<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: June 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 August 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
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<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
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
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
THE A CONSULTING TEAM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,285,311 $ 13,003,038
Accounts receivable 15,197,173 8,848,932
Prepaid income taxes - 674,500
Deferred income taxes 142,000 -
Prepaid expenses and other current assets 396,659 432,377
------------------ ------------------
Total current assets 25,021,143 22,958,847
Investment at cost 150,000 3,000,000
Property and equipment, at cost, less accumulated
depreciation and amortization 6,181,719 2,702,021
Intangibles 3,648,589 -
Deposits 260,654 111,263
================== ==================
Total assets $ 35,262,105 $ 28,772,131
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loan payable - bank $ 1,999,820 $ -
Accounts payable and accrued expenses 4,938,308 2,876,945
Income tax payable 362,533 -
Capital lease obligation 201,468 -
Deferred revenue 209,787 -
Deferred income taxes 503,000 682,000
Current portion of long-term debt 14,381 15,126
------------------ ------------------
Total current liabilities 8,229,297 3,574,071
Capital lease obligation 319,173 -
Long-term debt 8,299 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 5,598,728 4,076,486
------------------ ------------------
Total shareholders' equity 26,705,336 25,183,094
------------------ ------------------
Total liabilities and shareholders' equity $ 35,262,105 $ 28,772,131
================== ==================
</TABLE>
See accompanying notes to financial statements.
3
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THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ------------------- ------------------ ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Consulting services $ 24,717,722 $ 19,986,388 $ 13,016,107 $ 10,897,245
Software licensing 2,239,620 2,708,426 1,479,681 1,438,009
Training services 127,809 151,231 37,034 62,670
------------------ ------------------- ------------------ ------------------
Total revenues 27,085,151 22,846,045 14,532,822 12,397,924
Cost of revenues 17,343,690 14,914,755 9,131,101 8,080,960
------------------ ------------------- ------------------ ------------------
Gross profit 9,741,461 7,931,290 5,401,721 4,316,964
Operating expenses:
Selling, general & administrative 7,509,338 6,077,378 4,082,222 3,279,105
------------------ ------------------- ------------------ ------------------
Total operating expenses 7,509,338 6,077,378 4,082,222 3,279,105
------------------ ------------------- ------------------ ------------------
Income from operations 2,232,123 1,853,912 1,319,499 1,037,859
Interest income 431,200 352,091 226,759 180,602
Interest expense (1,081) (1,649) (504) (791)
------------------ ------------------- ------------------ ------------------
Income before income taxes 2,662,242 2,204,354 1,545,754 1,217,670
Income taxes 1,140,000 950,000 659,000 530,000
================== =================== ================== ==================
Net income $ 1,522,242 $ 1,254,354 $ 886,754 $ 687,670
================== =================== ================== ==================
Net income per share - basic and dilutive $ 0.28 $ 0.23 $ 0.16 $ 0.13
================== =================== ================== ==================
</TABLE>
See accompanying notes to financial statements.
4
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THE A CONSULTING TEAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,522,242 $ 1,254,354
Adjustments to reconcile net income to net cash:
used in operating activites
Depreciation and amortization 400,304 180,181
Deferred income taxes (197,000) 159,000
Changes in operating assets and liabilities:
Accounts receivable (6,156,497) (2,908,110)
Prepaid income taxes 674,500 -
Prepaid expenses and other 126,946 (157,972)
Accounts payable and accrued expenses 1,642,741 606,785
Income taxes payable 351,703 (431,783)
------------------ ------------------
Net cash used in operating activities (1,635,081) (1,297,545)
Cash flows from investing activities:
Purchase of property and equipment (1,811,392) (843,190)
Investment at cost (150,000) -
Investment and advances to T3 Media,
net of cash required (87,030) -
Deposits (26,832) -
------------------ ------------------
Net cash used in investing activities (2,075,254) (843,190)
Cash flows from financing activities:
Repayment of long-term debt (7,412) (6,844)
------------------ ------------------
Net cash used in financing activities (7,412) (6,844)
------------------ ------------------
Net decrease in cash and cash equivalents (3,717,727) (2,147,579)
Cash and cash equivalents at beginning of period 13,003,038 16,945,010
------------------ ------------------
Cash and cash equivalents at end of period $ 9,285,311 $ 14,797,431
================== ==================
Supplemental disclosure of cash flow information:
Interest $ 1,081 $ 1,649
================== ==================
Income taxes $ 310,797 $ 1,222,783
================== ==================
</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 June 30,1999, the consolidated results of operations
for the six and three months ended June 30, 1999 and 1998, and cash flows for
the six months ended June 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 six and three months
ended June 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.
All outstanding options were included in the computation of diluted earnings per
share because the options' exercise price was less than the average market price
of the common shares and, therefore, the effect would be dilutive.
6
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The following table sets forth the computation of basic and diluted earnings per
share for the six and three months ended June 30, 1999 and June 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------------- --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,522,242 $ 1,254,354 $ 886,754 $ 687,670
--------------- -------------- --------------- ---------------
Numerator for basic and diluted earnings per share $ 1,522,242 $ 1,254,354 $ 886,754 $ 687,670
=============== ============== =============== ===============
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 25,781 6,711 46,214 7,897
--------------- -------------- --------------- ---------------
Denominator for diluted earnings per
share - adjusted weighted-average shares 5,510,781 5,491,711 5,531,214 5,492,897
=============== ============== =============== ===============
Basic and Diluted earnings per share $ 0.28 $ 0.23 $ 0.16 $ 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 45% of the Company's
revenue for the six months ended June 30, 1999. Sales to three customers for the
same period in 1998 represented approximately 40% of the Company's revenue.
Sales to two customers represented approximately 44% of the Company's revenue
for the three months ended June 30, 1999. Sales to four customers for the same
period in 1998 represented approximately 51% 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, Inc. to approximately 51% by an additional investment of common stock for
$370,000 and a 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 $3.6 million and has been recorded as intangibles.
7
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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 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 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. 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, 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; and Chicago, IL.
The Company opened an additional Solution Branch in Atlanta, GA in
April 1999. The Company plans to open additional Solution Branches in one to two
other select major U.S. markets in 1999. Considering its limited experience with
opening Solution Branches, the Company cannot predict when
8
<PAGE>
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, Inc. to approximately 51% by an additional investment of common stock for
$370,000 and a 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 $3.6 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>
Six Months Ended Three Months Ended
---------------- -------------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Consulting services 91.2 % 87.5 % 89.6 % 87.9%
Software licensing 8.3 11.8 10.2 11.6
Training services 0.5 0.7 0.2 0.5
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 64.0 65.3 62.8 65.2
---------- ---------- ---------- ----------
Gross profit 36.0 34.7 37.2 34.8
Selling, general and administrative expenses 27.7 26.6 28.1 26.4
Income from operations 8.3 8.1 9.1 8.4
Net income 5.6% 5.5% 6.1% 5.5%
========== ========== ========== ==========
</TABLE>
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended
June 30, 1998
Revenues. Revenues of the Company increased by approximately $4.2
million, or 18.6%, from $22.8 million for the six months ended June 30, 1998 to
$27.1 million for the six months ended June 30, 1999. Revenues from consulting
services increased by approximately $4.7 million, or 23.7%, from $20 million for
the six months ended June 30, 1998 to $24.7 million for the same period in 1999.
The increase in 1999 period revenues from consulting services was primarily the
result of higher hourly billing rates offset by a reduction in the consultant
utilization rate and to a lesser extent a slight decrease in the average number
of consultants during the period. The number of consultants engaged by the
Company was approximately 4% lower in 1999 compared to 1998. 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 $469,000, or 17.3%, from $2.7
million in 1998 to $2.2 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.
Revenues from training represented less than 1% of the Company's total
revenues for the six months ended June 30, 1999 and 1998, respectively.
Gross Profit. The gross profit for the six months ending June 30, 1999
increased by approximately $1.8 million, or 22.8%, from $7.9 million in 1998 to
$9.7 million in 1999. As a percentage
9
<PAGE>
of total revenues, gross profit increased from 34.7% of total revenues for the
six months ended June 30, 1998 to 36.0% 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 $1.4 million, or 23.6%, from
$6.1 million for the six months ended June 30, 1998 to $7.5 million for the same
period in 1999. Expressed as a percentage of revenues, selling, general and
administrative expenses increased, representing 27.7% of revenue for the six
months ended June 30, 1999 revenues as compared to 26.6% of total revenues for
the same period in 1998. The increase in selling, general and administrative
expenses in the first two quarters of 1999 resulted from an increase in the
number of sales and marketing, recruiting and management personnel in TACT,
including at our newest branches.
Net Income. Net income increased approximately $268,000 from $1.3
million for the six months ended June 30, 1998 to $1.5 million for the same
period in 1999.
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
June 30, 1998
Revenues. Revenues of the Company increased by approximately $2.1
million, or 17.2%, from $12.4 million for the three months ended June 30, 1998
to $14.5 million for the three months ended June 30, 1999. Revenues from
consulting services increased by approximately $2.1 million, or 19.4%, from
$10.9 million for the three months ended June 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 higher hourly billing rates offset by a
reduction in the consultant utilization rate and to a lesser extent a slight
decrease in the average number of consultants during the period. The number of
consultants engaged by the Company was approximately 4% lower in 1999 compared
to 1998.
Software licensing revenues increased by approximately $42,000, or
2.9%, from $1.4 million for the three months ended June 30, 1998 to $1.5 million
for the same period in 1999. The increase resulted from the sale of newer
products, almost completely 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 June 30, 1999 and 1998,
respectively.
Gross Profit. The gross profit for the three months ended June 30,1999
increased by approximately $1.1 million, or 25.1%, from $4.3 million in 1998 to
$5.4 million in 1999. As a percentage of total revenues, gross profit increased
from 34.8% of total revenues for the three months ended June 30, 1998 to 37.2%
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 $803,000, or 24.5%, from $3.3
million for the three months ended June 30, 1998 to $4.1 million for the same
period in 1999. Expressed as a percentage of revenues, selling, general and
administrative expenses increased, representing 28.1% of total revenues for the
three months ended June 30, 1999 as compared to 26.4% of total revenues for the
same period in 1998. The increase in selling, general and administrative
expenses in the first two quarters of 1999 resulted from an increase in the
number of sales and marketing, recruiting and management personnel in TACT,
including at our newest branches.
Net Income. Net income increased approximately $199,000 from $688,000
for the three months ended June 30, 1999 to $887,000 for the same period in
1999.
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
10
<PAGE>
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 currently has no outstanding
borrowings.
The Company's cash balances were approximately $13.0 million at
December 31,1998, and $9.3 million at June 30, 1999. Net cash used in operating
activities was approximately $1.6 for the six months ended June 30, 1999,
compared with net cash used of $1.3 million 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 currently has a line of credit of $2,100,000 and no
outstanding borrowings. The line of credit is guaranteed by the Company's
principal shareholder. The line of credit bears interest at a variable rate
based on prime plus 1%, 7.75% at June 30, 1999).
The Company's accounts receivable at June 30, 1999 and December 31,
1998 were approximately $15.2 million and $8.8 million, respectively,
representing 94 and 62 days of sales outstanding ("DSO"), respectively. The
Company does not anticipate any difficulty in collecting amounts due, since this
increase in DSO resulted from increased sales toward the end of the reporting
period and business with several clients that have been granted longer payment
terms.
Sales to two customers represented approximately 45% of the Company's
revenue for the six months ended June 30, 1999. Sales to three customers for the
same period in 1998 represented approximately 40% of the Company's revenue.
Sales to two customers represented approximately 44% of the Company's revenue
for the three months ended June 30, 1999. Sales to four customers for the same
period in 1998 represented approximately 51% of the Company's revenue.
Net cash used in investing activities was approximately $2.1 million
and $843,000 for the six months ended June 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 proceeds from the 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. Numerous managers throughout the Company have been designated
to report on and oversee Year 2000 efforts and provide periodic reports to
senior management.
The Company's State of Readiness
As of June 30, 1999, the Company's assessment of all Year 2000 issues
was not yet completed. It is anticipated that the assessment will be
substantially completed in the third quarter of 1999. However, the assessment of
some issues, especially external ones, may 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, referring 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,
11
<PAGE>
referring 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. Some of the information technology
architecture and systems have 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 application
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 expects to achieve Year 2000 compliance
review and testing of its infrastructure including localized hardware and
software application systems and embedded systems 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 is inquiring as
to the readiness of the lessors and, as applicable, their managing agents
regarding the embedded systems. The Company has received some responses from its
lessors indicating that the embedded systems in the buildings are either
already, or are expected to be, Year 2000 compliant before the end of 1999.
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 (especially financial accounting). To date, 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 expects to provide adequate information respecting the Company's Year 2000
readiness. Many customers 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 (including general and administrative expenses); existing staff
have been and will be implemented to address Year 2000 compliance issues, so no
further personnel costs are expected to be incurred presently for resolution of
Year 2000 issues.
12
<PAGE>
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.
There still remains a great deal of uncertainty on the part of the
Company's customers as to whether they will be able to enter into agreements to
develop new projects and solutions in the second half of 1999. Potential
reductions in business may arise 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
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 current 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 technical backgrounds. The Company intends to
rely upon its internal staff in order to respond to contingencies that may arise
due to the Year 2000. In particular, the 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 manner. The Company has contingency plans for
certain critical applications and systems and is working on such plans for
others. These contingency plans involve, among other actions, manual
work-arounds. Certain staff will be required to be available 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 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission ("SEC"). Such forward-looking statements involve risk
and uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such
13
<PAGE>
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.
August 12, 1999 By: /s/ Shmuel BenTov
- ---------------- ----------------------------------------
Date Shmuel BenTov, President
and Chief Executive Officer
August 12, 1999 By: /s/ Frank T Thoelen
- ---------------- ----------------------------------------
Date Frank T Thoelen, Secretary-Treasurer
and Chief Financial Officer
16
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