<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 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 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
New York, New York 10003 (212) 979-8228
- ---------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number,
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 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 3, 1999 was approximately $13,424,450 based on the
average of the high and low prices of the registrant's Common Stock on The
Nasdaq Stock Market SM on such date.
As of March 3, 1999, there were 5,485,000 shares of Common Stock, $.01 par value
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, which will be filed on or before April 15, 1999, are
incorporated by reference into Part III of the Report.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................1
Item 2. Properties..........................................................5
Item 3. Legal Proceedings...................................................5
Item 4. Submission of Matters to a Vote of Security Holders.................5
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.........................................6
Item 6. Selected Financial Data.............................................8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................................16
Item 8. Financial Statements and Supplementary Data........................16
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.............................16
Part III
Item 10. Directors and Executive Officers of the
Registrant........................................................17
Item 11. Executive Compensation............................................17
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................17
Item 13. Certain Relationships and Related Transactions....................17
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...............................................17
<PAGE>
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 (the "SEC" or "Commission")
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. Description of Business
General
The A Consulting Team, Inc. (the "Company" or "TACT") provides a wide
range of information technology ("IT") consulting, software licensing and
training services. TACT's service offerings consist of a broad range of IT
consulting services, including application systems development and maintenance,
IT architecture and engineering, systems consulting, project outsourcing and
general support services. The Company supports all major computer technology
platforms and supports client projects using a broad range of software
applications. TACT's clients consist primarily of large organizations. The
Company was incorporated in New York in 1983.
The Company's shares are listed on The Nasdaq Stock MarketSM under the
symbol "TACX."
Industry Background
Rapid technological advances have accelerated the growth of the IT
industry in recent years. These advances include 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 and web enabled software. These advances have
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 are employing IT in new ways, often to
gain competitive advantages in the marketplace, and IT services have become an
important component of their long-term growth strategies. The same advances that
have enhanced the benefits of computer systems have rendered the development and
implementation of such systems increasingly complex. In addition, there is a
shortage of IT consultants qualified to support these systems. Accordingly,
organizations are turning to external IT services organizations such as TACT to
develop, support and enhance their internal IT systems. The Company has achieved
a compound annual revenue growth rate of over 45% for the three-year period
ended December 31, 1998.
Growth Strategy
The Company's objective is to expand its position in the IT services
industry by providing its clients with high quality, knowledge-based IT
consulting services. The Company's strategies include the following key
components:
Cross-sell Additional IT Services to Existing Clients. By offering
existing clients additional IT consulting, software and training, TACT
intends to leverage its existing client base. The Company's
relationships with current clients provide opportunities to market
additional services in current and new geographical markets.
Expand Client Base. The Company is developing additional client
relationships in geographic markets where the Company maintains
Solution Branches, through targeted marketing initiatives,
<PAGE>
participation in local and national trade shows, user group meetings
and conventions, referrals from existing clients and direct mail.
Open Additional Solution Branches. The Company believes that
maintaining a local presence within its markets gives it a competitive
advantage by increasing name recognition and referral potential as well
as reducing travel expenses and attracting locally-based, skilled
consultants. TACT supplemented its three existing Solution Branches
with the opening of a Solution Branch in Chicago in 1998, and plans to
open one or two additional Solution Branches in select major markets in
1999.
Acquisitions. The Company is actively looking for companies and other
organizations that it may acquire. The Company has established certain
acquisition criteria. It is primarily interested in companies and
organizations that are (i) established in geographic locations that the
Company is interested in expanding into, or (ii) has a depth of service
offerings that the Company finds attractive. The Company currently has
no agreements, understandings or commitments with respect to any
potential acquisitions.
TACT Operations
TACT 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.
A Solution Team is typically deployed from one of the Company's local
Solution Branches in order to provide solutions to its clients by utilizing
local resources. The Company maintains four Solution Branches - one in each of
New York, New York; Clark, New Jersey; Stamford, Connecticut; and Chicago,
Illinois. Management's experience has been that the local presence established
by a Solution Branch 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 each Solution
Branch and performs many functions that allow the Solution Branches to focus on
recruiting, sales and marketing. Management has developed the TACT Solution
Teams, as well as TACT's local Solution Branch structure, in an effort to
advance the Company's objective of establishing and maintaining long-term
relationships with its clients. Seventeen of the Company's top twenty clients
measured by revenue for the year ended December 31, 1998 had been clients for
over three years.
Solution Branch Managers are responsible for recruiting consultants,
assigning consultants to fulfill client requirements, implementing sales and
marketing programs, and managing client and employee relations. In employing new
Solution Branch Managers, the Company seeks candidates who have demonstrated IT
industry and local client knowledge, managerial and organizational skills,
initiative and strong interpersonal skills. In addition, a portion of the
Solution Branch Managers' compensation results
2
<PAGE>
from an incentive bonus package based upon revenue and profit generated by the
Solution Branch, fostering an entrepreneurial culture throughout the Company.
TACT Software. TACT markets and distributes over 20 software products
developed by independent software developers. The Company believes its
relationships with over 200 software clients throughout the country provide
opportunities for the delivery of additional TACT consulting and training
services. The software products offered by TACT Software are developed in the
United States, England and Finland and marketed primarily through trade shows,
direct mail, telemarketing, client presentations and referrals. TACT Software
personnel currently includes sales and marketing personnel as well as 24-hour
technical support.
The Company intends to continue to focus on adding to its software
product offerings by identifying and marketing innovative third-party developed
software products and becoming a leading provider of Windows NT add-on products.
TACT intends to increase its marketing efforts of new and existing software
products through telemarketing, telesales, direct mail, client presentations,
trade shows and referrals. The Company intends to leverage existing software
client relationships by targeting new Solution Branches in or near markets where
software clients are located to cross-sell consulting services.
TACT Training. TACT offers an extensive selection of technical training
courses to large organizations at either TACT's Training Center or at a client's
site. These courses include classes in client/server and legacy technologies as
well as in recent technologies, such as JAVA, ActiveX, Active Server Pages and
HTML. In addition, the Company conducts presentations on specific topics, such
as co-existence of legacy and client/server systems, use of legacy mainframe
databases as servers, conversion/migration of legacy systems to new
architectures and performance monitoring/tuning. TACT offers end-user training
for both off-the-shelf software, such as Microsoft Office and Lotus Notes, and
customer specific applications.
The Company's training services are often included in total project
solutions for businesses, in retraining MIS personnel in new technologies, and
in software vendor product training. These courses may be customized to address
a client's specific needs and are taught at the client's site or at the TACT
Training Center. TACT utilizes computer labs to enable participants to gain
practical experience in the materials presented. TACT's training curriculum is
developed in-house by technicians with a working experience in the technologies
being taught. In addition, TACT provides a "Fast Track" program and a series of
"For Consultants Only" classes on evenings and weekends to train/re-train the
consultant community in new technologies. All classes are free of charge for
TACT employees. Consultants who are non-TACT employees pay a nominal fee that is
refunded if the consultant joins TACT within three months after completing the
training.
Management believes that TACT's training services are an important and
differentiating factor in attracting and retaining IT professionals. TACT
training courses introduce prospective consultants to the Company and provide
for technical advancement for the Company's existing consultants. TACT training
clients also represent an opportunity for the Company to market additional
services such as consulting services. The Company has been successful in
generating consulting business from its training clients and plans to continue
to identify situations where its knowledge of a training client's needs can lead
to other IT business.
Clients
The Company's clients consist primarily of Fortune 1000 companies and
other large organizations. Because of the diverse range of industries in which
the Company's clients operate, the Company believes that it is not dependent
upon any single industry or market. Seventeen of the Company's top twenty
clients measured by revenue for the year ended December 31, 1998 had been
clients for over three years. In 1998, the largest three customers represented
16%, 15% and 12% of revenues, respectively. Besides these customers, no other
customer represented greater than 10% of the Company's revenues.
3
<PAGE>
TACT Research
TACT continuously researches new technologies developed by third
parties to determine their viability and potential acceptance in the Fortune
1000 marketplace. The Company's research and development staff work diligently
to identify those "bleeding-edge" technologies that will succeed as
"leading-edge" business solutions. TACT research personnel work closely with
Technical Practice Managers to predict future tools and technologies to be used
by corporate America so that TACT consultants can be trained in those emerging
technologies. TACT research personnel also prepare technology demonstrations and
pilot projects used in the Company's marketing and sales efforts and identify,
evaluate and recommend software products, including those to be marketed by
TACT's Software division. In addition, TACT research personnel participate in
short-term special projects requiring particular expertise for certain of the
Company's clients.
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 the 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, 1998, the
Company employed 25 sales and marketing personnel. In addition to the Company's
primary marketing approach, the Company also produces The Tactician magazine,
which is regularly published in-house and distributed by TACT. The magazine
circulates both to existing and potential clients as well as existing
consultants and candidates. 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 and
training 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 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 and niche providers of IT services. Many of
these competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its clients' internal resources, particularly when these
resources represent an existing cost to the client. Such competition may impose
additional pricing pressures on the Company.
The Company believes that the principal competitive factors in the IT
services market include breadth of services offered, technical expertise,
knowledge and experience in the industry, quality of service and responsiveness
to client needs. The Company believes it competes primarily on the basis of 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. Although highly skilled technical employees, particularly project
managers and technical specialists, are in great demand, 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, 1998, the Company had 327 personnel, of whom 232 were
consultants, 12 were recruiting personnel, 25 were sales and marketing
personnel, 11 were technical and customer service personnel, and 47 were
executive and administrative personnel. None of the Company's employees are
4
<PAGE>
represented by a labor union, and the Company has never incurred a work
stoppage. The Company utilizes the services of a significant number of
independent contractors to act as consultants. These independent contractors are
not employees of the Company, and 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.
Over the course of the year, the Company hired additional consultants
for several significant projects. While management expects the number of
consultants it employs to fluctuate from quarter to quarter, the average number
of consultants for 1998 was up about 18%, or 40 consultants over last year,
which reflects the increased demand experienced by TACT during the year. It is
the Company's intention to adjust the number of consultants it employs on an
on-going basis to keep utilization rates high. The consultant utilization rate
for 1998 was about 95%, compared with about 90% for 1997. TACT strives to keep
utilization rates high, but will manage this measure within limits, as
management recognizes the need to have a small pool of people available for new
assignments as they arise.
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 initiated the application
process in order to protect certain marks, including "TACT" and "The A
Consulting Team."
Software developed by the Company in connection with a client
engagement is 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.
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 located in a leased facility
with approximately 10,250 square feet, at a current annual rent of $211,915 and
a term expiring in June 30, 2003. The Company also has leased facilities in
Clark, New Jersey, Stamford, Connecticut, Chicago, Illinois and Atlanta,
Georgia.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1998.
5
<PAGE>
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 traded on The Nasdaq Stock
Market(R) ("Nasdaq") under the symbol "TACX". TACT completed an initial public
offering in August 8, 1997. Prior to that date, there was no market for the
Company's Common Stock.
The following table sets forth the quarterly range of high and low
sales prices of the Company's Common Stock since August 8, 1997 as reported by
Nasdaq:
1997 High Low
- ---- ---- ---
Third Quarter $14.125 $12.000
Fourth Quarter 12.875 9.250
1998 High Low
- ---- ---- ---
First Quarter $12.375 $8.750
Second Quarter 12.500 9.750
Third Quarter 11.125 7.125
Fourth Quarter 8.875 5.000
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.
Holders
The Company estimates that there were approximately 10 holders of
record of the Company's Common Stock on March 26, 1999. The Company believes
that the number of beneficial shareholders presently exceeds 400.
Use of Proceeds From Registered Securities
The effective date of the Company's registration statement on Form SB-2
was August 8, 1997. The Commission file number for that filing is 333-29233.
Between the effective date and December 31, 1998, the expenses incurred in
connection with the issuance and distribution of the securities registered were
as follows:
<TABLE>
<CAPTION>
As Previously Reported
on Form 10-Q for the Additional Expenses Expenses Incurred to
Direct or Indirect Period Ending Incurred Through Date as of
Payments to Others: September 30, 1998 December 31, 1998 December 31, 1998
- ------------------- ----------------------- ------------------- --------------------
<S> <C> <C> <C>
Underwriting discounts and
commissions $ 1,512,000 -0- $ 1,512,000
Other expenses 518,300 -0- 518,300
----------- --- -----------
Total Expenses 2,030,300 -0- 2,030,300
----------- --- -----------
Net offering proceeds after
total expenses $21,071,000 -0- $21,071,000
=========== === ===========
</TABLE>
6
<PAGE>
Between the effective date and December 31, 1998, net offering proceeds
of $7,692,000 were used for the following purposes:
<TABLE>
<CAPTION>
As Previously Reported
on Form 10-Q for the Use of Proceeds
Direct or Indirect Period Ending Changes in Through
Payments to Others: September 30, 1998 Use of Proceeds December 31, 1998
- ------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C>
Repayment of loans to
shareholder $1,045,000 $ - $1,045,000
Distribution of S
Corporation earnings to
shareholder 2,007,000 - 2,007,000
Repayment of debt 1,940,000 1,940,000
Working capital and general
corporate purposes
2,700,000 - 2,700,000
----------- --- -----------
Total use of proceeds $7,692,000 $ - $7,692,000
=========== === ===========
</TABLE>
The use of proceeds does not represent a material change in the use of
proceeds described in the prospectus. There have been no other changes to the
information provided by the Company on Form SR for the period ended April 30,
1997, on Form10-Q for the period ended September 30, 1997, on Form 10-K for the
period ended December 31, 1997 or on Form 10-Q for the periods ended March 31,
1998, June 30,1998 and September 30, 1998.
7
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Item 6. Selected Financial Data
The following table contains certain financial and operating data and is
qualified by the more detailed Financial Statements and Notes thereto included
herein. The selected financial data in the table are derived from the Company's
Financial Statement and Notes thereto. The selected financial data should be
read in conjunction with the Financial Statements and Notes thereto and other
financial information included herein.
Selected Financial Data
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Consulting services $ 42,422 $ 32,481 $ 18,981 $ 14,430 $ 9,463
Software licensing 6,248 2,541 1,776 1,383 1,321
Training services 255 194 238 210 98
----------- ----------- ----------- ----------- -----------
Total Revenues 48,925 35,216 20,995 16,023 10,882
Cost of revenues 32,168 23,932 14,521 11,041 8,016
----------- ----------- ----------- ----------- -----------
Gross profit 16,757 11,284 6,474 4,982 2,866
Operating expenses:
Selling, general and
administrative 12,470 7,950 6,322 4,890 2,908
Equity in net (income) loss from
joint venture -- (13) 50 -- (35)
----------- ----------- ----------- ----------- -----------
Total operating expenses 12,470 7,937 6,372 4,890 2,873
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 4,287 3,347 102 92 (7)
Net income 2,785 2,524 8 190 2
Net income per share --
basic and diluted $ 0.51
Shares used in per share calculation 5,488,356
Unaudited Pro Forma Data (1)
Pro forma income from operations $ 3,310 $ 1,325
Pro forma net income 1,966 692
Pro forma net income per share $ 0.45 $ 0.19
Weighted average shares
outstanding 3,729,211 4,409,658
BALANCE SHEET DATA
Total Assets $ 28,772 $ 25,467 $ 5,100 $ 3,196 $ 1,663
Long-term debt 15 30 44 -- --
Shareholders' equity 25,183 22,398 811 803 613
Number of shares outstanding 5,485,000 3,550,000 3,550,000 5,485,000 3,550,000
</TABLE>
- -----------------------------------------
(1) The 1996 and 1997 amounts relating to income from operations, net income
and net income per share are shown on a pro forma basis. The pro forma
adjustments reflect (i) reduced executive compensation expense for the CEO,
partially offset by increased salary expense related to the Company's
hiring of a CFO and (ii) provision for federal and state income taxes as if
the Company had been subject to federal and state income taxation as a C
Corporation during each of the periods.
8
<PAGE>
Item 7. Management's Discussion and Analysis of Plan of Operation
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 financial statements and related
notes.
Overview
TACT provides enterprise-wide IT consulting, software and training
services and solutions primarily to Fortune 1000 companies and other large
organizations. These companies and organizations are in a wide range of
industries. The Company generated 86.7% of its revenues from IT consulting
services in 1998. Moreover, over 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.
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 achieving a higher margin on a number of projects related to Year
2000 services and project management activity. 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. TACT 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 TACT's 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, because future obligations associated with such revenue are
insignificant. 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 technical 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.
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 BranchSM offices
located in New York, NY; Clark, NJ; Stamford, CT; and Chicago, IL.
The Company opened an additional Solution Branch in Chicago, IL during
1998. The Company plans to open additional Solution Branches in one to three
other select major U.S. markets in 1999.
9
<PAGE>
Considering its limited experience with opening Solution Branches, the Company
cannot predict when 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 salaries and
occupancy.
During 1998, The Company formed a strategic partnership with T3 Media,
Inc., Silicon Alley's largest independent Web integrator. In addition to the
alliance, TACT invested $3 million in T3 Media, Inc. convertible preferred
stock, representing 30% of the company's equity.
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>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Consulting services 86.7% 92.2% 90.4%
Software licensing 12.8 7.2 8.5
Training services 0.5 0.6 1.1
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of revenues 65.7 68.0 69.2
----- ----- -----
Gross profit 34.3 32.0 30.8
Selling, general and administrative expenses 25.5 22.6 30.1
Income (loss) from operations 8.8 9.5 0.5
Net income 5.7 7.2 *
Pro forma income from operations -- 9.4 6.3
Pro forma net income -- 5.6 3.3
*Represents less than 0.1%.
</TABLE>
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Revenues. Revenues of the Company increased by $13.7 million, or 38.9%,
from $35.2 million for the year ended December 31, 1997 to $48.9 million for the
year ended December 31, 1998. Revenues from consulting services increased by 9.9
million, or 30.6%, from $32.5 million in 1997 to $42.4 million in 1998. As a
percentage of total revenues, consulting services decreased to 86.7% of the
total in 1998 compared to 92.2% in 1997. The increase in 1998 revenues from
consulting services was primarily the result of an increased number of
consultants and, to a lesser extent, higher hourly billing rates and a slight
increase in consultant utilization rate. The number of consultants engaged by
the Company increased by approximately 18% from December 31, 1997 to December
31, 1998. The Company was engaged on several significant projects involving Year
2000 remediation, project management and Internet application development from
existing clients that resulted in higher billings.
Software licensing revenues increased by $3.7 million, or 148%, from
$2.5 million in 1997 to $6.2 million in 1998. This increase was related to an
increase in Year 2000 product sales and in license renewals as well as expanded
software offerings through a number of new strategic alliances. Management's
strategy is to have new software offerings replace the anticipated reduction of
Y2K related products. In addition, the Company has enhanced its testing tools so
they are non-Y2K specific, making them useful beyond the year 2000.
Revenues from training represented less than 1% of the Company's total
revenues in both 1998 and 1997.
Gross Profit. The resulting gross profit for 1998 increased by $5.5
million, or 48.7%, from $11.3 million in 1997 to $16.8 in 1998. Improvement in
gross margin was attributable to both an increase in consulting margins and a
slight increase in software margins. As a percentage of total revenues, gross
profit increased slightly from 32% of revenues in 1997 to 34.2% of revenues in
1998.
10
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.5 million, or 56.3%, from $8.0 million
in 1997 to $12.5 million in 1998. Expressed as a percentage of sales, selling,
general and administrative expenses increased 25.5% of total 1998 revenues as
compared to 22.6% of total 1997 revenues. These expenses are reflective of
continued efforts to broaden the Company's customer base, expand its service
offerings, increase its geographic presence and capitalize on new business
opportunities.
Actual and Pro Forma Net Income. Actual net income increased by
approximately $0.3 million, from $2.5 million in 1997, to $2.8 million in 1998.
Pro forma net income was $2.0 million in 1997. Pro forma net income includes an
adjustment for executive compensation to reflect the terms of 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 for all of 1997. The per share amounts in 1998 were impacted by an
additional 1.8 million shares outstanding for the full year, as a result of the
public offering in August 1997.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Revenues. Revenues of the Company increased by $14.2 million, or 67.7%,
from $21.0 million for the year ended December 31, 1996 to $35.2 million for the
year ended December 31, 1997. Revenues from consulting services increased by
$13.5 million, or 71.1%, from $19.0 million in 1996 to $32.5 million in 1997. As
a percentage of total revenues, consulting services remained relatively constant
at approximately 90%. The increase in 1997 revenues from consulting services was
primarily the result of an increased number of consultants and, to a lesser
extent, higher hourly billing rates and a higher consultant utilization rate.
The number of consultants engaged by the Company increased 52% from December 31,
1996 to December 31, 1997. The Company continued to receive significant full
life cycle projects involving networking and system management, Windows NT
rollout, client/server development, quality assurance and testing, and
internet/intranet from existing clients that resulted in higher billings.
Software licensing revenues increased by $0.8 million, or 43.0%, from
$1.8 million in 1996 to $2.5 million in 1997. This increase was primarily due to
an increase in Year 2000 product sales and in license renewals.
Revenues from training represented less than 1% of the Company's total
revenues in 1997 and 1.1% in 1996.
Gross Profit. The resulting gross profit increased by $4.8 million, or
74.3%, from $6.5 million in 1996 to $11.3 million in 1997. As a percentage of
total revenues, gross profit increased slightly from 30.8% of total revenues in
1996 to 32.0% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.6 million, or 25.7%, from $6.3 million
in 1996 to $8.0 million in 1997. Expressed as a percentage of sales, selling,
general and administrative expenses decreased, representing 22.6% of total 1997
revenues as compared to 30.1% of total 1996 revenues. The increase in selling,
general and administrative expenses in 1997 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 costs and depreciation expense.
Actual and Pro Forma Net Income. Actual net income increased by
approximately $2.5 million, from $8,000 in 1996 to $2.5 million in 1997. Pro
forma net income was $2.0 million in 1997 as compared to $692,000 in 1996. 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 for all of 1997 and 1996.
11
<PAGE>
Liquidity and Capital Resources
Prior to the Company's initial public offering, its operations and
geographic expansion were funded by cash flow generated from operations,
borrowings under the Company's credit line and borrowings from the principal
shareholder. The Company sold a total of 1,935,000 shares of Common Stock in the
Company's initial public offering, generating net proceeds to the Company of
approximately $21,071,000. The uses of these funds were as follows: a
distribution of $2.0 million (the "Distribution") was paid to the sole
shareholder of the Company prior to the initial public offering, $1.9 million
was paid to Citibank, N.A. to repay its line of credit, and $17.2 million was
made available to fund current operations. The Company currently has no
outstanding borrowings.
The Company's cash balances were $13.0 million at December 31, 1998,
and $16.9 million at December 31, 1997. Net cash provided by operating
activities in 1998 was $1.1 million compared to $944,000 for the year ended
December 31, 1997. Net cash used in operating activities was $1.0 million for
the year ended December 31, 1996. 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.
While the Company has no significant long-term debt outstanding, it
does have a line of credit available through Citibank, N.A in the amount of
$2,100,000.
The Company's accounts receivable at December 31, 1998 and December 31,
1997 were $8.8 million and $7.2 million respectively, representing 61 and 67
days of sales outstanding, respectively. The Company does not anticipate any
difficulty in collecting amounts due. In each of the last three years, the
Company has had at least one customer with revenues exceeding 10% of the
Company's revenues. In 1998, the largest three customers represented
approximately 16%, 15% and 12% of revenues, respectively. In 1997 the largest
customer represented approximately 24% of revenues, and in 1996 the largest
customer represented approximately 12% of revenues. Besides these customers, no
other customer represented greater than 10% of the Company's revenues.
Net cash used in financing activities for the year ended December 31,
1998 was approximately $14,000. Net cash provided by financing activities was
approximately $16.6 million for the year ended December 31, 1997, representing
the proceeds from the public offering, offset by repayment of bank debt and
loans and the Distribution. Net cash provided by financing activities for the
year ended December 31, 1996 was approximately $1.3 million, primarily
representing proceeds from bank borrowings.
Net cash used in investing activities for the year ended December 31,
1998 was approximately $5.1 million, representing the investment of $3 million
in T3 Media, Inc. convertible preferred stock. In addition, the Company
purchased approximately $2.0 million of property and equipment in support of the
Company's expanding operations. Net cash used in investing activities was
approximately $903,000 for the year ended December 31, 1997, representing the
purchase of property and equipment. Net cash used in investing activities for
the year ended December 31, 1996 was approximately $349,000 representing the
purchase of property and equipment and to a lesser extent an advance to a joint
venture.
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 and expansion plans.
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 adopted 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
12
<PAGE>
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
because management views the Company as primarily operating in one segment of
business.
In February 1998, the FASB issued Statement No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits" and in June 1998,
the FASB issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The adoption of these Statements will have no impact on the
Company's consolidated results of operations or financial position.
Inflation
The Company has not suffered material adverse affects by inflation in
the past. However, a substantial increase in the inflation rate in the future
may adversely affect customers' purchasing decisions or may have an adverse
impact on the Company's margins and overall cost structure.
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. A number of these third party
vendors have provided information to the Company regarding their respective
efforts to be Year 2000 compliant. 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 a contingency plan in the event that an adverse impact is caused
by non-compliant critical systems.
The Company has an overall plan and a systematic process in place to
make its internal financial and administrative systems Year 2000 compliant.
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.
The costs incurred by the Company during 1998 to address Year 2000
compliance were approximately $50,000. The Company estimates that it will incur
up to approximately $25,000 indirect costs during fiscal 1999. During the
execution of the compliance process the Company will incur certain costs and
expenses. Though the Company has not established a final cost estimate, the
expense of the year 2000 compliance process is not expected to have a material
effect on the Company's financial position or results of operations. 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.
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. Despite the fact that the
Company has purchased various insurance policies, including general liability
and errors and omissions policies, the Company has limited insurance coverage
with respect to Year 2000 non-compliance. No assurances can be
13
<PAGE>
given that the Company can completely avoid all costs and uncertainties arising
from non-compliance that might materially affect future financial results.
Factors That Could Affect Operating Results
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 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 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.
Risk Associated With Growth Through Acquisitions
The Company's expansion is dependent upon, among other things, (i) the
availability of consultants as employees or independent contractors, (ii) the
Company's ability to identify suitable new geographic markets with sufficient
demand for the Company's services; to hire and retain skilled management,
marketing, customer service and other personnel; and to successfully manage
growth, including monitoring operations, controlling costs and maintaining
effective quality and service controls and (iii) if the Company consummates any
acquisitions, the Company's 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 are unable to achieve anticipated performance
levels, the Company's business, results of operations and financial condition
could be materially and adversely affected.
Dependence on Qualified Personnel
The Company's business involves the delivery of professional services
which depends in large part upon its ability to attract and retain highly
skilled project managers, technical specialists and independent contractor
consultants. The Company utilizes the services of a significant number of
independent contractors to act as consultants. Since the Company does not have
employment agreements with these individuals for any specific term, there can be
no assurance that the services of these individuals will continue to be
available to the Company on terms acceptable to the Company.
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. Revenues from the Company's ten
most significant clients accounted for a majority of the Company's revenues in
1998. In each of the last three years, the Company has had at least one customer
with revenues exceeding 10% of the Company's revenues. In 1998, the largest
three customers represented 16%, 15% and 12% of revenues, respectively. In 1997
the largest customer represented 24% of revenues, and in 1996, the largest
customer represented 12% of revenues. Besides these customers, no other customer
represented greater than 10% of the Company's revenues. Clients engage the
Company on an assignment-by-assignment basis, and a client can generally
14
<PAGE>
terminate an assignment at any time without penalty. The loss of, or reduction
in revenue from, any significant customer could have a material adverse effect
on the Company's business, results of operations and financial condition.
Rapid Technological Change
The Company's success will depend in part on its ability to meet client
expectations, develop IT solutions and offer software products, in each case
that keeps pace with continuing changes in IT, evolving industry standards,
changing client preferences and a continuing shift to outsourced solutions by
clients. There can be no assurance that the Company will be successful in
adequately addressing the outsourcing market or other IT or software
developments on a timely basis or that, if addressed, the Company will be
successful in the marketplace. There can also be no assurance that products or
technologies developed by others will not render the Company's services or
products uncompetitive or obsolete. The Company's failure to address these
developments could have a material adverse effect on the Company's business,
results of operations and financial condition.
Fluctuations in Quarterly Operating Results
Variations in the Company's revenues and results of operations occur
from time to time as a result of a number of factors, such as the timing of new
Solution Branch openings, Technical Practice expansion activities, the
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 Company's 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 the Company. The Company has
also experienced, and may in the future experience, significant fluctuations in
the quarterly results of software sales. Software licensing activity is
difficult to forecast because the number and amount of particular license
transactions can vary significantly, the Company's sales incentive plans have an
unpredictable impact on the timing and size of orders, client projects and
evaluations may be postponed as the year 2000 approaches, many clients are
repairing or replacing existing applications which have year 2000 operability
issues. In the event that the Company's results of operations for any period are
below the expectation of market analysts and investors, the market price of the
Common Stock could be adversely affected.
The Company derives revenues primarily from the hourly billing of its
consultants' services and, to a lesser extent, from fixed-price projects. The
Company's most significant cost is project personnel cost, which consists of
consultant salaries and benefits. There can be no assurance, however, that the
Company's revenues will continue to be billed primarily on a time and materials
basis or that the Company will be able to continue to pass along increases in
its cost of services to is clients.
Competition
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. 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 the Company. Such competition may impose
additional pricing pressures on the Company.
Dependence on Senior Management
The success of the Company is highly dependent upon the efforts and
abilities of its executive officers, particularly Shmuel BenTov, the Company's
founder, Chairman of the Board, Chief Executive
15
<PAGE>
Officer and President and Frank T. Thoelen, its Chief Financial Officer.
Although Mr. BenTov and Mr. Thoelen have entered into employment agreements
containing noncompetition, nondisclosure and nonsolicitation covenants, these
contracts do not guarantee that these individuals will continue their employment
with the Company. The loss of the services of either of these key executives for
any reason could have a material adverse effect upon the Company's business,
results of operations and financial condition.
Risks Associated With Intellectual Property
Ownership of software from the development of custom software
applications in connection with specific client engagements is generally
assigned to the client. The Company relies upon a combination of nondisclosure
and other contractual arrangements and trade secret, copyright and trademark
laws to protect its proprietary rights and the proprietary rights of third
parties from whom the Company licenses intellectual property. The Company enters
into confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance 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. The Company is
subject to the risk of litigation alleging infringement of third-party,
intellectual property rights. Any such claims could require the Company 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 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 initiated the
application process in order to protect certain marks, including "TACT" and "The
A Consulting Team." The Company's inability or failure to establish rights to
these terms may have a material adverse effect on the Company's business,
results of operations and financial condition.
Volatility of Stock Price
The Common Stock may be subject to wide fluctuations in price in
response to variations in quarterly results of operations and other factors,
including acquisitions, technological innovations and general economic or market
conditions. In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market price of many technology companies and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of me Common Stock. Additionally, there can be no
assurance that an active trading market for the Common Stock will be sustained.
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-3 through F-13 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders that
will be filed with the SEC on or before April 15, 1999.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders that
will be filed with the SEC on or before April 15, 1999.
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 1999 Annual Meeting of Shareholders that
will be filed with the SEC on or before April 15, 1999.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders that will
be filed with the SEC on or before April 15, 1999.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report at F-1.
(a)(3) Listing of Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
1.1 Form of Underwriting Agreement by and among Registrant and the
Underwriters, incorporated by reference to Exhibit 1.1 to the
Registration Statement on Form SB-2 as previously filed with the
Securities and Exchange Commission ("Commission") on August 8,
1997.
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form
SB-2 as previously filed with the Commission on August 6, 1997.
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 Commission on August 6, 1997.
4 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4 to the Registration Statement on Form SB-2 as
previously filed with the Commission on July 23, 1997.
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 Commission on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant,
incorporated by reference to Form S-8-Filed December 12, 1997.
10.2 Form of Employment Agreement, dated as of the Effective Date,
between the Registrant and Shmuel BenTov, incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form
SB-2 as previously filed with the Commission on August 6,
1997.
17
<PAGE>
10.3 Form of Employment Agreement, effective as of June 30, 1997,
between the Registrant and Frank T. Thoelen incorporated by
reference to Exhibit 10.3 to the Registration Statement on Form
SB-2 as previously filed with the Commission on August 6, 1997.
10.4 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 Commission on August 6, 1997.
10.5 Demand Note (Multiple Advances), issued February 1997, between
Citibank, N.A. and the Registrant, incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form SB-2 as
previously filed with the Commission on June 13, 1997.
10.6 Promissory Note and Cross-Receipt in connection with the
Shareholder, incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form SB-2 as previously filed with the
Commission on August 6, 1997.
10.7 Joint Venture Agreement, dated April 11, 1994, between Kalanit
Center for Marketing Software & Hardware Ltd. and the Registrant,
incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form SB-2 as previously filed with the Commission on
June 13, 1997.
10.8 Form of Director and Executive Officer Indemnification Agreement,
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form SB-2 as previously filed with the Commission on
August 6, 1997.
10.9 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 Commission on
July 23, 1997.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
No reports on Form 8-K were filed in the quarter ended December 31, 1998.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - None
18
<PAGE>
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, President
Chief Executive Officer
Date: March 30, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- ---------------------------------------- ---------------------------------
<S> <C> <C>
/s/ Shmuel BenTov President, Chief Executive Officer and March 30, 1999
- --------------------------------- Director
Shmuel BenTov (Principal Executive Officer)
/s/ Frank T Thoelen Chief Financial Officer and Director March 30, 1999
- --------------------------------- (Principal Financial and Accounting
Frank T Thoelen Officer)
/s/ Reuven Battat Director March 30, 1999
- ---------------------------------
Reuven Battat
/s/ Joseph E. Imholz Director March 30, 1999
- ---------------------------------
Joseph E. Imholz
/s/ Steven M. Mukamal Director March 30, 1999
- ---------------------------------
Steven M. Mukamal
</TABLE>
19
<PAGE>
FORM 10-K - ITEM 14 (a) (1) and (2)
THE A CONSULTING TEAM, INC.
The following financial statements of The A Consulting Team, Inc. are included
in Item 8.
<TABLE>
<S> <C>
Balance Sheets at December 31, 1998 and 1997..........................................................F-3
Statements of Operations for the years ended December 31, 1998, 1997 and 1996.........................F-4
Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996...............F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.........................F-6
Notes to Financial Statements.........................................................................F-7
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the SEC are not required under the related instructions or are
inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The A Consulting Team, Inc.
We have audited the accompanying balance sheets of The A Consulting
Team, Inc. (the "Company") as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The A Consulting
Team, Inc. at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 28, 1999
F-2
<PAGE>
THE A CONSULTING TEAM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $13,003,038 $16,945,010
Accounts receivable 8,848,932 7,237,905
Prepaid income taxes 674,500
Prepaid expenses and other current assets 432,377 83,320
----------- -----------
Total current assets 22,958,847 24,266,235
Investment at cost 3,000,000 --
Property and equipment, at cost, less accumulated
depreciation and amortization 2,702,021 1,124,396
Deposits 111,263 76,692
----------- -----------
Total assets $28,772,131 $25,467,323
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,876,945 $ 2,139,551
Income tax payable -- 527,376
Deferred income taxes 682,000 358,000
Current portion of long-term debt 15,126 13,967
----------- -----------
Total current liabilities 3,574,071 3,038,894
Long-term debt 14,966 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 4,076,486 1,291,729
----------- -----------
Total shareholders' equity 25,183,094 22,398,337
=========== ===========
Total liabilities and shareholders' equity $28,772,131 $25,467,323
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Consulting services $42,421,779 $32,481,351 $18,980,857
Software licensing 6,247,771 2,540,534 1,776,222
Training services 255,053 194,026 237,975
----------- ----------- -----------
Total revenues 48,924,603 35,215,911 20,995,054
Cost of revenues 32,167,572 23,931,627 14,521,124
----------- ----------- -----------
Gross profit 16,757,031 11,284,284 6,473,930
Operating expenses:
Selling, general and administrative 12,469,658 7,950,091 6,322,642
Equity in net (income) loss from joint venture,
including loss on disposal
of $1,584 for 1997 -- (13,253) 49,575
----------- ----------- -----------
Total operating expenses 12,469,658 7,936,838 6,372,217
----------- ----------- -----------
Income from operations 4,287,373 3,347,446 101,713
Interest income 650,404 345,296 2,446
Interest expense (3,020) (147,234) (67,496)
----------- ----------- -----------
Income before income taxes 4,934,757 3,545,508 36,663
----------- ----------- -----------
Income taxes 2,150,000 1,022,000 28,700
----------- ----------- -----------
Net income $ 2,784,757 $ 2,523,508 $ 7,963
=========== =========== ===========
Net income per share - basic and diluted $ 0.51
===========
Unaudited pro forma information:
Historical income from operations $ 3,347,446 $ 101,713
Pro forma adjustment for executive compensation (37,500) 1,222,886
----------- -----------
Pro forma income from operations 3,309,946 1,324,599
Interest (expense) income, net 198,062 (65,050)
----------- -----------
Pro forma income before income taxes 3,508,008 1,259,549
Pro forma provision for income taxes 1,542,000 568,000
----------- -----------
Pro forma net income $ 1,966,008 $ 691,549
=========== ===========
Pro forma net income per share basic and diluted $ 0.45 $ 0.19
=========== ===========
Weighted average number of common
shares outstanding 4,409,558 3,729,211
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
--------- -------- ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 -- $ -- $3,550,000 $35,500 $ -- $ 767,221 $ 802,721
Net income -- -- -- -- -- 7,963 7,963
------ ------ ---------- ------- ----------- ----------- -----------
Balance, December 31, 1996 -- -- 3,550,000 35,500 -- 775,184 810,684
Issuance of 1,935,000 shares of
Common Stock in an Initial
Public Offering net of
offering costs of $2,148,892 -- -- 1,935,000 19,350 21,051,758 -- 21,071,108
Distribution -- -- -- -- -- (2,006,963) (2,006,963)
Net income -- -- -- -- -- 2,523,508 2,523,508
------ ------ ---------- ------- ----------- ----------- -----------
Balance, December 31, 1997 -- -- 5,485,000 54,850 21,051,758 1,291,729 22,398,337
Net income -- -- -- -- -- 2,784,757 2,784,757
------ ------ ---------- ------- ----------- ----------- -----------
Balance, December 31, 1998 -- $ -- $5,485,000 $54,850 $21,051,758 $ 4,076,486 $25,183,094
------ ------ ---------- ------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,784,757 $ 2,523,508 $ 7,963
Adjustments to reconcile net income
to net cash provided by (used in) operating activites:
Depreciation and amortization 441,208 141,273 96,261
Deferred income taxes 324,000 342,000 (31,000)
Equity in net income from joint venture -- (13,253) 49,575
Changes in operating assets and liabilities:
Accounts receivable (1,611,027) (3,074,036) (1,667,509)
Prepaid income taxes (674,500) -- --
Prepaid expenses and other current assets (349,057) 79,230 (106,309)
Accounts payable and accrued expenses 737,394 426,204 714,756
Due to joint venture -- -- (43,480)
Income taxes payable (527,376) 519,269 (50,408)
-------------------------------------------------
Net cash provided by (used in) operating activities 1,125,399 944,195 (1,030,151)
Cash flows from investing activities:
Purchase of property and equipment (2,018,833) (890,346) (301,053)
Deposits (34,571) 29,705 (29,705)
Repayment from joint venture -- (42,078) (17,918)
Investment at cost (3,000,000) -- --
-------------------------------------------------
Net cash used in investing activities (5,053,404) (902,719) (348,676)
Cash flows from financing activities:
Net proceeds from public offering -- 21,071,108 --
Proceeds from loan payable-bank -- 1,215,000 1,315,000
Repayment of loan payable-bank -- (2,665,000) --
Proceeds from loan by shareholder -- -- 691,000
Repayment of loan to shareholder -- (1,045,000) (757,000)
Distribution of S Corporation earnings to shareholder -- (2,006,963) --
Proceeds from long-term debt -- -- 57,984
Repayment of long-term debt (13,967) (12,896) (1,029)
-------------------------------------------------
Net cash (used in) provided by financing activities (13,967) 16,556,249 1,305,955
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,941,972) 16,597,725 (72,872)
Cash and cash equivalents at beginning of year 16,945,010 347,285 420,157
-------------------------------------------------
Cash and cash equivalents at end of year $13,003,038 $16,945,010 $ 347,285
=================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,020 $ 211,591 $ 13,921
=================================================
Income taxes $ 3,027,876 $ 160,731 $ 110,108
=================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
The A Consulting Team, Inc. (the "Company") was incorporated on
February 16, 1983, in the State of New York, for the purpose of providing
various computer consulting and training services and marketing software
products. The Company's customers are primarily located in the New York/New
Jersey metropolitan area.
In August 1997, the Company completed its initial public offering (the
"Offering") of 1,800,000 shares of Common Stock at an offering price of $12.00
per share, resulting in net proceeds to the Company of approximately $19.6
million. In September 1997, an over-allotment option of 135,000 shares of Common
Stock was exercised, generating an additional $1.5 million of net proceeds to
the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share
Basic and diluted earnings per share is calculated in accordance with
Financial Accounting Standards Board Statement
No. 128, Earnings per Share.
Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment acquired after December 31, 1994 are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from five to ten years. Property and equipment acquired prior to
January 1, 1995 are depreciated using an accelerated method over the estimated
useful lives of the assets, which range from five to seven years.
Revenue and Accounts Receivable
Consulting and training 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.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Provisions for
doubtful accounts, which have not been material for any of the periods
presented, are recorded when such losses are determined. Credit losses
historically have been consistent with management's expectations.
Research and Development Expenses
Research and development costs are charged to expense as incurred.
F-7
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations with pro forma
disclosure of what net income and earnings per share would have been had the
Company adopted the new fair value method. The Company has elected to account
for its stock-based compensation plans in accordance with the provisions of APB
25.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the year ended December 31, 1998. See Note 12 for information
regarding the computation of basic and diluted earnings per share for the years
ended December 31, 1997 and 1996.
Numerator:
Net income..................................................... $2,784,757
----------
Numerator for basic and diluted earnings per
share...................................................... $2,784,757
==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares........................... 5,485,000
Effect of dilutive securities:
Employee stock options..................................... 3,356
---------
Denominator for diluted earnings per
share - adjusted weighted-average shares................... 5,488,356
=========
Basic and Diluted earnings per share............................ $ 0.51
==========
Options to purchase 416,150 shares of common stock at $7.50 per share were
outstanding during 1998, but were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the shares of Common Stock, and therefore, the effect would be
antidilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
------------
1998 1997
---- ----
Equipment and leasehold improvements.... $2,388,459 $1,255,176
Software................................ 555,160 17,143
Furniture and fixtures.................. 548,850 201,316
Automobiles............................. 88,970 102,355
---------- ----------
Subtotal............................. 3,581,439 1,575,990
Less accumulated depreciation........... 879,418 451,594
---------- ----------
Total................................ $2,702,021 $1,124,396
========== ==========
4. LOANS PAYABLE AND CREDIT ARRANGEMENT
The Company has a line of credit of $2,100,000 and no outstanding
borrowings at December 31, 1998 and December 31, 1997. The line of credit is
guaranteed by the Company's principal shareholder and
F-8
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
bears interest at a variable rate based on prime plus 1% (7.75% at December 31,
1998 and 8.5% at December 31, 1997). In June 1997, there was $1,045,000
outstanding from the principal shareholder. The loan bore interest at a variable
rate based on prime (8.5% at June 13, 1997, the date of repayment) and was due
on demand.
Long-term debt is comprised of an automobile loan and is payable in
monthly installments of $1,415 including interest at 8%. As of December 31,
1998, the loan matures as follows: 1999--$15,126 and 2000--$14,966.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
------------
1998 1997
---- ----
Accounts payable..................... $ 535,250 $ 787,962
Commissions.......................... 209,858 120,418
Payroll.............................. 1,181,007 1,034,662
Other accrued expenses............... 950,830 196,509
---------- ----------
$2,876,945 $2,139,551
========== ==========
6. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
Effective January 1, 1993, the Company elected to change its tax
accounting method from cash to accrual basis. The cumulative tax effect of this
change as of January 1, 1993 was recognized over four years on the Company's tax
returns. The federal income tax provision for 1996 consists of the tax effect of
this change.
Effective January 1, 1995, the Company elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code for federal income
tax purposes. In addition, the Company elected to be treated as an S Corporation
for New Jersey and New York state income tax purposes. In New York and New
Jersey, S Corporations are subject to a minimum income tax. Because the sole
shareholder of the Company included the Company's income in his own personal
income tax return for the year ended December 31, 1996 and part of the fiscal
year ending December 31, 1997, the Company was not subject to federal income
taxes during that time. However, the Company was liable for New York City income
taxes for those periods because New York City does not recognize S Corporation
status.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At December 31,
1998 and 1997, the deferred income tax liability relates solely to licensing
revenue.
F-9
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
Significant components of the provision (credit) for income taxes are
as follows:
Year Ended
December 31,
------------
1998 1997 1996
----- ----- ----
Current:
Federal............................ $1,178,000 $ 338,000 $ 28,300
State and local.................... 648,000 342,000 31,400
---------- ---------- ---------
Total current.................... 1,826,000 680,000 59,700
---------- ---------- ---------
Deferred:
Federal............................ 277,000 302,000 (28,500)
State and local.................... 47,000 40,000 (2,500)
---------- ---------- ---------
Total deferred................... 324,000 342,000 (31,000)
========== ========== =========
Total Current and Deferred............ $2,150,000 $1,022,000 $ 28,700
========== ========== =========
Effective August 12, 1997, the day before the Company completed its
Offering, the Company changed from S Corporation to C Corporation status. Upon
the change in status, under the provisions of SFAS 109, the Company recorded an
additional deferred income tax liability of $163,000 due to federal and state
income taxes being payable on the temporary differences.
A reconciliation between the federal statutory rate and the effective
income tax rate for the year ended December 31, 1998 and the unaudited pro forma
income tax rate for the years ended December 31, 1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
Federal statutory rate............................... 34.0% 34.0% 34.0%
State and local taxes net of federal tax benefit..... 9.3 9.6 10.0
Non deductible expenses.............................. 0.3 0.4 1.1
---- ---- ----
Total.......................................... 43.6% 44.0% 45.1%
==== ==== ====
7. RETIREMENT PLAN
The Company sponsors a defined contribution plan under Section 401(k)
of the Internal Revenue Code for its employees. Participants can make elective
contributions subject to certain limitations. Under the plan, the Company can
make matching contributions on behalf of all participants. No such contributions
were made by the Company in 1998, 1997 and 1996.
8. JOINT VENTURE
The Company owned a 50% interest in Vianet, Inc. ("Vianet"), which is
located in New York and is engaged in the recruiting of international
consultants and software development for resale. The Company paid Vianet $36,595
for recruiting services in 1996. The Company accounted for this investment under
the equity method of accounting.
The following is summarized financial information of Vianet for the
year ended December 31, 1996:
Revenues.................................. $ 36,595
Costs and expenses........................ (135,745)
---------
Net loss.................................. $ (99,150)
=========
F-10
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
Vianet had limited activity during the three months ended March 31,
1997. On March 31, 1997, the Company sold its 50% interest in Vianet to its
joint venture partner for a nominal amount. Vianet repaid the $29,705 advance to
the Company during March 1997.
9. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains its cash balances on deposit with a limited number of
financial institutions.
In 1998, the three largest customers represented 16%, 15% and 12% of
revenues, while in 1997 and 1996 the largest customer represented 24% and 12% of
revenues, respectively. Besides these customers, no other customer represented
greater than 10% of the Company's revenues.
One customer represented approximately 15% of accounts receivable as of
December 31, 1998. Receivables from two customers with the largest balances
represented approximately 44% and 28% of accounts receivable as of December 31,
1997 and 1996, respectively.
10. LEASES
The Company leases office space under non-cancellable operating leases.
Future base rental payments are as follows:
1999................................... $ 701,000
2000................................... 697,000
2001................................... 691,000
2002................................... 672,000
2003................................... 383,000
----------
$3,144,000
==========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $407,000, $157,000 and $119,000, respectively.
In addition, in 1996, the Company leased, on a month-to-month basis,
office space from the Company's sole shareholder. Rent paid to the sole
shareholder was $12,000 in 1996.
11. STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") that provides for
the grant of stock options that are either "incentive" or "non-qualified" for
federal income tax purposes. The Plan provides for the issuance of up to a
maximum of 600,000 shares of common stock. On May 27, 1998, the shareholders
approved and ratified an increase to the Plan from 600,000 to 900,000 shares of
Common Stock (subject to adjustment pursuant to customary anti-dilution
provisions).
The exercise price per share of a stock option is to be established by
the Executive Compensation Committee of the Board of Directors in its
discretion, but may not be less than the fair market value of a share of common
stock as of the date of grant. The aggregate fair market value of the shares of
common stock with respect to which "incentive" stock options are exercisable for
the first time by an individual to whom an "incentive" stock option is granted
during any calendar year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any
time after full vesting for a period not to exceed five years from the date of
grant and terminate upon the date of termination of employment. Such period is
to be established by the Company in its discretion on the date of grant.
F-11
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
Information with respect to options under the Plan is as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Granted during 1997 561,200 $11.65
Forfeitures during 1997 (28,750) 12.00
-------- ------
Balance - December 31,1997 532,450 11.63
Granted during 1998 141,000 7.00
Forfeitures during 1998 (116,300) 7.50
-------- ------
Balance - December 31,1998 557,150 $ 7.38
======== ======
Effective October 14, 1998, the Company changed the exercise price of
the stock options granted during 1997 (which ranged from $10.25 to $12.00) to
$7.50 per share, which was the market price per share on that date.
No options were exercisable at December 31, 1997 and 111,537 options
are exercisable as of December 31, 1998. Options outstanding at December 31,
1998 have exercise prices ranging from $7.00 to $7.50.
At December 31, 1998, the Company has 900,000 shares of Common Stock
reserved in connection with the Plan.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation expense has been recognized for the Plan. Had
compensation costs for the Company's Plan been determined based on the fair
value as of the grant date for awards in 1998 and 1997 consistent with the
provision of SFAS 123, the Company's net income and pro forma net income per
share (see Note 12) would have been reduced to the pro forma amounts as
indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pro forma net income................................. $2,346,000 $2,392,000
Pro forma net income per share - basic and diluted... $ 0.43 $ 0.42
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:
1998 1997
---- ----
Expected life (years)..................... 4 4
Risk free interest rate.................... 6.0% 5.67%
Expected volatility........................ 0.84 0.70
Expected dividend yield.................... 0 0
The weighted average fair value of options granted was $4.50 in 1998
and $6.68 in 1997. The weighted average remaining contractual life of options
outstanding at December 31, 1998 is 3.7 years.
12. PRO FORMA ADJUSTMENTS (UNAUDITED)
Pro Forma Net Income
Pro forma net income for the years ended December 31, 1997 and 1996
includes an adjustment for executive compensation to reflect the terms of new
contracts with the Chief Executive Officer and Chief
F-12
<PAGE>
THE A CONSULTING TEAM, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
Financial Officer in connection with the Offering. In addition, it also includes
an adjustment to provide for income taxes as if the Company had been a C
corporation for all years presented.
Pro Forma Net Income Per Share
Pro forma net income per share, basic and diluted, for the years ended
December 31, 1997 and 1996 has been computed by dividing pro forma net income by
the weighted average number of common shares outstanding plus the estimated
number of shares assumed to be sold by the Company to pay the S Corporation
distribution to the shareholder, for the period prior to the Offering. The
impact of including outstanding stock options was anti-dilutive.
F-13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-42145), pertaining to The A Consulting Team, Inc. 1997 Stock Option
and Award Plan, of our report dated January 28, 1999, with respect to the
financial statements of The A Consulting Team, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
Ernst & Young LLP
March 30, 1999
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 13,003,038
<SECURITIES> 0
<RECEIVABLES> 8,848,932
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,958,847
<PP&E> 3,581,439
<DEPRECIATION> 879,418
<TOTAL-ASSETS> 28,772,131
<CURRENT-LIABILITIES> 3,574,071
<BONDS> 0
0
0
<COMMON> 54,850
<OTHER-SE> 25,128,244
<TOTAL-LIABILITY-AND-EQUITY> 28,772,131
<SALES> 48,924,603
<TOTAL-REVENUES> 48,924,603
<CGS> 32,167,572
<TOTAL-COSTS> 44,640,250
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,020
<INCOME-PRETAX> 4,934,757
<INCOME-TAX> 2,150,000
<INCOME-CONTINUING> 2,784,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,784,757
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
