ITEM 1. BUSINESS
GENERAL
Incorporated in 1983, The A Consulting Team, Inc., a New York corporation (the "Company" or "TACT" or the "Registrant") has provided a wide range of information technology ("IT") consulting, custom application development and solutions to Fortune 1000 companies and other large organizations. In August of 1997, TACT became a public company, headquartered in New York, NY. In addition, TACT has an office in Clark, NJ. The Company supports all major computer technology platforms and supports client IT projects by using a broad range of third-party software applications.
The Company's shares are listed on The NASDAQ SmallCap MarketSM under the symbol "TACX."
INDUSTRY BACKGROUND
Rapid technological advance, and the wide acceptance and use of the Internet as a driving force in commerce, accelerated the growth of the IT industry through 2001. These advances included more powerful and less expensive computer technology, the transition from predominantly centralized mainframe computer systems to open and distributed computing environments and the advent of capabilities such as relational databases, imaging, software development productivity tools, electronic commerce ("e-commerce") applications and web-enabled software. These advances expanded the benefits that users can derive from computer-based information systems and improved the price-to-performance ratios of such systems. As a result, an increasing number of companies were employing IT in new ways, often to gain competitive advantages in the marketplace, and IT services have become an essential component of their long-term growth strategies. The same advances that have enhanced the benefits of computer systems rendered the development and implementation of such systems increasingly complex. In addition, there was a shortage of IT consultants qualified to support these systems. Accordingly, organizations turned to external IT services organizations such as TACT to develop, support and enhance their internal IT systems. However, during 2002 and continuing into 2003 there was a slowdown in IT spending coincident with the general economic slowdown. This resulted in revenue decreases at many IT service companies, however, IT spending increased in 2004. Industry analysts believe that this trend will continue in 2005.
STRATEGY
The Company's objective is to continue to provide its clients with high quality, technology-based consulting services in the areas of migrations and conversions of legacy systems, performance optimization, web enhancements, custom development, strategic sourcing and enterprise-wide IT consulting, outsourcing and software solutions. The Company's strategies include the following key components:
Cross-sell Additional Services to Existing Clients. By offering existing clients additional IT consulting services and software, TACT intends to leverage its existing client base. The Company's relationships with current clients provide opportunities to market additional services in current and new geographical markets.
Expand Client Base. The Company is developing additional client relationships in geographic markets where the Company maintains offices (New York, NY and Clark, NJ) through targeted marketing initiatives, participation in local trade shows, user group meetings and conventions and referrals from existing clients.
Acquisitions and Strategic Relationships. On July 19, 2002, the Company consummated the acquisition of all of the issued and outstanding capital stock of International Object Technology, Inc. (IOT). IOT was a privately owned, professional services firm that provides data management and business intelligence solutions, technology consulting and project management services. The Company continuously looks for companies and other organizations that it may acquire or develop other relationships with that are strategic to the Company's business. The Company has established certain acquisition criteria. It is primarily interested in companies and organizations that are (i) established in geographic locations of the Company, or (ii) has a depth of service offerings that the Company finds attractive or (iii) a customer base that the Company can cross sell its services into.
Operational Efficiencies and Cost Reductions. The Company has restructured its operations and reduced its cost structure by migrating to a flexible workforce and reducing corporate and general administrative expenses.
SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control.
In addition, the Company's Board of Directors has approved the payment of a $0.75 per share cash dividend to holders of its common stock and preferred stock of record on March 21, 2005, if the Share Exchange Agreement and the Share Issuance are consummated.
Under the terms of the loan agreement with Keltic Financial Partners, LP, their consent to the proposed transaction with Vanguard was required. Keltic provided their consent in March 2005.
If the transactions are consummated the Chief Executive Officer of Vanguard will become the Chief Executive Officer of the combined companies.
These agreements allow Vanguard to appoint three Board of Director members. Accordingly, subject to the consummation of the Share Exchange Agreement and the Share Issuance Agreement, the Board of Directors of the Company have proposed to the shareholders of the Company that they elect Andrew Ball, William Newman and Joseph Harris to the Board of Directors and Shmuel BenTov and Reuven Battat will resign from the Board.
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
TACT OPERATIONS
CONSULTING. TACT provides a wide range of IT consulting services, including technology infrastructure advisory services and systems architecture design for Fortune 1000 companies and other large organizations. These services account for over 90% of the Company's revenues. The Company's solutions are based on an understanding of each client's enterprise model. The Company's accumulated knowledge may be applied to new projects such as planning, designing and implementing enterprise-wide information systems, database management services, performance optimization, migrations and conversions, strategic sourcing, outsourcing and systems integration.
TACT delivers its IT solutions through TACT Solution Teams composed of Project Managers, Technical Practice Managers and Technical Specialists. These professionals possess the project management skills, technical expertise and industry experience to identify and effectively address a particular client's technical needs in relation to its business objectives. TACT's focus on providing highly qualified IT professionals allows the Company to identify additional areas of the client's business which could benefit from the Company's IT solutions, thereby facilitating the cross-marketing of multiple Company services. The Company keeps its Solution Teams at the forefront of emerging technologies through close interaction with TACT research personnel who identify innovative IT tools and technologies. As a result, management believes that TACT Solution Teams are prepared to anticipate client needs, develop appropriate strategies and deliver comprehensive IT services, thereby allowing the Company to deliver the highest quality IT services in a timely fashion.
A Solution Team is typically deployed from one of the Company's offices in order to provide solutions to its clients by utilizing local resources. Management's experience has been that the presence established by a local office improves the Company's ability to attract local clients, as well as its ability to attract, develop, motivate and retain locally-based IT professionals. The Company's corporate headquarters supports its Clark, NJ office and performs many functions, which allow the office to focus on recruiting, sales and marketing.
Business Process Outsourcing. During 2004 TACT began to provide business process outsourcing services (BPO) to its clients. The Company believes that this is an area where substantial growth opportunities exist and plans on focusing resources on growing this line of business in the future.
SOFTWARE. TACT markets and distributes a number of software products developed by independent software developers. The Company believes its relationships with over 70 software clients throughout the country provide opportunities for the delivery of additional TACT consulting and training services. The software products offered by TACT are developed in the United States, England and Finland and marketed primarily through trade shows, direct mail, telemarketing, client presentations and referrals. Revenue from the sale of software is ancillary to the Company's total revenues.
CLIENTS
The Company's clients consist primarily of Fortune 1000 companies and other large organizations. The Company's clients operate in a diverse range of industries with a concentration in the financial services, automotive and insurance industries. Ten of the Company's top twenty clients measured by revenue for the year ended December 31, 2003 had been clients for over five years. In 2004, two of the Company's largest customers were BMW NA and Pfizer, who represented 20% and 19% of revenues respectively. Besides these customers, no other customer represented greater than 10% of the Company's revenues. During 2005, the Company expects that a significant portion of its revenues will continue to come from these clients.
NEW TECHNOLOGIES
TACT continuously investigates new technologies developed by third parties to determine their viability and potential acceptance in the Fortune 1000 marketplace. The Company's staff works diligently to identify those "bleeding-edge" technologies that will succeed as "leading-edge" business solutions. TACT personnel are highly qualified in delivering these technical solutions.
SALES AND MARKETING
TACT's marketing strategy is to develop long-term partnership relationships with existing and new clients that will lead to the Company becoming a preferred provider of IT services. The Company seeks to employ a "cross selling" approach where appropriate to expand the number of services utilized by a single client. Other sales and marketing methods include client referrals, networking and attending trade shows. At December 31, 2004, the Company employed 13 sales and marketing personnel. Another marketing resource, which has also served the Company in its recruiting efforts, is the Company's web site at http://www.tact.com. The web site provides information about TACT consulting services and software products to the IT community.
COMPETITION
The market for IT consulting services is intensely competitive. It is affected by rapid technological advances and includes a large number of competitors. The Company's competitors include the current or former consulting divisions of "Big Four" accounting firms, systems consulting and implementation firms, application software development firms, management consulting firms, divisions of large hardware and software companies, offshore outsourcing companies and niche providers of IT services. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition than the Company. In addition, the Company competes with its clients' internal resources, particularly when these resources represent an existing cost to the client. Such competition may impose additional pricing pressures on the Company.
The Company believes that the principal competitive factors in the IT services market include breadth of services offered, technical expertise, knowledge and experience in the industry, quality of service and responsiveness to client needs. The Company believes it competes primarily based on its in-depth technical expertise, timely delivery of products and services and quality of service.
A critical component of the Company's ability to compete in the marketplace is its ability to attract, develop, motivate and retain skilled professionals. The Company believes it can compete favorably in hiring such personnel by offering competitive compensation packages and attractive assignment opportunities.
HUMAN RESOURCES
At December 31, 2004, the Company had 111 personnel, of whom 71 were consultants, 6 were recruiting personnel, 13 were sales and marketing personnel, 3 were technical and customer service personnel and 18 were executive, financial and administrative personnel. None of the Company's employees are represented by a labor union, and the Company has never incurred a work stoppage. In addition to the Company's 111 personnel, the Company was utilizing the services of 55 independent contractors at December 31, 2004. These independent contractors act as consultants and they are not employees of the Company. There can be no assurance that the services of these independent contractors will continue to be available to the Company on terms acceptable to the Company.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company has entered into confidentiality agreements with its employees and limits distribution of proprietary information. There can be no assurance, however, that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. In addition, the Company is aware of other users of the term "TACT" and combinations including "A Consulting," which users may be able to restrict the Company's ability to establish or protect its right to use these terms. The Company has in the past been contacted by other users of the term "TACT" alleging rights to the term. However, the Company has completed the application process for protection of certain marks, including "TACT" and "The A Consulting Team."
All ownership rights to software developed by the Company in connection with a client engagement are typically assigned to the client. In limited situations, the Company may retain ownership or obtain a license from its client, which permits the Company or a third party to market the software for the joint benefit of the client and the Company or for the sole benefit of the Company.
SEASONALITY
The Company's business has not been affected by seasonality.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive office is located at 200 Park Avenue South, New York, NY 10003. The Company's executive office is approximately 6,000 square feet and is located in a leased facility with a term expiring in July 31, 2007. The Company also leases approximately 7,000 square feet in a facility in Clark, NJ. The lease on this facility expires on August 31, 2007.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 2004. The Company plans to hold its 2005 Annual Shareholder Meeting in the second quarter of 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently listed on The NASDAQ SmallCap MarketSM ("NASDAQ") under the symbol "TACX." TACT completed an initial public offering of its Common Stock on August 8, 1997 and was listed on the NASDAQ National Market. Prior to that date, there was no market for the Company's Common Stock. In August 2002, the Company's common stock transitioned to the NASDAQ SmallCap Market.
On January 7, 2004, the Company effected a one-for-four reverse stock split of its common stock. Accordingly, the share and per share data throughout this document have been retroactively adjusted to reflect the reverse stock split.
The following table sets forth the quarterly range of high and low bid prices of the Company's Common Stock since January 1, 2003 as reported by NASDAQ:
2003 HIGH LOW - ---- ----- --- First Quarter $1.96 $0.80 Second Quarter 2.24 1.00 Third Quarter 3.20 1.80 Fourth Quarter 4.64 1.80
2004 HIGH LOW - ---- ----- --- First Quarter $4.24 $3.24 Second Quarter 7.40 3.21 Third Quarter 7.24 4.76 Fourth Quarter 7.50 5.70
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock. However, on January 20, 2005 the Company's Board of Directors authorized a $0.75 dividend on the Company's common stock and preferred stock to shareholders of record as of March 21, 2005. The dividend is contingent upon the consummation of share exchange transaction discussed in Item 1.
The Company is prohibited from paying dividends on its stock due to restrictions under the Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated June 27, 2001, amended by the July 2002 Modification Agreement and amended by the restated and amended Loan and Security Agreement dated March 23, 2004. Keltic has consented to the payment of dividends on the Series A and Series B Preferred Stock, provided an event of default does not exist. Additionally, Keltic has consented to payment of the $0.75 per share dividend on the Company's common stock and preferred stock.
HOLDERS
The Company estimates that there were approximately 10 holders of record of the Company's Common Stock as of March 15, 2005. The Company believes that the number of beneficial shareholders exceeds 600. There was one holder of the Company's Series A Preferred Stock and one holder of the Company's Series B Preferred Stock as of March 15, 2005.
RECENT SALES OF UNREGISTERED SECURITIES
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control. The Company plans to rely upon the exemption from registration set forth in Section 4(2) of the Securities Act, relating to sales by an issuer not involving a public offering, in issuing the stock to the Vanguard and Oak shareholders. Based upon discussions with and representations made by the Vanguard and Oak shareholders, the Company reasonably believes that each Vanguard and Oak shareholder is an accredited and/or sophisticated investor. The Company granted to each Vanguard and Oak shareholder access to information on the Company necessary to make an informed investment decision.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial and operating data and is qualified by the more detailed Consolidated Financial Statements and Notes thereto included herein. The selected financial data in the table is derived from the Company's Consolidated Financial Statements and Notes thereto, which includes financial data from IOT from the date of acquisition on July 19, 2002. The selected financial data should be read in conjunction with the Financial Statements and Notes thereto and other financial information included herein.
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(1) All share and per share amounts have been restated to reflect the one for four reverse stock split of the Company's common stock, which occurred on January 7, 2004
ITEM 7.
ITEM 7. 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 consolidated financial statements and related notes.
OVERVIEW
Since 1983, TACT has provided IT services and solutions to Fortune 1000 companies and other large organizations. In 1997, TACT became a public company (NASDAQ SmallCap: TACX), headquartered in New York, NY. In addition, TACT has an office in Clark, NJ.
Rapid technological advance, and the wide acceptance and use of the Internet as a driving force in commerce, accelerated the growth of the IT industry through 2001. These advances included more powerful and less expensive computer technology, the transition from predominantly centralized mainframe computer systems to open and distributed computing environments and the advent of capabilities such as relational databases, imaging, software development productivity tools, electronic commerce ("e-commerce") applications and web-enabled software. These advances expanded the benefits that users can derive from computer-based information systems and improved the price-to-performance ratios of such systems. As a result, an increasing number of companies were employing IT in new ways, often to gain competitive advantages in the marketplace, and IT services have become an essential component of their long-term growth strategies. The same advances that have enhanced the benefits of computer systems rendered the development and implementation of such systems increasingly complex. In addition, there was a shortage of IT consultants qualified to support these systems. Accordingly, organizations turned to external IT services organizations such as TACT to develop, support and enhance their internal IT systems. However, during 2002 and continuing into 2003 there was a slowdown in IT spending coincident with the general economic slowdown. This resulted in revenue decreases at many IT service companies, however, IT spending increased in 2004. Industry analysts believe that this trend will continue into 2005.
TACT is an end-to-end IT solutions and services provider focused on leveraging existing systems and data. The Company's goal is to empower customers through the utilization of technology to reduce costs, improve services and increase revenues. The Company delivers migrations and conversions of legacy systems, web enablement of existing systems, customer development, performance optimization, migrations and conversions, outsourcing, strategic sourcing and enterprise wide IT consulting, and software solutions.
Over 68% 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 for 2004.
TACT provides clients with enterprise-wide information technology consulting services and software products. TACT solutions cover the entire spectrum of IT needs, including applications, data, and infrastructure. TACT provides complete project life-cycle services--from application and system design, through development and implementation, to documentation and training. Strategic alliances with leading software vendors ensure that TACT solutions are dependable and within the mainstream of industry trends. These partnerships allow TACT to provide a wide variety of business technology solutions such as enterprise reporting solutions, data warehousing, systems strategies, application and database conversions, and application development services.
When TACT is engaged by its clients to implement IT solutions or services it uses its Smart Approach. TACT's Smart Approach is a leading edge set of end-to-end solutions and services that include Strategy, Methodology, Architecture, Resources and Tools. The Strategy is developed together with the client to ensure that the client's goals and objectives are met. The Methodology is a Tried and True TACT Methodology that is followed in order to implement the Strategy. The solutions and services are built on a robust Architecture. Utilize highly qualified TACT Resources and Exploits best-of-breed Tools.
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. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs
The Company's most significant operating cost is its personnel cost, which is included in cost of revenues. As a result, the Company's operating performance is primarily based upon billing margins (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 2000 and the first half of 2001, the Company's margins were adversely affected by a decrease in billing rates and a reduction in consultant utilization rate; however, gross margins began to improve in the second half of 2001 and have continued through 2004, primarily due to improved utilization rates and decreases in consultant costs. Large portions of the Company's engagements are on a time and materials basis. While most of the Company's engagements allow for periodic price adjustments to address, among other things, increases in consultant costs, during 2002, 2003, and 2004 clients have been adverse to accepting cost increases. TACT also actively manages its personnel utilization rates by constantly monitoring project requirements and timetables. Through the Company's cost containment and work force rationalization efforts TACT's utilization rates began to improve in the second half of 2001 and continued through 2004. As projects are completed, consultants either are re-deployed 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. TACT carefully monitors consultants that are not utilized and has established guidelines for the amount of non-billing time that it allows before a consultant is terminated.
Historically, the Company has also generated revenues by selling software licenses. In addition to initial software license fees, the Company also 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. The revenues from the sales of software is ancillary to the Company's total revenues.
On October 2, 1998, the Company made an investment in a Web integrator, T3 Media, Inc., of $3 million of non-voting convertible preferred stock. On June 23, 1999, the Company converted its preferred stock into a 30% common stock ownership interest and increased its ownership interest in T3 Media to approximately 51% by an additional investment in T3 Media's common stock of $370,000. The acquisition of T3 Media was accounted for using the purchase method of accounting. 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 estimated fair value of the net identifiable assets acquired totaled $4.0 million and was recorded as goodwill and was being amortized using the straight-line method over 7 years. After extensive review of changing market conditions, it was determined that the carrying value of $3.1 million of the intangibles and certain other fixed assets could not be supported, resulting in an aggregate write-off of $3.9 million in the fourth quarter of 2000. Due to the continued deterioration in revenues and market conditions for T3 Media's services, the operations of T3 Media ceased in the second quarter of 2001. Accordingly, the Company recorded additional charges of $1.2 million related to termination costs and the settlement of the various operating lease obligations, in the second quarter of 2001.
In 1999 and 2000, the Company made a minority investment in LightPC.com (renamed Always-On Software, Inc.) in the aggregate amount of $2.3 million. At December 31, 2000, the Company owned approximately 10% of Always-On Software, Inc. Always-On Software, Inc. was a global provider of ASP based in New York City. The Company's investment in Always-On was subject to periodic review to ensure that its market value exceeded its carrying value. The market conditions for companies operating in this sector became increasingly adverse in 2001. Due to the deteriorating conditions of the ASP market and deteriorating cash reserves, Always-On Software, Inc. ceased operations in July 2001. As a result, the Company recorded a charge of $2.3 million to reflect the impairment in the value of its investment in the second quarter of 2001. In the fourth quarter of 2001, Always-On Software Inc. merged with Veracicom, Inc. and the Company received warrants in this transaction. The Company considers these warrants to have no value. In the third quarter of 2002, the Company wrote off the balance of its minority investment in Always-On Software Inc.
On July 19, 2002, the Company, acquired all of the common stock of International Object Technology, Inc. (IOT) for a combination of deferred cash consideration of $650,000 and 317,500 shares of TACT unregistered Common Stock, which has been retroactively adjusted to reflect the one-for-four reverse stock split that occurred on January 7, 2004 and is valued at $635,000. The acquisition of IOT was accounted for using the purchase method of accounting. Accordingly, the results of operations of IOT are included in the Company's consolidated results of operation from the date of acquisition. The purchase price of the acquisition exceeded the fair market value of the net assets acquired, resulting in the recording of goodwill of $1,181,520 and other identifiable intangibles of $312,000 with the identifiable intangible assets being amortized over a three year period on a straight line basis. IOT was a privately owned, professional services firm that provides data management and business intelligence solutions, technology consulting and project management services. The acquisition increased the depth of the Company's services and solution offerings and provided the Company with cross-selling opportunities.
SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control.
In addition, the Company's Board of Directors has approved the payment of a $0.75 per share cash dividend to holders of its common stock and preferred stock of record as of March 21, 2005, if the Share Exchange Agreement and the Share Issuance are consummated.
Under the terms of the loan agreement with Keltic Financial Partners, LP, their consent to the proposed transaction with Vanguard was required; Keltic provided their consent in March 2005.
If the transactions are consummated the Chief Executive Officer of Vanguard will become the Chief Executive Officer of the combined companies.
These agreements allow Vanguard to appoint three Board of Director members. Accordingly, subject to the consummation of the Share Exchange Agreement and the Share Issuance Agreement, the Board of Directors of the Company have proposed to the shareholders of the Company that they elect Andrew Ball, William Newman and Joseph Harris to the Board of Directors and Shmuel BenTov and Reuven Battat will resign from the Board.
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
CERTAIN CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying our most critical accounting polices have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements.
Goodwill and Intangible Assets
The Company's goodwill is evaluated and tested on a periodic basis by an independent third party. If it is determined that goodwill has been impaired it will be written down at that time.
The Company's useful life of its intangible assets has been evaluated and it was determined that they will be amortized over a three year period.
Revenue Recognition
Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly and monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.
Allowance for Doubtful Accounts
The Company monitors its accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical experience to accurately determine its accounts receivable reserve. The Company's allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. The Company also establishes a general reserve for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, the Company's estimate of the recoverability of amounts due the Company could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items included in the Company's Statements of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
REVENUES. Revenues of the Company increased by $3.4 million or 15.7% from $21.6 million for the year ended December 31, 2003 to $25 million for the year ended December 31, 2004. The increase was primarily attributable to an industry wide increase in IT spending in 2004 and increased marketing efforts by the Company.
Software licensing revenues decreased by $348,000 or 20.5% from $1.7 million in 2003 to $1.3 million in 2004. Software sales are expected to remain ancillary to the Company's total revenues in future years.
GROSS PROFIT. The resulting gross profit for 2004 increased by $1.9 million or 32% from $5.8 million in 2003 to $7.7 million in 2004. As a percentage of total revenue, gross margin for the year increased from 26.9% in 2003 to 30.7% in 2004. Gross margin increased primarily due to increased consultant utilization rates (89% in 2004 compared to 79% in 2003) and an increase in revenues coming from fixed price contracts, which have higher gross margins.
OPERATING EXPENSES. Operating expenses are comprised of Selling, General and Administrative ("SG&A") expenses, provision for doubtful accounts, and depreciation and amortization costs. Operating expenses increased by $455,000, or 7.8% from $5.9 million in 2003 to $6.3 million in 2004. The increase was primarily attributable an increase in payroll and related costs ($430,000) due to increases in recruiting and sales staffs, costs associated with the proposed transaction with Vanguard ($150,000) and an increase in bad debt expenses ($105,000) which were partially offset by a decrease in depreciation and amortization expenses.
TAXES. Taxes in 2004 were $99,000 compared to $24,000 in 2003. The increase in income taxes was attributable to the increase in income before income taxes from a loss of ($100,000) in 2003 to income of $1.3 million in 2004. The Company's effective tax rate is low due to the utilization of net operating loss carry forwards.
NET INCOME/(LOSS). As a result of the above, the Company had net income of $1.2 million in 2004 compared to a net loss of ($123,000) in 2003.
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002
REVENUES. Revenues of the Company decreased by $2.4 million or 9.8%, from $24 million for the year ended December 31, 2002 to $21.6 million for the year ended December 31, 2003. The decrease was primarily attributable to a slowdown in spending in the IT industry, which resulted in bringing the Company back to its core IT services, which was partially offset by an increase in revenue of $4,129,000 as a result of the acquisition of IOT.
Software licensing revenues increased by $353,000, or 26.3%, from $1.3 million in 2002 to $1.7 million in 2003. Software sales are expected to remain ancillary to the Company's total revenues in future years.
GROSS PROFIT. The resulting gross profit for 2003 decreased by $1.3 million, or 18.6%, from $7.1 million in 2002 to $5.8 million in 2003. As a percentage of total revenues, gross margin for the year decreased from 29.8% in 2002 to 26.9% in 2003. Gross margin decreased due to a lower consultant utilization rate (79% in 2003 compared to 81% in 2002), lower gross margin on IOT revenues and a lower gross margin on a fixed price contract due to higher front loaded costs (the Company expects that over the next year this contract will have a normal gross margin).
OPERATING EXPENSES. Operating expenses are comprised of Selling, General and Administrative ("SG&A") expenses, provision for doubtful accounts, depreciation and amortization and impairment of assets and restructuring charges. Operating expenses decreased by $1.4 million, or 19.5%, from $7.3 million in 2002 to $5.9 million in 2003. The decrease is primarily attributable to a decrease in the Company's payroll costs ($800,000) and a reduction in the Company's telecommunication cost and professional fees ($234,000). Depreciation and amortization decreased $121,000 or 13.9% from $873,000 in 2002 to $752,000 in 2003. This decrease is attributable to certain leaseholds and office equipment becoming fully depreciated. Impairment of assets and restructuring charges decreased by $150,000 due to the fact that the Company wrote down a portion of its investment in Methoda Computer Ltd. in 2002.
TAXES. Taxes in 2003 were $24,000 in comparison to a ($431,000) income tax benefit recorded in 2002, which resulted from a tax refund of $439,000 due to a 2002 change in tax law allowing the Company to carry-back its net operating losses for five years instead of the two years previously allowed.
GAIN FROM EXTINGUISHMENT OF DEBT. In 2002, the Company recorded one time income of $49,000 resulting from the extinguishments of debt associated with the settlement of capital leases at less than these carrying values.
NET (LOSS) INCOME. As a result of the above, the Company had a net loss of ($123,000) in 2003 compared to net income of $204,000 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, (Keltic) based on the Company's eligible accounts receivable balances. The line of credit has certain financial covenants, which the Company must meet on a quarterly basis. There was no outstanding balance at December 31, 2004 or 2003. The Company's Chief Executive Officer initially guaranteed $1 million of the line of credit. The line of credit bears interest at a variable rate based on prime plus 2% and the rate was 7.25% at December 31, 2004. In July 2002, the credit line was amended to reduce the guarantee of the Company's Chief Executive Officer to $400,000, and to reflect the Company's acquisition of International Objects Technology, Inc. In March 2004, the line of credit was amended and restated to include the following: an extension to June 2007, the removal of the guarantee of the Chief Executive Officer and less restrictive financial covenants. Under the terms of the loan agreement with Keltic, their consent to the proposed transaction with Vanguard was required; Keltic provided their consent in March 2005.
T3 Media had entered into a series of capital lease obligations, which the Company had guaranteed to finance its expansion plans, covering leasehold improvements, furniture and computer-related equipment. The amount outstanding under such leases was approximately $291,000 at December 31, 2004 and 2003. The Company continues the process of negotiating buy-outs on these leases.
The Company's cash balances were approximately $2.5 million at December 31, 2004 and $1.4 million at December 31, 2003. Net cash provided by operating activities in 2004 was approximately $1.2 million compared to net cash used in operating activities of $(88,000) in 2003 and net cash provided by operating activities of 2.8 million in 2002.
The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 2004 and December 31, 2003 were $4.1 million and $3.6 million, respectively, representing 55 and 54 days of sales outstanding, respectively. The accounts receivable at December 31, 2004 and 2003 included $260,000 and $134,000 of unbilled revenue respectively. The Company has provided an allowance for doubtful accounts at the end of each of the periods presented. After giving effect to this allowance, the Company does not anticipate any difficulty in collecting amounts due because improved collection techniques and daily monitoring of receivables and cash balances have been implemented. Collection of receivables is one of the Company's highest priorities and improved collections were one of the primary reasons for the improvement in cash provided by operations.
For the twelve months ended December 31, 2004, the Company had revenues from two customers, which represented 20% and 19% of revenues. For the year ended December 31, 2003, the Company had revenues from one customer, which represented 28% of revenues, respectively. No other customer represented greater than 10% of the Company's revenues for such periods.
The Company has written down its minority investment in Methoda Computer Ltd. during the third quarter of 2002 from $500,000 to $368,000. In January of 2004, the Company sold approximately 75 percent of its investment in Methoda for $200,000 in cash and $81,000 payable over the next twenty months. The remaining investment has a carrying value of $87,000. Methoda Computer Ltd. is a leading methodology provider and knowledgebase for IT management and software engineering based in Israel.
During 2002, the Company continued the restructuring of its operations and took a charge of $150,000. This charge consisted of $18,000 for the write-off of the remaining balance of the Company's investment in Always-On Software, Inc., and $132,000 write-down of the Company's investment in Methoda Computer Ltd. During 2001, the Company restructured its operations and took a charge of approximately $8,711,000. This charge consisted of $2,303,000 for the write-down for substantially all of the Company's investment in Always-On Software, Inc., $2,000,000 for the write off of all prepaid software licenses because it was determined that the licenses no longer had any value, $1,616,000 for lease expenses, write-off of leaseholds and other fixed assets due to the cessation of T3 Media, Inc.'s operations, $832,000 for lease expenses, write-off of leaseholds and other fixed assets related to the closing of several of its Solution Branches, $867,000 for lease expenses, write-off of leaseholds and other fixed assets related to the reduction of office space in its New York headquarters, $699,000 for severance costs and $394,000 for other associated costs. During 2000, the Company wrote-off approximately $3.9 million, which related to the impairment of goodwill, write-down of fixed assets no longer in use and other charges. These charges related to the Company's majority-owned subsidiary, T3 Media, Inc.
Net cash provided by investing activities was approximately $44,000, for the year ended December 31, 2004 and net cash used in investing activities was approximately ($10,000), and ($291,000) for the years ended December 31, 2003 and 2002, respectively. In each of the three years, this represented additions to property and equipment of ($168,000), ($23,000), and ($47,000) respectively.
On July 19, 2002, the Company acquired all of the Common Stock of IOT for a combination of cash consideration of $650,000 and 317,500 shares of TACT unregistered Common Stock, which has been retroactively adjusted to reflect the one-for-four reverse stock split that occurred on January 7, 2004 and was valued at $635,000.
The cash consideration of $650,000 was paid as follows: $140,000 on September 2, 2002; $210,000 on April 1, 2003; $100,000 on April 1, 2004 and $200,000 on January 2, 2005. The excess of the purchase price over the estimated fair value of the net identifiable assets acquired totaled $1,494,000 and was allocated as follows; $312,000 to intangible assets which is being amortized on a straight line basis over thirty six months, and $1,182,000 to goodwill. The three majority shareholders of IOT received employment agreements for a three-year period at an annual salary of $160,000 per year each. During the second quarter of 2003, one of the former IOT principals left the Company, a buyout of his contract was negotiated and a portion of the intangible asset was written down ($23,000). From the date of acquisition through the end of year 2002, the Company recorded revenue attributed to IOT in the amount of $1,689,000. The Company recorded revenue attributable to the IOT acquisition in the amount of $4,154,000 and $4,129,000 for the years ended December 31, 2004 and 2003, respectively.
Net cash used in financing activities was approximately ($202,000) in 2004, ($267,000) in 2003, and ($1.7 million) in 2002.
On August 12, 2002, the Company issued 530,304 shares of Series A Preferred Stock to Shmuel BenTov in exchange for $350,000.64. On November 12, 2002, the Company issued 41,311 shares of Series B Preferred Stock to Mr. Yossi Vardi in exchange for $27,265.26. The Company relied upon the exemption from registration set forth in Section 4(2) of the Securities Act, relating to sales by an issuer not involving a public offering, in issuing the stock to Shmuel BenTov and Yossi Vardi. Based upon discussions with and representations made by the investors, the Company reasonably believed that such investors were accredited and sophisticated investors. Mr. BenTov and Mr. Vardi had access to information on the Company necessary to make an informed investment decision. The shares of Series A and Series B Preferred Stock are convertible into Common Stock on a 4:1 basis, which reflects the Company's one-for-four reverse stock split that occurred on January 7, 2004 and are subject to further adjustment for stock splits, consolidations and stock dividends. In addition, the shares of Series A and Series B Preferred Stock are entitled to a 7% cumulative dividend payable semi-annually. The Company has also agreed to grant "piggyback" registration rights to Mr. BenTov and Mr. Vardi for the shares of Common Stock issuable upon conversion of the Series A and Series B Preferred Stock. The Company used the proceeds from the sale of Series A and Series B Preferred Stock for general working capital purposes.
In the year 2004 and 2003, the Company did not sell any other equity securities.
In 2004 and 2003, 14,688 and 11,250 shares of Common Stock, which have been retroactively adjusted to reflect the one-for-four reverse stock split that occurred on January 7, 2004, were issued pursuant to the exercise of options issued under the Company's stock option plan. No other shares of Common Stock were issued pursuant to the exercise of options issued under the Company's stock option plan.
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the years ended December 31, 2004, 2003, and 2002, the Company reported a net income of $1.2 million, a net loss of $123,305 and net income of $203,613, respectively. Additionally, the Company has an accumulated deficit of ($27,785,251) as of December 31, 2004. The Company has implemented a plan whereby it is actively managing its personnel utilization rates and is constantly monitoring project requirements and timetables.
In management's opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months. There may be circumstances that would accelerate its use of liquidity resources, including but not limited to, its ability to implement a profitable business model, which may include further restructuring charges. If this occurs, the Company, may from time to time, incur additional indebtedness or issue, in public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will be available to the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not have any "Off Balance Sheet Arrangements" in 2004, 2003, and 2002.
CONTRACTUAL OBLIGATIONS
The Company has the following contractual obligations as of December 31, 2004:
In management's opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months. There may be circumstances that would accelerate its use of liquidity resources, including, but not limited to, its ability to implement a profitable business model, which may include further restructuring charges. If this occurs, the Company may, from time to time, incur additional indebtedness or issue, in public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will be available to the Company.
SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control.
In addition, the Company's Board of Directors has approved the payment of a $0.75 per share cash dividend to holders of its common stock and preferred stock of record as of March 21, 2005, if the Share Exchange Agreement and the Share Issuance are consummated.
Under the terms of the loan agreement with Keltic Financial Partners, LP, their consent to the proposed transaction with Vanguard was required. Keltic provided their consent in March 2005.
If the transactions are consummated the Chief Executive Officer of Vanguard will become the Chief Executive Officer of the combined companies.
These agreements allow Vanguard to appoint three Board of Director members. Accordingly, subject to the consummation of the Share Exchange Agreement and the Share Issuance Agreement, the Board of Directors of the Company have proposed to the shareholders of the Company that they elect Andrew Ball, William Newman and Joseph Harris to the Board of Directors and Shmuel BenTov and Reuven Battat will resign from the Board.
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
RECENT ACCOUNTING PRONOUNCEMENTS
See page of the consolidated financial statements for a discussion of the impact of recent accounting standards.
INFLATION
The Company has not suffered material adverse affects from inflation in the past. However, a substantial increase in the inflation rate in the future may adversely affect customers' purchasing decisions, may increase the costs of borrowing, or may have an adverse impact on the Company's margins and overall cost structure.
FACTORS THAT COULD AFFECT OPERATING RESULTS
Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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.
OPERATING LOSSES
The Company has incurred operating losses in 2003 and 2002. In the year ended December 31, 2003, the Company had an operating loss of $42,000 and net loss of $123,000. In the year ended December 31, 2002, the Company had an operating loss of $130,000 and net income of $204,000. There is no guarantee that the Company can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow slower than anticipated, or if operating expenses exceed expectations or cannot be adjusted accordingly the Company could to experience losses and the results of operations and financial condition would be materially and adversely affected.
CAPITAL REQUIREMENTS
The Company may be unable to meet its future capital requirements. The Company may require additional financing in the future in order to continue to implement its product and services development, marketing and other corporate programs. The Company may not be able to obtain such financing or obtain it on acceptable terms. Without additional financing, the Company may be forced to delay, scale back or eliminate some or all of its product and services development, marketing and other corporate programs. If the Company is able to obtain such financing, the terms may contain restrictive covenants that might negatively affect its shares of Common Stock, such as limitations on payments of dividends or, in the case of a debt financing, reduced earnings due to interest expenses. Any further issuance of equity securities would likely have a dilutive effect on the holders of its shares of Common Stock. Its business, operating results and financial condition may be materially harmed if revenues do not develop or grow slower than the Company anticipates, if operating expenses exceed its expectations or cannot be reduced accordingly, or if the Company cannot obtain additional financing.
DEPENDENCE ON LIMITED NUMBER OF CLIENTS
The Company derives a significant portion of its revenues from a relatively limited number of clients primarily located in the New York/New Jersey metropolitan area of the United States. Adverse economic conditions affecting this region could have an adverse effect on the financial condition of its clients located there, which in turn could adversely impact its business and future growth. Revenues from its ten most significant clients accounted for a majority of its revenues for each of the three years ended December 31, 2004. In each of the last three years, the Company had at least one customer with revenues exceeding 10% of the Company's revenues. For the year ended December 31, 2004, the Company had two customers which accounted for 20% and 19% of revenues, respectively. For the year ended December 31, 2003, the Company had one customer which represented 28% of revenues. For the year ended December 31, 2002, the Company had revenues from two customers which represented 25% and 24% of revenues, respectively. Besides these customers, no other customer represented greater than 10% of the Company's revenues. In any given year, its ten most significant customers may vary based upon specific projects for those clients during that year. There can be no assurance that its significant clients will continue to engage it for additional projects or do so at the same revenue levels. Clients engage the Company on an assignment-by-assignment basis, and a client can generally terminate an assignment at any time without penalties. The loss of any significant customer could have a material adverse effect on its business, results of operations and financial condition. A failure of the Company to develop relationships with new customers could have a material adverse effect on its business, results of operations and financial condition.
PROJECT RISK
The Company's projects entail significant risks. Many of its engagements involve projects that are critical to the operations of its clients' businesses and provide benefits that may be difficult to quantify. The Company's failure or inability to meet a client's expectations in the performance of the Company's services could result in a material adverse change to the client's operations and therefore could give rise to claims against the Company or damage its reputation, adversely affecting its business, results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE
The Company's business is subject to rapid technological change and is dependent on new solutions. Its success will depend in part on its ability to develop information technology solutions to meet client expectations, and offer software services and solutions that keep pace with continuing changes in information technology, evolving industry standards, changing client preferences and a continuing shift to outsourced solutions by clients. The Company cannot assure you that it will be successful in adequately addressing the outsourcing market or other information technology developments on a timely basis or that, if addressed, the Company will be successful in the marketplace. The Company also cannot assure you that products or technologies developed by others will not render its services uncompetitive or obsolete. Its failure to address these developments could have a material adverse effect on its business, results of operations and financial condition.
e-BUSINESS INITIATIVES
The Company faces difficulties typically encountered by development stage companies in rapidly evolving markets because of its e-commerce initiative. The Company provides web enablement services and solutions and other related e-business services. Revenues from its e-business services constituted 46% of revenues for the year ended December 31, 2004, 38% of revenues for the year ended December 31, 2003 and 40% of revenues for the year ended December 31, 2002. The Company cannot assure you that any products or services developed by it, or its strategic partners will achieve market acceptance. The risks involved in these service offering include the Company's and its strategic partners' abilities to:
o create a customer base;
o respond to changes in a rapidly evolving and unpredictable business environment;
o maintain current and develop new strategic relationships;
o manage growth;
o continue to develop and upgrade technology; and
o attract, retain and motivate qualified personnel.
POSSIBILITY THAT CUSTOMERS MAY NOT DO BUSINESS WITH THE COMPANY
The Company's existing customers may decide not to continue to do business with the Company, and potential customers may decide not to engage the Company, or may conduct business with the Company on terms that are less favorable than those currently extended, due to the Company's operating losses in the past two years. In those events, the Company's net revenues would decrease, and the Company's business would be adversely affected.
BILLING MARGINS
The Company's ability to maintain billing margins is uncertain. It derives revenues primarily from the hourly billing of consultants' services and, to a lesser extent, from fixed-price projects. Its most significant cost is project personnel cost, which consists of consultant salaries and benefits. Thus, its financial performance is primarily based upon billing margin (billable hourly rate less the consultant's hourly cost) and personnel utilization rates (number of days worked by a consultant during a two-week billing cycle divided by the number of billing days in that cycle). The gross margin increased in 2004 due to a higher consultant utilization rate (89% in 2004 compared to 79% in 2003), and higher margin on fixed price contracts. The gross margin decreased in 2003 due to a lower consultant utilization rate (79% in 2003 compared to 81% in 2002). There can be no assurance, however, that its revenues will continue to be billed primarily on a time and materials basis or that the Company's cost containment and workforce rationalization effects will continue to provide positive results. In addition, during the past two years the Company's clients have been adverse to increases in any costs of the Company's services.
MANAGING GROWTH
The Company may have difficulty managing its growth. Its expansion is dependent upon, among other things,
o its ability to hire and retain consultants as employees or independent consultants,
o its ability to identify suitable new geographic markets with sufficient demand for its services, hire and retain skilled management, marketing, customer service and other personnel, and successfully manage growth, including monitoring operations, controlling costs and maintaining effective quality and service controls, and
o if the Company consummates additional acquisitions, its ability to successfully and profitably integrate any acquired businesses into its operations.
If the Company's management is unable to manage growth or new employees or consultants are unable to achieve anticipated performance levels, its business, results of operations and financial condition could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations are variable. Variations in revenues and results of operations occur from time to time as a result of a number of factors, such as the timing of closing of Solution Branch offices, the size and significance of client engagements commenced and completed during a quarter, the number of business days in a quarter, consultant hiring and utilization rates and the timing of corporate expenditures. The timing of revenues is difficult to forecast because the sales cycle can be relatively long and may depend on such factors as the size and scope of assignments and general economic conditions. A variation in the number of client assignments or the timing of the initiation or the completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in results of operations from quarter to quarter and can result in losses to it. In addition, its engagements generally are terminable by the client at any time without penalties. Although the number of consultants can be adjusted to correspond to the number of active projects, the Company must maintain a sufficient number of senior consultants to oversee existing client projects and to assist with its sales force in securing new client assignments. An unexpected reduction in the number of assignments could result in excess capacity of consultants and increased selling, general and administrative expenses as a percentage of revenues. The Company has also experienced, and may in the future experience, significant fluctuations in the quarterly results of its software sales as a result of the variable size and timing of individual license transactions, competitive conditions in the industry, changes in customer budgets, and the timing of the introduction of new products or product enhancements. In the event that its results of operations for any period are below the expectation of market analysts and investors, the market price of its shares of common stock could be adversely affected.
VOLATILITY OF STOCK PRICE
The Company's Common Stock may be subject to wide fluctuations in price in response to variations in quarterly results of operations and other factors, including acquisitions, technological innovations and general economic or market conditions. In addition, stock markets have experienced extreme price and volume trading volatility in recent years. This volatility has had a substantial effect on the market price of many technology companies and has often been unrelated to the operating performance of those companies. This volatility may adversely affect the market price of its Common Stock. Additionally, there can be no assurance that an active trading market for the Common Stock will be sustained.
REAPPLICATION FOR QUOTATION OF COMMON STOCK ON NASDAQ
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
The Company hopes to receive approval from The NASDAQ SmallCap Market for its reapplication prior to the consummation of the Share Exchange and the Share Issuance, but there are no assurances that the Company will receive such approval prior to the consummation of such transactions, which could result in a halt in the trading of the Company's Common Stock upon consummation of such transactions until the Company receives such approval. There are also no assurances that the Company will receive such approval at all, in which case the Company's Common Stock would be removed from quotation on The NASDAQ SmallCap Market.
If the Company's Common Stock were removed from quotation on The NASDAQ SmallCap Market, any trading in the Company's Common Stock would thereafter be conducted in the over-the-counter market on the OTC Electronic Bulletin Board or in the "pink sheets." Accordingly, the liquidity of the Company's Common Stock could be reduced and the coverage of the Company by security analysts and media could be reduced, which could result in lower prices for the Company's Common Stock than might otherwise prevail and could also result in spreads between the bid and asked prices for the Company's Common Stock. Additionally, certain investors will not purchase securities that are not quoted on The NASDAQ SmallCap Market, which could materially impair the Company's ability to raise funds through the issuance of its Common Stock or other securities convertible into its Common Stock.
In addition, if the Company's Common Stock is removed from quotation on NASDAQ and the trading price of its Common Stock is less than $5.00 per share, trading in its Common Stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended. Under that Rule, broker and dealers who recommend such low priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to recent regulations adopted by the SEC, any equity security not traded on an exchange or quoted on NASDAQ or the OTC Bulletin Board that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Such requirements could severely limit the market liquidity of the Company's Common Stock. There can be no assurance that the Company's Common Stock will not be removed from quotation on NASDAQ or treated as penny stock.
COMPETITION
The market for information technology services includes a large number of competitors, is subject to rapid change and is highly competitive. Its primary competitors include participants from a variety of market segments, including the current and former consulting divisions of the "Big Four" accounting firms, interactive advertising agencies, web development companies, systems consulting and implementation firms, application software firms and management consulting firms. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition than the Company. In addition, the Company competes with its clients' internal resources, particularly when these resources represent a fixed cost to the client. In the future, such competition may impose additional pricing pressures on it. The Company cannot assure you that it will compete successfully with its existing competitors or with any new competitors.
INTELLECTUAL PROPERTY RIGHTS
The Company's business includes the development of custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to the client. The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company license intellectual property. The Company enters into confidentiality agreements with its employees and limits distribution of proprietary information. However, the Company cannot assure you that the steps taken by it in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company is subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require it to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property, which is the subject of the asserted infringement. In addition, the Company is aware of other users of the term "TACT" and combinations including "A Consulting," which users may be able to restrict its ability to establish or protect its right to use these terms. The Company has in the past been contacted by other users of the term "TACT" alleging rights to the term. The Company has completed filings with the U.S. Patent and Trademark Office in order to protect certain marks, including "TACT" and "The A Consulting Team." Its inability or failure to establish rights to these terms or protect its rights may have a material adverse effect on its business, results of operations and financial condition.
GOING CONCERN
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2004 the Company reported net income of $1.2 million. For the year ended December 31, 2003, the Company reported a net loss of $123,000. For the year ended December 31, 2002, the Company reported net income of $204,000. Additionally, the Company has an accumulated deficit of $27 million at December 31, 2004. The Company believes that its continuing focus on cost reductions, together with a number of other operational changes, has resulted in an improved financial condition. There can be no assurance that the Company will be profitable in future years.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into the market risk sensitive transactions required to be disclosed under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements on pages through of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to us by others within these entities.
Changes in internal controls. There were no significant changes in the Company's internal control over financial reporting that occurred during our fourth fiscal quarter of 2004 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following section sets forth information as to each director and executive officer of TACT, including his or her age, present principal occupation, other business experience during the last five years, directorships in other publicly-held companies, membership on committees of the Board of Directors and period of service with TACT.
Shmuel BenTov, 50, is the founder of TACT and has been the Chairman of the Board and Chief Executive Officer of the Company since its establishment in 1983. Mr. BenTov received a B.Sc. in Economics and Computer Science in 1979 from the Bar-Ilan University in Israel. From 1979 to 1983, Mr. BenTov was a consultant Database Administrator and then an Account Manager with Spiridellis & Associates. From 1972 to 1979, Mr. BenTov served with the Israeli Defense Forces as a Programmer, Analyst, Project Manager, Database Administrator and Chief Programmer.
Richard D. Falcone, 52, has been the Chief Financial Officer and Treasurer of the Company since July 2001 and was an advisor to the Company from January 2001 to July 2001. Mr. Falcone is a Certified Public Accountant and is a graduate of the University of Vermont. Prior to joining the Company, Mr. Falcone was the CFO for Acuent from January 1999 to July 2000 and Chief Operating Officer of Netgrocer.com from January 1997 to December 1998.
Steven S. Mukamal, 65, has been a director of the Company since August 1997. Mr. Mukamal is the Chairman of the Compensation Committee as well as a member of the Audit Committee and the Nominating Committee. Mr. Mukamal received a B.A. in 1962 from Michigan State University and a J.D./L.L.B. in 1965 from Brooklyn Law School. Since 1965, he has been a member and senior partner of the law firm Barst & Mukamal LLP. Mr. Mukamal specializes in the areas of immigration and nationality law, consular law and real estate and debt restructuring.
Reuven Battat, 49, has been a director of the Company since August 1997. Mr. Battat is a member of the Compensation Committee, the Audit Committee and the Nominating Committee. In 2003, Mr. Battat became the Chief Executive Officer of Actimize, LTD, a provider of enterprise technology solutions for mitigating operational risk. Mr. Battat was the President and Chief Executive Officer of ProcureNet Inc., a provider of internet business to government and business to business solutions and services, from 2000 through 2003. Mr. Battat was the Senior Vice President and General Manager of Global Marketing for Computer Associates International, Inc. and from 1995 through 1999. Mr. Battat was responsible for Computer Associates' worldwide marketing activities and long-term planning of product development in new and emerging markets.
William Miller, 67, has been a director of the Company since July 2002. Mr. Miller is the Chairman of the Audit Committee, as well as a member of the Nominating Committee. Mr. Miller is a private investor. He is a Certified Public Accountant and an Attorney. He was affiliated for eight years with Cantor Fitzgerald, an Investment Banking Firm, as Executive Vice President responsible for corporate finance, real estate, and retail sales. Subsequent to that he was with Telerate, a computer information services company.
AUDIT COMMITTEE
The Company's Audit Committee is comprised of three independent directors as follows: Mr. William Miller, Chairman, Mr. Steven S. Mukamal and Mr. Reuven Battat. Mr. William Miller, Chairman of the Audit Committee, is considered an "audit committee financial expert" as defined in Regulation S-K, Item 401(h)(2).
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has affirmatively determined that the Company has at least one Audit Committee Financial Expert as defined by Section 407 of the Sarbanes-Oxley Act of 2002 serving on our audit committee. The directors have determined that Mr. William Miller is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934 and has all of the following five attributes due to his experience overseeing and assessing the performance of companies with respect to the preparation and evaluation of financial statements:
o An understanding of GAAP and financial statements;
o The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company's financial statements, or experience actively supervising one or more persons engaged in such activities;
o An understanding of internal controls and procedures for financial reporting; and
o An understanding of audit committee functions.
NOMINATING COMMITTEE
The Company's Nominating Committee is comprised of three independent directors as follows: Mr. Reuven Battat, Chairman, Mr. William Miller and Mr. Steven S. Mukamal.
SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control.
These agreements allow Vanguard to appoint three Board of Director members. Accordingly, subject to the consummation of the Share Exchange Agreement and the Share Issuance Agreement, the Board of Directors of the Company have proposed to the shareholders of the Company that they elect Andrew Ball, William Newman and Joseph Harris to the Board of Directors and Shmuel BenTov and Reuven Battat will resign from the Board.
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and certain beneficial owners of the Company's equity securities (the "Section 16 Reporting Persons") to file with the SEC reports regarding their ownership and changes in ownership of the Company's equity securities. The Company believes that, during the fiscal year 2004, its Section 16 Reporting Persons complied with all Section 16(a) filing requirements, except that (i) Robert Duncan reported three transactions late on Form 4 filed in 2004, (ii) Stephen Mukamal reported four transactions late on a Form 4 filed in 2004 and two transactions late on a Form 4 filed in 2005, (iii) Reuven Battat reported four transactions late on a Form 4 filed in 2004 and two transactions late on a Form 4 filed in 2005, (iv) Richard D. Falcone reported two transactions late on a Form 5 filed in 2005, (v) Shmuel BenTov reported one transaction late on a Form 5 filed in 2005, and (vi) William Miller reported two transactions late on a Form 4 filed in 2004 and reported two transactions late on a Form 5 filed in 2005. In making this statement, the Company has relied upon examination of the copies of Forms 3, 4 and 5 provided to the Company and the written representations of the Section 16 Reporting Persons.
CODE OF ETHICS
The Board of Directors has adopted a code of ethics designed, in part, to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with or submit to the Securities and Exchange Commission and in the Company's other public communications, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations of the code to an appropriate person or persons, as identified in the code and accountability for adherence to the code. The code of ethics applies to all directors, executive officers and employees of the Company. The Company will provide a copy of the code to any person without charge, upon request to Mr. Richard D. Falcone, Chief Financial Officer by calling 732-499-8228 or writing to Mr. Falcone's attention at The A Consulting Team, Inc., 77 Brant Avenue, Suite 320, Clark, NJ, 07066.
The Company intends to disclose any amendments to or waivers of its code of ethics as it applies to directors or executive officers by filing them on Form 8-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2005.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2005 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2005.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2005 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2005.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2005.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to this portion of Item 15 is submitted as a separate section of this report at.
(a)(3) Listing of Exhibits
Exhibit Number Description of Exhibits - ------ -----------------------
2.1 Stock Purchase Agreement dated as of June 28, 2002 among the Registrant, International Object Technology, Inc. and the Stockholders of International Object Technology, Inc. incorporated by reference to Exhibit 2.1 to the Form 8-K, as previously filed with the SEC on July 12, 2002.
3.1 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001.
3.2.1 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated August 8, 2002 incorporated by reference to Exhibit 3.2 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 14, 2002.
3.2.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated November 12, 2002, incorporated by reference to Exhibit 3.2.2 to the Form 10-Q for the period ended September 30, 2002, as previously filed with the SEC on November 14, 2002.
3.2.3 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated January 5, 2004, incorporated by reference to Exhibit 3.2.3 to the Form 8-K dated January 8, 2004, as previously filed with the SEC on January 8, 2004.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by reference to Exhibit 3.3 to the Registration Statement on Form SB-2 as previously filed with the SEC on August 6, 1997.
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Registrant incorporated by reference to Exhibit 3.4 to the Form 10-Q for the period ended June 30, 2003, as previously filed with the SEC on August 14, 2003.
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4 to the Registration Statement on Form SB-2 as previously filed with the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among the Registrant and those persons listed on Schedule I attached thereto, incorporated by reference to Exhibit 4.1 to the Form 8-K dated July 19, 2002, as previously filed by the SEC on July 25, 2002.
10.1.1 Stock Option and Award Plan of the Registrant and Form of Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.1 to the Registration Statement on Form SB-2 as previously filed with the SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant, incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 as previously filed with the SEC on June 25, 1998.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the Registrant, incorporated by reference to Exhibit C to the Registrant's 2001 Proxy Statement on Schedule 14A, as previously filed with the SEC on April 30, 2001.
10.2 Amended and restated Loan and Security Agreement between the Registrant and Keltic Financial Partners, LP, dated March 23, 2004.
10.3 Employment Agreement, dated January 1, 2002, between the Registrant and Shmuel BenTov, incorporated by reference to Exhibit 10.5 to the Form 10-K for the fiscal year ended December 31, 2001, as previously filed with the SEC on April 1, 2002.
10.4 Employment Agreement, dated September 11, 2001, between the Registrant and Richard Falcone, incorporated by reference to Exhibit 10.8 to the Form 10-K/A for the fiscal year ended December 31, 2001, as filed with the SEC on April 4, 2002.
10.5 Form of S Corporation Termination, Tax Allocation and Indemnification Agreement, incorporated by reference to Exhibit 10.4 to the Registration Statement on Form SB-2, as previously filed with the SEC on August 6, 1997.
10.6 Letter of Undertaking from the Registrant and Shmuel BenTov, incorporated by reference to Exhibit 10.9 to the Registration Statement on Form SB-2, as previously filed with the SEC on July 23, 1997.
10.7 Shmuel BenTov Letter Commitment, dated March 29, 2001, incorporated by reference to Exhibit 10.10 to the Form 10-K for the fiscal year ended December 31, 2000, as previously filed with the SEC on April 2, 2001.
10.8 Employment Agreement dated as of July 19, 2002 between the Registrant and Dr. Piotr Zielczynski, incorporated by reference to Exhibit 10.1 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.9 Employment Agreement dated as of July 19, 2002 between the Registrant and Ilan Nachmany, incorporated by reference to Exhibit 10.2 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.10 Employment Agreement dated as of July 19, 2002 between the Registrant and Sanjeev Welling, incorporated by reference to Exhibit 10.3 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.11 Form of Indemnification Agreement between the Registrant and each of its Directors and its Chief Executive Officer, incorporated by reference to Exhibit 10.12 to the Form 10-Q for the period ended September 30, 2003 as filed with the SEC on November 11, 2003.
23.1 Consent of Grant Thornton, LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Exhibits - The response to this portion of Item 15 is submitted as a separate section of this report.
(c) Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report at S-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE A CONSULTING TEAM, INC.
By: /s/ Shmuel BenTov ------------------ Shmuel BenTov, Chief Executive Officer Date: March 24, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ITEM 15 (a) (1) AND (2)
THE A CONSULTING TEAM, INC.
The following consolidated financial statements and financial statement schedule of The A Consulting Team, Inc. are included in Item 8:
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Shareholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements...................................F-7
The following consolidated financial statement schedule of The A Consulting Team, Inc. is included in Item 15(d): Schedule II - Valuation and Qualifying Accounts..............................S-1
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors The A Consulting Team, Inc.
We have audited the accompanying consolidated balance sheets of The A Consulting Team, Inc. and Subsidiaries, (the "Company") as of December 31, 2004, and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The A Consulting Team, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations, and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II listed in the index of financial statements is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
GRANT THORNTON LLP
New York, New York February 24, 2005
THE A CONSULTING TEAM, INC. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
THE A CONSULTING TEAM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
THE A CONSULTING TEAM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
* Adjusted for the January 7, 2004 reverse stock split (See Note 1)
See accompanying notes to consolidated financial statements.
THE A CONSULTING TEAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
The A Consulting Team, Inc. (the "Company") was incorporated on February 16, 1983, in the State of New York and provides information technology consulting, custom application development services and solutions to Fortune 1000 companies. The Company's customers are primarily located in the New York/New Jersey metropolitan area.
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the years ended December 31, 2004, 2003, and 2002, the Company reported a net income of $1,236,705. a net loss of $123,305, and net income of $203,613, respectively. Additionally, the Company has an accumulated deficit of $27,785,251 as of December 31, 2004. The Company has implemented a plan whereby it is actively managing its personnel utilization rates and is constantly monitoring project requirements and timetables.
In management's opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months. There may be circumstances that would accelerate its use of liquidity resources, including but not limited to, its ability to implement a profitable business model, which may include further restructuring charges. If this occurs, the Company, may from time to time, incur additional indebtedness or issue, in public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will be available to the Company.
Reverse Stock Split
On January 7, 2004, the Company effected a one-for-four reverse stock split of its common stock in order to regain compliance with NASDAQ's minimum bid price requirement to remain listed on the NASDAQ SmallCap Market. All share and per share amounts used in the Company's financial statements and notes thereto have been retroactively restated to reflect the one-for-four reverse stock split.
Principles of Consolidation
The consolidated financial statements include the accounts of The A Consulting Team, Inc., its 100% owned subsidiary International Object Technology, Inc. (IOT) from its date of acquisition on July 19, 2002 and its 51% owned subsidiary, T3 Media, Inc., which ceased operations in 2001, from its date of acquisition in 1999. All material inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
The Company calculates earnings per share in accordance with Financial Accounting Standards Board (FASB) Statement No. 128, Earnings Per Share. Basic earnings per share is calculated by dividing net earnings available to common shares by weighted average common shares outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities except when it is anti-dilutive, including the effect of shares issuable under the Company's incentive plans. All share and per share amounts used in the Company's financial statements and notes thereto have been retroactively restated to reflect the one-for-four reverse stock split, which occurred on January 7, 2004.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
The Company considers all highly liquid financial instruments with original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of financial instruments (principally consisting of cash, cash equivalents, accounts receivable, long term debt and capital leases) approximates fair value because of their short maturities.
Property and Equipment
Property and equipment acquired after December 31, 1994 are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Property and equipment acquired prior to January 1, 1995 are depreciated using an accelerated method over the estimated useful lives of the assets, which range from five to seven years.
Long-Lived Assets
The Company adopted the provisions of FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets " effective January 1, 2002. When impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using analyses of future undiscounted cash flows expected to be generated by the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeded its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.
In the third quarter of 2002, after extensive review of changing market conditions, the Company wrote-off $150,000, which related to the permanent impairment of the investments. These charges relate to the Company's investments in Methoda Computer, Ltd ($132,000) and Always-On Software, Inc. ($18,000). (See Note 14)
Goodwill and Intangible Assets
The Company adopted the provisions of FASB Statement No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142) effective January 1, 2002. SFAS No. 142 required that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment using the guidance for measuring impairment set forth in this statement. As prescribed under SFAS 142, the Company had an evaluation done of its goodwill and intangible assets, which was performed by an independent third party. The Company tested for impairment using the guidance for measuring impairment set forth in SFAS No. 142 and it was determined that there was no impairment at December 31, 2004, 2003 and 2002.
In accordance with SFAS No. 142, the following are changes in the carrying amount of goodwill for the year ended December 31, 2004, 2003 and 2002:
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the carrying amounts of acquired intangible assets and related amortization:
During 2004, the Company recorded amortization of intangible assets of ($69,333) as part of the purchase price of IOT (See Note 2). The intangible amount pertains to certain employment agreements. The Company is amortizing the cost of these employee contracts over a three-year period of the asset's estimated useful life.
Revenue Recognition
Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly and monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company monitors its accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical experience to accurately determine its accounts receivable reserve. The Company's allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. The Company also establishes a general reserve for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, the Company's estimate of the recoverability of amounts due the company could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
At December 31, 2004, the Company has stock based compensation plans, which are described more fully in Note 12. As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock-based compensation arrangements with employees in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense for stock options issued to employees is based on the difference on the date of grant, between the fair value of the Company's stock and the exercise price of the option. No stock based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based compensation:
The fair value of options at the date of grant was estimated using the Black-Scholes model with the following assumptions:
The weighted average fair value of options granted by the Company was $3.53 in 2004, $.80 in 2003, and $0.80 in 2002.
Segment Information
The disclosure of segment information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is not required as the Company operates in only one business segment.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement 123 (revised 2004), Share Based Payment (Statement 123 (R) ). This Statement requires that the costs of employee share based payments be measured at fair value on the awards' grant date using an option-pricing model and recognized in the financial statements over the requisite service period. This Statement does not change the accounting for stock ownership plans, which are subject to American Institute of Certified Public Accountants SOP 93-6, "Employer's Accounting for Employee Stock Ownership Plans." Statement 123 (R) supersedes Opinion 25, Accounting for Stock Issued to Employees and its related interpretations, and eliminates the alternative to use Opinion 25's intrinsic value method of accounting, which the Company is currently using. Statement 123 (R) allows for two alternative transition methods. The first method is the modified prospective application whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date will be recognized over the remaining service period. The compensation cost for that portion of awards will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under Statement 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of Statement 123 (R). The second method is the modified retrospective application, which requires that the Company restates prior period financial statements. The modified retrospective application may be applied either to all prior periods or only to prior interim periods in the year of adoption of this statement. The Company is currently determining which transition method it will adopt and is evaluating the impact Statement 123 (R) will have on its financial position, results of operations, EPS and cash flows when the Statement is adopted.
2. ACQUISITIONS
On July 19, 2002, the Company consummated the acquisition of all of the issued and outstanding capital stock of IOT, a New Jersey corporation, pursuant to a Stock Purchase Agreement dated as of June 28, 2002 among TACT, IOT and the holders of all of the issued and outstanding capital stock of IOT (the "IOT Stockholders"). TACT acquired all of the issued and outstanding capital stock of IOT from the IOT Stockholders in exchange for an aggregate of three hundred seventeen thousand five hundred (317,500) shares of unregistered TACT Common Stock, which has been retroactively adjusted to reflect the one-for-four reverse stock split that occurred on January 7, 2004, and is valued at $635,000 (the "Acquisition Shares") and the obligation to make certain deferred cash payments of six hundred fifty thousand ($650,000) in the aggregate (the "Deferred Payments"). The Acquisition Shares were issued by TACT to the IOT Stockholders at the closing of the acquisition. Subject to the terms and conditions of the Stock Purchase Agreement, the Deferred Payments are payable as follows: (i) an aggregate of $140,000 on or before September 2, 2002, (ii) an aggregate of $210,000 on or before April 1, 2003, (iii) an aggregate of $100,000 on or before April 1, 2004, and (iv) an aggregate of $200,000 on or before January 2, 2005. The consideration paid by TACT for the acquisition of IOT was determined through arms-length negotiation by the management of TACT and a majority of the IOT Stockholders. The acquisition was accounted for under the purchase method of accounting for business combinations and operations of IOT has been included from the date of acquisition. The purchase price of the acquisition exceeded the fair market value of the net assets acquired, resulting in the recording of goodwill of $1,181,520 and other intangibles of $312,000. The three majority shareholders of IOT received employment agreements for a three-year period at an annual salary of $160,000 per year each. For the year ended December 31, 2004, the amortization expense for the intangible asset was $69,333.
IOT was a privately owned, professional services firm that provides data management and business intelligence solutions, technology consulting and project management services. IOT will operate as a wholly owned subsidiary of TACT. The acquisition was made to increase the depth of the Company's services and solutions offerings and provide the Company with significant cross-selling opportunities.
The Company's net income for the year ended December 31, 2002, includes the results of IOT from July 19, 2002, the date of acquisition.
On October 2, 1998, the Company made an investment in web integrator T3 Media of $3 million, in return for non-voting convertible preferred stock. On June 23, 1999, the Company converted its preferred stock into 30% common stock ownership and increased its ownership interest to approximately 51% by an additional investment in T3 Media's common stock of $370,000. The acquisition of T3 Media was accounted for using the purchase method of accounting. 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 estimated fair value of the net identifiable assets acquired totaled $4.0 million and was recorded as goodwill and was being amortized using the straight-line method over 7 years. During 2000, the Company wrote-off the net carrying value of the goodwill which amounted to $3.1 million. T3 Media ceased operations in the second quarter of 2001. During 2003 and 2002, the Company reversed approximately $113,000 and $272,000, respectively, in accounts payable relating to T-3 Media, resulting in a reduction in SG&A expenses.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
The Company invested approximately $2,000,000 and $300,000 in Always-On Software, Inc. during 2000 and 1999, respectively, and the Company invested $500,000 in Methoda Computers Ltd. during 2000. Due to the deteriorating conditions of the software application services ("ASP") market and deteriorating cash reserves, Always-On Software, Inc. ceased operations in July 2001. As a result, the Company wrote-down virtually all of its investment of $2.3 million to reflect the impairment in the value of its investment in the second quarter of 2001. In the fourth quarter of 2001, Always-On Software Inc. merged with Veracicom, Inc. and the Company received warrants in this transaction. In the third quarter of 2002, the Company wrote off the remainder of its investment in Always-On Software, Inc. in the amount of $18,000. The Company also wrote down its investment in Methoda Computer Ltd. in that same period in the amount of $132,000.
In January of 2004, the Company sold approximately 75 percent of its investment in Methoda for $200,000 in cash and $81,000 payable over the next twenty months. The remaining investment has a carrying value of $87,000.
4. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share for the years ended December 31, 2004, 2003 and 2002.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2004 and 2002, there were 159,140 and 157,494 options, respectively, that were excluded from the computation of diluted earnings per share. All options and warrants outstanding during 2003 (see Notes 13) were not included in the computation of net loss per share because the effect would be antidilutive.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
6. CREDIT ARRANGEMENT
The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, (Keltic) based on the Company's eligible accounts receivable balances. The line of credit has certain financial covenants, which the Company must meet on a quarterly basis. There was no outstanding balance at December 31, 2004 or 2003. The Company's Chief Executive Officer initially guaranteed $1 million of the line of credit. The line of credit bears interest at a variable rate based on prime plus 2% and the rate was 7.25% at December 31, 2004. In July 2002, the credit line was amended to reduce the guarantee of the Company's Chief Executive Officer to $400,000, and to reflect the Company's acquisition of International Objects Technology, Inc. In March 2004, the line of credit was amended and restated to include the following: an extension to June 2007, the removal of the guarantee of the Chief Executive Officer and less restrictive financial covenants.
The Company is prohibited from paying dividends on its common stock due to restrictions under the restated and amended Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated March 23, 2004. Keltic has consented to the payment of dividends on the Series A and Series B Preferred Stock, provided an event of default does not exist.
The Company's subsidiary, T3 Media, which ceased operations in 2001, had a demand loan with a bank. The T3 Media demand loan, which was guaranteed by the Company, was paid down and cancelled in January of 2002.
7. CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has the following commitments as of December 31, 2004, and is comprised of long term obligations of an automobile loan, shareholder loan, note payable for acquisition and employment contracts. In addition, there is a capital lease obligation and operating lease obligation as well. The automobile loan is payable in monthly installments of $1,262 including interest at 6%. As of December 31, 2004, the loan matures as follows: 2005 - $13,885 and 2006 - $13,478. The shareholder loan is payable in monthly installments of $5,000 including interest at 3.9%. As of December 31, 2004, the loan matures as follows: 2005 - $20,077. The note payable for acquisition is payable as follows: 2005 - $200,000. The employment contracts are payable as follows: 2005 - $132,000. One of the Company's subsidiaries, T3 Media, which ceased operations in 2001, had entered into a series of capital lease obligations, which the Company had guaranteed. The Company continues the process of negotiating buy-outs on these leases. The Company has two operating leases for its corporate headquarters located in NY and its branch office in NJ. The annual amounts due for both locations are as follows: 2005 - $308,663, 2006 - $308,663 and 2007 - $191,100.
As of December 31, 2004, the Company does not have any "Off Balance Sheet Arrangements".
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's commitments at December 31, 2004, are comprised of the following:
The Company presently employs, Victoria BenTov, the sister of the Chief Executive Officer and President, as a billable consultant. On January 1, 2005 her salary was increased from $88,000 to $140,000 and she was paid a $10,000 bonus.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
9. 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 tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and (liabilities) consist of the following:
The deferred tax liability at December 31, 2004 and 2003 relates to the change in accounting methods for tax purposes arising from the IOT acquisition.
Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry-forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss carry-forwards and other deferred tax assets for tax purposes may be limited annually under Code Section 382 to a percentage (currently about four and a half percent) of the fair market value of the Company at the time of any such ownership change.
For the year ended December 31, 2004, approximately $1,354,000 of federal and $760,000 of state net operating losses were utilized to offset current year income. As a result, at December 31, 2004, the Company has federal net operating loss carry forwards of approximately $10.2 million which will begin to expire in 2020. In addition, the Company has state net operating loss carry forward of approximately $16.4 million remaining which will expire 2009 to 2012. The full utilization of the deferred tax assets in the future is dependent upon the Company's ability to generate taxable income; accordingly, a valuation allowance of an equal amount has been established. During the years ended December 31, 2004, 2003, and 2002, the valuation allowance decreased by $1,592,000, $69,000 and $5,805,000, respectively.
In March 2002, new legislation was enacted that allowed for losses incurred in 2001 to be carried back five years. The tax effect relating to this legislation, amounting to $438,665 was recorded as a refund in the first quarter of 2002.
Significant components of the provision for income taxes are as follows:
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the federal statutory rate and the effective income tax rate for the years ended December 31, 2004, 2003, and 2002.
10. RETIREMENT PLAN
The Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code for its employees. Participants can make elective contributions subject to certain limitations. Under the plan, the Company can make matching contributions on behalf of all participants. There were no such contributions made by the Company in 2004, 2003 and 2002.
11. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. The Company maintains its cash balances on deposit with a limited number of financial institutions. For the year ended December 31, 2004, the Company had two customers which accounted for 20% and 19% of revenues, respectively. For the year ended December 31, 2003, the Company had one customer which represented 28% of revenues. For the year ended December 31, 2002, the Company had revenues from two customers which represented 25% and 24% of revenues, respectively. Besides these customers, no other customer represented greater than 10% of the Company's revenues. Three customers represented approximately 10%, 14% and 17% of accounts receivable as of December 31, 2004, and three customers represented approximately 10%, 13% and 15% of accounts receivable as of December 31, 2003 and two customers represented approximately 17% and 15%, of accounts receivable as of December 31, 2002.
12. LEASES
The Company leases office space under non-cancelable operating leases. The future minimum payments for all non-cancelable operating leases as of December 31, 2004 are as follows:
Office leases are subject to escalations based on increases in real estate taxes and operating expenses. Rent expense for the years ended December 31, 2004, 2003, and 2002 was approximately $299,121, $340,000, and $307,000, respectively.
In 2001, T3 Media stopped paying its capital lease obligations. The Company was a guarantor of the majority of these obligations and is continuing the process of negotiating buy-outs of the remaining leases. For the year ended December 31, 2004, $291,000 of T3 Media's capital lease obligations remained outstanding.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") that provides for the grant of stock options that are either "incentive" or "non-qualified" for federal income tax purposes. The Plan provided for the issuance of up to a maximum of 150,000 shares of common stock. On May 27, 1998, the shareholders approved and ratified an increase to the Plan from 150,000 to 225,000 shares of common stock and on May 24, 2001, the shareholders approved and ratified an increase to the Plan from 225,000 to 300,000 shares of common stock (subject to adjustment pursuant to customary anti-dilution provisions).
The exercise price per share of a stock option is established by the Executive Compensation Committee of the Board of Directors in its discretion, but may not be less than the fair market value of a share of common stock as of the date of grant. The aggregate fair market value of the shares of common stock with respect to which "incentive" stock options are exercisable for the first time by an individual to whom an "incentive" stock option is granted during any calendar year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any time after full vesting for a period not to exceed ten years from the date of grant and terminate upon the date of termination of employment. Such period is to be established by the Company in its discretion on the date of grant.
Information with respect to options under the Company's Plan (adjusted for reverse stock split that occurred on January 7, 2004) is as follows:
At December 31, 2004, 2003 and 2002, 96,657, 83,959, and 119,154 options, respectively, were exercisable with weighted average exercise prices of $3.56, $4.78 and $11.48, respectively.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of the stock options outstanding and exercisable at December 31, 2004:
At December 31, 2004, the Company had 300,000 shares of Common Stock reserved in connection with the Stock Option Plan.
14. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
The Company began to restructure its operations in 2000 and has continued to restructure its operations through 2002. The restructuring was completed in the first quarter of 2003.
The restructuring charges for the year ended December 31, 2002 was approximately $150,000, consisting of following:
At December 31, 2004 and 2003, the Company had no restructuring charge liability. The Company had restructuring charge liabilities of approximately $11,000 at December 31, 2002. During the year ended December 31, 2002, the Company recorded additions to its restructuring liability of $125,000 related to the acquisition of IOT and recorded payments of approximately $275,000 consisting of $141,000 related to the reduction of the leased space, which IOT formerly occupied, and $134,000 in severance costs.
15. GAIN FROM EXTINGUISHMENT OF DEBT
The 2002 gain from extinguishment of debt relates to T3 Media's capital lease obligations. The Company was a guarantor of the majority of these obligations and was able to settle $65,000 of the leases for $16,000 resulting in the gain from extinguishment of debt of $49,000 in 2002.
16. EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
The Company has entered into an employment agreement with Shmuel BenTov, its Chairman, Chief Executive Officer and President, which terminated on December 31, 2004. The contract calls for a salary of $300,000 per year, which was subsequently reduced to $240,000 in May 2002. His employment agreement contains non-competition, non-disclosure and non-solicitation covenants. It also contains a Board of Director's approved annual bonus that is not to exceed one percent of the Company's total revenues for the year. In the event that he is terminated by the Company, he is to receive severance pay that is two times his then annual salary and is payable within 30 days of the termination.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SALES OF PREFERRED SHARES
In 2002, the Company issued 530,304 shares of Series A Preferred Stock and 41,311 shares of Series B Preferred Stock. The shares of Series A and Series B Preferred Stock are convertible into Common Stock on a 4:1 basis, which reflects the Company's one-for-four reverse stock split that occurred on January 7, 2004 and are subject to further adjustment for stock splits, consolidations and stock dividends. In addition, the shares of Series A and B Preferred Stock are entitled to a 7% cumulative dividend payable semi-annually. The Company has also agreed to grant "piggyback" registration rights to the Preferred Stockholders for the shares of Common Stock issuable upon conversion of the Series A and Series B Preferred Stock. The Series A and Series B Preferred Stock carries a liquidation preference in that the Series A and Series B shareholders are paid before any other class of stock.
18. (a) SUBSEQUENT EVENTS
On January 21, 2005, the Company entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Vanguard Info-Solutions Corporation, a New Jersey corporation ("Vanguard"), the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the "Share Exchange"). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Oak Finance Investments Limited ("Oak"), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the "Share Issuance"). The Company's Chairman and CEO, Mr. Shmuel BenTov has also entered into an agreement under which he has agreed to sell all of his shares of TACT capital stock to Oak in a separate transaction at $10.25 per share. These transactions require the approval of a majority of TACT's shares of common stock and preferred stock voting as a single class and constitutes a change of control.
In addition, the Company's Board of Directors has approved the payment of a $0.75 per share cash dividend to holders of its common stock and preferred stock of record at a date to be determined in the future, if the Share Exchange Agreement and the Share Issuance are consummated.
If the transactions are consummated the Chief Executive Officer of Vanguard will become the Chief Executive Officer of the combined companies.
These agreements allow Vanguard to appoint three Board of Director members. Accordingly, subject to the consummation of the Share Exchange Agreement and the Share Issuance Agreement, the Board of Directors of the Company have proposed to the shareholders of the Company that they elect Andrew Ball, William Newman and Joseph Harris to the Board of Directors and Shmuel BenTov and Reuven Battat will resign from the Board of Directors.
18. (b) SUBSEQUENT EVENTS (UNAUDITED)
In March 2005, the Board of Directors set March 21, 2005 as the record date for the payment of the $0.75 per share dividend discussed in Note 18. (a) above.
Under the terms of the loan agreement with Keltic Financial Partners, LP, their consent to the proposed transaction with Vanguard was required; Keltic provided their consent in March 2005.
The NASDAQ SmallCap Market rules require the Company to reapply for initial quotation of our Common Stock in connection with the proposed Share Exchange and the Share Issuance, since these transactions would result in a change of control and potentially allow Vanguard, a non-NASDAQ entity, to obtain a NASDAQ quotation. The Company submitted a reapplication in anticipation of the Share Exchange and the Share Issuance under the symbol "VSIX." If the Share Exchange and the Share Issuance are not consummated, the Company will withdraw this reapplication and its Common Stock will continue to be quoted under the symbol "TACX".
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 2004 and 2003.
(1) All share and per share amounts have been retroactively restated to reflect the one-for-four reverse stock split, which occurred on January 7, 2004.
THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a) Uncollectible accounts written off during 2004.
(b) Uncollectible accounts written off during 2003.
(c) Uncollectible accounts written off during 2002.
S-1
EXHIBIT INDEX
Exhibit Number Description of Exhibits - ------ -----------------------
2.1 Stock Purchase Agreement dated as of June 28, 2002 among the Registrant, International Object Technology, Inc. and the Stockholders of International Object Technology, Inc. incorporated by reference to Exhibit 2.1 to the Form 8-K, as previously filed with the SEC on July 12, 2002.
3.2 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001.
3.2.1 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated August 8, 2002 incorporated by reference to Exhibit 3.2 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 14, 2002.
3.2.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated November 12, 2002, incorporated by reference to Exhibit 3.2.2 to the Form 10-Q for the period ended September 30, 2002, as previously filed with the SEC on November 14, 2002.
3.2.3 Certificate of Amendment of the Certificate of Incorporation of the Registrant dated January 5, 2004, incorporated by reference to Exhibit 3.2.3 to the Form 8-K dated January 8, 2004, as previously filed with the SEC on January 8, 2004.
3.3 Amended and Restated By-Laws of the Registrant, incorporated by reference to Exhibit 3.3 to the Registration Statement on Form SB-2 as previously filed with the SEC on August 6, 1997.
3.4 Amendment No. 1 to the Amended and Restated Bylaws of the Registrant incorporated by reference to Exhibit 3.4 to the Form 10-Q for the period ended June 30, 2003, as previously filed with the SEC on August 14, 2003.
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4 to the Registration Statement on Form SB-2 as previously filed with the SEC on July 23, 1997.
4.2 Registration Rights Agreement dated as of July 19, 2002 among the Registrant and those persons listed on Schedule I attached thereto, incorporated by reference to Exhibit 4.1 to the Form 8-K dated July 19, 2002, as previously filed by the SEC on July 25, 2002.
10.1.1 Stock Option and Award Plan of the Registrant and Form of Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.1 to the Registration Statement on Form SB-2 as previously filed with the SEC on August 6, 1997.
10.1.2 Amendment to the Stock Option and Award Plan of the Registrant, incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 as previously filed with the SEC on June 25, 1998.
10.1.3 Amendment No. 2 to the Stock Option and Award Plan of the Registrant, incorporated by reference to Exhibit C to the Registrant's 2001 Proxy Statement on Schedule 14A, as previously filed with the SEC on April 30, 2001.
10.2 Amended and restated Loan and Security Agreement between the Registrant and Keltic Financial Partners, LP, dated March 23, 2004.
10.3 Employment Agreement, dated January 1, 2002, between the Registrant and Shmuel BenTov, incorporated by reference to Exhibit 10.5 to the Form 10-K for the fiscal year ended December 31, 2001, as previously filed with the SEC on April 1, 2002.
10.4 Employment Agreement, dated September 11, 2001, between the Registrant and Richard Falcone, incorporated by reference to Exhibit 10.8 to the Form 10-K/A for the fiscal year ended December 31, 2001, as filed with the SEC on April 4, 2002.
10.5 Form of S Corporation Termination, Tax Allocation and Indemnification Agreement, incorporated by reference to Exhibit 10.4 to the Registration Statement on Form SB-2, as previously filed with the SEC on August 6, 1997.
10.6 Letter of Undertaking from the Registrant and Shmuel BenTov, incorporated by reference to Exhibit 10.9 to the Registration Statement on Form SB-2, as previously filed with the SEC on July 23, 1997.
10.7 Shmuel BenTov Letter Commitment, dated March 29, 2001, incorporated by reference to Exhibit 10.10 to the Form 10-K for the fiscal year ended December 31, 2000, as previously filed with the SEC on April 2, 2001.
10.8 Employment Agreement dated as of July 19, 2002 between the Registrant and Dr. Piotr Zielczynski, incorporated by reference to Exhibit 10.1 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.9 Employment Agreement dated as of July 19, 2002 between the Registrant and Ilan Nachmany, incorporated by reference to Exhibit 10.2 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.10 Employment Agreement dated as of July 19, 2002 between the Registrant and Sanjeev Welling, incorporated by reference to Exhibit 10.3 to the Form 8-K dated July 19, 2002, as previously filed with the SEC on July 25, 2002.
10.11 Form of Indemnification Agreement between the Registrant and each of its Directors and its Chief Executive Officer, incorporated by reference to Exhibit 10.12 to the Form 10-Q for the period ended September 30, 2003 as filed with the SEC on November 11, 2003.
23.1 Consent of Grant Thornton, LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.