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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to
___________
Commission file number: 0-22945
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 25, 2003 was approximately $1,367,318 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 25, 2003, there were 8,386,871 shares of the registrant's Common
Stock, $.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders, which will be filed on or before April 30, 2003, 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.......................................................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................5
PART II ........................................................................................................5
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................5
ITEM 6. SELECTED FINANCIAL DATA.................................................................................6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................7
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................21
PART III .......................................................................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................22
ITEM 11. EXECUTIVE COMPENSATION................................................................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................23
Item 14. Controls and Procedures...............................................................................23
Item 15. Principal Accountant Fees and Services................................................................23
PART IV ......................................................................................................25
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................25
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 MarketSM under
the symbol "TACX."
Industry Background
Rapid technological advance, and the wide acceptance and use of the
Internet as a driving force in commerce, 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
and is expected to continue for the remainder of 2003.
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, web enhancements, custom development, strategic
sourcing and enterprise-wide IT consulting, software and solutions. The
Company's strategies include the following key components:
Cross-sell Additional Services to Existing Clients. By offering
existing clients additional IT consulting 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.
1
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. In addition, the Company has initiatives to develop clients in
other geographic areas based on certain specialized services that the Company
provides.
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 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.
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.
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 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.
2
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 74 software clients throughout the country provide
opportunities for the delivery of additional TACT consulting and training
services. The software products offered by TACT are developed in the United
States, England and Finland and marketed primarily through trade shows, direct
mail, telemarketing, client presentations and referrals. Revenue from the sale
of software is ancillary to the Company's total revenues.
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. Eleven of the Company's top twenty clients measured by
revenue for the year ended December 31, 2002 had been clients for over five
years. In 2002, the Company's two largest customers were Mellon Investor
Services and BMW NA and they represented 25% and 24% of revenues, respectively.
Besides these two customers, no other customer represented greater than 10% of
the Company's revenues. During 2003, the Company expects revenues derived from
Mellon Investor Services to decrease.
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, 2002, 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.
3
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, 2002, the Company had 101 personnel, of whom 62 were
consultants, 2 were recruiting personnel, 11 were sales and marketing personnel,
6 were technical and customer service personnel and 20 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 101 personnel, the Company was utilizing the services of 46
independent contractors at December 31, 2002. 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.
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 8,400 square
feet and is located in a leased facility with a term expiring in January 31,
2004. The Company also leases approximately 7,000 square feet in a facility in
Clark, NJ. The lease on this facility expires on January 31, 2004.
4
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a pending lawsuit with Sovereign Bank over
equipment leases related to its investment in Always-On Software, Inc. The
Company does not expect the results of this lawsuit to have a material adverse
effect on its financial statements.
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, 2002.
The Company submitted a proposal for an amendment to its Restated
Certificate of Incorporation to effect a reverse split of its common stock at a
ratio ranging from one-for-four to one-for-nine, grant the Board of Directors
the authority to decide whether to effect the reverse split and if the Board
elects to effect the reverse split, to select a split ratio within this range at
its discretion. This amendment was approved at a Special Shareholder Meeting on
January 21, 2003 as follows: 5,776,209 votes in favor of the amendment; 376,831
votes against the amendment; 400 votes abstained and 2,233,431 shares not voted.
The Board has not authorized the reverse stock split as of March 20, 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
MarketSM ("Nasdaq") under the symbol "TACX." TACT completed an initial public
offering of its Common Stock in 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.
The following table sets forth the quarterly range of high and low bid
prices of the Company's Common Stock since January 1, 2001 as reported by
Nasdaq:
2001 High Low
---- ---- ---
First Quarter $2.375 $1.000
Second Quarter 1.031 .330
Third Quarter .580 .330
Fourth Quarter .650 .220
2002 High Low
---- ---- ---
First Quarter $.600 $.190
Second Quarter .690 .250
Third Quarter .770 .310
Fourth Quarter .500 .210
Dividends
The Company has not paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. There are also certain restrictions on the payment of dividends within
the current line of credit agreement the Company has with Keltic Financial
Partners, LP.
5
The Company is prohibited from paying dividends on its capital stock
due to restrictions under the Loan and Security Agreement between the Company
and Keltic Financial Partners, L.P., dated June 27, 2001 and amended by the July
2002 Modification Agreement. Keltic has consented to the payment of dividends on
the Series A and Series B Preferred Stock, provided an event of default does not
exist.
Holders
The Company estimates that there were approximately 18 holders of
record of the Company's Common Stock on March 20, 2003. 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, 2003.
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 1:1 basis subject to 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 1,270,000 shares of unregistered common stock
to the IOT Stockholders and agreed to pay an aggregate of $650,000 in cash in
deferred payments over the next 30 months in exchange for all the issued and
outstanding capital stock of IOT (the "Acquisition"). The Acquisition closed on
July 19, 2002. The Company relied upon the exemption from registration set forth
in Section 4(2) of the Securities Act, relating to sales by an issuer not
involving a public offering, in issuing the stock to the IOT Stockholders. Based
upon discussions with and representations made by the IOT Stockholders, the
Company reasonably believed that such 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.
In 2002, the Company issued an aggregate of 393,000 stock options,
each with a term of 10 years from the date of grant, pursuant to its Stock
Option and Award Plan. The options have initial exercise prices that range from
$0.31 to $0.43 per share and they have vesting periods that range from
immediately vesting to vesting over 4 years.
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.
6
Selected Financial Data
(in thousands, except number of shares and per share data)
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues $ 24,009 $ 36,227 $ 55,022 $ 53,517 $ 48,925
Income (loss) from operations (130) (13,472) (18,124) (3,203) 4,287
Income (loss) before extraordinary item 155 (13,900) (16,798) (2,667) 2,785
Extraordinary item 49 249 -- -- --
Net income (loss) 204 (13,651) (16,798) (2,667) 2,785
Net income (loss) per share-basic and dilutive
before extraordinary item $ 0.02 $ (1.95) $ (2.65) $ (0.49) $ 0.51
Extraordinary item 0.01 0.03 -- -- --
Net income (loss) per share-basic
and dilutive $ 0.03 $ (1.92) $ (2.65) $ (0.49) $ 0.51
Weighted average shares used in per
share calculation-basic 7,694,460 7,116,871 6,329,927 5,485,000 5,485,000
Weighted average shares used in per
share calculation-diluted 7,986,690 7,116,871 6,329,927 5,485,000 5,488,356
Balance Sheet Data
Total assets $ 8,046 $ 8,957 $ 27,038 $ 28,582 $ 28,772
Long-term liabilities 386 53 457 561 15
Stockholders' equity 5,325 4,119 17,770 22,516 25,183
Number of shares outstanding at
year end 8,386,871 7,116,871 7,116,871 5,485,000 5,485,000
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.
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
and is expected to continue for the remainder of 2003.
7
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, strategic
sourcing and enterprise wide IT consulting, software and solutions.
Approximately 95% 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 2002. During 2003 the Company expects to decrease
revenue generated from hourly billing by 10 to 15 percent and increase revenue,
which is generated under fixed price contracts by a similar amount.
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 are recognized as those services are provided, whereas
consulting services revenues generated under fixed-price engagements are
recognized according to the percentage of completion method.
The Company's most significant operating cost is its personnel cost,
which is included in cost of revenues. As a result, the Company's operating
performance is primarily based upon billing margins (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During 2000 and the first half of 2001, the
Company's margins were adversely affected by a decrease in billing rates and a
reduction in consultant utilization rate; however, gross margins began to
improve in the second half of 2001, primarily due to improved utilization rates
and decreases in consultant costs. Large portions of the Company's engagements
are on a time and materials basis. While most of the Company's engagements allow
periodic price adjustments to address, among other things, increases in
consultant costs, during 2001, 2002 and into 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 and continued
throughout 2002. 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. Beginning in 1999 and extending through December 31, 2002, the
Company has limited its emphasis on software sales. This has resulted in a
significant reduction in software sales starting in the second half of 1999
through December 31, 2002. This trend is expected to continue with software
sales only being ancillary to the Company's IT solutions and services.
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 a nominal value, if any. 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 1,270,000 shares of TACT unregistered Common Stock
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 is expected to increase the depth of the Company's
services and solution offerings and provide the Company with significant
cross-selling opportunities.
9
Certain Critical Accounting Policies
The methods, estimates and judgments we use in applying our most
critical accounting polices have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements.
Recoverability of Long-Lived Assets
The Company's management is required to estimate the useful lives of
its long-lived assets at the time they are acquired. These estimates are
evaluated on an on-going basis to determine if their carrying value has been
impaired. If it is determined that the remaining useful lives differ from our
original estimates, revisions to the estimated fair values would be required.
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. 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. Customers for consulting revenues are billed on a weekly,
semi-monthly and monthly basis. Fixed fee contracts are accounted for under the
percentage-of-completion method. Any anticipated contract losses are estimated
and accrued at the time they become known and estimable.
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.
10
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,
------------------------------
2002 2001 2000
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 70.2% 75.5% 71.0%
------ ------ ------
Gross profit 29.8% 24.5% 29.0%
Operating expenses 30.3% 61.7% 61.9%
------ ------ ------
Income/Loss from operations (.5)% (37.2)% (32.9)%
------ ------ ------
Income/Loss before extraordinary item 0.6% (38.4)% (30.5)%
Extraordinary item 0.2% 0.7% 0.0%
------ ------ ------
Net loss 0.8% (37.7)% (30.5)%
====== ====== ======
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
be ancillary to the Company's total revenues in future years.
Revenues from training represented less than 1% of the Company's total
revenues in 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 $11.3 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.
Income/Loss Before Extraordinary Item. As a result of the
above-mentioned factors, the Company had income before extraordinary item of
approximately $155,000 in 2002, compared to a loss of $13.9 million in 2001.
Extraordinary Item. 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.
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
Revenues. Revenues of the Company decreased by $18.8 million, or 34.2%,
from $55.0 million for the year ended December 31, 2000 to $36.2 million for the
year ended December 31, 2001. The decrease was primarily attributable to a
slowdown in the IT industry, which resulted in the cessation of operations of T3
Media ($7.0 million) and bringing the Company back to its core IT solutions and
services ($11.3 million).
Software licensing revenues decreased by $500,000, or 26.3%, from $1.9
million in 2000 to $1.4 million in 2001. This decrease is attributable to the
Company placing less emphasis on software sales. Software sales are expected to
be ancillary to the Company's total revenues in future years.
Revenues from training services represented less than 1% of the
Company's total revenues in both 2001 and 2000. The Company's training services
were terminated in 2001.
Gross Profit. The resulting gross profit for 2001 decreased by $7.1
million, or 44.4%, from $16.0 million in 2000 to $8.9 million in 2001. As a
percentage of total revenues, gross profit decreased from 29.0% of revenues in
2000 to 24.5% of revenues in 2001. Gross margin was adversely affected,
primarily during the first half of 2001, by a decrease in billing rates and a
reduction in consultant utilization rate; however, this trend began to reverse
in the second half of 2001. Gross profit margins significantly improved in the
second half of 2001, which averaged 31.8%, compared to the first half, which
averaged 19.7%.
12
Operating Expenses. Operating expenses are comprised of SG&A expenses,
provision for doubtful accounts, depreciation and amortization and impairment of
assets and restructuring charges. Operating expenses decreased by $11.7 million,
or 34.4%, from $34.1 million in 2000 to $22.3 million in 2001. SG&A expenses
decreased by $14.5 million or 55.7%, from $26.1 million in 2000 to $11.5 million
in 2001. The decrease is primarily attributable to T3 Media's cessation of
operations ($5.8 million), a decrease in the Company's payroll costs ($4.6
million) and a decrease of other SG&A expenses due to its restructuring efforts.
The provision for doubtful accounts decreased $729,000 or 43.6% from $1.7
million in 2000 to $943,000 in 2001. The decrease was largely attributable to
improvement in the Company's collection techniques and daily monitoring of
receivables and cash balances. Depreciation and amortization decreased $1.3
million or 53.2% from $2.5 million in 2000 to $1.2 million in 2001. This
decrease is attributable to the closing of T3 Media, the closing of several of
the Company's Solution Branches and the reduction in office space in its New
York headquarters. Impairment of assets and restructuring charges increased by
$4.8 million, or 124.7% from $3.9 million in 2000 to $8.7 million in 2001. The
2001 charge related to the following: the Company closing four of its Solution
Branches ($832,000), reducing its office space in its New York headquarters by
approximately 50% ($867,000), closing of T3 Media ($1.6 million), the write-down
of its investment in Always-On Software, Inc. due to the termination of
Always-On's operations ($2.3 million), the write-off of prepaid software
licenses resulting from lack of sales due to the economic down-turn and the
determination that the software no longer had any value ($2.0 million),
severance costs due to staff reductions ($699,000) and other associated costs
($394,000). The 2000 charge primarily related to the write-off of T3 Media's
goodwill and fixed assets no longer in use.
Loss Before Extraordinary Item. As a result of the above-mentioned
factors, the Company had a loss before extraordinary item of approximately $13.9
million in 2001 compared to a loss of $16.8 million in 2000.
Extraordinary Item. The Company recorded income of $249,000 resulting
from the extinguishments of debt associated with the settlement of T3 Media's
capital leases at less than their carrying value.
Net Loss. The Company had a net loss of approximately $13.7 million in
2001 compared to a net loss of $16.8 million in 2000.
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, 2002, compared
to an outstanding balance of $1.9 million at December 31, 2001. 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 International Objects
Technology, Inc. The Company's previous line of credit was for $2.1 million and
was fully guaranteed by the Company's Chairman, Chief Executive Officer and
President.
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. The
amount outstanding on T3 Media's demand loan at December 31, 2001 was $4,700.
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, 2002. The Company
continues the process of negotiating buy-outs on these leases.
The Company's cash balances were approximately $1.8 million at December
31, 2002 and $947,000 at December 31, 2001. Net cash provided by operating
activities in 2002 was approximately $2.8 million compared to $575,000 in 2001,
and compared to net cash used of $14.4 million in 2000.
13
The Company's accounts receivable, less allowance for doubtful
accounts, at December 31, 2002 and December 31, 2001 were $3.1 million and $5.3
million, respectively, representing 49 and 69 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 was one of the primary
reasons for the improvement in cash provided by operations.
For the twelve months ended December 31, 2002, the Company had revenues
from two customers, which represented 25%, and 24% of revenues. The Company's
services for the customer that represents 25% of the Company's revenues declined
in the fourth quarter of 2002 and will continue to decline in the first quarter
of 2003. For the year ended December 31, 2001, the Company had revenues from
three customers, which represented 19%, 19% and 13% of revenues, respectively.
No other customer represented greater than 10% of the Company's revenues for
such periods.
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 $291,000,
$59,000, and $3.4 million for the year ended December 31, 2002, 2001 and 2000,
respectively. In each of the three years, this represented additions to property
and equipment of $47,000, $199,000, and $890,000 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 1,270,000 shares of TACT
unregistered Common Stock 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. From the date of acquisition through the end of year 2002, the Company
recorded revenue in the amount of $1,689,000.
In 2000, $2.5 million in cash was used for making minority investments
in two different companies, Always-On Software, Inc. ($2,000,000) and Methoda
Computer Ltd. ($500,000).
Net cash used in financing activities was approximately $1.7 million in
2002, and $408,000 in 2001, while $13.6 million was provided by financing
activities in 2000.
14
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 1:1 basis subject to 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.
In the year 2001 the Company did not sell any equity securities.
During 2000, the Company sold an aggregate of 1,624,996 shares of Common Stock
to investors for aggregate proceeds of approximately $12.0 million, in each case
in reliance upon the exemption from registration set forth in Section 4(2) of
the Securities Act, relating to sales by an issuer not involving a public
offering.
In 2000, 6,875 shares of Common Stock were issued pursuant to the
exercise of options issued under the Company's stock option plan. No shares of
Common Stock were issued pursuant to the exercise of options issued under the
Company's stock option plan in 2001 or 2002.
The Company is involved in a pending lawsuit with Sovereign Bank over
equipment leases related to its investment in Always-On Software, Inc. The
Company does not expect the results of this lawsuit to have a material adverse
effect on its financial statements.
The Company has the following commitments as of December 31, 2002:
Payments Due in
-----------------------
Total 2003 2004 2005 2006
---------- ---------- ---------- ---------- ----------
Automobile Loan $ 52,759 $ 12,318 $ 13,078 $ 13,885 $ 13,478
Shareholder Loan 133,832 55,770 57,985 20,077 --
Acquisition Note 510,000 210,000 100,000 200,000 --
Employment Contracts 960,000 720,000 240,000 -- --
---------- ---------- ---------- ---------- ----------
Total $1,656,591 $ 998,088 $ 411,063 $ 233,962 $ 13,478
========== ========== ========== ========== ==========
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.
Impact of New Accounting Standards to Be Implemented
See page F-10 of the consolidated financial statements for a discussion
of the impact of new accounting standards to be implemented.
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.
15
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, 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. In the year ended December 31, 2000, the Company had an
operating loss of $18.1 million and a net loss of $16.8 million of which $5.5
million was attributable to T3 Media (including certain one-time charges
referred to below). In addition, in the fourth quarter of 2000, the Company
recorded a $3.9 million charge to reflect the impairment of goodwill and other
related charges relating to T3 Media. There is no guarantee that the Company can
sustain or increase profitability on a quarterly or annual basis in the future.
If revenues grow slower than anticipated, or if operating expenses exceed
expectations or cannot be adjusted accordingly the Company will continue to
experience losses and the results of operations and financial condition will be
materially and adversely affected.
Capital Requirements
The Company may be unable to meet its future capital requirements. The
Company may require additional financing in the future in order to continue to
implement its product and services development, marketing and other corporate
programs. The Company may not be able to obtain such financing or obtain it on
acceptable terms. Without additional financing, the Company may be forced to
delay, scale back or eliminate some or all of its product and services
development, marketing and other corporate programs. If the Company is able to
obtain such financing, the terms may contain restrictive covenants that might
negatively affect its shares of Common Stock, such as limitations on payments of
dividends or, in the case of a debt financing, reduced earnings due to interest
expenses. Any further issuance of equity securities would 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 each of the three years ended December 31, 2002. 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, 2002, the Company had revenues from two customers which represented 25% and
24% of revenues, respectively. The Company's services for the customer, that
represents 25% of the Company's revenues, are expected to decrease in the first
quarter of 2003. For the year ended December 31, 2001, the Company had revenues
from three customers which represented 19%, 19% and 13% of revenues,
respectively. For the year ended December 31, 2000, the Company had revenues
from one customer, which represented 17% 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
state 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
40% of revenues for the year ended December 31, 2002, 46% of revenues for the
year ended December 31, 2001 and 51% for the year ended December 31, 2000. The
Company cannot assure you that any products or services developed by it, or its
strategic partners will achieve market acceptance. The risks involved in these
service offering include the Company's and its strategic partners' abilities to:
o create a customer base;
17
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 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.
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.
18
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.
Possible Removal From Quotation Of Common Stock On Nasdaq And Resulting
Market Illiquidity
On February 14, 2002, the Company was informed by Nasdaq that it had
failed to maintain a closing bid price of at least $1.00 per share and a market
value of publicly held shares of at least $5,000,000 for 30 consecutive trading
days, and therefore the Company did not comply with the requirements as set
forth in Nasdaq Marketplace Rules 4450(a)(5) and 4450(b)(2), respectively.
Pursuant to Nasdaq rules, the Company was provided with a 90-day grace period,
through May 15, 2002, to regain compliance with the minimum bid price and market
value of public float requirements. The Company did not regain compliance within
the proscribed time period. On May 23, 2002, the Company requested a hearing,
which stayed the de-listing of the Company's common stock. On July 11, 2002, the
Company participated in a hearing before the Nasdaq Listing Qualifications Panel
(the "Nasdaq Panel"). On July 31, 2002, the Nasdaq Panel notified the Company
that the Nasdaq Panel had determined not to grant any further exception to the
minimum bid price and/or market value of publicly held shares requirements. The
Nasdaq Panel further determined to transfer listing of the Company's common
stock to The Nasdaq SmallCap Market, effective with the open of business on
August 5, 2002 and gave the Company an extension of 180 days until February 10,
2003 to meet the minimum requirement of $1.00 per share.
19
On February 19, 2003, the Company announced that it had been granted a
sixty-day extension to April 14, 2003 to comply with Nasdaq's minimum bid price
requirement necessary to remain listed on the Nasdaq SmallCap Market. The
extension was granted by Nasdaq while it deliberates on the modifications to its
listing requirements proposed by its Board of Directors, which could provide
issuers with additional time to satisfy the minimum bid price requirements.
If the Company's Common Stock were removed from quotation on The Nasdaq
SmallCap Market any trading in the Company's Common Stock would thereafter be
conducted in the over-the-counter market on the OTC Electronic Bulletin Board or
in the "pink sheets." Accordingly, the liquidity of the Company's Common Stock
could be reduced and the coverage of the Company by security analysts and media
could be reduced, which could result in lower prices for the Company's Common
Stock than might otherwise prevail and could also result in spreads between the
bid and asked prices for the Company's Common Stock. Additionally, certain
investors will not purchase securities that are not quoted on The Nasdaq
SmallCap Market, which could materially impair the Company's ability to raise
funds through the issuance of its Common Stock or other securities convertible
into its Common Stock.
In addition, if the Company's Common Stock is removed from quotation on
Nasdaq and the trading price of its Common Stock is less than $5.00 per share,
trading in its Common Stock would also be subject to the requirements of Rule
15g-9 promulgated under the Securities Exchange Act of 1934, as amended. Under
that Rule, broker and dealers who recommend such low priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to transaction. The Securities Enforcement
Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure
in connection with any trades involving a stock defined as a penny stock
(generally, according to recent regulations adopted by the SEC, any equity
security not traded on an exchange or quoted on Nasdaq or the OTC Bulletin Board
that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of the
Company's Common Stock. There can be no assurance that the Company's Common
Stock will not be removed from quotation on Nasdaq or treated as penny stock.
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.
20
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, 2002, the Company reported net income of $204,000, but for the
years ended December 31, 2001 and 2000, the Company reported net losses of $13.7
million and $16.8 million, respectively. Additionally, the Company has an
accumulated deficit of $28.8 million at December 31, 2002. The Company believes
that its continuing focus on cost reductions, together with a number of other
operational changes, has resulted in the attainment of net earnings during 2002.
There can be no assurance that the Company will remain 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements on pages F-1 through F-23 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).
21
The audit reports of Ernst & Young LLP on the financial statements of
The A Consulting Team, Inc. as of December 31, 2001 and December 31, 2000 and
for the years ended December 31, 2001 and December 31, 2000 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.
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, 48, 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, 50, 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.
Steven S. Mukamal, 63, 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. 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, 47, has been a director of the Company since August
1997. Mr. Battat is a member of the Compensation Committee as well as member of
the Audit Committee. Mr. Battat has been the President and Chief Executive
Officer of ProcureNet Inc. since January 2000. Mr. Battat was the Senior Vice
President and General Manager of Global Marketing for Computer Associates
International, Inc. and from 1995 through 1999. Mr. Battat was responsible for
Computer Associates' worldwide marketing activities and long-term planning of
product development in new and emerging markets.
Robert E. Duncan, 55, has been a director of the Company since May
2002. Mr. Duncan is a member of the Compensation 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.
22
William Miller, 65, has been a director of the Company since July 2002.
Mr. Miller is the Chairman of the Audit 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.
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:
Robert E. Duncan, a director of the Company, reported his initial
statement of beneficial holdings late on a Form 3 filed on June 3, 2002.
Richard D. Falcone, the Chief Financial Officer of the Company,
reported a transaction late on a Form 4 filed on August 5, 2002.
Shmuel Bentov, the Chairman, Chief Executive Officer and President of
the Company, reported a transaction late on a Form 4 filed on August 28, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2003 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2003.
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 2003 Annual Meeting of Shareholders, which
will be filed with the SEC on or before April 30, 2003.
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, 2002, compared
to an outstanding balance of $1.9 million at December 31, 2001. 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 International Objects
Technology, Inc. The Company's previous line of credit was for $2.1 million and
was fully guaranteed by the Company's Chairman, Chief Executive Officer and
President.
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.
23
The Company presently employs, Victoria Bentov, the sister of the Chief
Executive Officer and President, as a billable consultant and at an annual
salary of approximately $80,000.
ITEM 14. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer have conducted an evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c )
and 15d-14(c ) of the Securities Exchange Act of 1934) within 90 days of this
report and each has concluded that such disclosure controls and procedures were
effective as of such date to ensure that information required to be disclosed in
the Company's reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees. 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. There were no fees paid
to Grant Thornton in the year of 2001, due to the fact that they did not assume
responsibility as principal accountants for the Company until the second quarter
of 2002.
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. During the year ended December 31, 2001, the aggregate fees paid to
Ernst & Young LLP for the audit of the Company's financial statements for such
year and for the reviews of the Company's interim financial statements were
$167,000.
Audit Related Fees. During the year ended December 31, 2002 and 2001,
there were no fees paid to Grant Thornton for audit related fees.
During the year ended December 31, 2002 and 2001, there were no fees
paid to Ernst & Young LLP for audit related fees.
Tax Fees. During the year ended December 31, 2002, the aggregate fees
paid to Grant Thornton, LLP for tax compliance, tax advice and tax planning were
$30,000. There were no fees paid to Grant Thornton in the year of 2001 for tax
compliance, due to the fact that they did not assume responsibility as principal
accountants for the Company until the second quarter of 2002.
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.
During the year ended December 31, 2001, the aggregate fees paid to Ernst &
Young LLP for tax compliance were $43,500.
All Other Fees. 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. There were no fees paid to Grant Thornton in the year
of 2001 for professional services, due to the fact that they did not assume
responsibility as principal accountants for the Company until the second quarter
of 2002.
24
During the year ended December 31, 2002, there were no fees paid to
Ernst & Young LLP for professional services other than audit. As well as, no
fees were paid to Ernst & Young LLP in the year of 2001 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 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to this portion of Item 16 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.
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.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form
SB-2 as previously filed with the SEC on August 6, 1997.
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among the
Registrant and those persons listed on Schedule I attached
thereto, incorporated by reference to Exhibit 4.1 to the Form 8-K
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.
25
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to the Registration Statement on Form
S-8 as previously filed with the SEC on December 12, 1997.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the
Registrant, incorporated by reference to Exhibit C to the
Registrant's 2001 Proxy Statement on Schedule 14A, as previously
filed with the SEC on April 30, 2001.
10.2 Loan and Security Agreement between the Registrant and Keltic
Financial Partners, LP, dated June 27, 2001, incorporated by
reference to Exhibit 10.1.1 to the Form 10Q for the period ended
June 30, 2001, as previously filed with the SEC on August 10,
2001.
10.3 Guaranty of Payment and Performance between Shmuel BenTov, the
Chairman and Chief Executive Officer of the Registrant, and
Keltic Financial Partners, LP, dated June 27, 2001, incorporated
by reference to Exhibit 10.2 to the Form 10Q for the period ended
June 30, 2001, as previously filed with the SEC on August 10,
2001.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
16.1 Letter dated July 2, 2002, of Ernst & Young, LLP, incorporated by
reference to Exhibit 16.1 to the Form 8-K dated June 28, 2002, as
previously filed with the SEC on July 3, 2002.
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Grant Thornton, LLP
26
(b) Reports on Form 8-K filed in the fourth quarter of 2002:
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 2002.
(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.
27
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 25, 2003
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 25, 2003
- --------------------------------- (Principal Executive Officer)
Shmuel BenTov
/s/ Richard D. Falcone Chief Financial Officer March 25, 2003
- --------------------------------- (Principal Financial and Accounting Officer)
Richard D. Falcone
/s/ Reuven Battat Director March 25, 2003
- ---------------------------------
Reuven Battat
/s/ Robert Duncan Director March 25, 2003
- ---------------------------------
Robert Duncan
/s/ Steven Mukamal Director March 25, 2003
- ---------------------------------
Steven Mukamal
/s/ William Miller Director March 25, 2003
- ---------------------------------
William Miller
28
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Shmuel BenTov, the principal executive officer of The A Consulting Team,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of The A Consulting
Team, Inc., the registrant;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 25, 2003
-------------------
/s/ Shmuel Bentov
------------------------------
Shmuel BenTov
Chief Executive Officer
(Principal Executive Officer)
29
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Richard D. Falcone, the principal financial officer of The A Consulting Team,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of The A Consulting
Team, Inc., the registrant;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 ann