-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FtGHK/E801ZZuuaswH7qdleKgpSUirNXYnf1tAoXb0vmYuVfHW1RAqemwOH0sfH7 YqkyRpXFWXpkXwhFaVQnAw== 0001125282-04-005677.txt : 20041112 0001125282-04-005677.hdr.sgml : 20041111 20041112140814 ACCESSION NUMBER: 0001125282-04-005677 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041112 DATE AS OF CHANGE: 20041112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A CONSULTING TEAM INC CENTRAL INDEX KEY: 0001040792 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 133169913 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22945 FILM NUMBER: 041138116 BUSINESS ADDRESS: STREET 1: 200 PARK AVE S STREET 2: SUITE 901 CITY: NEW YORK STATE: NY ZIP: 10003 BUSINESS PHONE: 2129798228 MAIL ADDRESS: STREET 1: 200 PARK AVENUE SOUTH STREET 2: SUITE 901 CITY: NEW YORK STATE: NY ZIP: 10003 10-Q 1 b402245_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the nine-month period ended: September 30, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-22945 THE A CONSULTING TEAM, INC. --------------------------- (Exact name of Registrant as specified in its charter) NEW YORK 13-3169913 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 200 PARK AVENUE SOUTH NEW YORK, NEW YORK 10003 ------------------------ (Address of principal executive offices) (212) 979-8228 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act) Yes No X --- --- As of November 11, 2004, there were 2,109,530 shares of Common Stock, with $.01 par value per share, outstanding. THE A CONSULTING TEAM, INC. INDEX PART I. FINANCIAL INFORMATION.............................................................................................3 ITEM 1. FINANCIAL STATEMENTS...........................................................................................3 Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003................................................................................................3 Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2004 and 2003................................................................................4 Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003 ...............................................................................5 Notes to Condensed Consolidated Financial Statements.............................................................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................20 ITEM 4. CONTROLS AND PROCEDURES......................................................................................20 PART II. OTHER INFORMATION...............................................................................................20 ITEM 1. LEGAL PROCEEDINGS............................................................................................20 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................................20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................................................21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................21 ITEM 5. OTHER INFORMATION............................................................................................21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................................21 SIGNATURES...............................................................................................................24
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE A CONSULTING TEAM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------ ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 884,402 $ 1,409,623 Accounts receivable- less allowance for doubtful accounts of $314,425 at September 30, 2004, and $305,290 at December 31, 2003 5,017,121 3,423,271 Unbilled receivables 301,111 133,605 Prepaid expenses and other current assets 223,143 56,004 ------------ ------------ Total current assets 6,425,776 5,022,503 Investments, net 87,059 368,059 Property and equipment, net 553,224 680,295 Goodwill 1,140,964 1,140,964 Intangibles, net 52,000 104,000 Deposits and Other 129,363 57,874 ------------ ------------ Total assets $ 8,388,385 $ 7,373,694 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,745,637 $ 1,442,730 Capital lease obligation 290,517 290,517 Deferred income taxes 28,125 45,000 Current portion of long-term debt 244,371 171,063 ------------ ------------ Total current liabilities 2,308,650 1,949,309 Other long-term liabilities 17,028 231,067 SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value; 2,000,000 shares authorized; 571,615 shares issued and outstanding as of September 30, 2004, and December 31, 2003 5,716 5,716 Common stock, $.01 par value; 30,000,000 shares authorized; 2,109,530 issued and outstanding as of September 30, 2004,and 2,107,967 issued and outstanding as of December 31, 2003 21,096 21,080 Paid-in capital 34,163,487 34,161,627 Accumulated deficit (28,127,592) (28,995,106) ------------ ------------ Total shareholders' equity 6,062,707 5,193,318 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,388,385 $ 7,373,694 ============ ============
See accompanying notes to condensed consolidated financial statements 3 THE A CONSULTING TEAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) REVENUES $ 18,733,064 $ 15,941,442 $ 6,584,780 $ 5,554,093 Cost of revenues 13,045,840 11,716,945 4,486,486 3,992,729 ------------ ------------ ------------ ------------ Gross profit 5,687,224 4,224,496 2,098,295 1,561,364 OPERATING EXPENSES: Selling, general & administrative 4,385,462 3,786,877 1,634,133 1,212,986 Depreciation & amortization 292,660 585,533 66,130 166,060 ------------ ------------ ------------ ------------ 4,678,122 4,372,410 1,700,262 1,379,046 ------------ ------------ ------------ ------------ Income (loss) from operations 1,009,103 (147,913) 398,032 182,318 OTHER INCOME(EXPENSE): Interest (expense) net (22,501) (38,387) (8,989) (15,599) ------------ ------------ ------------ ------------ (22,501) (38,387) (8,989) (15,599) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 986,602 (186,300) 389,044 166,719 Provision (benefit) for income taxes 98,988 10,457 18,945 (1,000) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 887,614 $ (196,757) $ 370,099 $ 167,719 ============ ============ ============ ============ Net earnings per share of common stock: Basic $ 0.41 $ (0.10) $ 0.17 $ 0.08 ============ ============ ============ ============ Diluted $ 0.38 $ (0.10) $ 0.16 $ 0.08 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 4 THE A CONSULTING TEAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30 2004 2003 ------------ ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ 887,614 $ (196,757) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities, Depreciation and amortization 292,660 585,533 Deferred income taxes (16,875) - Provision for doubtful accounts 145,000 40,000 Amortization of deferred financing cost 7,000 - Changes in operating assets and liabilities: Accounts receivable (1,738,850) (1,148,089) Unbilled receivables (167,506) - Prepaid or refundable income taxes (18,760) - Prepaid expenses and other current assets (93,829) (51,185) Accounts payable and accrued expenses 302,908 (137,401) ------------ ------------ Net cash provided by (used in) operating activities (400,638) (907,899) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (113,589) (9,996) Proceeds from Sale of Investment 226,450 - Deposits (38,489) 14,734 ------------ ------------ Net cash provided by (used in) investing activities 74,372 4,738 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 1,876 - Payment of deferred financing cost (40,000) - Dividend paid to Preferred Shareholders (20,101) (23,140) Repayment of long-term debt (140,731) (248,512) ------------ ------------ Net cash (used in) provided by financing activities (198,956) (271,652) ------------ ------------ Net increase (decrease) in cash and cash equivalents (525,222) (1,174,813) Cash and cash equivalents at beginning of period 1,409,623 1,774,828 ------------ ------------ Cash and cash equivalents at end of period $ 884,402 $ 600,014 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 28,477 $ 26,775 ============ ============ Cash paid during the period for income tax $ 125,041 $ 17,966 ============ ============
See accompanying notes to condensed consolidated financial statements 5 THE A CONSULTING TEAM, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1) GENERAL: These financial statements should be read in conjunction with The A Consulting Team, Inc. (the "Company") Form 10-K for the year ended December 31, 2003 filed with the SEC, and the accompanying financial statements and related notes thereto. The accounting policies used in preparing these financial statements are the same as those described in the Company's Form 10-K for the year ended December 31, 2003. 2) INTERIM FINANCIAL STATEMENTS: In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated financial position as of September 30, 2004 and the consolidated results of operations for the three and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America, for complete financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Form 10-K filed by the Company for the year ended December 31, 2003. The consolidated results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for any other interim period or for the full year. 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. In management's opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months. There may be circumstances that would accelerate its use of liquidity resources, including but not limited to, its ability to implement a profitable business model, which may include further restructuring charges. If this occurs, the Company, may from time to time, incur additional indebtedness or issue, in public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will be available to the Company. 3) STOCK BASED COMPENSATION: At September 30, 2004, the Company has a stock based compensation plan, which is described as follows: The Company adopted a Stock Option Plan (the "Plan") that provides for the grant of stock options that are either "incentive" or "non-qualified" for federal income tax purposes. The Plan provided for the issuance of up to a maximum of 150,000 shares of common stock. On May 27, 1998, the shareholders approved and ratified an increase to the Plan from 150,000 to 225,000 shares of common stock 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 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. 6 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. 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:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 2004 2003 2004 2003 -------------------------------- -------------------------------- Net income (loss) $ 887,614 $ (196,757) $ 370,099 $ 167,719 Preferred dividend 20,101 20,027 6,749 6,749 ------------ ------------ ------------ ------------ Net income (loss) available to common stockholders 867,514 (216,784) 363,350 160,970 Deduct: Total stock based compensation expense determined under fair value based method for all awards (19,000) (69,000) (4,000) (21,000) ------------ ------------ ------------ ------------ Pro forma net income (loss) $ 848,514 $ (285,784) $ 359,350 $ 139,970 ============ ============ ============ ============ Earnings per share: Basic - as reported $ 0.41 $ (0.10) $ 0.17 $ 0.08 ============ ============ ============ ============ Diluted - as reported $ 0.38 $ (0.10) $ 0.16 $ 0.08 ============ ============ ============ ============ Basic - as pro forma $ 0.40 $ (0.14) $ 0.17 $ 0.07 ============ ============ ============ ============ Diluted - as pro forma $ 0.38 $ (0.14) $ 0.16 $ 0.07 ============ ============ ============ ============
7 4) NET INCOME (LOSS) PER SHARE: The following table set forth the computation of basic and diluted net income (loss) per share for the nine and three months ended September 30, 2004 and 2003.
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------------- -------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Numerator for basic net income(loss) per share Net income (loss) $ 887,614 $ (196,757) $ 370,099 $ 167,719 Preferred dividend 20,101 20,027 6,749 6,749 ------------ ------------ ------------ ------------ Net income (loss) available to common stockholders $ 867,513 $ (216,784) $ 363,350 $ 160,970 ============ ============ ============ ============ NUMERATOR FOR DILUTED NET INCOME(LOSS) PER SHARE Net income (loss) available to common stockholders & assumed conversion $ 887,614 $ (216,784) $ 370,099 $ 167,719 ============ ============ ============ ============ DENOMINATOR: Denominator for basic income (loss) per share - weighted-average shares 2,108,732 2,096,717 2,109,530 2,096,717 ============ ============ ============ ============ Effect of dilutive securities: Preferred Shares 142,903 - 142,903 142,903 Employee stock options 56,972 - 66,522 58,714 ------------ ------------ ------------ ------------ Denominator for diluted earnings (loss) per share - adjusted weighted-average shares 2,308,607 2,096,717 2,318,955 2,298,334 ============ ============ ============ ============ BASIC EARNINGS INCOME (LOSS) PER SHARE: ------------ ------------ ------------ ------------ Net income (loss) $ 0.41 $ (0.10) $ 0.17 $ 0.08 ============ ============ ============ ============ DILUTED EARNINGS INCOME (LOSS) PER SHARE: ------------ ------------ ------------ ------------ Net income (loss) $ 0.38 $ (0.10) $ 0.16 $ 0.08 ============ ============ ============ ============
During the nine months and the three months ended September 30, 2004, there were 136,985, and 127,435 options that were excluded from the computation of diluted earnings per share. During the nine months ended September 30, 2003, all preferred shares, options and warrants outstanding were not included in the computation of net loss per share because the effect would be antidilutive. During the three months ended September 30, 2003 there were 176,350 options that were excluded from the computation of diluted earnings per share. 5) ACCOUNTING PRONOUNCEMENTS: 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. The impact of FIN 46R, did not have a material effect on the Company's financial statements. 8 6) CONCENTRATION OF CREDIT RISK: The revenues of three customers represented approximately 20%, 17%, and 10% of the revenues for the nine months ended September 30, 2004. The revenues of one customer represented 27% of revenues for the same period in 2003. 7) INVESTMENTS: In January of 2004, the Company sold approximately 75 percent of its investment in Methoda Computer Ltd. Through September 30, 2004 the Company received $226,000 on this sale. The remaining investment has a carrying value of $55,000. 8) IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES: The Company began to restructure its operations in 2000 and completed the restructuring of its operations in 2003. During the nine months ended September 30, 2003, the Company recorded no additions to its restructuring liability and recorded payments of approximately $11,000 consisting of $9,000 related to the reduction of leased office space and $2,000 in leased equipment. The Company has no restructuring charge liability as of September 30, 2004 and 2003. 9) CREDIT FACILITY: The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, ("Keltic") based on the Company's eligible accounts receivable balances. The line of credit has certain financial covenants, which the Company must meet on a quarterly basis. On March 23, 2004, the agreement was restated and amended and extended to June 27, 2007. Included in the restated and amended agreement is the removal of the guaranty of the Company's Chairman, Chief Executive Officer and President and less restrictive financial covenants. There were no outstanding balances at September 30, 2004 and December 31, 2003. The line of credit bears interest at a variable rate based on prime plus 2% and the rate was 6.75% at September 30, 2004. The Company is prohibited from paying dividends on its common stock due to restrictions under the restated and amended Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated March 23, 2004. Dividends on the Series A and Series B Preferred Stock are permitted, provided an event of default does not exist. 10) CONTRACTUAL OBLIGATIONS AND COMMITMENTS The Company has the following commitments as of September 30, 2004, which are comprised of long term obligations of an automobile loan, shareholder loan, short term note payable for acquisition and employment contracts. In addition, there is a capital lease obligation and operating lease obligations as well. The automobile loan is payable in monthly installments of $1,262 including interest at 6%. As of September 30, 2004, the loan matures as follows: 2004 - $3,319; 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 September 30, 2004, the loan matures as follows: 2004 - $14,708 and 2005 - $20,077. The note payable for acquisition is payable as follows: 2005 - $200,000. The employment contracts are payable as follows: 2004 - $126,000 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 - $76,975, 2005 - $308,663, 2006 - $308,663 and 2007 - $191,100. The Company's commitments at September 30, 2004, are comprised of the following: 9
- ------------------------------------------------------------------------------------------------------------------------------------ CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD -------------------------------------------------------------------------------------------------- Less Than 1 - 3 3 - 5 More Than Total 1 Year Years Years 5 Years - ------------------------------------------------------------------------------------------------------------------------------------ Long Term Obligations Automobile Loan 30,707 $ 3,319 $ 27,388 $ - $ - Shareholder Loan 34,785 34,785 - - - Employment Contracts 258,000 258,000 - - - - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM OBLIGATIONS Acquisition Note 200,000 200,000 - - - CAPITAL LEASE OBLIGATIONS Capital Lease - Short Term 290,517 290,517 - - - - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING LEASES Rent 885,401 76,975 808,426 - - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 1,699,410 $863,596 $835,814 $ - $ - - ------------------------------------------------------------------------------------------------------------------------------------
As of September 30, 2004, the Company does not have any "Off Balance Sheet Arrangements". 11) QUOTATION OF COMMON STOCK ON NASDAQ 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of significant factors affecting the Company's operating results, liquidity and capital resources should be read in conjunction with the accompanying financial statements and related notes. OVERVIEW Since 1983, TACT has provided 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. 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 was a slowdown in IT spending coincident with the general economic slowdown. This resulted in revenue decreases at many IT service companies, however, revenues begin to increase during the first nine months of 2004 and industry analysts believe that IT spending will continue to increase during the remainder of 2004 and beyond. Accordingly, the company is expanding its sales and recruiting function in our effort to further increase its revenues, in both the short-term and long-term. 10 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 60% 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 increase, however, will be less than 40% of revenues. 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, 2003 and 2004 to date, clients have been adverse to accepting cost increases. TACT also actively manages its personnel utilization rates by constantly monitoring project requirements and timetables. Through the Company's cost containment and work force rationalization efforts TACT's utilization rates began to improve in the second half of 2001, continued in 2002 and remained stable in 2003 and 2004 to date and this trend is expected to continue throughout the remainder of 2004. 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. 11 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 revenue from the sale of software is ancillary to the Company's total revenues. 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. 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 provides consulting services under time and material and fixed price contracts. Revenue under time and material contracts is recognized as hours and costs are incurred and customers 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. 12 RESULTS OF OPERATIONS The following table sets forth the percentage of revenues of certain items included in the Company's Statements of Operations: THE A CONSULTING TEAM, INC. STATEMENT OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ REVENUES 100.0% 100.0% 100.0% 100.0% COST OF REVENUES 69.6% 73.5% 68.1% 71.9% ------------ ------------ ------------ ------------ GROSS PROFIT 30.4% 26.5% 31.9% 28.1% OPERATING EXPENSES 24.9% 27.4% 25.7% 24.8% ------------ ------------ ------------ ------------ INCOME/LOSS FROM OPERATIONS 5.4% (.9)% 6.2% 3.3% ------------ ------------ ------------ ------------ NET GAIN(LOSS) 4.7% (1.2)% 5.6% 3.0% ============ ============ ============ ============
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 REVENUES. Revenues of the Company increased by 1.0 million, or 18.6%, from $5.6 million for the three months ended September 30, 2003 to $6.6 million for the three months ended September 30, 2004. The increase was primarily attributable to increased IT spending in the market place. Software licensing revenues decreased by $99,000, or 25.2%, from $393,000 in the third quarter of 2003 to $294,000 in the third quarter of 2004. Software sales are ancillary to the Company's total revenues and are expected to remain so in future periods. GROSS PROFIT. The gross profit for the three months ended September 30, 2004 increased by $537,000, or 34.4%, from $1.6 million in the third quarter of 2003 to $2.1 million in the third quarter of 2004. As a percentage of total revenues, gross margin for the quarter increased from 28.1% in 2003 to 31.9% in 2004. The increase in gross profit margin percentage was primarily attributable to increased revenue, improved utilization rate, a heavier emphasis on fixed price contracts, and efficient use of outsourcing. OPERATING EXPENSES. Operating expenses are comprised of Selling, General and Administrative ("SG&A") expenses, depreciation and amortization and impairment of assets and restructuring charges. Operating expenses increased by $321,000, or 23.2%, from $1.4 million in the third quarter of 2003 to $1.7 million in the third quarter of 2004. The increase was attributable to increases in salaries and related costs, as a result of expanding the sales and recruiting staffs, increases in professional fees, attributable to the Company's acquisition activities and an increase in bad debt expense, which was partially offset by a decrease in depreciation and amortization expenses. The decrease in depreciation and amortization expenses was primarily due to assets being fully depreciated. 13 TAXES. Taxes increased by $20,000 from a benefit of ($1,000) in the third quarter in 2003 to $19,000 in the third quarter of 2004. The increase is primarily in state and local taxes and reflects the fact that the Company's profit increased by over 100% in the third quarter of 2004 compared to the third quarter of 2003. NET INCOME (LOSS). As a result of the above, the Company had a net income of $370,000 or $.17 per basic share and $.16 per diluted share in the third quarter of 2004 compared to a net income of $168,000 or $0.08 adjusted per basic and diluted share in the third quarter of 2003. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 REVENUES. Revenues of the Company increased by $2.8 million or 17.5%, from $15.9 million for the nine months ended September 30, 2003 to $18.7 million for the nine months ended September 30,2004. The increase was primarily attributable to increased IT spending in the market place. Software licensing revenues decreased by $311,000, or 24%, from $1,296,000 for the nine months ended September 30, 2003 to $985,000 for the nine months ended September 30, 2004. Software sales are ancillary to the Company's total revenues and are expected to remain so in future periods. GROSS PROFIT. Gross profit increased by $1.5 million or 34.6%, from $4.2 million for the nine months ended September 30, 2003 to $5.7 million for the nine months ended September 30, 2004. As a percentage of total revenues, gross margin increased from 26.5% in 2003 to 30.4% in 2004. The increase in gross profit margin percentage was primarily attributable to increased revenue, improved utilization rate, a heavier emphasis on fixed price contracts, and efficient use of outsourcing. OPERATING EXPENSES. Operating expenses are comprised of SG&A expenses, depreciation and amortization and impairment of assets and restructuring charges. Operating expenses increased by $306,000 or 7.0% from $4.4 million for the nine months ended September 30, 2003 compared to $4.7 million for the nine months ended September 30, 2004. The increase was attributable to increases in salaries and related costs, as a result of expanding the sales and recruiting staffs, increases in professional fees, attributable to the Company's acquisition activities and an increase in bad debt expense, which was partially offset by a decrease in depreciation and amortization expenses. The decrease in depreciation and amortization expenses was primarily due to assets being fully depreciated. TAXES. Taxes increased by $89,000 from $10,000 in the nine months ended September 30, 2003 to $99,000 in the nine months ended September 30, 2004. The increase is primarily in state and local taxes and reflects the fact that the Company was profitable for the nine months ended September 30, 2004 compared to a net loss in the same period of 2003. NET INCOME (LOSS). As a result of the above, the Company had net income of $888,000 or $.41 per basic and $.38 per diluted share for the nine months ended September 30, 2004 compared to a net loss of ($197,000) or ($.10) per basic and diluted share for the nine months ended September 30 2003. LIQUIDITY AND CAPITAL RESOURCES The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, ("Keltic") based on the Company's eligible accounts receivable balances. The line of credit has certain financial covenants, which the Company must meet on a quarterly basis. On March 23, 2004, the agreement was restated and amended and extended to June 27, 2007. Included in the restated and amended agreement is the removal of the guaranty of the Company's Chairman, Chief Executive Officer and President and less restrictive financial covenants. There were no outstanding balances at September 30, 2004 and December 31, 2003. The line of credit bears interest at a variable rate based on prime plus 2% and the rate was 6.75 % at September 30, 2004. 14 The Company is prohibited from paying dividends on its common stock due to restrictions under the restated and amended Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated March 23, 2004. Dividends on the Series A and Series B Preferred Stock are permitted, provided an event of default does not exist. 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 September 30, 2004. The Company continues the process of negotiating buy-outs on these leases. The Company's cash balances were approximately $900,000 million at September 30, 2004 and $1.4 million at December 31, 2003. Net cash used in operating activities for the nine months ended September 30, 2004 was approximately ($401,000) compared to ($908,000) for the nine months ended September 30, 2003. The Company's accounts receivable, less allowance for doubtful accounts, at September 30, 2004 and December 31, 2003 were $5.0 million and $3.4 million, respectively, representing 67 and 54 days of sales outstanding, respectively. The Company has provided an allowance for doubtful accounts at the end of each of the periods presented. After giving effect to this allowance, the Company does not anticipate any difficulty in collecting amounts due 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 were one of the primary reasons for the company's improve financial condition. The revenues of three customers represented approximately 20%, 17%, and 10% of the revenues for the nine months ended September 30, 2004. The revenues of one customer represented 27% of revenues for the same period in 2003. The Company has no restructuring charge liability as of September 30, 2004 and December 31, 2003. Net cash provided by investing activities was approximately $74,000 and $4,700 for the nine months ended September 30, 2004 and 2003. In each of these periods additions to property and equipment was ($114,000), and ($10,000). Net cash used in by financing activities was approximately ($199,000) and ($272,000) at September 30, 2004 and 2003. In management's opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months. There may be circumstances that would accelerate its use of liquidity sources, including, but not limited to, its ability to implement a profitable business model, which may include further restructuring charges. If this occurs, the Company may, from time to time, incur additional indebtedness or issue, in public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will be available to the Company. ACCOUNTING PRONOUNCEMENTS: 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. The impact of FIN 46R, did not have a material effect on the Company's financial statements. OFF BALANCE SHEET ARRANGEMENTS As of September 30, 2004, the Company does not have any "Off Balance Sheet Arrangements". 15 CONTRACTUAL OBLIGATIONS AND COMMITMENTS During the nine months ended September 30, 2004, there were no material changes outside the ordinary course of the Company's business to the Company's contractual obligations and commitments, which were discussed in the table appearing in the Liquidity and Capital Resources section, under the Contractual Obligations header in Item 7 of the Company's Form 10-K for the year ended December 31, 2003. INFLATION The Company has not suffered material adverse affects from inflation in the past. However, a substantial increase in the inflation rate in the future may adversely affect customers' purchasing decisions, may increase the costs of borrowing, or may have an adverse impact on the Company's margins and overall cost structure. FACTORS THAT COULD AFFECT OPERATING RESULTS Statements included in this Management's Discussion and Analysis 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 did not incur an operating loss in the nine months ended September 30, 2004, however, the Company did incur operating losses for the last two years. In the nine months ended September 30, 2004, the Company had operating income of $1.0 million and a net income of $888,000. In the year ended December 31, 2003, the Company had an operating loss of $42,000 and a net loss of $123,000. There is no guarantee that the Company can achieve profitability on a quarterly or annual basis in the future. If revenues grow slower than anticipated, or if operating expenses exceed expectations or cannot be adjusted accordingly the Company will continue to experience losses and the results of operations and financial condition will be materially and adversely affected. 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. 16 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 the nine months ended September 30, 2004 as well as for each of the two years ended December 31, 2003 and 2002. In each of these periods, the Company had at least one customer with revenues exceeding 10% of the Company's revenues. For the nine months ended September 30, 2004, the Company had revenues from three customers, which represented 20%, 17%, and 10% of revenues. For the year ended December 31, 2003, the Company had revenues from one customer, which represented 28% of revenues. Besides these customers, no other customer represented greater than 10% of the Company's revenues. In any given year, its ten most significant customers may vary based upon specific projects for those clients during that year. There can be no assurance that its significant clients will continue to engage it for additional projects or do so at the same revenue levels. Clients engage the Company on an assignment-by-assignment basis, and a client can generally terminate an assignment at any time without penalties. The loss of any significant customer could have a material adverse effect on its business, results of operations and financial condition. A failure of the Company to develop relationships with new customers could have a material adverse effect on its business, results of operations and financial condition. PROJECT RISK The Company's projects entail significant risks. Many of its engagements involve projects that are critical to the operations of its clients' businesses and provide benefits that may be difficult to quantify. The Company's failure or inability to meet a client's expectations in the performance of the Company's services could result in a material adverse change to the client's operations and therefore could give rise to claims against the Company or damage its reputation, adversely affecting its business, results of operations and financial condition. RAPID TECHNOLOGICAL CHANGE The Company's business is subject to rapid technological change and is dependent on new solutions. Its success will depend in part on its ability to develop information technology solutions to meet client expectations, 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 51% of revenues for the nine months ended September 30, 2004. Revenues from its e-business services constituted 38% of revenues for the year ended December 31, 2003. 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; 17 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. In the first nine months of 2004, the Company's gross margin increased due to higher utilization rates, improved margins on fixed fee contracts and efficient use of outsourcing. 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. 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. Negotiations are currently underway for a contract extension for Mr. Bentov. 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. 18 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. POSSIBLE REMOVAL FROM QUOTATION OF COMMON STOCK ON NASDAQ 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. 19 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 nine months ended September 30, 2004, the Company reported net income of $888,000. For the year ended December 31, 2003, the Company reported a net loss of ($123,000). 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 be profitable in future quarters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into market risk sensitive transactions required to be disclosed under this item. ITEM 4. CONTROLS AND PROCEDURES (a) 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. (b) Changes in internal controls. There were no significant changes in the Company's internal control over financial reporting that occurred during the nine months ended September 30, 2004 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None material. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company is prohibited from paying dividends on its common stock due to restrictions under the restated and amended Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated March 23, 2004. Dividends on the Series A and Series B Preferred Stock are permitted, provided an event of default does not exist. 20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 4, 2004, the Company held its annual meeting of shareholders (the "Annual Meeting"). The shareholders approved by a majority of votes the election of Messrs. Shmuel BenTov, Steven S. Mukamal, Reuven Battat,and William Miller as directors of the Company as follows: NAME IN FAVOR AGAINST WITHHELD ---- -------- ------- -------- Shmuel BenTov 1,713,011 5,086 391,119 Steven S. Mukamal 1,713,473 4,624 391,119 Reuven Battat 1,713,473 4,624 391,119 William Miller 1,713,473 4,624 391,119 In addition, the Company's shareholders voted on the ratification by a majority of votes present of the appointment of Grant Thornton LLP as independent public accountants for the year ending December 31, 2004. IN FAVOR AGAINST ABSTAINED -------- ------- --------- 1,717,498 600 0 To (a) approve an amendment and restatement of the Company's stock option plan to reflect previous amendments to the stock option plan, (b) allow for discretionary grants of options to purchase up to 5,000 shares of the Company's common stock, $0.01 par value per share per calendar year to each non-employee director of the Company at fair market value on the date of grant, (c) extend the term of the stock option plan until February 26, 2014, (d) restrict payment of the exercise price for options by delivery of previously acquired shares of Common Stock to delivery of shares of Common Stock owned more than six months and (e) restrict the use of shares of Common Stock to satisfy tax withholding obligations to the satisfaction of the statutory tax withholding obligations. FOR AGAINST ABSTAINED --- ------- --------- 1,202,009 15,011 892,197 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 2.1 Stock Purchase Agreement dated as of June 28, 2002 among the Registrant, International Object Technology, Inc. and the Stockholders of International Object Technology, Inc. incorporated by reference to Exhibit 2.1 to the Form 8-K, as previously filed with the SEC on July 12, 2002. 21 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 Amended and Restated 1997 Stock Option and Award Plan of the Registrant, incorporated by reference to Exhibit C. 10.2 Amended and restated Loan and Security Agreement between the Registrant and Keltic Financial Partners, LP, dated March 23, 2004, as previously filed with the SEC on March 29, 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. 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. 22 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. 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 The Company filed the following Current Reports on Form 8-K during the nine months ended September 30, 2004. (i) The Registrant filed a Form 8-K with the SEC dated August 13, 2004 on August 13, 2004 regarding the second quarter of 2004 financial results 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE A CONSULTING TEAM, INC. By: /s/ Shmuel BenTov ----------------- DATE: NOVEMBER 11, 2004 Shmuel BenTov, Chairman, Chief Executive Officer and President By: /s/ Richard D. Falcone ---------------------- DATE: NOVEMBER 11, 2004 Richard D. Falcone, Treasurer and Chief Financial Officer 24 EX-31.1 2 b402245_ex31-1.txt CERTIFICATION OF CEO SEC. 302 SARBANES-OXLEY ACT EXHIBIT 31.1 CERTIFICATIONS I, Shmuel BenTov, the principal executive officer of The A Consulting Team, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The A Consulting Team, Inc., the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures or cause such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2004 ----------------- /s/ Shmuel Bentov -------------------------------- Shmuel BenTov Chief Executive Officer (Principal Executive Officer) EX-31.2 3 b402245_ex31-2.txt CERTIFICATION OF CFO SEC. 302 SARBANES-OXLEY ACT EXHIBIT 31.2 CERTIFICATIONS I, Richard D. Falcone, the principal financial officer of The A Consulting Team, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The A Consulting Team, Inc., the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures or cause such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2004 ----------------- /s/ Richard D. Falcone ----------------------------------------- Richard D. Falcone Chief Financial Officer (Principal Financial Officer) EX-32.1 4 b402245_ex32-1.txt CERTIFICATION CEO PURSUANT TO 18 U.S.C. SEC. 1350 EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report on Form 10-Q of The A Consulting Team, Inc. for the three months ended September 30, 2004, I, Shmuel BenTov, the principal executive officer of The A Consulting Team, Inc., hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) such Quarterly Report on Form 10-Q for the three months ended September 30, 2004 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Quarterly Report on Form 10-Q for the three months ended September 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of The A Consulting Team, Inc., on a consolidated basis. November 11, 2004 /s/ Shmuel BenTov - ----------------- ----------------- Date Name: Shmuel BenTov Title: Chairman, Chief Executive Officer and President A signed original of this written statement required by section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document EX-32.2 5 b402245_ex32-2.txt CERTIFICATION CFO PURSUANT TO 18 U.S.C. SEC. 1350 EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report on Form 10-Q of The A Consulting Team, Inc. for the three months ended September 30, 2004, I, Richard Falcone, the principal financial officer of The A Consulting Team, Inc., hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) such Quarterly Report on Form 10-Q for the three months ended September 30, 2004 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Quarterly Report on Form 10-Q for the three months ended September 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of The A Consulting Team, Inc., on a consolidated basis. November 11, 2004 /s/ Richard Falcone - ----------------- ------------------- Date Name: Richard Falcone Title: Chief Financial Officer A signed original of this written statement required by section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document -----END PRIVACY-ENHANCED MESSAGE-----