HACKETT GROUP, INC. - Quarter Report: 2005 September (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2005

OR

For the transition period from              to             

Commission File Number 0-24343

Answerthink, Inc.

(Exact name of Registrant as specified in its charter)

(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 by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Securities Exchange Act of 1934).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

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 28, 2005, there were 44,114,680 shares of common stock outstanding.

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Answerthink, Inc.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Answerthink, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

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Answerthink, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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Answerthink, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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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 31, 2004 included in the Annual Report on 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 30, 2005 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

2. Pro Forma Impact of Employee Stock Option Plans

The Company applies Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, in accounting for its stock option plans related to the grant of stock options and stock-based awards to employees (including independent directors). In accordance with APB Opinion No. 25, compensation expense, if any, is generally based on the difference between the exercise price of an option, or the amount paid for an award, and the market price or fair value of the underlying common stock at the date of the award or at the measurement date for variable awards. Stock-based compensation arrangements involving non-employees are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, under which such arrangements are accounted for based on the fair value of the option or award.

Under SFAS No. 123, compensation cost for the Company’s stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Had the Company adopted SFAS No. 123 in accounting for its stock option plans, the Company’s consolidated net income (loss) and net income (loss) per share for the quarters and nine months ended September 30, 2005 and October 1, 2004 would have been adjusted to the pro forma amounts indicated as follows (in thousands, except per share data):

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3. Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. With regard to restricted stock units issued to employees, the calculation includes only shares related to the vested portion of such restricted stock units.

Diluted net income per common share is computed by dividing net income 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 and nine months ended September 30, 2005, potentially dilutive securities included 2,621,266 shares and 3,534,791 shares, respectively, of shares underlying unvested restricted stock units issued to employees and 216,857 shares and 228,880 shares, respectively, of common stock issuable upon the exercise of stock options and warrants following the treasury stock method. Potentially dilutive securities for the quarter and nine months ended October 1, 2004 included 3,618,463 shares and 3,628,691 shares, respectively, of shares underlying unvested restricted stock units issued to employees and 441,268 shares and 769,122 shares, respectively, of common stock issuable upon the exercise of stock options and warrants following the treasury stock method.

4. Comprehensive Income

The Company accounts for comprehensive income under SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is summarized below (in thousands):

5. Accounts Receivable and Unbilled Revenue, Net

Accounts receivable and unbilled revenues, net consists of the following (in thousands):

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

6. Restructuring Accrual

The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions 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 to better align the Company’s overall cost structure and organization with anticipated demand for services throughout 2001 and 2002. In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease excess facilities. Also in the second quarter of 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the consolidated statement of operations. In 2005, the Company negotiated a buyout of the Company’s New York City lease obligation. In connection with this transaction, the Company recorded additional restructuring costs of $1.1 million to increase existing reserves. As a result of the buyout the Company was fully released during the second quarter of 2005, from $20 million of future lease obligations and the Company assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor.

The following table sets forth the detail and activity in the restructuring expense accrual during the nine months ended September 30, 2005 (in thousands):

2001 Restructuring Accrual

2002 Restructuring Accrual

7. Shareholders’ Equity

Stock Plans

As of September 30, 2005 and October 1, 2004, the Company had 2,378,768 and 3,610,830 restricted stock units outstanding, respectively. The Company recorded compensation expense totaling $817 thousand and $599 thousand, respectively, during the quarters ended September 30, 2005 and October 1, 2004, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. During the nine months ended September 30, 2005 and October 1, 2004, the Company recorded $2.1 million and $1.8 million, respectively, of compensation expense based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. As of September 30, 2005, the Company had 169,295 outstanding stock options which are accounted for under variable plan accounting pursuant to FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The weighted average exercise price of these outstanding options is $3.96. Variable plan accounting resulted in stock compensation expense of approximately $31 thousand and $112 thousand for the quarter ended September 30, 2005 and the nine months ended October 1, 2004, respectively, and a reduction in stock compensation expense of $49 thousand and $2 thousand for the nine months ended September 30, 2005 and the quarter ended October 1, 2004, respectively.

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. Shareholders’ Equity (continued)

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. In 2003, 2004 and the second quarter of 2005 the Board of Directors approved the repurchase of an additional $25 million of the Company’s common stock, thereby increasing the total program size to $30 million. Under the repurchase plans, the Company 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. During the quarter ended September 30, 2005, the Company did not repurchase any shares of its common stock. As of September 30, 2005, the Company had repurchased 6,534,155 shares of its common stock at an average price of $3.39 per share.

Common stock

The delivery of 438,751 shares of our common stock classified as issued as of September 30, 2005 in the accompanying balance sheet was deferred by employees entitled to receive these shares in connection with the vesting of restricted stock units. The shares will be delivered to the employees at the expiration of the deferral period elected by the employees or upon their termination of employment.

8. Litigation

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 matters will not have a material adverse effect on the financial position or results of operations of the Company.

9. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004), Share-Based Payment, (“SFAS 123R”). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. The Company will be required to adopt SFAS 123R in the first quarter of 2006 and has not yet determined which fair-value method and transitional provision it will follow, or if the adoption of SFAS 123R will have a significant impact on its results of operations.

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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, our financing plans and forecasted demographic and economic trends relating to our business and industry 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 effectively integrate acquisitions into our operations, 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 and changes in general economic conditions 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 31, 2004. 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 advisory 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, our business and technology solutions help clients improve performance and maximize returns on technology investments. Our capabilities include benchmarking, business advisory, business transformation, business applications, business intelligence, and offshore application development and support.

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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:

        Revenues. Revenues for the quarter ended September 30, 2005 increased by $2.9 million or 8% to $40.0 million from $37.1 million in the quarter ended October 1, 2004. Revenues for the nine months ended September 30, 2005 increased $8.7 million or 8% to $118.6 million from $109.9 million in the nine months ended October 1, 2004. The increase in revenues for the quarter and nine months ended September 30, 2005 was primarily attributable to increased revenue from benchmarking and membership advisory program sales and related transformation advisory services and increased revenue from our Hyperion implementation practice. Additionally, the acquisition of EZCommerce, a dual shore ERP implementation company, in May 2004 contributed to the increase in revenues for the nine months ended September 30, 2005. These impacts were partially offset by a decline in ERP and custom business intelligence revenues due to increased price competition from offshore suppliers. Reimbursements as a percentage of revenues during the quarters and nine months ended September 30, 2005 and October 1, 2004 were comparable at 10%. During the quarter and nine months ended September 30, 2005, one customer had revenues equal to or greater than 5% of total revenues, accounting for 6% of revenues. During the quarter and nine months ended October 1, 2004, one customer had revenues greater than 5% of total revenues, accounting for 6% and 8% of revenues during those periods, respectively. With respect to our largest customer in 2005, our contracts can be cancelled for convenience by the customer upon 30 days’ notice. Our projects with this customer expire on various dates ranging from November 2005 to July 2006. We do not anticipate any credit and/or collection issues with this customer. As is customary with most of our significant relationships, we may be able to continue with new and follow-on projects as these initiatives progress into subsequent phases. However, there is no assurance that we will be able to renew these contracts. The cancellation or significant reduction in the use of services from this key customer could have a material adverse effect on our results of operations.

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Project Personnel and Expenses. Project personnel costs and expenses primarily consist of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Project personnel costs and expenses were $23.5 million in the quarter ended September 30, 2005 which is comparable to $23.6 million in the quarter ended October 1, 2004. Consultant headcount was 601 as of September 30, 2005 compared to 600 as of October 1, 2004. Project personnel costs and expenses were $72.0 million in the nine months ended September 30, 2005 an increase of $3.7 million or 5% compared to the nine months ended October 1, 2004. This increase was primarily attributable to the increase in the average number of consultants in order to balance workforce capacity with market demand for services. Average consultant headcount was 577 and 550, respectively, for the nine months ended September 30, 2005 and October 1, 2004.

Project personnel and expenses as a percentage of revenues was 59% for the quarter ended September 30, 2005, a decrease from 64% in the quarter ended October 1, 2004. The decrease was primarily the result of higher revenue per consultant during the quarter ended September 30, 2005 due to an increase in the average gross billing rate per hour to $194 in the quarter ended September 30, 2005 from $174 in the quarter ended October 1, 2004. The rate increase is a result of our continuing shift in mix to higher rate benchmarking and membership advisory programs and related transformation advisory services and launch of the new fixed priced transformation advisory programs in March 2005 sold under the Hackett brand. Utilization was comparable at 67% for the quarters ended September 30, 2005 and October 1, 2004. Project personnel and expenses as a percentage of revenues was 61% for the nine months ended September 30, 2005 a decrease from 62% for the nine month ended October 1, 2004 as average higher gross billing rates in 2005 were partially offset by average lower utilization of consultants. Average gross billing rates for the nine months ended September 30, 2005 and October 1, 2004 were $189 and $177, respectively. Utilization approximated 69% for the nine months ended September 30, 2005 and 71% for the nine months ended October 1, 2004.

Selling, General and Administrative. Selling, general and administrative expenses increased 13% to $13.6 million in the quarter ended September 30, 2005 from $12.1 million in the quarter ended October 1, 2004. Selling, general and administrative expenses increased 16% to $42.0 million in the nine months ended September 30, 2005 from $36.1 million in the nine months ended October 1, 2004. Selling, general and administrative expenses as a percentage of revenues were 34% and 33% and 36% and 33%, respectively, during the quarters and nine months ended September 30, 2005 and October 1, 2004. The overall increases in selling, general and administrative expenses were primarily attributable to the acquisition of EZCommerce, increased legal and recruiting expenses and additional sales personnel and related commissions to accommodate the growth in our benchmarking, membership advisory programs, transformation advisory and Hyperion implementation services. These impacts were partially offset by lower bad debt expense.

Restructuring Costs. We recorded restructuring costs of $1.1 million in the first quarter of 2005 to increase previously established reserves in order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, we were fully released from $20 million of future lease obligations and we assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. We recorded restructuring costs of $3.7 million for the nine months ended October 1, 2004 to increase previously established reserves recorded for the closure and consolidation of facilities. Existing reserves were increased to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Also in 2004, the restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the consolidated statement of operations for the nine months ended October 1, 2004.

Stock Compensation Expense. As of September 30, 2005 and October 1, 2004, we had 2,378,768 and 3,610,830 restricted stock units outstanding, respectively. We recorded non-cash compensation expense of $817 thousand and $599 thousand, respectively, during the quarters ended September 30, 2005 and the October 1, 2004, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. During the nine months ended September 30, 2005 and October 1, 2004, the Company recorded $2.1 million and $1.8 million, respectively, of compensation expense based on the vesting provisions of the restricted stock units and the fair value of the stock on the grant date. In addition, as of September 30, 2005, we had 169,295 outstanding stock options accounted under variable plan accounting pursuant to FASB Interpretation No. 28. Variable plan accounting resulted in stock compensation expense of $31 thousand and $112 thousand for the quarter ended September 30, 2005 and the nine months ended October 1, 2004, respectively, and a reduction in stock compensation expense of $49 thousand and $2 thousand for the nine months ended September 30, 2005 and the quarter ended October 1, 2004, respectively.

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Income Taxes. We recorded income tax expenses of $155 thousand and $73 thousand for the nine months ended September 30, 2005 and October 1, 2004, respectively, which represented effective tax rates of 8% and 26%, respectively, of pre-tax losses for certain state and foreign taxes. The estimated annual effective tax rates include an income tax benefit attributable to a decrease in the valuation allowance as a result of the expected utilization of tax net operating loss carryforwards in 2005 and 2004. The liability method of accounting for deferred income taxes requires that a change in the valuation allowance for deferred tax assets be included in income tax expense or benefit for the current year.

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 30, 2005, we had $30.6 million in cash and cash equivalents compared to $38.9 million at December 31, 2004. At September 30, 2005 and December 31, 2004, we had $600 thousand and $3.0 million, respectively, on deposit with a financial institution as collateral for letters of credit and have classified these as restricted cash on the accompanying consolidated balance sheets. We also had marketable investments of $9.9 million at September 30, 2005 and December 31, 2004.

There were no material capital commitments at September 30, 2005. The following summarizes our lease commitments under non-cancelable operating leases for premises at September 30, 2005 (in thousands):

Net cash used in operating activities was $3.2 million for the nine months ended September 30, 2005 compared to $839 thousand during the comparable period of 2004. During the nine months ended September 30, 2005, net cash used in operating activities was primarily attributable to increases of $10.5 million in accounts receivable and unbilled revenue and $401 thousand in prepaid expenses and other assets and a decrease of $1.0 million in accrued expenses and other liabilities. These effects were partially offset by our net income of $1.9 million, non-cash expenses of $6.1 million and an increase in accounts payable of $818 thousand. Non-cash expenses included depreciation and amortization, provision for doubtful accounts and non-cash compensation expense. During the nine months ended October 1, 2004, net cash used in operating activities was primarily attributable to a $6.3 million increase in accounts receivable and unbilled revenue, and decreases of $1.8 million in accrued expenses and other liabilities and $365 thousand in accounts payable. These effects were partially offset by net income of $582 thousand, non-cash expenses of $6.3 million and a decrease of $676 thousand in prepaid expenses and other assets.

Net cash used in investing activities was $976 thousand for the nine months ended September 30, 2005 compared to $29.0 million used during the comparative nine months of 2004. The uses of cash for investing activities in 2005 were primarily attributable to purchases of $27.9 million of marketable investments, $2.2 million used for business acquisitions and $1.1 million for purchases of property and equipment, partially offset by $27.9 million of proceeds from calls, sales and maturities of marketable investments and a $2.4 million decrease in restricted cash. The uses of cash for investing activities in 2004 were primarily attributable to the purchases of $35 million of marketable investments, $6.1 million used in the acquisition of a business, and $2.9 million for purchases of property and equipment, partially offset by $15 million of proceeds from calls, sales and maturities of marketable investments.

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Net cash used in financing activities was $4.2 million for the nine months ended September 30, 2005 compared to $6.0 million for the comparable period of 2004. During the nine months ended September 30, 2005, cash used in financing activities was attributable to the repurchase of $3.9 million of our common stock and $1.2 for payment of employee withholding tax related to restricted stock units, partially offset by proceeds of $940 thousand from the sale of stock as a result of exercises of stock options and the sale of stock through our employee stock purchase plan. During the nine months ended October 1, 2004, cash used in financing activities was primarily for the repurchase of $8.2 million of our common stock, partially offset by proceeds of $2.1 million from the sale of stock as a result of exercises of stock options as well as the sale of stock through our employee stock purchase plan.

On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our common stock. In 2003 and 2004, and the second quarter of 2005 our Board of Directors approved the repurchase of an additional $25.0 million of our common stock, thereby increasing the total program size to $30 million. Under the repurchase plans, we may buy back shares of our outstanding common 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 30, 2005, we had repurchased 6,534,155 shares of our common stock at an average price of $3.39 per share.

We currently believe that available funds and cash flows generated by operations 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.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004), Share-Based Payment, (“SFAS 123R”). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. We will be required to adopt SFAS 123R in the first quarter of 2006 and have not yet determined which fair-value method and transitional provision we will follow, or if the adoption of SFAS 123R will have a significant impact on our results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 30, 2005, our exposure to market risk related primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term variable interest rate securities. We invest only with high credit quality issuers and we do not use derivative financial instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) pursuant to Rule 13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934. Based upon that evaluation, the CEO and CFO concluded that our Disclosure Controls are effective in timely alerting them to material information required to be included in our periodic SEC filings.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are 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 matters will not have a material adverse effect on our financial position or results of operations.

Item 5. Other Information

On November 9, 2005, the Company, with the approval of the Audit Committee, entered into an employment agreement with Grant M. Fitzwilliam, effective as of August 11, 2005, the date that Mr. Fitzwilliam assumed the title and role as the Company’s Executive Vice President and Chief Financial Officer. Mr. Fitzwilliam’s employment agreement has a three-year term (with an automatic renewal, for one additional year thereafter on each subsequent anniversary unless either party gives contrary notice) and provides for a current annual salary of $275,000, plus a bonus pursuant to a bonus plan to be adopted by the Board of Directors for each fiscal year. The Company’s employment agreement with Mr. Fitzwilliam contains provisions regarding confidentiality, proprietary information and work product, non-competition and non-solicitation. A copy of Mr. Fitzwilliam’s employment agreement is filed as Exhibit 10-6 hereto. Also, on November 9, 2005, the Company’s Compensation Committee approved a compensation plan for fiscal year 2005 for its Chief Financial Officer. This plan provides for annual cash bonuses and equity awards subject to the achievement of pre-established pro-forma earnings targets levels which relate to an operating plan that has been approved by the Board of Directors. These targets were established in connection with the implementation of the 2005 compensation plan for its Chief Executive Officer and Chief Operating Officer that were disclosed in a Form 8-K filed June 16, 2005. Any equity award will be subject to limits on the dilution caused by such grants based on the level of targets, and thus Company performance, achieved and the fair market value of our Common Stock on the date of such awards.

Item 6. Exhibits

See Index to Exhibits on page 17, which is incorporated herein by reference.

The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.

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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.

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INDEX TO EXHIBITS

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