10-K 1 b323894_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-22945 THE A CONSULTING TEAM, INC. (Exact Name of Registrant as Specified in Its Charter) New York 13-3169913 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 200 Park Avenue South (212) 979-8228 New York, New York 10003 (Registrant's Telephone Number, (Address of Principal Executive Offices) Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 25, 2003 was approximately $1,367,318 based on the average of the bid and asked prices of the registrant's Common Stock on The Nasdaq SmallCap Stock Market (SM) on such date. As of March 25, 2003, there were 8,386,871 shares of the registrant's Common Stock, $.01 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders, which will be filed on or before April 30, 2003, are incorporated by reference into Part III of this Report. See Item 16 for a list of exhibits incorporated by reference into this Report. TABLE OF CONTENTS
Page ---- PART I ........................................................................................................1 ITEM 1. BUSINESS................................................................................................1 ITEM 2. PROPERTIES..............................................................................................4 ITEM 3. LEGAL PROCEEDINGS.......................................................................................5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................5 PART II ........................................................................................................5 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................5 ITEM 6. SELECTED FINANCIAL DATA.................................................................................6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................7 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................21 PART III .......................................................................................................22 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................22 ITEM 11. EXECUTIVE COMPENSATION................................................................................23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................23 Item 14. Controls and Procedures...............................................................................23 Item 15. Principal Accountant Fees and Services................................................................23 PART IV ......................................................................................................25 ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................25
PART I This Annual Report on Form 10-K contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission ("SEC") filings and otherwise. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements due to risks and factors identified from time to time in the Company's filings with the SEC including those discussed in this Report. ITEM 1. 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 has been a slowdown in IT spending coincident with the general economic slowdown. This has resulted in revenue decreases at many IT service companies and is expected to continue for the remainder of 2003. 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, web enhancements, custom development, strategic sourcing and enterprise-wide IT consulting, software and 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. 1 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. In addition, the Company has initiatives to develop clients in other geographic areas based on certain specialized services that the Company provides. 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 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. 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. T3 Media, Inc. T3 Media, Inc. a majority-owned subsidiary of the Company, ceased operations during the second quarter of 2001. Always-On Software, Inc. The Company wrote off its minority ownership in Always-On Software, Inc. during the second quarter of 2001. Always-On Software was a global provider of software application services ("ASP") based in New York City. Always-On Software was merged with Veracicom, Inc. in the fourth quarter of 2001. Methoda Computers Ltd. The Company has written down its minority investment in Methoda Computer Ltd. during the third quarter of 2002 from $500,000 to $368,000. Methoda Computer Ltd. is a leading methodology provider and knowledgebase for IT management and software engineering based in Israel. 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. The Company's solutions are based on an understanding of each client's enterprise model. The Company's accumulated knowledge may be applied to new projects such as planning, designing and implementing enterprise-wide information systems, database management services and systems integration. TACT delivers its IT solutions through TACT Solution Teams composed of Project Managers, Technical Practice Managers and Technical Specialists. These professionals possess the project management skills, technical expertise and industry experience to identify and effectively address a particular client's technical needs in relation to its business objectives. TACT's focus on providing highly qualified IT professionals allows the Company to identify additional areas of the client's business which could benefit from the Company's IT solutions, thereby facilitating the cross-marketing of multiple Company services. The Company keeps its Solution Teams at the forefront of emerging technologies through close interaction with TACT research personnel who identify innovative IT tools and technologies. As a result, management believes that TACT Solution Teams are prepared to anticipate client needs, develop appropriate strategies and deliver comprehensive IT services, thereby allowing the Company to deliver the highest quality IT services in a timely fashion. 2 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. Software. TACT markets and distributes a number of software products developed by independent software developers. The Company believes its relationships with over 74 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. Eleven of the Company's top twenty clients measured by revenue for the year ended December 31, 2002 had been clients for over five years. In 2002, the Company's two largest customers were Mellon Investor Services and BMW NA and they represented 25% and 24% of revenues, respectively. Besides these two customers, no other customer represented greater than 10% of the Company's revenues. During 2003, the Company expects revenues derived from Mellon Investor Services to decrease. 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, 2002, the Company employed 11 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 Five" 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. 3 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, 2002, the Company had 101 personnel, of whom 62 were consultants, 2 were recruiting personnel, 11 were sales and marketing personnel, 6 were technical and customer service personnel and 20 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 101 personnel, the Company was utilizing the services of 46 independent contractors at December 31, 2002. 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. PROPERTIES The Company's executive office is located at 200 Park Avenue South, New York, NY 10003. The Company's executive office is approximately 8,400 square feet and is located in a leased facility with a term expiring in January 31, 2004. The Company also leases approximately 7,000 square feet in a facility in Clark, NJ. The lease on this facility expires on January 31, 2004. 4 ITEM 3. LEGAL PROCEEDINGS The Company is involved in a pending lawsuit with Sovereign Bank over equipment leases related to its investment in Always-On Software, Inc. The Company does not expect the results of this lawsuit to have a material adverse effect on its financial statements. 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, 2002. The Company submitted a proposal for an amendment to its Restated Certificate of Incorporation to effect a reverse split of its common stock at a ratio ranging from one-for-four to one-for-nine, grant the Board of Directors the authority to decide whether to effect the reverse split and if the Board elects to effect the reverse split, to select a split ratio within this range at its discretion. This amendment was approved at a Special Shareholder Meeting on January 21, 2003 as follows: 5,776,209 votes in favor of the amendment; 376,831 votes against the amendment; 400 votes abstained and 2,233,431 shares not voted. The Board has not authorized the reverse stock split as of March 20, 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock The Company's Common Stock is currently listed on The Nasdaq SmallCap MarketSM ("Nasdaq") under the symbol "TACX." TACT completed an initial public offering of its Common Stock in 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. The following table sets forth the quarterly range of high and low bid prices of the Company's Common Stock since January 1, 2001 as reported by Nasdaq: 2001 High Low ---- ---- --- First Quarter $2.375 $1.000 Second Quarter 1.031 .330 Third Quarter .580 .330 Fourth Quarter .650 .220 2002 High Low ---- ---- --- First Quarter $.600 $.190 Second Quarter .690 .250 Third Quarter .770 .310 Fourth Quarter .500 .210 Dividends The Company has not paid any cash dividends on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. There are also certain restrictions on the payment of dividends within the current line of credit agreement the Company has with Keltic Financial Partners, LP. 5 The Company is prohibited from paying dividends on its capital stock due to restrictions under the Loan and Security Agreement between the Company and Keltic Financial Partners, L.P., dated June 27, 2001 and amended by the July 2002 Modification Agreement. 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. Holders The Company estimates that there were approximately 18 holders of record of the Company's Common Stock on March 20, 2003. 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 on March 20, 2003. Recent Sales of Unregistered Securities 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. Yosi 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 Yosi 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 1:1 basis subject to 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 will use the proceeds from the sale of Series A and Series B Preferred Stock for general working capital purposes. Pursuant to a Stock Purchase Agreement dated as of June 28, 2002 among the Company, International Object Technology, Inc. ("IOT") and the holders of all the issued and outstanding capital stock of IOT (the "IOT Stockholders"), the Company sold an aggregate of 1,270,000 shares of unregistered common stock to the IOT Stockholders and agreed to pay an aggregate of $650,000 in cash in deferred payments over the next 30 months in exchange for all the issued and outstanding capital stock of IOT (the "Acquisition"). The Acquisition closed on July 19, 2002. 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 the IOT Stockholders. Based upon discussions with and representations made by the IOT Stockholders, the Company reasonably believed that such IOT Stockholders were accredited and/or sophisticated investors. The Company granted to each IOT Stockholder access to information on the Company necessary to make an informed investment decision. In 2002, the Company issued an aggregate of 393,000 stock options, each with a term of 10 years from the date of grant, pursuant to its Stock Option and Award Plan. The options have initial exercise prices that range from $0.31 to $0.43 per share and they have vesting periods that range from immediately vesting to vesting over 4 years. 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. 6 Selected Financial Data (in thousands, except number of shares and per share data)
Year Ended December 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- Statement of Operations Data: Revenues $ 24,009 $ 36,227 $ 55,022 $ 53,517 $ 48,925 Income (loss) from operations (130) (13,472) (18,124) (3,203) 4,287 Income (loss) before extraordinary item 155 (13,900) (16,798) (2,667) 2,785 Extraordinary item 49 249 -- -- -- Net income (loss) 204 (13,651) (16,798) (2,667) 2,785 Net income (loss) per share-basic and dilutive before extraordinary item $ 0.02 $ (1.95) $ (2.65) $ (0.49) $ 0.51 Extraordinary item 0.01 0.03 -- -- -- Net income (loss) per share-basic and dilutive $ 0.03 $ (1.92) $ (2.65) $ (0.49) $ 0.51 Weighted average shares used in per share calculation-basic 7,694,460 7,116,871 6,329,927 5,485,000 5,485,000 Weighted average shares used in per share calculation-diluted 7,986,690 7,116,871 6,329,927 5,485,000 5,488,356 Balance Sheet Data Total assets $ 8,046 $ 8,957 $ 27,038 $ 28,582 $ 28,772 Long-term liabilities 386 53 457 561 15 Stockholders' equity 5,325 4,119 17,770 22,516 25,183 Number of shares outstanding at year end 8,386,871 7,116,871 7,116,871 5,485,000 5,485,000
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 has been a slowdown in IT spending coincident with the general economic slowdown. This has resulted in revenue decreases at many IT service companies and is expected to continue for the remainder of 2003. 7 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, strategic sourcing and enterprise wide IT consulting, software and solutions. Approximately 95% of the Company's consulting services revenues were generated from the hourly billing of its consultants' services to its clients under time and materials engagements, with the remainder generated under fixed-price engagements for 2002. During 2003 the Company expects to decrease revenue generated from hourly billing by 10 to 15 percent and increase revenue, which is generated under fixed price contracts by a similar amount. 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, whereas consulting services revenues generated under fixed-price engagements are recognized according to the percentage of completion method. The Company's most significant operating cost is its personnel cost, which is included in cost of revenues. As a result, the Company's 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, 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 periodic price adjustments to address, among other things, increases in consultant costs, during 2001, 2002 and into 2003 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 throughout 2002. 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. 8 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. Beginning in 1999 and extending through December 31, 2002, the Company has limited its emphasis on software sales. This has resulted in a significant reduction in software sales starting in the second half of 1999 through December 31, 2002. This trend is expected to continue with software sales only being ancillary to the Company's IT solutions and services. 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 a nominal value, if any. 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 1,270,000 shares of TACT unregistered Common Stock 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 is expected to increase the depth of the Company's services and solution offerings and provide the Company with significant cross-selling opportunities. 9 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. Recoverability of Long-Lived Assets The Company's management is required to estimate the useful lives of its long-lived assets at the time they are acquired. These estimates are evaluated on an on-going basis to determine if their carrying value has been impaired. If it is determined that the remaining useful lives differ from our original estimates, revisions to the estimated fair values would be required. 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. 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. Customers for consulting revenues are billed on a weekly, semi-monthly and monthly basis. Fixed fee contracts are accounted for under the percentage-of-completion method. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. 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. 10 Results of Operations The following table sets forth the percentage of revenues of certain items included in the Company's Statements of Operations: Year Ended December 31, ------------------------------ 2002 2001 2000 ------ ------ ------ Revenues 100.0% 100.0% 100.0% Cost of revenues 70.2% 75.5% 71.0% ------ ------ ------ Gross profit 29.8% 24.5% 29.0% Operating expenses 30.3% 61.7% 61.9% ------ ------ ------ Income/Loss from operations (.5)% (37.2)% (32.9)% ------ ------ ------ Income/Loss before extraordinary item 0.6% (38.4)% (30.5)% Extraordinary item 0.2% 0.7% 0.0% ------ ------ ------ Net loss 0.8% (37.7)% (30.5)% ====== ====== ====== Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001 Revenues. Revenues of the Company decreased by $12.2 million, or 33.7%, from $36.2 million for the year ended December 31, 2001 to $24 million for the year ended December 31, 2002. The decrease was primarily attributable to a slowdown in the IT industry, which resulted in the cessation of operations of T3 Media, the closing of three of the Company's Solution Branches and bringing the Company back to its core IT solutions and services businesses, which was partially offset by an increase in revenues of $1,689,000 as a result of the acquisition of IOT. Software licensing revenues decreased by $100,000, or 7%, from $1.4 million in 2001 to $1.3 million in 2002. This decrease is attributable to the Company placing less emphasis on software sales. Software sales are expected to be ancillary to the Company's total revenues in future years. Revenues from training represented less than 1% of the Company's total revenues in 2001. Training services were terminated in 2001. Gross Profit. The resulting gross profit for 2002 decreased by $1.8 million, or 19%, from $8.9 million in 2001 to $7.1 million in 2002. As a percentage of total revenues, gross margin for the year increased from 24.5% in 2001 to 29.8% in 2002. Gross margin improved due to the Company's lower consultant costs, a higher utilization rate, and software revenues, which have a higher gross margin than consulting services, being a larger percentage of total revenues compared to the prior year, which was partially offset by a lower gross margin from IOT revenues. 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 $15 million, or 67%, from $22.3 million in 2001 to $7.3 million in 2002. The SG&A expenses decreased by $5.3 million or 46% from $11.3 million in 2001 to $6.2 million in 2002. The decrease is primarily attributable to T3 Media's cessation of operations ($1.1 million) and a decrease in the Company's payroll costs ($3.8 million) due to its restructuring efforts. In addition, the Company wrote off approximately $272,000 of T3 Media's accounts payable from prior years. The provision for doubtful accounts decreased $918,000 or 97% from $943,000 in 2001 to $25,000 in 2002. The decrease was largely attributable to improvement in the Company's collections and daily monitoring of receivables and cash balances. Depreciation and amortization decreased $284,000 or 28% from $1.2 million in 2001 to $873,000 in 2002. This decrease is attributable to the closing of T3 Media, the closing of several of the Company's Solution Branches and the reduction in office space in its New York headquarters. Impairment of assets and restructuring charges decreased by $8.55 million, or 98%, from $8.7 million in 2001 to $150,000 in 2002. The 2002 charge primarily related to the write-down of the Company's investment in Methoda Computer Ltd. The 2001 charge related to the following: the Company closing four of its Solution Branches ($832,000), reducing its office space in its New York headquarters by approximately 50% ($867,000), closing of T3 Media ($1.6 million), the write-down of its investment in Always-On Software, Inc. due to the termination of Always-On's operations ($2.3 million), the write-off of prepaid software licenses resulting from lack of sales due to the economic down-turn and the determination that the software no longer had any value ($2.0 million), severance costs due to staff reductions ($699,000) and other associated costs ($394,000). 11 Taxes. During the first quarter of 2002, the Company recorded a tax refund of $439,000 resulting from 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. Income/Loss Before Extraordinary Item. As a result of the above-mentioned factors, the Company had income before extraordinary item of approximately $155,000 in 2002, compared to a loss of $13.9 million in 2001. Extraordinary Item. During the first quarter of 2002, the Company recorded income of $49,000 resulting from the extinguishments of debt associated with the settlement of T3 Media's capital leases at less than their carrying value. Net Income (Loss). As a result of the above, the Company had net income of $204,000 in 2002 compared to a net loss of $13.7 million in 2001. Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000 Revenues. Revenues of the Company decreased by $18.8 million, or 34.2%, from $55.0 million for the year ended December 31, 2000 to $36.2 million for the year ended December 31, 2001. The decrease was primarily attributable to a slowdown in the IT industry, which resulted in the cessation of operations of T3 Media ($7.0 million) and bringing the Company back to its core IT solutions and services ($11.3 million). Software licensing revenues decreased by $500,000, or 26.3%, from $1.9 million in 2000 to $1.4 million in 2001. This decrease is attributable to the Company placing less emphasis on software sales. Software sales are expected to be ancillary to the Company's total revenues in future years. Revenues from training services represented less than 1% of the Company's total revenues in both 2001 and 2000. The Company's training services were terminated in 2001. Gross Profit. The resulting gross profit for 2001 decreased by $7.1 million, or 44.4%, from $16.0 million in 2000 to $8.9 million in 2001. As a percentage of total revenues, gross profit decreased from 29.0% of revenues in 2000 to 24.5% of revenues in 2001. Gross margin was adversely affected, primarily during the first half of 2001, by a decrease in billing rates and a reduction in consultant utilization rate; however, this trend began to reverse in the second half of 2001. Gross profit margins significantly improved in the second half of 2001, which averaged 31.8%, compared to the first half, which averaged 19.7%. 12 Operating Expenses. Operating expenses are comprised of SG&A expenses, provision for doubtful accounts, depreciation and amortization and impairment of assets and restructuring charges. Operating expenses decreased by $11.7 million, or 34.4%, from $34.1 million in 2000 to $22.3 million in 2001. SG&A expenses decreased by $14.5 million or 55.7%, from $26.1 million in 2000 to $11.5 million in 2001. The decrease is primarily attributable to T3 Media's cessation of operations ($5.8 million), a decrease in the Company's payroll costs ($4.6 million) and a decrease of other SG&A expenses due to its restructuring efforts. The provision for doubtful accounts decreased $729,000 or 43.6% from $1.7 million in 2000 to $943,000 in 2001. The decrease was largely attributable to improvement in the Company's collection techniques and daily monitoring of receivables and cash balances. Depreciation and amortization decreased $1.3 million or 53.2% from $2.5 million in 2000 to $1.2 million in 2001. This decrease is attributable to the closing of T3 Media, the closing of several of the Company's Solution Branches and the reduction in office space in its New York headquarters. Impairment of assets and restructuring charges increased by $4.8 million, or 124.7% from $3.9 million in 2000 to $8.7 million in 2001. The 2001 charge related to the following: the Company closing four of its Solution Branches ($832,000), reducing its office space in its New York headquarters by approximately 50% ($867,000), closing of T3 Media ($1.6 million), the write-down of its investment in Always-On Software, Inc. due to the termination of Always-On's operations ($2.3 million), the write-off of prepaid software licenses resulting from lack of sales due to the economic down-turn and the determination that the software no longer had any value ($2.0 million), severance costs due to staff reductions ($699,000) and other associated costs ($394,000). The 2000 charge primarily related to the write-off of T3 Media's goodwill and fixed assets no longer in use. Loss Before Extraordinary Item. As a result of the above-mentioned factors, the Company had a loss before extraordinary item of approximately $13.9 million in 2001 compared to a loss of $16.8 million in 2000. Extraordinary Item. The Company recorded income of $249,000 resulting from the extinguishments of debt associated with the settlement of T3 Media's capital leases at less than their carrying value. Net Loss. The Company had a net loss of approximately $13.7 million in 2001 compared to a net loss of $16.8 million in 2000. Liquidity and Capital Resources The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, 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, 2002, compared to an outstanding balance of $1.9 million at December 31, 2001. 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 6.25% at December 31, 2002. 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. The Company's previous line of credit was for $2.1 million and was fully guaranteed by the Company's Chairman, Chief Executive Officer and President. One of the Company's subsidiaries, 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. The amount outstanding on T3 Media's demand loan at December 31, 2001 was $4,700. 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, 2002. The Company continues the process of negotiating buy-outs on these leases. The Company's cash balances were approximately $1.8 million at December 31, 2002 and $947,000 at December 31, 2001. Net cash provided by operating activities in 2002 was approximately $2.8 million compared to $575,000 in 2001, and compared to net cash used of $14.4 million in 2000. 13 The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 2002 and December 31, 2001 were $3.1 million and $5.3 million, respectively, representing 49 and 69 days of sales outstanding, 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 was one of the primary reasons for the improvement in cash provided by operations. For the twelve months ended December 31, 2002, the Company had revenues from two customers, which represented 25%, and 24% of revenues. The Company's services for the customer that represents 25% of the Company's revenues declined in the fourth quarter of 2002 and will continue to decline in the first quarter of 2003. For the year ended December 31, 2001, the Company had revenues from three customers, which represented 19%, 19% and 13% of revenues, respectively. No other customer represented greater than 10% of the Company's revenues for such periods. 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 it 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 used in investing activities was approximately $291,000, $59,000, and $3.4 million for the year ended December 31, 2002, 2001 and 2000, respectively. In each of the three years, this represented additions to property and equipment of $47,000, $199,000, and $890,000 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 1,270,000 shares of TACT unregistered Common Stock valued at $635,000. The schedule of payment of the cash consideration of $650,000 is 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. From the date of acquisition through the end of year 2002, the Company recorded revenue in the amount of $1,689,000. In 2000, $2.5 million in cash was used for making minority investments in two different companies, Always-On Software, Inc. ($2,000,000) and Methoda Computer Ltd. ($500,000). Net cash used in financing activities was approximately $1.7 million in 2002, and $408,000 in 2001, while $13.6 million was provided by financing activities in 2000. 14 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. Yosi 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 Yosi 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 1:1 basis subject to 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 will use the proceeds from the sale of Series A and Series B Preferred Stock for general working capital purposes. In the year 2001 the Company did not sell any equity securities. During 2000, the Company sold an aggregate of 1,624,996 shares of Common Stock to investors for aggregate proceeds of approximately $12.0 million, in each case in reliance 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 2000, 6,875 shares of Common Stock were issued pursuant to the exercise of options issued under the Company's stock option plan. No shares of Common Stock were issued pursuant to the exercise of options issued under the Company's stock option plan in 2001 or 2002. The Company is involved in a pending lawsuit with Sovereign Bank over equipment leases related to its investment in Always-On Software, Inc. The Company does not expect the results of this lawsuit to have a material adverse effect on its financial statements. The Company has the following commitments as of December 31, 2002:
Payments Due in ----------------------- Total 2003 2004 2005 2006 ---------- ---------- ---------- ---------- ---------- Automobile Loan $ 52,759 $ 12,318 $ 13,078 $ 13,885 $ 13,478 Shareholder Loan 133,832 55,770 57,985 20,077 -- Acquisition Note 510,000 210,000 100,000 200,000 -- Employment Contracts 960,000 720,000 240,000 -- -- ---------- ---------- ---------- ---------- ---------- Total $1,656,591 $ 998,088 $ 411,063 $ 233,962 $ 13,478 ========== ========== ========== ========== ==========
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 sources, 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. Impact of New Accounting Standards to Be Implemented See page F-10 of the consolidated financial statements for a discussion of the impact of new accounting standards to be implemented. 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. 15 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 the last three years. In the year ended December 31, 2002, the Company had an operating loss of $130,000 and net income of $204,000. In the year ended in December 31, 2001, the Company had an operating loss of $13.5 million and a net loss of $13.7 million, of which $1.0 million was attributable to T3 Media (including certain expenses associated with the close down of T3 Media's operations ($1.6 million)). The remaining net loss for the year was attributable to the Company and includes certain one-time charges of $7.1 million associated with the impairment of assets and restructuring charges. In the year ended December 31, 2000, the Company had an operating loss of $18.1 million and a net loss of $16.8 million of which $5.5 million was attributable to T3 Media (including certain one-time charges referred to below). In addition, in the fourth quarter of 2000, the Company recorded a $3.9 million charge to reflect the impairment of goodwill and other related charges relating to T3 Media. There is no guarantee that the Company can sustain or increase 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 will continue to experience losses and the results of operations and financial condition will 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. 16 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, 2002. 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, 2002, the Company had revenues from two customers which represented 25% and 24% of revenues, respectively. The Company's services for the customer, that represents 25% of the Company's revenues, are expected to decrease in the first quarter of 2003. For the year ended December 31, 2001, the Company had revenues from three customers which represented 19%, 19% and 13% of revenues, respectively. For the year ended December 31, 2000, the Company had revenues from one customer, which represented 17% of revenues. 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 state 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 40% of revenues for the year ended December 31, 2002, 46% of revenues for the year ended December 31, 2001 and 51% for the year ended December 31, 2000. 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; 17 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 2002 due principally to a higher consultant utilization rate, resulting from the Company's aggressive cost containment and workforce rationalization efforts. 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. 18 Dependence on Chief Executive Officer The Company's success is highly dependent upon the efforts and abilities of Shmuel BenTov, its Chairman, Chief Executive Officer and President. Mr. BenTov has entered into an employment agreement with the Company, which terminates on December 31, 2004. Although his employment agreement contains non-competition, non-disclosure and non-solicitation covenants, this contract does not guarantee that Mr. BenTov will continue his employment with Company. The loss of services of Mr. BenTov for any reason could have a material adverse effect upon the Company's business, results of operations and financial condition. 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. Possible Removal From Quotation Of Common Stock On Nasdaq And Resulting Market Illiquidity On February 14, 2002, the Company was informed by Nasdaq that it had failed to maintain a closing bid price of at least $1.00 per share and a market value of publicly held shares of at least $5,000,000 for 30 consecutive trading days, and therefore the Company did not comply with the requirements as set forth in Nasdaq Marketplace Rules 4450(a)(5) and 4450(b)(2), respectively. Pursuant to Nasdaq rules, the Company was provided with a 90-day grace period, through May 15, 2002, to regain compliance with the minimum bid price and market value of public float requirements. The Company did not regain compliance within the proscribed time period. On May 23, 2002, the Company requested a hearing, which stayed the de-listing of the Company's common stock. On July 11, 2002, the Company participated in a hearing before the Nasdaq Listing Qualifications Panel (the "Nasdaq Panel"). On July 31, 2002, the Nasdaq Panel notified the Company that the Nasdaq Panel had determined not to grant any further exception to the minimum bid price and/or market value of publicly held shares requirements. The Nasdaq Panel further determined to transfer listing of the Company's common stock to The Nasdaq SmallCap Market, effective with the open of business on August 5, 2002 and gave the Company an extension of 180 days until February 10, 2003 to meet the minimum requirement of $1.00 per share. 19 On February 19, 2003, the Company announced that it had been granted a sixty-day extension to April 14, 2003 to comply with Nasdaq's minimum bid price requirement necessary to remain listed on the Nasdaq SmallCap Market. The extension was granted by Nasdaq while it deliberates on the modifications to its listing requirements proposed by its Board of Directors, which could provide issuers with additional time to satisfy the minimum bid price requirements. 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 Five" 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. 20 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, 2002, the Company reported net income of $204,000, but for the years ended December 31, 2001 and 2000, the Company reported net losses of $13.7 million and $16.8 million, respectively. Additionally, the Company has an accumulated deficit of $28.8 million at December 31, 2002. The Company believes that its continuing focus on cost reductions, together with a number of other operational changes, has resulted in the attainment of net earnings during 2002. There can be no assurance that the Company will remain profitable in future quarters. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into the market risk sensitive transactions required to be disclosed under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See financial statements on pages F-1 through F-23 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Ernst & Young LLP was previously the principal accountants for The A Consulting Team, Inc. The A Consulting Team, Inc. dismissed Ernst & Young LLP on June 28, 2002. The decision to dismiss Ernst & Young LLP was approved by the Audit Committee of the Board of Directors of The A Consulting Team, Inc. In connection with the audits of the two fiscal years ended December 31, 2001, and the subsequent interim period through June 28, 2002, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. During the two most recent fiscal years and through June 28, 2002, there have been no reportable events (as defined in Regulation S-K 304(a)(1). 21 The audit reports of Ernst & Young LLP on the financial statements of The A Consulting Team, Inc. as of December 31, 2001 and December 31, 2000 and for the years ended December 31, 2001 and December 31, 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The A Consulting Team, Inc. engaged Grant Thornton LLP as principal accountants on June 28, 2002. The decision to hire Grant Thornton LLP was approved by the Audit Committee of the Board of Directors of The A Consulting Team, Inc. PART III 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, 48, 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, 50, 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, 63, 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. 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, 47, has been a director of the Company since August 1997. Mr. Battat is a member of the Compensation Committee as well as member of the Audit Committee. Mr. Battat has been the President and Chief Executive Officer of ProcureNet Inc. since January 2000. 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. Robert E. Duncan, 55, has been a director of the Company since May 2002. Mr. Duncan is a member of the Compensation Committee. Mr. Duncan received a BBA in Finance and Accounting from Iona College in 1970. Since 1991, Mr. Duncan has been the Principal of Duncan Consulting, a management, consulting firm. Since 1998, he also has been the chairman of two area groups of The Executive Committee (TEC), an International Organization of Chief Executive Officers. From 1978 to 1991, Mr. Duncan held various management positions including President and Chief Operating Officer of General Bearing Corporation, a manufacturer and distributor of bearings, automotive products and industrial products. 22 William Miller, 65, has been a director of the Company since July 2002. Mr. Miller is the Chairman of the Audit 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. 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 reports of holdings of and transactions in the Company's equity securities with the Securities and Exchange Commission ("SEC"), and to furnish the Company with all copies of Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms that the Company has received, or written representations from the Section 16 Reporting Persons, to the Company's knowledge, all transactions in the Company's equity securities by the Company's Section 16 Reporting Persons during the Company's last fiscal year were reported on-time, except as follows: Robert E. Duncan, a director of the Company, reported his initial statement of beneficial holdings late on a Form 3 filed on June 3, 2002. Richard D. Falcone, the Chief Financial Officer of the Company, reported a transaction late on a Form 4 filed on August 5, 2002. Shmuel Bentov, the Chairman, Chief Executive Officer and President of the Company, reported a transaction late on a Form 4 filed on August 28, 2002. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to the Company's Proxy Statement for its 2003 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2003. 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 2003 Annual Meeting of Shareholders, which will be filed with the SEC on or before April 30, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, 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, 2002, compared to an outstanding balance of $1.9 million at December 31, 2001. 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 6.25% at December 31, 2002. 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. The Company's previous line of credit was for $2.1 million and was fully guaranteed by the Company's Chairman, Chief Executive Officer and President. 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. The amount outstanding on T3 Media's demand loan at December 31, 2001 was $4,700. 23 The Company presently employs, Victoria Bentov, the sister of the Chief Executive Officer and President, as a billable consultant and at an annual salary of approximately $80,000. ITEM 14. CONTROLS AND PROCEDURES. Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c ) and 15d-14(c ) of the Securities Exchange Act of 1934) within 90 days of this report and each has concluded that such disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit Fees. During the year ended December 31, 2002, the aggregate fees paid to Grant Thornton LLP for the audit of the Company's financial statements for such year and for the reviews of the Company's interim financial statements for the second, third and fourth quarter were $92,409. There were no fees paid to Grant Thornton in the year of 2001, due to the fact that they did not assume responsibility as principal accountants for the Company until the second quarter of 2002. During the year ended December 31, 2002, the aggregate fees paid to Ernst & Young LLP for the audit of the Company's financial statements were $141,000. During the year ended December 31, 2001, the aggregate fees paid to Ernst & Young LLP for the audit of the Company's financial statements for such year and for the reviews of the Company's interim financial statements were $167,000. Audit Related Fees. During the year ended December 31, 2002 and 2001, there were no fees paid to Grant Thornton for audit related fees. During the year ended December 31, 2002 and 2001, there were no fees paid to Ernst & Young LLP for audit related fees. Tax Fees. During the year ended December 31, 2002, the aggregate fees paid to Grant Thornton, LLP for tax compliance, tax advice and tax planning were $30,000. There were no fees paid to Grant Thornton in the year of 2001 for tax compliance, due to the fact that they did not assume responsibility as principal accountants for the Company until the second quarter of 2002. During the year ended December 31, 2002, the aggregate fees paid to Ernst & Young LLP for tax compliance, tax advice and tax planning were $52,795. During the year ended December 31, 2001, the aggregate fees paid to Ernst & Young LLP for tax compliance were $43,500. All Other Fees. During the year ended December 31, 2002, the aggregate fees paid to Grant Thornton, LLP for professional services other than audit were related to the filing of Form 8-K and a special project requested by the Audit Committee, were $26,200. There were no fees paid to Grant Thornton in the year of 2001 for professional services, due to the fact that they did not assume responsibility as principal accountants for the Company until the second quarter of 2002. 24 During the year ended December 31, 2002, there were no fees paid to Ernst & Young LLP for professional services other than audit. As well as, no fees were paid to Ernst & Young LLP in the year of 2001 for professional services other than audit. Audit Committee-Policies & Procedures. The Audit Committee reviews the independence of the Company's auditors on an annual basis and has determined that Grant Thornton, LLP is independent. In addition, the Audit Committee pre-approves all work and fees, which are performed by the Company's independent auditors. PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2) The response to this portion of Item 16 is submitted as a separate section of this report at F-1. (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. 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. 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. 25 Exhibit Number Description of Exhibits ------ ----------------------- 10.1.2 Amendment to the Stock Option and Award Plan of the Registrant, incorporated by reference to the Registration Statement on Form S-8 as previously filed with the SEC on December 12, 1997. 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 Loan and Security Agreement between the Registrant and Keltic Financial Partners, LP, dated June 27, 2001, incorporated by reference to Exhibit 10.1.1 to the Form 10Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001. 10.3 Guaranty of Payment and Performance between Shmuel BenTov, the Chairman and Chief Executive Officer of the Registrant, and Keltic Financial Partners, LP, dated June 27, 2001, incorporated by reference to Exhibit 10.2 to the Form 10Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001. 10.4 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 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. 10.11 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. 16.1 Letter dated July 2, 2002, of Ernst & Young, LLP, incorporated by reference to Exhibit 16.1 to the Form 8-K dated June 28, 2002, as previously filed with the SEC on July 3, 2002. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Grant Thornton, LLP 26 (b) Reports on Form 8-K filed in the fourth quarter of 2002: The Company did not file any reports on Form 8-K during the quarter ended December 31, 2002. (c) Exhibits - The response to this portion of Item 16 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this portion of Item 16 is submitted as a separate section of this report at S-1. 27 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 25, 2003 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.
Signature Title Date --------------------------------------- -------------------------------------------------- ----------------------- /s/ Shmuel BenTov Chief Executive Officer and Director March 25, 2003 --------------------------------- (Principal Executive Officer) Shmuel BenTov /s/ Richard D. Falcone Chief Financial Officer March 25, 2003 --------------------------------- (Principal Financial and Accounting Officer) Richard D. Falcone /s/ Reuven Battat Director March 25, 2003 --------------------------------- Reuven Battat /s/ Robert Duncan Director March 25, 2003 --------------------------------- Robert Duncan /s/ Steven Mukamal Director March 25, 2003 --------------------------------- Steven Mukamal /s/ William Miller Director March 25, 2003 --------------------------------- William Miller
28 CERTIFICATIONS CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Shmuel BenTov, the principal executive officer of The A Consulting Team, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of The A Consulting Team, Inc., the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 ------------------- /s/ Shmuel Bentov ------------------------------ Shmuel BenTov Chief Executive Officer (Principal Executive Officer) 29 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Richard D. Falcone, the principal financial officer of The A Consulting Team, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of The A Consulting Team, Inc., the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/ Richard D. Falcone ------------------------------ Richard D. Falcone Chief Financial Officer (Principal Financial Officer) 30 ITEM 16 (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-4 Consolidated Statements of Operations.....................................................................F-5 Consolidated Statements of Shareholders' Equity...........................................................F-6 Consolidated Statements of Cash Flows.....................................................................F-7 Notes to Consolidated Financial Statements................................................................F-8 The following consolidated financial statement schedule of The A Consulting Team, Inc. is included in Item 16(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. F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors The A Consulting Team, Inc. We have audited the accompanying consolidated balance sheet of The A Consulting Team, Inc., as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II for the year ended December 31, 2002. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information therein. GRANT THORNTON LLP New York, New York February 14, 2003 F-2 REPORT OF INDEPENDENT AUDITORS Board of Directors The A Consulting Team, Inc. We have audited the accompanying consolidated balance sheet of The A Consulting Team, Inc. (the "Company") as of December 31, 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 16(d). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The A Consulting Team, Inc. at December 31, 2001, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York February 15, 2002 F-3 THE A CONSULTING TEAM, INC. CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2002 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 1,774,828 $ 946,586 Accounts receivable, less allowance for doubtful accounts of $380,471 at December 31, 2002 and $652,048 at December 31, 2001 3,076,888 5,293,390 Prepaid expenses and other current assets 89,672 114,818 ------------ ------------ Total current assets 4,941,388 6,354,794 Investments, net 368,059 518,059 Property and equipment, net 1,223,417 1,997,244 Goodwill 1,181,520 -- Intangibles, net 260,000 -- Deposits 71,133 86,498 ------------ ------------ Total assets $ 8,045,517 $ 8,956,595 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Loan payable - banks $ -- $ 1,873,293 Accounts payable and accrued expenses 1,698,556 2,554,129 Capital lease obligation 290,517 345,729 Deferred income taxes 67,500 -- Current portion of long-term debt 278,089 11,603 ------------ ------------ Total current liabilities 2,334,662 4,784,753 Other long-term liabilities 385,756 52,760 Shareholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; 571,615 shares issued and outstanding as of December 31, 2002 5,716 -- Common stock, $.01 par value; 30,000,000 shares authorized; 8,386,871 issued and outstanding as of December 31, 2002; 7,116,871 issued and outstanding as of December 31, 2001 83,869 71,169 Paid-in capital 34,080,538 33,086,689 Accumulated deficit (28,845,025) (29,038,776) ------------ ------------ Total shareholders' equity 5,325,099 4,119,082 ------------ ------------ Total liabilities and shareholders' equity $ 8,045,517 $ 8,956,595 ============ ============
F-4 THE A CONSULTING TEAM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Revenues $ 24,008,964 $ 36,226,716 $ 55,021,679 Cost of revenues 16,860,418 27,357,278 39,069,237 ------------ ------------ ------------ Gross profit 7,148,546 8,869,438 15,952,442 Operating expenses: Selling, general and administrative 6,230,757 11,531,291 26,057,606 Provision for doubtful accounts 25,000 942,507 1,671,457 Depreciation and amortization 873,149 1,157,219 2,470,723 Impairment of assets and restructuring charges 150,000 8,710,690 3,876,547 ------------ ------------ ------------ 7,278,906 22,341,707 34,076,333 ------------ ------------ ------------ Loss from operations (130,361) (13,472,269) (18,123,891) Interest income 9,056 16,077 94,248 Interest expense (154,962) (415,095) (300,581) ------------ ------------ ------------ Interest (expense), net (145,906) (399,018) (206,333) ------------ ------------ ------------ Loss before income taxes (276,267) (13,871,287) (18,330,224) Provision (benefit) for income taxes (431,165) 28,628 (1,532,283) ------------ ------------ ------------ Income (loss) before extraordinary item 154,898 (13,899,915) (16,797,941) Extraordinary item - gain on extinguishment of debt 48,715 249,230 -- ------------ ------------ ------------ Net income (loss) $ 203,613 $(13,650,685) $(16,797,941) ============ ============ ============ Net earnings per share basic and diluted: Income (loss) before extraordinary item $ 0.02 $ (1.95) $ (2.65) Extraordinary item 0.01 0.03 -- ------------ ------------ ------------ Net income(loss) $ 0.03 $ (1.92) $ (2.65) ============ ============ ============
See accompanying notes to financial statements F-5 THE A CONSULTING TEAM, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Preferred Stock Common Stock Additional Earnings --------------------------- --------------------------- Paid-In (Accumulated Shares Amount Shares Amount Capital Deficit) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 -- $ -- 5,485,000 $ 54,850 $ 21,051,758 $ 1,409,850 Investment by new shareholders' 1,624,996 16,250 11,983,750 Exercise of employee stock options 6,875 69 51,181 Net loss -- -- -- -- -- (16,797,941) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2000 -- -- 7,116,871 71,169 33,086,689 (15,388,091) Net loss -- -- -- -- -- (13,650,685) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2001 -- -- 7,116,871 $ 71,169 $ 33,086,689 $(29,038,776) Net income (loss) -- -- -- 203,613 Preferred dividend -- -- -- -- -- (9,862) Acquistion of IOT-shares issued 1,270,000 12,700 622,300 Investment by new shareholders' 571,615 5,716 371,549 ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2002 571,615 $ 5,716 8,386,871 $ 83,869 $ 34,080,538 $(28,845,025) ============ ============ ============ ============ ============ ============ Total ------------ Balance, December 31, 1999 $ 22,516,458 Investment by new shareholders' 12,000,000 Exercise of employee stock options 51,250 Net loss (16,797,941) ------------ Balance, December 31, 2000 17,769,767 Net loss (13,650,685) ------------ Balance, December 31, 2001 $ 4,119,082 Net income (loss) 203,613 Preferred dividend (9,862) Acquistion of IOT-shares issued 635,000 Investment by new shareholders' 377,265 ------------ Balance, December 31, 2002 $ 5,325,098 ============
See accompanying notes to financial statements F-6 THE A CONSULTING TEAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net income(loss) $ 203,613 ($13,650,685) ($16,797,941) Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities, net of acquired assets: Depreciation and amortization 873,149 1,157,219 2,470,723 Impairment of assets and restructuring charges 150,000 8,710,690 3,876,547 Deferred income taxes (22,500) -- (57,000) Provision for doubtful accounts 25,000 942,507 1,671,457 Extraordinary item (48,715) (249,230) -- Changes in operating assets and liabilities: Accounts receivable 2,828,145 7,360,978 (4,034,192) Unbilled receivables -- -- 121,545 Prepaid software licenses -- -- (2,000,000) Prepaid or refundable income taxes -- 1,575,510 (1,011,019) Prepaid expenses and other current assets 63,145 17,605 32,180 Accounts payable and accrued expenses (1,274,410) (5,060,966) 1,263,409 Deferred revenue -- (166,015) 68,479 Other long-term liabilities -- (62,139) (27,190) ------------ ------------ ------------ Net cash provided by (used in) operating activities 2,797,427 575,474 (14,423,002) Cash flows from investing activities: Purchase of property and equipment (47,322) (199,337) (890,341) Acquisition of IOT assets, net of cash received (259,382) -- -- Investments at cost -- -- (2,520,638) Deposits 15,366 140,557 (1,871) ------------ ------------ ------------ Net cash used in investing activities (291,388) (58,780) (3,412,850) Cash flows from financing activities: Proceeds from sale of common stock -- -- 12,051,250 Proceeds from sale of preferred stock 377,265 -- -- Proceeds from long-term debt -- 65,298 -- Proceeds from loan payable -- -- 2,000,000 Repayment of loan payable -- -- (155,000) Loan Payable - bank (1,873,293) (296,707) -- Repayment of long-term debt (26,019) (937) (14,966) Repayment on note issued for assets acquired (140,000) -- -- Repayment of capital lease obligation (15,800) (175,708) (290,005) ------------ ------------ ------------ Net cash (used in) provided by financing activities (1,677,847) (408,054) 13,591,279 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 828,242 108,640 (4,244,573) Cash and cash equivalents at beginning of period 946,586 837,946 5,082,519 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 1,774,828 $ 946,586 $ 837,946 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 154,962 $ 328,094 $ 178,596 ============ ============ ============ Supplemental disclosure of non-cash investing and financing activity: Capital lease obligation $ -- $ -- $ 191,967 ============ ============ ============ Supplemental disclosure of non-cash investing and financing activity: Acquisition of International Object Technology, Inc. ("IOT") Tangible assets acquired (including cash of $10,618) $ 729,731 Liabilities assumed (709,186) Goodwill 1,181,520 Employee Agreements 312,000 Equity Issued (635,000) Notes issued, net discount of $40,935 (609,065) ------------ Cash Paid $ 270,000 less: Cash received in acquisition (10,618) ------------ Net Cash Paid $ 259,382 ============
See accompanying notes to financial statements F-7 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, 2002, 2001 and 2000, the Company reported net income of $203,613, and net losses of $13,650,685, and $16,797,941, respectively. Additionally, the Company has an accumulated deficit of $28,845,025 as of December 31, 2002. The Company has implemented a plan whereby it is actively managing its personnel utilization rates and it 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 sources, 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. (See Note 17) Principles of Consolidation The consolidated financial statements include the accounts of The A Consulting Team, Inc., its 100% owned subsidiary International Object Technology, Inc. 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 average common shares outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under the Company's incentive plans. Cash Equivalents The Company considers all highly liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. F-8 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 When impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses 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 exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. During 2002 and 2001, the Company recorded restructuring charges of approximately $150,000 and $8,711,000 (see Note 14). 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 Company's investment. These charges relate to the Company's investment in Methoda Computer, Ltd ($132,000) and Always-On Software, Inc. ($18,000). In the fourth quarter of 2000, after extensive review of changing market conditions, the Company wrote-off approximately $3,877,000, which related to the permanent impairment of goodwill, write-down of fixed assets no longer in use and other related charges. These charges relate to the Company's majority-owned subsidiary, T-3 Media, Inc. 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. (See Impact of Recently Adopted Accounting Standards) 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. (See Impact of Recently Adopted Accounting Standards) Revenue Recognition Consulting revenues are recognized as services are provided. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant. Customers for consulting revenues are billed on a weekly, semi-monthly and monthly basis. Fixed fee contracts are accounted for under the percentage-of-completion method. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. 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. F-9 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation At December 31, 2002, 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 Company expects to continue applying provision of APB 25 for equity issuances to employees. 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:
Year ended December 31, ----------------------------------------- 2002 2001 2000 --------- ------------- ------------ Net income (loss), as reported $ 204,000 $ (13,651,000) $(16,798,000) Deduct: Total stock based compensation expense determined under fair value based method for all awards (117,000) (146,000) (884,000) --------- ------------- ------------ Pro forma net inome (loss) $ 87,000 $ (13,797,000) $(17,682,000) ========= ============= ============ Earnings per share: Basic - as reported $ 0.03 $ (1.92) $ (2.65) ========= ============= ============ Basic - pro forma $ 0.01 $ (1.94) $ (2.79) ========= ============= ============ Diluted - as reported $ 0.03 $ (1.92) $ (2.65) ========= ============= ============ Diluted - pro forma $ 0.01 $ (1.94) $ (2.79) ========= ============= ============
The fair value of options at the date of grant was estimated using the Black-Scholes model with the following assumptions: 2002 2001 2000 -------- -------- -------- Expected life (years) 4.00 4.00 4.00 Risk free interest rate 3.00 % 4.37 % 5.96 % Expected volatility 0.83 1.25 1.00 Expected dividend yield 0.00 0.00 0.00 Weighted average fair value per option $ 0.20 $ 0.26 $ 4.16 F-10 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average fair value of options granted by the Company was $0.20 in 2002, $0.26 in 2001, and $4.16 in 2000. 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. New Accounting Standards to be Implemented In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements No 4, 44, and 64, Amendment of FASB 13, and Technical Corrections" (SFAS 145). Among other provisions, SFAS 145 rescinds FASB Statement 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or losses from extinguishments of debt should not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions (APB 30). Gains and losses from extinguishments of debt, which do not meet the criteria of APB 30, should be reclassified to income from continuing operations in all prior periods presented. The provisions of SFAS 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption, the Company anticipates it will reclassify gains on early extinguishment of debt previously recorded as extraordinary items to other income. The Company is evaluating the impact of the statement and intends to adopt FASB 145 in the first quarter of 2003. In June 2002, the FASB issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires entities to recognize costs associated with exit or disposal activities when liabilities are incurred rather than when the entity commits to an exit or disposal plan, as currently required. Examples of costs covered by this guidance include one-time employee termination benefits, costs to terminate contracts other than capital leases, costs to consolidate facilities or relocate employees, and certain other exit or disposal activities. This statement is effective for fiscal years beginning after December 31, 2002, and will impact any exit or disposal activities the Company initiates after that date. The Company is evaluating the impact of the statement and intends to adopt FASB 146 in the first quarter of 2003. In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002, but has certain disclosure requirements effective for interim and annual periods ending after December 15, 2002. The Company has historically issued guarantees only on a limited basis and does not anticipate FIN 45 will have a material effect on its 2003 financial statements. Disclosures required by FIN 45 are included in the accompanying financial statements. On November 4, 2002, the Securities Exchange Commission voted to adopt new Regulation G, which will apply whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure. This regulation will prohibit material misstatements or omissions that would make the presentation of the material non-GAAP financial measure, under the circumstances in which it is made, misleading, and will require a quantitative reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure presented and the comparable financial measure or measures calculated and presented in accordance with GAAP. The Company intends to adopt Regulation G in the first quarter of 2003. F-11 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impact of Recently Adopted Accounting Standards The Company adopted the provisions of FASB issued 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. In accordance with SFAS No. 142, the following are changes in the carrying amount of goodwill for the year ended December 31, 2002: Total ---------- Balance as of January 1, 2002 $ -- Goodwill acquired during the year 1,181,520 Impairment losses -- ---------- Balance as of December 31, 2002 $1,181,520 ========== During the year, the Company recorded goodwill in the amount of $1,181,520 as part of the purchase price of IOT. The Company tested for impairment using the guidance for measuring impairment set forth in SFAS No. 142. The following summarizes the carrying amounts of acquired intangible assets and related amortization: As of Dec. 31, 2002 -------- Amortized intangible assets Employee Contracts- gross carrying amount $312,000 Less accumulated amortization 52,000 -------- Unamortized intangible assets $260,000 ======== Amortization expense For the year ended 12/31/02 $ 52,000 Estimated amortization expense: For the year ended 12/31/03 $104,000 For the year ended 12/31/04 $104,000 For the year ended 12/31/05 $ 52,000 During the year, the Company recorded intangible assets of $312,000 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. F-12 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 one million two hundred seventy thousand (1,270,000) shares of unregistered TACT Common Stock, 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. For the year ended December 31, 2002, the amortization expense for the intangible asset was $52,000. The three majority shareholders of IOT received employment agreements for a three-year period at an annual salary of $160,000 per year each. From the date of acquisition through the end of year 2002, the Company recorded revenue in the amount of $1,689,000. 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 is expected 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. The following unaudited pro forma condensed results of operations reflect the acquisition of International Object Technology, Inc., as if it had occurred on January 1, 2002 and January 1, 2001 respectively. The revenues and results of operations included in the following pro forma unaudited condensed statements of operations is not necessarily considered indicative of the results of operations for the periods specified had the transaction actually been completed at the beginning of the period. Notes to Condensed Consolidated Financial Statements (Unaudited) Twelve Months Ended December 31, --------------------------- 2002 2001 ------------ ------------ (unaudited) (unaudited) Pro forma Net Sales $ 27,076,510 $ 44,383,342 Pro forma Net Income (Loss) Earnings $ 47,791 $(13,713,681) Pro forma Net Income (Loss) Earnings per Share of Common Stock $ 0.01 $ 1.93 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 2002, the Company reversed approximately $272,000 in accounts payable relating to T-3 Media, resulting in a reduction in SG&A expenses. F-13 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. F-14 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2002, 2001 and 2000.
Year Ended December 31, ------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Numerator for basic net income(loss) per share Income (loss) before extraordinary item $ 154,898 $(13,899,915) $(16,797,941) Extraordinary item 48,715 249,230 -- ------------ ------------ ------------ Net income (loss) 203,613 (13,650,685) (16,797,941) Preferred Dividend 9,861 -- -- ------------ ------------ ------------ Net income (loss) available to common stockholders $ 193,752 $(13,650,685) $(16,797,941) ============ ============ ============ Numerator for diluted net income(loss) per share Income (loss) before extraordinary item $ 154,898 $(13,899,915) $(16,797,941) Extraordinary item $ 48,715 $ 249,230 -- ------------ ------------ ------------ Net income (loss) available to common stockholders & assumed conversion $ 203,613 $(13,650,685) $(16,797,941) ============ ============ ============ Denominator: Denominator for basic income (loss) before extraordinary item and net loss per share - weighted-average shares 7,694,460 7,116,871 6,329,927 Effect of dilutive securities: Preferred shares 210,353 -- -- Employee stock options 81,877 -- -- ------------ ------------ ------------ Denominator for diluted earnings (loss) per share - adjusted weighted-average shares 7,986,690 7,116,871 6,329,927 ============ ============ ============ Basic earnings income(loss) per share: Income (loss) before extraordinary item $ 0.02 $ (1.95) $ (2.65) Extraordinary item 0.01 0.03 -- ------------ ------------ ------------ Net income (loss) $ 0.03 $ (1.92) $ (2.65) ============ ============ ============ Diluted earnings income(loss) per share: Income (loss) before extraordinary item $ 0.02 $ (1.95) $ (2.65) Extraordinary item 0.01 0.03 -- ------------ ------------ ------------ Net income (loss) $ 0.03 $ (1.92) $ (2.65) ============ ============ ============
All options and warrants outstanding during 2001 and 2000 (see Notes 12 and 13) were not included in the computation of net loss per share because the effect would be antidilutive. During the year ended December 31, 2002, there were 629,978 options that were excluded from the computation of diluted earnings per share. F-15 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following: December 31, ----------------------- 2002 2001 ---------- ---------- Equipment and leaseholds $3,536,728 $3,489,407 Software 703,775 703,775 Furniture and fixtures 904,177 904,177 Automobiles 158,769 158,768 ---------- ---------- 5,303,448 5,256,127 Less accumulated depreciation and amortization 4,080,031 3,258,883 ---------- ---------- $1,223,417 $1,997,244 ========== ========== 6. CREDIT ARRANGEMENT The Company has a line of credit of $4.0 million with Keltic Financial Partners, LP, 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, 2002, compared to an outstanding balance of $1.9 million at December 31, 2001. 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 6.25% at December 31, 2002. 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 IOT. The Company's previous line of credit was for $2.1 million and was fully guaranteed by the Company's Chairman, Chief Executive Officer and President. 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. The amount outstanding on T3 Media's demand loan at December 31, 2001 was $4,700. 7. COMMITMENTS The Company has the following commitments as of December 31, 2002, and is comprised of an automobile loan, shareholder loan and note payable for acquisition. The automobile is payable in monthly installments of $1,262 including interest at 6%. As of December 31, 2002, the loan matures as follows: 2003 - $12,318; 2004 - $13,078; 2005 - $13,885 and 2006 - $13,478. The long term note is payable in monthly installments of $5,000 including interest at 3.9%. As of December 31, 2002, the loan matures as follows: 2003 - $55,770; 2004 - $57,985; and 2005 - $20,077. The note payable for acquisition is payable as follows: 2003 - $210,000; 2004 - $100,000 and 2005 - $200,000. The Company's commitments at December 31, 2002, are comprised of the following:
Payments Due in ------------------------------------------------- Total 2003 2004 2005 2006 ---------- ---------- ---------- ---------- ---------- Automobile Loan $ 52,759 $ 12,318 $ 13,078 $ 13,885 $ 13,478 Shareholder Loan 133,832 55,770 57,985 20,077 -- Acquisition Note 510,000 210,000 100,000 200,000 -- Employment Contracts 960,000 720,000 240,000 -- -- ---------- ---------- ---------- ---------- ---------- Total $1,656,591 $ 998,088 $ 411,063 $ 233,962 $ 13,478 ========== ========== ========== ========== ==========
F-16 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company presently employs, Victoria Bentov, the sister of the Chief Executive Officer and President, as a billable consultant and at an annual salary of approximately $80,000. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following: December 31, ---------------------------- 2002 2001 ------------ ------------ Accounts payable $ 393,724 $ 973,396 Payroll 600,850 704,091 Bonuses 108,932 243,750 Restructuring 10,662 160,679 Other accrued expenses 584,388 472,213 ------------ ------------ $ 1,698,556 $ 2,554,129 ============ ============ 8. 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. Deferred tax assets and (liabilities) consist of the following: December 31, ---------------------------- 2002 2001 ------------ ------------ Licensing revenues $ 299,000 $ 322,000 Accounts receivable reserve 257,000 378,000 Depreciation and amortization 80,000 57,000 Investments 756,000 1,023,000 Other 18,000 (3,000) Accounting method change (67,500) -- Net operating losses 5,914,000 11,352,000 ------------ ------------ 7,256,500 13,129,000 Valuation allowance (7,324,000) (13,129,000) ------------ ------------ $ (67,500) $ -- ============ ============ 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 (about 4.5%) of the fair market value of the Company at the time of any such ownership change. F-17 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2002, the Company has net operating loss carry-forwards of approximately $18.5 million for state and local tax purposes and $11.2 million for Federal tax purposes, expiring in 2020 through 2022. 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, 2002, 2001 and 2000, the valuation allowance decreased by $5,805,000 and increased by $6,509,000 and $4,746,000, 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:
Year Ended December 31, ----------------------------------------- 2002 2001 2000 ----------- --------- ----------- Current: Federal ($438,665) $ -- ($1,475,000) State and local 30,000 29,000 -- ----------- --------- ----------- Total Current ($408,665) 29,000 (1,475,000) ----------- --------- ----------- Deferred: Federal (5,063) -- (44,000) State and local (17,437) -- (13,000) ----------- --------- ----------- Total Deferred (22,500) -- (57,000) ----------- --------- ----------- Total ($ 431,165) $ 29,000 ($1,532,000) =========== ========= ===========
A reconciliation between the federal statutory rate and the effective income tax rate for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000 ----------- --------- ----------- Federal statutory rate (34.0)% (34.0)% (34.0)% State and local taxes net of federal tax benefit 7.0 0.1 -- Non-deductible expenses 2.2 0.5 7.6 Carryback of losses for which no benefit was previously recorded (158.78) -- -- Losses for which no benefit was received (including T3 Media) 27.51 33.6 18.0 ----------- --------- ----------- Total (156.07)% 0.2% (8.4)% =========== ========= ===========
9. 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 2002, 2001 and 2000. F-18 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. The Company maintains its cash balances on deposit with a limited number of financial institutions. In 2002, the Company's two largest customers represented 25% and 24% of revenues, respectively, in 2001, the three largest customers represented 19%, 19% and 13% of revenues, respectively and in 2000, the largest customer represented 17% of revenues. The Company's services for the customer that accounted for 25% of the Company's revenues will be decreasing in the first quarter of 2003. Besides these customers, no other customer represented greater than 10% of the Company's revenues. Two customers represented approximately 17% and 15% of accounts receivable as of December 31, 2002, and three customers represented approximately 33%, 12% and 13% of accounts receivable as of December 31, 2001. 11. 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, 2002 are as follows: 2003 $432,000 2004 $ 51,500 2005 -- -------- Total minimum future lease payments $483,500 ======== Rent expense for the years ended December 31, 2002, 2001 and 2000 was approximately $307,000, $710,000 and $1,524,000, 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. $291,000 of T3 Media's capital lease obligations remained outstanding at December 31, 2002. 12. 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 600,000 shares of common stock. On May 27, 1998, the shareholders approved and ratified an increase to the Plan from 600,000 to 900,000 shares of common stock and on May 24, 2001, the shareholders approved and ratified an increase to the Plan from 900,000 to 1,200,000 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. F-19 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information with respect to options under the Company's Plan is as follows: Weighted Number of Average Shares Exercise Price ---------- -------------- Balance - January 1, 2000 747,537 $6.38 Granted during 2000 86,330 5.48 Exercised during 2000 (6,875) 7.45 Forfeitures during 2000 (152,625) 6.59 ---------- Balance - December 31, 2000 674,367 6.20 Granted during 2001 740,000 0.36 Forfeitures during 2001 (392,699) 6.19 ---------- Balance - December 31, 2001 1,021,668 1.98 Granted during 2002 393,000 0.39 Forfeitures during 2002 (423,578) 1.26 ---------- Balance - December 31, 2002 991,090 $1.66 ========== At December 31, 2002, 2001 and 2000, 465,005, 385,481, and 333,570 options, respectively, were exercisable with weighted average exercise prices of $2.93, $3.93 and $6.94, respectively. The following table summarizes the status of the stock options outstanding and exercisable at December 31, 2002: Stock Options Outstanding ---------------------------------------------------------------------------- Number of Weighted Weighted- Stock Exercise Price Average Number of Remaining Options Range Exercise Price Options Contractual Life Exercisable -------------- -------------- --------- ---------------- ----------- $0.00 - $1.20 $0.363 770,779 7.8 years 265,654 $3.60 - $4.80 $3.875 66,175 6.5 years 49,737 $4.81 - $6.00 $5.257 17,486 1.4 years 13,902 $6.01 - $7.20 $7.000 27,775 5.4 years 27,775 $7.21 - $8.40 $7.506 108,750 5.7 years 107,875 $8.41 - $9.60 $8.563 125 7.3 years 62 --------- ------- 991,090 465,005 ========= ======= At December 31, 2002, the Company had 1,200,000 shares of Common Stock reserved in connection with the Stock Option Plan. In 1997, T3 Media adopted the T3 Media, Inc. 1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of options to purchase up to 1,000,000 shares of T3 Media common stock. F-20 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information with respect to options under T3 Media's 1997 Plan is as follows: Weighted Number of Average Shares Exercise Price ---------- -------------- Balance - December 31, 1999 387,906 1.34 Granted during 2000 523,802 3.00 Exercised during 2000 (21,170) 1.14 Forfeitures during 2000 (203,038) 1.24 ---------- Balance - December 31, 2000 687,500 2.44 Forfeitures during 2001 (687,500) 2.44 ---------- Balance - December 31, 2001 -- -- ========== There are no T3 Media stock options outstanding and exercisable at December 31, 2002 and 2001. At December 31, 2000, 133,500 options were exercisable with a weighted average exercise price of $1.67. 13. SALES OF UNREGISTERED SECURITES During 2000, the Company sold an aggregate of 1,624,996 shares of Common Stock to a variety of investors through private placements of the Company's Common Stock, as described below. On March 19, 2000, Yosi Vardi, Rita Folger, DS Polaris Group, SFK Group and Arison Investments Ltd. invested an aggregate of approximately $2.75 million by purchasing an aggregate of 392,855 shares of Common Stock at $7.00 per share with 60-day warrants (subsequently extended by an additional 14 days) to purchase an aggregate of 607,142 additional shares of Common Stock at $7.00 per share (one of which warrants was exercised in part by Arison Investments Ltd. on June 5, 2001 to purchase 142,857 shares of Common Stock for an aggregate exercise price of approximately $1,000,000) and two-year warrants to purchase an aggregate of 1,000,000 additional shares of Common Stock at $13.00 per share. On June 5, 2000, Koonras Technologies, Eurocom Communications and Poalim Capital Markets technologies invested an aggregate of approximately $3.25 million by purchasing an aggregate of 464,284 shares of Common Stock at $7.00 per share with two-year warrants to purchase an aggregate of 464,284 additional shares of Common Stock at an exercise price of $13.00 per share. On June 14, 2000, two investment trusts controlled by Michael G. Jesselson invested $1 million purchasing an aggregate of 125,000 shares of Common Stock at $8.00 per share with two-year warrants to purchase an aggregate of 125,000 additional shares of Common Stock at an exercise price of $13.00 per share. On September 29, 2000 Level 8 Systems, Inc. invested $4.0 million by purchasing 500,000 shares of Common Stock at $8.00 per share with two year warrants to purchase an aggregate of 500,000 additional shares of Common Stock with an exercise price of $13.00 per share. The warrants issued with these shares of Common stock expired at various times during 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. Yosi 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 Yosi 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 1:1 basis subject to 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 will use the proceeds from the sale of Series A and Series B Preferred Stock for general working capital purposes. F-21 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to a Stock Purchase Agreement dated as of June 28, 2002 among the Company, IOT and the holders of all the issued and outstanding capital stock of IOT (the "IOT Stockholders"), the Company sold an aggregate of 1,270,000 shares of unregistered common stock to the IOT Stockholders and agreed to pay an aggregate of $650,000 in cash in deferred payments over the next 30 months in exchange for all the issued and outstanding capital stock of IOT (the "Acquisition"). The Acquisition closed on July 19, 2002. 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 the IOT Stockholders. Based upon discussions with and representations made by the IOT Stockholders, the Company reasonably believed that such investors were accredited and/or sophisticated investors. The Company granted to each investor access to information on the Company necessary to make an informed investment decision. In 2002, the Company issued an aggregate of 393,000 stock options, each with a term of 10 years from the date of grant, pursuant to its Stock Option and Award Plan. The options had initial exercise prices that range from $0.31 to $0.43 per share and they had vesting periods that range from immediately vesting to vesting over 4 years. 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 charges for the year ended December 31, 2002 was approximately $150,000 consisting of following: Write-off of the investment in Always-On Software, Inc. $ 18,000 Write-down of the investment in Methoda Computers Ltd. 132,000 ---------- $ 150,000 ========== The restructuring charges for the year ended December 31, 2001 was approximately $8,711,000, consisting of the following: Write-off of the investment in Always-On Software, Inc. $2,303,000 Write-off of prepaid software licenses 2,000,000 Lease expense and write-off of leaseholds and other fixed assets: * due to the closing of the operations and liquidation of T3 Media, Inc. 1,616,000 * related to the closing of locations 832,000 * related to the reduction of office space in the New York headquarters 867,000 Severance costs 699,000 Other associated costs 394,000 ---------- $8,711,000 ========== F-22 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company had restructuring charge liabilities of approximately $11,000 $161,000 and $240,000 at December 31, 2002, December 31, 2001 and December 31, 2000, respectively. 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. During the year ended December 31, 2001, the Company recorded additions to the restructuring liability of $1.1 million, consisting of $537,000 related to leases, lease buy-outs of office space no longer utilized by the Company and other associated costs and the reduction of its staff resulting in termination costs of $616,000. The Company paid approximately $1.2 million during 2001, consisting of $616,000 for space no longer utilized, and $616,000 for termination costs. During 2000, the Company recorded a charge of $3.9 million related to the permanent impairment of goodwill of T3 Media, the write down of fixed assets no longer in use and other related charges. 15. EXTRAORDINARY ITEM The 2002 and 2001 extraordinary items resulted from the early extinguishments of 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 an extraordinary item of $49,000 in 2002 and $523,000 of the leases for $176,000, resulting in an extraordinary item of $249,000 in 2001. 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 terminates 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. 17. POSSIBLE REMOVAL FROM QUOTATION OF COMMON STOCK ON NASDAQ AND RESULTING MARKET ILLIQUIDITY (UNAUDITED) On February 14, 2002, the Company was informed by Nasdaq that it had failed to maintain a closing bid price of at least $1.00 per share and a market value of publicly held shares of at least $5,000,000 for 30 consecutive trading days, and therefore the Company did not comply with the requirements as set forth in Nasdaq Marketplace Rules 4450(a)(5) and 4450(b)(2), respectively. Pursuant to Nasdaq rules, the Company was provided with a 90-day grace period, through May 15, 2002, to regain compliance with the minimum bid price and market value of public float requirements. The Company did not regain compliance within the proscribed time period. On May 23, 2002, the Company requested a hearing, which stayed the de-listing of the Company's common stock. On July 11, 2002, the Company participated in a hearing before the Nasdaq Listing Qualifications Panel (the "Nasdaq Panel"). On July 31, 2002, the Nasdaq Panel notified the Company that the Nasdaq Panel had determined not to grant any further exception to the minimum bid price and/or market value of publicly held shares requirements. The Nasdaq Panel further determined to transfer listing of the Company's common stock to The Nasdaq SmallCap Market, effective with the open of business on August 5, 2002 and gave the Company an extension of 180 days until February 10, 2003 to meet the minimum requirement of $1.00 per share. On February 19, 2003, the Company announced that it had been granted a sixty-day extension to April 14, 2003 to comply with Nasdaq's minimum bid price requirement necessary to remain listed on the Nasdaq SmallCap Market. The extension was granted by Nasdaq while it deliberates on the modifications to its listing requirements proposed by its Board of Directors, which could provide issuers with additional time to satisfy the minimum bid price requirements. 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." The Company believes that these factors could materially impair its ability to raise funds through the issuance of its Common Stock or other securities convertible into its Common Stock. F-23 THE A CONSULTING TEAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. SUBSEQUENT EVENT The Company submitted a proposal for an amendment to its Restated Certificate of Incorporation to effect a reverse split of its common stock at a ratio ranging from one-for-four to one-for-nine, grant the Board of Directors the authority to decide whether to effect the reverse split and if the Board elects to effect the reverse split, to select a split ratio within this range at its discretion. F-24 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, 2002 and 2001.
Quarter Ended ---------------------------------------------------------------- (in thousands, except per share amounts) March 31, June 30, September 30, December 31, 2002 2002 2002 2002 -------- -------- ------------- ------------ Revenues $ 6,461 $ 5,643 $ 5,830 $ 6,075 Gross profit 1,827 1,736 1,697 1,888 Income (loss) from operations 69 94 (467)(1) 173 Income (loss) before extraordinary item 450 39 (498) 164 Extraordinary item 49 -- -- -- Net income (loss) 499 39 (498) 164 Net income (loss) per share-basic and dilutive $ 0.07 $ 0.01 ($ 0.06) $ 0.02
Quarter Ended ---------------------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 -------- -------- ------------- ------------ Revenues $ 12,148 $ 9,393 $ 7,350 $ 7,336 Gross profit 2,295 1,912 2,373 2,289 Income (loss) from operations (4,741)(2) (9,067)(3) 134 202 Income (loss) before extraordinary item (4,889) (9,187) 49 127 Extraordinary item -- -- 187 62 Net income (loss) (4,889) (9,187) 236 189 Net income (loss) per share-basic and dilutive ($ 0.69) ($ 1.29) $ 0.03 $ 0.03
---------- (1) During the third quarter of 2002, the Company wrote-off $150,000 consisting of $18,000 write-off of its investment in Always-On Software, Inc., and $132,000 write-down of its investment in Methoda Computers, Ltd. (2) During the first quarter of 2001, the Company wrote-off approximately $1.5 million consisting of $371,000 write-off of leaseholds and fixed assets related to the wind down of operations of the Company's majority-owned subsidiary, T3 Media, Inc.and $1.1 million related to the closing of several of its Solution Branches and converting them into virtual offices and severance costs related to the reduction of its staff. (3) During the second quarter of 2001, the Company wrote-off approximately $7.2 million related to the write-off its investment in Always-On Software, Inc., prepaid software licenses, fixed assets related to the reduction of office space in its New York headquarters, severance costs and other associated costs. F-25 THE A CONSULTING TEAM, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E ----------------------------------------------------- ------------ --------------------------- ------------ ------------- Additions --------------------------- (1) (2) ---------- -------------- Balance at Charged to Charged to Beginning of Costs and Other Accounts Deductions - Balances at Description Period Expenses Describe Describe End of Period ----------------------------------------------------- ------------ ---------- -------------- ------------ ------------- Reserves and allowances deducted from asset accounts: For the year ended December 31, 2002 Allowance for doubtful accounts $ 652,048 $ 25,000 $ -- $ (296,576)(a) $ 380,472 For the year ended December 31, 2001 Allowance for doubtful accounts $ 948,397 $ 942,507 $ -- $ (1,238,856)(b) $ 652,048 For the year ended December 31, 2000 Allowance for doubtful accounts $ 682,424 $1,671,457 $ -- $ (1,405,484)(c) $ 948,397
(a) Uncollectible accounts written off during 2002. (b) Uncollectible accounts written off during 2001. (c) Uncollectible accounts written off during 2000. 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. 3.1 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10-Q 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. 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. 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 the Registration Statement on Form S-8 as previously filed with the SEC on December 12, 1997. 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 Loan and Security Agreement between the Registrant and Keltic Financial Partners, LP, dated June 27, 2001, incorporated by reference to Exhibit 10.1.1 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001. 10.3 Guaranty of Payment and Performance between Shmuel BenTov, the Chairman and Chief Executive Officer of the Registrant, and Keltic Financial Partners, LP, dated June 27, 2001, incorporated by reference to Exhibit 10.2 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001. Exhibit Number Description of Exhibits ------ ----------------------- 10.4 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. 10.5 Employment Agreement, dated September 11, 2001, between the Registrant and Richard Falcone, incorporated by reference to Exhibit 10.6 to the Form 10-K/A for the fiscal year ended December 31, 2001, as previously filed with the SEC on April 4, 2002. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 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. 10.11 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. 16.1 Letter dated July 2, 2002, of Ernst & Young, LLP, incorporated by reference to Exhibit 16.1 to the Form 8-K dated June 28, 2002, as previously filed with the SEC on July 3, 2002. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Grant Thornton, LLP