<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: March 31, 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 May 14, 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. Financial Statements 3-7
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation 8-12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Owners 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 27 Financial Data Schedule 15
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE A CONSULTING TEAM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $11,825,822 $13,003,038
Accounts receivable 11,184,794 8,848,932
Prepaid income taxes 4,297 674,500
Prepaid expenses and other current assets 411,506 432,377
----------- -----------
Total current assets 23,426,419 22,958,847
Investment at cost 3,000,000 3,000,000
Property and equipment, at cost, less accumulated
depreciation and amortization 3,547,570 2,702,021
Deposits 129,426 111,263
=============== ===============
Total assets $30,103,415 $28,772,131
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $3,770,410 $2,876,945
Deferred income taxes 488,000 682,000
Current portion of long-term debt 15,431 15,126
--------------- ---------------
Total current liabilities 4,273,841 3,574,071
Long-term debt 10,992 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 4,711,974 4,076,486
--------------- ---------------
Total shareholders' equity 25,818,582 25,183,094
---------------- ----------------
================ ================
Total liabilities and shareholders' equity $30,103,415 $28,772,131
================ ================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Consulting services $11,701,615 $9,089,143
Software licensing 759,939 1,270,417
Training services 90,775 88,561
---------------- ----------------
Total revenues 12,552,329 10,448,121
Cost of revenues 8,212,589 6,833,795
---------------- ----------------
Gross profit 4,339,740 3,614,326
Operating expenses:
Selling, general & administrative 3,427,116 2,798,273
---------------- ----------------
Total operating expenses 3,427,116 2,798,273
---------------- ----------------
Income from operations 912,624 816,053
Interest income 204,441 171,489
Interest expense (577) (858)
---------------- ----------------
Income before income taxes 1,116,488 986,684
Income taxes 481,000 420,000
================ ================
Net income $635,488 $566,684
================ ================
Net income per share - basic and dilutive $0.12 $0.10
================ ================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THE A CONSULTING TEAM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $635,488 $566,684
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 177,482 82,105
Deferred income taxes (194,000) 59,000
Changes in operating assets and liabilities:
Accounts receivable (2,335,862) (981,174)
Prepaid income taxes 670,203 -
Prepaid expenses and other current assets 20,871 (71,157)
Accounts payable and accrued expenses 893,465 9,951
Income taxes payable - (299,784)
----------- -----------
Net cash used in operating activities (132,353) (634,375)
Cash flows from investing activities:
Purchase of property and equipment (1,023,031) (476,684)
Deposits (18,163) -
----------- -----------
Net cash used in investing activities (1,041,194) (476,684)
Cash flows from financing activities:
Repayment of long-term debt (3,669) (3,388)
----------- -----------
Net cash used in financing activities (3,669) (3,388)
----------- -----------
Net decrease in cash and cash equivalents (1,177,216) (1,114,447)
Cash and cash equivalents at beginning of year 13,003,038 16,945,010
=========== ===========
Cash and cash equivalents at end of year $11,825,822 $15,830,563
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $577 $858
=========== ===========
Income taxes $4,797 $660,784
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THE A CONSULTING TEAM, INC.
Notes to Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with The A
Consulting Team, Inc.'s (the "Company") Form 10-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
financial statements contain all the adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1999, and the results of operations and cash flows for the three
months ended March 31, 1999 and 1998 respectively.
The 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 results of operations for the three months ended March 31, 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 407,324 shares of common stock at $7.50 per share for the
three months ended March 31, 1999, were outstanding 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 three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Numerator:
Net income $635,488 $566,684
----------------- ------------------
Numerator for basic and diluted earnings per share $635,488 $566,684
================= ==================
Denominator:
Denominator for basic earnings per
Share - weighted-average shares 5,485,000 5,485,000
Effect of dilutive securities:
Employee stock options 5,349 5,525
----------------- ------------------
Denominator for diluted earnings per
share - adjusted weighted-average shares 5,490,349 5,490,525
================= ==================
Basic and Diluted earnings per share $0.12 $0.10
================= ==================
</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 46% of the Company's
revenue for the three months ended March 31, 1999. Sales to three customers for
the same period in 1998 represented approximately 41% of the Company's revenue.
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 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 93% of its revenues from IT consulting
services for the three months ended March 31, 1999. 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 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 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 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.
8
<PAGE>
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 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.
TACT has formed a strategic partnership with T3 Media Inc. ("T3
Media"), Silicon Alley's largest independent web integrator. In addition to the
alliance, TACT purchased 30% of T3 Media's non-voting preferred stock.
Results of Operations
The following tables set forth the percentage of revenues of certain
items included in the Company's Statements of Operations:
Three Months Ended
------------------
March 31,
---------
1999 1998
---- ----
Revenues:
Consulting services 93.2% 87.0%
Software licensing 6.1 12.2
Training services 0.7 0.8
---------- ----------
Total revenues 100.0 100.0
Cost of revenues 65.4 65.4
---------- ----------
Gross profit 34.6 34.6
Operating expenses:
Selling, general and administrative expenses 27.3 26.8
---------- ----------
Income from operations 7.3 7.8
---------- ----------
Net income 5.1 5.4
========== ==========
Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
March 31, 1998
Revenues. Revenues of the Company increased by $2.1 million, or 20.1%,
from $10.4 million for the three months ended March 31, 1998 to $12.6 million
for the three months ended March 31, 1999. Revenues from consulting services
increased by $2.6 million, or 28.7%, from $9.1 million in 1998 to $11.7 million
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 2% 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 $510,000, or 40.1%, from $1.3
million in 1998 to $760,000 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 previous quarter 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 three months ended March 31, 1999 and 1998, respectively.
Gross Profit. The resulting gross profit increased $725,000, or 20.1%,
from $3.6 million in 1998 to $4.3 million in 1999. As a percentage of total
revenues, gross profit remained constant at 34.6% of total revenues for the
three months ended March 31, 1998 and 1999.
9
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $629,000, or 22.5%, from $2.8 million for
the three months ended March 31, 1998 to $3.4 million for the same period in
1999. Expressed as a percentage of sales, selling, general and administrative
expenses increased, representing 27.3% of total revenues for the three months
ended March 31, 1999 as compared to 26.8% of total revenues for the same period
in 1998. The increase in selling, general and administrative expenses in the
first quarter 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 $69,000 from
$567,000 for the three months end March 31, 1998 to $635,000 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
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 $11.8 million at March 31, 1999. Net cash used in
operating activities was approximately $132,000 for the three months ended March
31, 1999, compared with net cash used of $634,000 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 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 March 31, 1999).
The Company's accounts receivable at March 31, 1999 and December 31,
1998 were approximately $11.2 million and $8.8 million respectively,
representing 78 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 towards the end of the reporting
period and business with several clients that has been granted longer payment
terms.
Sales to two customers represented approximately 46% of the Company's
revenue for the three months ended March 31, 1999. Sales to three customers for
the same period in 1998 represented approximately 41% of the Company's revenue.
Net cash used in investing activities was approximately $1.0 million
and $477,000 for the three months ended March 31, 1999 and 1998, respectively.
This represented additions to property and equipment as the Company continues to
expand its Solution Branch locations and expansion of the Company's computing
network and infrastructure.
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.
10
<PAGE>
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 Company presently believes that with modifications to existing
software and conversions to new software, year 2000 issues will not pose
significant operational problems for the Company's 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 given that the
Company can completely avoid all costs and uncertainties arising from
non-compliance that might materially affect future financial results.
11
<PAGE>
Forward Looking Statements
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission ("SEC"). Such forward-looking statements involve risk
and uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Words such as
"believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to the following factors, among
other risks and factors identified from time to time in the Company's filings
with the SEC. Among the important factors on which such statements are based are
assumptions concerning the anticipated growth of the information technology
industry, the continued needs of current and prospective customers for the
Company's services, the availability of qualified professional staff, and price
and wage inflation.
12
<PAGE>
Part II. Other Information
Item 1. Legal proceedings
None.
Item 2. Changes in Securities
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.
13
<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.
May 14, 1999 By: /s/ Shmuel BenTov
- ------------- -------------------
Date Shmuel BenTov, President
and Chief Executive Officer
May 14, 1999 By: /s/ Frank T Thoelen
- ------------- ---------------------
Date Frank T Thoelen, Secretary-Treasurer
and Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,825,822
<SECURITIES> 0
<RECEIVABLES> 11,184,794
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,426,419
<PP&E> 4,604,470
<DEPRECIATION> 1,056,900
<TOTAL-ASSETS> 30,103,415
<CURRENT-LIABILITIES> 4,273,841
<BONDS> 0
0
0
<COMMON> 54,850
<OTHER-SE> 25,763,732
<TOTAL-LIABILITY-AND-EQUITY> 30,103,415
<SALES> 12,552,329
<TOTAL-REVENUES> 12,552,329
<CGS> 8,212,589
<TOTAL-COSTS> 11,640,282
<OTHER-EXPENSES> 3,427,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 577
<INCOME-PRETAX> 1,116,488
<INCOME-TAX> 481,000
<INCOME-CONTINUING> 635,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635,488
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
