholders' Equity...........................................................F-6
Consolidated Statements of Cash Flows.....................................................................F-7
Notes to Consolidated Financial Statements................................................................F-8
The following consolidated financial statement schedule of The A Consulting Team, Inc. is included
in Item 15(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 CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The A Consulting Team, Inc.
We have audited the accompanying consolidated balance sheets of The A Consulting
Team, Inc. and subsidiaries, (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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. as of December 31, 2003 and 2002, and the consolidated results of
their operations, stockholders equity and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited Schedule II as of December 31, 2003 and 2002 and for the
years then ended. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
GRANT THORNTON LLP
New York, New York
February 20, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The A Consulting Team, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of The A Consulting Team, Inc. (the
"Company") for the year ended December 31, 2001. Our audit also included the
financial statement schedule listed in the Index at Item 15(d) for the year
ended December 31, 2001. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
The A Consulting Team, Inc. for the 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 for the year ended December
31, 2001.
ERNST & YOUNG LLP
New York, New York
February 15, 2002
F-3
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
--------------------- ---------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,409,623 $ 1,774,828
Accounts receivable, less allowance for doubtful accounts
of $305,290 at December 31, 2003 and $380,471 at December 31, 2002 3,423,271 3,076,888
Unbilled receivables 133,605 -
Prepaid expenses and other current assets 56,004 89,672
--------------------- ---------------------
Total current assets 5,022,503 4,941,388
Investments, net 368,059 368,059
Property and equipment, net 680,295 1,223,417
Goodwill 1,140,964 1,181,520
Intangibles, net 104,000 260,000
Deposits 57,874 71,133
--------------------- ---------------------
Total assets $ 7,373,694 $ 8,045,517
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,442,730 1,698,556
Capital lease obligation 290,517 290,517
Deferred income taxes 45,000 67,500
Current portion of long-term debt 171,063 278,089
--------------------- ---------------------
Total current liabilities 1,949,309 2,334,662
Other long-term liabilities 231,067 385,756
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
571,615 shares issued and outstanding as of December 31, 2003,
and December 31, 2002. 5,716 5,716
Common stock, $.01 par value; 30,000,000 shares authorized;
2,107,967 issued and outstanding as of December 31, 2003, and
2,096,717 issued and outstanding as of December 31, 2002. 21,080 20,967
Paid-in capital 34,161,628 34,143,440
Accumulated deficit (28,995,106) (28,845,025)
--------------------- ---------------------
Total shareholders' equity 5,193,318 5,325,099
--------------------- ---------------------
Total liabilities and shareholders' equity $ 7,373,694 $ 8,045,517
===================== =====================
See accompanying notes to consolidated financial statements.
F-4
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Revenues $ 21,645,763 $ 24,008,964 $ 36,226,716
Cost of revenues 15,829,442 16,860,418 27,357,278
--------------------- --------------------- ---------------------
Gross profit 5,816,321 7,148,546 8,869,438
Operating expenses:
Selling, general and administrative 5,065,462 6,230,757 11,531,291
Provision for doubtful accounts 40,000 25,000 942,507
Depreciation and amortization 752,609 873,149 1,157,219
Impairment of assets and
restructuring charges - 150,000 8,710,690
--------------------- --------------------- ---------------------
5,858,071 7,278,906 22,341,707
--------------------- --------------------- ---------------------
Loss from operations (41,750) (130,361) (13,472,269)
Gain from extinguishment of debt - 48,715 249,230
Interest income 8,379 9,056 16,077
Interest expense (66,433) (154,962) (415,095)
--------------------- --------------------- ---------------------
Interest (expense), net (58,055) (145,906) (399,018)
--------------------- --------------------- ---------------------
Loss before income taxes (99,805) (276,267) (13,871,287)
Provision (benefit) for income taxes 23,500 (431,165) 28,628
--------------------- --------------------- ---------------------
Net income (loss) $ (123,305) $ 203,613 $ (13,650,685)
===================== ===================== =====================
Net income(loss) per share
Basic and Diluted $ (0.07) $ 0.10 $ (7.67)
===================== ===================== =====================
See accompanying notes to consolidated financial statements.
F-5
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Preferred Stock Common Stock (*) Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- $ -- 1,779,217 $ 17,792 $ 33,140,066 $(15,388,091) $ 17,769,767
Net loss -- -- -- -- -- $(13,650,685) $(13,650,685)
--------- --------- --------- --------- ------------ ------------ ------------
Balance, December 31, 2001 -- $ -- 1,779,217 $ 17,792 $ 33,140,066 $(29,038,776) $ 4,119,082
Net income -- -- -- -- -- 203,613 203,613
Preferred dividend -- -- -- -- -- (9,862) (9,862)
Acquisition of IOT-shares issued -- -- 317,500 3,175 631,825 -- 635,000
Investment by new shareholders' 571,615 5,716 -- -- 371,549 -- 377,265
--------- --------- --------- --------- ------------ ------------ ------------
Balance, December 31, 2002 571,615 $ 5,716 2,096,717 $ 20,967 $ 34,143,440 $(28,845,025) $ 5,325,098
Net loss -- -- -- -- -- $ (123,305) (123,305)
Preferred dividend -- -- -- -- -- (26,776) (26,776)
Exercise of employee stock options -- -- 11,250 113 18,188 -- 18,301
--------- --------- --------- --------- ------------ ------------ ------------
Balance, December 31, 2003 571,615 $ 5,716 2,107,967 $ 21,080 $ 34,161,628 $(28,995,106) $ 5,193,318
========= ========= ========= ========= ============ ============ ============
* Adjusted for the January 7, 2004 reverse stock split (See Note 1)
See accompanying notes to condensed consolidated financial statements.
F-6
THE A CONSULTING TEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
----------- ---------- -------------
Cash flows from operating activities:
Net income(loss) $ (123,305) $ 203,613 $ (13,650,685)
Adjustments to reconcile net income(loss) to net cash provided by
(used in) operating activities, net of acquired assets:
Depreciation and amortization 752,609 873,149 1,157,219
Gain from extinguishment of debt - (48,715) (249,230)
Deferred income taxes (22,500) (22,500) -
Impairment of assets and restructuring charges - 150,000 8,710,690
Provision for doubtful accounts 40,000 25,000 942,507
Changes in operating assets and liabilities:
Accounts receivable (386,383) 2,828,145 7,360,978
Unbilled receivables (133,605) - -
Prepaid or refundable income taxes - - 1,575,510
Prepaid expenses and other current assets 3,668 63,145 17,605
Accounts payable and accrued expenses (218,907) (1,274,410) (5,060,966)
Deferred revenue - - (166,015)
Other long-term liabilities - - (62,139)
----------- ---------- -------------
Net cash provided by (used in) operating activities (88,422) 2,797,427 575,474
Cash flows from investing activities:
Purchase of property and equipment (23,487) (47,322) (199,337)
Acquisition of IOT assets, net of cash received - (259,382) -
Deposits 13,259 15,366 140,557
----------- ---------- -------------
Net cash (used in) investing activities (10,228) (291,338) (58,780)
Cash flows from financing activities:
Proceeds from sale of preferred stock - 377,265 -
Proceeds from conversion of stock options 18,300 - -
Proceeds from long-term debt - - 65,298
Loan payable - bank - (1,873,293) (296,707)
Dividend paid to Preferred Shareholders (23,140) - -
Repayment of long-term debt (261,715) (26,019) (937)
Repayment on note issued for assets acquired - (140,000) -
Repayment of capital lease obligation - (15,800) (175,708)
----------- ---------- -------------
Net cash (used in) financing activities (266,554) (1,677,847) (408,054)
----------- ---------- -------------
Net increase (decrease) in cash and cash equivalents (365,205) 828,242 108,640
Cash and cash equivalents at beginning of period 1,774,828 946,586 837,946
----------- ---------- -------------
Cash and cash equivalents at end of period $1,409,623 $1,774,828 $ 946,586
=========== ========== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 66,433 $ 154,962 $ 328,094
=========== ========== =============
Supplemental disclosure of non-cash investing
and financing activity:
Acquisition of International Object Technology, Inc. ("IOT")
Tangible assets acquired (including cash of $10,618) $ 729,731
Liabilities assumed (709,186)
Goodwill 1,181,520
Employee Agreements 312,000
Equity Issued (635,000)
Notes issued, net discount of $40,935 (609,065)
----------
Cash paid $ 270,000
less: Cash received in acquisition (10,618)
----------
Net Cash Paid $ 259,382
==========
See accompanying notes to consolidated financial statements.
F-7
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 2003, 2002, and 2001, the Company reported a net loss of
$123,305, net income of $203,613, and a net loss of $13,650,685, respectively.
Additionally, the Company has an accumulated deficit of $28,995,106 as of
December 31, 2003. The Company has implemented a plan whereby it is actively
managing its personnel utilization rates and 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.
There may be circumstances that would accelerate its use of liquidity resources,
including but not limited to, its ability to implement a profitable business
model, which may include further restructuring charges. If this occurs, the
Company, may from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. However, there can be
no assurance that suitable debt or equity financing will be available to the
Company. (See Note 17)
Reverse Stock Split
On January 7, 2004, the Company effected a one-for-four reverse stock
split of its common stock in order to regain compliance with Nasdaq's minimum
bid price requirement to remain listed on the Nasdaq SmallCap Market. All share
and per share amounts used in the Company's financial statements and notes
thereto have been retroactively restated to reflect the one-for-four reverse
stock split. (See Note 17)
Principles of Consolidation
The consolidated financial statements include the accounts of The A
Consulting Team, Inc., its 100% owned subsidiary International Object
Technology, Inc. (IOT) from its date of acquisition on July 19, 2002 and its 51%
owned subsidiary, T3 Media, Inc., which ceased operations in 2001, from its date
of acquisition in 1999. All material inter-company 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 of America 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
The Company calculates earnings per share in accordance with Financial
Accounting Standards Board (FASB) Statement No. 128, Earnings Per Share. Basic
earnings per share is calculated by dividing net earnings available to common
shares by average common shares outstanding. Diluted earnings per share is
calculated similarly, except that it includes the dilutive effect of the assumed
exercise of securities except when it is anti-dilutive, including the effect of
shares issuable under the Company's incentive plans. All share and per share
amounts used in the Company's financial statements and notes thereto have been
retroactively restated to reflect the one-for-four reverse stock split, which
occurred on January 7, 2004.
Cash Equivalents
The Company considers all highly liquid financial instruments with
original maturity of three months or less when purchased to be cash equivalents.
F-8
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying value of financial instruments (principally consisting of
cash, cash equivalents, accounts receivable, long term debt and capital leases)
approximates fair value because of their short maturities.
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.
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 analyses of future undiscounted cash flows 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.
During 2002 and 2001, the Company recorded restructuring charges of
approximately $150,000 and $8,711,000 (see Note 14).
In the third quarter of 2002, after extensive review of changing market
conditions, the Company wrote-off $150,000, which related to the permanent
impairment of the investments. These charges relate to the Company's investments
in Methoda Computer, Ltd ($132,000) and Always-On Software, Inc. ($18,000).
Goodwill and Intangible Assets
The Company adopted the provisions of FASB issued Statement No. 142,
"Goodwill and Other Intangible Assets," (SFAS No. 142) effective January 1,
2002. SFAS No. 142 required that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment using the
guidance for measuring impairment set forth in this statement. As prescribed
under SFAS 142, the Company had an evaluation done of its goodwill and
intangible assets, which was performed by an independent third party. The
Company tested for impairment using the guidance for measuring impairment set
forth in SFAS No. 142 and it was determined that there was no impairment at
December 31, 2003 and 2002.
In accordance with SFAS No. 142, the following are changes in the
carrying amount of goodwill for the year ended December 31, 2003:
2003 2002
------------ -----------
Balance as of January 1, $1,181,520 $ -
Goodwill acquired during the year - 1,181,520
Reclass of reduction in reserve for acquisition costs (40,556) -
------------ -----------
Balance as of December 31, $1,140,964 $1,181,520
=========== ===========
F-9
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the carrying amounts of acquired intangible
assets and related amortization:
Year ended December 31
------------------------
2003 2002
---------- ----------
Amortized intangible assets
Employee Contracts- gross carrying amount $ 312,000 $ 312,000
Less accumulated amortization (208,000) (52,000)
---------- ----------
Unamortized intangible assets $ 104,000 $ 260,000
========== ==========
Amortization expense
For the year ended 12/31/03 $ 156,000 $ 52,000
Estimated amortization expense:
For the year ended 12/31/04 $ 69,333 $ -
For the year ended 12/31/05 $ 34,667 $ -
During the year, the Company recorded amortization of intangible assets
of ($156,000) as part of the purchase price of IOT (See Note 2). The intangible
amount pertains to certain employment agreements. The Company is amortizing the
cost of these employee contracts over a three-year period of the asset's
estimated useful life.
Revenue Recognition
Consulting revenues are recognized as services are provided. The
Company primarily provides consulting services under time and material
contracts, whereby revenue is recognized as hours and costs are incurred.
Customers for consulting revenues are billed on a weekly, semi-monthly and
monthly basis. Revenues from fixed fee contracts are recorded when work is
performed on the basis of the proportionate performance method, which is based
on costs incurred to date relative to total estimated costs. Any anticipated
contract losses are estimated and accrued at the time they become known and
estimable. Unbilled accounts receivables represent amounts recognized as revenue
based on services performed in advance of customer billings. Revenue from sales
of software licenses is recognized upon delivery of the software to a customer
because future obligations associated with such revenue are insignificant.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at amounts due from customers, net of an
allowance for doubtful accounts. The Company monitors its accounts receivable
balances on a monthly basis to ensure that they are collectible. On a quarterly
basis, the Company uses its historical experience to accurately determine its
accounts receivable reserve. The Company's allowance for doubtful accounts is an
estimate based on specifically identified accounts as well as general reserves.
The Company evaluates specific accounts where it has information that the
customer may have an inability to meet its financial obligations. In these
cases, management uses its judgment, based on the best available facts and
circumstances, and records a specific reserve for that customer against amounts
due to reduce the receivable to the amount that is expected to be collected.
These specific reserves are reevaluated and adjusted as additional information
is received that impacts the amount reserved. The Company also establishes a
general reserve for all customers based on a range of percentages applied to
aging categories. These percentages are based on historical collection and
write-off experience. If circumstances change, the Company's estimate of the
recoverability of amounts due the company could be reduced or increased by a
material amount. Such a change in estimated recoverability would be accounted
for in the period in which the facts that give rise to the change become known.
F-10
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
At December 31, 2003, the Company has stock based compensation plans,
which are described more fully in Note 12. As permitted by SFAS No. 123,
"Accounting for Stock Based Compensation", the Company accounts for stock-based
compensation arrangements with employees in accordance with provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Compensation expense for stock options issued to employees is
based on the difference on the date of grant, between the fair value of the
Company's stock and the exercise price of the option. No stock based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock at the date of grant. The Company accounts for equity instruments issued
to non-employees in accordance with the provisions of SFAS 123. The Company
expects to continue applying provision of APB 25 for equity issuances to
employees.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock based compensation:
Year ended December 31,
----------------------------------------
2003 2002 2001
----------- ----------- --------------
Net income (loss), as reported $ (123,000) $(204,0000) $ (13,651,000)
Deduct:
Total stock based compensation
expense determined under fair
value based method for all awards (85,000) (117,000) (146,000)
----------- ----------- --------------
Pro forma net inome (loss) $ (208,000) $ 87,0000) $ (13,797,000)
=========== =========== ==============
Earnings per share:
Basic - as reported $ (0.07) $ 0.10 $ (7.67)
=========== =========== ==============
Basic - pro forma $ (0.06) $ 0.02 $ (7.72)
=========== =========== ===============
Diluted - as reported $ (0.07) $ (0.10) $ (7.67)
=========== =========== ==============
Diluted - pro forma $ (0.06) $ 0.02 $ (7.72)
=========== =========== ==============
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions:
2003 2002 2001
------ ------ ------
Expected life (years) 4.00 4.00 4.00
Risk free interest rate 3.00 % 3.00 % 4.37 %
Expected volatility 0.83 0.83 1.25
Expected dividend yield 0.00 0.00 0.00
Weighted average fair value per option $0.80 $0.80 $1.04
The weighted average fair value of options granted by the Company was
$.80 in 2003, $0.80 in 2002 and $1.04 in 2001.
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-11
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No 4, 44, and 64, Amendment of FASB 13, and Technical Corrections"
(SFAS 145). Among other provisions, SFAS 145 rescinds FASB Statement 4,
Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or
losses from extinguishments of debt should not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
criteria of Accounting Principles Board Opinion 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 (APB
30). Gains and losses from extinguishments of debt, which do not meet the
criteria of APB 30, should be reclassified to income from continuing operations
in all prior periods presented. The provisions of SFAS 145 were effective for
fiscal years beginning after May 15, 2002. Upon adoption, in the first quarter
of 2003, the Company reclassified gains on early extinguishment of debt
previously recorded as extraordinary items to other income.
In June 2002, the FASB issued Statement 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires entities to
recognize costs associated with exit or disposal activities when liabilities are
incurred rather than when the entity commits to an exit or disposal plan, as
currently required. Examples of costs covered by this guidance include one-time
employee termination benefits, costs to terminate contracts other than capital
leases, costs to consolidate facilities or relocate employees, and certain other
exit or disposal activities. This statement is effective for fiscal years
beginning after December 31, 2002, and impacts any exit or disposal activities
the Company initiates after that date. The Company has adopted FASB 146 in the
first quarter of 2003. Adoption of FASB 146 did not have an effect on the
accompanying financial statements.
Effective May 31, 2003, Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity was issued. This Statement establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This standard will be effective (a) for financial
instruments entered or modified after May 31, 2003, and (b) for financial
instruments issued on or before May 31, 2003 at the beginning of the first
interim period beginning after June 15, 2003. Adoption of FASB 150 did not have
an effect on the accompanying financial statements.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) was issued. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company has historically issued guarantees
only on a limited basis. Adoption of FIN 45 did not have a material effect on
the Company's financial statements. Disclosures required by FIN 45 are included
in the accompanying financial statements.
In January 2003, the FASB issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), which addresses
consolidation by business enterprises of variable interest entities ("VIEs").
The accounting provisions and disclosure requirements of FIN 46 are effective
immediately for VIEs created after January 31, 2003, and are effective for
reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, FASB published a revision to FIN 46 ("FIN
46R") to clarify some of the provisions of the interpretation and to defer the
effective date of implementation for certain entities. Under the guidance of FIN
46R, public companies that have interests in VIE's that are commonly referred to
as special purpose entities are required to apply the provisions of FIN 46R for
periods ending after December 15, 2003. A public company that does not have any
interests in special purpose entities but does have a variable interest in a VIE
created before February 1, 2003, must apply the provisions of FIN 46R by the end
of the first interim or annual reporting period after March 14, 2004. Although
the Company is still evaluating the impact of FIN 46R, it is not expected to
have a material effect on the Company's financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This Issue
provides guidance on when and how to separate elements of an arrangement that
may involve the delivery or performance of multiple products, services and
rights to use assets into separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into fiscal periods
beginning after June 15, 2003. The transition provision allows either
prospective application or a cumulative effect adjustment upon adoption. The
effect of the adoption of this statement is immaterial to the Company.
F-12
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS
On July 19, 2002, the Company consummated the acquisition of all of the
issued and outstanding capital stock of IOT, a New Jersey corporation, pursuant
to a Stock Purchase Agreement dated as of June 28, 2002 among TACT, IOT and the
holders of all of the issued and outstanding capital stock of IOT (the "IOT
Stockholders"). TACT acquired all of the issued and outstanding capital stock of
IOT from the IOT Stockholders in exchange for an aggregate of three hundred
seventeen thousand five hundred (317,500) shares of unregistered TACT Common
Stock, which has been retroactively adjusted to reflect the one-for-four reverse
stock split that occurred on January 7, 2004, and is valued at $635,000 (the
"Acquisition Shares") and the obligation to make certain deferred cash payments
of six hundred fifty thousand ($650,000) in the aggregate (the "Deferred
Payments"). The Acquisition Shares were issued by TACT to the IOT Stockholders
at the closing of the acquisition. Subject to the terms and conditions of the
Stock Purchase Agreement, the Deferred Payments are payable as follows: (i) an
aggregate of $140,000 on or before September 2, 2002, (ii) an aggregate of
$210,000 on or before April 1, 2003, (iii) an aggregate of $100,000 on or before
April 1, 2004, and (iv) an aggregate of $200,000 on or before January 2, 2005.
The consideration paid by TACT for the acquisition of IOT was determined through
arms-length negotiation by the management of TACT and a majority of the IOT
Stockholders. The acquisition was accounted for under the purchase method of
accounting for business combinations and operations of IOT has been included
from the date of acquisition. The purchase price of the acquisition exceeded the
fair market value of the net assets acquired, resulting in the recording of
goodwill of $1,181,520 and other intangibles of $312,000. The three majority
shareholders of IOT received employment agreements for a three-year period at an
annual salary of $160,000 per year each. For the year ended December 31, 2003,
the amortization expense for the intangible asset was ($156,000).
IOT was a privately owned, professional services firm that provides
data management and business intelligence solutions, technology consulting and
project management services. IOT will operate as a wholly owned subsidiary of
TACT. The acquisition is expected to increase the depth of the Company's
services and solutions offerings and provide the Company with significant
cross-selling opportunities.
The Company's net income for the year ended December 31, 2002, includes
the results of IOT from July 19, 2002, the date of 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. T3 Media
ceased operations in the second quarter of 2001. During 2003 and 2002, the
Company reversed approximately $113,000 and $272,000, respectively, in accounts
payable relating to T-3 Media, resulting in a reduction in SG&A expenses.
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 software application services ("ASP") market and deteriorating
cash reserves, Always-On Software, Inc. ceased operations in July 2001. As a
result, the Company wrote-down virtually all of its investment 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. In the
third quarter of 2002, the Company wrote off the remainder of its investment in
Always-On Software, Inc. in the amount of $18,000. The Company also wrote down
its investment in Methoda Computer Ltd. in that same period in the amount of
$132,000.
F-13
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January of 2004, the Company sold approximately 75 percent of its
investment in Methoda for $200,000 in cash and $81,000 payable over the next
twenty months. The remaining investment has a carrying value of $87,000.
4. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share for the years ended December 31, 2003, 2002 and 2001.
Year Ended December 31,
---------------------------------------
2003 2002 2001
----------- ---------- --------------
Numerator for basic net income(loss) per share
Net income (loss) (123,305) 203,613 (13,650,685)
Preferred Dividend 26,776 9,861 -
----------- ---------- --------------
Net income (loss) available to
common stockholders $ (150,081) $ 193,752 $ (13,650,685)
=========== ========== ==============
Numerator for diluted net income(loss) per share
Net income (loss) available to common
stockholders & assumed conversion $ (150,081) $ 203,613 $ (13,650,685)
=========== ========== ==============
Denominator:
Denominator for basic income (loss) before
extraordinary item and net loss per share
- weighted-average shares 2,098,810 1,923,615 1,779,218
Effect of dilutive securities:
Preferred shares - 52,588 -
Employee stock options - 20,469 -
----------- ---------- --------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares 2,098,810 1,996,672 1,779,218
=========== ========== ==============
Basic and Diluted earnings income (loss) per share:
Net income (loss) $ (0.07) $ 0.10 $ (7.67)
=========== ========== ==============
All options and warrants outstanding during 2003 and 2001 (see Notes 12
and 13) were not included in the computation of net loss per share because the
effect would be antidilutive. During the year ended December 31, 2002, there
were 157,494 options that were excluded from the computation of diluted earnings
per share.
F-14
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
---------------------------
2003 2002
------------ ------------
Equipment and leaseholds $ 5,378,358 $ 3,536,728
Software $ 943,379 $ 703,775
Furniture and fixtures $ 1,107,272 $ 904,177
Automobiles $ 158,769 $ 158,769
------------ ------------
$ 7,587,778 $ 5,303,448
Less accumulated depreciation and amortization $ 6,907,483 $ 4,080,031
------------ ------------
$ 680,295 $ 1,223,417
============ ============
6. CREDIT ARRANGEMENT
The Company has a line of credit of $4.0 million with Keltic Financial
Partners, LP, based on the Company's eligible accounts receivable balances. The
line of credit has certain financial covenants, which the Company must meet on a
quarterly basis. There was no outstanding balance at December 31, 2003 and 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 6.25% at December 31, 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 IOT. ( See Note
18)
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, amended by the July
2002 Modification Agreement. Keltic has consented to the payment of dividends on
the Series A and Series B Preferred Stock, provided an event of default does not
exist.
The Company's subsidiary, T3 Media, which ceased operations in 2001,
had a demand loan with a bank. The T3 Media demand loan, which was guaranteed by
the Company, was paid down and cancelled in January of 2002. The amount
outstanding on T3 Media's demand loan at December 31, 2001 was $4,700.
7. CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has the following commitments as of December 31, 2003, and
is comprised of long term obligations of an automobile loan, shareholder loan,
note payable for acquisition and employment contracts. In addition, there is a
capital lease obligation and operating lease obligation as well. The automobile
loan is payable in monthly installments of $1,262 including interest at 6%. As
of December 31, 2003, the loan matures as follows: 2004 - $13,078, 2005 -
$13,885 and 2006 - $13,478. The shareholder loan is payable in monthly
installments of $5,000 including interest at 3.9%. As of December 31, 2003, the
loan matures as follows: 2004 - $57,985; and 2005 - $20,077. The note payable
for acquisition is payable as follows: 2004 - $100,000 and 2005 - $200,000. The
employment contracts are payable as follows: 2004 - $639,000 and 2005 -
$132,000. One of the Company's subsidiaries, T3 Media, which ceased operations
in 2001, had entered into a series of capital lease obligations, which the
Company had guaranteed. The Company continues the process of negotiating
buy-outs on these leases. The Company has two operating leases for its corporate
headquarters located in NY and its branch office in NJ. The annual amounts due
for both locations are as follows: 2004 - $307,898, 2005 - $308,663, 2006 -
$308,663 and 2007 - $191,100.
As of December 31, 2003, the Company does not have any "Off Balance
Sheet Arrangements".
F-15
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's commitments at December 31, 2003, are comprised of the
following:
- ------------------------------------------------------------------------------------------------------------
Payments Due by Period
-----------------------------------------------------------------------
Contractual Obligations Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
- ------------------------------------------------------------------------------------------------------------
Long Term Obligations
Automobile Loan $ 40,441 $ 13,078 $ 27,363 $ - $ -
Shareholder Loan 78,062 57,985 20,077 - -
Acquisition Note 300,000 100,000 200,000 - -
Employment Contracts 771,000 639,000 132,000 - -
- ------------------------------------------------------------------------------------------------------------
Capital Lease Obligations
Capital Lease - Short Term 290,517 290,517 - - -
- ------------------------------------------------------------------------------------------------------------
Operating Leases
Rent 1,116,324 307,898 808,426 - -
- ------------------------------------------------------------------------------------------------------------
Total $2,596,343 $1,408,477 $1,187,866 $ - $ -
- ------------------------------------------------------------------------------------------------------------
The Company presently employs, Victoria Bentov, the sister of the Chief
Executive Officer and President, as a billable consultant. On February 1, 2004
her salary was increased from $80,000 to $88,000 and she was paid a $7,000
bonus.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
-------------------------
2003 2002
----------- -----------
Accounts payable $ 218,297 $ 393,724
Payroll 552,488 600,850
Bonuses 99,956 108,932
Restructuring - 10,662
Other accrued expenses 571,989 584,388
----------- -----------
$1,442,730 $1,698,556
=========== ===========
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.
F-16
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and (liabilities) consist of the following:
December 31,
--------------------------
2003 2002
----------- -----------
Licensing revenues $ (67,000) $ 299,000
Accounts receivable reserve 157,000 257,000
Depreciation and amortization 243,000 80,000
Investments 981,000 756,000
Other 21,000 18,000
Accounting method change (45,000) (67,500)
Net operating losses 5,920,000 5,914,000
----------- -----------
7,210,000 7,256,500
Valuation allowance (7,255,000) (7,324,000)
----------- -----------
$ (45,000) $ (67,500)
=========== ===========
The deferred tax liability at December 31, 2003 and 2002 relates to the
change in accounting methods for tax purposes arising from the IOT acquisition.
Internal Revenue Code Section 382 places a limitation on the
utilization of Federal net operating loss and other credit carry-forwards when
an ownership change, as defined by the tax law, occurs. Generally, this occurs
when a greater than 50 percentage point change in ownership occurs. Accordingly,
the actual utilization of the net operating loss carry-forwards and other
deferred tax assets for tax purposes may be limited annually under Code Section
382 to a percentage (currently about four and a half percent) of the fair market
value of the Company at the time of any such ownership change.
At December 31, 2003, the Company has net operating loss carry-forwards
of approximately $18.6 million for state and local tax purposes and $11.3
million for Federal tax purposes, expiring in 2020 through 2023. The full
utilization of the deferred tax assets 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,
2003, 2002, and 2001, the valuation allowance decreased by $69,000 decreased by
$5,805,000 and increased by $6,509,000.
In March 2002, new legislation was enacted that allowed for losses
incurred in 2001 to be carried back five years. The tax effect relating to this
legislation, amounting to $438,665 was 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,
2003 2002 2001
-------- ---------- --------
Current:
Federal $ 0 ($438,665) $ -
State and local 46,000 30,000 29,000
-------- ---------- --------
Total Current $46,000 ($408,665) 29,000
-------- ---------- --------
Deferred:
Federal (19,125) (5,063) -
State and local (3,375) (17,437) -
-------- ---------- --------
Total Deferred (22,500) (22,500) -
-------- ---------- --------
Total $23,500 ($431,165) $29,000
======== ========== ========
F-17
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the federal statutory rate and the effective
income tax rate for the years ended December 31, 2003, 2002 and 2001.
2003 2002 2001
------ -------- ------
Federal statutory rate (34.0)% (34.0)% (34.0)%
State and local taxes net of federal tax benefit 45.6 7.0 0.1
Non-deductible expenses 4.8 2.2 0.5
Carryback of losses for which no benefit was
previously recorded - (158.78) -
Losses for which no benefit was received
(including T3 Media) 7.15 27.51 33.6
------ -------- ------
Total 23.55 % (156.07)% 0.2 %
====== ======== ======
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. There were no such
contributions made by the Company in 2003, 2002 and 2001.
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 2003, the Company's largest customer
represented 28% of revenues, in 2002, the two largest customers represented 25%
and 24% of revenues, respectively and in 2001, the three largest customers
represented 19%, 19% and 13% of revenues, respectively. Besides these customers,
no other customer represented greater than 10% of the Company's revenues. Three
customers represented approximately 10%, 13% and 15% of accounts receivable as
of December 31, 2003, and two customers represented approximately 17% and 15%,
of accounts receivable as of December 31, 2002.
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, 2003 are as follows:
2004 $ 307,898
2005 308,663
2006 308,663
2007 191,100
----------
Total minimum future lease payments $1,116,324
==========
Office leases are subject to escalations based on increases in real
estate taxes and operating expenses. Rent expense for the years ended December
31, 2003, 2002 and 2001 was approximately $340,000, $307,000 and $710,000,
respectively.
In 2001, T3 Media stopped paying its capital lease obligations. The
Company was a guarantor of the majority of these obligations and is continuing
the process of negotiating buy-outs of the remaining leases. For the year ended
December 31, 2003, $291,000 of T3 Media's capital lease obligations remained
outstanding.
F-18
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 150,000 shares of common stock. On May 27, 1998, the shareholders
approved and ratified an increase to the Plan from 150,000 to 225,000 shares of
common stock and on May 24, 2001, the shareholders approved and ratified an
increase to the Plan from 225,000 to 300,000 shares of common stock (subject to
adjustment pursuant to customary anti-dilution provisions).
The exercise price per share of a stock option is established by the
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 ten years from the date of
grant and terminate upon the date of termination of employment. Such period is
to be established by the Company in its discretion on the date of grant.
Information with respect to options under the Company's Plan (adjusted for
reverse stock split that occurred on January 7, 2004) is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Balance - January 1, 2001 174,078 $24.93
Granted during 2001 185,750 1.45
Forfeitures during 2001 (103,149) 24.92
----------
Balance - December 31, 2001 256,679 7.94
Granted during 2002 99,500 1.57
Forfeitures during 2002 (107,025) 5.17
----------
Balance - December 31, 2002 249,154 6.58
Granted during 2003 1,000 1.81
Exercised during 2003 (11,250) 1.63
Forfeitures during 2003 (80,383) 13.75
----------
Balance - December 31, 2003 158,521 $3.27
==========
At December 31, 2003, 2002 and 2001, 83,959, 119,154, and 97,100
options, respectively, were exercisable with weighted average exercise prices of
$4.78, $11.48 and $15.83, respectively.
F-19
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of the stock options
outstanding and exercisable at December 31, 2003:
Stock Options Outstanding
- -----------------------------------------------------------------------------
Number of
Weighted Weighted- Stock
Exercise Price Average Number of Remaining Options
Range Exercise Price Options Contractual Life Exercisable
- ----------------- -------------- --------- ----------------- ------------
$0.00 - $4.80 $1.425 140,000 8.2 years 65,658
$14.40 - $19.20 $15.504 15,750 3.5 years 15,750
$19.20 - $24.00 $23.165 865 1.9 years 653
$24.00 - $28.80 $27.000 1,000 3.2 years 1,000
$28.80 - $33.60 $30.857 875 4.3 years 875
$33.60 - $38.40 $34.256 31 6.3 years 23
--------- ------------
158,521 83,959
========= ============
At December 31, 2003, the Company had 300,000 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.
Information with respect to options under T3 Media's 1997 Plan is as
follows:
Weighted
Number of Average
Shares Exercise Price
------------- -----------------
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, 2001 - -
=============
There are no T3 Media stock options outstanding and exercisable at
December 31, 2003, 2002, 2001. At December 31, 2000, 133,500 options were
exercisable with a weighted average exercise price of $1.67.
13. SALES OF UNREGISTERED SECURITES
On August 12, 2002, the Company issued 530,304 shares of Series A
Preferred Stock to Shmuel BenTov in exchange for $350,000.64. On November 12,
2002, the Company issued 41,311 shares of Series B Preferred Stock to Mr. Yosi
Vardi in exchange for $27,265.26. 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 and Yosi Vardi. Based upon discussions with and representations made by
the investors, the Company reasonably believed that such investors were
accredited and sophisticated investors. Mr. BenTov and Mr. Vardi had access to
information on the Company necessary to make an informed investment decision.
The shares of Series A and Series B Preferred Stock are convertible into Common
Stock on a 4:1 basis, which reflects the company's one-for-four reverse stock
split that occurred on January 7, 2004 and are subject to further adjustment for
stock splits, consolidations and stock dividends. In addition, the shares of
Series A and Series B 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 and Mr. Vardi for the shares of Common Stock
issuable upon conversion of the Series A and Series B Preferred Stock. The
Series A and Series B Preferred stock carries a liquidation preference in that
the Series A and Series B shareholders are paid before any other class of stock.
F-20
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to a Stock Purchase Agreement dated as of June 28, 2002 among
the Company, IOT and the holders of all the issued and outstanding capital stock
of IOT (the "IOT Stockholders"), the Company sold an aggregate of 317,500 shares
of unregistered common stock, which has been retroactively adjusted to reflect
the one-for-four reverse stock split that occurred on January 7, 2004, 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.
In 2003, the Company issued an aggregate of 1,000 stock options to
non-employee members of its Board of Directors, which has been retroactively
adjusted to reflect the one-for-four reverse stock split that occurred on
January 7, 2004, each with a term of 5 years from the date of grant, pursuant to
its Stock Option and Award Plan. The options have an initial exercise price of
$1.80 per share, which has been retroactively adjusted to reflect the
one-for-four reverse stock split that occurred on January 7, 2004. The options
become fully vested and exercisable one year after the grant date. The Company
did not issue any other options for the year ended December 31, 2003.
In 2002, the Company issued an aggregate of 99,500 stock options, which
has been retroactively adjusted to reflect the one-for-four reverse stock split
that occurred on January 7, 2004, with terms ranging between 5 to 10 years from
the date of grant, pursuant to its Stock Option and Award Plan. The options have
initial exercise prices that range from $1.24 to $1.72 per share, which has been
retroactively adjusted to reflect the one-for-four reverse stock split that
occurred on January 7, 2004 and they have vesting periods that range from
immediately vesting to vesting over 4 years. In addition, 1,250 of the options
issued were to non-employee members of its Board of Directors, each with a term
of 5 years from the date of grant, pursuant to its Stock Option and Award Plan.
The options have an initial exercise price of $1.32 to $1.64 per share. The
options become fully vested and exercisable one year after the grant date.
In 2001, the Company issued an aggregate of 185,750 stock options,
which has been retroactively adjusted to reflect the one-for-four reverse stock
split that occurred on January 7, 2004, with terms ranging between 5 to 10 years
from the date of grant, pursuant to its Stock Option and Award Plan. The options
have initial exercise prices that range from $1.20 to $1.80 per share, which has
been retroactively adjusted to reflect the one-for-four reverse stock split that
occurred on January 7, 2004 and they have vesting periods that range from
immediately vesting to vesting over 4 years. In addition, 750 of the options
issued were to non-employee members of its Board of Directors, each with a term
of 5 years from the date of grant, pursuant to its Stock Option and Award Plan.
The options have an initial exercise price of $1.32. The options become fully
vested and exercisable one year after the grant date.
14. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
The Company began to restructure its operations in 2000 and has
continued to restructure its operations through 2002. The restructuring was
completed in the first quarter of 2003.
F-21
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The restructuring charges for the year ended December 31, 2002 and 2001
was approximately $150,000 and $8,711,000, respectively, consisting of
following:
2002 2001
-------------- ---------------
Write-off of the investment in Always-On Software, Inc. $ 18,000 $ 2,303,000
Write-down of the investment in Methoda Computers Ltd. 132,000 -
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
-------------- ---------------
$ 150,000 $ 8,711,000
============== ===============
At December 31, 2003, the Company had no restructuring charge
liability. The Company had restructuring charge liabilities of approximately
$11,000 and $161,000 at December 31, 2002 and December 31, 2001. During the year
ended December 31, 2002, the Company recorded additions to its restructuring
liability of $125,000 related to the acquisition of IOT and recorded payments of
approximately $275,000 consisting of $141,000 related to the reduction of the
leased space, which IOT formerly occupied, and $134,000 in severance costs.
During the year ended December 31, 2001, the Company recorded additions to the
restructuring liability of $1.1 million, 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 $1.2 million during 2001,
consisting of $616,000 for space no longer utilized, and $616,000 for
termination costs.
15. GAIN FROM EXTINGUISHMENT OF DEBT
The 2002 and 2001 gain from extinguishment of debt of T3 Media's
capital lease obligations. The Company was a guarantor of the majority of these
obligations and was able to settle $65,000 of the leases for $16,000 resulting
in the gain from extinguishment of debt of $49,000 in 2002 and $425,000 of the
leases for $176,000, resulting in an extraordinary item of $249,000 in 2001.
16. EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
The Company has entered into an employment agreement with Shmuel
BenTov, its Chairman, Chief Executive Officer and President, which terminates on
December 31, 2004. The contract calls for a salary of $300,000 per year, which
was subsequently reduced to $240,000 in May 2002. His employment agreement
contains non-competition, non-disclosure and non-solicitation covenants. It also
contains a Board of Director's approved annual bonus that is not to exceed one
percent of the Company's total revenues for the year. In the event that he is
terminated by the Company, he is to receive severance pay that is two times his
then annual salary and is payable within 30 days of the termination.
17. 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 as set forth
in Nasdaq Market Place Rule 4450 (a) (5). The Company was granted several
extensions by the Nasdaq Listing Qualification Panel in order to regain
compliance with the minimum bid price requirement to remain listed with the last
extension expiring on January 9, 2004.
F-22
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 7, 2004, the Company effected a one-for-four reverse stock
split in order to regain compliance with the minimum bid price requirement.
On January 23, 2004, the Company was informed by Nasdaq that the
Company evidenced compliance with the minimum bid price requirement.
Accordingly, Nasdaq determined to continue the listing of the Company's
securities on The Nasdaq SmallCap Market.
18. SUBSEQUENT EVENT (UNAUDITED)
In March 2004, the Company entered into an amended and restated
agreement to include the following: an extension to June 2007, the removal of
the guarantee of the Chief Executive Officer and less restrictive financial
covenants with Keltic Financial Partners, LP.
F-23
THE A CONSULTING TEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY RESULTS (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2003 and 2002.
Quarter Ended
-----------------------------------------------------------------------------------
(in thousands, except per share amounts) March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-----------------------------------------------------------------------------------
Revenues $ 5,110 $ 5,278 $ 5,554 $ 5,704
Gross profit 1,337 1,326 1,561 1,592
Income (loss) from operations (120) (211) 182 106
Other income(expense): - - - -
Gain from extinguishment of debt - - - -
Net income (loss) (144) (221) 168 73
Net income (loss) per share-basic
and dilutive $ (0.07)(2) $ (0.11)(2) $ 0.08 (2) $ 0.03 (2)
Quarter Ended
-----------------------------------------------------------------------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-----------------------------------------------------------------------------------
Revenues $ 6,461 $ 5,643 $ 5,830 $ 6,075
Gross profit 1,827 1,736 1,697 1,888
Income (loss) from operations 69 94 (467) (1) 173
Other income(expense):
Gain from extinguishment of debt 49 - - -
Net income (loss) 499 39 (498) 164
Net income (loss) per share-basic
and dilutive $ 0.28 (2) $ 0.02 (2) $ (0.24)(2) $ 0.08 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) During the third quarter of 2002, the Company wrote-off $150,000 consisting
of $18,000 write-off of its investment in Always-On Software, Inc., and
$132,000 write-down of its investment in Methoda Computers, Ltd.
(2) All share and per share amounts have been retroactively restated to reflect
the one-for-four reverse stock split, which occurred on January 7, 2004.
F-24
THE A CONSULTING TEAM, INC.
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 - Balances at
Description Period Expenses Describe Describe End of Period
- ------------------------------------------- --------------- -------------- ------------------ --------------- ----------------
Reserves and allowances deducted from
asset accounts:
For the year ended December 31, 2003
Allowance for doubtful accounts $ 380,472 $ 40,000 $ - $ (115,182)(a) $ 305,290
For the year ended December 31, 2002
Allowance for doubtful accounts $ 652,048 $ 25,000 $ - $ (296,576)(b) $ 380,472
For the year ended December 31, 2001
Allowance for doubtful accounts $ 948,397 $ 942,507 $ - $(1,238,856)(c) $ 652,048
(a) Uncollectible accounts written off during 2003.
(b) Uncollectible accounts written off during 2002.
(c) Uncollectible accounts written off during 2001.
S-1