We have
enhanced our value proposition,
broadened our business model and
improved our
ability to compete.
TED
Ted A. Fernandez
Chairman and Chief Executive Officer
Dear Shareholders,
As we move forward into a new year, I am very pleased about Answerthink’s strategic focus,
unique value proposition and financial strength. With economic uncertainty lingering, what
are the reasons for our optimism? Throughout 2002, we worked hard and invested heavily to
create a unique delivery approach and set of offerings that would expand our business model
and strongly differentiate ourselves in the marketplace.
During the fourth quarter, we formally launched several important initiatives. The first was our
innovative service delivery approach called Business Process Intelligence, or BPI. BPI
incorporates intellectual capital from The Hackett Group, with its world-renowned database
of business process best practices and benchmarking results, into Answerthink's implementation
tools and techniques. Hackett has deep insight into how the world’s top companies operate,
while Answerthink specialists possess the skills and experience to implement solutions, based
on these insights, that enable world-class performance. Specifically, Answerthink uses best
practice process flows and software configuration methods to ensure Hackett Best Practices are
optimized in the implementation of business processes, enterprise applications and enabling
technologies. The end results are tangible cost improvements, strategic performance gains
and improved ROI. None of our competitors have this intellectual capital. Simply put, we
believe we can define, measure and evaluate world-class performance more clearly and help
our clients achieve it more effectively than any other business and technology consultancy.
To drive both greater understanding and demand for this approach, BPI and our expanded
Hackett offerings will be the cornerstones of our sales and marketing programs in the coming
year. Our associates have been trained and fully understand the value of BPI. They are
equipped with the knowledge and tools necessary to share our vision with existing and
prospective clients.
Secondly, we are expanding our Hackett offerings with a new Business Value Index offering,
collaborative learning products and business advisory services. Hackett services allow
companies to assess and specifically measure their performance against the highest performing
corporations, while Answerthink's business process transformation and technology
implementation services help companies convert the opportunities identified by Hackett into
specific performance gains. Our Business Value Index, or BVI, offering helps companies
identify and quantify opportunities for operational improvements in functional areas. BVI
efficiently measures and tracks the degree of improvement against specific internal and peer
performance targets over multi-year periods. A new ERP optimization collaborative learning
platform will help clients develop strategies to optimize their operating efficiency from
enterprise application investments. We also plan to launch business advisory services targeted
at senior executives seeking guidance and proven strategies on operational and strategic issues.
Further, a set of Hackett follow-on products will allow clients to utilize implementation
support services to efficiently realize the benefits identified in the Hackett benchmark offering.
By the end of the coming year, our goal is to firmly establish Answerthink as the leader in
business process measurement and related optimization services.
Our third key initiative, the creation of a Business Process Outsourcing, or BPO, advisory
service, directly leverages our BPI tools and Hackett knowledge base. We have an unrivaled
understanding of how to optimize processes and configure software with proven best
practices. To take full advantage of our competitive advantage and to expand our client base,
we are seeking a strategic partnership with a leading provider of BPO services. We will
continue our pursuit until we identify a partner who recognizes the value of our approach and
how it can benefit their go-to-market efforts.
In 2002, we improved our ability to compete for and serve clients. We continued to build a
culture of collaboration that leverages the power of our multi-disciplinary teams and enables
us to work with clients more strategically, as evidenced by our increasing customer
satisfaction levels.
We have not only survived a three-year IT spending recession, but we have also significantly
improved our value proposition, broadened our business model, strengthened our client
relationships and enhanced our ability to increase revenue. During this period we have
improved our financial position, completing 2002 with a record $66 million in cash balances.
The result is that we are in a stronger position both financially and strategically. Facing a new
year, we are confident we will take full advantage of the considerable opportunities ahead.
Ted A. Fernandez
Chairman and Chief Executive
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 2003
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
(State or other jurisdiction of
incorporation or organization)
1001 Brickell Bay Drive, Suite 3000
Miami, Florida
(Address of principal executive offices)
65-0750100
(I.R.S. Employer
Identification Number)
33131
(Zip Code)
(305) 375-8005
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share
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 requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Securities
Exchange Act of 1934). YES [X] NO [ ]
The aggregate market value of the common stock held by non-affiliates of the registrant was $167,944,352 on June 28, 2002
based on the last reported sale price of the registrant’s common stock on the Nasdaq National Market on June 28, 2002.
The number of shares of the registrant’s common stock outstanding on March 14, 2003 was 46,415,527.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2003 Annual Meeting
of Stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
ANSWERTHINK, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
Business
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters
ITEM 6.
Selected Consolidated Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
PART III
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Control and Procedures
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART IV
Signatures
Certifications
Index to Exhibits
Page
1
11
11
11
12
13
14
21
22
44
44
44
44
44
44
45
46
47
49
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it include “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements in these sections. All statements regarding our expected financial position and operating results, our
business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are
forward-looking statements. These statements can sometimes be identified by our use of forward-looking words
such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from the results, performance or achievements expressed or implied by
the forward-looking statements. We cannot promise you that our expectations in such forward-looking statements
will turn out to be correct. Factors that impact such forward looking statements include, among others, our ability
to attract additional business, the timing of projects and the potential for contract cancellation by our customers,
changes in expectations regarding the information technology industry, our ability to attract and retain skilled
employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends,
changes in general economic conditions and interest rates, the risk that the Internal Revenue Service or the courts
may not accept the amount or nature of one or more items of deduction, loss, income or gain as reported by
Answerthink for tax purposes and the possible outcome of pending litigation and our actions in connection with
such litigation. An additional description of our risk factors is described in Part 1—Item 1 “Business—Risk Factors”.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 1. BUSINESS
GENERAL
PART I
Answerthink, Inc. (“Answerthink”) (www.answerthink.com) is a leading business and technology consulting firm
that enables companies to achieve world-class business performance. By leveraging the comprehensive database of our
Hackett Group business, with its world-renowned repository of enterprise best practice metrics and business process
knowledge, our business and technology solutions help clients improve performance and optimize returns on technology
investments. Our capabilities include performance measurement, business transformation, business applications,
technology integration, and offshore application maintenance and support.
In this Form 10-K, unless the context otherwise requires, “Answerthink”, the “Company”, “we”, “us”, and
“our” refer to Answerthink, Inc. and its subsidiaries and predecessors.
INDUSTRY BACKGROUND
For the third straight year, business and technology consultancies experienced a weak spending outlook and
generally soft market in 2002. For 2003, some market observers are predicting a slight increase or “uptick” in IT
spending, though a return to the boom years of the late 1990s is unlikely. Throughout the downturn, companies
have placed heavy emphasis on risk management and tangible return on their business and technology investments.
As the economy recovers, large enterprises will center their IT spending on tools that help them generate more
value from past investments. Specifically, they will be looking to derive maximum value from their existing
enterprise applications. Enabling technologies will be used to complement and extend the capabilities of enterprise
and key functional systems. For example, Business Process Management, or BPM, tools will give companies
increased visibility into key business processes that reach across functional and organizational boundaries. Not only
will BPM help reduce error rates and cycle times by automating workflow, it will also increase the efficiency and
productivity of all the people and systems that collaborate on individual processes.
There will also be market opportunity around the need for better real-time performance measurement and
strategic decision-making. Many companies are seeking to link optimized processes directly to technology and
consolidate the gains of their business process re-engineering efforts. Enterprise applications and BPM software
will both play a role. Companies will embed optimized processes directly into ERP systems, and use BPM and
other enabling technologies to improve ongoing management and control, so they can ensure that streamlined or
re-engineered processes continue to deliver cost and performance improvements in the future. Business intelligence,
analytics and knowledge management applications will also play an increasingly significant role in the future as
1
companies seek to generate more valuable insight and analysis from their operational and financial data. These
enabling technologies point the way to tomorrow’s real-time enterprises which will be capable of nearly
instantaneous views of current performance and more accurate and efficient planning, forecasting and reporting.
OUR APPROACH
Answerthink enables companies to achieve world-class business performance by combining intellectual capital
from The Hackett Group, with its world-renowned database of business process best practices and performance
measurement results, and Answerthink’s proprietary Business Process Intelligence (BPI) approach, which is based
on proven implementation techniques. Hackett’s services help clients understand how well they are performing
today compared with the world’s most effective companies, while Answerthink specialists have the skills and
experience to implement solutions, based on client performance measurement results, to drive them toward world-
class performance. Hackett provides deep insight into how top-performing companies operate, and Answerthink
applies those best practices to generate cost and performance gains for clients. Specifically, Answerthink uses best
practice process flows and configuration guides to integrate Hackett’s empirically proven best practices directly
into enterprise applications and enabling technologies.
Because our solutions are based on Hackett-certified best practices, clients gain a significant advantage. They
can have confidence that their solutions are based on strategies from the world’s leading companies. This clearly
defined path to world-class performance delivers enhanced efficiency, improved effectiveness, increased flexibility,
maximized ROI, reduced risk and sustainability of performance improvements moving forward.
The BPI approach begins with a clear understanding of current performance, which is gained through
measuring key processes and comparing the results to world-class levels and industry standards captured in the
Hackett database. We then, help clients prioritize and select the appropriate best practices to implement through
a coordinated performance improvement strategy. Without a coordinated strategy that addresses the four key
business drivers of people, process, technology and information, companies risk losing a significant portion of
business case benefits. Based on Hackett’s deep knowledge of world-class business performance, we have designed
detailed best practice process flows which enable clients to streamline and automate key processes, and generate
performance improvements quickly and efficiently at both the functional and enterprise level.
Similarly, we integrate Hackett Best Practices directly into technology solutions. Because today’s business
applications are flexible, it is imperative to simplify and automate processes to meet best practice standards before
new technology implementations and upgrades are completed. Otherwise, old, inefficient processes will simply be
automated and continue to drive up costs, cycle times and error rates. Answerthink has completed detailed fit-gap
analyses, in certain functional areas of major business application packages from Lawson, Oracle, PeopleSoft and
SAP to determine their ability to support best practices. Application-specific tools, implementation guides and
process flows allow us to optimize the configuration of ERP software, while limiting customization. These best
practice implementations establish the foundation for improved performance. Building on that foundation a new
breed of enabling technologies complement enterprise systems to drive further performance gains. These
technologies, which include business process management software, portals, business intelligence and analytics,
and knowledge management, enhance real-time business process management, visibility and decision-making.
This combination of optimized processes, a best practices-based business application environment and the right
enabling technologies allows our clients to achieve and sustain significant business performance improvement.
COMPETITION
Even as the economy has slowed these last few years, competition in the technology consulting marketplace
has heated up. Our competitors include international, national and regional systems consulting and implementation
firms, international accounting firms and the IT services divisions of application software firms. Mergers,
consolidation and bankruptcies throughout our industry have resulted in higher levels of competition. There is great
pressure to complete projects quickly, control costs and maintain efficient operations.
Still, we believe our competitive position is strong. Because of our Hackett intellectual capital and its direct
link to our BPI implementation approach, we believe we can assist clients better than our competitors. Our ability
to apply best practices to client operations via proven techniques further strengthens our competitive standing.
Answerthink’s culture of collaboration leverages the power of our cross-functional and service line teams to increase
revenue, strengthen relationships. We believe that this culture, along with our multidisciplinary approach, allows the
company to compete favorably.
2
STRATEGY
Moving forward, Answerthink’s focus is on executing those strategies that will lead to significant growth. They
include:
•
•
•
•
The integration of our Hackett best practices knowledge base into our business and technology
solutions. Our single largest initiative in 2002 was in our innovative Business Process Intelligence (BPI)
service delivery approach. Formally launched in the fourth quarter, BPI has received very favorable
reaction from clients and industry analysts. For this reason, BPI and our expanded Hackett offerings will
be the cornerstones of our marketing and communications programs in the coming year. We will drive
both greater understanding of and demand for this approach. We will continue to train associates in all
of our practices about BPI so they are equipped with the knowledge and tools necessary to share our vision
with existing and prospective clients. BPI incorporates intellectual capital from The Hackett Group into
our proven implementation tools and techniques. For clients, the end results are tangible cost and
performance gains and the improved ROI they are seeking in this difficult economic environment. We
will continue to enhance and expand the BPI toolkit, which includes best practice process flows and
application-specific configuration guides, in 2003.
Accelerated growth of our Hackett offerings with new and renewable services. We have expanded the
Hackett offerings with a new Business Value Index product and renewable business advisory services. We
have also developed renewable collaborative learning products that allow executives to share insights and learn
from their peers in a confidential environment. Our Business Value Index offering helps companies identify
and quantify opportunities for operational improvements in functional areas and efficiently measure and track
the degree of improvement against specific internal and peer performance targets over multi-year periods. We
also plan to launch Business Advisory Services targeted at senior executives seeking guidance and proven
strategies on operational and strategic issues. Additionally, a new ERP Optimization collaborative learning
program will help clients develop strategies to optimize their operating efficiency based on existing
investments in enterprise application investments. We are also working on a set of follow-on products that
allow clients to utilize implementation support services to efficiently realize the benefits identified in the
Hackett performance measurement process. Hackett services allow companies to assess and specifically
measure their performance against the highest-performing companies, while Answerthink business process
transformation and technology implementation services help companies convert the opportunities identified
by Hackett into specific performance gains. Our goal is to establish Answerthink as the leader in business
process measurement and related optimization services.
The creation of a new Business Process Outsourcing Advisory Service. Because of Answerthink’s
understanding of how to optimize processes and software configuration with proven best practices,
business process outsourcing represents a logical opportunity to expand our client base. The company
is seeking a strategic partnership with a leading provider of BPO services. We will continue our pursuit
of potential partners, until we identify a partner who recognizes the value of our Hackett knowledge base
and BPI tools and how they can benefit their go-to-market efforts.
Strategic Acquisitions. Answerthink will continue to pursue strategic acquisitions that strengthen our
ability to compete. Given our current financial position and distinct value proposition, Answerthink is
well positioned to pursue opportunities as they arise.
THE ANSWERTHINK SOLUTION
Answerthink offers a comprehensive range of services, including performance measurement and research,
business transformation, enterprise business applications,
technology integration and offshore application
maintenance and support. With strategic and functional knowledge in customer service, sales and marketing,
finance, human resources, information technology, procurement and supply chain management, our expertise
extends across the entire enterprise. We have completed successful engagements in a variety of industries, including
automotive, consumer goods, financial services, high tech, life sciences, manufacturing, media and entertainment,
retail, telecommunications, transportation and utilities.
3
Service Capabilities
•
The Hackett Group
The Hackett Group has measured and evaluated the efficiency and effectiveness of staff functions at nearly
2,000 global organizations since 1991. Hackett’s clients include 97 percent of the Dow Jones Industrials, 83 percent
of the Fortune 100, and 86 percent of the Dow Jones Global Titans Index. Ongoing studies are conducted in a wide
range of areas, including finance, human resources, information technology, procurement, SG&A and shared service
centers. Hackett has nearly 1,200 best practices for approximately 100 processes in these key functional areas.
Hackett uses proprietary performance measurement tools and a data collection model that enables companies
to complete the performance measurement cycle and identify and quantify improvement opportunities in as little
as four weeks. Additionally, Hackett offers subscription-based group learning opportunities and access to an online
library of best practices data.
•
Business Transformation
Answerthink’s Business Transformation services help clients develop a coordinated strategy for process
improvements across the enterprise. Our expert teams use reliable performance measurement data to link
performance gains to industry best practices. Our strategic capabilities include operational planning, process and
organization design, change management and the effective application of technology. Because Answerthink
combines best practices knowledge with our business expertise and broad technology capabilities, our solutions
maximize return on client investments in people, processes, technology and information.
•
Business Applications
Our Business Applications professionals help clients choose and deploy the software applications that best
meet their needs and objectives. The group offers comprehensive services from strategic planning, architecture,
and vendor evaluation and selection through implementation, customization, testing and integration. Our expertise
is focused on the following application providers: Lawson, Oracle, PeopleSoft, SAP, Siebel, and several leading
time and attendance providers. Furthermore, comprehensive fit-gap analyses of all major packages against Hackett
Best Practices have been completed. Proven tools and templates integrate best practices into business applications.
The group also offers post-implementation support, change management, system documentation and end-user
training, all of which are designed to enhance return on investment.
•
Technology Integration
Based on our extensive best practices knowledge, our Technology Integration group designs, develops and
implements IT solutions for more effective Business Process Management (BPM) and increased business
intelligence (BI). Our Technology Integration experts know how to apply BPM tools to increase process
transparency, improve efficiency in workflow and exception management, and create continuous improvement
environments. Similarly, our BI services are designed to increase visibility into current performance, improve access
to key financial and operational data, and enhance strategic decision making. The group offers strategy and
management services, including operational diagnostics and planning and enterprise architecture. Further, we assist
clients in improving business performance by rationalizing IT infrastructures, and selecting the right enabling
technologies, such as Web services, portals and BPM software, to complement enterprise systems and facilitate
information sharing and process integration inside and outside the enterprise.
JOINT VENTURE
Application Maintenance and Support: HCL-Answerthink
Through a joint venture with HCL Technologies, Answerthink provides offshore custom application
development and maintenance services. HCL-Answerthink brings together the skills and experience of one of
India’s top IT services and product engineering firms with the world-class business process and best practices
knowledge of Answerthink. The joint venture offers outsourcing diagnostics, post-implementation support for
enterprise systems, legacy system and custom application maintenance, custom development and application
reporting services.
4
CLIENTS
Answerthink focuses on long-term client relationships with Global 2000 firms and other sophisticated buyers of
business consulting and IT services. During 2002, our ten most significant clients accounted for approximately 57% of
revenues. Two clients, Waste Management and Exelon, each had revenues greater than 10% of total revenues.
The continuing high level of satisfaction across our client base offers more evidence of our success in 2002.
The responses to the surveys we send to clients continue to be extremely positive. During 2002, we received surveys
from a significant number of our engagements with a weighted average score of 4.5 on a 5.0 scale. The direct
feedback and suggestions we receive on surveys are captured and used to continuously improve our delivery
execution, sales processes, methodologies and training.
BUSINESS DEVELOPMENT AND MARKETING
Our extensive client base and relationships with Global 2000 firms remains our most significant sources of
new business. Our revenue generation strategy is formulated to ensure we are addressing the multiple facets of
business development. The categories below define our business development resources and market segmentation.
Expanding awareness of our brand by leveraging the unique value proposition we have created around BPI is our
main goal for 2003. Our BPI message will be the hallmark of our marketing and communications programs this
year as we drive both an understanding of and demand for this approach. Similarly, we have increased our Hackett
sales resources and established compensation programs that reward the linkage between sales of Hackett services
and Answerthink implementation solutions.
BUSINESS DEVELOPMENT RESOURCES
Although virtually all of our consultants have a responsibility to impact revenue, our primary internal business
development resources are comprised of the following:
• The Leadership Team
• The Sales Organization
• The Solution Strategist Network
• Telemarketing
• The Delivery Organization
The Leadership Team is comprised of the senior leaders within Answerthink who have a combination of
executive, functional, practice and anchor account responsibilities. In addition to their management
responsibilities, this group of associates is responsible for growing business by fostering executive level
relationships within accounts and leveraging their existing contacts in the marketplace.
The Sales Organization is comprised of associates who are 100% dedicated to increasing revenue. They are
deployed geographically in key markets and are primarily focused on developing new account relationships
within their target accounts (described below). Each sales associate has between two and 10 target accounts
split between existing clients and select Global 2000 prospects. They represent the entire Answerthink offering.
They also handle geographic-related opportunities as they arise.
The Solution Strategist Network is comprised of associates throughout our various practices who are
primarily dedicated to developing business. Solution strategists possess deep subject matter expertise within
a specific discipline and receive incentive compensation on the amount of revenue they generate. Solution
strategists sell new business in geographic accounts and collaborate with the sales organization on target
account opportunities to provide content expertise.
Telemarketing. Answerthink has trained groups of telemarketers to be conversant with its various solution
areas. Telemarketing is coordinated to ensure that our inbound and outbound efforts are synchronized.
The Delivery Organization is comprised of our billable associates who work at client locations. Their job
is to find additional opportunities through their normal course of delivering existing projects, thereby helping
the company expand our business within existing accounts.
In addition to our business development
team, we have a corporate marketing and communications
organization responsible for overseeing Answerthink’s marketing programs, public relations and employee
communications activities. Our Business Process Intelligence approach will form the main thrust of our market
5
message in 2003. It will continue to be our defining voice and differentiating point of view in the marketplace.
During 2002, we formally launched the BPI message to clients and industry analysts through a variety of
communications initiatives, including collateral, white papers, a series of executive breakfasts and Web casts.
MARKET SEGMENTATION
We have segmented our market focus into the following categories:
• Top 25 Accounts
• Target Accounts
• Geographic Focus Accounts
Top 25 Accounts are a mix of our largest existing clients and our most strategic prospects. To facilitate proper
account management, each top 25 account has a leadership team member assigned to perform the role of client
executive, an associate from the sales, solution strategist or delivery organizations to perform the role of
account manager, and an associate from the delivery organizations to perform the role of delivery leader.
Target Accounts are comprised of prospects and clients who are geographically situated where a sales
representative resides. Criteria for inclusion as a target account includes the size of the company, industry
affiliation, propensity to buy external consulting services and contacts within the account. The sales
representative is primarily responsible to identify business opportunities in the account, act as the single point
of coordination for the client and perform the general duties of account manager.
Geographic Focus Accounts are accounts within a specified geography that fall neither within the top 25 or
target account lists. These accounts can include large prospects, dormant clients, existing medium-sized clients
and mid-tier market accounts. This account set is handled primarily on an opportunistic basis, except for active
clients where delivery teams are focused on driving additional revenue.
MANAGEMENT SYSTEMS
Our management control systems are comprised of various accounting, billing, financial reporting, human
resources, marketing and resource allocations systems, many of which are integrated with our knowledge
management system, Mind~Share. We continuously work to improve Mind~Share, as well as our infrastructure
and management control systems, which we believe represents a competitive advantage for us. We believe that
Mind~Share significantly enhances our ability to serve our clients efficiently by allowing our knowledge base to
be shared by all of our consultants worldwide on a real-time basis. Our well-developed, flexible, scalable
infrastructure has allowed us to quickly integrate the new employees and systems of businesses we have acquired.
HUMAN RESOURCES
Our culture fosters intellectual rigor and creativity, collaboration and innovation. We believe in building
relationships with our clients. We believe the best solutions come from teams of diverse individuals addressing
problems collectively and from multiple dimensions, including the business, technological and human dimensions.
We maintain that the most effective working environment is one where everyone is encouraged to contribute.
We believe that Answerthink’s central values are the strongest expression of our working style. They represent
the behavior we want to encourage and the people we want to develop. They are what, at our core, we really stand
for. These central values are:
• Diversity: of backgrounds, skills and experiences
• Knowledge: as individuals and a system of individuals
• Collaboration: with one another, with our partners and with our clients
Answerthink’s working style is how those values get translated in daily life, how clients experience working
with the Answerthink individuals and how we deliver on our promises. Our work style is:
Insightful: the problems our clients face are complex; therefore we have to be imaginative and innovative
•
• Thorough: we deliver rigorous, thorough solutions because that is what our clients expect
• Committed: we are utterly and absolutely committed to delivering the right solutions and avoiding the
tempting compromises sometimes offered by deadlines, budgets or politics
• Passionate: passion drives business success, our clients’ success and, therefore, ours
6
Our HR staff includes dedicated resources to recruit consultants with both business and technology expertise.
Our recruiting team drives our hiring process by focusing on the highest demand solution areas of our business
to ensure an adequate pipeline of resources. We also have an employee referral program, which rewards existing
employees who source new hires.
Training and development are keys to our success—and therefore, our clients’ successes. That is why we
provide a thorough orientation and training curriculum for employees at every level. New hires complete
“OnBoarding” training to gain a complete picture of Answerthink, our mission, core objectives and values, as well
as our organization, clients and structure. Key executives regularly attend these sessions. In addition, we train our
consultants via Answerthink University in specific skill sets, such as business strategy, technology and project
management, that best complement our multidisciplinary teams. To fully leverage our “front-line” experiences and
support our culture, we often use our own people as trainers. Many of our practices maintain technology and
development labs, so our implementation specialists can stay current on the latest software releases from leading
vendors. Much of the ongoing development of our consultants comes from their work on client engagements
involving new business models and technology, which is then captured in Mind~Share and made available for
training other consultants.
The benefits package that we provide includes comprehensive health and welfare insurance, work/life balance
programs, a 401(k) program including a company match, stock options and a stock purchase program. Our associates
are paid competitive salaries and cash bonuses based upon market conditions and our performance.
As of January 3, 2003, we had approximately 750 associates, approximately 80% of whom were billable
professionals. None of our associates are subject to collective bargaining arrangements. We have entered into
nondisclosure and non-solicitation agreements with virtually all of our personnel. We engage consultants as
independent contractors from time to time.
COMMUNITY INVOLVEMENT
One important way we put our values into action is through our commitment to the communities where we
work. The mission of Answerthink’s Community Council, which operates in each of the cities where we have offices,
is to leave the markets, communities and clients we serve better than we found them. We do it by building a strong
sense of community, collaboration and personal interaction among all of our associates, through both volunteer and
service programs and social gatherings. Not only do the Community Council’s efforts make our towns and cities
better places to live and do business, but they also make Answerthink a better place to work. Answerthink’s
associates are actively involved in many valuable and high-impact community programs, including United Way,
Ronald McDonald House, Big Brothers & Sisters, Race for the Cure, Make-A-Wish Foundation, Habitat for
Humanity, the National Adoption Center, the National Heart Association and Special Olympics.
AVAILABLE INFORMATION
We make our public filings with the Securities and Exchange Commission, including our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to
these reports, available free of charge at our web site http://www.answerthink.com as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Any
material that we file with the Securities and Exchange Commission may be read and copied at the Securities and
Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information
on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330.
RISK FACTORS
The following important factors, among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this Annual Report on Form 10-K or printed elsewhere by
management from time to time.
7
Our quarterly operating results may vary.
Our financial results may fluctuate from quarter to quarter. In future quarters, our operating results may not meet
public market analysts’ and investors’ expectations. If that happens, the price of our common stock may fall. Many factors
can cause these fluctuations, including:
•
•
•
•
•
•
•
•
•
•
•
•
the number, size, timing and scope of client engagements;
customer concentration;
long and unpredictable sales cycles;
contract terms of client engagements;
degrees of completion of client engagements;
client engagement delays or cancellations;
competition for and utilization of employees;
how well we estimate the resources we need to complete client engagements;
the integration of acquired businesses;
pricing changes in the industry;
economic conditions specific to information technology consulting; and
general economic conditions.
A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular
quarter. As a result, if we experience unanticipated changes in client engagements or in employee utilization rates, we
could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors,
we believe you should not compare our quarter-to-quarter operating results to predict future performance.
If we are unable to maintain our reputation and expand our name recognition, we may have difficulty
attracting new business and retaining current clients and employees.
We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and
retaining clients and employees. We also believe that the importance of reputation and name recognition is increasing
and will continue to increase due to the number of providers of IT services. If our reputation is damaged or if potential
clients are not familiar with us or with the solutions we provide, we may be unable to attract new, or retain existing,
clients and employees. Promotion and enhancement of our name will depend largely on our success in continuing to
provide effective solutions. If clients do not perceive our solutions to be effective or of high quality, our brand name
and reputation will suffer. In addition, if solutions we provide have defects, critical business functions of our clients may
fail, and we could suffer adverse publicity as well as economic liability.
We depend heavily on a limited number of clients.
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited
number of clients for which we perform large projects. In 2002, our ten largest clients accounted for approximately 57%
of our revenues in the aggregate, with two clients each accounting for more than 10% of revenues. In addition, revenues
from a large client may constitute a significant portion of our total revenues in a particular quarter. The loss of any principal
client for any reason, including as a result of the acquisition of that client by another entity, our failure to meet that client’s
expectations, or that client’s decision to reduce spending on technology-related projects, could have a material adverse
effect on our business, financial condition and results of operations.
We have risks associated with potential acquisitions or investments.
Since we were founded, we have significantly expanded through acquisitions. In the future, we plan to pursue
additional acquisitions. We will do this to:
•
•
recruit well-trained, high-quality professionals;
expand our service offerings;
8
•
•
•
gain additional industry expertise;
broaden our client base; and
expand our geographic presence.
We may not be able to integrate successfully businesses which we may acquire in the future without substantial
expense, delays or other operational or financial problems. We may not be able to identify, acquire or profitably manage
additional businesses. Also, acquisitions may involve a number of risks, including:
•
•
•
•
•
•
diversion of management’s attention;
failure to retain key personnel;
failure to retain existing clients;
unanticipated events or circumstances;
legal liabilities; and
amortization of acquired intangible assets.
We cannot assure you that client satisfaction or performance problems at a single acquired firm will not have a
material adverse impact on our reputation as a whole. Further, we cannot assure you that our recent or future acquired
businesses will generate anticipated revenues or earnings.
We may be unable to achieve anticipated benefits from acquisitions and joint ventures.
The anticipated benefits from our acquisitions may not be achieved. For example, when we acquire a company
or certain assets of a company, we cannot be certain that customers acquired in the transaction will continue to do business
with us or that employees of the acquired operations will continue their employment or become well integrated into our
operations. The identification, consummation and integration of acquisitions and joint ventures require substantial
attention from management. The diversion of this attention from management, as well as any difficulties encountered
in the integration process, could have an adverse impact on our business, financial condition and results of operations.
We may be subject to claims for past acts of the companies that we acquire, which may subject us to
increased expenses.
We could experience financial or other setbacks if any of the businesses that we acquire had problems in the past
of which we are not aware. To the extent any client or other third party asserts any legal claim against any of the companies
we have acquired, our business, results of operations and financial condition could be materially and adversely affected.
We may not be able to hire, train, motivate, retain and manage professional staff.
To succeed, we must hire, train, motivate, retain and manage highly skilled employees. Competition for skilled
employees who can perform the services we offer is intense. We might not be able to hire enough of them or to train,
motivate, retain and manage the employees we hire. This could hinder our ability to complete existing client engagements
and bid for new client engagements. Hiring, training, motivating, retaining and managing employees with the skills we
need is time-consuming and expensive.
We could lose money on our contracts.
As part of our strategy, we enter into capped or fixed-price contracts, in addition to contracts based on payment
for time and materials. Because of the complexity of many of our client engagements, accurately estimating the cost,
scope and duration of a particular engagement can be a difficult task. If we fail to make these estimates accurately, we
could be forced to devote additional resources to these engagements for which we will not receive additional
compensation. To the extent that an expenditure of additional resources is required on an engagement, this could reduce
the profitability of, or result in a loss on, the engagement. In the past, we have, on occasion, engaged in negotiations
with clients regarding changes to the cost, scope or duration of specific engagements. To the extent we do not sufficiently
communicate to our clients, or our clients fail to adequately appreciate, the nature and extent of any of these types of
changes to an engagement, our reputation may be harmed and we may suffer losses on an engagement.
Lack of detailed written contracts could impair our ability to collect fees, protect our intellectual
property and protect ourselves from liability to others.
We try to protect ourselves by entering into detailed written contracts with our clients covering the terms and
contingencies of the client engagement. In some cases, however, consistent with what we believe to be industry practice,
9
work is performed for clients on the basis of a limited statement of work or verbal agreements before a detailed written
contract can be finalized. To the extent that we fail to have detailed written contracts in place, our ability to collect fees,
protect our intellectual property and protect ourselves from liability to others may be impaired.
Our corporate governance provisions may deter a financially attractive takeover attempt.
Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders
may consider favorable, including transactions in which stockholders would receive a premium for their shares. These
provisions include the following:
•
•
stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders
or nominating a director for election;
our board of directors is staggered into three classes and the members may be removed only for cause upon
the affirmative vote of holders of at least two-thirds of the shares entitled to vote;
• we would not be required to hold a special meeting to consider a takeover proposal unless holders of more than
a majority of the shares entitled to vote on the matter were to submit a written demand or demands for us to
do so; and
•
our board of directors may, without obtaining stockholder approval, classify and issue up to 1,250,000 shares
of preferred stock with powers, preferences, designations and rights that may make it more difficult for a third
party to acquire us.
Our markets are highly competitive.
We may not be able to compete effectively with current or future competitors. The IT services market is highly
competitive. We expect competition to further intensify as this market continues to evolve. Some of our competitors have
longer operating histories, larger client bases, longer relationships with their clients, greater brand or name recognition
and significantly greater financial, technical and marketing resources than we do. As a result, our competitors may be
in a stronger position to respond more quickly to new or emerging technologies and changes in client requirements and
to devote greater resources than we can to the development, promotion and sale of their services. Competitors could
lower their prices, potentially forcing us to lower our prices and suffer reduced operating margins. We face competition
from international accounting firms; international, national and regional systems consulting and implementation firms;
the IT services divisions of application software firms; and marketing and communication firms.
In addition, there are relatively low barriers to entry into the IT services market. We do not own any patented
technology that would stop competitors from entering this market and providing services similar to ours. As a result,
the emergence of new competitors may pose a threat to our business. Existing or future competitors may develop and
offer services that are superior to, or have greater market acceptance, than ours, which could significantly decrease our
revenues and the value of your investment.
We may lose large clients or significant client engagements.
Our client engagements are generally short-term arrangements, and most clients can reduce or cancel their contracts
for our services with 30 days notice and without penalty. As a result, if we lose a major client or large client engagement,
our revenues will be adversely affected. We perform varying amounts of work for specific clients from year to year. A
major client in one year may not use our services in another year. In addition, we may derive revenue from a major client
that constitutes a large portion of total revenue for particular quarters. If we lose any major clients or any of our clients
cancel or significantly reduce the scope of a large client engagement, our business, financial condition and results of
operations could be materially and adversely affected. Also, if we fail to collect a large account receivable, we could
be subjected to significant financial exposure. Consequently, you should not predict or anticipate our future revenue based
upon the number of clients we currently have or the number and size of our existing client engagements.
We rely on our intellectual property rights.
We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and
trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license
intellectual property. Although we enter into confidentiality agreements with our employees and limit distribution of
proprietary information, there can be no assurance that the steps we have taken in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps
to enforce our intellectual property rights.
10
Although we believe that our services do not infringe on the intellectual property rights of others and that we have
all rights necessary to utilize the intellectual property employed in our business, we are subject to the risk of claims
alleging infringement of third-party intellectual property rights. Any claims could require us to spend significant sums
in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property
that is the subject of asserted infringement.
The market price of our common stock may fluctuate widely.
The market price of our common stock could fluctuate substantially due to:
•
•
•
•
future announcements concerning us or our competitors;
quarterly fluctuations in operating results;
announcements of acquisitions or technological innovations; or
changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely for reasons which may be unrelated
to operating results. Fluctuations in our common stock’s market price may impact our ability to finance our operations
and retain personnel.
ITEM 2. PROPERTIES
Our principal executive offices currently are located at 1001 Brickell Bay Drive, Suite 3000, Miami, Florida
33131. The lease on these premises covers 16,036 square feet and expires June 30, 2003. We also have offices in
Atlanta, Boston, Chicago, Cleveland, Frankfurt, New York, Philadelphia, London and Iselin, New Jersey. We
believe that we will be able to obtain suitable space as needed. We own no real estate and do not intend to invest
in real estate or real estate-related assets.
ITEM 3. LEGAL PROCEEDINGS
Between November, 2002 and January, 2003, six class actions seeking unspecified damages were filed against
Answerthink and certain of its current and former officers and directors alleging violations of the Securities and
Exchange Act of 1934. The complaints allege misstatements and omissions concerning related party transactions
during the alleged class period of February 8, 2000 to April 25, 2002. On January 7, 2003 the federal district court
entered an order closing and consolidating these cases and any subsequently filed related cases (the “Consolidation
Order”) into Druskin, et al. v. Answerthink, Inc., et al., Case No. 02-23304-CIV-GOLD. The Consolidated Amended
Complaint is due to be filed on April 18, 2003. We intend to file a motion seeking the dismissal of the Consolidated
Amended Complaint. Based on the status of these actions it is not possible to determine the range of loss to us,
if any. We believe that the plaintiffs’ claims are without merit and intend to defend the lawsuits vigorously.
Between September and October 1998, seven purported class action suits were filed against THINK New Ideas,
Inc. (“THINK New Ideas”) and certain of its then current and former officers and directors alleging violations of
the Securities Exchange Act of 1934. All seven of these lawsuits were consolidated by order of the court. This
lawsuit became our responsibility upon the merger of Answerthink and THINK New Ideas. On April 18, 2002,
the parties reached an agreement in principle to settle this action. The Court approved the settlement in September
2002 in all respects and dismissed the complaint with prejudice. The time for appeal has expired and the settlement
has become final. The full amount of the settlement has been paid by THINK New Ideas’ insurance carrier.
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 other matters will not
have a material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2002.
11
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the Nasdaq National Market since our initial public offering on May 28,
1998 under the Nasdaq symbol “ANSR”. The following table sets forth for the fiscal periods indicated the high
and low sales prices of the common stock, as reported on the Nasdaq National Market.
2002
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2001
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$3.29
$3.91
$7.30
$8.34
$6.80
$9.81
$9.99
$9.06
Low
$1.43
$1.52
$3.60
$4.65
$3.15
$3.50
$3.50
$3.25
The closing sale price for the common stock on March 14, 2003 was $2.43.
As of March 14, 2003, there were approximately 386 holders of record of our common stock and 46,415,527
shares of common stock outstanding.
Company Dividend Policy
We do not expect to pay any cash dividends on our common stock in the foreseeable future. Our present policy
is to retain earnings, if any, for use in the operation of our business.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data sets forth selected financial information for Answerthink
as of and for each of the years in the five-year period ended January 3, 2003, and has been derived from our audited
financial statements. The selected consolidated financial data should be read together with our consolidated financial
statements and related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Consolidated Statement of Operations Data:
Revenues:
Revenues before reimbursements
Reimbursements
Total revenues
Costs and expenses:
Project personnel and expenses:
Project personnel and expenses before
reimbursable expenses
Reimbursable expenses
Total project personnel and expenses
Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Stock compensation expense
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Litigation settlement
Non-cash investment losses
Interest income (expense), net
Income (loss) before income taxes, loss from
discontinued operations, extraordinary loss and
cumulative effect of change in accounting principle
Income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of
income taxes
January 3,
2003
Year Ended
December 31,
December 29,
December 28,
2001
1999
2000
(in thousands, except per share data)
January 1,
1999
$156,357
20,490
176,847
$220,966
29,377
250,343
$260,892
35,811
296,703
$202,318
29,255
231,573
$118,155
14,648
132,803
104,981
20,490
125,471
53,416
20,000
10,886
—
209,773
(32,926)
—
—
570
(32,356)
(3,508)
(28,848)
132,843
29,377
162,220
77,087
—
5,619
4,855
249,781
562
—
—
843
1,405
1,807
(402)
147,040
35,811
182,851
92,321
—
3,268
853
279,293
17,410
1,850
(2,350)
589
17,499
8,571
8,928
118,844
29,255
148,099
57,297
—
—
960
206,356
25,217
—
—
(26)
71,890
14,648
86,538
38,516
—
—
40,843
165,897
(33,094)
2,500
—
(739)
25,191
11,431
13,760
(31,333)
1,719
(33,052)
(8,911)
(8,117)
(1,027)
(10,513)
(28,362)
Income (loss) before extraordinary loss and
cumulative effect of change in accounting principle
Extraordinary loss on early extinguishment of debt,
net of taxes
Cumulative effect of change in accounting principle
Net income (loss)
(37,759)
(8,519)
—
(31,200)
$ (68,959)
—
—
$ (8,519)
Basic net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations, net of
income taxes
Extraordinary loss on early extinguishment
of debt
Cumulative effect of change in accounting
principle
Net income (loss) per common share
Weighted average common shares outstanding
Diluted net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations, net of
income taxes
Extraordinary loss on early extinguishment
of debt
Cumulative effect of change in accounting
principle
Net income (loss) per common share
Weighted average common shares and common
share equivalents
$
$
$
$
$
$
$
$
$
$
(0.62)
(0.19)
—
(0.68)
(1.49)
46,348
(0.62)
(0.19)
—
(0.68)
(1.49)
$
$
$
$
$
$
$
$
$
$
(0.01)
(0.18)
—
—
(0.19)
43,999
(0.01)
(0.18)
—
—
(0.19)
7,901
—
—
7,901
0.22
(0.02)
—
—
0.20
40,262
0.20
(0.02)
—
—
0.18
$
$
$
$
$
$
$
$
$
$
$
3,247
(61,414)
(2,113)
—
1,134
—
—
$ (61,414)
0.39
(0.30)
(0.06)
—
0.03
34,953
0.32
(0.24)
(0.05)
—
0.03
$
$
$
$
$
$
$
$
$
$
(1.33)
(1.14)
—
—
(2.47)
24,844
(1.33)
(1.14)
—
—
(2.47)
$
$
$
$
$
$
$
$
$
$
$
46,348
43,999
45,137
43,098
24,844
13
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Shareholders’ equity
January 3,
2003
December 28,
2001
December 29,
2000
(in thousands)
December 31,
1999
January 1,
1999
$ 63,419
$ 74,537
$145,361
$113,047
$ 59,888
$ 81,313
$211,919
$177,701
$ 51,662
$ 74,787
$228,676
$172,054
$ 27,124
$ 55,166
$200,713
$140,270
$ 36,931
$ 49,711
$153,394
$100,789
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Answerthink 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, with its world-
renowned repository of enterprise best practice metrics and business process knowledge, Answerthink’s business
and technology solutions help clients significantly improve performance and optimize returns on technology
investments. Answerthink’s capabilities include performance measurement services, business transformation,
business applications, technology integration, and offshore application maintenance and support. Answerthink was
formed on April 23, 1997. Since our formation, we have grown through internal expansion as well as through
mergers and acquisitions. Our consolidated financial statements may lack comparability from period to period
because of acquisitions we made for which we used the purchase method of accounting.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting
of results of operations and financial position in the preparation of financial statements in conformity with generally
accepted accounting principles. Actual results could differ significantly from those estimates under different
assumptions and conditions. We believe the following discussion addresses our most critical accounting policies.
These policies require management to exercise judgements that are often difficult, subjective and complex due to
the necessity of estimating the effect of matters that are inherently uncertain.
Revenue Recognition
Our revenues are derived from fees for services generated on a project-by-project basis. Revenues for services
rendered are recognized on a time and materials basis based on the number of hours worked by our consultants
at an agreed upon rate per hour or on a fixed-fee or capped-fee basis. Revenues related to time and material contracts
are recognized in the period in which services are performed. Revenues related to fixed-fee or capped-fee contracts
are recognized based on our evaluation of actual costs incurred to date compared to total estimated costs using the
percentage of completion method of accounting. The cumulative impact of any revisions in estimated total revenues
and direct contract costs are recognized in the period in which they become known. Unbilled revenues represent
revenues for services performed that have not been billed. If we do not accurately estimate the resources required
or the scope of the work to be performed, or we do not manage our projects properly within the planned periods
of time or we do not meet our clients’ expectations under the contracts, then future consulting margins may be
significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting
reductions in margins or contract losses could be material to our results of operations.
The agreements entered into in connection with a project, whether time and materials based or fixed-fee or
capped-fee based, are typically terminable by the client upon 30 days’ notice. Upon early termination of an
engagement, the client is required to pay for all time, materials and expenses incurred by us through the effective
date of the termination. In addition, provisions in some of the agreements we have with our clients limit our right
to enter into business relationships with specific competitors of that client for a specific time period. These provisions
typically prohibit us from performing a defined range of our services that we might otherwise be willing to perform
for potential clients. These provisions are generally limited to six to twelve months and usually apply only to specific
employees or the specific project team.
14
Accounts Receivable and Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients
to make required payments. Our management makes estimates of the uncollectibility of our accounts receivables.
Management critically reviews accounts receivable and analyzes historical bad debts, past-due accounts, client
credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Goodwill
We assess goodwill for impairment when events or circumstances indicate that the carrying value may not
be recoverable, or, at a minimum, on an annual basis. We have made determinations as to what our reporting units
are and what amounts of goodwill and intangible assets should be allocated to those reporting units.
In assessing the recoverability of long-lived identifiable assets and goodwill, we must make assumptions
regarding estimated future cash flows, discount rates and other factors to determine if impairment tests are met.
These estimates contain management’s best estimates, using appropriate and customary assumptions and projections
at the time. If these estimates or their related assumptions change in the future, we may be required to record
additional impairment charges.
Restructuring Costs
During 2002, 2001 and 2000, we recorded charges in connection with our restructuring actions. The related
reserves reflect judgements and estimates of our ultimate costs for severance, closure and consolidation of facilities
and settlement of contractual obligations under our operating leases, including sublease rental rates, absorption
period to relet space and other related costs. We reassess the reserve requirements to complete each individual plan
under our restructuring programs at the end of each reporting period. Such charges have been recorded under
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and Securities and Exchange
Commission Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges. If these estimates change
in the future or actual results are different than our estimates, we may be required to record additional charges in
the future.
Income Taxes
We record income taxes using the liability method. Under this method, we record deferred taxes based on
temporary taxable and deductible differences between the tax bases of our assets and liabilities and our financial
reporting bases. The liability method of accounting for deferred income taxes requires a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Litigation and Contingencies
Litigation and contingencies are reflected in our consolidated financial statements based on management’s
assessment, along with legal counsel, of the expected outcome from such litigation. If the final outcome of such
litigation and contingencies differs adversely from that currently expected, it would result in a charge to earnings
when determined.
15
Results of Operations
Our fiscal year generally consists of a 52-week period and periodically consists of a 53-week period because
the fiscal year ends on the Friday closest to December 31. Fiscal years 2002, 2001 and 2000 ended on January 3,
2003, December 28, 2001 and December 29, 2000, respectively. Our fiscal year 2002 was a 53-week period.
References to a year included in this section refer to a fiscal year rather than a calendar year.
The following table sets forth, for the periods indicated, our results of operations and the percentage
relationship to net revenues of such results:
Revenues:
Revenues before reimbursements
Reimbursements
Total revenues
Costs and expenses:
Project personnel and expenses:
Project personnel and expenses before
reimbursable expenses
Reimbursable expenses
Total project personnel and expenses
Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Stock compensation expense
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Litigation settlement
Non-cash investment losses
Interest income (expense), net
Income (loss) before income taxes, loss from
discontinued operations and cumulative
effect of change in accounting principle
Income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of
January 3, 2003
Year Ended
December 28, 2001
(in thousands, except percentage data)
December 29, 2000
$156,357
20,490
176,847
88.4%
11.6%
100.0%
$220,966
29,377
250,343
88.3%
11.7%
100.0%
$260,892
35,811
296,703
87.9%
12.1%
100.0%
104,981
20,490
125,471
53,416
20,000
10,886
—
209,773
(32,926)
—
—
570
59.4%
11.6%
71.0%
30.2%
11.3%
6.2%
—
118.7%
(18.7%)
—
—
0.4%
132,843
29,377
162,220
77,087
—
5,619
4,855
249,781
562
—
—
843
53.1%
11.7%
64.8%
30.8%
—
2.2%
2.0%
99.8%
0.2%
—
—
0.3%
147,040
35,811
182,851
92,321
—
3,268
853
279,293
17,410
49.5%
12.1%
61.6%
31.1%
—
1.1%
0.3%
94.1%
5.9%
1,850
(2,350)
589
0.6%
(0.8%)
0.2%
(32,356)
(3,508)
(28,848)
(18.3%)
(2.0%)
(16.3%)
1,405
1,807
(402)
0.5%
0.7%
(0.2%)
17,499
8,571
8,928
5.9%
2.9%
3.0%
income taxes
(8,911)
(5.1%)
(8,117)
(3.2%)
(1,027)
(0.3%)
Income (loss) before cumulative effect of
change in accounting principle
Cumulative effect of change in accounting
principle
Net income (loss)
Comparison of 2002 to 2001
(37,759)
(21.4%)
(8,519)
(3.4%)
(31,200)
$ (68,959)
(17.6%)
(39.0%)
—
$ (8,519)
—
(3.4%)
$
7,901
—
7,901
2.7%
—
2.7%
Overview. We reported a net loss of $69.0 million in 2002 compared to a net loss of $8.5 million in 2001.
Our $69.0 million net loss during 2002 included a $31.2 million cumulative effect of change in accounting principle
as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other
Intangible Assets, a non-cash goodwill impairment charge of $20.0 million, restructuring costs of $10.9 million
and a loss from discontinued operations of $8.9 million related to our interactive marketing business. Our
$8.5 million net loss during 2001 included a loss from discontinued operations of $8.1 million, restructuring costs
of $5.6 million and $4.9 million of non-cash compensation expense. The compensation expense was primarily
related to the granting of “in-the-money” stock options to participants in our Employee Stock Purchase Plan in lieu
of the Employee Stock Purchase Plan shares that could not be issued because the plan was oversubscribed for the
purchase periods ending December 31, 2000 and June 30, 2001. Our losses in 2002 and 2001 were attributable
to the items mentioned above. The decrease in revenues in 2002 resulted from a decline in information technology
spending by our customers and potential customers in reaction to the overall slowdown in the economy during 2002.
Revenues. Revenues decreased 29.4% to $176.8 million in 2002 from $250.3 million in 2001. The decrease
in revenues was primarily attributable to a decrease in the number of customers and the average size of our projects
16
resulting from the decreased demand for information technology services due to weak economic conditions. In fiscal
year 2002, three customers had revenues greater than 5% of total revenues, which, in the aggregate, accounted for
36% of total revenues. In fiscal year 2001, three customers had revenues greater than 5% of total revenues, which,
in the aggregate, accounted for approximately 39% of total revenues.
Project Personnel and Expenses. Project personnel costs and expenses consist primarily of salaries, benefits
and bonuses for consultants. Project personnel costs and expenses decreased 22.7% to $125.5 million in 2002 from
$162.2 million in 2001. The decrease in project personnel and expenses was primarily due to the reduction in the
number of consultants in order to balance workforce capacity with market demand for services. Consultant
headcount was 620 as of January 3, 2003 compared to 887 as of December 28, 2001. Project personnel and expenses
as a percentage of revenues increased to 71.0% in 2002 from 64.8% in 2001. This increase in project personnel
costs and expenses as a percentage of revenues was primarily the result of lower per hour billing rates charged
to customers and a higher average cost per consultant attributable to a greater percentage of senior associates
working on projects during 2002 compared to 2001.
Selling, General and Administrative. Selling, general and administrative expenses decreased 30.7% to
$53.4 million in 2002 from $77.1 million in 2001. The decrease in selling, general and administrative expenses
were primarily due to our continued cost control initiatives, reduced discretionary spending and the adoption of
SFAS No. 142, which eliminated amortization expense of goodwill in 2002. Goodwill amortization for the year
2001 was $3.9 million. In addition to the change in goodwill amortization, we reduced functional support headcount,
incurred lower recruiting, selling and bad debt expenses, and reduced property and facility expenses as a result of
a decrease in the number of offices from 14 at the end of 2001 to 12 at the end of 2002. Sales and functional support
headcount was 133 as of January 3, 2003 compared to 168 as of December 28, 2001. Selling, general and
administrative expenses as a percentage of revenues were comparable between 2002 and 2001 at 30.2% and 30.8%,
respectively.
Impairment of Goodwill and Cumulative Effect of Change in Accounting Principle. We adopted SFAS
No. 142 during the first quarter of 2002. The new accounting rule eliminated the amortization of goodwill and
changed the method of determining whether there is a goodwill impairment from an undiscounted cash flow method
to a fair value method. As a result of the adoption of this standard, we incurred a non-cash transitional impairment
charge of $31.2 million in the first quarter of 2002 due to the cumulative effect of a change in accounting principle.
This charge related to the Technology Integration reporting unit. The new statement also requires that goodwill
be tested for impairment on an annual basis and between annual tests in certain circumstances. We performed an
impairment test primarily as a result of the decline in our stock price and that of our peer group during the third
quarter of 2002 and recorded a non-cash impairment charge of $20.0 million related to the Technology Integration
reporting unit.
Restructuring Costs. Restructuring costs were $10.9 million and $5.6 million in 2002 and 2001, respectively.
In 2002, costs consisted of $1.5 million for reduction in consultants and functional support personnel and
$9.4 million for closure and consolidation of facilities and related exit costs, including a $5.0 million write-off of
leasehold improvements and other assets. The 2002 restructuring plan involved the involuntary termination of
approximately 100 employees. The 2001 costs consisted of $3.7 million for reduction in consultants and functional
support personnel and $1.9 million for closure and consolidation of facilities and related exit costs. The 2001
restructuring plan involved the involuntary termination of approximately 200 employees. These actions were taken
as a result of the continued decline in demand for technology services throughout 2001 and 2002. We took steps
to reduce our costs to better align our overall cost structure and organization with anticipated demand for our
services.
Stock Compensation Expense. Stock compensation expense in 2001 primarily related to the granting of stock
options to participants in our Employee Stock Purchase Plan. These stock options were granted in lieu of the
Employee Stock Purchase Plan shares that could not be issued because the plan was oversubscribed for the purchase
periods ending on December 31, 2000 and June 30, 2001. We recorded a non-cash compensation charge of
$4.2 million in 2001 for the difference between the fair market value of the stock on the option grant date and the
exercise price.
Income Taxes. We recorded an income tax benefit of $3.5 million in 2002, which represented 10.8% of our
2002 loss before discontinued operations and cumulative effect of change in accounting principle. In 2001, we
recorded income tax expense of $1.8 million, which represented 128.6% of our 2001 pre-tax income from
17
continuing operations. The low effective tax rate for 2002 was primarily due to the $20.0 million charge for the
impairment of goodwill which was not deductible for tax purposes and to the establishment of a valuation allowance
on our net deferred tax assets that existed at the end of the year.
In 2002, we discontinued our interactive marketing business which we acquired with THINK New Ideas. The
discontinuance of THINK New Ideas will generate an approximate $75.0 million worthless stock deduction for
our investment in THINK New Ideas in our 2002 tax return. Although we believe that our tax position is sustainable
there is no assurance that the Internal Revenue Service will not challenge our conclusion.
At the end of 2002, we had a net operating loss carryforward available for tax purposes of $68.0 million, which
we will use in future years to offset future taxable income.
The high effective tax rate for 2001 was the result of the impact of permanent differences on a very low level
of pretax income. Our effective tax rate may vary from period to period based on changes in our estimated annual
taxable income or loss.
Loss from Discontinued Operations. Results for 2002 included a net loss of $8.9 million from the discontinued
operations of our interactive marketing business. The operating results of the interactive marketing business have
been reported as discontinued operations and results for prior periods have been restated. For the years ended
January 3, 2003 and December 28, 2001 the losses from discontinued operations were $8.9 million and $8.1 million,
respectively, and included restructuring costs of $3.4 million and $2.9 million, respectively, for reduction in
consultants and for closure and consolidation of facilities and related exit costs. For the years ended January 3,
2003 and December 28, 2001, total revenues for discontinued operations were $7.2 million and $28.9 million,
respectively.
Comparison of 2001 to 2000
Overview. We reported a net loss of $8.5 million in 2001 compared to net income of $7.9 million in 2000.
Our $8.5 million net loss during 2001 was primarily attributable to a loss from discontinued operations of
$8.1 million related to the discontinued operations of our interactive marketing business, restructuring costs of
$5.6 million related to restructuring costs associated with personnel and facilities reductions and $4.9 million of
non-cash compensation expense. The compensation expense was primarily related to the granting of “in-the-money”
stock options to participants in our Employee Stock Purchase Plan in lieu of the Employee Stock Purchase Plan
shares that could not be issued because the plan was oversubscribed for the purchase periods ending December 31,
2000 and June 30, 2001. In 2000, we incurred non-recurring items of $9.9 million related to reserves for dotcom
related receivables, $3.3 million of restructuring costs associated with personnel and facilities reductions,
$2.4 million for non-cash investment losses, a $1.0 million loss from discontinued operations and $1.9 million of
income from a litigation settlement. Our loss in 2001 was attributable to the items mentioned above as well as the
decrease in revenues resulting from a decline in information technology spending by our customers and potential
customers in reaction to the overall slowdown in the economy during 2001.
Revenues. Revenues decreased 15.6% to $250.3 million in 2001 from $296.7 million in 2000. The decrease
in revenues was primarily attributable to a decrease in the number of customers and the average size of our projects
resulting from reduced demand for information technology services. In 2001, three customers each had revenues
greater than 5% of total net revenues, which, in the aggregate, accounted for approximately 39% of total revenues.
In 2000, one customer accounted for approximately 13% of revenues.
Project Personnel and Expenses. Project personnel costs and expenses consist primarily of salaries, benefits
and bonuses for consultants. Project personnel costs and expenses decreased 11.3% to $162.2 million in 2001 from
$182.9 million in 2000. The decrease in project personnel and expenses was the result of a decrease in the number
of consultants, partially offset by an increase in average salaries. Consultant headcount was 887 as of December 28,
2001 compared to 1,074 as of December 29, 2000. Project personnel and expenses as a percentage of revenues
increased to 64.8% in 2001 from 61.6% in 2000. This increase in project personnel costs and expenses as a
percentage of revenues was due to lower consultant utilization, partially offset by higher billing rates.
Selling, General and Administrative. Selling, general and administrative expenses decreased 16.5% to
$77.1 million in 2001 from $92.3 million in 2000. The decrease in selling, general and administrative expenses
was primarily a result of a decrease in bad debt expense, lower salary and benefit expenses associated with a decrease
in functional support associates, lower recruiting and training costs resulting from a decrease in the number of
18
consultants and reduced marketing costs. Sales and functional support headcount was 168 as of December 28, 2001
compared to 270 as of December 29, 2000. Selling, general and administrative expenses as a percentage of net
revenues were comparable between 2001 and 2000 at 30.8% and 31.1%, respectively.
Restructuring Costs. Restructuring costs were $5.6 million and $3.3 million in 2001 and 2000, respectively.
In 2001, costs consisted of $3.7 million for reduction in consultants and functional support personnel and
$1.9 million for closure and consolidation of facilities and related exit costs. The 2000 costs related to the reduction
in consultants and functional support personnel and 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 in the latter portion
of 2000 and throughout 2001. We took steps to reduce our costs to better align our overall cost structure and
organization with anticipated demand for our services.
Stock Compensation Expense. Stock compensation expense in 2001 primarily related to the granting of stock
options to participants in our Employee Stock Purchase Plan. These stock options were granted in lieu of the
Employee Stock Purchase Plan shares that could not be issued because the plan was oversubscribed for the purchase
periods ending on December 31, 2000 and June 30, 2001. We recorded a non-cash compensation charge of
$4.2 million in 2001 for the difference between the fair market value of the stock on the option grant date and the
exercise price.
Litigation Settlement. In June 2000, pursuant to a confidential settlement agreement, we settled litigation in
which we were the plaintiff. We recorded a gain of $1.9 million as a result of this settlement.
Non-Cash Investment Losses. In the fourth quarter of 2000, we recorded non-cash investment losses of
$2.4 million related to the full impairment of all of our dotcom related investments.
Income Taxes. We recorded an income tax expense from continuing operations of $1.8 million in 2001, which
represented 128.6% of our 2001 pre-tax loss from continuing operations. In 2000, we recorded income tax expense
of $8.6 million, which represented 49.0% of our 2000 pre-tax income from continuing operations. The high effective
tax rate for 2001 was the result of the impact of permanent differences on a very low level of pretax income.
Loss from Discontinued Operations. For the years ended December 28, 2001 and December 29, 2000, loss
from discontinued operations for the interactive marketing business were $8.1 million and $1.0 million, respectively,
while total revenues were $28.9 million and $53.9 million, respectively. Included in the loss from discontinued
operations for fiscal years 2001 and 2000 were restructuring costs of $2.9 million and $432,000, respectively, for
reduction in consultants and for closure and consolidation of facilities and related exit costs.
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 January 3, 2003, we had $63.4 million of cash and cash equivalents compared to
$59.9 million at December 28, 2001.
In August 2002, we cancelled our $15.0 million revolving credit facility. At the time of cancellation and at
all times throughout 2002 and 2001, we had no borrowings outstanding under the facility. Letters of credit of
$2.6 million were outstanding under the agreement at the time of the cancellation. We have deposited $2.9 million
with a financial institution as collateral for these letters of credit and have classified this cash as restricted on the
accompanying consolidated balance sheet at January 3, 2003.
19
There were no material capital commitments at January 3, 2003. The following summarizes our lease
commitments under non-cancelable operating leases for premises having a remaining term in excess of one year
at January 3, 2003 (in thousands):
2003
2004
2005
2006
2007
Thereafter
Less: sublease income
Total minimum lease payments, less sublease income
$ 7,194
6,166
5,017
4,941
4,581
22,981
50,880
15,293
$35,587
Net cash provided by operating activities was $7.0 million for 2002 compared to $15.5 million during 2001.
During 2002, net cash provided by operating activities was primarily attributable to a $18.9 million decrease in
accounts receivable and unbilled revenue. This was partially offset by a $5.4 million increase in prepaid expenses
and other assets, a $3.9 million decrease in accrued expenses and other liabilities and our $69.0 million net loss
adjusted for non-cash expenses of $67.5 million. Non-cash expenses included the impact of adopting SFAS No. 142,
impairment of goodwill, write-off of leasehold improvements, depreciation, deferred taxes and provision for
doubtful accounts. During 2001, net cash provided by operating activities was primarily attributable to an
$18.0 million decrease in accounts receivable and unbilled revenue and our $8.5 million net loss adjusted for
$22.5 million of non-cash expenses which included depreciation and amortization, non-cash compensation expense
and provision for doubtful accounts. These effects were partially offset by a $6.3 million decrease in media payable,
a $6.0 million decrease in accrued expenses and other liabilities and a $4.8 million decrease in accounts payable.
Media payables represent media placement costs owed to media providers on behalf of our customers. Amounts
in media payables that have been billed to our customers are included in accounts receivables.
Net cash used in investing activities was $7.8 million for 2002 compared to $11.7 million used during 2001.
The uses of cash for investing activities in 2002 were attributable to $4.0 million of purchases of property and
equipment, an increase in restricted cash of $2.9 million and $851,000 used in acquisitions in 2002. The uses of
cash for investing activities in 2001 were attributable to $9.5 million of purchases of property and equipment and
$2.1 million used in the acquisition of businesses.
Net cash provided by financing activities was $4.3 million in 2002 compared to $4.4 million during 2001.
Cash from financing activities during 2002 and 2001 was from the sale of common stock as a result of exercises
of stock options as well as the sale of stock through our Employee Stock Purchase Plan, offset by repurchases of
common stock of $2.2 million in 2002.
On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million
of our common stock. Under the repurchase plan, we may buy back shares of our outstanding stock from time to
time either on the open market or through privately negotiated transactions, subject to market conditions and trading
restrictions. As of January 3, 2003, we had repurchased 1,146,000 shares of our common stock at an average price
of $1.93 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 expenditures requirements for at least the next twelve 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. We cannot assure you however,
that additional financing will be available when needed or desired on terms favorable to us or at all.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities. This statement supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity and requires that a liability for a cost associated with an exit or disposal activity
20
be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. We do not believe that the adoption of SFAS No. 146 will
have a material impact on our consolidated financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS
No. 148 amends Statement of Financial Accounting Standards No. 123, Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported results. We continue to account for
stock-based compensation using Accounting Principles Board Statement No. 25, Accounting for Stock Issued to
Employees, and have not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. The
disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and have been
incorporated into our footnotes to the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that there is any material market risk exposure with respect to derivative or other financial
instruments, which would require disclosure under this item. At January 3, 2003, our exposure to market risk relates
primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily
of short-term fixed income 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 adverse impact on the fair value of our investment portfolio.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANSWERTHINK, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of January 3, 2003 and December 28, 2001
Consolidated Statements of Operations for the Years Ended January 3, 2003, December 28, 2001
and December 29, 2000
Consolidated Statements of Shareholders’ Equity for the Years Ended January 3, 2003,
December 28, 2001 and December 29, 2000
Consolidated Statements of Cash Flows for the Years Ended January 3, 2003, December 28, 2001
and December 29, 2000
Notes to Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts and Reserves
Page
23
24
25
26
27
28
43
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Answerthink, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Answerthink, Inc. and its subsidiaries at January 3, 2003 and December 28, 2001,
and the results of their operations and their cash flows for each of the three years in the period ended January 3,
2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the responsibility of the Company’s
management; our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, pursuant to the adoption of Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets, the Company changed its method of
accounting for goodwill in 2002.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 11, 2003
23
ANSWERTHINK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable and unbilled revenue, net of allowance of $3,526 and
$6,810 in 2002 and 2001, respectively
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Goodwill, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other liabilities
Media payable
Total current liabilities
Commitments and contingencies
Shareholders’ equity:
January 3,
2003
December 28,
2001
$ 63,419
2,909
24,159
16,364
106,851
11,790
26,720
$ 145,361
$ 59,888
40,015
15,628
115,531
18,468
77,920
$211,919
$
5,684
26,478
152
32,314
$
5,187
27,992
1,039
34,218
Preferred stock, $.001 par value, 1,250,000 shares authorized, none issued
and outstanding
—
—
Common stock, $.001 par value, authorized 125,000,000 shares; issued:
47,728,129 shares at January 3, 2003; 45,880,118 shares at
December 28, 2001
Additional paid-in capital
Treasury stock, at cost, 1,146,000 shares at January 3, 2003
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
48
263,626
(2,208)
(148,419)
113,047
$ 145,361
46
257,115
—
(79,460)
177,701
$211,919
The accompanying notes are an integral part of the consolidated financial statements.
24
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues:
Revenues before reimbursements
Reimbursements
Total revenues
Costs and expenses:
Project personnel and expenses:
Project personnel and expenses before reimbursable
expenses
Reimbursable expenses
Total project personnel and expenses
Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Stock compensation expense
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Litigation settlement
Non-cash investment losses
Interest income
Interest expense
Income (loss) before income taxes, loss from discontinued operations
and cumulative effect of change in accounting principle
Income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of income taxes
Income (loss) before cumulative effect of change in accounting
principle
Cumulative effect of change in accounting principle
Net income (loss)
Basic net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations, net of income taxes
Cumulative effect of change in accounting principle
Net income (loss) per common share
Weighted average common shares outstanding
Diluted net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations, net of income taxes
Cumulative effect of change in accounting principle
Net income (loss) per common share
Weighted average common and common equivalent shares
outstanding
January 3,
2003
$156,357
20,490
176,847
Year Ended
December 28,
2001
December 29,
2000
$220,966
29,377
250,343
$260,892
35,811
296,703
104,981
20,490
125,471
53,416
20,000
10,886
—
209,773
(32,926)
—
—
766
(196)
(32,356)
(3,508)
(28,848)
(8,911)
132,843
29,377
162,220
77,087
—
5,619
4,855
249,781
562
—
—
1,008
(165)
1,405
1,807
(402)
(8,117)
(37,759)
(31,200)
$ (68,959)
(8,519)
—
$ (8,519)
$
$
$
$
$
$
$
$
(0.62)
(0.19)
(0.68)
(1.49)
46,348
(0.62)
(0.19)
(0.68)
(1.49)
$
$
$
$
$
$
$
$
(0.01)
(0.18)
—
(0.19)
43,999
(0.01)
(0.18)
—
(0.19)
147,040
35,811
182,851
92,321
—
3,268
853
279,293
17,410
1,850
(2,350)
844
(255)
17,499
8,571
8,928
(1,027)
7,901
—
7,901
0.22
(0.02)
—
0.20
40,262
0.20
(0.02)
—
0.18
$
$
$
$
$
$
$
$
$
46,348
43,999
45,137
The accompanying notes are an integral part of the consolidated financial statements.
25
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Balance at December 31, 1999
Issuance of common stock
Purchase and retirement of stock
Issuance of common stock for
business acquisitions
Amortization of deferred
compensation expense
Net income
Balance at December 29, 2000
Issuance of common stock
Issuance of stock options
Issuance of common stock for
business acquisitions
Amortization of deferred
compensation expense
Net loss
Balance at December 28, 2001
Issuance of common stock
Treasury stock purchased
Net loss
Balance at January 3, 2003
Common Stock
Shares Amount
42,732
1,298
(172)
377
—
—
44,235
890
—
$43
1
—
—
—
—
$44
1
—
Additional
Paid-In
Capital
$219,884
17,176
(1,883)
8,122
—
—
$243,299
4,366
4,218
755
1
5,232
Treasury Stock
Shares Amount
Unearned
Compensation
Accumulated
Deficit
Total
Shareholder’s
Equity
— $ —
—
—
—
—
—
—
—
—
—
—
— $ —
—
—
—
—
—
—
—
—
—
—
$(815)
—
—
—
467
—
$(348)
—
—
—
348
—
$ —
—
—
—
$ —
$ (78,842)
—
—
$140,270
17,177
(1,883)
—
—
7,901
8,122
467
7,901
$ (70,941)
—
—
$172,054
4,367
4,218
—
5,233
—
(8,519)
$ (79,460)
—
—
(68,959)
348
(8,519)
$177,701
6,513
(2,208)
(68,959)
$(148,419)
$113,047
—
—
45,880
1,848
—
—
47,728
—
—
$46
2
—
—
$48
—
—
$257,115
6,511
— $ —
—
—
(2,208)
— (1,146)
—
—
—
$263,626
(1,146) $(2,208)
The accompanying notes are an integral part of the consolidated financial statements.
26
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle
Impairment of goodwill
Write-off of leasehold improvements and other assets
Depreciation and amortization
Non-cash compensation expense
Provision for doubtful accounts
Deferred income taxes
Investment losses
Gain on litigation settlement
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable and unbilled revenue
Decrease (increase) in prepaid expenses and other assets
Increase (decrease) in accounts payable
Decrease in accrued expenses and other liabilities
Decrease in media payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Increase in restricted cash
Purchases of short-term investments
Redemption, sales and maturities of short-term investments
Cash used in acquisition of businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Repurchases of common stock
Repayment of notes payable
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
January 3,
2003
Year Ended
December 28,
2001
December 29,
2000
$(68,959)
$ (8,519)
$ 7,901
31,200
20,000
5,217
5,327
—
779
4,961
—
—
18,930
(5,419)
(230)
(3,889)
(887)
7,030
(4,044)
(2,909)
—
—
(851)
(7,804)
—
—
—
12,531
4,855
5,279
(160)
—
—
17,959
740
(4,819)
(6,044)
(6,307)
15,515
(9,514)
—
—
—
(2,142)
(11,656)
6,513
(2,208)
—
4,305
3,531
59,888
$ 63,419
4,367
—
—
4,367
8,226
51,662
$ 59,888
—
—
—
12,589
853
12,982
(175)
2,350
(1,850)
3,509
(9,689)
1,024
(181)
(9,154)
20,159
(8,920)
—
(500)
2,932
(4,560)
(11,048)
17,177
—
(1,750)
15,427
24,538
27,124
$ 51,662
$
$
72
133
92
$
$ 1,524
100
$
$ 9,673
The accompanying notes are an integral part of the consolidated financial statements.
27
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business
Answerthink, Inc. (the “Company” or “Answerthink”) is a leading business and technology consulting firm.
Answerthink’s capabilities include performance measurement, business transformation, business applications,
technology integration, and offshore application maintenance and support.
Principles of Consolidation
The consolidated financial statements and information herein include the accounts of Answerthink and its
subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. In
February 1999, Answerthink merged with triSpan, Inc. (“triSpan”) and in November 1999, Answerthink merged
with THINK New Ideas, Inc. (“THINK New Ideas”). The mergers with triSpan and THINK New Ideas were
accounted for using the pooling-of-interests method of accounting.
Fiscal Year
The Company’s fiscal year generally consists of a 52-week period and periodically consists of a 53-week period
because the fiscal year ends on the Friday closest to December 31. Fiscal years 2002, 2001 and 2000 ended on
January 3, 2003, December 28, 2001 and December 29, 2000, respectively. Fiscal year 2002 was a 53-week period.
References to a year included in this section refer to a fiscal year rather than a calendar year.
Cash and Cash Equivalents
The Company considers all short-term investments with maturities of three months or less when purchased
to be cash equivalents. The Company places its temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of the F.D.I.C. insurance limits. The Company has not
experienced any loss to date on these investments.
Accounts Receivables and Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of
our clients to make required payments. Management makes estimates of the uncollectibility of the accounts
receivables. Management critically reviews accounts receivable and analyzes historical bad debts, past-due
accounts, client credit-worthiness and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts.
Media Payable
Media payables represent media placement costs due to media providers on behalf of the Company’s clients.
Amounts in media payables that have been billed to the Company’s customers are included in accounts receivables.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is provided using
the straight-line method over the estimated useful life of the assets ranging from three to five years. Leasehold
improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the
improvement, whichever is shorter. Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for betterments and major improvements are capitalized. The carrying amount of assets sold or retired
and related accumulated depreciation are removed from the accounts in the year of disposal and any resulting gains
or losses are included in the statement of operations.
The Company capitalizes the costs of internal-use software in accordance with Statement of Position No. 98-1
(“SOP 98-1), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
provides guidance on applying generally accepted accounting principles in addressing whether and under what
conditions the costs of internal-use software should be capitalized.
28
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Goodwill and Other Intangible Assets
Effective December 29, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but are reviewed at least annually for impairment. Other intangible
assets will continue to be amortized over their estimated useful lives. Prior to the adoption of SFAS No. 142, the
Company amortized goodwill over 15 years. SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level at adoption and at least annually thereafter, utilizing a “fair value” methodology versus an
undiscounted cash flow method required under previous accounting rules. The Company evaluates the fair values
of its reporting units utilizing various valuation techniques including discounted cash flow analysis. Based on the
new method for recording impairment, the Company recognized a transitional impairment loss of $31.2 million
as the cumulative effect of a change in accounting principle in the first quarter of 2002. This charge related to the
Technology Integration reporting unit.
The new statement also requires that goodwill be tested for impairment on an annual basis and between annual
tests in certain circumstances. The Company performed an impairment test primarily as a result of the decline in
stock prices for the Company and its peer group during the quarter ended September 27, 2002 and recorded a non-
cash impairment charge of $20.0 million related to the Technology Integration reporting unit.
Goodwill amortization for the years ended December 28, 2001 and December 29, 2000 was $6.7 million and
$6.1 million, respectively. Of these amounts, $2.8 million and $2.3 million for the years ended December 28, 2001
and December 29, 2000, respectively, are included in the loss from discontinued operations in the consolidated
statements of operations. The following schedule reconciles net income (loss) and per share amounts for the years
ended December 28, 2001 and December 29, 2000, adjusted for SFAS No. 142 (in thousands, except per share data):
Net income (loss) as reported
Add back: Goodwill amortization
Adjusted net income (loss)
Basic net income (loss) per share:
Net income (loss) as reported
Goodwill amortization
Adjusted net income (loss) per share
Diluted net income (loss) per share:
Net income (loss) as reported
Goodwill amortization
Adjusted net income (loss) per share
Revenue Recognition
January 3,
2003
$(68,959)
—
$(68,959)
$
$
$
$
(1.49)
—
(1.49)
(1.49)
—
(1.49)
Year Ended
December 28,
2001
$(8,519)
6,657
$(1,862)
$ (0.19)
0.15
$ (0.04)
$ (0.19)
0.15
$ (0.04)
December 29
2000
$ 7,901
6,104
14,005
$
$
$
$
0.20
0.15
0.35
0.18
0.13
0.31
The Company recognizes revenues for services as work is performed on a project-by-project basis adjusted
for any anticipated losses in the period in which any such losses are identified. For projects charged on a time and
materials basis, revenue is recognized based on the number of hours worked by consultants at an agreed-upon rate
per hour. The Company also undertakes projects on a fixed-fee or capped-fee basis for which revenues are
recognized on the percentage of completion method of accounting based on the evaluation of actual costs incurred
to date compared to total estimated costs.
29
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Reimbursable Expenses
During the first quarter of 2002, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred. In
accordance with the provisions of EITF Issue No. 01-14, reimbursements received from customers for out-of-pocket
expenses incurred by employees are classified as revenue in the statement of operations. The Company has
historically accounted for reimbursements received for out-of-pocket expenses incurred as a reduction to project
personnel and expenses in the statement of operations. The statements of operations for the years ended
December 28, 2001 and December 29, 2000 were reclassified to comply with the guidance in EITF Issue No. 01-14.
Adoption of the provisions had no impact on the reported net income (loss) or net income (loss) per share.
Stock Compensation
The Company applies Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued
to Employees and related interpretations in accounting for its stock option plans. The Company measures
compensation expense related to the grant of stock options and stock-based awards to employees (including
independent directors) in accordance with the provisions of APB No. 25. 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. The assumptions underlying
the fair value calculations for the stock option grants are presented in Note 8. 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 years ended January 3, 2003, December 28, 2001 and December 29, 2000 would have been
adjusted to the pro forma amounts indicated as follows (in thousands, expect per share data):
Net income (loss), as reported
Total stock-based employee pro forma compensation expense
determined under fair value based method for all awards,
net of related tax benefits
Pro forma net income
Basic net income (loss) per common share
As reported
Pro forma
Diluted net income (loss) per common share
As reported
Pro forma
January 3,
2003
Year Ended
December 28,
2001
December 29,
2000
$(68,959)
$ (8,519)
$ 7,901
(27,802)
$(96,761)
(4,929)
$(13,448)
(7,820)
81
$
$
$
$
$
(1.49)
(2.09)
(1.49)
(2.09)
$
$
$
$
(0.19)
(0.31)
(0.19)
(0.31)
$ 0.20
$ —
$ 0.18
$ —
Included in the pro forma net loss for the year ended January 3, 2003 is $10.6 million of expense related to
the reversal of pro forma accumulated deferred tax benefits established in previous years to provide a pro forma
valuation allowance on all deferred tax assets.
30
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Income Taxes
The Company records income taxes using the liability method. Under this method, the Company records
deferred taxes based on temporary taxable and deductible differences between the tax bases of the Company’s assets
and liabilities and their financial reporting bases. The liability method of accounting for deferred income taxes
requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized.
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 shares issued to employees under
employment agreements, the calculation includes only the vested portion of such shares. Accordingly, common
shares outstanding for the basic net income (loss) per share computation is lower than actual shares issued and
outstanding. Included in the common shares outstanding for the basic net income per share computation for the
year ended December 29, 2000 were an estimated 1,443,466 shares (based on the share price on December 29,
2000) related to an earn-out that was paid in the Company’s common stock in March 2001 (see Note 2). In
March 2001, the Company issued 755,374 shares (based on the average share price on the last three days of February
2001) of the Company’s common stock for the earn-out.
Net income (loss) per share assuming dilution is computed by dividing the 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 years ended January 3, 2003 and December 28, 2001 because 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 years. Potentially dilutive shares that were not included in the diluted loss per share calculation
for the years ending January 3, 2003 and December 28, 2001 included 333,644 and 1,444,392 shares, respectively,
of unvested common stock issued under employment agreements and 310,478 and 860,751 shares, respectively,
issuable upon the exercise of stock options and warrants assuming the treasury stock method. For the year ended
December 29, 2000 potentially dilutive securities included 3,681,880 shares of unvested common stock issued under
employment agreements and 1,193,050 shares issuable upon the exercise of stock options and warrants assuming
the treasury stock method.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and unbilled
revenue, accounts payable, accrued expenses and other liabilities, and media payable. At January 3, 2003 and
December 28, 2001, the fair value of these instruments approximated their carrying value.
Concentration of Credit Risk
The Company provides services primarily to Global 2000 companies and other sophisticated buyers of business
consulting and IT services. The Company performs ongoing credit evaluations of its major customers and maintains
reserves for potential credit losses. In fiscal year 2002, three customers had revenues greater than 5% of total revenues,
which, in the aggregate, accounted for approximately 36% of total revenues. In fiscal year 2001, three customers had
revenues greater than 5% of total revenues, which, in the aggregate, accounted for approximately 39% of total revenues.
In fiscal year 2000, one customer accounted for approximately 13% of revenues.
31
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Management’s Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Reporting
The Company engages in business activities in one operating segment, which provides technology-enabled
business solutions.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities. This statement supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity and requires that a liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not believe that the adoption of SFAS 146
will have a material impact on its consolidated financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No.
148 amends Statement of Financial Accounting Standards No. 123, Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported results. The Company continues to
account for stock-based compensation using Accounting Principles Board Statement No. 25, Accounting for Stock
Issued to Employees, and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No.
148. The disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and
have been incorporated into the footnotes.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the
current year presentation.
2. Acquisitions and Investing Activities
During the three year period ended January 3, 2003, the Company acquired three businesses providing
information technology services (collectively, the “Acquired Entities”) in separate transactions. Two were
completed in 2002 and one was completed in 2001. Aggregate consideration for the Acquired Entities was
$3.0 million. This amount has been allocated, on an entity-by-entity basis, to the assets acquired and liabilities
assumed based on their respective fair values on the dates of acquisition. During 2000, the Company recorded a
liability of $5.2 million for an earned contingent consideration paid in the Company’s common stock in March 2001,
when the Company issued 755,374 shares of the Company’s common stock for the earned contingent consideration.
32
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Acquisitions and Investing Activities (continued)
The components of the purchase price allocation for the Acquired Entities, contingent consideration earned
for previous acquisitions, and fees and expenses incurred are as follows (in thousands):
Fair value of net assets (excluding cash) acquired
Goodwill
Common stock issued
Accrued earn-out
Cash used in acquisitions of businesses, net of cash acquired
2002
$851
—
—
—
$851
2001
$
150
1,992
(5,233)
5,233
$ 2,142
2000
$ (250)
18,165
(8,122)
(5,233)
$ 4,560
These acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results
of the acquisitions are included in the Company’s consolidated results of operations from the respective dates of
acquisition. For each acquisition, the excess of the purchase price of the acquisition over the estimated fair value
of the net identifiable assets acquired and any contingent consideration has been recorded as goodwill and/or
intangible assets. The pro forma impact of the acquisitions completed in 2002 and 2001 was not significant to the
results of the Company’s consolidated operations for the years ended January 3, 2003 and December 28, 2001.
3. Property and Equipment
Property and equipment consists of the following (in thousands):
Equipment
Furniture and fixtures
Software
Leasehold improvements
Less accumulated depreciation
January 3,
2003
$ 12,320
738
6,114
5,057
24,229
(12,439)
$ 11,790
December 28,
2001
$ 11,360
1,535
5,946
10,956
29,797
(11,329)
$ 18,468
During fiscal year 2002, write-offs of $5.0 million for leasehold improvements and other assets were recorded
as part of restructuring costs.
Depreciation expense for the years ended January 3, 2003, December 28, 2001 and December 29, 2000 was
$5.1 million, $5.5 million and $5.5 million, respectively. Of these amounts, $1.0 million, $2.0 million and
$1.8 million for the years ended January 3, 2003, December 28, 2001 and December 29, 2000, respectively, are
included in the loss from discontinued operations in the consolidated statements of operations.
4. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following (in thousands):
Accrued compensation and benefits
Accrued restructuring related expenses
Deferred revenue
Employee stock purchase plan payable
Other accrued expenses
33
January 3,
2003
December 28,
2001
$ 5,521
9,616
6,453
—
4,888
$26,478
$ 7,023
5,677
8,812
1,652
4,828
$27,992
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Revolving Credit Facility
In August 2002, the Company cancelled its $15.0 million revolving credit facility. At the time of cancellation
and at all times throughout 2002 and 2001, there were no borrowings outstanding under the facility. Letters of credit
of $2.6 million were outstanding under the agreement at the time of the cancellation. The Company has deposited
$2.9 million with a financial institution as collateral for these letters of credit and has classified this cash as restricted
on the accompanying consolidated balance sheet at January 3, 2003.
6. Lease Commitments
The Company has operating lease agreements for its premises that expire on various dates through 2015. Rent
expense for the years ended January 3, 2003, December 28, 2001 and December 29, 2000 was $4.9 million,
$6.5 million and $6.1 million, respectively.
Future minimum lease commitments under non-cancelable operating leases for premises having a remaining
term in excess of one year at January 3, 2003 are as follows (in thousands):
2003
2004
2005
2006
2007
Thereafter
Less: sublease income
Total minimum lease payments, less sublease income
$ 7,194
6,166
5,017
4,941
4,581
22,981
50,880
15,293
$35,587
7. Income Taxes
The components of the tax expense (benefit) for income taxes are as follows (in thousands):
Current tax expense (benefit)
Federal
State
Deferred tax expense
Federal
State
Income taxes
January 3,
2003
Year Ended
December 28,
2001
December 29,
2000
$(8,469)
—
(8,469)
4,961
—
4,961
$(3,508)
$1,173
514
1,687
115
5
120
$1,807
$5,788
1,420
7,208
1,099
264
1,363
$8,571
34
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Income Taxes (continued)
A reconciliation of the Federal statutory tax rate with the effective tax rate is as follows:
U.S. statutory rate
State income taxes, net of Federal income tax benefit
Loss on investment in subsidiary
Valuation allowance
Goodwill amortization
Miscellaneous items, net
Effective rate
January 3,
2003
(35.0)%
—
(85.2)
87.2
21.6
0.6
(10.8)%
Year Ended
December 28,
2001
December 29,
2000
35.0%
24.0
—
7.4
52.1
10.1
128.6%
35.0%
6.2
—
—
4.0
3.8
49.0%
The components of the net deferred income tax asset are as follows (in thousands):
Deferred income tax assets
Purchased research and development
Allowance for doubtful accounts
Net operating loss and tax credits carryforward
Accrued expenses and other liabilities
Valuation allowance
Deferred income tax liabilities
Depreciation and amortization
Other items
Net deferred income tax asset
January 3,
2003
December 28,
2001
$ 1,267
1,234
25,538
4,816
32,855
(30,101)
2,754
(1,869)
(885)
(2,754)
—
$
$ 1,374
2,213
1,340
2,831
7,758
(935)
6,823
(1,480)
(382)
(1,862)
$ 4,961
An income tax receivable of $11.0 million and $4.2 million is included in prepaid expenses and other assets
in the consolidated balance sheets as of January 3, 2003 and December 28, 2001, respectively. Current net deferred
tax assets of $-0- million and $5.5 million are included in prepaid expenses and other assets in the consolidated
balance sheets as of January 3, 2003 and December 28, 2001, respectively. Net deferred tax liabilities of $-0- and
$573,000 are included in accrued expenses and other liabilities in the consolidated balance sheets as of January 3,
2003 and December 28, 2001, respectively. At January 3, 2003 and December 28, 2001, the Company had $68.0
million and $4.2 million, respectively, of net operating loss carryforwards available for tax purposes, most of which
expire in 2023 if not utilized.
In 2002, the Company discontinued its interactive marketing business which was acquired with THINK New
Ideas. The discontinuance of THINK New Ideas will generate an approximate $75.0 million worthless stock
deduction for the Company’s investment in THINK New Ideas in its 2002 tax return. Although the Company
believes that its tax position is sustainable there is no assurance that the Internal Revenue Service will not challenge
its conclusion.
At January 3, 2003 and December 28, 2001, the Company had established a valuation allowance of
$30.1 million and $935,000, respectively, to reduce deferred income tax assets primarily related to net operating
loss carryforwards. The liability method of accounting for deferred income taxes requires a valuation allowance
against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
35
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Shareholders’ Equity
Common Stock Subject to Vesting Requirements
As of January 3, 2003 and December 28, 2001, the Company had shares of outstanding common stock totaling
205,512 and 615,188, respectively, that are subject to certain vesting criteria. Answerthink sold the shares to its
employees at nominal purchase prices per share in connection with Answerthink’s formation in 1997. Each
employee executed an employment agreement or a stock agreement with the Company providing for, among other
things, the manner in which the shares will vest. In general, a certain percentage of shares will begin to vest upon
the second anniversary from the purchase date of such shares and will become fully vested either by the fourth
or sixth anniversary from the purchase date so long as the holder remains an employee.
Securities Purchase Agreement
In March 1999, THINK New Ideas entered into a securities purchase agreement (the “Securities Purchase
Agreement”) with Capital Ventures International and Marshall Capital Management, Inc. (the “Purchasers”)
whereby the Purchasers agreed to purchase shares of common stock and warrants to acquire shares of common
stock. Pursuant to the Securities Purchase Agreement, on March 5, 1999, THINK New Ideas issued, for proceeds
of $6 million, 609,799 shares of its common stock at $9.84 per share and warrants to purchase an additional 121,961
shares of common stock exercisable for a five-year term, at an exercise price of $14.76. All of these warrants were
outstanding as of January 3, 2003.
At any time prior to March 5, 2000 the Purchasers also had the right but not the obligation to purchase 371,353
additional shares of common stock at $13.46 per share, together with warrants for 1/5 share for each additional
share purchased, exercisable at an exercise price of 150% of the market price on the date the related additional
shares were purchased. Pursuant to the Securities Purchase Agreement, the additional shares were sold in March
2000 for $5.0 million and warrants to acquire 74,270 shares of common stock, exercisable for a five-year term,
were issued at an exercise price of $36.94. All of these warrants were outstanding as of January 3, 2003.
Stock Plans
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, up to 10% of eligible compensation. Participant
account balances are used to purchase shares of stock at the lesser of 85 percent 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. The Employee Stock Purchase Plan expires on July 1, 2008.
A total of 2,750,000 shares of common stock (increased from 750,000 shares per an amendment to the plan that
was approved by the shareholders on May 9, 2001) are available for purchase under the plan with a limit of 400,000
shares of common stock to be issued per offering period. For plan years 2002, 2001 and 2000, 734,047, 298,210
and 482,196 shares, respectively, were issued.
In 2001, the Company granted stock options to participants in the Company’s Employee Stock Purchase Plan.
These options were granted in lieu of the Employee Stock Purchase Plan shares that could not be issued because
the plan was oversubscribed for the purchase periods ending December 31, 2000 and June 30, 2001. The Company
recorded a non-cash compensation charge of $4.2 million in the year ended December 28, 2001 based on the vesting
provisions of the options for the difference between the fair market value of the stock on the option grant date and
the exercise price. These options fully vested on June 30, 2001, therefore, operating results in future periods will
not be impacted by this special grant.
The Company has granted stock options to employees and directors of the Company at exercise prices equal
to the market value of the stock at the date of grant. The options generally vest ratably over periods ranging from
four years to six years with a maximum term of 10 years. The number of shares available for future issuance at
January 3, 2003 is 9,838,660 shares.
36
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Shareholders’ Equity (continued)
On June 27, 2001, the Company filed with the Securities and Exchange Commission a Schedule TO describing
a program offering a voluntary stock option exchange for the Company’s employees. The offering period for the
stock option exchange ended on August 8, 2001. Under the program, employees holding nonqualified options to
purchase the Company’s common stock or incentive stock options to purchase the Company’s common stock with
an exercise price of $10.00 per share or more were given the opportunity to exchange their existing options for
new options to purchase shares of the Company’s common stock equal in number to 66 2/3% of the number of
options tendered and accepted for exchange. The new options were granted on February 9, 2002, which was six
months and one day after acceptance of the old options for exchange and cancellation. The exercise price of the
new options was $6.03, which was the last reported sale price of the Company’s common stock on the Nasdaq Stock
Market’s National Market on February 8, 2002. Options for 4,400,893 shares were tendered on August 8, 2001
in the exchange program. On February 9, 2002, the Company granted 2,479,699 shares of the Company’s common
stock in exchange for the shares tendered.
Stock option activity under the Company’s stock option plans is summarized as follows:
January 3, 2003
Weighted
Average
Exercise
Price
Option
Shares
6,812,444
5,594,518
(824,356)
(3,318,635)
8,263,971
$8.42
5.46
3.47
8.69
$6.78
Year Ended
December 28, 2001
December 29, 2000
Option
Shares
9,871,253
5,945,286
(742,015)
(8,262,080)
6,812,444
Weighted
Average
Exercise
Price
$19.84
4.83
3.19
20.34
$ 8.42
Option
Shares
7,351,535
6,312,584
(485,520)
(3,307,346)
9,871,253
Weighted
Average
Exercise
Price
$16.58
23.08
7.84
20.35
$19.84
$
3.83
$
3.43
$
16.22
Outstanding at beginning
of year
Granted
Exercised
Canceled
Outstanding at end of year
Weighted average fair
value of options granted
during the period
The following assumptions were used by the Company to determine the fair value of stock options granted
using the Black-Scholes options-pricing model:
Expected volatility
Average expected option life
Risk-free rate
Dividend yield
January 3,
2003
100%
4 years
3.0%
0%
Year Ended
December 28,
2001
December 29,
2000
100%
4 years
4.5%
0%
100%
4 years
5.5%
0%
37
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Shareholders’ Equity (continued)
The following table summarizes information about the Company’s stock options outstanding at
January 3, 2003:
Range of Exercise
Prices
Number
Outstanding
Options Outstanding
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
$1.45–$2.74
$3.08–$3.79
$4.66–$5.99
$6.00–$6.86
$7.08–$9.97
$10.46–$14.44
$16.25–$18.50
$19.25–$24.50
$25.25–$34.25
Treasury Stock
618,115
1,051,176
2,221,942
2,594,445
815,708
345,091
465,769
66,776
84,949
8,263,971
8.3
7.0
8.6
6.1
7.1
4.4
6.6
5.4
5.8
7.1
$ 2.06
3.63
5.43
6.06
8.79
11.60
17.08
21.22
31.10
$ 6.78
Options Exercisable
Number
Exercisable
123,651
532,240
139,929
1,663,198
436,822
315,935
319,700
50,549
51,938
3,633,962
Weighted Average
Exercise Price
$ 2.50
3.63
5.15
6.05
8.86
11.55
17.20
21.03
30.70
$ 7.90
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. Under the repurchase plan, the Company may buy back shares of its
outstanding stock from time to time either on the open market or through privately negotiated transactions, subject
to market conditions and trading restrictions. As of January 3, 2003, the Company had repurchased 1,146,000 shares
of its common stock at an average price of $1.93 per share. The Company holds repurchased shares of its common
stock as treasury stock and accounts for treasury stock under the cost method.
9. Benefit Plan
The Company maintains a 401(k) plan covering all eligible employees. Subject to certain dollar limits, eligible
employees may contribute up to 15% of their pre-tax annual compensation to the plan. The Company may make
discretionary contributions on an annual basis. During fiscal years 2002 and 2001, the Company made matching
contributions of 25% of employee contributions up to 4% of their gross salaries. The Company’s matching
contributions were $656,000 and $736,000 for the years ended January 3, 2003 and December 28, 2001,
respectively. The Company made no matching contributions in fiscal year 2000.
10. Restructuring Costs
Restructuring costs were $10.9 million, $5.6 million and $3.3 million in 2002, 2001 and 2000, respectively.
In 2002 and 2001, costs consisted of $1.5 million and $3.7 million, respectively, for reduction in consultants and
functional support personnel and $9.4 million and $1.9 million, respectively, for closure and consolidation of
facilities and related exit costs. The 2000 costs consisted of $2.1 million for reduction in consultants and functional
support personnel and $1.2 million 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 in the latter portion of 2000 and
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. The 2002 restructuring plan involved the involuntary
termination of approximately 100 employees. The 2001 restructuring plan involved the involuntary termination
of approximately 200 employees. The Company has subleased or is attempting to mitigate the lease obligations
on the vacated space.
38
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Restructuring Costs (continued)
The following table sets forth the detail and activity in the restructuring expense accruals during the years ended
January 3, 2003, December 28, 2001 and December 29, 2000 (in thousands):
2000 Restructuring Accrual
Accrual
Balance at
December 31,
1999
Additions to
Accrual from
Continuing
Operations
Additions to
Accrual from
Discontinued
Operations
2000
Expenditures
2001
Expenditures
2002
Expenditures
Accrual
Balance at
January 3,
2003
$ —
$2,054
$432
$(800)
$(1,686)
$ —
$ —
—
1,214
—
—
(592)
(622)
—
$ —
$3,268
$432
$(800)
$(2,278)
$(622)
$ —
Severance and other
employee costs
Closure and consolidation
of facilities and related
exit costs
Total restructuring
accrual
2001 Restructuring Accrual
Severance and other
employee costs
Closure and consolidation
of facilities and related
exit costs
Total restructuring accrual
2002 Restructuring Accrual
Severance and other
employee costs
Closure and consolidation
of facilities and related
exit costs
Total restructuring accrual
11. Discontinued Operations
Accrual
Balance at
December 29,
2000
Additions to
Accrual from
Continuing
Operations
Additions to
Accrual from
Discontinued
Operations
2001
Expenditures
2002
Expenditures
Accrual
Balance at
January 3,
2003
$ —
$3,694
$ 559
$(3,186)
$(1,064)
$ —
—
$ —
1,925
$5,619
2,311
$2,870
(248)
$(3,434)
(1,965)
$(3,032)
2,023
$2,023
Accrual
Balance at
December 28,
2001
Additions to
Accrual from
Continuing
Operations
Additions to
Accrual from
Discontinued
Operations
Expenditures
Asset
Write-offs
Accrual
Balance at
January 3,
2003
$ —
$ 1,528
$ 616
$ (855)
$ —
$1,289
—
$ —
9,358
$10,886
2,747
$3,363
(584)
$(1,439)
(5,217)
$(5,217)
6,304
$7,593
As a result of a decline in the demand for interactive marketing services during 2002, the Company
discontinued the interactive marketing business which was acquired in the merger with THINK New Ideas, Inc.
in 1999. In accordance with Financial and Accounting Standards Board Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the results of the interactive marketing business have been reported
as discontinued operations in the consolidated statements of operations and results for prior periods have been
restated.
39
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Discontinued Operations (continued)
The following table sets forth revenues, pre-tax loss, income tax benefit and loss from discontinued operations
for the years ended January 3, 2003, December 28, 2001 and December 29, 2000 (in thousands):
Revenues
Pre-tax loss from discontinued operations
Income tax benefit
Loss from discontinued operations
January 31,
2003
$7,235
$8,911
$ —
$8,911
December 28,
2001
$ 28,942
$(10,085)
$ (1,968)
$ (8,117)
December 29,
2000
$53,868
$ (2,659)
$ (1,632)
$ (1,027)
Included in the loss from discontinued operations for fiscal years 2002, 2001 and 2000 were restructuring costs
of $3.4 million, $2.9 million and $432,000, respectively, for reduction in consultants and for closure and
consolidation of facilities and related exit costs.
12. Litigation
Between November, 2002 and January, 2003, six class actions seeking unspecified damages were filed against
Answerthink and certain of its current and former officers and directors alleging violations of the Securities and
Exchange Act of 1934. The complaints allege misstatements and omissions concerning related party transactions
during the alleged class period of February 8, 2000 to April 25, 2002. On January 7, 2003 the federal district court
entered an order closing and consolidating these cases and any subsequently filed related cases (the “Consolidation
Order”) into Druskin, et al. v. Answerthink, Inc., et al., Case No. 02-23304-CIV-GOLD. The Consolidated Amended
Complaint is due to be filed on April 18, 2003. The Company intends to file a motion seeking the dismissal of
the Consolidated Amended Complaint. Based on the status of these actions it is not possible to determine the range
of loss to the Company, if any. The Company believes that the plaintiffs’ claims are without merit and intend to
defend the lawsuits vigorously.
Between September and October 1998, seven purported class action suits were filed against THINK New Ideas,
Inc. (“THINK New Ideas”) and certain of its then current and former officers and directors alleging violations of
the Securities Exchange Act of 1934. All seven of these lawsuits were consolidated by order of the court. This
lawsuit became the Company’s responsibility upon the merger of Answerthink and THINK New Ideas. On April 18,
2002, the parties reached an agreement in principle to settle this action. The Court approved the settlement in
September 2002 in all respects and dismissed the complaint with prejudice. The time for appeal has expired and
the settlement has become final. The full amount of the settlement has been paid by THINK New Ideas’ insurance
carrier.
In June 2000, pursuant to a confidential settlement agreement, the Company settled litigation in which it was
the plaintiff. The Company recorded a gain of $1.85 million as a result of this settlement.
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 other matters will
not have a material adverse effect on the Company’s financial position or results of operations.
13. Related Party Transactions
During 2002, the Company and HCL Technologies Limited, an Indian information technology services and
product engineering firm, formed HCL-Answerthink, Inc. to provide offshore custom application development and
maintenance services. The Company has a non-controlling equity interest of 50% in this joint venture. For the year
ended January 3, 2003, the Company’s net equity loss from the joint venture was $687,000. During 2002, the
Company sold services of $233,000 to the joint venture. The Company also incurred costs of $230,000 for
consulting services provided by the joint venture to Answerthink. In addition, the Company reduced general and
administrative expenses by $856,000 for administrative services billed to the joint venture during 2002. At
January 3, 2003, the Company had receivables of $550,000 due from the joint venture and payables of $230,000
due to the joint venture.
40
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Related Party Transactions (continued)
During 2000, the Company recognized approximately $16.7 million in sales to related parties in which the
Company had non-controlling equity interests or whereby a director of the Company holds equity interests in such
clients or is a director of such company. The Company had net receivables due from these entities of approximately
$-0- and $788,000, and payables due to these entities of approximately $-0- and $443,000, at January 3, 2003 and
December 28, 2001, respectively.
14. Quarterly Financial Information (unaudited)
The following table presents unaudited supplemental quarterly financial information for the years ended
January 3, 2003 and December 28, 2001 (in thousands, except per share data):
Total revenues
Loss from operations
Loss before income taxes, loss from discontinued
operations and cumulative effect of change in
accounting principle
Income (loss) from continuing operations
Loss from discontinued operations, net of income
taxes
Cumulative effect of change in accounting principle
Net loss
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations, net of income
taxes
Cumulative effect of change in accounting
principle
Net loss per common share
Total revenues
Income (loss) from operations
Income (loss) before income taxes and loss from
discontinued operations
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of
income taxes
Net income (loss)
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations
Income (loss) from discontinued operations, net
Quarter Ended
March 29,
2002
$ 49,688
(192)
June 28,
2002
$46,364
(607)
September 27,
2002
$ 41,418
(20,332)
January 3,
2003
$ 39,377
(11,795)
(82)
534
(481)
544
(20,220)
(19,820)
(11,573)
(10,106)
(1,457)
(31,200)
$(32,123)
(2,082)
—
$ (1,538)
$
$
$
$
0.01
$
0.01
(0.03)
$ (0.04)
(0.68)
(0.70)
$ —
$ (0.03)
(780)
—
$(20,600)
$
$
$
$
(0.42)
(0.02)
—
(0.44)
(4,592)
—
$(14,698)
$
$
$
$
(0.22)
(0.10)
—
(0.32)
Quarter Ended
March 30,
2001
$69,988
(631)
June 29,
2001
$64,072
950
$62,242
2,937
September 28,
2001
December 28,
2001
(285)
82
1,109
(317)
3,105
(888)
(282)
$ (200)
382
65
$
(1,307)
$ (2,195)
$54,041
(2,694)
(2,524)
721
(6,910)
$ (6,189)
$ —
$ (0.01)
$ (0.02)
$
0.01
of income taxes
Net income (loss) per common share
$ —
$ —
0.01
$
$ —
$ (0.03)
$ (0.05)
$ (0.15)
$ (0.14)
41
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Quarterly Financial Information (unaudited) (continued)
Quarterly basic and diluted net income or loss per common share were computed independently for each quarter
and do not necessarily total to the year to date basic and diluted net income (loss) per common share.
The results of the interactive marketing business have been reported as discontinued operations in the
consolidated statements of operations and results for prior periods have been restated (see Note 11).
42
ANSWERTHINK, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(in thousands)
Allowance for Doubtful Accounts
Year Ended December 29, 2000
Year Ended December 28, 2001
Year Ended January 3, 2003
Balance at
Beginning of
Year
$ 1,510
$11,122
$ 6,810
Charge to
Expense
$12,982
$ 5,279
$
779
Write-offs
$(3,370)
$(9,591)
$(4,063)
Balance at
Ending of
Year
$11,122
$ 6,810
$ 3,526
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responsive to this Item is incorporated herein to the Company’s definitive 2003 proxy statement
for the 2003 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein to the Company’s definitive 2003 proxy statement
for the 2003 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item is incorporated herein to the Company’s definitive 2003 proxy statement
for the 2003 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein to the Company’s definitive 2003 proxy statement
for the 2003 Annual Meeting of Shareholders.
ITEM 14. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of 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, subject to the limitations noted below, our Disclosure Controls
are effective in timely alerting them to material information required to be included in our periodic SEC filings.
Changes in Internal Controls
Subsequent to the date we carried out our evaluation, there have been no significant changes in the our internal
controls or other factors that could significantly affect these internal controls.
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.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and not be detected.
44
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PART IV
(a) The following documents are filed as a part of this Form:
1.
Financial Statements
The Consolidated Financial Statements filed as part of this report are listed and indexed on page 22. Schedules
other than those listed in the index have been omitted because they are not applicable or the required information
has been included elsewhere in this report.
2.
Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts and Reserves are included in this report. Schedules other
than those listed in the index have been omitted because they are inapplicable or the information required to be
set forth therein is contained, or incorporated by reference, in the Consolidated Financial Statements of Answerthink
or notes thereto.
3.
Exhibits: See Index to Exhibits on page 49.
The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of
this report.
(b) Reports on Form 8-K:
None.
45
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Miami, State of Florida, on the 31st day of March, 2003.
SIGNATURES
ANSWERTHINK, INC.
By:
/s/ Ted A. Fernandez
Ted A. Fernandez
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed by the following
persons in the capacities and on the date indicated.
Signatures
Title
Date
/s/ Ted A. Fernandez
Ted A. Fernandez
/s/ John F. Brennan
John F. Brennan
/s/ Allan R. Frank
Allan R. Frank
/s/ David N. Dungan
David N. Dungan
/s/ Richard Hamlin
Richard Hamlin
/s/ Edwin A. Huston
Edwin A. Huston
/s/ Jeffrey E. Keisling
Jeffrey E. Keisling
/s/ Alan T. G. Wix
Alan T. G. Wix
Chief Executive Officer and Chairman
(Principal Executive Officer)
Executive Vice President, Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer)
March 31, 2003
March 31, 2003
President and Director
March 31, 2003
Chief Operating Officer and Director
March 31, 2003
March 31, 2003
March 31, 2003
March 31, 2003
March 31, 2003
Director
Director
Director
Director
46
I, Ted A. Fernandez, certify that:
CERTIFICATIONS
1.
I have reviewed this Annual Report on Form 10-K of Answerthink, Inc. (the “Registrant”);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual
Report, fairly present in all material respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this Annual Report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90
days prior to the filing date of this Annual Report (the “Evaluation Date”); and
(c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the
Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
Registrant’s ability to record, process, summarize and report financial data and have identified for the
Registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the Registrant’s internal controls; and
6.
The Registrant’s other certifying officer and I have indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Ted A. Fernandez
Ted A. Fernandez
Chairman and Chief Financial Officer
Answerthink, Inc.
Date: March 31, 2003
47
I, John F. Brennan, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Answerthink, Inc. (the “Registrant”);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual
Report, fairly present in all material respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this Annual Report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90
days prior to the filing date of this Annual Report (the “Evaluation Date”); and
(c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the
Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
Registrant’s ability to record, process, summarize and report financial data and have identified for the
Registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the Registrant’s internal controls; and
6.
The Registrant’s other certifying officer and I have indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ John F. Brennan
John F. Brennan
Executive Vice President and Chief Financial Officer
Answerthink, Inc.
Date: March 31, 2003
48
Exhibit
No.
INDEX TO EXHIBITS
Exhibit Description
10.5+
10.1+
10.2+
10.3+
10.4+
9.2+
9.3+
9.4+
3.1++++
3.2++++
9.1+
Second Amended and Restated Articles of Incorporation of the Registrant, as amended
Amended and Restated Bylaws of the Registrant, as amended
Shareholders Agreement dated April 23, 1997 among the Registrant, GTCR V, MG, the Miller
Group, Messrs. Fernandez, Frank, Knotts and Miller and certain other shareholders of the
Registrant parties thereto
Amendment No. 1 to Shareholders Agreement dated February 24, 1998
Letter Agreement dated as of March 15, 1998 to amend Shareholders Agreement
Form of Restricted Securities Agreement dated April 23, 1997 among the Initial Investors and
each of Messrs. Fernandez, Frank, Knotts and Miller
Purchase Agreement dated April 23, 1997 among the Registrant, GTCR V, MG, Gator and Tara
Series A Preferred Stock Purchase Agreement dated February 24, 1998 among the Registrant,
GTCR V, GTCR Associates and Miller Capital
Stock Purchase Agreement dated March 5, 1998 between the Registrant and FSC
Second Amended and Restated Registration Rights Agreement dated as of May 5, 1998 among
the Registrant, GTCR V, MG, GTCR Associates, Miller Capital, FSC, Messrs. Fernandez,
Frank, Knotts and Miller and certain other shareholders of the Registrant named therein
Second Amended and Restated Registration Rights Agreement dated as of May 5, 1998 among
the Registrant and the eight former shareholders of RTI
10.6*+
Registrant’s 1998 Stock Option and Incentive Plan
10.7*+++++ Amendment to Registrant’s 1998 Stock Option and Incentive Plan
10.8*+
Form of Senior Management Agreement dated April 23, 1997 between the Registrant and each
of Messrs. Fernandez, Frank and Knotts
Senior Management Agreement dated July 11, 1997 between Registrant and Mr. Dungan
10.9*++++
10.10*+++++ Form of Employment Agreement entered into between the Registrant and Mr. Dungan
10.11*+
Form of Employment Agreement entered into between the Registrant and each of Messers.
Fernandez, Frank and Knotts
Amendment No. 2 dated as of May 5, 1998 to Purchase Agreement dated April 23, 1997
among the Registrant, GTCR V, MG, Gator and Tara
Amendment No. 2 dated as of May 5, 1998 to Stock Purchase Agreement dated March 5, 1998
between the Registrant and FSC
Amendment to Certain Senior Management Agreements dated March 27, 1998 among the
Company, the Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan
Second Amendment to Certain Senior Management Agreements dated May 26, 1998 among the
Company, the Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan
AnswerThink Consulting Group, Inc. Employee Stock Purchase Plan
10.16*++
10.17*+++++ Amendment to Registrant’s Employee Stock Purchase Plan dated February 16, 2001
10.18*+++
10.19*+++
10.20*+++
Employment Agreement dated March 23, 1999 between the Registrant and Mr. Brennan
Restricted Stock Agreement dated July 31, 1997 between the Registrant and Mr. Brennan
Amendment to Restricted Stock Agreement dated March 27, 1998 between the Registrant and
Mr. Brennan
Form of Senior Management Agreement dated July 31, 1997 between the Registrant and
Mr. Brennan
10.21*+++
10.15*+
10.14*+
10.13+
10.12+
10.22++++++ Securities Purchase Agreement by and among THINK New Ideas, Inc., Capital Ventures
International and Marshall Capital Management, Inc.
10.23++++++ Registration Rights Agreement dated as of March 3, 1999 by and among THINK New Ideas,
21.1^
Inc., Capital Ventures International and Marshall Capital Management, Inc.
Subsidiaries of the Registrant
49
Exhibit
No.
23.1^
99.1^
99.2^
*
^
+
++
+++
++++
+++++
++++++
Exhibit Description
Consent of PricewaterhouseCoopers LLP
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The
Sarbanes-Oxley Act of 2002
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The
Sarbanes-Oxley Act of 2002
Management agreement or compensatory plan or arrangement
Exhibits filed herewith.
Incorporated herein by reference to the Company’s Registration Statement on Form S-1
(333-48123).
Incorporated herein by reference to the Company’s Registration Statement on Form S-8
(333-69951).
Incorporated herein by reference to the Company’s Form 10-K for the year ended
January 1, 1999.
Incorporated herein by reference to the Company’s Form 10-K for the year ended
December 29, 2000.
Incorporated herein by reference to the Company’s Form 10-K for the year ended
December 28, 2001.
Incorporated herein by reference to THINK New Ideas, Inc.’s Form 8-K dated March 12, 1999.
50
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Corporate Information
Corporate Headquarters
Board of Directors
Answerthink, Inc.
1001 Brickell Bay Drive, Suite 3000
Miami, FL 33131
Ted A. Fernandez
Chairman & Chief Executive Officer
Answerthink, Inc.
Telephone: 305-375-8005
Facsimile: 305-379-8810
www.answerthink.com
Annual Meeting
Answerthink shareholders are invited to attend our annual
meeting on Wednesday, May 7, 2003 at 11:00 am at:
JW Marriott Hotel Miami
1109 Brickell Avenue
Miami, FL 33131
Transfer Agent
EquiServe Trust Company, NA
Canton, MA
877-282-1168
Independent Auditors
PricewaterhouseCoopers LLP
Miami, FL
David N. Dungan
Chief Operating Officer
Answerthink, Inc.
Allan R. Frank
President
Answerthink, Inc.
Richard N. Hamlin
Chief Financial Officer
CommerceQuest, Inc.
Edwin A. Huston
Retired Vice Chairman
Ryder System, Inc.
Jeffrey E. Keisling
Vice President, Information Services
Wyeth Pharmaceuticals
Alan T.G. Wix
Chairman of the Board
Farsight PLC
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