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HACKETT GROUP, INC. - Quarter Report: 2002 September (Form 10-Q)

Period Ending 09/27/2002
Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 10-Q
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
 
    
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 27, 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 0-24343
 
 
ANSWERTHINK, INC.
(Exact name of Registrant as specified in its charter)
 
Florida
  
65-0750100
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification Number)
1001 Brickell Bay Drive, Suite 3000
    
Miami, Florida
  
33131
(Address of principal executive offices)
  
(Zip Code)
 
(305) 375-8005
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.  Yes  x  No  ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
As of October 31, 2002, there were 46,229,452 shares of common stock outstanding.
 

Table of Contents
 
Answerthink, Inc.
TABLE OF CONTENTS
 
        
Page
PART I    FINANCIAL INFORMATION
     
Item 1.    Financial Statements
     
      
3
      
4
      
5
      
6
  
10
  
14
Item 4.     Control and Procedures
  
14
PART II    OTHER INFORMATION
     
Item 1.     Legal Proceedings
  
15
  
15
  
16
  
17
  
19

2

Table of Contents
 
PART I—FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
Answerthink, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
    
September 27,
2002
     
December 28,
2001
  
    
(unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
58,515
 
   
$
59,888
 
Restricted cash
   
 
2,901
 
   
 
—  
 
Accounts receivable and unbilled revenue, net of allowance of $6,304 and $6,810 in 2002 and 2001, respectively
   
 
28,781
 
   
 
39,164
 
Other receivables
   
 
734
 
   
 
851
 
Prepaid expenses and other current assets
   
 
16,183
 
   
 
15,628
 
    
  
Total current assets
   
 
107,114
 
   
 
115,531
 
Property and equipment, net
   
 
17,717
 
   
 
18,468
 
Goodwill, net
   
 
26,720
 
   
 
77,920
 
    
  
Total assets
   
$
151,551
 
   
$
211,919
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
4,445
 
   
$
5,187
 
Accrued expenses and other liabilities
   
 
18,319
 
   
 
27,992
 
Media payable
   
 
736
 
   
 
1,039
 
    
  
Total current liabilities
   
 
23,500
 
   
 
34,218
 
Commitments and contingencies
                  
Shareholders’ equity
                  
Preferred stock, $.001 par value, 1,250,000 authorized, none issued and outstanding
   
 
—  
 
   
 
—  
 
Common stock, $.001 par value, authorized 125,000,000 shares; issued and outstanding: 46,592,852 shares at September 27, 2002; 45,880,118 shares at December 28, 2001
   
 
47
 
   
 
46
 
Additional paid-in capital
   
 
263,213
 
   
 
257,115
 
Treasury stock, at cost, 777,200 shares at September 27, 2002
   
 
(1,488
)
   
 
—  
 
Accumulated deficit
   
 
(133,721
)
   
 
(79,460
)
    
  
Total shareholders’ equity
   
 
128,051
 
   
 
177,701
 
    
  
Total liabilities and shareholders’ equity
   
$
151,551
 
   
$
211,919
 
    
  
 
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents
 
Answerthink, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
    
Quarter Ended
     
Nine Months Ended
  
    
September 27, 2002
     
September 28, 2001
     
September 27, 2002
     
September 28, 2001
  
Revenues:
                                    
Revenues before reimbursements (Net revenues)
   
$
38,461
 
   
$
60,016
 
   
$
127,552
 
   
$
197,307
 
Reimbursements
   
 
4,444
 
   
 
7,525
 
   
 
16,189
 
   
 
25,281
 
    
  
  
  
Total revenues
   
 
42,905
 
   
 
67,541
 
   
 
143,741
 
   
 
222,588
 
Costs and expenses:
                                    
Project personnel and expenses:
                                    
Project personnel and expenses before reimbursable expenses
   
 
25,537
 
   
 
36,955
 
   
 
88,008
 
   
 
123,004
 
Reimbursable expenses
   
 
4,444
 
   
 
7,525
 
   
 
16,189
 
   
 
25,281
 
    
  
  
  
Total project personnel and expenses
   
 
29,981
 
   
 
44,480
 
   
 
104,197
 
   
 
148,285
 
Selling, general and administrative expenses
   
 
14,041
 
   
 
22,122
 
   
 
45,024
 
   
 
70,123
 
Impairment of goodwill
   
 
20,000
 
   
 
—  
 
   
 
20,000
 
   
 
—  
 
Stock compensation expense
   
 
—  
 
   
 
211
 
   
 
—  
 
   
 
4,855
 
    
  
  
  
Total costs and operating expenses
   
 
64,022
 
   
 
66,813
 
   
 
169,221
 
   
 
223,263
 
    
  
  
  
Income (loss) from operations
   
 
(21,117
)
   
 
728
 
   
 
(25,480
)
   
 
(675
)
Other income (expense):
                                    
Interest income
   
 
220
 
   
 
250
 
   
 
574
 
   
 
985
 
Interest expense
   
 
(103
)
   
 
(42
)
   
 
(196
)
   
 
(126
)
    
  
  
  
Income (loss) before income taxes
   
 
(21,000
)
   
 
936
 
   
 
(25,102
)
   
 
184
 
Income taxes
   
 
(400
)
   
 
3,131
 
   
 
(2,041
)
   
 
2,514
 
    
  
  
  
Loss before cumulative effect of change in accounting principle
   
 
(20,600
)
   
 
(2,195
)
   
 
(23,061
)
   
 
(2,330
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
(31,200
)
   
 
—  
 
    
  
  
  
Net loss
   
$
(20,600
)
   
$
(2,195
)
   
$
(54,261
)
   
$
(2,330
)
    
  
  
  
Basic and diluted net loss per common share:
                                    
Loss before cumulative effect of change in accounting principle
   
$
(0.44
)
   
$
(0.05
)
   
$
(0.50
)
   
$
(0.05
)
Cumulative effect of change in accounting principle
   
$
—  
 
   
$
—  
 
   
$
(0.67
)
   
$
—  
 
Net loss per common share
   
$
(0.44
)
   
$
(0.05
)
   
$
(1.17
)
   
$
(0.05
)
Weighted average common and common equivalent shares outstanding
   
 
46,879
 
   
 
44,682
 
   
 
46,431
 
   
 
43,631
 
 
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents
 
Answerthink, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Nine Months Ended
  
    
September 27,
2002
     
September 28, 2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(54,261
)
   
$
(2,330
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                  
Cumulative effect of change in accounting principle
   
 
31,200
 
   
 
—  
 
Impairment of goodwill
   
 
20,000
 
   
 
—  
 
Non-cash compensation expense
   
 
—  
 
   
 
4,855
 
Depreciation and amortization
   
 
4,023
 
   
 
9,267
 
Provision for doubtful accounts
   
 
229
 
   
 
4,776
 
Deferred income taxes
   
 
3,552
 
   
 
1,457
 
Changes in assets and liabilities, net of effects from acquisitions:
                  
Decrease in accounts receivable and unbilled revenue
   
 
10,155
 
   
 
8,082
 
Decrease in other receivables
   
 
117
 
   
 
1,893
 
Increase in prepaid expenses and other assets
   
 
(3,618
)
   
 
(1,708
)
Decrease in accounts payable
   
 
(743
)
   
 
(3,020
)
Decrease in accrued expenses and other liabilities
   
 
(9,737
)
   
 
(9,046
)
Decrease in media payable
   
 
(303
)
   
 
(5,448
)
    
  
Net cash provided by operating activities
   
 
614
 
   
 
8,778
 
Cash flows from investing activities:
                  
Purchases of property and equipment
   
 
(3,461
)
   
 
(8,340
)
Increase in restricted cash
   
 
(2,901
)
   
 
—  
 
Cash used in acquisition of business, net of cash acquired
   
 
(236
)
   
 
(2,051
)
    
  
Net cash used in investing activities
   
 
(6,598
)
   
 
(10,391
)
Cash flows from financing activities:
                  
Proceeds from issuance of common stock
   
 
6,099
 
   
 
3,409
 
Repurchases of common stock
   
 
(1,488
)
   
 
—  
 
    
  
Net cash provided by financing activities
   
 
4,611
 
   
 
3,409
 
    
  
Net increase (decrease) in cash and cash equivalents
   
 
(1,373
)
   
 
1,796
 
Cash and cash equivalents at beginning of period
   
 
59,888
 
   
 
51,662
 
    
  
Cash and cash equivalents at end of period
   
$
58,515
 
   
$
53,458
 
    
  
 
The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
1.    Basis of Presentation
 
The consolidated financial statements of Answerthink, Inc. (“Answerthink” or the “Company”) include the accounts of the Company and all of its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
 
In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 28, 2001 included in the Form 10-K filed by the Company with the Securities and Exchange Commission. The consolidated results of operations for the quarter and nine months ended September 27, 2002 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year. Certain prior period amounts have been reclassified to conform to the current period presentation (see Note 3).
 
2.    Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. With regard to common shares issued to employees under employment agreements, the calculation includes only the vested portion of such shares. Accordingly, common shares outstanding for the basic net income (loss) per share computation are lower than actual shares issued and outstanding.
 
Income (loss) per common share assuming dilution is computed by dividing net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period. For the quarter ended September 27, 2002 and September 28, 2001, potentially dilutive securities of 187,433 and 822,638 shares, respectively, of unvested common stock issued under employment agreements and 1,668 and 1,156,696 shares, respectively, of common stock issuable upon the exercise of stock options and warrants assuming the treasury stock method were excluded from the diluted loss per share calculation because their effects would have been anti-dilutive to the loss incurred by the Company. Therefore, the amounts reported for basic and diluted net loss per share were the same for the quarters ended September 27, 2002 and September 28, 2001.
 
Potentially dilutive shares were excluded from the diluted loss per share calculation for the nine months ended September 27, 2002 and September 28, 2001 because their effects would have been anti-dilutive to the loss incurred by the Company. Therefore, the amounts reported for basic and diluted net loss per share were the same for the nine months ended September 27, 2002 and September 28, 2001. Potentially dilutive securities which were not included in the diluted loss per share calculation for the nine months ended September 27, 2002 and September 28, 2001 include 376,609 and 1,705,812 shares, respectively, of unvested common stock issued under employment agreements and 398,607 and 986,591 shares, respectively, of common stock issuable upon the exercise of stock options and warrants assuming the treasury stock method.

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Table of Contents

Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
3.    Reimbursable Expenses
 
During the first quarter of 2002, the Company adopted Emerging Issues Task Force Topic No. D-103, Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred. In accordance with the provisions of Topic No. D-103, reimbursements received from customers for out-of-pocket expenses incurred by employees are classified as revenue in the statement of operations. The Company has historically accounted for reimbursements received for out-of-pocket expenses incurred as a reduction to project personnel and expenses in the statement of operations. The statements of operations for the quarter and nine months ended September 28, 2001 were reclassified to comply with the guidance in Topic No. D-103. Adoption of the provisions had no impact on the reported net loss or net loss per share.
 
4.    Goodwill and Other Intangibles
 
Effective December 29, 2001, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are reviewed at least annually for impairment. Other intangible assets will continue to be amortized over their estimated useful lives. SFAS 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a “fair value” methodology versus an undiscounted cash flow method required under previous accounting rules. The Company evaluated the fair values of its reporting units utilizing various valuation techniques including discounted cash flow analysis. Based on the new method for recording impairment, the Company recognized a transitional impairment loss of $31.2 million as the cumulative effect of a change in accounting principle in the first quarter of 2002. This charge related to the Technology Integration reporting unit.
 
The new statement also requires that goodwill be tested for impairment on an annual basis and between annual tests in certain circumstances. The Company performed an impairment test primarily as a result of the decline in stock prices for the Company and its peer group during the quarter ended September 27, 2002 and recorded a non-cash impairment charge of $20.0 million. This charge related to the Technology Integration reporting unit.
 
Goodwill amortization for the quarter and nine months ended September 28, 2001 was $1.8 million and $5.1 million, respectively. The following schedule reconciles net loss and per share amounts for the quarter and nine months ended September 28, 2001, adjusted for SFAS 142 (in thousands, except per share data):
 
    
Quarter Ended
     
Nine Months Ended
  
    
September 27,
2002
     
September 28,
2001
     
September 27,
2002
     
September 28,
2001
  
Net loss as reported
   
$
(20,600
)
   
$
(2,195
)
   
$
(54,261
)
   
$
(2,330
)
Add back: Goodwill amortization
   
 
—  
 
   
 
1,810
 
   
 
—  
 
   
 
5,147
 
    
  
  
  
Adjusted net income (loss)
   
$
(20,600
)
   
$
(385
)
   
$
(54,261
)
   
$
2,817
 
    
  
  
  
Basic and diluted net income (loss) per share:
                                    
Net loss as reported
   
$
(0.44
)
   
$
(0.05
)
   
$
(1.17
)
   
$
(0.05
)
Goodwill amortization
   
 
—  
 
   
 
0.04
 
   
 
—  
 
   
 
0.11
 
    
  
  
  
Adjusted net income (loss) per share
   
$
(0.44
)
   
$
(0.01
)
   
$
(1.17
)
   
$
0.06
 
    
  
  
  

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Table of Contents

Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
5.    Restructuring Accrual
 
The Company recorded restructuring costs of $8.5 million in fiscal year 2001 for reduction in consultants and functional support personnel and for closure and consolidation of facilities and related exit costs. These actions were taken as a result of the continued decline in demand for technology services in 2001. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services.
 
The following table sets forth the detail and activity in the restructuring expense accrual during the nine months ended September 27, 2002 (in thousands):
 
      
Accrual Balance
at December 28,
2001
   
Expenditures
       
Accrual Balance
at September 27,
2002
Severance and other employee costs
     
$
1,153
   
$
(1,153
)
     
$
—  
Closure and consolidation of facilities and related exit costs
     
 
4,524
   
 
(2,177
)
     
 
2,347
      
  
    
Total restructuring accrual
     
$
5,677
   
$
(3,330
)
     
$
2,347
      
  
    
 
6.    Borrowings Under Credit Facility
 
In August 2002, the Company cancelled its $15.0 million revolving credit facility. At the time of cancellation and at all times throughout 2002 and 2001, there were no borrowings outstanding under the facility. Letters of credit of $2.6 million were outstanding under the agreement at the time of the cancellation. The Company has deposited $2.9 million with a financial institution as collateral for these letters of credit and has classified this cash as restricted on the accompanying consolidated balance sheet at September 27, 2002.
 
7.    Stock Options
 
On June 27, 2001, the Company filed with the Securities and Exchange Commission a Schedule TO describing a program offering a voluntary stock option exchange for the Company’s employees. The offering period for the stock option exchange ended on August 8, 2001. Under the program, employees holding nonqualified options to purchase the Company’s common stock or incentive stock options to purchase the Company’s common stock with an exercise price of $10.00 per share or more were given the opportunity to exchange their existing options for new options to purchase shares of the Company’s common stock equal in number to 66 2/3% of the number of options tendered and accepted for exchange. The new options were granted on February 9, 2002, which was six months and one day after acceptance of the old options for exchange and cancellation. The exercise price of the new options was $6.03, which was the last reported sale price of the Company’s common stock on the Nasdaq Stock Market’s National Market on February 8, 2002. Options for 4,400,893 shares were tendered on August 8, 2001 in the exchange program. On February 9, 2002, the Company granted 2,479,699 shares of the Company’s common stock in exchange for the shares tendered.
 
8.    Treasury Stock
 
On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to $5.0 million of Answerthink’s common stock. Under the repurchase plan, Answerthink may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of September 27, 2002, the Company had repurchased 777,200 shares of its common stock at an average price of $1.91 per share. The Company holds repurchased shares of its common stock as treasury stock and accounts for treasury stock under the cost method.

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Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
9.    Litigation
 
THINK New Ideas, Inc. (“THINK New Ideas”) and three of its former officers were defendants in a consolidated class action filed in federal court in New York. THINK New Ideas merged with Answerthink on November 5, 1999. This suit was previously described in Answerthink’s Annual Report on Form 10-K for the year ended December 28, 2001. On April 18, 2002, the parties reached an agreement in principle to settle this action. The Court held a hearing on September 13, 2002 and on September 16, 2002 entered an Order approving the settlement in all respects and dismissing the complaint with prejudice. The time for appeal has now expired and the settlement has become final. The full amount of the settlement has been paid by THINK New Ideas’ insurance carrier.
 
The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such other matters will not have a material adverse effect on the financial position or results of operations of the Company.
 
10.    New Accounting Pronouncement
 
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, (“SFAS 146”) Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of SFAS 146 will have a material impact on its consolidated financial statements.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report and the information incorporated by reference in it include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy and our financing plans are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Factors that impact such forward-looking statements include, among others, our ability to attract additional business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the information technology industry, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends, changes in general economic conditions, changes in demand for information technology spending and interest rates. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 28, 2001. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
 
OVERVIEW
 
Answerthink, Inc. is a leading business and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository of enterprise best practice metrics and business process knowledge, Answerthink’s business and technology solutions help clients significantly improve performance and maximize returns on technology investments. Answerthink’s capabilities include benchmarking, business transformation, business applications, technology integration and offshore application maintenance and support.
 
Critical Accounting Policies
 
Revenue Recognition
 
Revenues include all amounts that are billable to clients. Our revenues are derived from fees for services generated on a project-by-project basis. Revenues for services rendered are recognized on a time and materials basis based on the number of hours worked by our consultants at an agreed upon rate per hour or on a fixed-fee or capped-fee basis. Revenues related to time and material contracts are recognized in the period in which services are performed. Revenues related to fixed-fee or capped-fee contracts are recognized based on our evaluation of actual costs incurred to date compared to total estimated costs using the percentage of completion method of accounting. The cumulative impact of any revisions in estimated total revenues and direct contract costs are recognized in the period in which they become known. Unbilled revenues represent revenues for services performed that have not been billed. If we do not accurately estimate the resources required or the scope of the work to be performed, or we do not manage our projects properly within the planned periods of time or we do not meet our clients’ expectations under the contracts, then future consulting margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our results of operations. Revenues before reimbursements exclude reimbursable expenses charged to clients. Reimbursements, including those related to travel and out-of-pocket expenses, are included in revenues, and an equivalent amount of reimbursable expenses is included in project personnel and expenses.
 
The agreements entered into in connection with a project, whether time and materials based or fixed-fee or capped-fee based, are typically terminable by the client upon 30 days notice. Upon early termination of an engagement, the client is required to pay for all time, materials and expenses incurred by us through the effective date of the

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termination. In addition, provisions in some of the agreements we have with our clients limit our right to enter into business relationships with specific competitors of that client for a specific time period. These provisions typically prohibit us from performing a defined range of our services that we might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific employees or the specific project team.
 
Accounts Receivable and Allowances for Doubtful Accounts
 
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. Our management makes estimates of the uncollectibility of our accounts receivables. Management critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
Litigation and Contingencies
 
Litigation and contingencies are reflected in our consolidated financial statements based on management’s assessment, along with legal counsel, of the expected outcome from such litigation. If the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to earnings when determined.
 
Results of Operations
 
The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenues of such results:
 
   
Quarter Ended
  
Nine Months Ended
   
September 27, 2002
  
September 28, 2001
  
September 27, 2002
  
September 28, 2001
Revenues:
                                        
Revenues before reimbursements (Net revenues)
  
$
38,461 
  
89.6% 
  
$
60,016 
  
88.9% 
  
$
127,552 
  
88.7% 
  
$
197,307 
  
88.6% 
Reimbursements
  
 
4,444 
  
10.4% 
  
 
7,525 
  
11.1% 
  
 
16,189 
  
11.3% 
  
 
25,281 
  
11.4% 
   
 
 
 
 
 
 
 
Total revenues
  
 
42,905 
  
100.0% 
  
 
67,541 
  
100.0% 
  
 
143,741 
  
100.0% 
  
 
222,588 
  
100.0% 
Costs and expenses:
                                        
Project personnel and expenses:
                                        
Project personnel and expenses before reimbursable expenses
  
 
25,537 
  
59.5% 
  
 
36,955 
  
54.7% 
  
 
88,008 
  
61.2% 
  
 
123,004 
  
55.3% 
Reimbursable expenses
  
 
4,444 
  
10.4% 
  
 
7,525 
  
11.1% 
  
 
16,189 
  
11.3% 
  
 
25,281 
  
11.4% 
   
 
 
 
 
 
 
 
Total project personnel and expenses
  
 
29,981 
  
69.9% 
  
 
44,480 
  
65.8% 
  
 
104,197 
  
72.5% 
  
 
148,285 
  
66.6% 
Selling, general and administrative expenses
  
 
14,041 
  
32.7% 
  
 
22,122 
  
32.8% 
  
 
45,024 
  
31.3% 
  
 
70,123 
  
31.5% 
Impairment of goodwill
  
 
20,000 
  
46.6% 
  
 
—   
  
—   
  
 
20,000 
  
13.9% 
  
 
—   
  
—   
Stock compensation expense
  
 
—   
  
—   
  
 
211 
  
0.3% 
  
 
—   
  
—   
  
 
4,855 
  
2.2% 
   
 
 
 
 
 
 
 
Total costs and operating expenses
  
 
64,022 
  
149.2% 
  
 
66,813 
  
98.9% 
  
 
169,221 
  
117.7% 
  
 
223,263 
  
100.3% 
   
 
 
 
 
 
 
 
Income (loss) from operations
  
 
(21,117)
  
(49.2)%
  
 
728 
  
1.1% 
  
 
(25,480)
  
(17.7)%
  
 
(675)
  
(0.3)%
Other income:
                                        
Interest income, net
  
 
117 
  
0.3% 
  
 
208 
  
0.3% 
  
 
378 
  
0.3% 
  
 
859 
  
0.4% 
   
 
 
 
 
 
 
 
Income (loss) before income taxes
  
 
(21,000)
  
(48.9)%
  
 
936 
  
1.4% 
  
 
(25,102)
  
(17.4)%
  
 
184 
  
0.1% 
Income taxes
  
 
(400)
  
(0.9)%
  
 
3,131 
  
4.6% 
  
 
(2,041)
  
(1.4)%
  
 
2,514 
  
1.1% 
   
 
 
 
 
 
 
 
Loss before cumulative effect of change in accounting principle
  
 
(20,600)
  
(48.0)%
  
 
(2,195)
  
(3.2)%
  
 
(23,061)
  
(16.0)%
  
 
(2,330)
  
(1.0)%
Cumulative effect of change in accounting principle
  
 
—   
  
—  
  
 
—   
  
—   
  
 
(31,200)
  
(21.7)%
  
 
—   
  
—  
   
 
 
 
 
 
 
 
Net loss
  
$
(20,600)
  
(48.0)%
  
$
(2,195)
  
(3.2)%
  
$
(54,261)
  
(37.7)%
  
$
(2,330)
  
(1.0)%
   
 
 
 
 
 
 
 

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Revenues.    Revenues for the quarter ended September 27, 2002 decreased by $24.6 million or 36% compared to the quarter ended September 28, 2001. Revenues for the nine months ended September 27, 2002 decreased by $78.8 million or 35% compared to the nine months ended September 28, 2001. The decreases in revenues for the quarter and nine-month period were primarily attributable to a decrease in the number of customers and the average size of our projects resulting from the decreased demand for information technology services, principally in the interactive marketing and custom-web development areas, as well as lower revenues from our largest customer in conjunction with the completion of one of their more significant projects. Reimbursements as a percentage of total revenues during the quarters and nine months ended September 27, 2002 and September 28, 2001 were comparable at 10% and 11%, respectively, during the quarters and 11% during the nine-month periods.
 
Project Personnel and Expenses.    Project personnel costs and expenses consist of salaries, benefits and bonuses for consultants and reimbursable expenses associated with projects. Project personnel costs and expenses were $30.0 million in the quarter ended September 27, 2002, a decrease of $14.5 million or 33% compared to the quarter ended September 28, 2001. Project personnel costs and expenses were $104.2 million in the nine months ended September 27, 2002, a decrease of $44.1 million or 30% compared to the nine months ended September 28, 2001. These decreases were primarily due to the reduction in the number of consultants in order to balance workforce capacity with market demand for services. Consultant headcount was 735 as of September 27, 2002 compared to 1,180 as of September 28, 2001.
 
Project personnel and expenses as a percentage of revenues increased to 70% in the quarter ended September 27, 2002 from 66% in the comparable quarter of 2001. Project personnel and expenses as a percentage of revenues increased to 72% in the nine months ended September 28, 2002 from 67% in the comparable period of 2001. These increases were primarily the result of lower per hour billing rates charged to customers and a higher average cost per consultant attributable to a greater percentage of senior resources during the third quarter and first nine months of 2002 compared to the third quarter and first nine months of 2001.
 
Selling, General and Administrative.    Selling, general and administrative expenses decreased 37% to $14.0 million in the quarter ended September 27, 2002 from $22.1 million in the quarter ended September 28, 2001. Selling, general and administrative expenses decreased 36% to $45.0 million in the nine months ended September 27, 2002 from $70.1 million in the nine months ended September 28, 2001. The overall decreases in selling, general and administrative expenses were primarily due to our continued cost control initiatives, reduced discretionary spending and our adoption of Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets, which eliminated amortization expense of goodwill in 2002. Goodwill amortization in the third quarter and first nine months of 2001 was $1.8 million and $5.1 million, respectively. In addition to the change in goodwill amortization, we reduced functional support headcount, incurred lower recruiting, selling and bad debt expenses, and reduced property and facility expenses as a result of a decrease in the number of offices from 18 at the end of the third quarter of 2001 to 12 at the end of the third quarter of 2002. Sales and functional support headcount was 127 as of September 27, 2002 compared to 209 as of September 28, 2001. Selling, general and administrative expenses as a percentage of revenues were comparable between the third quarters of 2002 and 2001 at 33% and the first nine months of 2002 and 2001 at 31% and 32%, respectively.
 
Impairment of Goodwill and Cumulative Effect of Change in Accounting Principle.    We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, during the first quarter of 2002. The new accounting rule eliminates the amortization of goodwill and changes the method of determining whether there is a goodwill impairment from an undiscounted cash flow method to a fair value method. As a result of the adoption of this standard, we incurred a non-cash transitional impairment charge of $31.2 million in the first quarter of 2002 due to the cumulative effect of a change in accounting principle. This charge related to the Technology Integration reporting unit. The new statement also requires that goodwill be tested for impairment on an annual basis and between annual tests in certain circumstances. We performed an impairment test primarily as a result of the decline in our stock price and that of our peer group during the quarter ended September 27, 2002 and recorded a non-cash impairment charge of $20.0 million. This charge related to the Technology Integration reporting unit.
 
Stock Compensation Expense.    Stock compensation expense in 2001 primarily related to the granting of stock options to participants in our Employee Stock Purchase Plan. These stock options were granted in lieu of the Employee Stock Purchase Plan shares that could not be issued because the plan was oversubscribed for the purchase periods ending on December 31, 2000 and June 30, 2001. We recorded a non-cash compensation charge of $4.2 million in the nine months ended September 28, 2001 based on the vesting provision of the options for the difference between the fair market value of the stock on the option grant date and the exercise price.

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Income Taxes.    Our effective tax rate for the first nine months of 2002 was 8.1% compared to an effective tax rate of 1,366% for the comparable period of 2001. The low effective tax rate for the first nine months of 2002 was primarily due to the $20.0 million charge for the impairment of goodwill which was not deductible for tax purposes. Excluding this charge, our income tax rate would have been 40%. The high effective tax rate for 2001 was the result of the impact of permanent differences on a very low level of pretax income. Our effective tax rate may vary from period to period based on changes in our estimated annual taxable income or loss.
 
Liquidity and Capital Resources
 
We have funded our operations primarily with cash flow generated from operations and the proceeds from our initial public offering. At September 27, 2002, we had approximately $61.4 million (including $2.9 million of restricted cash) in cash and cash equivalents compared to $59.9 million at December 28, 2001.
 
In August 2002, we cancelled our $15.0 million revolving credit facility. At the time of cancellation and at all times throughout 2002 and 2001, we had no borrowings outstanding under the facility. Letters of credit of $2.6 million were outstanding under the agreement at the time of the cancellation. We have deposited $2.9 million with a financial institution as collateral for these letters of credit and have classified this cash as restricted on the accompanying consolidated balance sheet at September 27, 2002.
 
Net cash provided by operating activities was $614,000 for the nine months ended September 27, 2002 compared to $8.8 million provided by operating activities during the comparable period of 2001. During the nine months ended September 27, 2002, net cash provided by operating activities was primarily attributable to a $10.2 million decrease in accounts receivable and unbilled revenue and our net loss adjusted for the non-cash expenses which include the impact of adopting SFAS 142, impairment of goodwill, depreciation and deferred income taxes. These effects were partially offset by a $9.7 million decrease in accrued expenses and other liabilities and a $3.6 million increase in prepaid expenses and other assets. During the nine months ended September 28, 2001, net cash provided by operating activities was primarily attributable to an $8.1 million decrease in accounts receivable and unbilled revenue and our net loss adjusted for the non-cash expenses which include depreciation and amortization, non-cash compensation expense, provision for doubtful accounts and deferred income taxes. These effects were partially offset by a $9.0 million decrease in accrued expenses and other liabilities, a $5.4 million decrease in media payable and a $3.0 million decrease in accounts payable. Media payables represent media placement costs owed to media providers on behalf of our customers. Amounts in media payables which have been billed to our customers are included in other receivables. The level of media payables and the related receivables will vary with the timing of our customers’ media campaigns.
 
Net cash used in investing activities was $6.6 million for the nine months ended September 27, 2002 compared to $10.4 million used during the comparative period of 2001. The uses of cash for investing activities in 2002 were attributable to $3.5 million of purchases of property and equipment, an increase in restricted cash of $2.9 million and $236,000 used in the acquisition of Exult Process Intelligence Center, a business unit of Exult, Inc., in February 2002. The use of cash in investing activities in 2001 was $8.3 million for purchases of property and equipment and $2.1 million used in the acquisition of businesses.
 
Net cash provided by financing activities was $4.6 million for the nine months ended September 27, 2002 compared to $3.4 million provided during the comparable period of 2001. The source of cash from financing activities during 2002 and 2001 was from the sale of common stock as a result of exercises of stock options as well as the sale of stock through our Employee Stock Purchase Plan, offset by repurchases of common stock of $1.5 million in 2002.
 
On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our common stock. Under the repurchase plan, we may buy back shares of our outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of September 27, 2002, we had repurchased 777,200 shares of our common stock at an average price of $1.91 per share. We hold repurchased shares of our common stock as treasury stock and account for treasury stock under the cost method.
 
We currently believe that available funds and cash flows generated by operations, if any, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We may decide to raise additional funds in order to fund expansion, to develop new or enhanced products and services, to respond to competitive pressures or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired on terms favorable to us or at all.

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New Accounting Pronouncement
 
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, (“SFAS 146”) Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. We do not believe that the adoption of SFAS 146 will have a material impact on our consolidated financial statements.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments, which would require disclosure under this item.
 
Item 4.    Controls and Procedures
 
Within ninety days prior to the filing of this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective in timely bringing to their attention material information related to Answerthink required to be included in the our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II—OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
THINK New Ideas, Inc. (“THINK New Ideas”) and three of its former officers were defendants in a consolidated class action filed in federal court in New York. THINK New Ideas merged with Answerthink on November 5, 1999. This suit was previously described in Answerthink’s Annual Report on Form 10-K for the year ended December 28, 2001. On April 18, 2002, the parties reached an agreement in principle to settle this action. The Court held a hearing on September 13, 2002 and on September 16, 2002 entered an Order approving the settlement in all respects and dismissing the complaint with prejudice. The time for appeal has now expired and the settlement has become final. The full amount of the settlement has been paid by THINK New Ideas’ insurance carrier.
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a)    Exhibits
 
See Index to Exhibits on page 19, which is incorporated herein by reference.
 
The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
 
(b)    Reports on Form 8-K
 
No reports on Form 8-K were filed by Answerthink during the quarter ended September 27, 2002.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
Answerthink, Inc.
Date: November 12, 2002
      
    /s/ John F. Brennan
           
  John F. Brennan
    Executive Vice President and Chief Financial Officer

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CERTIFICATIONS
 
I, Ted A. Fernandez, certify that:
 
1.      I
 
have reviewed this quarterly report on Form 10-Q of Answerthink, Inc.;
 
2.
 
Based on my knowledge, this quarterly 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 quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly 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 quarterly report whether or not 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: November 12, 2002
      
    /s/ Ted A. Fernandez
           
  Ted A. Fernandez
    Chairman and Chief Financial Officer
    Answerthink, Inc.

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Table of Contents
 
I, John F. Brennan, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Answerthink, Inc.;
 
2.
 
Based on my knowledge, this quarterly 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 quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly 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 quarterly report whether or not 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: November 12, 2002
      
/s/    John F. Brennan
           
John F. Brennan
Executive Vice President and Chief Financial Officer
Answerthink, Inc.

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INDEX TO EXHIBITS
 
Exhibit No.
   
Exhibit Description
   3.1+
   
Second Amended and Restated Articles of Incorporation of the Registrant, as amended
   3.2+
   
Amended and Restated Bylaws of the Registrant, as amended
99.1
   
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002
99.2
   
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002
+
 
Incorporated herein by reference to the Company’s Form 10-K for the year ended December 29, 2000

19