<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
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 Issuer as specified in its charter)
New York 13-3169913
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Park Avenue South
New York, New York 10003
------------------------
(Address of principal executive offices)
(212) 979-8228
--------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ___
---
As of November 12, 1998, there were 5,485,000 shares
of Common Stock, with $.01 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
---
<PAGE>
THE A CONSULTING TEAM, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Index 2
Part I. Financial Information
Item 1. Financial Statements 3-7
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis or Plan of Operations 8-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27 Financial Data Schedule 16
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE A CONSULTING TEAM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,009,116 $ 16,945,010
Accounts receivable 10,820,274 7,237,905
Prepaid expenses and other current assets 441,015 83,320
--------------- ---------------
Total current assets 26,270,405 24,266,235
Property and equipment, at cost, less accumulated
depreciation and amortization 2,037,903 1,124,396
Deposits 84,730 76,692
--------------- ---------------
Total assets $ 28,393,038 $ 25,467,323
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 14,828 $ 13,967
Accounts payable and accrued expenses 3,436,799 2,139,551
Income tax payable - 527,376
Deferred income taxes 554,000 358,000
--------------- ---------------
Total current liabilities 4,005,627 3,038,894
Long-term debt 18,861 30,092
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 10,000,000 shares authorized;
5,485,000 issued and outstanding 54,850 54,850
Additional paid-in capital
21,051,758 21,051,758
Retained earnings
3,261,942 1,291,729
--------------- ---------------
Total shareholders' equity
24,368,550 22,398,337
--------------- ---------------
Total liabilities and shareholders' equity $ 28,393,038 $ 25,467,323
=============== ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ --------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Consulting services $31,266,218 $23,839,803 $11,279,830 $8,461,408
Software licensing 4,049,929 1,440,857 1,341,503 656,076
Training services 198,848 163,810 47,617 53,588
-------------- -------------- --------------- ---------------
Total revenues 35,514,995 25,444,470 12,668,950 9,171,072
Cost of revenues 23,265,421 17,439,174 8,350,666 6,222,308
-------------- -------------- --------------- ---------------
Gross profit 12,249,574 8,005,296 4,318,284 2,948,764
Operating expenses:
Selling, general & administrative 9,281,172 5,388,733 3,203,794 1,997,568
Equity in net (income) loss from joint venture,
including loss on disposal of $1,584 for 1997 - (13,253) -
-------------- -------------- --------------- ---------------
Total operating expenses 9,281,172 5,375,480 3,203,794 1,997,568
-------------- -------------- --------------- ---------------
Income from operations 2,968,402 2,629,816 1,114,490 951,196
Interest income 504,181 83,465 152,090 83,294
Interest expense (2,370) (148,489) (721) (40,311)
-------------- -------------- --------------- ---------------
Income before income taxes 3,470,213 2,564,792 1,265,859 994,179
Income taxes 1,500,000 608,000 550,000 492,000
============== ============== =============== ===============
Net income $ 1,970,213 $ 1,956,792 $ 715,859 $ 502,179
============== ============== =============== ===============
Basic earnings per share $ 0.36 $ 0.13
============== ===============
Dilutive earnings per share $ 0.36 $ 0.13
============== ===============
Unaudited pro forma information:
Historical income from operations $ 2,629,816 $ 951,196
Pro forma adjustment for executive compensation (37,500) -
-------------- ---------------
Pro forma income from operations 2,592,316 951,196
Interest (expense) income, net (65,024) 42,983
-------------- ---------------
Pro forma income before income taxes 2,527,292 994,179
Pro forma provision for income taxes 1,128,000 447,000
-------------- ---------------
Pro forma net income $ 1,399,292 $ 547,179
============== ===============
Pro forma net income per share basic and dilutive $ 0.35 $ 0.12
============== ===============
Weighted average number of common
shares outstanding 4,051,210 4,695,209
============== ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,970,213 $ 1,956,792
Adjustments to reconcile net income
to net cash (used in) provided by operating activites:
Depreciation and amortization 287,781 82,699
Deferred income taxes 196,000 209,000
Equity in net income from joint venture - (13,253)
Changes in operating assets and liabilities:
Accounts receivable (3,582,369) (3,118,566)
Prepaid expenses and other (357,695) 48,707
Accounts payable and accrued expenses 1,297,248 535,432
Income taxes payable (527,376) 348,473
---------------- ---------------
Net cash (used in) provided by operating activities (716,198) 49,284
Cash flows from investing activities:
Purchase of property and equipment (1,201,288) (222,789)
Deposits (8,038) (4,502)
Repayment from joint venture - 29,705
---------------- ---------------
Net cash used in investing activities (1,209,326) (197,586)
Cash flows from financing activities:
Net proceeds from public offering - 21,075,627
Proceeds from loan payable-bank - 1,215,000
Repayment of loan payable-bank - (2,665,000)
Repayment of loan to shareholder - (1,045,000)
Distribution of S Corporation earnings to shareholder - (2,000,000)
Repayment of long-term debt (10,370) (8,511)
---------------- ---------------
Net cash (used in) provided by financing activities (10,370) 16,572,116
---------------- ---------------
Net decrease in cash and cash equivalents (1,935,894) 16,423,814
Cash and cash equivalents at beginning of period 16,945,010 347,285
---------------- ---------------
Cash and cash equivalents at end of period $ 15,009,116 $ 16,771,099
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,370 $ 148,489
================ ===============
Income taxes $ 1,993,872 $ 50,527
================ ===============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THE A CONSULTING TEAM, INC.
Notes to Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with The A
Consulting Team, Inc.'s (the "Company") Form 10-KSB for the year ended December
31, 1997 filed with the SEC, and the accompanying financial statements and
related notes thereto. All outstanding share amounts included in the
accompanying financial statements have been adjusted to reflect a 355,000-for-1
stock split on August 4, 1997. The accounting policies used in preparing these
financial statements are the same as those described in the Company's Form
10-KSB for the year ended December 31, 1997 filed with the SEC.
2) INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited condensed
financial statements contain all the adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1998 and the results of operations for the nine and three months
ended September 30, 1998 and 1997 and cash flows for the nine months ended
September 30, 1998 and 1997.
The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the audited
financial statements and footnotes thereto included in the Form 10-KSB filed by
the Company for the year ended December 31, 1997.
The results of operations for the nine and three months ended September
30, 1998 are not necessarily indicative of the results to be expected for any
other interim period or for the full year.
3) INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS 128"), which was required to be
adopted on December 31, 1997. Under the new requirements for calculating primary
(basic) earnings per share, the dilutive effect of stock options will be
excluded. Options to purchase 343,937 shares of common stock at $12.00 per share
and options to purchase 86,150 shares of common stock at $10.25 per share, for
the three months ended September 30, 1998, were outstanding during 1998 but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
6
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share for the nine and three months ended September 30, 1998.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Numerator:
Net income..................................... $ 1,970,213 $ 715,859
-------------------- ---------------------
Numerator for basic and diluted earnings per
share...................................... $ 1,970,213 $ 715,859
==================== =====================
Denominator:
Denominator for basic earnings
per share - weighted-average shares........ 5,485,000 5,485,000
Effect of dilutive securities:
Employee stock options..................... 4,474 -
-------------------- ---------------------
Denominator for diluted earnings per
share - adjusted weighted-average shares.... 5,489,474 5,485,000
==================== =====================
Basic earnings per share........................ 0.36 0.13
==================== =====================
Diluted earnings per share...................... 0.36 0.13
==================== =====================
</TABLE>
4) INCOME TAXES:
The Company's income taxes on actual pretax income for the nine and
three month periods ended September 30, 1998 were calculated on a "C
corporation" basis. The Company's income taxes on actual pretax income for the
nine and three months ended September 30, 1997 were calculated on an "S
corporation" basis. The Company was an "S Corporation" between January 1, 1995
and August 12, 1997, the day before the Company completed the Offering. During
this period, the Company was not subject to federal income taxes at the
corporate level.
5) CONCENTRATION OF CREDIT RISK:
Sales to three customers represent approximately 42% of the Company's
revenue for the nine months ended September 30, 1998. Sales to three customers
for the same period in 1997 represented approximately 39% of the Company's
revenue, of which sales to one of those customers represented approximately 25%
of the Company's revenue with sales to the remaining two customers each
representing less than 10% of the Company's revenue. Sales to three customers
represent approximately 53% of the Company's revenue for the three months ended
September 30, 1998. Sales to three customers for the same period in 1997
represented approximately 36% of the Company's revenue, of which sales to one of
those customers represented approximately 22% of the Company's revenue with
sales to the remaining two customers each representing less than 10% of the
Company's revenue.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN 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 Company's Form 10-KSB for the year ended December
31, 1997, the accompanying financial statements and related notes.
Overview
The Company provides enterprise-wide IT consulting, software and
training services and solutions primarily to Fortune 1000 companies in a wide
range of industries. The Company generates over 87% of its revenues from IT
consulting services. Moreover, over 65% 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.
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 financial
performance is primarily based upon billing margin (billable hourly rate less
the consultant's hourly cost) and consultant utilization rates (number of days
worked by a consultant during a semi-monthly billing cycle divided by the number
of billing days in that cycle). During the periods presented, the Company has
been able to increase its billing margins by increasing its hourly billing rates
and through higher margin service offerings in new technologies such as
client/server and internet/intranet. These increases, however, were partially
offset by increases in consultants' and employees' salaries and wages. Because
most of the Company's engagements are on a time and materials basis, the Company
generally has been able to pass on to its clients most increases in cost of
services. Accordingly, such increases have historically not had a significant
impact on the Company's financial results. Further, most of the Company's
engagements allow for periodic price adjustments to address, among other things,
increases in consultant costs. The Company also actively manages its personnel
utilization rates by constantly monitoring project requirements and timetables.
As projects are completed, consultants are re-deployed either to new projects at
the current client site or to new projects at another client site, or are
encouraged to participate in the Company training programs in order to expand
their technical skill sets.
The Company also generates revenues by selling software licenses and
providing training services. In addition to initial software license fees, the
Company 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, and training service revenues are recognized as the services are
provided.
The Company's revenue growth has been driven by three primary factors:
increasing the number of consultants, managing the business to attain higher
average billing rates through the delivery of higher value-added services to the
Company's clients, and carefully managing consultant utilization rates.
Additionally, the Company has expanded its Technical Practices into areas such
as Windows NT and Internet/Intranet, which has enabled it to cross-sell
higher-margin services. The Company also has been successful in expanding
existing client relationships as well as establishing new client relationships.
Such relationships are established and maintained through the Company's local
Solution Branch offices located in New York, New Jersey, Connecticut, and
Illinois.
8
<PAGE>
The Company opened its Solution Branch in Connecticut in December 1997.
The Company has opened its Solution Branch in Illinois in October of 1998 and
plans to open an additional Solution Branch in one other select major U.S.
markets in 1998. Considering its limited experience with opening Solution
Branches, the Company cannot predict when new Solution Branches will contribute
to the Company's net income. Until such time, the Company will have incurred the
costs associated with opening each new Solution Branch, including the costs of
office equipment, salaries and occupancy.
The Company was an "S Corporation" between January 1, 1995 and August
12, 1997, the day before the Company completed its initial public offering (the
"Offering"). During this period, the Company was not subject to federal income
taxes at the corporate level.
Results of Operations
The following tables set forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
------------------------ -------------------------
<S> <C> <C> <C> <C>
Consulting services ............................ 88.0 % 93.7 % 89.0 % 92.2 %
Software licensing ............................. 11.4 5.7 10.6 7.2
Training services .............................. 0.6 0.6 0.4 0.6
----- ----- ----- -----
Total revenues ............................ 100.0 100.0 100.0 100.0
Cost of revenues ............................... 65.5 68.5 65.9 67.8
----- ----- ----- -----
Gross profit .............................. 34.5 31.5 34.1 32.2
Selling, general and administrative expenses ... 26.1 21.2 25.3 21.8
Income from operations ......................... 8.4 10.3 8.8 10.4
Net income ..................................... 5.5 7.7 5.7 5.5
===== 7.7 ====
Pro forma income from operations ............... 10.2 10.4
Proforma net income ............................ 5.5 6.0
===== =====
</TABLE>
Comparison of the Nine Months Ended September 30, 1998 to the Nine Months Ended
September 30, 1997
Revenues. Revenues of the Company increased by approximately $10.1
million, or 40%, from $25.4 million for the nine months ended September 30, 1997
to $35.5 million for the nine months ended September 30, 1998. Revenues from
consulting services increased by approximately $7.5 million, or 31%, from $23.8
million for the nine months ended September 30, 1997 to $31.3 million for the
same period in 1998. The increase in 1998 period revenues from consulting
services was primarily the result of an increased number of consultants, an
increase in the consultant utilization rate, and to a lesser extent, higher
hourly billing rates.
The number of consultants engaged by the Company increased 14% for the
nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997. This increase was due primarily to an increase in Year 2000
and fixed price projects.
Software licensing revenues increased by approximately $2.6 million, or
181%, from $1.4 million for the nine months ended September 30, 1997 to $4.0
million for the same period in 1998. This increase was primarily due to an
increase in Year 2000 product sales. Revenues from training services represented
less than 1% of the Company's total revenues for the nine months ended September
30, 1998 and 1997 respectively.
9
<PAGE>
Gross Profit. Gross profit for the nine months ended September 30, 1998
increased by approximately $4.2 million, or 53%, from $8.0 million for the nine
months ended September 30, 1997 to $12.2 million for the same period in 1998. As
a percentage of total revenues, gross profit increased from 31.5% of total
revenues for the nine months ended September 30, 1997 to 34.5% for the same
period in 1998. This increase was primarily the results of changes in revenue
mix, including higher software sales during the nine months ended September 30,
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $3.9 million, or 72%, from
$5.4 million for the nine months ended September 30, 1997 to $9.3 million for
the same period in 1998. Expressed as a percentage of sales, selling, general
and administrative expenses represented 26% of total revenues for the nine
months ended September 30, 1998 revenues as compared to 21% of total revenues
for the same period in 1997. The increase in selling, general and administrative
expenses for the nine months ended September 30, 1998 was primarily the result
of increases in the number of technical practice personnel hired and not fully
utilized, the addition of sales, recruiting and administration staff, the
establishment of the Stamford, Connecticut Solutions Branch office and increased
health care costs, depreciation expense, rent, and outside professional
services.
Actual and Pro Forma Net Income. Actual net income was $2.0 million for
the nine months ended September 30, 1997 and 1998. Pro forma net income was $1.4
million for the nine months ended September 30, 1997 as compared to $2.0 million
for the same period in 1998. Pro forma net income includes an adjustment for
executive compensation to reflect the terms of new contracts with the Chief
Executive Officer and Chief Financial Officer. In addition, it also includes an
adjustment to provide for income taxes as if the Company had been a C
corporation.
Comparison of the Three Months Ended September 30, 1998 to the Three Months
Ended September 30, 1997
Revenues. Revenues of the Company increased by approximately $3.5
million, or 38%, from $9.2 million for the three months ended September 30, 1997
to $12.7 million for the three months ended September 30, 1998. Revenues from
consulting services increased by approximately $2.8 million, or 33%, from $8.5
million for the three months ended September 30,1997 to $11.3 million for the
same period in 1998. The increase in 1998 period revenues from consulting
services was primarily the result of new projects, a slight increase in the
consultant utilization rate, and higher average hourly billing rates.
The number of consultants engaged by the Company increased by 12% for
the three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. This increase was due primarily to an increase in Year 2000,
and fixed price projects.
Software licensing revenues increased by approximately $0.7 million, or
105%, from $0.7 million for the three months ended September 30, 1997 to $1.3
million for the same period in 1998. This increase was primarily due to an
increase in Year 2000 product sales.
Revenues from training services represented less than 1% of the
Company's total revenues for the three months ended September 30, 1998 and 1997
respectively.
Gross Profit. Gross profit for the three months ended September 30,1998
increased by approximately $1.4 million, or 46%, from $2.9 million for the three
months ended September 30, 1997 to $4.3 million for the same period in 1998. As
a percentage of total revenues, gross profit increased from 32.2% of total
revenues for the three months ended September 30, 1997 to 34.1% for the same
period in 1998. This increase was primarily the results of changes in revenue
mix, including higher software sales during the three months ended September 30,
1998.
10
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.2 million, or 60%, from
$2.0 million for the three months ended September 30, 1997 to $3.2 million for
the same period in 1998. Expressed as a percentage of sales, selling, general
and administrative expenses increased, representing 25% of total three months
ended September 30, 1998 revenues as compared to 22% of total revenues for the
same period in 1997. The increase in selling, general and administrative
expenses for the three months ended September 30, 1998 was primarily the result
of increases in the number of technical practice personnel hired and not fully
utilized, the addition of sales, recruiting and administration staff, the
establishment of the Stamford, Connecticut Solutions Branch office and increased
health care costs, depreciation expense, rent, and outside professional
services.
Actual and Pro Forma Net Income. Actual net income increased by
approximately $0.2 million from $0.5 million for the three months ended
September 30, 1997 to approximately $0.7 million for the same period in 1998.
Pro forma net income was $0.5 million for the three months ended September 30,
1997 as compared to $0.7 million for the same period in 1998. Pro forma net
income includes an adjustment to provide for income taxes as if the Company had
been a C corporation.
Liquidity and Capital Resources
The Company's operations and geographic expansion are funded from cash
flow generated from operations, borrowings under the Company's credit line,
borrowing from the principal shareholder and from balances generated from the
Offering. The Company currently has no outstanding borrowings.
The Company's cash balances were approximately $16.9 million at
December 31,1997, and $15.0 million at September 30, 1998. Net cash used in
operating activities was approximately $716,000 for the nine months ended
September 30, 1998. Net cash provided by operating activities was approximately
$49,000 for the nine months ended September 30, 1997. In accordance with
investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to fund operations have been invested in
short-term commercial paper with a credit rating no lower than A1, P1.
The Company currently has a line of credit of $2,100,000 and no
outstanding borrowings. The line of credit is guaranteed by the Company's
principal shareholder. The line of credit bears interest at a variable rate
based on prime plus 1% (8.25% at September 30, 1998).
The Company's accounts receivable at September 30, 1998 and December
31, 1997 were approximately $10.8 million and $7.2 million respectively,
representing 77 and 73 days of sales outstanding ("DSO"), respectively. The
Company does not anticipate any difficulty in collecting amounts due, since this
increase in DSO resulted from increased sales toward the end of the reporting
period and business with a client that has been granted longer payment terms.
Sales to three customers represent approximately 42% of the Company's
revenue for the nine months ended September 30, 1998. Sales to three customers
for the same period in 1997 represented approximately 39% of the Company's
revenue, of which sales to one of those customers represented approximately 25%
of the Company's revenue with sales to the remaining two customers each
representing less than 10% of the Company's revenue. Sales to three customers
represent approximately 53% of the Company's revenue for the three months ended
September 30, 1998. Sales to three customers for the same period in 1997
represented approximately 36% of the Company's revenue, of which sales to one of
those customers represented approximately 22% of the Company's revenue with
sales to the remaining two customers each representing less than 10% of the
Company's revenue.
Net cash used in financing activities was approximately $10,400 for the
nine months ended September 30, 1998, representing the repayment of long-term
debt. Net cash provided by financing activities for the nine months ended
September 30, 1997 was approximately $16.6 million, primarily representing the
proceeds from the public offering, offset by repayment of bank debt and loans
and the distribution of S Corporations earnings to the Shareholder.
11
<PAGE>
Net cash used in investing activities was approximately $1.2 million
for the nine months ended September 30, 1998, representing the purchase of fixed
assets and leasehold improvements. Net cash used in investing activities for the
nine months ended September 30, 1997 was approximately $0.2 million representing
the purchase of fixed assets, leasehold improvements and offset by repayment of
an advance to a joint venture.
In management's opinion, cash flows from operations and borrowing
capacity combined with proceeds from the Offering will provide adequate
flexibility for funding the Company's working capital obligations and expansion
plans.
Subsequent Events
In October 1998, the Company formed a strategic partnership with T3
Media, Inc., an independent Web integrator. In addition to the alliance, the
Company has invested $3 million in T3 Media Convertible Preferred Stock,
representing 30% of T3 Media's equity.
New Accounting Pronouncements
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which the
Company is required to adopt for its year ended December 31, 1998. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about product and services, geographic areas, and major
customers. The adoption of SFAS No. 131 had no impact on the Company's
consolidated results of operations, financial position or cash flow.
Impact of Year 2000
Management has initiated a program to prepare the Company's computer
systems to accurately process transactions relating to the Year 2000 and beyond.
The Company utilizes third party vendor network equipment, telecommunication
products, and other third party software products. The failure of any critical
components in these products to operate properly in the Year 2000 may have an
adverse impact on business operations and require the Company to incur
unanticipated expenses.
The Company has an overall plan and a systematic process in place to
make its internal financial and administrative systems Year 2000 ready within
the next twelve to eighteen months. Modification or replacement of portions of
the Company's software may be required so that the computer systems will
function properly with respect to date values for the Year 2000 and thereafter.
The Company presently believes that with modifications to existing software and
conversions to new software, Year 2000 issues will not pose significant
operational problems for its computer systems. During the execution of the
compliance process; the Company will incur certain costs and expenses. The costs
incurred by the Company during the nine months ended September 30, 1998 to
address Year 2000 compliance were not material. The Company estimates that it
will incur approximately $75,000 to $100,000 of indirect costs over the next
eighteen months. The Company expects that its internal Year 2000 compliance
process will be completed on a timely basis. If such modifications are not made,
however, or are not completed in a timely manner, the Year 2000 issues could
have a material impact on the operations and financial condition of the Company.
12
<PAGE>
Finally, the Company licenses software developed by third parties to
end user clients. The third party developers have designed and tested the
majority of their recent product offerings to be Year 2000 compliant. However,
there is currently a small minority of the Company's end user clients utilizing
product offerings that have not been updated to meet the Year 2000 compliance
specifications. The Company is making efforts to address this issue and expects
that the third party developers will continue to update older products and test
all new product offerings for Year 2000 compliance. The Company is requiring its
third party software developers to represent that the products provided are or
will be Year 2000 compliant. There can be no assurance, however, that all of the
Company's products under license and in use by clients will be Year 2000
compliant prior to and following January 1, 2000. No assurances can be given
that the Company can completely avoid all costs and uncertainties arising from
non-compliance that might materially affect future financial results.
Forward Looking Statements
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission ("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.
13
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
For the nine months ended September 30, 1998, the amount of net
offering proceeds used for any purpose for which at least 5% of the
issuer's total offering proceeds has been used was:
Working Capital and General Business Purposes $2,800,000
Such payments referred to above were not direct or indirect payments to
officers, directors, general partners of the issuer or their
associates, affiliates of the issuer or any person owning 10% or more
of any class of equity securities of the issuer, nor were such payments
referred to above direct or indirect payments to others, except as
indicated.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
- --------
27 Financial Data Schedule: Information Provided Pursuant to
Article 5 of Regulation S-X
No reports on Form 8-K were filed during the quarter for which this report is
filed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
November 12, 1998 By: /s/ Shmuel BenTov
- ------------------ ------------------------------------
Date Shmuel BenTov, President
and Chief Executive Officer
November 12, 1998 By: /s/ Frank T Thoelen
- ------------------ ------------------------------------
Date Frank T Thoelen, Secretary-Treasurer
and Chief Financial Officer
15
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