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 30, 2005March 31, 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 registrantregistrant: (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, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Exchange Act Rule 12b-2 of the Securities Exchange Act of 1934). YESAct. (Check one):
Large Accelerated Filer ¨ Accelerated Filer x NONon-Accelerated Filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): YesAct). YES ¨ NoNO 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 OctoberApril 28, 2005,2006, there were 44,114,68044,601,102 shares of common stock outstanding.
TABLE OF CONTENTS
PART I | ||||
Item 1. | ||||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
| 14 | |||
Item | ||||
| 18 | |||
PART II OTHER INFORMATION | ||||
| ||||
| ||||
| ||||
Item 1. | ||||
Item 6. Exhibits | 19 | |||
| 20 | ||||
| 21 | ||||
PART I - FINANCIAL INFORMATION
(in thousands, except share data)
| September 30, 2005 | December 31, 2004 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 30,595 | $ | 38,890 | ||||
Marketable investments | 4,966 | — | ||||||
Accounts receivable and unbilled revenue, net of allowance of $1,430 and $2,109 at September 30, 2005 and December 31, 2004, respectively | 39,155 | 28,883 | ||||||
Prepaid expenses and other current assets | 2,108 | 3,459 | ||||||
Total current assets | 76,824 | 71,232 | ||||||
Marketable investments | 4,911 | 9,902 | ||||||
Restricted cash | 600 | 3,000 | ||||||
Property and equipment, net | 6,376 | 7,568 | ||||||
Other assets | 2,285 | 3,245 | ||||||
Goodwill, net | 35,683 | 33,786 | ||||||
Total assets | $ | 126,679 | $ | 128,733 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,280 | $ | 3,462 | ||||
Accrued expenses and other liabilities | 19,775 | 17,910 | ||||||
Total current liabilities | 24,055 | 21,372 | ||||||
Accrued expenses and other liabilities, non-current | 2,851 | 7,507 | ||||||
Total liabilities | 26,906 | 28,879 | ||||||
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: 50,646,835 shares at September 30, 2005; 48,969,181 shares at December 31, 2004 | 51 | 49 | ||||||
Additional paid-in capital | 279,623 | 277,356 | ||||||
Unearned compensation | (6,417 | ) | (6,011 | ) | ||||
Treasury stock, at cost, 6,534,155 shares at September 30, 2005 and 5,526,855 shares at December 31, 2004 | (22,119 | ) | (18,178 | ) | ||||
Accumulated deficit | (151,477 | ) | (153,389 | ) | ||||
Accumulated other comprehensive income | 112 | 27 | ||||||
Total shareholders’ equity | 99,773 | 99,854 | ||||||
Total liabilities and shareholders’ equity | $ | 126,679 | $ | 128,733 | ||||
| March 31, 2006 | December 30, 2005 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,785 | $ | 18,103 | ||||
Marketable investments | 4,928 | 9,902 | ||||||
Restricted cash | — | 3,657 | ||||||
Accounts receivable and unbilled revenue, net of allowance of $2,141 and $1,766 at March 31, 2006 and December 30, 2005 | 42,182 | 41,928 | ||||||
Prepaid expenses and other current assets | 3,393 | 3,273 | ||||||
Total current assets | 69,288 | 76,863 | ||||||
Restricted cash | 600 | 600 | ||||||
Property and equipment, net | 5,485 | 6,304 | ||||||
Other assets | 5,489 | 6,422 | ||||||
Goodwill, net | 62,176 | 61,692 | ||||||
Total assets | $ | 143,038 | $ | 151,881 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,807 | $ | 6,319 | ||||
Accrued expenses and other liabilities | 35,681 | 37,751 | ||||||
Loan payable | — | 3,657 | ||||||
Total current liabilities | 40,488 | 47,727 | ||||||
Accrued expenses and other liabilities, non-current | 5,750 | 3,272 | ||||||
Total liabilities | 46,238 | 50,999 | ||||||
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: 51,769,386 shares at March 31, 2006; 51,020,343 shares at December 30, 2005 | 51 | 51 | ||||||
Additional paid-in capital | 276,663 | 274,746 | ||||||
Treasury stock, at cost, 6,534,155 shares at March 31, 2006 and December 30, 2005 | (22,119 | ) | (22,119 | ) | ||||
Accumulated deficit | (157,702 | ) | (151,748 | ) | ||||
Accumulated other comprehensive loss | (93 | ) | (48 | ) | ||||
Total shareholders’ equity | 96,800 | 100,882 | ||||||
Total liabilities and shareholders’ equity | $ | 143,038 | $ | 151,881 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Quarter Ended | Nine Months Ended | |||||||||||||||
| September 30, 2005 | October 1, 2004 | September 30, 2005 | October 1, 2004 | |||||||||||||
Revenues: | ||||||||||||||||
Revenues before reimbursements | $ | 36,171 | $ | 33,329 | $ | 106,789 | $ | 98,893 | ||||||||
Reimbursements | 3,834 | 3,802 | 11,788 | 10,976 | ||||||||||||
Total revenues | 40,005 | 37,131 | 118,577 | 109,869 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Project personnel and expenses: | ||||||||||||||||
Project personnel and expenses before reimbursable expenses | 19,700 | 19,845 | 60,239 | 57,376 | ||||||||||||
Reimbursable expenses | 3,834 | 3,802 | 11,788 | 10,976 | ||||||||||||
Total project personnel and expenses | 23,534 | 23,647 | 72,027 | 68,352 | ||||||||||||
Selling, general and administrative expenses | 13,619 | 12,081 | 42,038 | 36,122 | ||||||||||||
Restructuring costs | — | — | 1,134 | 3,749 | ||||||||||||
Stock compensation expense | 905 | 597 | 2,190 | 1,891 | ||||||||||||
Total costs and operating expenses | 38,058 | 36,325 | 117,389 | 110,114 | ||||||||||||
Income (loss) from operations | 1,947 | 806 | 1,188 | (245 | ) | |||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 346 | 184 | 930 | 570 | ||||||||||||
Interest expense | (12 | ) | (40 | ) | (52 | ) | (40 | ) | ||||||||
Income before income taxes and income from discontinued operations | 2,281 | 950 | 2,066 | 285 | ||||||||||||
Income taxes | 174 | 126 | 155 | 73 | ||||||||||||
Income from continuing operations | 2,107 | 824 | 1,911 | 212 | ||||||||||||
Income from discontinued operations | — | — | — | 370 | ||||||||||||
Net income | $ | 2,107 | $ | 824 | $ | 1,911 | $ | 582 | ||||||||
Basic net income per common share: | ||||||||||||||||
Income from continuing operations | $ | 0.05 | $ | 0.02 | $ | 0.04 | $ | — | ||||||||
Income from discontinued operations | $ | — | $ | — | $ | — | $ | 0.01 | ||||||||
Net income per common share | $ | 0.05 | $ | 0.02 | $ | 0.04 | $ | 0.01 | ||||||||
Weighted average common shares outstanding | 43,912 | 43,900 | 43,379 | 44,427 | ||||||||||||
Diluted net income per common share: | ||||||||||||||||
Income from continuing operations | $ | 0.05 | $ | 0.02 | $ | 0.04 | $ | — | ||||||||
Income from discontinued operations | $ | — | $ | — | $ | — | $ | 0.01 | ||||||||
Net income per common share | $ | 0.05 | $ | 0.02 | $ | 0.04 | $ | 0.01 | ||||||||
Weighted average common and common equivalent shares outstanding | 46,750 | 47,960 | 47,143 | 48,824 | ||||||||||||
| Quarter Ended | ||||||||
| March 31, 2006 | April 1, 2005 | |||||||
Revenues: | ||||||||
Revenues before reimbursements | $ | 44,896 | $ | 33,178 | ||||
Reimbursements | 4,935 | 3,694 | ||||||
Total revenues | 49,831 | 36,872 | ||||||
Costs and expenses: | ||||||||
Cost of service: | ||||||||
Personnel costs before reimbursable expenses (includes $220 and $122 of stock compensation expense in 2006 and 2005, respectively) | 26,464 | 20,508 | ||||||
Reimbursable expenses | 4,935 | 3,694 | ||||||
Total cost of service | 31,399 | 24,202 | ||||||
Selling, general and administrative expenses (includes $856 and $435 of stock compensation expense in 2006 and 2005, respectively) | 17,791 | 13,319 | ||||||
Restructuring costs | 6,313 | 1,134 | ||||||
Total costs and operating expenses | 55,503 | 38,655 | ||||||
Loss from operations | (5,672 | ) | (1,783 | ) | ||||
Other income (expense): | ||||||||
Interest income | 189 | 263 | ||||||
Interest expense | (106 | ) | (24 | ) | ||||
Loss before income taxes | (5,589 | ) | (1,544 | ) | ||||
Income taxes | 365 | (114 | ) | |||||
Net loss | $ | (5,954 | ) | $ | (1,430 | ) | ||
Basic net loss per common share: | ||||||||
Net loss per common share | $ | (0.13 | ) | $ | (0.03 | ) | ||
Weighted average common shares outstanding | 44,518 | 43,439 | ||||||
Diluted net loss per common share: | ||||||||
Net loss per common share | $ | (0.13 | ) | $ | (0.03 | ) | ||
Weighted average common and common equivalent shares outstanding | 44,518 | 43,439 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended | ||||||||
| September 30, 2005 | October 1, 2004 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,911 | $ | 582 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 3,590 | 3,710 | ||||||
Provision for doubtful accounts | 303 | 711 | ||||||
Non-cash compensation expense | 2,190 | 1,891 | ||||||
Changes in assets and liabilities, net of effects from acquisitions: | ||||||||
Increase in accounts receivable and unbilled revenue | (10,520 | ) | (6,252 | ) | ||||
Decrease (increase) in prepaid expenses and other assets | (401 | ) | 676 | |||||
Increase (decrease) in accounts payable | 818 | (365 | ) | |||||
Decrease in accrued expenses and other liabilities | (1,041 | ) | (1,792 | ) | ||||
Net cash used in operating activities | (3,150 | ) | (839 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (1,139 | ) | (2,862 | ) | ||||
Decrease in restricted cash | 2,400 | — | ||||||
Purchases of marketable investments | (27,900 | ) | (35,000 | ) | ||||
Proceeds from calls, sales and maturities of marketable investments | 27,900 | 15,000 | ||||||
Cash used in acquisition of business, net of cash acquired | (2,237 | ) | (6,116 | ) | ||||
Net cash used in investing activities | (976 | ) | (28,978 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 940 | 2,138 | ||||||
Payment of employee withholding tax related to restricted stock units | (1,168 | ) | — | |||||
Repurchases of common stock | (3,941 | ) | (8,171 | ) | ||||
Net cash used in financing activities | (4,169 | ) | (6,033 | ) | ||||
Net decrease in cash and cash equivalents | (8,295 | ) | (35,850 | ) | ||||
Cash and cash equivalents at beginning of period | 38,890 | 54,441 | ||||||
Cash and cash equivalents at end of period | $ | 30,595 | $ | 18,591 | ||||
| Quarter Ended | ||||||||
| March 31, 2006 | April 1, 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (5,954 | ) | $ | (1,430 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Write-off of leasehold improvements | 715 | — | ||||||
Depreciation and amortization | 1,640 | 1,262 | ||||||
Provision for doubtful accounts | 389 | — | ||||||
Non-cash compensation expense | 1,076 | 557 | ||||||
Changes in assets and liabilities, net of effects from acquisitions: | ||||||||
Decrease (increase) in accounts receivable and unbilled revenue | (571 | ) | 48 | |||||
Increase in prepaid expenses and other assets | (157 | ) | (400 | ) | ||||
Decrease in accounts payable | (1,512 | ) | (293 | ) | ||||
Increase (decrease) in accrued expenses and other liabilities | 1,842 | (6 | ) | |||||
Net cash used in operating activities | (2,532 | ) | (262 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (570 | ) | (157 | ) | ||||
Decrease in restricted cash | 3,657 | 295 | ||||||
Purchases of marketable investments | — | (27,900 | ) | |||||
Proceeds from calls, sales and maturities of marketable investments | 5,000 | 4,000 | ||||||
Cash used in acquisition of business, net of cash acquired | (353 | ) | (331 | ) | ||||
Net cash provided by (used in) investing activities | 7,734 | (24,093 | ) | |||||
Cash flows from financing activities: | ||||||||
Repayments of borrowings | (1,101 | ) | — | |||||
Repayment of loan payable | (3,657 | ) | — | |||||
Proceeds from issuance of common stock | 238 | 111 | ||||||
Repurchases of common stock | — | (809 | ) | |||||
Net cash used in financing activities | (4,520 | ) | (698 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 682 | (25,053 | ) | |||||
Cash and cash equivalents at beginning of period | 18,103 | 38,890 | ||||||
Cash and cash equivalents at end of period | $ | 18,785 | $ | 13,837 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements of Answerthink,Inc. (“Answerthink” or the “Company”) include the accounts of the Company and all of its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 200430, 2005 included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. The consolidated results of operations for the quarter and nine months ended September 30, 2005March 31, 2006 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.
2. Pro Forma Impact of Employee Stock Option Plans
The Company applies Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employeesand related interpretations, in accounting for its stock option plans related to the grant of stock options and stock-based awards to employees (including independent directors). In accordance with APB Opinion No. 25, compensation expense, if any, is generally based on the difference between the exercise price of an option, or the amount paid for an award, and the market price or fair value of the underlying common stock at the date of the award or at the measurement date for variable awards. Stock-based compensation arrangements involving non-employees are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, under which such arrangements are accounted for based on the fair value of the option or award.
Under SFAS No. 123, compensation cost for the Company’s stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Had the Company adopted SFAS No. 123 in accounting for its stock option plans, the Company’s consolidated net income (loss) and net income (loss) per share for the quarters and nine months ended September 30, 2005 and October 1, 2004 would have been adjusted to the pro forma amounts indicated as follows (in thousands, except per share data):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| September 30, 2005 | October 1, 2004 | September 30, 2005 | October 1, 2004 | |||||||||||||
Net income, as reported | $ | 2,107 | $ | 824 | $ | 1,911 | $ | 582 | ||||||||
Add: Stock based employee compensation expense included in reported net income, net of related tax effects | 905 | 597 | 2,190 | 1,891 | ||||||||||||
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 | ) | (1,378 | ) | (3,616 | ) | (4,182 | ) | ||||||||
Pro forma net income (loss) | $ | 1,696 | $ | 43 | $ | 485 | $ | (1,709 | ) | |||||||
Basic and Diluted net income (loss) per common share: | ||||||||||||||||
As reported | $ | 0.05 | $ | 0.02 | $ | 0.04 | $ | 0.01 | ||||||||
Pro forma | $ | 0.04 | $ | 0.00 | $ | 0.01 | $ | (0.04 | ) | |||||||
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. Net IncomeLoss Per Common Share
Basic net incomeloss per common share is computed by dividing net incomeloss 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 shares related to the vested portion of such restricted stock units.stock. Accordingly, common shares outstanding for the basic net loss per share computation is lower than actual shares issued.
Diluted net incomeNet loss per common share assuming dilution is computed by dividing net incomeloss by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period. For
Potentially dilutive shares were excluded from the quarterdiluted loss per share calculation for the quarters ended March 31, 2006 and nine months ended September 30,April 1, 2005 potentiallybecause their effects would have been anti-dilutive to the loss incurred by the Company. Therefore, the amounts reported for basic and diluted net loss per share were the same for those periods. Potentially dilutive securities which were not included 2,621,266 sharesin the diluted loss per share calculation for the quarters ended March 31, 2006 and 3,534,791April 1, 2005 include 1,705,212 and 2,181,591 shares, respectively, of shares underlying unvested common stock subject to vesting requirements and restricted stock units issued to employees and 216,857 shares327,407 and 228,880293,691 shares, respectively, of common stock issuable upon the exercise of stock options and warrants following the treasury stock method. Potentially dilutive securities for the quarter and nine months ended October 1, 2004 included 3,618,463 shares and 3,628,691 shares, respectively, of shares underlying unvested restricted stock units issued to employees and 441,268 shares and 769,122 shares, respectively, of common stock issuable upon the exercise of stock options and warrants following the treasury stock method.
4.3. Comprehensive IncomeLoss
The Company accounts for comprehensive income under SFAS No. 130,Reporting Comprehensive Income. Comprehensive incomeloss is summarized below (in thousands):
| Quarter Ended | Nine Months Ended | |||||||||||||
| September 30, 2005 | October 1, 2004 | September 30, 2005 | October 1, 2004 | |||||||||||
Net income | $ | 2,107 | $ | 824 | $ | 1,911 | $ | 582 | ||||||
Change in cumulative foreign currency translation adjustment | 17 | 38 | 110 | 73 | ||||||||||
Change in net unrealized gain (loss) on marketable investments | — | 58 | (25 | ) | (55 | ) | ||||||||
Comprehensive income | $ | 2,124 | $ | 920 | $ | 1,996 | $ | 600 | ||||||
5. Accounts Receivable and Unbilled Revenue, Net
Accounts receivable and unbilled revenues, net consists of the following (in thousands):
| September 30, 2005 | December 31, 2004 | |||||||
Accounts receivable | $ | 33,010 | $ | 24,932 | ||||
Unbilled revenue | 7,575 | 6,060 | ||||||
Allowance for doubtful accounts | (1,430 | ) | (2,109 | ) | ||||
| $ | 39,155 | $ | 28,883 | |||||
| Quarter Ended | ||||||||
| March 31, 2006 | April 1, 2005 | |||||||
Net loss | $ | (5,954 | ) | $ | (1,430 | ) | ||
Change in cumulative foreign currency translation adjustment | (72 | ) | 14 | |||||
Change in net unrealized gain (loss) on marketable investments | 27 | (63 | ) | |||||
Comprehensive loss | $ | (5,999 | ) | $ | (1,479 | ) | ||
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. Accounts Receivable and Unbilled Revenue, Net
Accounts receivable and unbilled revenues, net consists of the following (in thousands):
| March 31, 2006 | December 30, 2005 | |||||||
Accounts receivable | $ | 33,001 | $ | 35,870 | ||||
Unbilled revenue | 11,322 | 7,824 | ||||||
Allowance for doubtful accounts | (2,141 | ) | (1,766 | ) | ||||
| $ | 42,182 | $ | 41,928 | |||||
5. 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.
6. Restructuring Accrual
The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions in consultantsassociates and functional support personnel and for closure and consolidation of facilities and related exit costs. These actions were taken as a result of the continued decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align the Company’sits overall cost structure and organization with anticipated demand for services throughout 2001 and 2002. 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 the second quarter of 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the consolidated statement of operations. operations for the year ended December 31, 2004.
In 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 a buyout of the Company’sour New York City lease obligation. In connection with this transaction, the Company recorded additional restructuring costs of $1.1 million to increase existing reserves. As a result of the buyout, the Company was fully released during the second quarter of 2005, from $20 million of future lease obligations, and the Company assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. The 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.
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Restructuring Accrual (continued)
In 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.
The following table sets forth the detail and activity in the restructuring expense accrual during the nine monthsquarter ended September 30, 2005March 31, 2006 (in thousands):
2001 Restructuring Accrual
| Accrual Balance at December 31, 2004 | Adjustments to Accrual | Expenditures | Accrual 2005 | ||||||||||
Closure and consolidation of facilities and related exit costs | $ | 2,674 | $ | — | $ | (552 | ) | $ | 2,122 | ||||
| Accrual Balance at December 30, 2005 | Adjustments to Accrual | Expenditures | Accrual Balance at March 31, 2006 | ||||||||||
Closure and consolidation of facilities and related exit costs | $ | 2,617 | $ | 387 | $ | (216 | ) | $ | 2,788 | ||||
2002 Restructuring Accrual
| Accrual Balance at December 31, 2004 | Adjustments to Accrual | Write-off of Lessor Receivable | Expenditures | Accrual 2005 | |||||||||||||
Closure and consolidation of facilities and related exit costs | $ | 5,370 | $ | 1,134 | $ | (1,374 | ) | $ | (3,415 | ) | $ | 1,715 | |||||
| Accrual Balance at December 30, 2005 | Adjustments to Accrual | Expenditures | Accrual Balance at March 31, 2006 | ||||||||||
Closure and consolidation of facilities and related exit costs | $ | 1,151 | $ | 3,094 | $ | (80 | ) | $ | 4,165 | ||||
2005 Restructuring Accrual
| Accrual Balance at December 30, 2005 | Adjustments to Accrual | Asset Write-Off | Expenditures | Accrual Balance at March 31, 2006 | |||||||||||||
Severance and other employee costs | $ | 372 | $ | 906 | $ | — | $ | (468 | ) | $ | 810 | ||||||
Closure and consolidation of facilities and related exit costs | 694 | 1,926 | (715 | ) | (165 | ) | 1,740 | ||||||||||
| $ | 1,066 | $ | 2,832 | $ | (715 | ) | $ | (633 | ) | $ | 2,550 | ||||||
7. 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
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Shareholders’ EquityStock Based Compensation (continued)
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.
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 March 31, 2006 | ||||||||
| As Reported | Under APB No. 25 | |||||||
Loss before income taxes | $ | (5,589 | ) | $ | (5,427 | ) | ||
Net loss | $ | (5,954 | ) | $ | (5,792 | ) | ||
Results for the quarter ended April 1, 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 loss and net loss per share for the three months ended April 1, 2005 would have been adjusted to the pro forma amounts indicated below:
| Quarter Ended April 1, 2005 | ||||
Net loss, as reported | $ | (1,430 | ) | |
Add: Stock based employee compensation expense included in reported net loss, net of related tax effects | 557 | |||
Deduct: Total stock based employee pro forma compensation expense determined under fair value based method for all awards, net of related tax effects | (1,120 | ) | ||
Pro forma net loss | $ | (1,993 | ) | |
Basic net loss per common share: | ||||
As reported | $ | (0.03 | ) | |
Pro forma | $ | (0.05 | ) | |
Diluted net loss per common share: | ||||
As reported | $ | (0.03 | ) | |
Pro forma | $ | (0.05 | ) | |
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Stock Based Compensation (continued)
Stock Plans
Total share based compensation included in the net loss for the quarter ended March 31, 2006 was $1.1 million. The number of shares available for future issuance under the plans at March 31, 2006 is 10,634,469 shares. The Company issues new shares as shares are required to be delivered under the plan.
AsStock Options
The Company has granted stock options to employees and directors of September 30, 2005 and October 1, 2004, the Company had 2,378,768 and 3,610,830 restricted stock units outstanding, respectively. The Company recorded compensation expense totaling $817 thousand and $599 thousand, respectively, duringat exercise prices equal to the quarters ended September 30, 2005 and October 1, 2004, based on the vesting provisions of the restricted stock units and the fair market value of the stock 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 (in thousands) | ||||||||
Outstanding at December 31, 2005 | 2,445,321 | $ | 5.63 | ||||||||
Granted | — | — | |||||||||
Exercised | (72,347 | ) | 3.28 | ||||||||
Canceled | (133,655 | ) | 5.41 | ||||||||
Outstanding at March 31, 2006 | 2,239,319 | $ | 5.72 | 5.97 | $ | 1,600 | |||||
Exercisable at March 31, 2006 | 1,618,234 | $ | 5.92 | 5.36 | $ | 829 | |||||
Other information pertaining to option activity during the quarter was as follows (in thousands):
| Quarter Ended | ||||||
| March 31, 2006 | April 1, 2005 | |||||
Total fair value of stock options vested | $ | 612 | $ | 1,065 | ||
Total intrinsic value of stock options exercised | $ | 171 | $ | 44 | ||
No options were granted during the quarters ended March 31, 2006 and April 1, 2005. The Company recorded stock based compensation totaling $162 thousand during the quarter ended March 31, 2006 related to the unvested portion of previously granted stock options.
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% |
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. 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. During the nine months ended September 30, 2005 and October 1, 2004, the Company recorded $2.1 million and $1.8 million, respectively, of compensation expense based on theUpon vesting, provisions of the restricted stock units andwill convert into an equivalent number of shares of common stock. The amount of expense relating to the fairrestricted stock units is based on the closing market valueprice of the Company’s common stock on the date of grant date.and is amortized on a straight-line basis over the four-year requisite service period. Restricted stock unit activity for the quarter ended March 31, 2006 was as follows:
| Quarter Ended March 31, 2006 | ||||||
| Number of Restricted Stock Units | Weighted Average Grant-Date Fair Value | |||||
Nonvested balance at December 31, 2005 | 2,828,633 | $ | 3.43 | |||
Granted | 570,864 | 5.67 | ||||
Vested | — | — | ||||
Forfeited | (706,046 | ) | 3.93 | |||
Nonvested balance at March 31, 2006 | 2,693,451 | $ | 3.77 | |||
The Company recorded stock based compensation totaling $745 thousand and $605 thousand, respectively, related to restricted stock units during the quarters ended March 31, 2006 and April 1, 2005. As of September 30,March 31, 2006, there was $6.8 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 2.24 years.
As of April 1, 2005, the Company had 169,295 outstandingof stock options which arewere accounted for under variable plan accounting pursuant to FASB Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The weighted average exercise price of these outstanding options is $3.96. Variable plan accounting resulted in a reduction of stock compensation expense of approximately $31 thousand and $112$48 thousand for the quarter ended September 30, 2005April 1, 2005.
Common Stock Subject to Vesting Requirements
Shares of common stock subject to vesting requirements were issued in connection with an acquisition to certain 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 the nine months ended October 1, 2004, respectively, andis recognized on a reduction instraight-line basis. Restricted stock compensation expense of $49 thousand and $2 thousandactivity for the nine months ended September 30, 2005 and the quarter ended October 1, 2004, respectively.March 31, 2006 was as follows:
| Quarter Ended March 31, 2006 | |||||
Number of Shares of Common Stock | Weighted Average Grant-Date Fair Value | ||||
Nonvested balance at December 31, 2005 | — | $ | — | ||
Granted | 676,695 | 3.99 | |||
Vested | — | — | |||
Forfeited | — | — | |||
Nonvested balance at March 31, 2006 | 676,695 | $ | 3.99 | ||
Answerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Shareholders’ EquityStock Based Compensation (continued)
The Company recorded compensation expense totaling $169 thousand during the quarter ended March 31, 2006 related to common stock subject to vesting requirements. As of March 31, 2006, there was $2.5 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 3.67 years.
8. 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 quarter ended March 31, 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 the second quarter of 2005, the Board of Directors approved the repurchase of an additional $25 million of the Company’s common stock, thereby increasing the total program size to $30 million. Under the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. During the quarter ended September 30, 2005,March 31, 2006, the Company did notmade no repurchase any shares of its common stock. As of September 30, 2005,March 31, 2006, the Company had repurchased 6,534,155 shares of its common stock at an average price of $3.39 per share.
Common stock
The delivery of 438,751 shares of our common stock classified as issued as of September 30, 2005 in the accompanying balance sheet was deferred by employees entitled to receive these shares in connection with the vesting of restricted stock units. The shares will be delivered to the employees at the expiration of the deferral period elected by the employees or upon their termination of employment.
8.9. 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 financial position, cash flows or results of operations of the Company.
10. Geographic and Service Group Information
9. Recent Accounting PronouncementsRevenues are attributed to geographic areas as follows (in thousands):
| Quarter Ended | ||||||
| March 31, 2006 | April 1, 2005 | |||||
Total Revenues | ||||||
Domestic | $ | 44,099 | $ | 34,844 | ||
Foreign | 5,732 | 2,028 | ||||
Total | $ | 49,831 | $ | 36,872 | ||
InAnswerthink, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. Geographic and Service Group Information (continued)
Long-lived assets are attributed to geographic areas as follows (in thousands):
| March 31, 2006 | December 30, 2005 | |||||
Long-Lived Assets | ||||||
Domestic | $ | 41,842 | $ | 43,112 | ||
Foreign | 31,308 | 31,306 | ||||
Total | $ | 73,150 | $ | 74,418 | ||
As of March 31, 2006 and December 2004,30, 2005, foreign assets included $31 million of goodwill and intangible assets related to REL, a UK based company.
The Company’s revenue is derived from the Financial Accounting Standards Board issued SFAS 123 (revised 2004),Share-Based Payment, (“SFAS 123R”). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25,Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expensefollowing service groups (in thousands):
| Quarter Ended | ||||||
| March 31, 2006 | April 1, 2005 | |||||
The Hackett Group | ||||||
Benchmarking | $ | 4,623 | $ | 4,633 | ||
Membership Advisory Programs | 2,236 | 1,675 | ||||
Transformation Advisory | 18,354 | 9,079 | ||||
Best Practices Solutions | ||||||
Business Applications | 14,124 | 13,233 | ||||
Business Intelligence | 10,494 | 8,252 | ||||
Total Revenues | $ | 49,831 | $ | 36,872 | ||
11. Reclassifications
Certain prior year amounts in the consolidated statement of income. The Company will be requiredfinancial statements have been reclassified to adopt SFAS 123R in the first quarter of 2006 and has not yet determined which fair-value method and transitional provision it will follow, or if the adoption of SFAS 123R will have a significant impact on its results of operations.conform to current year presentation.
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 the information technologyour 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 for the year ended December 31, 2004.30, 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.
OVERVIEW
Answerthink, Inc. is a leading business advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository of enterprise business process performance metrics and best practice metrics and business process knowledge,intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments. Our
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 advisory, business transformation, working capital management, business applications, and business intelligence, andwith corresponding offshore application development and support. Answerthink was formed on April 23, 1997.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenues of such results:
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2005 | October 1, 2004 | September 30, 2005 | October 1, 2004 | ||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||
Revenues before reimbursements | $ | 36,171 | 90.4 | % | $ | 33,329 | 89.8 | % | $ | 106,789 | 90.1 | % | $ | 98,893 | 90.0 | % | |||||||||
Reimbursements | 3,834 | 9.6 | % | 3,802 | 10.2 | % | 11,788 | 9.9 | % | 10,976 | 10.0 | % | |||||||||||||
Total revenues | 40,005 | 100.0 | % | 37,131 | 100.0 | % | 118,577 | 100.0 | % | 109,869 | 100.0 | % | |||||||||||||
Costs and expenses: | |||||||||||||||||||||||||
Project personnel and expenses: | |||||||||||||||||||||||||
Project personnel and expenses before reimbursable expenses | 19,700 | 49.2 | % | 19,845 | 53.5 | % | 60,239 | 50.8 | % | 57,376 | 52.2 | % | |||||||||||||
Reimbursable expenses | 3,834 | 9.6 | % | 3,802 | 10.2 | % | 11,788 | 9.9 | % | 10,976 | 10.0 | % | |||||||||||||
Total project personnel and expenses | 23,534 | 58.8 | % | 23,647 | 63.7 | % | 72,027 | 60.7 | % | 68,352 | 62.2 | % | |||||||||||||
Selling, general and administrative expenses | 13,619 | 34.0 | % | 12,081 | 32.5 | % | 42,038 | 35.5 | % | 36,122 | 32.9 | % | |||||||||||||
Restructuring costs | — | — | — | — | 1,134 | 1.0 | % | 3,749 | 3.4 | % | |||||||||||||||
Stock compensation expense | 905 | 2.3 | % | 597 | 1.6 | % | 2,190 | 1.8 | % | 1,891 | 1.7 | % | |||||||||||||
Total costs and operating expenses | 38,058 | 95.1 | % | 36,325 | 97.8 | % | 117,389 | 99.0 | % | 110,114 | 100.2 | % | |||||||||||||
Income (loss) from operations | 1,947 | 4.9 | % | 806 | 2.2 | % | 1,188 | 1.0 | % | (245 | ) | (0.2 | %) | ||||||||||||
Other income: | |||||||||||||||||||||||||
Interest income, net | 334 | 0.8 | % | 144 | 0.3 | % | 878 | 0.7 | % | 530 | 0.5 | % | |||||||||||||
Income before income taxes and income from discontinued operations | 2,281 | 5.7 | % | 950 | 2.5 | % | 2,066 | 1.7 | % | 285 | 0.3 | % | |||||||||||||
Income taxes | 174 | 0.4 | % | 126 | 0.3 | % | 155 | 0.1 | % | 73 | 0.1 | % | |||||||||||||
Income from continuing operations | 2,107 | 5.3 | % | 824 | 2.2 | % | 1,911 | 1.6 | % | 212 | 0.2 | % | |||||||||||||
Income from discontinued operations | — | — | — | — | — | — | 370 | 0.3 | % | ||||||||||||||||
Net Income | $ | 2,107 | 5.3 | % | $ | 824 | 2.2 | % | $ | 1,911 | 1.6 | % | $ | 582 | 0.5 | % | |||||||||
| Quarter Ended | ||||||||||||||
| March 31, 2006 | April 1, 2005 | |||||||||||||
Revenues: | ||||||||||||||
Revenues before reimbursements | $ | 44,896 | 90.1 | % | $ | 33,178 | 90.0 | % | ||||||
Reimbursements | 4,935 | 9.9 | % | 3,694 | 10.0 | % | ||||||||
Total revenues | 49,831 | 100.0 | % | 36,872 | 100.0 | % | ||||||||
Costs and expenses: | ||||||||||||||
Cost of service: | ||||||||||||||
Personnel costs before reimbursable expenses | 26,464 | 53.1 | % | 20,508 | 55.6 | % | ||||||||
Reimbursable expenses | 4,935 | 9.9 | % | 3,694 | 10.0 | % | ||||||||
Total cost of service | 31,399 | 63.0 | % | 24,202 | 65.6 | % | ||||||||
Selling, general and administrative expenses | 17,791 | 35.7 | % | 13,319 | 36.1 | % | ||||||||
Restructuring costs | 6,313 | 12.7 | % | 1,134 | 3.1 | % | ||||||||
Total costs and operating expenses | 55,503 | 111.4 | % | 38,655 | 104.8 | % | ||||||||
Loss from operations | (5,672 | ) | (11.4 | %) | (1,783 | ) | (4.8 | %) | ||||||
Other income: | ||||||||||||||
Interest income, net | 83 | 0.2 | % | 239 | 0.6 | % | ||||||||
Loss before income taxes | (5,589 | ) | (11.2 | %) | (1,544 | ) | (4.2 | %) | ||||||
Income taxes | 365 | 0.7 | % | (114 | ) | (0.3 | %) | |||||||
Net loss | $ | (5,954 | ) | (11.9 | %) | $ | (1,430 | ) | (3.9 | %) | ||||
Revenues.Revenues for the quarter ended September 30, 2005March 31, 2006 increased by $2.9$13.0 million or 8%35% to $40.0$49.8 million from $37.1$36.9 million in the quarter ended OctoberApril 1, 2004. Revenues for the nine months ended September 30, 2005 increased $8.7 million or 8% to $118.6 million from $109.9 million in the nine months ended October 1, 2004.2005. The increase in revenues for the quarter and nine months ended September 30, 2005March 31, 2006 was primarily attributable to revenue of approximately $6.2 million relating to REL Consultancy Group Limited (“REL”) which was acquired on November 29, 2005, increased revenue from benchmarking andour membership advisory program sales and related transformation advisory services and increased revenue from our Hyperion implementation practice. Additionally, the acquisition of EZCommerce, a dual shore ERP implementation company, in May 2004 contributed to the increase in revenues for the nine months ended September 30, 2005. These impacts were partially offset by a decline in ERP and custom business intelligence revenues due to increased price competition from offshore suppliers. Reimbursements as a percentage of revenues during the quarters ended March 31, 2006 and nine months ended September 30,April 1, 2005 and October 1, 2004 were comparable at 10%. During the quarterquarters ended March 31, 2006 and nine months ended September 30,April 1, 2005, one customer had revenues equal to or greater than 5% of total revenues, accountingtwo customers accounted for 6% of revenues. During the quarter and nine months ended October 1, 2004, one customer had revenues greater than 5% of total revenues, accountingwhich together accounted for 6%11% and 8%13% of total revenues, during those periods, respectively. With respect to our two largest customercustomers in 2005,2006, our contracts can be cancelled for convenience by the customer upon 30 days’ notice. Our projects with this customerthese customers expire on various dates ranging from November 2005April 2006 to JulySeptember 2006. During the quarter ended March 31, 2006, one of these customers filed for bankruptcy protection. In order to mitigate our credit risk, we entered into an agreement with a third party on April 19, 2006 to sell our pre-bankruptcy accounts receivable from this customer for 65% of the total outstanding balance. The remaining 35% of the balance has been fully reserved for at March 31, 2006. We do not anticipate any credit and/or collection issues with thisthe other significant customer. 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. 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 thisthese key customercustomers could have a material adverse effect on our results of operations.
Project Personnel and Expenses.Cost of Service.Project personnel costs and expensesCost of service primarily consist of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Project personnel costs and expenses were $23.5Cost of service was $31.4 million in the quarter ended September 30, 2005 which is comparableMarch 31, 2006, an increase of $7.2 million or 30% compared to $23.6 million in the quarter ended OctoberApril 1, 2004. Consultant headcount was 601 as of September 30, 2005 compared to 600 as of October 1, 2004. Project personnel costs and expenses were $72.0 million in the nine months ended September 30, 2005 an increase of $3.7 million or 5% compared to the nine months ended October 1, 2004.2005. This increase was primarily attributable to the increase in total billable headcount, as a result of the average number of consultantsREL acquisition in order to balance workforce capacity with market demand for services. Average consultantNovember 2005. Consultant headcount was 577 and 550, respectively, for the nine months ended September 30, 2005 and October670 as of March 31, 2006 compared to 569 as of April 1, 2004.2005.
Project personnel and expenses
Cost of service as a percentage of revenues was 59%63% for the quarter ended September 30, 2005,March 31, 2006, a decrease from 64%66% in the quarter ended OctoberApril 1, 2004. The decrease was2005, primarily as the result of higher revenue per consultant during the quarter ended September 30, 2005 due toutilization of our Best Practice Solutions consultants and an increase in the averagetheir gross billing rate per hour to $194during 2006. Best Practice Solutions consultant utilization approximated 76% in 2006, up from 73% in the comparable quarter ended September 30,of 2005 and gross billing rate per hour approximated $155 in 2006 up from $174$146 in the quarter ended October 1, 2004.2005. The rate increase is a result of our continuing shift in mix to higher rate benchmarking and membership advisory programs and related transformation advisory services and launch of the new fixed priced transformation advisory programs in March 2005 sold under the Hackett brand. UtilizationGroup annualized revenue per professional was comparable at 67% for the quarters ended September 30, 2005$350 thousand in 2006 and October 1, 2004. Project personnel and expenses as a percentage of revenues was 61% for the nine months ended September 30, 2005 a decrease from 62% for the nine month ended October 1, 2004 as average higher gross billing rates$352 thousand in 2005 were partially offset by average lower utilization of consultants. Average gross billing rates for the nine months ended September 30, 2005 and October 1, 2004 were $189 and $177, respectively. Utilization approximated 69% for the nine months ended September 30, 2005 and 71% for the nine months ended October 1, 2004.
2005.
Selling, General and Administrative.Selling, general and administrative expenses increased 13%34% to $13.6$17.8 million in the quarter ended September 30, 2005March 31, 2006 from $12.1$13.3 million in the quarter ended OctoberApril 1, 2004. Selling,2005. The overall increase in selling, general and administrative expenses was primarily attributable to the acquisition of REL in November 2005 and increased 16%sales and recruiting expenses to $42.0 millionaccommodate the growth in the nine months ended September 30, 2005 from $36.1 million in the nine months ended October 1, 2004.our transformation and membership based advisory programs and Hyperion implementation practice. Selling, general and administrative expenses as a percentage of revenues were 34% and 33% andcomparable at 36% and 33%, respectively, during the quarters ended March 31, 2006 and nine months ended September 30, 2005 and OctoberApril 1, 2004. The overall increases in selling, general and administrative expenses were primarily attributable to the acquisition of EZCommerce, increased legal and recruiting expenses and additional sales personnel and related commissions to accommodate the growth in our benchmarking, membership advisory programs, transformation advisory and Hyperion implementation services. These impacts were partially offset by lower bad debt expense.2005.
Restructuring Costs.We recorded restructuring costs of $1.1$6.3 million in the first quarter ended March 31, 2006 which was comprised of $2.8 million relating to the 2005 to increaserestructuring 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 order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, we were fully released from $20 million of future lease obligations2002 and we assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. We recorded restructuring costs of $3.7 million for the nine months ended October 1, 2004 to increase previously established reserves recorded2001 for the closure and consolidation of facilities. Existing reserves were increasedfacilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Also in 2004, the restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operationsIncluded in the consolidated statement$2.8 million is a further reduction of operationsoccupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the nine months ended October 1, 2004.
Stock Compensation Expense.As of September 30, 2005Company’s primary business model shifts to a proprietary best practice intellectual capital and October 1, 2004, we had 2,378,768 and 3,610,830 restricted stock units outstanding, respectively.strategic advisory services firm. We recorded non-cash compensation expenserestructuring costs of $817 thousand and $599 thousand, respectively, during the quarters ended September 30, 2005 and the October 1, 2004, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. During the nine months ended September 30, 2005 and October 1, 2004, the Company recorded $2.1$1.1 million and $1.8 million, respectively, of compensation expense based on the vesting provisions of the restricted stock units and the fair value of the stock on the grant date. In addition, as of September 30, 2005, we had 169,295 outstanding stock options accounted under variable plan accounting pursuant to FASB Interpretation No. 28. Variable plan accounting resulted in stock compensation expense of $31 thousand and $112 thousand for the quarter ended September 30,April 1, 2005 andto increase previously established reserves in order to reflect the nine months ended October 1, 2004, respectively, and a reduction in stock compensation expensenegotiated buyout of $49 thousand and $2 thousand for the nine months ended September 30, 2005 and the quarter ended October 1, 2004, respectively.our New York City lease obligation.
Income Taxes.We recorded income tax expensestaxes of $155 thousand and $73$365 thousand for the nine monthsquarter ended September 30,March 31, 2006. This amount reflects an estimated annual 7% tax rate for 2006 for certain U.S. federal and state taxes. The federal taxes relate to REL’s U.S. entity, as we are currently unable to utilize our federal net operating loss carryforward to offset REL U.S. income. For the quarter ended April 1, 2005, and October 1, 2004, respectively, which represented effectivewe recorded an income tax ratesbenefit of 8% and 26%, respectively, of pre-tax losses$114 thousand. This amount reflects an estimated annual 7% tax rate for 2005 for certain state and foreign taxes. The estimated annual effective tax rates include an income tax benefit attributable to a decrease in the valuation allowance as a result of the expected utilization of tax net operating loss carryforwards in 2005 and 2004. The liability method of accounting for deferred income taxes requires that a change in the valuation allowance for deferred tax assets be included in income tax expense or benefit for the current year.period.
Liquidity and Capital Resources
We have funded our operations primarily with cash flow generated from operations and the proceeds from our initial public offering. At September 30, 2005,March 31, 2006, we had $30.6$18.8 million in cash and cash equivalents compared to $38.9$18.1 million at December 30, 2005. At March 31, 2004. At September2006 and December 30, 2005, and December 31, 2004, we had $600 thousand and $3.0 million, respectively, on deposit with a financial institution as collateral for letters of credit and have classified these 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 $4.9 million and $9.9 million at SeptemberMarch 31, 2006 and December 30, 2005, and December 31, 2004.respectively.
There were no material capital commitments at September 30, 2005. The following summarizes our lease commitments under non-cancelable operating leases for premises at September 30, 2005 (in thousands):
Less than 1 year | $ | 3,865 | |
1-3 years | 6,700 | ||
4-5 years | 6,037 | ||
After 5 years | 1,884 | ||
| 18,486 | |||
Less: sublease income | 5,568 | ||
Total minimum lease payments, less sublease income | $ | 12,918 | |
Net cash used in operating activities was $3.2$2.5 million for the nine monthsquarter ended September 30, 2005March 31, 2006 compared to $839$262 thousand duringfor the comparable period of 2004.2005. During the nine monthsquarter ended September 30,March 31, 2006, net cash used in operating activities was primarily attributable to our net loss of $6.0 million adjusted for $3.8 million of non-cash expenses, increases of $571 thousand in accounts receivable and unbilled revenues and $157 thousand in prepaid expenses and other assets and a decrease of $1.5 million in accounts payable. These effects were partially offset by an increase of $1.8 million in accrued expenses and other liabilities. During the quarter ended April 1, 2005, net cash used in operating activities was primarily attributable to increases of $10.5 million in accounts receivable and unbilled revenue and $401a $400 thousand increase in prepaid expenses and other assets and a decrease of $1.0 million$293 thousand in accrued expenses and other liabilities.accounts payable. These effects were partially offset by our net incomeloss of $1.9$1.4 million adjusted for $1.8 million of non-cash expenses of $6.1 million and an increase in accounts payable of $818 thousand.expenses. Non-cash expenses included depreciation and amortization, provision for doubtful accounts, and non-cash compensation expense. During the nine months ended October 1, 2004, netexpense and write-off of leasehold improvements.
Net cash used in operatingprovided by investing activities was primarily attributable$7.7 million for the quarter ended March 31, 2006 compared to a $6.3 million increase in accounts receivable and unbilled revenue, and decreases of $1.8 million in accrued expenses and other liabilities and $365 thousand in accounts payable. These effects were partially offset by net income of $582 thousand, non-cash expenses of $6.3 million and a decrease of $676 thousand in prepaid expenses and other assets.
Net cash used in investing activities was $976 thousand for the nine months ended September 30, 2005 compared to $29.0of $24.1 million used during the comparative nine monthsquarter of 2004.2005. Cash from investing activities in 2006 was primarily attributable to maturities of marketable investments of $5.0 million and a decrease in restricted cash of $3.7 million, partially offset by $570 thousand used for the purchase of property and equipment and $353 thousand used for the acquisition of businesses. The uses of cash for investing activities in 2005 were primarily attributable to the purchases of $27.9 million of marketable investments, $2.2 million$331 thousand used for the acquisition of a business acquisitions and $1.1 million$157 thousand for purchases of property and equipment, partially offset by $27.9$4.0 million of proceeds from calls, sales and maturities of marketable investments and a $2.4 million$295 thousand decrease in restricted cash. The uses of cash for investing activities in 2004 were primarily attributable to the purchases of $35 million of marketable investments, $6.1 million used in the acquisition of a business, and $2.9 million for purchases of property and equipment, partially offset by $15 million of proceeds from calls, sales and maturities of marketable investments.
Net cash used in financing activities was $4.2$4.5 million for the nine monthsquarter ended September 30, 2005March 31, 2006 compared to $6.0 million$698 thousand for the comparable period of 2004.2005. During the nine monthsquarter ended September 30,March 31, 2006, cash used in financing activities was primarily for the repayment of the Employee Benefit Trust loan of $3.7 million and the repayment of bank overdrafts of $1.1 million, partially offset by $238 thousand from proceeds from the sale of stock as a result of exercises of stock options. During the quarter ended April 1, 2005, cash used in financing activities was attributable toprimarily for the repurchase of $3.9 million of our common stock and $1.2 for paymentstock. These repurchases of employee withholding tax related to restricted stock units,$809 thousand were partially offset by proceeds of $940$111 thousand from the sale of stock as a result of exercises of stock options and the sale of stock through our employee stock purchase plan. During the nine months ended October 1, 2004, cash used in financing activities was primarily for the repurchase of $8.2 million of our common stock, partially offset by proceeds of $2.1 million from the sale of stock as a result of exercises of stock options as well as the sale of stock through our employee stock purchase plan.
options.
On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our common stock. In 2003, and 2004 and the second quarter of 2005, our Board of Directors approved the repurchase of an additional $25.0 million of our common stock, thereby increasing the total program size to $30 million. Under the repurchase plans,plan, we may buy back shares of our outstanding common stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of September 30, 2005,March 31, 2006, we had repurchased 6,534,155 shares of our common stock at an average price of $3.39 per share.
We currently believe that available funds and cash flows generated by operations, 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 December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004),Share-Based Payment, (“SFAS 123R”). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25,Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. We will be required to adopt SFAS 123R in the first quarter of 2006 and have not yet determined which fair-value method and transitional provision we will follow, or if the adoption of SFAS 123R will have a significant impact on our results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2005,March 31, 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 variablefixed 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 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. 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 that is required of this entity.
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 judgements 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,there were no changes in our internal control 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.
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.
None
On November 9, 2005, the Company, with the approval of the Audit Committee, entered into an employment agreement with Grant M. Fitzwilliam, effective as of August 11, 2005, the date that Mr. Fitzwilliam assumed the title and role as the Company’s Executive Vice President and Chief Financial Officer. Mr. Fitzwilliam’s employment agreement has a three-year term (with an automatic renewal, for one additional year thereafter on each subsequent anniversary unless either party gives contrary notice) and provides for a current annual salary of $275,000, plus a bonus pursuant to a bonus plan to be adopted by the Board of Directors for each fiscal year. The Company’s employment agreement with Mr. Fitzwilliam contains provisions regarding confidentiality, proprietary information and work product, non-competition and non-solicitation. A copy of Mr. Fitzwilliam’s employment agreement is filed as Exhibit 10-6 hereto. Also, on November 9, 2005, the Company’s Compensation Committee approved a compensation plan for fiscal year 2005 for its Chief Financial Officer. This plan provides for annual cash bonuses and equity awards subject to the achievement of pre-established pro-forma earnings targets levels which relate to an operating plan that has been approved by the Board of Directors. These targets were established in connection with the implementation of the 2005 compensation plan for its Chief Executive Officer and Chief Operating Officer that were disclosed in a Form 8-K filed June 16, 2005. Any equity award will be subject to limits on the dilution caused by such grants based on the level of targets, and thus Company performance, achieved and the fair market value of our Common Stock on the date of such awards.
See Index to Exhibits on page 17,21, which is incorporated herein by reference.
The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
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: | /s/ Grant M. Fitzwilliam | |
| Grant M. Fitzwilliam | ||
Executive Vice President, Finance and Chief Financial Officer | ||
| 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 | |
| 31.2 | Certification by CFO pursuant to | |
| 32 | Certification Pursuant | |
| + | Incorporated herein by reference to the Company’s Form 10-K for the year ended December 29, 2000 |
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