HACKETT GROUP, INC. - Quarter Report: 2009 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended July 3, 2009

OR

For the transition period from              to             

Commission File Number 0-24343

The Hackett Group, 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 the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

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

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 August 7, 2009, there were 38,497,186 shares of common stock outstanding.

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The Hackett Group, Inc.

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PART I — FINANCIAL INFORMATION

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

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

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The Hackett Group, 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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The Hackett Group, 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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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information

Basis of Presentation

The accompanying consolidated financial statements of The Hackett Group, Inc. (“Hackett” or the “Company”) include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. All intercompany transactions and balances have been eliminated in consolidation.

The Company consolidates the assets, liabilities, and results of operations of its entities in accordance with Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements, Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries – an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12, and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, as revised.

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 January 2, 2009 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 six months ended July 3, 2009 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations. FAS No. 141 (revised 2007) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination and is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FAS No. 141 (revised 2007) did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP No. 142-3 did not have a material impact on the Company’s consolidated financial statements.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information (continued)

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly. FSP No. 157-4 provides additional guidance for estimating fair value in accordance with FAS No. 157. This standard is effective for financial statements issued for periods ending after June 15, 2009. The adoption of FSP No. 157-4 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP No. 107-1 and APB No. 28-1 require disclosures about fair value of financial instruments for annual and interim reporting periods of publicly traded companies. FSP No. 107-1 and APB No. 28-1 are effective for financial statements used for periods ending after June 15, 2009. The adoption of FSP No. 107-1 and APB No. 28-1 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP No. 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This FSP is effective for business combinations with an acquisition date on or after June 1, 2009. The adoption of FSP No. 141(R)-1 did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued FAS No. 165, Subsequent Events. FAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. As of this date the Company adopted FAS No. 165 and evaluated subsequent events through the date of this filing.

In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162. FAS No. 168 will become effective on the date of this Statement, and will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. FAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the impact FAS No. 168 will have on its consolidated financial statements.

2. 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 common stock subject to vesting requirements or restricted stock units issued to employees, the calculation includes only the vested portion of such stock.

Dilutive 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.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2. Net Income per Common Share (continued)

The following table reconciles basic and dilutive weighted average shares:

Approximately 1.2 million stock options were excluded from the computations of diluted net income per common share for the quarters ended July 3, 2009 and June 27, 2008, as the exercise price was higher than the Company’s average stock price.

3. Comprehensive Income

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

4. Restructuring

As of July 3, 2009 and January 2, 2009, the Company had restructuring expense accruals related to the closure and consolidation of facilities and related exit costs recorded in fiscal years 2001, 2002 and 2005. The following table sets forth the activity in the restructuring expense accruals during the six months ended July 3, 2009 (in thousands):

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

5. Marketable Investments

The Company adopted FAS No. 157, Fair Value Measurements, on December 29, 2007. FAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FAS No. 157 describes the following three levels of inputs that may be used to measure fair value:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

As of July 3, 2009, the Company’s financial instruments were carried at fair value in the consolidated balance sheet. The fair value of the short-term financial instruments, including cash and cash equivalents, marketable investments, restricted cash, accounts receivable and unbilled revenue, accounts payable and accrued expenses and other liabilities, equaled the respective carrying value due to the short-term nature of these instruments.

As of July 3, 2009 and January 2, 2009, the Company had a net balance of $1.1 million and $1.7 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). Subsequent to July 3, 2009, the Company’s remaining balance in the Portfolio was redeemed. As a result of the final redemption, the Company recorded an additional reserve on the marketable investments of $35 thousand to reflect the fair market value as of July 3, 2009.

The following table summarizes the Company’s activity in the Portfolio during the quarter and six months ended July 3, 2009 (in thousands):

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

6. Accounts Receivable and Unbilled Revenue, Net

Accounts receivable and unbilled revenue, net, consisted of the following (in thousands):

Accounts receivable for the periods ending July 3, 2009 and January 2, 2009, is net of uncollected advanced billings. Unbilled revenue as of July 3, 2009 and January 2, 2009 includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.

7. Stock Based Compensation

During the quarter and six months ended July 3, 2009, the Company issued 4,831 and 1,378,301 restricted stock units, respectively, at a weighted average grant-date fair value of $2.07 and $2.56, respectively. As of July 3, 2009, the Company had 2,462,993 restricted stock units outstanding at a weighted average grant-date fair value of $3.14. As of July 3, 2009, there was $5.6 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 2.42 years.

8. Shareholders’ Equity

Treasury Stock

Under the repurchase plan, 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 July 3, 2009, the Company repurchased approximately 163 thousand shares of its common stock at an average price of $2.12, for a total cost of approximately $346 thousand. During the six months ended July 3, 2009, the Company repurchased approximately 1.2 million shares of its common stock at an average price of $2.09, for a total cost of approximately $2.5 million. As of July 3, 2009, the Company had $4.5 million available under its buyback program.

9. 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 Company’s financial position, cash flows or results of operations.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

10. Geographic and Group Information

Revenue is primarily based on the country of the contracting entity and was attributed to the following geographical areas (in thousands):

Long-lived assets are attributed to the following geographical areas (in thousands):

As of July 3, 2009 and January 2, 2009, international assets included $15.2 million and $13.6 million of goodwill and intangible assets, respectively, related to the REL acquisition.

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

11. Reclassifications

Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current period presentation.

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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 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 attract additional business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the business and information technology industries, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable due to the bankruptcy or financial difficulties of our customers, 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 January 2, 2009. 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

The Hackett Group, Inc. (“Hackett”) is a leading strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive Hackett database, 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.

Hackett, formed on April 23, 1997, is a strategic advisory firm and a world leader in best practice research, benchmarking, business transformation and working capital management services that empirically defines and enables world-class enterprise performance. Only Hackett empirically defines world-class performance in sales, general and administrative and supply chain activities with analysis gained through more than 4,000 benchmark studies over 16 years at 2,700 of the world’s leading companies.

Hackett’s combined capabilities include business advisory programs, benchmarking, business transformation, working capital management and technology solutions, with corresponding offshore support.

In the following discussion, “Hackett” represents our total company, “The Hackett Group” encompasses our Benchmarking, Business Transformation and Executive Advisory groups, and “Hackett Technology Solutions” encompasses our technology groups, including SAP, Oracle and EPM Oracle.

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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 total revenue of such results (in thousands):

Quarter and Six Months Ended July 3, 2009 versus Quarter and Six Months Ended June 27, 2008

Revenue. We are a global company with operations primarily in the United States and Western Europe. Our revenue is denominated in multiple currencies, mostly the U.S. Dollar, British Pound and Euro, and as a result is affected by currency exchange rate fluctuations. The exchange rate fluctuations had an impact on our revenue comparisons between the quarters and six months ended July 3, 2009 and June 27, 2008; therefore, in the following revenue discussion we will disclose The Hackett Group revenue variances based on the U.S. Dollar reporting currency, as well as variances excluding the impact of currency fluctuations, otherwise referred to below as constant currency. Hackett Technology Solutions was not materially impacted by foreign currency rate fluctuations.

The following table summarizes revenue (in thousands):

Total revenue decreased 29%, or 27% in constant currency, for the quarter ended July 3, 2009, as compared to the quarter ended June 27, 2008. Total revenue decreased 20%, or 17% in constant currency, for the six months ended July 3, 2009, as compared to the six months ended June 27, 2008. The Hackett Group revenue decreased 26%, or 22% in constant currency, for the quarter ended

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July 3, 2009, as compared to the quarter ended June 27, 2008. The Hackett Group revenue decreased 18%, or 14% in constant currency, for the six months ended July 3, 2009, as compared to the six months ended June 27, 2008. The decrease in The Hackett Group revenue was primarily the result of delays in client decision-making and protracted sales cycles which has impacted our momentum in 2009.

The Hackett Group’s international revenue, which is primarily based on the country of the contracting entity, accounted for 34% and 33%, or 39% and 39% in constant currency, of The Hackett Group’s total revenue in the quarter and six months ended July 3, 2009, respectively, as compared to 40% and 39% for the quarter and six months ended June 27, 2008, respectively.

Hackett Technology Solutions revenue decreased 37% and 25% for the quarter and six months ended July 3, 2009, respectively, as compared to the quarter and six months ended June 27, 2008, primarily due to lower revenue from our Oracle and EPM Oracle groups.

During the quarter and six months ended July 3, 2009 one customer accounted for 7% and 8%, respectively, of our total revenue. For the quarter and six months ended June 27, 2008, no customer accounted for greater than 5% of our total revenue.

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 before reimbursable expenses decreased 19% and 12% for the quarter and six months ended July 3, 2009, respectively, as compared to the quarter and six months ended June 27, 2008, primarily due to lower accruals for 2009 incentive compensation awards and reductions in headcount made to conform to the current market demand.

Total cost of service as a percentage of revenue before reimbursable expenses increased to 59% and 58% for the quarter and six months ended July 3, 2009, respectively, from 52% for the quarter and six months ended June 27, 2008. The increase was primarily due to the decrease in revenue as previously discussed. Cost of service is also denominated in multiple currencies and is therefore affected by currency exchange rate fluctuations.

The Hackett Group revenue produced gross margins of 40% and 41% for the quarter and six months ended July 3, 2009, respectively, as compared to Hackett Technology Solutions which produced gross margins of 21% and 22% for the same periods, respectively. On a net revenue basis, The Hackett Group produced gross margins as a percentage of revenue of 43% and 45% for the quarter and six months ended July 3, 2009, respectively, as compared to Hackett Technology Solutions, which produced gross margins as a percentage of net revenue of 24% and 25% for the same periods, respectively.

Selling, General and Administrative. Selling, general and administrative costs decreased by 30% and 16% for the quarter and six months ended July 3, 2009, respectively, compared to the quarter and six months ended June 27, 2008. The decrease was primarily related to lower 2009 incentive compensation accruals, lower commission expense due to the decrease in revenue as previously discussed and various other cost reduction actions taken in 2009. Partially offsetting these cost reductions for the six months ended July 3, 2009 were foreign currency losses of $0.4 million, compared to foreign currency gains of $1.2 million for the six months ended June 27, 2008. Selling, general and administrative costs as a percentage of revenue were 31% and 32% for the quarter and six months ended July 3, 2009, respectively, as compared to 31% and 30% for the quarter and six months ended June 27, 2008, respectively.

Income Taxes. We recorded income taxes of $26 thousand and $89 thousand for the quarter and six months ended July 3, 2009, respectively, which reflected estimated annual tax rates of 14% and 8%, respectively, for certain federal and state taxes. For the quarter and six months ended June 27, 2008, we recorded income taxes of $23 thousand and $130 thousand, respectively, which reflected estimated annual tax rates of 1% and 2%, respectively, for certain federal and state taxes.

Liquidity and Capital Resources

At July 3, 2009 and January 2, 2009, we had $22.5 million and $32.1 million, respectively, classified in cash and cash equivalents in the accompanying consolidated balance sheets. During these same periods, we had $600 thousand on deposit with financial institutions as collateral for letters of credit classified as restricted cash in the accompanying consolidated

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balance sheets. At July 3, 2009 and January 2, 2009, we had a net balance of $1.1 million and $1.7 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). The Portfolio is classified as marketable investments in the accompanying consolidated balance sheets (see Note 5 to our accompanying consolidated financial statements). Subsequent to July 3, 2009, our remaining balance in the Portfolio was redeemed.

The following table summarizes our cash flow activity (in thousands):

Net cash used in operating activities was $6.6 million for the six months ended July 3, 2009, as compared to net cash provided by operating activities of $3.2 million for the six months ended June 27, 2008. During the six months ended July 3, 2009, net cash used in operating activities was primarily attributable to the payout of 2008 incentive compensation awards, timing of vendor payments and an increase in prepaid assets related to the renewal of insurance policies. These uses of cash were partially offset by decreases in accounts receivable for the six months ended July 3, 2009.

Net cash provided by operating activities for the six months ended June 27, 2008 was primarily attributable to earnings net of non-cash items including foreign currency gains, depreciation and amortization expense, and non-cash stock compensation expense. The increases were mostly offset by higher accounts receivable and unbilled revenue due to an increase in revenue which resulted in an increase of five days in Days Sales Outstanding from December 28, 2007.

Net cash used in investing activities was $1.0 million for the six months ended July 3, 2009, as compared to net cash provided by investing activities of $2.4 million for the six months ended June 27, 2008. Cash used in investing activities for the six months ended July 3, 2009 was primarily attributable to $1.6 million in capital expenditures, partially offset by $623 thousand of Portfolio redemptions.

Net cash provided by investing activities in the six months ended June 27, 2008 was primarily attributable to $3.5 million of Portfolio redemptions, partially offset by $1.1 million of capital expenditures.

Net cash used in financing activities was $2.2 million for the six months ended July 3, 2009, as compared to $9.5 million for the six months ended June 27, 2008. Cash used in financing activities for the quarter ended July 3, 2009 was attributable to the repurchase of 1.2 million shares of our common stock at an average price of $2.09 per share, for a total cost of $2.5 million.

Net cash used in financing activities for the six months ended June 27, 2008 was primarily attributable to the repurchase of 2.5 million shares of our common stock at an average price of $3.97 per share, for a total cost of $9.8 million.

As of July 3, 2009, our total authorization under our share repurchase program was $60.0 million. Under the repurchase plan, we may buy back shares from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. As of July 3, 2009, we had $4.5 million available under the buyback program.

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 twelve months. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance 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.

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Recently Issued Accounting Standards

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations. FAS No. 141 (revised 2007) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination and is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FAS No. 141 (revised 2007) did not have a material impact on our consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP No. 142-3 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly. FSP No. 157-4 provides additional guidance for estimating fair value in accordance with FAS No. 157. This standard is effective for financial statements issued for periods ending after June 15, 2009. The adoption of FSP No. 157-4 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP No. 107-1 and APB No. 28-1 require disclosures about fair value of financial instruments for annual and interim reporting periods of publicly traded companies. FSP No. 107-1 and APB No. 28-1 are effective for financial statements used for periods ending after June 15, 2009. The adoption of FSP No. 107-1 and APB No. 28-1 did not have a material on our consolidated financial statements.

In April 2009, the FASB issued FSP No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP No. 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This FSP is effective for business combinations with an acquisition date on or after June 1, 2009. The adoption of FSP No. 141(R)-1 did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued FAS No. 165, Subsequent Events. FAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. As of this date we adopted FAS No. 165 and evaluated subsequent events through the date of this filing.

In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162. FAS No. 168, will become effective on the date of this Statement, and will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. FAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently evaluating the impact FAS No. 168 will have on our consolidated financial statements.

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At July 3, 2009, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

We invest only with high credit quality issuers and we do not use derivative financial instruments in our investments. As of July 3, 2009, we had a net balance of $1.1 million in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”), all of which was collected subsequent to the end of the quarter (see Note 5 to the accompanying consolidated financial statements).

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates, as a portion of our revenue, 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 derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.

Evaluation of Disclosure 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.

Limitations on the Effectiveness of Controls

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 our 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

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 controls over financial reporting.

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PART II — OTHER INFORMATION

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 Company’s financial position, cash flows or results of operations.

There have been no material changes to any of the risk factors disclosed in the Company’s most recently filed Annual Report on Form 10-K.

During the quarter ended July 3, 2009, the Company repurchased 163 thousand shares of its common stock at a cost of approximately $346 thousand under the Company’s share repurchase program approved by the Board of Directors in 2002. All repurchases were made in the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. There is no expiration date on the current authorization during the period covered by the table, nor was any determination made by the Company to suspend or cancel purchases under the program.

Issuer Purchases of Equity Securities

At the Company’s Annual Meeting of Shareholders held on May 8, 2009, the following proposals were voted on by the Company’s shareholders:

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See Index to Exhibits on page 21, 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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