<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-22945
THE A CONSULTING TEAM, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3169913
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Park Avenue South
New York, New York 10003
------------------------
(Address of principal executive offices)
(212) 979-8228
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of November 12, 1999, there were 5,485,000 shares
of Common Stock, with $.01 par value per share, outstanding.
<PAGE>
THE A CONSULTING TEAM, INC.
INDEX
Page Number
-----------
Index 2
Part I. Financial Information
Item 1. Consolidated Financial Statements (unaudited) 3-7
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation 8-14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 27 Financial Data Schedule 17
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,931,439 $13,003,038
Accounts receivable 13,430,675 8,848,932
Unbilled receivables 348,500 --
Prepaid income taxes -- 674,500
Prepaid expenses and other current assets 316,382 432,377
----------- -----------
Total current assets 21,026,996 22,958,847
Investment at cost 300,000 3,000,000
Property and equipment, at cost, less accumulated
depreciation and amortization 6,993,055 2,702,021
Intangibles (net) 3,682,118 --
Deposits 273,841 111,263
----------- -----------
Total assets $32,276,010 $28,772,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loan payable - bank $ 325,000 $ --
Accounts payable and accrued expenses 4,895,428 2,876,945
Income tax payable 18,604 --
Capital lease obligation 293,932 --
Deferred income taxes 256,000 682,000
Current portion of long-term debt 16,058 15,126
----------- -----------
Total current liabilities 5,805,022 3,574,071
Capital lease obligation 583,705 --
Long-term debt 2,803 14,966
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 4,777,872 4,076,486
----------- -----------
Total shareholders' equity 25,884,480 25,183,094
----------- -----------
Total liabilities and shareholders' equity $32,276,010 $28,772,131
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Consulting services $ 37,682,691 $ 31,266,218 $ 12,964,969 $ 11,279,830
Software licensing 3,416,412 4,049,929 1,176,792 1,341,503
Training services 192,759 198,848 64,950 47,617
------------ ------------ ------------ ------------
Total revenues 41,291,862 35,514,995 14,206,711 12,668,950
Cost of revenues 26,680,038 23,265,421 9,336,348 8,350,666
------------ ------------ ------------ ------------
Gross profit 14,611,824 12,249,574 4,870,363 4,318,284
Operating expenses:
Selling, general & administrative 13,446,844 9,281,172 5,937,506 3,203,794
------------ ------------ ------------ ------------
Total operating expenses 13,446,844 9,281,172 5,937,506 3,203,794
------------ ------------ ------------ ------------
Income (loss) from operations 1,164,980 2,968,402 (1,067,143) 1,114,490
Interest income,net 510,406 501,811 80,287 151,369
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,675,386 3,470,213 (986,856) 1,265,859
Income taxes 974,000 1,500,000 (166,000) 550,000
============ ============ ============ ============
Net income (loss) $ 701,386 $ 1,970,213 $ (820,856) $ 715,859
============ ============ ============ ============
Net income (loss)per share - basic and dilutive $ 0.13 $ 0.36 $ (0.15) $ 0.13
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 701,386 $ 1,970,213
Adjustments to reconcile net income to net cash:
used in operating activities
Depreciation and amortizatrion 856,913 287,781
Deferred income taxes (302,000) 196,000
Changes in operating assets and liabilities:
Accounts receivable (3,951,405) (3,582,369)
Unbilled receivables (153,948) --
Prepaid income taxes 674,500 --
Prepaid expenses and other 207,223 (357,695)
Accounts payable and accrued expenses 850,530 1,297,248
Deferred revenue (209,787) --
Income taxes payable 7,775 (527,376)
------------ ------------
Net cash used in operating activities (1,318,813) (716,198)
Cash flows from investing activities:
Purchase of property and equipment (2,568,501) (1,201,288)
Investment at cost (300,000) --
Investment and advances to T3 Media, Inc.,
net of cash acquired (95,591) --
Deposits (40,019) (8,038)
------------ ------------
Net cash used in investing activities (3,004,111) (1,209,326)
Cash flows from financing activities:
Repayment of debt (1,686,051) --
Repayment of capital lease obligations (62,624) (10,370)
------------ ------------
Net cash used in financing activities (1,748,675) (10,370)
------------ ------------
Net decrease in cash and cash equivalents (6,071,599) (1,935,894)
Cash and cash equivalents at beginning of period 13,003,038 16,945,010
------------ ------------
Cash and cash equivalents at end of period $ 6,931,439 $ 15,009,116
============ ============
Supplemental disclosure of cash flow information:
Interest $ 37,957 $ 2,370
============ ============
Income taxes $ 582,896 $ 1,993,872
============ ============
Supplemental disclosure of non cash investing
and financing activity:
Capital lease obligation $ 419,621 $ --
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THE A CONSULTING TEAM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with The A
Consulting Team, Inc. (the "Company") Form 10-K for the year ended December 31,
1998 filed with the SEC, and the accompanying financial statements and related
notes thereto. The accounting policies used in preparing these financial
statements are the same as those described in the Company's Form 10-K for the
year ended December 31, 1998 filed with the SEC.
2) INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial position as of September 30, 1999, the consolidated results of
operations for the nine and three months ended September 30, 1999 and 1998, and
cash flows for the nine months ended September 30, 1999 and 1998, respectively.
The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date, but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the audited financial statements and footnotes thereto included in the Form 10-K
filed by the Company for the year ended December 31, 1998.
The consolidated results of operations for the nine and three months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for any other interim period or for the full year.
3) INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which was required to be
adopted on December 31, 1997. Under the new requirements for calculating primary
(basic) earnings per share, the dilutive effect of stock options is excluded.
Options to purchase 392,111 shares of common stock at $7.50 per share,
options to purchase 128,750 shares of common stock at $7.00 per share, and
options to purchase 25,200 shares of common stock at $8.00 per share, for the
three months ended September 30, 1999, were outstanding during 1999, but were
not included in the computation of diluted earnings per share, because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
Options to purchase 343,937 shares of common stock at $12.00 per share and
options to purchase 86,150 shares of common stock at $10.25 per share, for the
three months ended September 30, 1998, were outstanding during 1998, but were
not included in the computation of diluted earnings per share, because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
6
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share for the nine and three months ended September 30, 1999 and September 30,
1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 701,386 $ 1,970,213 $ (820,856) $ 715,859
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per share $ 701,386 $ 1,970,213 $ (820,856) $ 715,859
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 5,485,000 5,485,000 5,485,000 5,485,000
Effect of dilutive securities:
Employee stock options 17,730 4,474 -- --
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted-average shares 5,502,730 5,489,474 5,485,000 5,485,000
=========== =========== =========== ===========
Basic and Diluted earnings per share $ 0.13 $ 0.36 $ (0.15) $ 0.13
=========== =========== =========== ===========
</TABLE>
4) INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of the assets and liabilities
for financial purposes and the amount used for income tax purposes.
5) CONCENTRATION OF CREDIT RISK:
Sales to two customers represented approximately 40% of the Company's
revenue for the nine months ended September 30, 1999. Sales to three customers
for the same period in 1998 represented approximately 42% of the Company's
revenue. Sales to two customers represented approximately 31% of the Company's
revenue for the three months ended September 30, 1999. Sales to three customers
for the same period in 1998 represented approximately 53% of the Company's
revenue.
6) ACQUISITION:
On October 2, 1998, the Company made an investment in web integrator T3
Media, Inc. ("T3 Media") of $3 million, in return for convertible preferred
stock. On June 23, 1999, the Company increased its ownership interest in T3
Media to approximately 51% by an additional investment in T3 Media's common
stock of $370,000 and conversion of the preferred stock to common stock. The
acquisition of T3 Media was accounted for using the purchase method of
accounting. The purchase price has been preliminarily allocated to the assets
acquired and liabilities assumed and are subject to change. Accordingly, the
results of operations of T3 Media are included in the Company's consolidated
results of operations from the date of acquisition. The excess of the purchase
price over the preliminarily estimate of fair value of the net identifiable
assets acquired totaled $3.7 million and has been recorded as intangibles.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of significant factors affecting the
Company's operating results and liquidity and capital resources should be read
in conjunction with the accompanying financial statements and related notes.
Overview
TACT(Registered) is an end-to-end e-Services provider. The Company
delivers e-business solutions from web strategy and design through web
development and integration, to web application hosting. Its clients include a
broad range of Fortune 1000 companies and other large organizations. TACT also
provides the same markets with enterprise-wide Information Technology
consulting, software and training services and solutions. The Company generated
91% of its revenues from IT consulting services. Moreover, over 87% 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 period 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. These increases, however, were partially offset by increases in
consultants' and employees' salaries and wages and reduction in the consultant
utilization rate. 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 consultants on billing, 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 Branch SM
offices located in New York, NY; Clark, NJ; Stamford, CT; Chicago, IL; and
Atlanta, GA.
8
<PAGE>
The Company opened an additional Solution Branch in Atlanta, GA in April
1999. 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.
On October 2, 1998 the Company made an investment in web integrator, T3
Media, Inc. ("T3 Media") of $3 million, in return for convertible preferred
stock. On June 23, 1999, the Company increased its ownership interest in T3
Media to approximately 51% by an additional investment in T3 Media's common
stock of $370,000 and conversion of the preferred stock to common stock. The
acquisition of T3 Media was accounted for using the purchase method of
accounting. The purchase price has been preliminarily allocated to the assets
acquired and liabilities assumed and are subject to change. Accordingly, the
results of operations of T3 Media are included in the Company's consolidated
results of operations from the date of acquisition. The excess of the purchase
price over the preliminarily estimate of fair value of the net identifiable
assets acquired totaled $3.7 million and has been recorded as intangibles.
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>
(1) Nine Months (2) Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Consulting services 91.2% 88.0% 91.3% 89.0%
Software licensing 8.3 11.4 8.3 10.6
Training services 0.5 0.6 0.4 0.4
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 64.6 65.5 65.7 65.9
------ ------ ------ ------
Gross profit 35.4 34.5 34.3 34.1
Selling, general and administrative expenses 32.6 26.1 41.8 25.3
Income (loss) from operations 2.8 8.4 (7.5) 8.8
Net income (loss) 1.7% 5.5% (5.8)% 5.7%
====== ====== ====== ======
</TABLE>
Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended
September 30, 1998
Revenues. Revenues of the Company increased by approximately $5.8 million,
or 16.3%, from $35.5 million for the nine months ended September 30, 1998 to
$41.3 million for the nine months ended September 30, 1999. Revenues from
consulting services increased by approximately $6.4 million, or 20.5%, from
$31.3 million for the nine months ended September 30, 1998 to $37.7 million for
the same period in 1999. The increase in 1999 period revenues from consulting
services was primarily the result of an increase in the average number of
consultants during the period, together with higher hourly billing rates, offset
by a reduction in the consultant utilization rate. The Company was engaged on
several significant projects involving Year 2000 remediation, project management
and Internet application development from existing clients, which resulted in
higher billings.
Software licensing revenues decreased $634,000, or 15.6%, from $4.0
million in 1998 to $3.4 million in 1999. This decrease is directly attributable
to reduced demand for Year 2000-related products due to the fact that many our
customers licensed Y2K-related products during the last quarter of 1998 and as a
result of slower than expected sales of new products.
9
<PAGE>
Revenues from training represented less than 1% of the Company's total
revenues for the nine months ended September 30, 1999 and 1998, respectively.
Gross Profit. The gross profit for the nine months ending September 30,
1999 increased by approximately $2.4 million, or 19.3%, from $12.2 million in
1998 to $14.6 million in 1999. As a percentage of total revenues, gross profit
increased from 34.5% of total revenues for the nine months ended September 30,
1998 to 35.4% for the same period in 1999. This increase directly relates to
sales of certain software products with higher than average margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $4.2 million, or 44.9%, from
$9.3 million for the nine months ended September 30, 1998 to $13.4 million for
the same period in 1999. Expressed as a percentage of revenues, selling, general
and administrative expenses increased, representing 32.6% of revenues for the
nine months ended September 30, 1999 as compared to 26.1% of total revenues for
the same period in 1998. The increase in selling, general and administrative
expenses in the first three quarters of 1999 resulted from an increase in
salaries, rent and depreciation associated with opening new branch locations, a
change in the mix of sales, marketing, recruiting and management personnel, and
the inclusion of T3 Media expenses. This inclusion of T3 Media expenses, which
is largely comprised of salaries, rent and depreciation, and recruiting-related
expenses added about 6 percentage points to TACT(Registered)'s 1998 SG&A
expenses.
Net Income. As a result of the factors described above, net income
decreased approximately $1.3 from $2.0 million for the nine months ended
September 30, 1998 to $701,000 for the same period in 1999.
Comparison of the Three Months Ended September 30, 1999 to the Three Months
Ended September 30, 1998
Revenues. Revenues of the Company increased by approximately $1.5 million,
or 12.1%, from $12.7 million for the three months ended September 30, 1998, to
$14.2 million for the three months ended September 30, 1999. Revenues from
consulting services increased by approximately $1.7 million, or 14.9%, from
$11.3 million for the three months ended September 30,1998 to $13.0 million for
the same period in 1999. The increase in 1999 period revenues from consulting
services was primarily the result of including T3 Media's results for the
quarter, together with higher hourly billing rates, offset by a reduction in the
consultant utilization rate.
Software licensing revenues decreased by approximately $165,000, or 12.3%,
from $1.3 million for the three months ended September 30, 1998 to $1.2 million
for the same period in 1999. The decrease resulted from the sale of newer
products, which was more than offset by the reduction in demand for Y2K related
products.
Revenues from training services represented less than 1% of the Company's
total revenues for the three months ended September 30, 1999 and 1998,
respectively.
Gross Profit. The gross profit for the three months ended September 30,
1999 increased by approximately $552,000, or 12.8%, from $4.3 million in 1998 to
$4.9 million in 1999. As a percentage of total revenues, gross profit increased
from 34.1% of total revenues for the three months ended September 30, 1998 to
34.3% for the same period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.7 million, or 85.3%, from
$3.2 million for the three months ended September 30, 1998 to $5.9 million for
the same period in 1999. Expressed as a percentage of revenues, selling, general
and administrative expenses increased, representing 41.8% of total revenues for
the three months ended September 30, 1999, as compared to 25.3% of total
revenues for the same period in 1998. The increase in selling, general and
administrative expenses for the three months ended September 30, 1999 resulted
from an increase in salaries, rent, depreciation associated with opening new
branch locations, and the inclusion of T3 Media's expenses for this period. This
inclusion of T3 Media expenses, which is largely comprised of salaries, rent
depreciation, and recruiting related expenses added about 6 percentage points to
TACT(Registered)'s 1998 SG&A expenses.
10
<PAGE>
Net Income (Loss). As a result of the factors described above, TACT had an
operating loss for the three months ended September 30, 1999 of $820,000,
compared with net income of $716,000 in the same period last year.
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, NA to repay its line of credit, and $17.2 million was made
available to fund current operations.
The Company's cash balances were approximately $13.0 million at December
31,1998 and $6.9 million at September 30, 1999. Net cash used in operating
activities was approximately $1.3 million for the nine months ended September
30, 1999, compared with net cash used of $716,000 in the comparable period in
1998. In accordance with investment guidelines approved by the Company's Board
of Directors, cash balances in excess of those required to fund operations have
been invested in short-term commercial paper with a credit rating no lower than
A1, P1.
The Company, together with its subsidiary, currently has a line of credit
of $2,425,000, of which $325,000 is outstanding at September 30, 1999. The line
of credit is guaranteed by the Company's principal shareholder. The line of
credit bears interest at a variable rate based on prime plus 1%. The rate was
8.25% at September 30, 1999. The Company's subsidiary has entered into a series
of capital leases to finance its expansion plans, covering leasehold
improvements, furniture and computer related equipment. The amount outstanding
under such leases was $878,000 at September 30, 1999.
The Company's accounts receivable at September 30, 1999 and December 31,
1998 were approximately $13.4 million and $8.8 million, respectively,
representing 91 and 62 days of sales outstanding ("DSO"), respectively. The
Company does not anticipate difficulty in collecting amounts due, since this
increase in DSO resulted from increased sales toward the end of the reporting
period and business with several clients that have been granted longer payment
terms.
Sales to two customers represented approximately 40% of the Company's
revenue for the nine months ended September 30, 1999. Sales to three customers
for the same period in 1998 represented approximately 42% of the Company's
revenue. Sales to two customers represented approximately 31% of the Company's
revenue for the three months ended September 30, 1999. Sales to three customers
for the same period in 1998 represented approximately 53% of the Company's
revenue.
Net cash used in investing activities was approximately $3.0 million and
$1.2 million for the nine months ended September 30, 1999 and 1998,
respectively. This represented additions to property and equipment as the
Company continues to expand its Solution Branch locations, expansion of the
Company's computing network and infrastructure, and the investment and advances
to T3 Media, net of cash acquired.
In management's opinion, cash flows from operations and borrowing capacity
combined with remaining proceeds from the its initial public offering will
provide adequate flexibility for funding the Company's working capital
obligations and expansion plans.
Year 2000 Compliance Disclosure
"Year 2000 compliance" means the ability of hardware, software and other
data processing instrumentalities to interpret and manipulate correctly all date
and time data up to and through the year 2000, including proper computation for
leap years. The Company's executive management continues to monitor the
Company's ongoing compliance and readiness status with respect to Year 2000
issues.
11
<PAGE>
Numerous managers throughout the Company have been designated to report on and
oversee Year 2000 efforts and to provide periodic reports to senior management.
The Company's State of Readiness
As of September 30, 1999, the Company's assessment of all Year 2000 issues
was substantially completed. However, the assessment of some non-critical
issues, will not be completed until the fourth quarter of 1999. The Company has
not delayed any significant internal information technology or other projects as
a result of its investment of internal resources on internal Year 2000 issues.
The Company has sought to address "Year 2000 compliance" issues in the
following three concentrations: (i) internally, throughout the Company and its
Solution BranchesSM and business units; (ii) externally, with regard to the
third parties who provide products, services and information to the Company that
are material to the Company's ongoing operations and ability to serve its
customers; and (iii) externally, with regard to the products and services that
the Company has provided to its customers, whether or not the products or
services are specifically intended as Year 2000 software products or solutions,
or Year 2000 compliance testing, remediation projects, or independent vendor
validation projects.
Internal Compliance: TACT's internal compliance review has included
overall analysis and assessment of the Company's information technology
architecture and systems (software and hardware); client software systems,
including those in use by the human resource and financial accounting
departments (software and hardware); and embedded systems (products which are
made with microprocessor (computer) chips, including desktop and portable
personal computers and communications devices. Internal technical staff have
reviewed and are in the ongoing process of reviewing and reporting on the
Company's technical infrastructure.
In 1998, the Company completed initial reviews of its major internal
application systems for Year 2000 compliance. Much of the information technology
architecture and systems that was non-compliant has been replaced with newer,
compliant versions, and some have merely required the addition of fixes or
patches in order to attain compliance. The Company began replacing portions of
its financial accounting systems in 1998. These particular systems have now been
replaced and have successfully passed unit testing. In addition to the
completion of testing, the Company has also developed certain other contingency
plans relating to these critical internal systems. The Company has completed the
majority of the Year 2000 compliance review and testing of its infrastructure
including localized hardware and software application systems and embedded
systems and the remaining minority will be completed by the end of 1999. Most of
the embedded systems on which the Company relies in its day to day operations
are owned and managed by the lessors of the buildings in which the Company's
offices are located, or by agents of such lessors. The Company has inquired as
to the readiness of the lessors and, as applicable, their managing agents
regarding the embedded systems. The Company has received responses from its
lessors indicating that the embedded systems in the buildings are either
already, or are expected to be, Year 2000 compliant.
External Compliance (Third Parties): With respect to its company-wide
hardware infrastructure, the Company has attempted to obtain or has already
obtained Year 2000 certifications from many of the outside vendors and suppliers
with whom the Company contracts for the provision of utilities, goods and
certain internal functionality (including financial accounting). The Company is
not aware of any outside vendor with a Year 2000 issue that would materially
impact the Company's results of operations. However, the Company has no means of
ensuring that external vendors will be Year 2000 compliant. The inability of
external vendors to complete their Year 2000 compliance process in a timely
fashion could materially adversely impact the Company.
External Compliance (Customers): Numerous customers have inquired as to
the Year 2000 compliance of the Company, as well as the Company's software and
services. The Company believes that the products and services it provides to its
customers are Year 2000 compliant. The Company is responding to all inquiries
and provides information respecting the Company's Year 2000 readiness. Many
customers
12
<PAGE>
would not conduct business with the Company without some adequate assurances of
Year 2000 compliance, and many of the Company's contracts include Year 2000
warranty language to that effect.
Costs to Address the Company's Year 2000 Issues
Total costs of achieving Year 2000 compliance in the Company's internal
systems, which costs have been and will be expensed as they are incurred, are
estimated to be approximately $50,000 for 1999. The overwhelming majority of
those costs will have been incurred on or before September 30, 1999. In total,
approximately $100,000 is to be expended by the Company on Year 2000 compliance
in respect of its internal systems alone. The Company estimates that it will
incur up to approximately $50,000 in indirect costs during fiscal 1999. Though
the Company has not established a final total 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. Funds expended and to be
expended on Year 2000 compliance are allocated out of the Company's normal
operating budget.
Risks of the Company's Year 2000 Issues
There are numerous risks involving the Company's Year 2000 issues. In the
Company's judgment, the most reasonably likely worst case scenarios in
connection with the Year 2000 are as follows: failure of third party vendors to
provide critical material goods or services; possible postponements or delays or
reductions in new business, especially during the second half of 1999; and the
costs of resolving potential Year 2000 lawsuits by the Company's clients. There
is no guarantee that possible "worst case" Year 2000 issues of outside vendors,
suppliers and customers would not impact the Company. In addition, disruptions
in the economy generally resulting from Year 2000 issues could adversely affect
the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
A number of the Company's customers have a freeze or lock-down in effect
with respect to the development of new projects and solutions in the second half
of 1999. Reductions in new business may occur due to overall cessation or
slowdown of new investment by some of the Company's customers, under which no
new information technology development projects will be authorized or entered
into until after the January 1, 2000 changeover. It is possible that the Company
may be affected materially by any such information technology cessations,
slowdowns or problems. Based on the Company's existing commitments from its
customers, however, the Company presently believes that its consulting
(staffing) business will remain at or near the traditional utilization rate for
the remainder of 1999.
Also, some current and prospective customers may encounter their own Year
2000 issues arising from problems with their information technology systems. In
many cases, the Company provides solutions for IT systems that may be critical
to customers' operations. Business interruptions, loss or corruption of data, or
other major problems resulting from the failure of a client's IT system to
process Year 2000 data correctly could have material adverse consequences to
that customer. These problems may or may not be attributable to the Company. In
addition, since the Company has entered into software licensing agreements and
other agreements for the sale of software products or solutions, as well as
contracts involving Year 2000 compliance testing, remediation projects, or
independent vendor validation projects, the Company may face material exposure
if a customer institutes litigation based upon the breach of Year 2000 warranty
language, whether express or implied. The Company cannot currently predict
whether or to what extent there will be any legal claims brought against the
Company or whether there will be any other material adverse effect on the
Company's business, financial condition or the results of operations, as a
result of any such adverse consequences to its clients. Nonetheless, the Company
has purchased some insurance respecting Year 2000 liability that may provide
some limited protection.
Contingency Plans
Since the Company is an IT solution provider, many members of the
Company's management staff have technology backgrounds. The Company intends to
rely primarily upon its internal staff in order to respond to contingencies that
may arise due to the Year 2000. In particular, the Company's Software division
will be handling numerous help desk inquiries as they are received. The Company
believes it will have an effective program in place to resolve the Year 2000
issues that may arise in a timely and efficient
13
<PAGE>
manner. The Company has contingency plans for certain critical applications and
systems. These contingency plans involve, among other actions, manual
work-arounds. Certain staff will be required to be available during the
changeover to respond rapidly to customer problems as they arise. All senior
staff and many junior staff members will be on call (remotely or locally,
accessible by telephone and beeper) to provide assistance to the Company and to
customers on an as-needed basis.
Forward Looking Statements
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission ("SEC"). Such forward-looking statements involve risk
and uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company has not entered into market risk sensitive transactions
required to be disclosed under this item.
14
<PAGE>
Part II. Other Information
Item 1. Legal proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
- --------
27 Financial Data Schedule: Information Provided Pursuant to Article 5 of
Regulation S-X
No reports on Form 8-K were filed during the quarter for which this report is
filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
November 12, 1999 By: /s/ Shmuel BenTov
- ----------------- ------------------------------------
Date Shmuel BenTov, President
and Chief Executive Officer
November 12, 1999 By: /s/ Frank T Thoelen
- ----------------- ------------------------------------
Date Frank T Thoelen, Secretary-Treasurer
and Chief Financial Officer
16
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