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HACKETT GROUP, INC. - Quarter Report: 2006 September (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

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 29, 2006

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

Incorporation or organization)

 

(I.R.S. Employer

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 by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨    Accelerated Filer  x    Non-Accelerated Filer  ¨

Indicate by check mark whether 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 27, 2006, there were 44,580,491 shares of common stock outstanding.

 



Table of Contents

Answerthink, Inc.

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets as of September 29, 2006 (unaudited) and December 30, 2005

   3

Consolidated Statements of Operations for the Quarters and Nine Months Ended September 29, 2006 and September 30, 2005 (unaudited)

   4

Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2006 and September 30, 2005 (unaudited)

   5

Notes to Consolidated Financial Statements

   6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   23

Item 4. Controls and Procedures

   23

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

   25

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

   25

Item 6. Exhibits

   25

SIGNATURES

   26

INDEX TO EXHIBITS

   27

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Answerthink, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

     September 29,
2006
    December 30,
2005
(Restated)
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 15,468     $ 18,103  

Marketable investments

     4,984       9,902  

Restricted cash

     —         3,657  

Accounts receivable and unbilled revenue, net of allowance of $2,191 and $1,766 at September 29, 2006 and December 30, 2005

     39,166       41,928  

Prepaid expenses and other current assets

     2,704       3,273  
                

Total current assets

     62,322       76,863  

Restricted cash

     600       600  

Property and equipment, net

     5,432       6,304  

Other assets

     4,380       6,422  

Goodwill, net

     66,236       61,692  
                

Total assets

   $ 138,970     $ 151,881  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 4,620     $ 6,319  

Accrued expenses and other liabilities

     31,261       39,594  

Loan payable

     —         3,657  
                

Total current liabilities

     35,881       49,570  

Accrued expenses and other liabilities, non-current

     4,503       3,272  
                

Total liabilities

     40,384       52,842  
                

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: 52,414,841 shares at September 29, 2006; 51,020,343 shares at December 30, 2005

     52       51  

Additional paid-in capital

     278,554       274,746  

Treasury stock, at cost, 7,157,655 shares at September 29, 2006 and 6,534,155 shares at December 30, 2005

     (23,867 )     (22,119 )

Accumulated deficit

     (157,294 )     (153,655 )

Accumulated other comprehensive income

     1,141       16  
                

Total shareholders’ equity

     98,586       99,039  
                

Total liabilities and shareholders’ equity

   $ 138,970     $ 151,881  
                

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 29,
2006
    September 30,
2005
(Restated)
    September 29,
2006
    September 30,
2005
(Restated)
 

Revenues:

        

Revenues before reimbursements

   $ 39,006     $ 36,171     $ 127,852     $ 106,789  

Reimbursements

     4,546       3,834       14,527       11,788  
                                

Total revenues

     43,552       40,005       142,379       118,577  

Costs and expenses:

        

Cost of service:

        

Personnel costs before reimbursable expenses (includes $269 and $210, and $736 and $473 of stock compensation expense in the quarters and nine months ended September 29, 2006 and September 30, 2005, respectively)

     22,646       19,910       73,637       60,712  

Reimbursable expenses

     4,546       3,834       14,527       11,788  
                                

Total cost of service

     27,192       23,744       88,164       72,500  

Selling, general and administrative costs (includes $746 and $695, and $2,500 and $1,717 of stock compensation expense in the quarters and nine months ended September 29, 2006 and September 30, 2005, respectively)

     15,709       14,314       50,574       43,755  

Restructuring costs

     —         —         6,313       1,134  

Loss from misappropriation

     24       277       326       801  
                                

Total costs and operating expenses

     42,925       38,335       145,377       118,190  
                                

Income (loss) from operations

     627       1,670       (2,998 )     387  

Other income (expense):

        

Interest income

     116       346       469       930  

Interest expense

     (21 )     (12 )     (164 )     (52 )
                                

Income (loss) before income taxes

     722       2,004       (2,693 )     1,265  

Income taxes

     249       174       946       155  
                                

Net income (loss)

   $ 473     $ 1,830     $ (3,639 )   $ 1,110  
                                

Basic net income (loss) per common share:

        

Net income (loss) per common share

   $ 0.01     $ 0.04     $ (0.08 )   $ 0.03  

Weighted average common shares outstanding

     44,884       43,912       44,676       43,379  

Diluted net income (loss) per common share:

        

Net income (loss) per common share

   $ 0.01     $ 0.04     $ (0.08 )   $ 0.02  

Weighted average common and common equivalent shares outstanding

     45,532       44,947       44,676       45,322  

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 29,
2006
    September 30,
2005
(Restated)
 

Cash flows from operating activities:

    

Net income (loss)

   $ (3,639 )   $ 1,110  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Write-off of leasehold improvements

     715       —    

Depreciation and amortization

     4,168       3,590  

Provision for doubtful accounts

     552       303  

Non-cash compensation expense

     3,236       2,190  

Changes in assets and liabilities, net of effects from acquisitions:

    

Decrease (increase) in accounts receivable and unbilled revenue

     2,211       (10,520 )

Decrease (increase) in prepaid expenses and other assets

     344       (401 )

Increase (decrease) in accounts payable

     (1,699 )     818  

Increase (decrease) in accrued expenses and other liabilities

     1,523       (240 )
                

Net cash provided by (used in) operating activities

     7,411       (3,150 )

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,748 )     (1,139 )

Decrease in restricted cash

     3,657       2,400  

Purchases of marketable investments

     —         (27,900 )

Proceeds from calls, sales and maturities of marketable investments

     5,000       27,900  

Cash used in acquisition of businesses, net of cash acquired

     (10,481 )     (2,237 )
                

Net cash used in investing activities

     (3,572 )     (976 )

Cash flows from financing activities:

    

Repayments of borrowings

     (1,101 )     —    

Repayment of loan payable

     (3,657 )     —    

Proceeds from issuance of common stock

     756       940  

Payment of employee withholding tax related to restricted stock units

     (725 )     (1,168 )

Repurchases of common stock

     (1,747 )     (3,941 )
                

Net cash used in financing activities

     (6,474 )     (4,169 )
                

Net decrease in cash and cash equivalents

     (2,635 )     (8,295 )

Cash and cash equivalents at beginning of period

     18,103       38,890  
                

Cash and cash equivalents at end of period

   $ 15,468     $ 30,595  
                

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

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Restatement

As described in the Company’s Current Report on Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the UK. The Company initiated a review of the matter, and has concluded that the loss resulting from the misappropriation was approximately $2.2 million of which $0.3 million relates to 2006 as described below. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million, and the write-off of funds owed back to the Company from the agent of approximately $0.3 million. The Company’s Audit Committee also initiated a review of the matter. That review is now complete.

The former disbursement agent admitted to the full extent of the misappropriation. A suit was commenced against the former disbursement agent in the UK on October 27, 2006. The Company and the former disbursement agent have agreed to settlement terms that, if satisfied, would include the full repayment of the misappropriation. In connection with the settlement, the agent made an initial cash payment to the Company in January 2007 of $0.4 million and has agreed to make additional payments to the Company on or before August 31, 2007 that, when taken together with the initial payment, approximate $2.5 million (at current foreign currency exchange rates). If the payments are not received by this date, the Company can foreclose certain assets pledged by the agent. The agent has guaranteed to pay any amount by which the initial payment, additional cash payments and the net proceeds from the sale of the pledged assets fall below approximately $2.5 million (at current foreign currency exchange rates). This shortfall amount would be repaid in annual installments of not less than approximately $0.1 million per year (at current foreign currency exchange rates) beginning in 2007, together with interest thereon accruing from January 1, 2008. The Company cannot predict the outcome of whether the former disbursement agent will satisfy the terms of the settlement agreement. Due to this uncertainty, any amounts recovered as a result of the Company’s claim have been and will be accounted for as income in the period collected.

Effects of Restatement

The following tables set forth the effects of the restatement relating to the aforementioned misappropriation on affected line items within financial statements previously reported:

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Restatement (continued)

Consolidated Statements of Operations Impact

The following table reconciles the Company’s previously reported results to the restated consolidated statements of operations for the quarters and nine months ended September 30, 2005. The loss from misappropriation had no effect on the income tax provision in the consolidated statements of operations.

ANSWERTHINK, INC.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

    

Quarter Ended September 30, 2005

   

Nine Months Ended September 30, 2005

 
     As Previously
Reported
    Adjustments     As
Restated
    As Previously
Reported
    Adjustments     As
Restated
 

Total revenues

   $ 40,005     $ —       $ 40,005     $ 118,577     $ —       $ 118,577  
                                                

Total cost of service

     23,744       —         23,744       72,500       —         72,500  

Selling, general and administrative costs

     14,314       —         14,314       43,755       —         43,755  

Restructuring costs

     —         —         —         1,134       —         1,134  

Loss from misappropriation

     —         277       277       —         801       801  
                                                

Total costs and operating expenses

     38,058       277       38,335       117,389       801       118,190  
                                                

Income (loss) from operations

     1,947       (277 )     1,670       1,188       (801 )     387  
                                                

Other income (expense):

            

Interest income

     346       —         346       930       —         930  

Interest expense

     (12 )     —         (12 )     (52 )     —         (52 )
                                                

Income (loss) before income taxes

     2,281       (277 )     2,004       2,066       (801 )     1,265  

Income taxes

     174       —         174       155       —         155  
                                                

Net income (loss)

   $ 2,107     $ (277 )   $ 1,830     $ 1,911     $ (801 )   $ 1,110  
                                                

Basic net income (loss) per common share:

            

Net income (loss) per common share

     0.05       (0.01 )     0.04       0.04       (0.01 )     0.03  

Diluted net income (loss) per common share:

            

Net income (loss) per common share

     0.05       (0.01 )     0.04       0.04       (0.02 )     0.02  

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Restatement (continued)

Consolidated Balance Sheets Impact

The following table reconciles the consolidated balance sheets previously reported in the Original 10-Q Filing to the restated amounts as of December 30, 2005:

ANSWERTHINK, INC.

Consolidated Balance Sheets

(in thousands, except share data)

 

     December 30, 2005  
    

As Previously

Reported

    Adjustments    

As

Restated

 

ASSETS

      

Total current assets

   $ 76,863     $ —       $ 76,863  

Total other assets

     75,018       —         75,018  
                        

Total assets

     151,881       —         151,881  
                        

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

     6,319       —         6,319  

Accrued expenses and other liabilities

     37,751       1,843       39,594  

Loan payable

     3,657       —         3,657  
                        

Total current liabilities

     47,727       1,843       49,570  

Accrued expenses and other liabilities, non-current

     3,272       —         3,272  
                        

Total liabilities

     50,999       1,843       52,842  
                        

Shareholders’ equity:

      

Preferred stock, $.001 par value, 1,250,000 shares authorized, none issued and outstanding

     —         —         —    

Common stock, $.001 par value, authorized 125,000,000 shares; issued: 51,020,343 shares at December 30, 2005

     51       —         51  

Additional paid-in capital

     282,749       —         282,749  

Unearned compensation

     (8,003 )     —         (8,003 )

Treasury stock, at cost, 6,534,155 shares at December 30, 2005

     (22,119 )     —         (22,119 )

Accumulated deficit

     (151,748 )     (1,907 )     (153,655 )

Accumulated other comprehensive income (loss)

     (48 )     64       16  
                        

Total shareholders’ equity

     100,882       (1,843 )     99,039  
                        

Total liabilities and shareholders’ equity

   $ 151,881     $ —       $ 151,881  
                        

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Restatement (continued)

Consolidated Statements of Cash Flows Impact

The restatement did not impact our net cash flows from operating, investing, or financing activities. However, certain items within net cash provided by operating activities were impacted. The following table shows the effect on our previously reported cash flow items in the Original 10-Q Filing for the nine months ended September 30, 2005:

ANSWERTHINK, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended September 30, 2005  
     As Previously
Reported
    Adjustments     As
Restated
 

Net income (loss)

   $ 1,911     $ (801 )   $ 1,110  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Write-off of leasehold improvements

     —         —         —    

Depreciation and amortization

     3,590       —         3,590  

Provision for doubtful accounts

     303       —         303  

Non-cash compensation expense

     2,190       —         2,190  

Changes in assets and liabilities, net of effects from acquisitions:

       —      

Decrease in accounts receivable and unbilled revenue

     (10,520 )     —         (10,520 )

Increase in prepaid expenses and other assets

     (401 )     —         (401 )

Increase in accounts payable

     818       —         818  

Decrease in accrued expenses and other liabilities

     (1,041 )     801       (240 )
                        

Net cash used in operating activities

   $ (3,150 )   $ —       $ (3,150 )
                        

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2. 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 30, 2005 included in the Form 10-K/A filed by the Company with the Securities and Exchange Commission. The consolidated results of operations for the quarter and nine months ended September 29, 2006 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

3. 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 stock subject to vesting requirements or restricted stock units issued to employees, the calculation includes only the vested portion of such stock. Accordingly, common shares outstanding for the basic net income (loss) per share computation is lower than actual shares issued.

Net 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 quarters ended September 29, 2006 and September 30, 2005 potentially dilutive securities included 572,217 shares and 818,379 shares of unvested restricted stock units issued to employees and 76,236 shares and 216,857 shares of common stock issuable upon the exercise of stock options following the treasury stock method.

For the nine months ended September 29, 2006 potentially dilutive securities were excluded from the dilutive net loss computation because their effects would have been anti-dilutive to the loss incurred by the Company. Potentially dilutive securities which were not included in the dilutive loss per share calculation for the nine month period ended September 29, 2006 includes 1,324,225 shares of unvested restricted stock units issued to employees and 219,913 shares of common stock issuable upon the exercise of stock options following the treasury stock method. For the nine months ended September 30, 2005, potentially dilutive securities include 1,714,470 shares of unvested common stock subject to vesting requirements and restricted stock units issued to employees and 228,880 shares of common stock issuable upon the exercise of stock options following the treasury stock method.

Approximately 1.7 million and 1.9 million stock options were excluded from the computations of diluted net income per common share for the quarters ended September 29, 2006 and September 30, 2005, respectively, as their stock price was higher than the Company’s average stock price.

4. Comprehensive Income (Loss)

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

 

     Quarter Ended    Nine Months Ended  
     September 29,
2006
   September 30,
2005
(Restated)
   September 29,
2006
    September 30,
2005
(Restated)
 

Net income (loss)

   $ 473    $ 1,830    $ (3,639 )   $ 1,110  

Change in cumulative foreign currency translation adjustment

     1,333      40      1,042       217  

Change in net unrealized gain (loss) on marketable investments

     34      —        83       (25 )
                              

Comprehensive income (loss)

   $ 1,840    $ 1,870    $ (2,514 )   $ 1,302  
                              

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

5. Accounts Receivable and Unbilled Revenue, Net

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

 

    

September 29,

2006

    December 30,
2005
 

Accounts receivable

   $ 26,743     $ 35,870  

Unbilled revenue

     14,614       7,824  

Allowance for doubtful accounts

     (2,191 )     (1,766 )
                
   $ 39,166     $ 41,928  
                

6. Loan Payable

At December 30, 2005, the Company had a loan with a financial institution of $3.7 million, classified as loan payable in the accompanying balance sheet. The loan was secured by $3.7 million of cash, classified as current restricted cash in the accompanying balance sheet as of December 30, 2005. This bank loan carried interest on the balance, net of restricted cash, of 2% over National Westminster Bank’s base rate, which was 4.5% at December 30, 2005. During March 2006, the Company used the restricted cash amount to repay the loan.

7. 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 associates and functional support personnel and for closure and consolidation of facilities and related exit costs. These actions were taken as a result of the decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for services.

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. The 2004 and 2003 restructuring costs consisted of additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million and $1.8 million to the 2001 restructuring accrual, respectively. Also in 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 for the year ended December 31, 2004.

During the first and fourth quarters of 2005, the Company recorded restructuring costs of $2.9 million which related to $1.1 million for the consolidation of additional facilities and related exit costs not included in previously established reserves primarily as a result of the REL Consultancy Group acquisition on November 29, 2005 and $1.8 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million is specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, the Company was fully released from $20 million of future lease obligations, assigned two subleases to the lessor, wrote-off $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. The remaining $700 thousand related to increases in the reserves 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. The 2005 restructuring costs of $1.8 million related to previously established reserves consisted of additions of $1.2 million and $600 thousand to the 2002 and 2001 restructuring accruals, respectively.

During the first quarter of 2006, the Company recorded restructuring costs of $6.3 million, which was comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL Consultancy Group acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities 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. Included in the $2.8 million is a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifts to a proprietary best practice and intellectual capital and strategic advisory services firm.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. Restructuring Accrual (continued)

 

The following table sets forth the detail and activity in the restructuring expense accrual during the nine months ended September 29, 2006 (in thousands):

2001 Restructuring Accrual

 

     Accrual
Balance at
December 30,
2005
   Adjustments
to Accrual
   Expenditures     Accrual
Balance at
September 29,
2006

Closure and consolidation of facilities and related exit costs

   $ 2,617    $ 387    $ (987 )   $ 2,017
                            

2002 Restructuring Accrual

 

     Accrual
Balance at
December 30,
2005
   Adjustments
to Accrual
   Expenditures     Accrual
Balance at
September 29,
2006

Closure and consolidation of facilities and related exit costs

   $ 1,151    $ 3,094    $ (361 )   $ 3,884
                            

2005 Restructuring Accrual

 

     Accrual
Balance at
December 30,
2005
   Adjustments
to Accrual
   Asset Write- Off     Expenditures     Accrual
Balance at
September 29,
2006

Severance and other employee costs

   $ 372    $ 906    $ —       $ (919 )   $ 359

Closure and consolidation of facilities and related exit costs

     694      1,926      (715 )     (515 )     1,390
                                    
   $ 1,066    $ 2,832    $ (715 )   $ (1,434 )   $ 1,749
                                    

8. Stock Based Compensation

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and its related implementation guidance. On December 31, 2005, the Company adopted the provisions of SFAS No. 123R using the modified prospective method. SFAS No.123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules. Upon the adoption of SFAS No. 123R, the Company recognized an immaterial one-time gain based on SFAS No. 123R’s requirement to apply an estimated forfeiture rate to unvested restricted stock and restricted stock unit awards. Previously, the Company recorded forfeitures as incurred for such awards.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8. Stock Based Compensation (continued)

 

Prior to the adoption of SFAS No. 123R, the Company followed the intrinsic value method in accordance with APB No. 25 to account for its employee stock plans. Accordingly, no compensation expense was recognized for the issuance of stock options or shares granted through the Employee Share Purchase Plan (the “ESPP”); however, compensation expense was recognized in connection with the issuance of restricted stock units and common stock subject to vesting requirements. The adoption of SFAS No. 123R primarily resulted in the Company estimating forfeitures for all unvested common stock subject to vesting requirements and restricted stock unit awards and the recognition of compensation expense for the unvested portion of previously granted stock options.

The following table shows the effect of adopting SFAS No. 123R on selected reported items (“As Reported”) and what those items would have been under previous guidance under APB No. 25:

 

     Quarter Ended September 29, 2006    Nine Months Ended September 29, 2006  
     As Reported   

Under

APB No. 25

   As Reported    

Under

APB No. 25

 

Income (loss) before income taxes

   $ 722    $ 829    $ (2,693 )   $ (2,304 )

Net income (loss)

   $ 473    $ 580    $ (3,639 )   $ (3,250 )

Results for the quarter and nine months ended September 30, 2005 have not been restated. Had compensation expense for employee stock options granted under the Company’s stock plans been determined based on fair value at the grant date consistent with SFAS No. 123, the Company’s net income and net income per share for the quarter and nine months ended September 30, 2005 would have been adjusted to the pro forma amounts indicated below:

 

     Quarter Ended     Nine Months Ended  
     September 30, 2005
(Restated)
    September 30, 2005
(Restated)
 

Net income, as reported

   $ 1,830     $ 1,110  

Add: Stock based employee compensation expense included in reported net income, net of related tax effects

     905       2,190  

Deduct: Total stock based employee pro forma compensation expense determined under fair value based method for all awards, net of related tax effects

     (1,316 )     (3,616 )
                

Pro forma net income (loss)

   $ 1,419     $ (316 )

Basic net income (loss) per common share:

    

As reported

   $ 0.04     $ 0.03  

Pro forma

   $ 0.03     $ (0.01 )

Diluted net income (loss) per common share:

    

As reported

   $ 0.04     $ 0.02  

Pro forma

   $ 0.03     $ (0.01 )

Stock Plans

Total share based compensation included in the net income (loss) for the quarter and nine months ended September 29, 2006 was $1.0 million and $3.2 million, respectively. The number of shares available for future issuance under the plans at September 29, 2006 is 10,653,483 shares. The Company issues new shares as shares are required to be delivered under the plan.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8. Stock Based Compensation (continued)

 

Stock Options

The Company has granted stock options to employees and directors of the Company at exercise prices equal to the market value of the stock at the date of grant. The options generally vest ratably over four years, based on continued employment, with a maximum term of 10 years.

Stock option activity under the Company’s stock option plans is summarized as follows:

 

    

Option

Shares

    Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
  

Aggregate
Intrinsic
Value

(in
thousands)

Outstanding at December 31, 2005

   2,445,321     $ 5.63      

Granted

   —         —        

Exercised

   (138,793 )     3.57      

Canceled

   (259,754 )     5.60      
                  

Outstanding at September 29, 2006

   2,046,774     $ 5.76    5.63    $ 100,223
                        

Exercisable at September 29, 2006

   1,533,488     $ 5.88    5.06    $ 79,596
                        

Other information pertaining to option activity during the quarter was as follows (in thousands):

 

     Quarter Ended    Nine Months Ended
     September 29,
2006
   September 30,
2005
   September 29,
2006
   September 30,
2005

Weighted average grant-date fair value of stock options granted

   $ —      $ —      $ —      $ 2.30

Total fair value of stock options vested

   $ 80    $ 178    $ 1,366    $ 1,667

Total intrinsic value of stock options exercised

   $ 3    $ 13    $ 304    $ 103

No options were granted during the quarter and nine months ended September 29, 2006. The Company recorded stock-based compensation totaling $107 thousand and $390 thousand during the quarter and nine months ended September 29, 2006, respectively, related to the unvested portion of previously granted stock options. No options were granted during the quarter ended September 30, 2005. The Company granted 45,000 options during the nine months ended September 30, 2005.

SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The following assumptions were used by the Company to determine the fair value of stock options granted during 2005 using the Black-Scholes options-pricing model:

 

Expected volatility

   75 %

Average expected option life

   4 years  

Risk-free rate

   3.9 %

Dividend yield

   0 %

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8. Stock Based Compensation (continued)

 

Restricted Stock Units

Under the stock plans, participants may be granted restricted stock units, each of which represents a conditional right to receive a common share in the future. The restricted stock units granted under this plan generally vest over a four-year period, with 50% vesting on the second anniversary and 25% of the shares vesting on the third and fourth anniversaries of the grant date. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the four-year requisite service period. Restricted stock unit activity for the nine months ended September 29, 2006 was as follows:

 

     Nine Months Ended September 29, 2006
     Number of
Restricted Stock
Units
   

Weighted
Average

Grant-Date

Fair Value

Nonvested balance at December 31, 2005

   2,828,633     $ 3.43

Granted

   758,838       5.24

Vested

   (786,935 )     3.87

Forfeited

   (712,170 )     2.75
            

Nonvested balance at September 29, 2006

   2,088,366     $ 4.14
            

The Company recorded stock based compensation totaling $2.3 million and $2.1 million, respectively, related to restricted stock units during the nine months ended September 29, 2006 and September 30, 2005. As of September 29, 2006, there was $5.5 million of total restricted stock unit compensation expense related to nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 1.38 years.

As of September 30, 2005, the Company had 169,295 of stock options which were 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. Variable plan accounting resulted in a reduction of stock compensation expense of approximately $49 thousand for the nine months ended September 30, 2005.

Common Stock Subject to Vesting Requirements

Shares of common stock subject to vesting requirements were issued in connection with an acquisition to the employees of such company. Employees of the acquired company vest in these shares over a period of four years. Compensation expense was based on the market value of the Company’s common stock at the time of grant and is recognized on a straight-line basis. Restricted stock activity for the nine months ended September 29, 2006 was as follows:

 

     Nine Months Ended September 29, 2006
     Number of Shares of
Common Stock
Subject to Vesting
Requirements
  

Weighted
Average
Grant-Date

Fair Value

Nonvested balance at December 31, 2005

   —      $ —  

Granted

   676,695      3.99

Vested

   —        —  

Forfeited

   —        —  
           

Nonvested balance at September 29, 2006

   676,695    $ 3.99
           

 

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Table of Contents

Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

8. Stock Based Compensation (continued)

The Company recorded compensation expense totaling $506 thousand during the nine months ended September 29, 2006 related to common stock subject to vesting requirements. As of September 29, 2006, there was $2.1 million of total stock based compensation related to common stock subject to vesting requirements not yet recognized, which is expected to be recognized over a weighted average period of 1.92 years.

9. Shareholders’ Equity

Employee Stock Purchase Plan

Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed three months of service as of the beginning of an offering period an opportunity to purchase shares of its common stock through payroll deductions. Purchases on any one grant are limited to 10% of eligible compensation. Participant account balances are used to purchase shares of stock at the lesser of 85% of the fair market value of shares on the first trading day of the six-month offering period or on the last trading day of such offering period. The aggregate fair market value, determined as of the first trading date of the offering period, as to shares purchased by an employee may not exceed $25,000 annually. During the fourth quarter of fiscal 2005, the Board of Directors approved a change to the common stock purchase discount and approved the elimination of the related look back period. As a result, effective beginning in fiscal 2006, shares of our common stock may be purchased by employees at six month intervals at 95% of the fair market value on the last trading day of each six month period. The plan, as amended, is considered non-compensatory, and as such, no stock based compensation was recorded in connection with the plan during the nine months ended September 29, 2006. The Employee Stock Purchase Plan expires on July 1, 2008. A total of 4,275,000 shares of common stock are available for purchase under the plan with a limit of 400,000 shares of common stock to be issued per offering period.

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 2005, the Board of Directors approved the repurchase of an additional $25.0 million of the Company’s common stock, thereby increasing the total program size to $30.0 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 29, 2006, the Company repurchased 623,500 shares of its common stock at a cost of approximately $1.7 million. As of September 29, 2006, the Company had repurchased 7,157,655 shares of its common stock at an average price of $3.33 per share.

10. Litigation

As described in the Company’s Current Report on Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the UK. The Company initiated a review of the matter, and has concluded that the loss resulting from the misappropriation was approximately $2.2 million of which $0.3 million relates to 2006 as described below. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million, and the write-off of funds owed back to the Company from the agent of approximately $0.3 million. The Company’s Audit Committee also initiated a review of the matter. That review is now complete.

The former disbursement agent admitted to the full extent of the misappropriation. A suit was commenced against the former disbursement agent in the UK on October 27, 2006. The Company and the former disbursement agent have agreed to settlement terms that, if satisfied, would include the full repayment of the misappropriation. In connection with the settlement, the agent made an initial cash payment to the Company in January 2007 of $0.4 million and has agreed to make additional payments to the Company on or before August 31, 2007 that, when taken together with the initial payment, approximate $2.5 million (at current foreign currency exchange rates). If the payments are not received by this date, the Company can foreclose certain assets pledged by the agent. The agent has guaranteed to pay any amount by which the initial payment, additional cash payments and the net proceeds from the sale of the pledged assets fall below approximately $2.5 million (at current foreign currency exchange rates). This shortfall amount would be repaid in annual installments of not less than approximately $0.1 million per year (at current foreign currency exchange rates) beginning in 2007, together with interest thereon accruing from January 1, 2008. The Company cannot predict the outcome of whether the former disbursement agent will satisfy the terms of the settlement agreement.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

10. Litigation (continued)

Due to this uncertainty, any amounts recovered as a result of the Company’s claim have been and will be accounted for as income in the period collected.

In addition to the matter described above, 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, cash flows or results of operations of the Company.

11. Geographic and Service Group Information

Revenues are attributed to geographic areas as follows (in thousands):

 

     Quarter Ended    Nine Months Ended
    

September 29,

2006

   September 30,
2005
   September 29,
2006
   September 30,
2005

Total Revenues

           

Domestic

   $ 38,821    $ 37,124    $ 125,344    $ 110,368

Foreign

     4,731      2,881      17,035      8,209
                           

Total

   $ 43,552    $ 40,005    $ 142,379    $ 118,577
                           

Long-lived assets are attributed to geographic areas as follows (in thousands):

 

    

September 29,

2006

   December 30,
2005

Long-Lived Assets

     

Domestic

   $ 57,974    $ 43,112

Foreign

     18,074      31,306
             

Total

   $ 76,048    $ 74,418
             

As of September 29, 2006 and December 30, 2005, foreign assets included $18 million and $31 million of goodwill and intangible assets related to REL, a UK based company, respectively.

The Company’s revenue is derived from the following service groups (in thousands):

 

     Quarter Ended    Nine Months Ended
    

September 29,

2006

  September 30,
2005
   September 29,
2006
  September 30,
2005

The Hackett Group

         

Benchmarking

   $ 4,006   $ 5,169    $ 13,756   $ 15,168

Membership Advisory Programs

     2,969     1,999      8,399     5,622

Transformation Advisory

     14,303     9,161      49,902     28,689

Best Practices Solutions

         

Business Applications

     11,986     13,555      38,890     41,186

Business Intelligence

     10,288     10,121      31,432     27,912
                         

Total Revenues

   $ 43,552   $ 40,005    $ 142,379   $ 118,577
                         

12. Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

13. Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation.

14. Subsequent Events

On October 6, 2006, the Company entered into an agreement with Lawson Software America, Inc. (“Lawson”) by which Lawson would make an employment offer to each of the Company’s employees dedicated to delivering Lawson software products. Subsequently, Lawson paid the Company an initial placement fee equal to $260,000 based on the number of employees who accepted Lawson’s offer.

If at least ten of the hired employees continue to be employed full time with Lawson as of May 1, 2007, Lawson will pay Answerthink a six month placement fee equal to $15,000 per employee still employed.

The Company’s contractual obligations with its existing customers are not being transferred. The Company also entered into a separate subcontract agreement with Lawson for resources. There were no assets transferred, no existing contracts being sold, and there are no liabilities being assumed by Lawson as part of this transaction.

 

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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 and retain existing business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding our industry, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends, foreign currency fluctuations 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/A for the year ended December 30, 2005. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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 business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments.

The Hackett Group, a strategic advisory firm and an Answerthink company, is a world leader in best practice research, benchmarking, business transformation and working capital management services that empirically define and enable world-class enterprise performance. Only The Hackett Group empirically defines world-class performance in sales, general and administrative (SG&A) and supply chain activities with analysis gained through 3,500 benchmark studies over 14 years at 2,000 of the world’s leading companies.

Answerthink’s combined capabilities include business advisory programs, benchmarking, business transformation, working capital management, business applications, and business intelligence, with corresponding offshore support. Answerthink was formed on April 23, 1997.

RESTATEMENT

As described in the Company’s Current Report on Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the UK. The Company initiated a review of the matter, and has concluded that the loss resulting from the misappropriation was approximately $2.2 million of which $0.3 million relates to 2006 as described below. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million, and the write-off of funds owed back to the Company from the agent of approximately $0.3 million.

 

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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, as restated. See Note 1 to the consolidated financial statements for a description and reconciliation of restated amounts.

 

     Quarter Ended     Nine Months Ended  
     September 29, 2006    

September 30, 2005

(Restated)

    September 29, 2006    

September 30, 2005

(Restated)

 

Revenues:

                   

Revenues before reimbursements

   $ 39,006    89.6 %   $ 36,171    90.4 %   $ 127,852     89.8 %   $ 106,789    90.1 %

Reimbursements

     4,546    10.4 %     3,834    9.6 %     14,527     10.2 %     11,788    9.9 %
                                                     

Total revenues

     43,552    100.0 %     40,005    100.0 %     142,379     100.0 %     118,577    100.0 %

Costs and expenses:

                   

Cost of service:

                   

Personnel costs before reimbursable expenses

     22,646    52.0 %     19,910    49.8 %     73,637     51.7 %     60,712    51.2 %

Reimbursable expenses

     4,546    10.4 %     3,834    9.6 %     14,527     10.2 %     11,788    9.9 %
                                                     

Total cost of service

     27,192    62.4 %     23,744    59.4 %     88,164     61.9 %     72,500    61.1 %

Selling, general and administrative costs

     15,709    36.1 %     14,314    35.8 %     50,574     35.6 %     43,755    36.9 %

Restructuring costs

     —      —         —      —         6,313     4.4 %     1,134    1.0 %

Loss from misappropriation

     24    0.0 %     277    0.7 %     326     0.2 %     801    0.7 %
                                                     

Total costs and operating expenses

     42,925    98.6 %     38,335    95.8 %     145,377     102.1 %     118,190    99.7 %
                                                     

Income (loss) from operations

     627    1.4 %     1,670    4.2 %     (2,998 )   (2.1 )%     387    0.3 %

Other income (expense):

                   

Interest income, net

     95    0.2 %     334    0.8 %     305     0.2 %     878    0.7 %
                                                     

Income (loss) before income taxes

     722    1.7 %     2,004    5.0 %     (2,693 )   (1.9 )%     1,265    1.0 %

Income taxes

     249    0.6 %     174    0.4 %     946     0.7 %     155    0.1 %
                                                     

Net income (loss)

   $ 473    1.1 %   $ 1,830    4.6 %   $ (3,639 )   (2.6 )%   $ 1,110    0.9 %
                                                     

Revenues. Revenues for the quarter ended September 29, 2006 increased by $3.6 million or 9% to $43.6 million from $40.0 million in the quarter ended September 30, 2005. Revenues for the nine months ended September 29, 2006 increased $23.8 million or 20% to $142.4 million from $118.6 million in the nine months ended September 30, 2005. The increase in revenues for the quarter and nine months ended September 29, 2006 was primarily attributable to revenue of approximately $4.0 million and $16.5 million, respectively, relating to REL Consultancy Group Limited (“REL”) which was acquired on November 29, 2005, increased revenue from our membership advisory program sales and related transformation advisory services and increased revenue from our Hyperion implementation practice, offset by decreased revenue from the continued de-emphasis of SAP staff augmentation work. Reimbursements as a percentage of revenues during the quarters and nine months ended September 29, 2006 and September 30, 2005 were comparable at 10%. During the quarter and nine months ended September 29, 2006, no customer accounted for revenues equal to or greater than 5% of total revenues. 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. Our contracts can be cancelled for convenience by the customer upon 30 days’ notice. During the quarter ended March 31, 2006, a significant customer filed for bankruptcy protection. In order to mitigate our credit risk, we entered into agreements with a third party on April 19, 2006 and on June 29, 2006 to sell our pre-bankruptcy accounts receivable from this customer for 65% and 75% of the total outstanding balances, respectively. The remaining amounts due under the terms of these agreements were collected in full subsequent to June 30, 2006. The cancellation or significant reduction in the use of services from key customers could have a material adverse effect on our results of operations. 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 these key customers could have a material adverse effect on our results of operations.

 

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Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service was $27.2 million in the quarter ended September 29, 2006 an increase of $3.4 million or 15% compared to the quarter ended September 29, 2005. Cost of service was $88.2 million in the nine months ended September 29, 2006, an increase of $15.7 million or 22% compared to the nine months ended September 30, 2005. This increase was primarily attributable to the increase in total billable headcount as a result of the REL acquisition in November 2005, offset by a reduction in headcount in the Business Applications group. Consultant average headcount for the nine months ended September 29, 2006 was 644 compared to consultant average headcount of 577 for the nine months ended September 30, 2005.

Cost of service as a percentage of revenue was 62% for the quarter ended September 29, 2006, an increase from 59% in the quarter ended September 30, 2005, primarily as the result of a decrease in The Hackett Group annualized revenue per professional. The Hackett Group annualized revenue per professional was $341 thousand for the quarter ended September 29, 2006, as compared to $383 thousand in the quarter ended September 30, 2005. The decrease in The Hackett Group revenue per professional was primarily attributable to lower than expected revenue in our Transformation Advisory practice and decreased benchmarking revenue. Cost of service as a percentage of revenue was 62% for the nine months ended September 29, 2006, comparable to 61% for the nine months ended September 30, 2005.

Selling, General and Administrative. Selling, general and administrative expenses increased 10% to $15.7 million in the quarter ended September 29, 2006 from $14.3 million in the quarter ended September 30, 2005. Selling, general and administrative expenses increased 16% to $50.6 million in the nine months ended September 29, 2006 from $43.8 million in the nine months ended September 30, 2005. The overall increase in selling, general and administrative expenses was primarily attributable to the acquisition of REL in November 2005 and increased revenue from the comparable quarter in 2005. Selling, general and administrative expenses as a percentage of revenues were 36% during the quarters ended September 29, 2006 and September 30, 2005 and the nine months ended September 29, 2006 and 37% for the nine months ended September 30, 2005. The slight decrease is primarily attributable to benefits achieved from the company’s restructuring efforts to rationalize real estate investments and benefits achieved from the integration of REL’s back office functions.

Restructuring Costs. We did not record any restructuring costs for the quarters ended September 29, 2006 and September 30, 2005. However, we recorded restructuring costs of $6.3 million in the quarter ended March 31, 2006 which was comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL Consultancy Group acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities 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 to sublease facilities based on current market conditions. Included in the $2.8 million is a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifts to a proprietary best practice intellectual capital and strategic advisory services firm. Additionally, we recorded restructuring costs of $1.1 million in the quarter ended April 1, 2005 to increase previously established reserves in order to reflect the negotiated buyout of our New York City lease obligation.

Loss from Misappropriation. The loss from misappropriation of $24 thousand and $277 thousand for the quarters ended September 29, 2006 and September 30, 2005 and $326 thousand and $801 thousand for the nine months ended September 29, 2006 and September 30, 2005, respectively, relates to funds that were misappropriated by the Company’s former UK disbursement agent. As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which relates to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the Company’s United Kingdom operations. As a result, the Company has amended and restated financial statements and other financial information for the quarter and nine months ended September 30, 2005. See Note 1 to the consolidated financial statements for a description and reconciliation of restated amounts.

Income Taxes. We recorded income taxes of $946 thousand for the nine months ended September 29, 2006, which represented an effective tax rate of 35.1% of loss before income taxes. These taxes are primarily attributable to federal and state taxes related to REL’s U.S. entity, which could not be offset against our federal net operating loss carryforward. For the nine months ended September 30, 2005, we recorded income tax expense of $155 thousand, which represented an effective tax rate of 12.3% of income before income taxes for certain state and foreign taxes. 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 period.

 

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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 29, 2006, we had $15.5 million in cash and cash equivalents compared to $18.1 million at December 30, 2005. At September 29, 2006 and December 30, 2005, we had $600 thousand on deposit with a financial institution as collateral for letters of credit and have classified these deposits as restricted cash on the accompanying consolidated balance sheets. In addition, we had $3.7 million at December 30, 2005 on deposit with a financial institution as collateral for an Employee Benefit Trust loan acquired as part of The REL Consultancy Group and have classified this deposit as restricted cash on the accompanying consolidated balance sheet as of December 30, 2005. This cash was used to repay the loan during March 2006. We also had marketable investments of $5.0 million and $9.9 million at September 29, 2006 and December 30, 2005, respectively.

Net cash provided by operating activities was $7.4 million for the nine months ended September 29, 2006 compared to cash used in operation of $3.2 million for the comparable period of 2005. During the nine months ended September 29, 2006, net cash provided by operating activities was primarily attributable to our net loss of $3.6 million adjusted for $8.7 million of non-cash expenses and decreases of $2.2 million in accounts receivable and unbilled revenues and $344 thousand in prepaid expenses and other current assets. These effects were partially offset by a decrease of $1.7 million in accounts payable and an increase of $1.5 million in accrued expenses and other liabilities. Non-cash expenses included depreciation and amortization, provision for doubtful accounts, non-cash compensation expense and the write-off of leasehold improvements. During the nine months ended September 30, 2005, net cash used in operating activities of $3.2 million 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 $240 thousand in accrued expenses and other liabilities. These effects were partially offset by our net income of $1.1 million, non-cash expenses of $6.1 million and an increase in accounts payable of $818 thousand.

Net cash used in investing activities was $3.6 million for the nine months ended September 29, 2006 compared to cash used in investing activities of $976 thousand during the comparative nine months of 2005. Cash used in investing activities in the nine months ended September 29, 2006 was primarily attributable to $1.7 million used for the purchase of property and equipment and $10.5 million used for the acquisition of businesses, partially offset by maturities of marketable investments of $5.0 million and a decrease in restricted cash of $3.7 million. The uses of cash for investing activities in the comparable period in 2005 were primarily attributable to the 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.

Net cash used in financing activities was $6.5 million for the nine months ended September 29, 2006 compared to $4.2 million for the comparable period of 2005. During the nine months ended September 30, 2006, cash used in financing activities was primarily attributable to $3.7 million for the repayment of the Employee Benefit Trust loan, $1.7 million for the repurchase of common stock, $1.1 million for the repayment of bank overdrafts, and $725 thousand for payment of employee withholding tax related to restricted stock units, partially offset by $756 thousand from proceeds 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. 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 million 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.

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, 2004 and 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 $30.0 million. 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. During the quarter ended September 29, 2006, the Company repurchased 623,500 shares of its common stock at a cost of approximately $1.7 million. As of September 29, 2006, we had repurchased 7,157,655 shares of our common stock at an average price of $3.33 per share.

 

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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.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 29, 2006, our exposure to market risk related primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed 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.

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates, as a portion of our revenues, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound and the Euro. These exposures may change over time as business practices evolve. Currently, we do not hold any derivatives contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As described in the Company’s Current Report on Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the UK. The Company initiated a review of the matter, and has concluded that the loss resulting from the misappropriation was approximately $2.2 million. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million, and the write-off of funds owed back to the Company from the agent of approximately $0.3 million.

Based on these findings, the Company concluded that it was necessary to amend and restate its financial statements and other financial information for the years 2005, 2004 and 2003, and the quarterly periods ended March 31, 2006 and June 30, 2006. The Company determined that the failure to maintain effective controls over cash disbursements and payroll transactions for its UK operations was a material weakness in its internal control over financial reporting.

As more fully described in our 2005 Form 10-K/A for the fiscal year ended December 30, 2005 containing the restated financial information, the Company concluded that it did not maintain effective controls over cash disbursement and payroll transactions for its UK operations, and as such did not maintain effective “disclosure controls and procedures” as defined under Exchange Act Rule 13a-15(f) or 15d-15(f). Solely as a result of this material weakness in its internal control over financial reporting, we also concluded that our disclosure controls and procedures were not effective for the period covered by this report.

 

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The Company opened its European financial shared service center in London, England in December 2005, and ceased its agency relationship with the UK disbursements agent in January 2006. Vendor disbursements are now processed in-house by our European financial shared service center, and payroll and related tax disbursements have been migrated to ADP UK, a unit of the largest global payroll processing organization. In addition, all tax filings in the Company’s European operations are now subject to review by the Company’s European Chief Financial Officer.

On November 29, 2005, our Hackett Group Limited (UK) subsidiary acquired REL Consultancy Group Limited (UK) or REL. Our management has not yet completed an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission for the acquired subsidiary as it was not considered material to the results of our operations, financial position and cash flows from the date of acquisition through December 30, 2005. We intend to disclose all material changes to internal control over financial reporting resulting from the acquisition, if any, within the time period for our first annual assessment of the internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

Changes in Internal Controls

With the exception of the implementation of internal controls relating to REL, and the controls implemented as a result of the misappropriation described herein, there were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company’s disclosure controls and procedures have been updated to ensure that the financial information of REL has been properly recorded.

 

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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 cash flows or results of operations.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

During the quarter ended September 29, 2006, the Company repurchased 623,500 shares of its common stock at a cost of approximately $1.7 million, under a repurchase program approved by the Board of Directors. All repurchases were made in the open market, subject to market conditions and trading restrictions. There is no expiration date on the current authorization and during the period covered by the table, no determination was made by the Company to suspend or cancel purchases under the program.

Issuer Purchases of Equity Securities

 

Period

   Total Number
of Shares
Purchased
  

Average Price

paid per Share

   Total Number of
Shares Purchased as
Part of the
Repurchase
Program
   Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Repurchase
Program

July 1, 2006 to July 28, 2006

   —      $ —      —      $ 7,880,785

July 29, 2006 to August 25, 2006

   315,700    $ 2.81    315,700    $ 6,995,231

August 26, 2006 to September 29, 2006

   307,800    $ 2.80    307,800    $ 6,133,373
               

Total

   623,500    $ 2.80    623,500   
               

Item 6. Exhibits

See Index to Exhibits on page 27, 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.

 

  Answerthink, Inc.

Date: February 15, 2007

 

/s/ Grant M. Fitzwilliam

  Grant M. Fitzwilliam
 

Executive Vice President, Finance and Chief

    Financial Officer

 

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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
31.1     Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2     Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32     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

 

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