Hill International, Inc. - Quarter Report: 2007 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2007

or

For the transition period from              to             

Commission File Number: 000-50781

HILL INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (856) 810-6200

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the 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  ¨    Non-Accelerated Filer  x

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

There were 28,594,836 shares of the Registrant’s Common Stock outstanding at November 2, 2007.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Form 10-Q

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PART 1—FINANCIAL INFORMATION

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—The Company

The Company was incorporated in Delaware in 2004 under the name Arpeggio Acquisition Corporation (“Arpeggio”), as a specified purpose acquisition corporation. On June 28, 2006, Arpeggio merged with Hill International, Inc. (“old Hill”), a Delaware corporation, and Arpeggio was the surviving entity of the merger. Following the merger, Arpeggio changed its name to Hill International, Inc. (“Hill” or “the Company”). The merger was accounted for as a reverse acquisition. Under this method of accounting, Arpeggio was treated as the “acquired” company for financial reporting purposes. Accordingly, the merger was treated as the equivalent of old Hill issuing stock for the net monetary assets of Arpeggio, accompanied by a recapitalization. The historical consolidated financial statements relate to the business of old Hill and its consolidated subsidiaries.

Note 2—Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States and the interim financial statement rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

The consolidated financial statements include our financial statements and those of our majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The interim operating results are not necessarily indicative of the results for a full year.

Commencing in 2007, we changed our financial reporting periods to coincide with the end of each calendar quarter. Prior to 2007, we utilized a 52-53 week fiscal year ending on the Saturday closest to December 31. The difference resulting from this change in reporting periods for the three- and nine-month periods ended September 30, 2007 is not significant.

Note 3—Acquisition

On May 10, 2007, the Company acquired all of the common stock of KJM & Associates, Ltd. (“KJM”). KJM provides project management and project controls services primarily for the transportation and education markets. KJM is headquartered in Bellevue, Washington and provides the Company’s Project Management Group with new and expanded geographic coverage in Washington, Oregon, California, Arizona, Texas and New York.

The Company paid $9,350,000 consisting of $8,350,000 in cash plus 136,593 shares of restricted common stock of the Company (the “Restricted Shares”) initially valued at $1,000,000. The Restricted Shares were valued based on the average closing price of the Company’s common stock for the 10 trading days prior to the closing

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date. The Restricted Shares will be held in escrow for one year as security for any indemnification obligations of KJM’s selling stockholder. Since the Restricted Shares are subject to forfeiture, they will not be considered outstanding for accounting purposes until the end of the contingency period, at which time the fair value of those shares actually distributed will be accounted for as additional purchase consideration.

For its fiscal year ended December 31, 2006, KJM’s unaudited financial results included total revenues of $16,400,000, net revenues of $14,400,000, gross profit of $7,300,000, and operating profit of $1,300,000. As of April 30, 2007, KJM had unaudited stockholder’s equity of $2,700,000 and total backlog estimated at $21,000,000. The results of operations and cash flows for the three- and nine-month periods ended September 30, 2007 were not material. KJM was fully integrated into Hill on September 1, 2007.

The acquisition was accounted for under the purchase method of accounting, effective as of May 1, 2007, and accordingly, the results of operations and cash flows of KJM have been included in the accompanying Consolidated Financial Statements for the period subsequent to the effective date. At September 30, 2007, the total purchase price, including acquisition expenses of $202,000, but excluding the Restricted Shares, which constitute contingent consideration, was $8,552,000. The following table summarizes the allocation of the purchase price based on the fair value of the assets acquired and liabilities assumed as of the acquisition date:

Note 4—Comprehensive Income

The following table summarizes the Company’s comprehensive income for the fiscal periods ended September 30, 2007 and September 30, 2006:

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Note 5—Accounts Receivable

The components of accounts receivable are as follows:

Note 6—Intangible Assets

The following table summarizes the Company’s cost in excess of net assets acquired as of September 30, 2007 and December 30, 2006:

Amortization expense related to intangible assets totaled $475,000 and $38,000 for the three months ended September 30, 2007 and September 30, 2006, respectively, and totaled $958,000 and $146,000 for the nine months ended September 30, 2007 and September 30, 2006. Estimated amortization expense based on our present intangible assets for the next five years is as follows:

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Note 7—Goodwill

In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142, Goodwill and Other Intangible Assets, the Company performs its annual goodwill impairment testing, by reportable segment, in the third quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company performed its annual impairment test effective July 1, 2007 and noted no impairment for either of its reporting units.

The following table summarizes the changes in the Company’s carrying value of goodwill during 2007 (in thousands):

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Note 8—Accounts Payable and Accrued Expenses

Below are the components of accounts payable and accrued expenses at September 30, 2007 and December 30, 2006:

Note 9—Deferred Revenue

In certain instances the Company may collect advance payments from clients for future services. As the services are performed these advance payments are recognized as revenue. Deferred revenue is classified as current or long term based on the anticipated life of the project. The following table summarizes deferred revenue as of September 30, 2007 and December 30, 2006:

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Note 10—Notes Payable

Outstanding debt obligations are as follows:

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Note 11—Supplemental Cash Flow Information

On March 24, 2006, options to purchase 482,767 shares of old Hill’s common stock with an exercise price of $0.37 per share and options to purchase 48,277 shares of old Hill’s common stock with an exercise price of $0.53 per share were exercised on a cashless basis when the fair market value was $5.47 resulting in old Hill issuing 493,465 shares of its common stock prior to the merger with Arpeggio.

On April 9, 2007, the Company issued 2,300,000 shares of its common stock in connection with the earn-out provision of the merger agreement with Arpeggio.

On August 9, 2007, the Company issued 30,000 shares of its common stock to non-employee members of the Board of Directors as partial compensation for services. The shares had a fair market value of $210,000 on the date of grant and the Company is recognizing expense ratably as services are rendered over a one year period.

In connection with the finalization of the fair values of assets acquired and liabilities assumed in the Knowles acquisition, the Company provided for additional accrued liabilities and other liabilities amounting to $2,101,000 and $1,214,000, respectively, which resulted in a corresponding increase of $3,315,000 in goodwill in the claims consulting segment.

In connection with the acquisition of the minority interest of a Knowles subsidiary, the Company issued a note payable amounting to $90,000 which increased goodwill in the claims consulting segment.

The following table provides additional cash flow information:

Note 12—Equity in Earnings of Affiliates

Stanley Baker Hill, LLC

Equity in earnings of affiliates reflects ownership by the Company of 33.33% of the members’ equity of Stanley Baker Hill, LLC (“SBH”). SBH is a joint venture formed in February 2004 between Stanley Consultants, Inc., Michael Baker, Jr. Inc., and Hill.

SBH has a contract for an indefinite delivery and indefinite quantity for construction management and general architect-engineer services for facilities in Iraq with the U.S. Army Corps of Engineers.

At September 30, 2007 and December 30, 2006, the Company reported receivables totaling $2,055,000 and $691,000, respectively, from SBH for work performed by the Company as a subcontractor to SBH. Such amounts were payable in accordance with the subcontract agreement between the Company and SBH.

Revenue from SBH pursuant to such subcontract agreement for the three-month periods ended September 30, 2007 and September 30, 2006 was $4,788,000 and $1,255,000, respectively and for the nine-month periods ended September 30, 2007 and September 30, 2006 was $7,925,000 and $2,600,000, respectively.

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Note 13—Earnings per Share

Basic earnings per common share and diluted earnings per common share are presented in accordance with SFAS No. 128, Earnings per Share. Basic earnings per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options, warrants and unit purchase options, if dilutive. Dilutive shares were 4,342,072 shares and 1,228,709 shares for the three-month periods ended September 30, 2007 and September 30, 2006, respectively, and were 4,353,138 shares and 1,427,551 shares for the nine-month periods ended September 30, 2007 and September 1, 2006, respectively. Certain stock options and warrants were excluded from the 2007 calculations of diluted earnings per common share because their effect was antidilutive. The total number of such shares excluded from diluted earnings per common share was 825,978 shares and 25,000 shares for the three-month periods ended September 30, 2007 and September 30, 2006, respectively, and 1,532,436 shares and 13,600,000 shares for the nine-month periods ended September 30, 2007 and September 30, 2006, respectively. The 2,300,000 common shares, which were issued in April 2007 in connection with the 2006 earn-out provision of the merger agreement with Arpeggio, have been included, effective January 1, 2007, in both the basic and diluted weighted average shares for the three- and nine-month periods ended September 30, 2007.

Note 14—Share-Based Compensation

At September 30, 2007, the Company had 865,000 options outstanding with a weighted average exercise price of $7.60. During the nine months ended September 30, 2007, the Company granted 905,000 options, which vest over a five-year period, with a weighted average exercise price of $7.66 and a contractual life of seven years. The aggregate fair value of the options was $2,725,000 calculated using the Black-Scholes valuation model. The weighted average assumptions used to calculate the fair value were: expected life – five years; volatility – 37.1% and risk free interest rate – 4.47%. During 2007, options for 65,000 shares with a weighted average exercise price of $7.60 were forfeited.

The Company recognized share-based compensation expense in selling, general and administrative expenses in the Consolidated Statement of Earnings totaling $155,000 for the three-month period ended September 30, 2007 and $318,000 for the nine-month period ended September 30, 2007.

On February 28, 2007, the Board of Directors approved for future issuance 340,000 shares of restricted common stock to certain of its employees. Such shares will be issued at the fair market value on the date of grant and will vest over a period of five years from the date of grant. Upon issuance, the Company will record compensation expense ratably over five years.

Note 15—Warrants and Units

At September 30, 2007, the Company had 12,423,628 Redeemable Common Stock Purchase Warrants (the “Warrants”) issued and outstanding. Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing on June 28, 2006 (the completion of the Hill and Arpeggio merger) and expiring on June 23, 2008 (four years from the effective date of Arpeggio’s Initial Public Offering). The Warrants are redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period, ending on the third day prior to the date on which notice of redemption is given. On October 23, 2007, the Company notified the warrant holders of its intention to redeem the warrants on November 23, 2007. During the nine-months ended September 30, 2007, holders exercised 1,176,372 warrants and the Company received proceeds of $5,881,860. See Note 20.

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In connection with its Initial Public Offering, Arpeggio issued an option for $100 to the representative of the underwriters to purchase 300,000 Units at an exercise price of $9.90 per Unit, although the Units may be exercised on a cashless basis. Each Unit consists of one share of the Company’s common stock and warrants to purchase two shares of the Company’s common stock at an exercise price of $6.25 per share. The option expires in June 2009. See Note 20.

Note 16—Income Taxes

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 provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. The Company adopted the provisions of FIN 48 on December 31, 2006, the first day of our fiscal year. As a result of the implementation of FIN 48, the Company has analyzed filing positions in all of the federal, state and foreign filing jurisdictions where it is required to file income tax returns, as well as all open years in those jurisdictions. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions which would require a cumulative effect adjustment to retained earnings.

The Company files income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. As a result of its acquisition of Knowles, the Company has an ongoing audit with Inland Revenue for two Knowles affiliates for the years ended in 2000 through 2005. The Company generally is no longer subject to U.S. federal, state or foreign examinations by tax authorities for tax years prior to 2004.

The Company’s policy is to record income tax related interest and penalties in income tax expense. At September 30, 2007, the Company had accrued $2.3 million for potential interest and penalties related to uncertain tax positions.

Note 17—Business Segment Information

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims services) and secondarily by their geography (Americas, Europe, the Middle East and Asia/Pacific).

The Project Management business segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, staff augmentation, management consulting, and estimating and cost management services.

The Construction Claims business segment provides such services as claims consulting, litigation support, expert witness testimony, cost and damages assessment, delay and disruption analysis, lender advisory, and adjudication services to clients worldwide.

The Company evaluates the performance of its segments primarily on operating profit before corporate overhead allocations and income taxes.

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The following tables reflect the required disclosures for the Company’s reportable segments for the three- and nine-month periods ended September 30, 2007 and September 30, 2006 (in thousands):

Three Months Ended:

Revenue:

Operating Profit:

Depreciation and Amortization Expense:

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Revenue by Geographic Region:

Revenue by Client Type:

Nine Months Ended:

Revenue:

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Operating Profit:

Depreciation and Amortization Expense:

Revenue by Geographic Region:

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Revenue By Client Type:

Note 18—Concentrations

The Company had one client, the City of New York, that accounted for 12% of total revenue for the three months ended September 30, 2007, and two clients, the City of New York and Nakheel Corporation, that collectively accounted for 28% of total revenue for the three months ended September 30, 2006 and one client, Nakheel Corporation, that accounted for 14% of RLRE for the three months ended September 30, 2006.

The Company had one client, the City of New York, that accounted for 16% of total revenue and one client, Nakheel Corporation, that accounted for 10% of RLRE for the nine months ended September 30, 2007, and two clients, the City of New York and Nakheel Corporation, that collectively accounted for 31% of total revenue and one client, Nakheel Corporation that accounted for 16% of RLRE for the nine months ended September 30, 2006.

None of the Company’s clients accounted for 10% or more of accounts receivable as of September 30, 2007. One client, the City of New York, accounted for 10% of accounts receivable as of December 30, 2006.

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The Company has several contracts with U.S. federal government agencies that account for 19% and 9% of total revenue during the three-month period ended September 30, 2007 and September 30, 2006, respectively, and 12% and 10% of total revenue during nine-month period ended September 30, 2007 and September 30, 2006, respectively.

Note 19—Commitments and Contingencies

Litigation

On September 23, 1996, William Hughes General Contractors, Inc. (“Hughes”) filed a complaint in the Superior Court of New Jersey, Law Division, Gloucester County, against the Monroe Township Board of Education, the Company and other parties, alleging breach of contract and other causes of action in connection with its performance of a construction project for Monroe Township, seeking in excess of $3,500,000 in damages. Monroe Township, which had terminated Hughes from the construction project prior to the commencement of the litigation on the basis of Hughes’ performance, made a cross claim against the Company and other parties for contribution and indemnification. Monroe Township is seeking approximately $89,000 in damages from the Company, in addition to an indemnification for Hughes’ claims. In relation to the Hughes claims, a claim was made against the Company by Fidelity and Deposit Company of Maryland (“F&D”). F&D is claiming damages in the range of $425,000 to $470,000. The F&D claim is being defended by the New Jersey Professional Liability Insurance Guarantee Association (“NJPLIGA”) and losses are covered up to $300,000. The Company believes that the claims of Hughes, Monroe Township and F&D are without merit.

On September 22, 1999, Wartsila NSD North America, Inc. filed a complaint against the Company in the United States District Court for the District of New Jersey. Wartsila alleged negligence, breach of contract and fraud against the Company in connection with plaintiff’s hiring of a former Company employee and sought damages in excess of $7,300,000. A jury verdict was rendered on March 6, 2006. The jury found that the Company was negligent and breached the contract with plaintiff but that the Company did not commit fraud. The jury awarded damages of approximately $2,000,000. The Company filed a Motion to Mold the Verdict and to Enter Judgment consistent with the parties’ contract which contains a limitation of liability clause which limits the Company’s liability, absent fraud, to direct damages. In connection with the Arpeggio and Hill merger described in Note 1, stockholders of old Hill had escrowed a total of 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters (see below). Liability in this matter, if any, will ultimately be satisfied from such escrowed shares under the terms of an escrow agreement. On June 28, 2006 the Court denied the Company’s motion and the Company subsequently filed a Notice of Appeal on July 26, 2006 with the Third Circuit Court of Appeals. The Company has posted a letter of credit securing the judgment plus pre- and post-judgment interest in the amount of $3,350,000 as of September 30, 2007. At December 30, 2006, a previously posted letter of credit was secured by cash collateral which was included in “cash-restricted” on the Company’s Consolidated Balance Sheet. The Company also recorded an accrued liability in the amount of $3,350,000 which is included in “Accrued liabilities” on the Company’s Consolidated Balance Sheet at September 30, 2007 and December 30, 2006. From the shares held in escrow, 451,665 shares representing $3,350,000 have been allocated at September 30, 2007 for satisfaction of the judgment and will be placed in treasury stock in the event the judgment is ultimately paid.

On May 28, 2004, Sims Group, Inc. (“Sims”) filed a Demand for Arbitration with the American Arbitration Association alleging breach of contract against the Company. The plaintiff was a subcontractor to the Company and sought the alleged contract balance owed of $1,300,000. The Company filed a counterclaim on July 2, 2004 alleging fraud and breach of contract. This matter was arbitrated during April 2006 and an arbitration award was issued on June 28, 2006 awarding Sims $1,250,000 plus costs of $33,000. The Company had accrued a liability of $772,000 related to this matter prior to September 30, 2005. In connection with the Arpeggio and Hill merger described in Note 1 to the Consolidated Financial Statements, stockholders of old Hill had escrowed 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters. Liability in this matter in excess of amounts accrued as of

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September 30, 2005 was to be satisfied from such escrowed shares. In October 2006, the Company made a payment of approximately $1,300,000 to claimant to satisfy this matter in full. From the shares held in escrow, 69,540 shares representing $515,777 were released to the Company on July 16, 2007 for satisfaction of the judgment amount in excess of the amount accrued and have been placed in treasury.

On May 23, 2007 Hill filed a Demand for Arbitration with the American Arbitration Association alleging breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and/or fraudulent inducement against Bachmann Springs Holdings, LLC and Thomas Bachmann (hereinafter, collectively “Bachmann”). Hill was hired by Bachmann to provide professional support services and is demanding payment of invoices in the amount of $634,904. On October 17, 2007, Bachmann filed a counterclaim with the American Arbitration Association alleging fraud and breach of contract and seeking damages in the amount of $8,600,000. The Company believes that Bachmann’s counterclaim is without merit.

General Litigation

From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The provision may change in the future due to new developments or changes in circumstances. Changes in the provision could increase or decrease the Company’s earnings in the period the changes are made. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition or results of operations.

Note 20—Subsequent Events

Notes Payable

On October 15, 2007, the Company amended its credit facility with LaSalle Bank N.A. increasing the secured revolving credit facility from $25,000,000 to $35,000,000; increasing the letter of credit subfacility from $10,000,000 to $20,000,000; extending the term of the facility by one year to January 1, 2011; and increasing the amount of the minimum net worth that the Company covenants to maintain from $35,000,000 to $45,000,000.

Warrants

From October 1, 2007 through November 2, 2007, the Company received proceeds amounting to $13,246,780 upon the exercise of warrants to purchase 2,649,356 shares of its common stock at an exercise price of $5.00 per share.

Representative’s Units

On October 22, 2007, holders exercised on a cashless basis 288,000 unit purchase options and the underlying warrants resulting in the issuance of 208,390 shares of the Company’s common stock. These options were part of 300,000 unit purchase options that were granted to the representatives of the underwriters in connection with the initial public offering of Arpeggio in June 2004. There remain outstanding 12,000 unit purchase options.

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We make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information However, there may be events in the future that we are not able to predict accurately or over which we have no control. Examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in such forward-looking statements include those described in Part I, Item 1A “Risk Factors” of our 2006 Form 10-K. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of hereof. All forward-looking statements included herein attributable to us are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements.

We were incorporated in Delaware in 2004, under the name Arpeggio Acquisition Corporation (“Arpeggio”), as a specified purpose acquisition corporation. On June 28, 2006, we merged with Hill International, Inc. (“old Hill”), a Delaware corporation, and Arpeggio was the surviving entity of the merger. Old Hill was founded in 1976 by our current Chairman and Chief Executive Officer, Irvin E. Richter. Following the merger, we changed our name to Hill International, Inc. In this report, the terms “Company,” “we,” or “Hill” mean Hill International, Inc. and its consolidated subsidiaries. All historical statements relate to the business of old Hill and its consolidated subsidiaries.

We provide fee-based services to clients worldwide, but primarily in the United States, Europe, the Middle East and Asia/Pacific. Our clients include the United States and other national governments and their agencies, state and local governments and their agencies and the private sector. Hill is organized into two key operating segments: the Project Management Group and the Construction Claims Group.

Our Project Management Group provides fee-based or “agency” construction management services to our clients leveraging our construction expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Our Construction Claims Group, advises clients in order to assist them in preventing or resolving claims and disputes based upon schedule delays, cost overruns and other problems on major construction projects worldwide.

We believe we are a world leader in both the project management and construction claims consulting businesses. We are a global company with over 1,500 employees operating out of nearly 70 offices in more than 25 countries.

We derive our revenues from fees for professional services. As a service company we are labor intensive rather than capital intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. Our income from operations is derived from our ability to generate revenue and collect cash under our contracts in excess of direct labor and other direct costs of executing the projects, subcontractors and other reimbursable costs and selling, general and administrative costs.

We believe there are high barriers to entry for new competitors, particularly in the project management sector. We compete for business based on reputation and past experience, including client requirements for substantial similar project and claims experience of the firm. We have developed significant long-standing relationships which bring us repeat business and would be very difficult to replicate. We have an excellent reputation for developing and rewarding employees, which allows us to attract and retain superior professionals.

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Critical Accounting Policies

The Company’s interim financial statements were prepared in accordance with generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions identified in the Company’s 2006 Annual Report on Form 10-K filed March 30, 2007 with the Securities and Exchange Commission have not materially changed.

Commencing in 2007, we changed our reporting periods to coincide with the end of each calendar quarter. Prior to 2007, we utilized a 52-53 week fiscal year ending on the Saturday closest to December 31. The difference resulting from this change in reporting periods for the three- and nine-month periods ended September 30, 2007 is not significant.

Three Months Ended September 30, 2007 Compared to

Three Months Ended September 30, 2006

Results of Operations

Revenue

The increase in project management revenue consists of a $10,900,000 increase in domestic project management revenue and a $391,000 increase in foreign project management revenue. The increase in domestic project management revenue was primarily due to a $4,041,000 increase in our New York City office where several projects began during 2006 and 2007. Of this increase, $2,643,000 was for use of subcontractors. We use subcontractors for a variety of reasons, including providing at-risk construction services on contracts where such work is required by a client (generally known as “CM/Build” contracts) since we do not provide such services. The New York City office projects are principally CM/Build contracts which require more subcontracting work. An increase in revenue of $3,532,000 for the Iraq projects and $3,924,000 in revenue for KJM & Associates, Ltd. (“KJM”) (acquired effective May 1, 2007) also contributed to the increase in domestic project management revenue. The increase in foreign project management revenue was due to a $779,000 increase generated in the Middle East and a $388,000 decrease generated in Europe. Middle East revenues continue to increase in the United Arab Emirates as well as an expansion into Saudi Arabia. In Europe, the decrease primarily consisted of lower use of sub-consultants which was offset by lower reimbursable expenses.

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The increase in construction claims revenue is due to a $10,599,000 increase in foreign construction claims revenue and an increase of $421,000 in domestic construction claims revenue. The increase in foreign construction claims revenue consists of $7,746,000 generated in Europe and Asia/Pacific, primarily as a result of the acquisition of Knowles in August 2006, a $2,013,000 increase in our London office (excluding Knowles) and an increase of $840,000 in the Middle East, primarily due to the Knowles acquisition. The Knowles operations in the U.S. and Middle East were consolidated into Hill effective January 1, 2007, and the integration of the other Knowles operations is now substantially complete. The increase in domestic claims revenue of $421,000 is principally attributable to an increase of $967,000 in our New Jersey office and an increase of $214,000 in our Washington DC office. In addition, the West Cost offices (San Francisco and Los Angeles) had a decrease of $807,000 due to the wind down of two large claim assignments.

Reimbursable Expenses