Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 0-24343

 

Answerthink, Inc.

(Exact name of Registrant as specified in its charter)

 

 

FLORIDA   65-0750100

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

1001 Brickell Bay Drive, Suite 3000

Miami, Florida

  33131
(Address of principal executive offices)   (Zip Code)

(305) 375-8005

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    YES   x     NO   ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of October 25, 2007, there were 43,626,640 shares of common stock outstanding.

 

Table of Contents

Answerthink, Inc.

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION   
Item 1.   Financial Statements   
 

Consolidated Balance Sheets as of September 28, 2007 and December 29, 2006 ( unaudited )

   3
 

Consolidated Statements of Operations for the Quarters and Nine Months Ended September 28, 2007 and September 29, 2006 ( unaudited )

   4
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2007 and September 29, 2006 ( unaudited )

   5
 

Notes to Consolidated Financial Statements ( unaudited )

   6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    12
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    15
Item 4.   Controls and Procedures    16
PART II OTHER INFORMATION   
Item 1.   Legal Proceedings    17
Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    17
Item 5.   Other Information    17
Item 6.   Exhibits    17
SIGNATURES    18
INDEX TO EXHIBITS    19

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

Answerthink, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     September 28,     December 29,  
     2007     2006  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 24,974     $ 19,585  

Accounts receivable and unbilled revenue, net of allowance of $1,582 and $1,851 at September 28, 2007 and December 29, 2006, respectively

     30,436       35,818  

Prepaid expenses and other current assets

     2,334       1,558  
                

Total current assets

     57,744       56,961  

Restricted cash

     600       600  

Property and equipment, net

     5,813       5,183  

Other assets

     2,807       3,870  

Goodwill, net

     68,622       66,652  
                

Total assets

   $ 135,586     $ 133,266  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 4,710     $ 5,427  

Accrued expenses and other liabilities

     30,313       24,773  
                

Total current liabilities

     35,023       30,200  

Accrued expenses and other liabilities, non-current

     4,016       4,611  
                

Total liabilities

     39,039       34,811  
                

Commitments and contingencies

     —         —    

Shareholders’ equity:

    

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

     —         —    

Common stock, $.001 par value, 125,000,000 shares authorized; 43,705,557 and 44,659,255 shares issued and outstanding at September 28, 2007 and December 29, 2006, respectively

     53       52  

Additional paid-in capital

     281,178       279,621  

Treasury stock, at cost, 8,853,795 and 7,157,655 shares at September 28, 2007 and December 29, 2006, respectively

     (29,731 )     (23,867 )

Accumulated deficit

     (156,484 )     (158,703 )

Accumulated other comprehensive income

     1,531       1,352  
                

Total shareholders’ equity

     96,547       98,455  
                

Total liabilities and shareholders’ equity

   $ 135,586     $ 133,266  
                

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

 

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Answerthink, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Quarter Ended     Nine Months Ended  
     September 28,
2007 		    September 29,
2006 		    September 28,
2007 		    September 29,
2006 		 

Revenues:

        

Revenues before reimbursements

   $ 41,834     $ 39,006     $ 118,500     $ 127,852  

Reimbursements

     4,895       4,546       13,618       14,527  
                                

Total revenues

     46,729       43,552       132,118       142,379  

Costs and expenses:

        

Cost of service:

        

Personnel costs before reimbursable expenses (includes $344 and $328 and $968 and $874 of stock compensation expense in the quarters and nine months ended September 28, 2007 and September 29, 2006, respectively)

     22,779       23,169       67,562       74,629  

Reimbursable expenses

     4,895       4,546       13,618       14,527  
                                

Total cost of service

     27,674       27,715       81,180       89,156  

Selling, general and administrative costs (includes $752 and $687 and $2,198 and $2,362 of stock compensation expense in the quarters and nine months ended September 28, 2007 and September 29, 2006, respectively)

     15,562       15,186       48,909       49,582  

Restructuring costs

     —         —         —         6,313  

Loss from misappropriation, net of collections

     —         24       (350 )     326  
                                

Total costs and operating expenses

     43,236       42,925       129,739       145,377  
                                

Income (loss) from operations

     3,493       627       2,379       (2,998 )

Other income (expense):

        

Interest income

     206       116       661       469  

Interest expense

     (1 )     (21 )     (94 )     (164 )
                                

Income (loss) before income taxes

     3,698       722       2,946       (2,693 )

Income taxes

     112       249       247       946  
                                

Net income (loss)

   $ 3,586     $ 473     $ 2,699     $ (3,639 )
                                

Basic net income (loss) per common share:

        

Net income (loss) per common share

   $ 0.08     $ 0.01     $ 0.06     $ (0.08 )

Weighted average common shares outstanding

     44,144       44,884       44,545       44,676  

Diluted net income (loss) per common share:

        

Net income (loss) per common share

   $ 0.08     $ 0.01     $ 0.06     $ (0.08 )

Weighted average common and common equivalent shares outstanding

     44,786       45,532       45,446       44,676  

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

 

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Answerthink, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended  
     September 28,
2007 		    September 29,
2006 		 

Cash flows from operating activities:

    

Net income (loss)

   $ 2,699     $ (3,639 )

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

    

Write-off of leasehold improvements

     —         715  

Depreciation expense

     1,586       1,901  

Amortization expense

     1,055       2,267  

Provision for doubtful accounts

     (180 )     552  

Gain on foreign currency translation

     (404 )     (659 )

Non-cash compensation expense

     3,166       3,236  

Gain on sale of property and equipment

     (46 )     (27 )

Changes in assets and liabilities:

    

Decrease in accounts receivable and unbilled revenue

     5,444       2,211  

Decrease (increase) in prepaid expenses and other assets

     (667 )     344  

Decrease in accounts payable

     (714 )     (1,699 )

Increase in accrued expenses and other liabilities

     1,298       2,307  
                

Net cash provided by operating activities

     13,237       7,509  

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,274 )     (1,748 )

Proceeds from sales of property and equipment

     50       29  

Decrease in restricted cash

     —         3,657  

Proceeds from calls, sales and maturities of marketable investments

     —         5,000  

Cash used in acquisition of business, net of cash acquired

     —         (10,481 )
                

Net cash used in investing activities

     (2,224 )     (3,543 )

Cash flows from financing activities:

    

Repayments of borrowings

     —         (1,101 )

Repayment of loan payable

     —         (3,657 )

Proceeds from issuance of common stock

     230       756  

Payment of employee withholding tax related to restricted stock units

     —         (725 )

Repurchases of common stock

     (5,864 )     (1,747 )
                

Net cash used in financing activities

     (5,634 )     (6,474 )
                

Effect of exchange rate on cash

     10       (127 )
                

Net increase (decrease) in cash and cash equivalents

     5,389       (2,635 )

Cash and cash equivalents at beginning of period

     19,585       18,103  
                

Cash and cash equivalents at end of period

   $ 24,974     $ 15,468  
                

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 4     $ 46  

Cash paid for income taxes

   $ 337     $ 120  

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

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The consolidated financial statements of Answerthink , Inc. (“Answerthink” or the “Company”) include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. The Company consolidates the assets, liabilities, and results of operations of entities in accordance with Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements , Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries – an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12 , and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities , as revised.

In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 2006 included in the Annual Report 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 28, 2007 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

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

2. Net Income (Loss) Per Common Share

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

Net income (loss) per common share assuming dilution is computed by dividing net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.

Potentially dilutive shares were excluded from the diluted loss per share calculation for the nine months ended September 29, 2006 as their effects would have been anti-dilutive to the net loss incurred by the Company.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

2. Net Income (Loss) Per Common Share (continued)

 

The following table reconciles basic and diluted weighted average shares:

 

     Quarter Ended    Nine Months Ended
     September 28,
2007 		   September 29,
2006 		   September 28,
2007 		   September 29,
2006

Basic weighted average common shares outstanding

   44,143,920    44,883,838    44,544,980    44,676,133

Effect of dilutive securities:

           

Unvested restricted stock units issued to employees

   566,457    572,217    824,295    —  

Common stock issuable upon the exercise of stock options

   76,055    76,236    77,152    —  
                   

Dilutive weighted average common shares outstanding

   44,786,432    45,532,291    45,446,427    44,676,133
                   

Dilutive securities not included in diluted weighted average common shares outstanding:

           

Unvested restricted stock units issued to employees

   —      —      —      1,329,802

Common stock issuable upon the exercise of stock options

   —      —      —      219,913
                   
   —      —      —      1,549,715
                   

Approximately 1.5 million and 1.7 million stock options were excluded from the computations of diluted net income per common share for the quarters ended September 28, 2007 and September 29, 2006, respectively, as their stock price was higher than the Company’s average stock price.

3. Comprehensive Gain (Loss)

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

 

     Quarter Ended    Nine Months Ended  
    

September 28,

2007

  

September 29,

2006

  

September 28,

2007

  

September 29,

2006

 
           

Net income (loss)

   $ 3,586    $ 473    $ 2,699    $ (3,639 )

Change in cumulative foreign currency on translation

          adjustment

     273      1,333      174      1,042  

Change in net unrealized gain on marketable investments

     —        34      5      83  
                             

Comprehensive gain (loss)

   $ 3,859    $ 1,840    $ 2,878    $ (2,514 )
                             

4. Loss from Misappropriation, net of Collections

As described in the Company’s Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The Company and its former disbursement agent agreed to settlement terms that resulted in the receipt of an initial cash payment of $350 thousand in January 2007 and the receipt of the final cash payment of $2.3 million in October 2007. These receipts are and will be accounted for in loss from misappropriation, net of collections, in the Consolidated Statements of Operations in the period in which they are received.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

5. Restructuring

The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions in consultants and functional support personnel and for the 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 its overall cost structure and organization with anticipated demand for its services.

In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease excess facilities. The 2004 and 2003 restructuring costs consisted of additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million and $1.8 million to the 2001 restructuring accrual, respectively. Also in 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the Consolidated Statement of Operations for 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 (“REL”) acquisition on November 29, 2005, and $1.8 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million is specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of a New York City lease obligation. As a result of the buyout, the Company was fully released from $20.0 million of future lease obligations, 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, which consisted of additions of $1.2 million and $600 thousand to the 2002 and 2001 restructuring accruals, respectively.

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 acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million is a further reduction of occupied space in our technology-focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifts to a proprietary best practice and intellectual capital and strategic advisory services firm.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

5. Restructuring (continued)

 

The following tables set forth the detail and activity in the restructuring expense accruals during the nine months ended September 28, 2007 (in thousands):

2001 Restructuring Accrual

    

Accrual

Balance at

December 29,

2006

    Expenditures    

Accrual

Balance at

September 28,

2007

Closure and consolidation of facilities and related exit costs

   $ 2,126     $ (338 )   $ 1,788
                      

2002 Restructuring Accrual

      
    

Accrual

Balance at

December 29,

2006

    Expenditures    

Accrual

Balance at

September 28,

2007

Closure and consolidation of facilities and related exit costs

   $ 3,717     $ (474 )   $ 3,243
                      
2005 Restructuring Accrual       
    

Accrual

Balance at

December 29,

2006

    Expenditures    

Accrual

Balance at

September 28,

2007

Severance and other employee costs

   $ 147     $ (140 )   $ 7

Closure and consolidation of facilities and related exit costs

     1,276       (264 )     1,012
                      
   $ 1,423     $ (404 )   $ 1,019
                      

6. Accounts Receivable and Unbilled Revenue, Net

 

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

     September 28,
2007 		    December 29,
2006 		     

Accounts receivable

   $ 25,576     $ 32,974    

Unbilled revenue

     6,442       4,695    

Allowance for doubtful accounts

     (1,582 )     (1,851 )  
                  
   $ 30,436     $ 35,818    
                  

7. Loan Payable

At September 28, 2007 and December 29, 2006, the Company did not have any outstanding loans. At December 30, 2005, the Company had a loan with a financial institution of $3.7 million which was repaid in March 2006.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

8. Income Taxes

Effective December 30, 2006, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes . FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

As a result of the implementation of FIN No. 48, the Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN No. 48. 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, on December 30, 2006, the Company adjusted the estimated value of its uncertain tax positions by recognizing additional liabilities totaling $481 thousand through a charge to retained earnings, which primarily related to potential state and federal tax exposure. The $481 thousand liability included $311 thousand, which was not expected to be paid within one year, and as such was classified as a non-current liability and included in the non-current portion of accrued expenses and other liabilities in the Consolidated Balance Sheet as of September 28, 2007. The amount of unrecognized tax positions did not materially change as of September 28, 2007 and the Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

Penalties and tax-related interest expense are reported as a component of income tax expense. As of December 30, 2006, the total amount of accrued income tax-related interest and penalties was $26 thousand and $237 thousand, respectively. The liability for the payment of interest and penalties did not materially change as of September 28, 2007.

The Company files federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most probable outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for years through 2002. All significant state, local and foreign matters have been concluded for years through 2002.

9. Stock Based Compensation

During the quarter and nine months ended September 28, 2007, the Company issued 105,660 and 633,660 restricted stock units, respectively, at a weighted average grant-date fair value of $3.51 and $3.44, respectively. Additionally, during the quarter and nine months ended September 28, 2007, 67,000 and 429,324 shares, respectively, were issued in connection with an acquisition and restricted stock units were forfeited at a weighted average grant-date fair value of $3.18 and $4.11, respectively. As of September 28, 2007, the Company had 1,430,907 restricted stock units outstanding.

10. Shareholders’ Equity

Treasury Stock

On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to $5.0 million of the Company’s common stock, which was subsequently increased to $30.0 million during the fiscal years 2003 to 2005. During the quarter ended September 28, 2007, the Board of Directors approved the repurchase of an additional $5.0 million of the Company’s common stock, thereby increasing the total approval for repurchase to $35.0 million. Under the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended September 28, 2007, the Company repurchased approximately 1.2 million shares of its common stock at an average price of $3.47, for a total cost of approximately $4.1 million. As of September 28, 2007, the Company had repurchased approximately 8.9 million shares of its common stock at an average price of $3.36 per share, leaving $5.3 million available under the Company’s share buyback program. Subsequent to September 28, 2007, the Board of Directors approved the repurchase of an additional $5.0 million of the Company’s common stock, thereby increasing the total approval for repurchase to $40.0 million.

 

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Answerthink, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

11. 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.

12. Geographic and Service Group Information

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

 

     Quarter Ended    Nine Months Ended
    

September 28,

2007

  

September 29,

2006

  

September 28,

2007

  

September 29,

2006

           

Total Revenues:

           

Domestic

   $ 36,400    $ 38,821    $ 105,269    $ 125,344

Foreign

     10,329      4,731      26,849      17,035
                           

Total

   $ 46,729    $ 43,552    $ 132,118    $ 142,379
                           

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

    

September 28,

2007

  

December 29,

2006

         
           

Long-Lived Assets:

           

Domestic

   $ 57,312    $ 57,148      

Foreign

     19,930      18,557      
                   

Total

   $ 77,242    $ 75,705      
                   

As of September 28, 2007 and December 29, 2006, foreign assets included $19.3 million and $18.3 million, respectively, of goodwill and intangible assets.

 

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

     Quarter Ended    Nine Months Ended
    

September 28,

2007

  

September 29,

2006

  

September 28,

2007

  

September 29,

2006

           

The Hackett Group

   $ 30,294    $ 21,278    $ 80,365    $ 72,057

Best Practice Solution

     16,435      22,274      51,753      70,322
                           

Total Revenues

   $ 46,729    $ 43,552    $ 132,118    $ 142,379
                           

13. Reclassifications

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

 

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in it include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our business and industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Factors that impact such forward-looking statements include, among others, our ability to effectively integrate acquisitions into our operations, our ability to attract additional and retain existing business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding our industry, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends, foreign currency fluctuations and changes in general economic conditions and interest rates. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 29, 2006. 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 and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments.

The Hackett Group, a strategic advisory firm and an Answerthink company, is a world leader in best practice research, benchmarking, business transformation and working capital management services that empirically define and enable world-class enterprise performance. Only The Hackett Group empirically defines world-class performance in Sales, General and Administrative and supply chain activities with analysis gained through 4,000 benchmark studies over 15 years and work with 2,700 of the world’s leading companies.

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

 

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Results of Operations

The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenues of such results.

 

     Quarter Ended     Nine Months Ended  
     September 28, 2007     September 29, 2006     September 28, 2007     September 29, 2006  

Revenues:

                  

Revenues before reimbursements

   $ 41,834    89.5 %   $ 39,006    89.6 %   $ 118,500     89.7 %   $ 127,852     89.8 %

Reimbursements

     4,895    10.5 %     4,546    10.4 %     13,618     10.3 %     14,527     10.2 %
                                                      

Total revenues

     46,729    100.0 %     43,552    100.0 %     132,118     100.0 %     142,379     100.0 %

Cost and expenses:

                  

Cost of service:

                  

Personnel costs before reimbursable expenses

     22,779    48.7 %     23,169    53.2 %     67,562     51.1 %     74,629     52.4 %

Reimbursable expenses

     4,895    10.5 %     4,546    10.4 %     13,618     10.3 %     14,527     10.2 %
                                                      

Total cost of service

     27,674    59.2 %     27,715    63.6 %     81,180     61.4 %     89,156     62.6 %

Selling, general and administrative costs

     15,562    33.3 %     15,186    34.9 %     48,909     37.0 %     49,582     34.8 %

Restructuring costs

     —      0.0 %     —      —         —       0.0 %     6,313     4.4 %

Loss from misappropriation, net of collections

     —      0.0 %     24    0.1 %     (350 )   (0.3 )%     326     0.2 %
                                                      

Total costs and operating expenses

     43,236    92.5 %     42,925    98.6 %     129,739     98.1 %     145,377     102.1 %
                                                      

Income (loss) from operations

     3,493    7.5 %     627    1.4 %     2,379     1.9 %     (2,998 )   (2.1 )%

Other income:

                  

Interest income, net

     205    0.4 %     95    0.2 %     567     0.4 %     305     0.2 %
                                                      

Income (loss) before income taxes

     3,698    7.9 %     722    1.6 %     2,946     2.3 %     (2,693 )   (1.9 )%

Income tax expense

     112    0.2 %     249    0.6 %     247     0.2 %     946     0.7 %
                                                      

Net income (loss)

   $ 3,586    7.7 %   $ 473    1.0 %   $ 2,699     2.1 %   $ (3,639 )   (2.6 )%
                                                      

Quarter and Nine Months Ended September 28, 2007 versus Quarter and Nine Months Ended September 29, 2006

Revenues. Revenues for the quarter ended September 28, 2007 increased 7% to $46.7 million from $43.6 million in the quarter ended September 29, 2006. Revenues in the nine months ended September 28, 2007 decreased 7% to $132.1 million from $142.4 million in the nine months ended September 29, 2006.

The Hackett Group revenues have grown 42% or $9.0 million, and 12% or $8.3 million, for the quarter and nine months ended September 28, 2007, respectively, compared to the quarter and nine months ended September 29, 2006. This growth was primarily due to increased revenues of 45% and 9% in our Benchmarking and Business Transformation group, respectively, and increased revenues in our Membership Advisory Programs group of 29% and 34%, for the quarter and nine months ended September 28, 2007, respectively, compared to the quarter and nine months ended September 29, 2006.

The revenue increases in The Hackett Group were partially offset by revenue decreases in our Best Practice Solution group of 26%, or $5.8 million, and 26%, or $18.6 million, for the quarter and nine months ended September 28, 2007, respectively. These decreases in revenues in our Best Practice Solution group were primarily due to the exit of our Lawson and low margin SAP staff augmentation contracts at the end of 2006 and lower revenues from our Oracle and Hyperion groups.

Reimbursements as a percentage of revenues during the quarters and nine months ended September 28, 2007 and September 29, 2006 were comparable at 11% and 10%, and 10% and 10%, respectively.

During the quarters and nine months ended September 28, 2007 and September 29, 2006, no customer accounted for revenues equal to or greater than 5% of total revenues.

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service was comparable at $27.7 million in the quarter ended September 28, 2007 and in the quarter ended September 29, 2006. Cost of service decreased 9% to $81.2 million in the nine months ended September 28, 2007 from $89.2 million in the nine months ended September 29, 2006. The nine month decrease was primarily attributable to a decrease in our Best Practice Solution group’s headcount as a result of the exit from our Lawson and low margin SAP staff augmentation contracts.

 

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Cost of service as a percentage of revenues during the quarters ended September 28, 2007 and September 29, 2006 decreased to 59% from 64%, respectively, primarily as a result of higher revenues. Cost of service as a percentage of revenues during the nine months ended September 28, 2007 and September 29, 2006 was comparable at 61% and 63%, respectively.

Selling, General and Administrative. Selling, general and administrative costs were comparable at $15.6 million and $48.9 million in the quarter and nine months ended September 28, 2007, respectively, compared to $15.2 million and $49.6 million in the quarter and nine months ended September 29, 2006, respectively.

Restructuring Costs. We recorded restructuring costs for the nine months ended September 29, 2006 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 (“REL”) 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 intellectual capital and strategic advisory services firm. We did not record any restructuring costs for the quarter and nine months ended September 28, 2007.

Loss from Misappropriation, net of Collections. The loss from misappropriation, net of collections, of $350 thousand for the nine months ended September 28, 2007, related to collections received on funds that were misappropriated by our former UK disbursement agent. We learned of a misappropriation by our former UK disbursement agent in 2006, which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in our UK operations.

Subsequent to September 28, 2007, we received the final payment from our former UK disbursement agent of $2.3 million, which will be reflected in the loss from misappropriation, net of collections, in the Consolidated Statements of Operations for the period ended December 28, 2007.

Income Taxes. We recorded income taxes of $112 thousand and $247 thousand for the quarter and nine months ended September 28, 2007, respectively. These amounts reflect estimated annual tax rates of 3.0% and 8.4% for the quarter and nine months ended September 28, 2007, respectively, for certain U.S. federal and state taxes. For the quarter and nine months ended September 29, 2006, we recorded income taxes of $249 thousand and $946 thousand, respectively, which reflected an estimated annual tax rate for 2006 of 34.4% and 35.1% for certain U.S. federal and state taxes. The 2006 income taxes were related to federal and state taxes for REL’s U.S. entity, which could not be offset against our federal net operating loss carryforward.

Effective December 30, 2006, we adopted FIN No. 48, Accounting for Uncertainty in Income Taxes . As a result of the implementation of FIN No. 48, we performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by FIN No. 48. In this regard, an uncertain tax position represents our 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, on December 30, 2006, we adjusted the estimated value of our uncertain tax positions by recognizing additional liabilities totaling $481 thousand through a charge to retained earnings, which primarily related to potential state and federal tax exposure. The $481 thousand liability included $311 thousand, which was not expected to be paid within one year, and as such was classified as a non-current liability and included in the non-current portion of accrued expenses and other liabilities in the Consolidated Balance Sheet as of September 28, 2007. The amount of unrecognized tax positions did not materially change as of September 28, 2007 and we do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Penalties and tax-related interest expense are reported as a component of income tax expense. As of December 30, 2006, the total amount of accrued income tax-related interest and penalties was $26 thousand and $237 thousand, respectively. The liability for the payment of interest and penalties did not materially change as of September 28, 2007.

Liquidity and Capital Resources

We have funded our operations primarily with cash flows generated from operations and the proceeds from our initial public offering. At September 28, 2007, we had $25.0 million in cash and cash equivalents, compared to $19.6 million at December 29, 2006. At September 28, 2007 and December 29, 2006, we had $600 thousand on deposit with a financial institution as collateral for letters of credit and have classified these deposits as restricted cash in the accompanying Consolidated Balance Sheets.

 

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Table of Contents

Net cash provided by operating activities was $13.2 million for the nine months ended September 28, 2007, compared to net cash provided by operating activities of $7.5 million for the comparable period in 2006. During the nine months ended September 28, 2007, net cash provided by operating activities was primarily attributable to the net collections of accounts receivable and unbilled revenue of $5.4 million, which resulted in a decrease in Days Sales Outstanding of 26 days from December 29, 2006. Additionally, accrued expenses and other liabilities increased $1.3 million primarily related to the timing of the payroll cycle. During the nine months ended September 29, 2006, net cash provided by operating activities was primarily attributable to net collections of accounts receivable and unbilled revenue of $2.2 million and an increase in accrued expenses and other liabilities of $2.3 million.

Net cash used in investing activities was $2.2 million for the nine months ended September 28, 2007, compared to $3.5 million for the nine months ended September 29, 2006. Cash used in investing activities in 2007 was primarily attributable to $2.3 million of purchases related to computer software and equipment and the build-out of new office space in the UK. Cash used in investing activities during the nine months ended September 29, 2006 was primarily attributable to $1.7 million for the purchase of property and equipment and $10.5 million used for the acquisition of businesses, partially offset by maturities of marketable investments of $5.0 million and a decrease in restricted cash of $3.7 million.

Net cash used in financing activities was $5.6 million for the nine months ended September 28, 2007, compared to $6.5 million for the nine months ended September 29, 2006. Cash used in financing activities in 2007 was primarily attributable to the repurchase of $5.9 million of our common stock, at an average price of $3.46 per share. During the nine months ended September 29, 2006, cash used in financing activities was primarily for the repayment of the Employee Benefit Trust loan of $3.7 million, $1.7 million for the repurchase of our common stock and $1.1 million for the repayment of bank overdrafts.

On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of common stock, which was subsequently increased to $30.0 million during the fiscal years 2003 to 2005. During the quarter ended September 28, 2007, the Board of Directors approved the repurchase of an additional $5.0 million, thereby increasing the total approval for repurchase to $35.0 million. Under the repurchase plans, we may buy back shares from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended September 28, 2007, we repurchased approximately 1.2 million shares at an average price of $3.47, for a total cost of approximately $4.1 million. As of September 28, 2007, we had repurchased approximately 8.9 million shares of our common stock at an average price of $3.36 per share, leaving $5.3 million available under our share buyback program. Subsequent to September 28, 2007, the Board of Directors approved the repurchase of an additional $5.0 million, thereby increasing the total approval for repurchase to $40.0 million.

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 further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 28, 2007, our exposure to market risk related primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed interest rate securities. We invest only with high credit quality issuers and we do not use derivative financial instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.

Exchange Rate Sensitivity

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

 

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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.

Limitations on the Effectiveness of Controls

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

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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Table of Contents

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on our financial position cash flows or results of operations.

 

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

During the quarter ended September 28, 2007, the Company repurchased 1,187,212 shares of its common stock at a cost of approximately $4.1 million, under a repurchase program approved by the Board of Directors. All repurchases were made in the open market, subject to market conditions and trading restrictions. There is no expiration date on the current authorization and during the period covered by the table, no determination was made by the Company to suspend or cancel purchases under the program.

Issuer Purchases of Equity Securities

 

Period

   Total Number
of Shares 		   Average Price
Paid per Share 		   Total Number
of Shares as Part
of Publicly
Announced
Programs 		   Maximum Dollar
Value that may
Yet be Purchased
Under the
Program

December 30, 2006 to January 26, 2007

   —      $ —      —      $ 6,133,373

January 27, 2007 to February 23, 2007

   —      $ —      —      $ 6,133,373

February 24, 2007 to March 30, 2007

   —      $ —      —      $ 6,133,373

March 31, 2007 to April 27, 2007

   95,456    $ 3.29    95,456    $ 5,819,539

April 28, 2007 to May 25, 2007

   276,000    $ 3.46    276,000    $ 4,865,067

May 26, 2007 to June 29, 2007

   137,472    $ 3.50    137,472    $ 4,384,258

June 30, 2007 to July 27, 2007

   —      $ —      —      $ 4,384,258

July 28, 2007 to August 24, 2007

   913,797    $ 3.53    913,797    $ 1,154,018

August 25, 2007 to September 28, 2007

   273,415    $ 3.24    273,415    $ 5,268,298
                   
   1,696,140    $ 3.46    1,696,140   
                   

 

Item 5. Other Information

None.

 

Item 6. Exhibits

See Index to Exhibits on page 19, which is incorporated herein by reference.

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Answerthink, Inc.

Date: October 30, 2007

   

/s/ Robert A. Ramirez

    Robert A. Ramirez
    Executive Vice President, Finance and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit No.  

Exhibit Description

  3.1+   Second Amended and Restated Articles of Incorporation of the Registrant, as amended
  3.2+   Amended and Restated Bylaws of the Registrant, as amended
31.1   Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
+ Incorporated herein by reference to the Company’s Form 10-K for the year ended December 29, 2000

 

19

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