The Hackett Group
Annual Report 2003

Download report
Get a demo

More annual reports from The Hackett Group:

2023 Report
2022 Report
2021 Report
2019 Report
2018 Report

Peers and competitors of The Hackett Group:

St. James's Place plc
Exponent
Heidrick & Struggles International
R1 RCM
ICF International

Plain-text annual report

907201 DP_CVR_R1 3/31/04 11:42 PM Page 2 907201 DP_CVR_R1 3/31/04 11:42 PM Page 3 We are very pleased with the measurable progress we made on our strategic priorities while maintaining strong focus on operational discipline and most importantly, how they both position us for the future. TED Ted A. Fernandez Chairman and Chief Executive Officer Dear Shareholders, As we evaluate the past year, and look forward, we have reason to be pleased with the real progress we’ve made, and are excited about our prospects for 2004 and beyond. We were strongly tested by this extended economic down cycle. However, we have used this time as an opportunity to drive a comprehensive transformation of our company. As I highlighted in last year’s shareholder’s letter, at the core of this transformation have been investments in an array of strategic initiatives designed to leverage the valuable intellectual capital of The Hackett Group and its deep understanding of how world-class companies consistently outperform their peers. Several of Answerthink’s most important initiatives began to bear fruit in 2003, including our growth strategy for The Hackett Group, our efforts to better integrate Hackett best practices into implementation solutions, and our search for an alliance partner that could help us open new doors with clients. The results of these initiatives have positioned Answerthink as a high value, high impact consultancy with unparalleled business process knowledge. First, 2003 saw us aggressively grow sales and revenues for The Hackett Group, while also fully transitioning and repositioning our entire offering for this group with the launch of our new Hackett Business Advisory Services (BAS). As part of this effort, we have made multi-year or subscription-based sales a much more meaningful component of our Hackett activity. Hackett provides a growing and higher margin source of new revenue to the organization. In addition, we know that customers that value our best practice offerings are more likely to use our implementation services. A second major initiative for 2003 has been to expand and to integrate Hackett best practice knowledge into our implementation solutions. The primary vehicle for this in 2003 has been our Best Practices Implementation (BPI) implementation approach, which contains software configuration tools and best practice process flows that enable Answerthink consultants to leverage proven best practices from Hackett’s renowned benchmarking database as part of business transformation and enterprise software implementation efforts. After making a significant resource commitment to BPI, dedicating more than 40,000 hours of consulting time to its creation, our investment began to pay off in 2003. We are clearly seeing an increasing number of clients directly attribute their decision to engage us to our BPI tools and knowledge base. We believe these activities are resulting in enhanced market permission as the overall market demand improves. It is worth repeating, no one else has an accepted business process taxonomy and a software tool that defines what data we capture and ensures the accuracy of this data. Most importantly, no one else has over 2,400 participants that includes 97 percent of the Dow Jones Industrials, 81 percent of the Fortune 100 and 92 percent of the Dow Jones Global Titans Index. As a result of this process, software tool and database we are able to provide objective, actionable insight quickly and we are able to do this at the price point which is impossible to match without these assets. This gives us a great opportunity to work with the largest companies in the world. Many of our competitors can only engage clients by talking about the low billing rates of their offshore resources. We can help clients achieve results and get greater ROI from their organizational and technology investments by using our proprietary performance data and related implementation knowledge and tools. Finally, in Q4 of 2003 we brought to fruition the creation of a strategic alliance with Accenture. This alliance enables us to leverage our Hackett benchmarking offering and our Best Practice Implementation tools on larger enterprise projects and business process outsourcing contracts that we would not be able to compete for and serve on our own. This was a very important year for us, a year that has been made possible by the support and commitment shown to us by our associates, clients, and shareholders. We are very pleased with the measurable progress we made on our strategic priorities while maintaining strong focus on operational discipline and most importantly, how they both position us for the future. We are confident that the strategic foundation that we developed in 2003 has strongly positioned our organization as we head into 2004. Ted A. Fernandez Chairman and Chief Executive Officer 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 2, 2004 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. [ ] 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 $105,874,553 on July 3, 2003 based on the last reported sale price of the registrant’s common stock on the Nasdaq National Market. The number of shares of the registrant’s common stock outstanding on March 5, 2004 was 44,872,006. DOCUMENTS INCORPORATED BY REFERENCE Part III of the Form 10-K incorporates by reference certain portions of the registrant's proxy statement for its 2004 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 9A. Control and Procedures PART III ITEM 10. Directors and Executive Officers of the Registrant ITEM 11. Executive Compensation ITEM 12. Security Ownership of Certain Beneficial Owners and Management ITEM 13. Certain Relationships and Related Transactions ITEM 14. Principal Accounting Fees and Services PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures Index to Exhibits -2- Page 3 14 14 15 16 17 18 25 26 48 48 48 48 48 48 49 49 50 51 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, and 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. 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. PART I ITEM 1. BUSINESS GENERAL Answerthink, Inc. is a leading business and technology consulting firm that provides services designed to enable companies to achieve world-class business performance. By leveraging the comprehensive database of the Hackett Group, the world’s leading repository of enterprise best practice metrics and business process knowledge, our business and technology solutions help clients improve performance and maximize returns on technology investments. Our capabilities include benchmarking, business transformation, business applications, business intelligence, and offshore application development 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 first time in the past four years, business and technology consultancies experienced a very slight increase in business activity in 2003 due to the economic recovery. For 2004, market observers are predicting a moderate rebound in IT spending, though a return to the high growth years of the late 1990s is unlikely. Throughout the last few years, companies have placed heavy emphasis on risk management and tangible return on their business and technology investments. As the economy begins to recover, we believe large enterprises will center their IT spending on tools that help them generate more value from past investments. Specifically, we believe they will be looking to derive maximum value from their existing enterprise applications. We believe enabling technologies will be used to complement and extend the capabilities of enterprise and key functional systems. For example, Business Process Management (BPM) tools will give companies increased visibility into key business processes that reach across functional and organizational boundaries. Not only may BPM help reduce error rates and cycle times by automating workflow, it may also increase the efficiency and productivity of all the people and systems that collaborate on individual processes. We believe 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 play a key role. We expect companies to embed optimized processes directly into Enterprise Resource Planning (ERP) systems, and use BPM and other enabling technologies to improve ongoing management and control, so they can ensure that streamlined or re- -3 - engineered processes continue to deliver cost and performance improvements in the future. Business intelligence, analytics and knowledge management applications are expected to also play an increasingly significant role in the future as companies seek to generate more valuable insight and analysis from their operational and financial data. We believe that 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 provides services designed to enable companies to achieve world-class business performance by combining intellectual capital from The Hackett Group, with its extensive database of business process best practices and performance measurement results, and Answerthink’s proprietary Best Practice Implementation (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, optimized return on investment and reduced implementation risk. 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 most functional areas of major business application packages from Lawson, Oracle, Hyperion, 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. It will be even more intense as the economy rebounds and as new opportunities are created as companies begin to spend more on their business and IT infrastructure. Our competitors include international, national and regional systems consulting and implementation 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. -4 - Still, we believe our competitive position is strong. Because of our Hackett intellectual capital and its direct link to our BPI 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 and strengthen relationships. We believe that this culture, along with our multidisciplinary approach, allows us to compete favorably. STRATEGY Moving forward, Answerthink’s focus is on executing the following strategies: • The integration of our Hackett best practices knowledge database into our business and technology solutions. This initiative was started at the end of 2002 and continued throughout 2003 with the introduction of our innovative Best Practice Implementation (BPI) service delivery approach. Formally launched in the fourth quarter of 2002, BPI continues to receive very favorable reaction from clients. For this reason, BPI and our expanded Hackett offerings will be the focus of our marketing and communications programs for 2004. We believe that this 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 return on investment 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. • Enhancement of our Hackett offerings with new and renewable services. In 2003, we continued to expand and aggressively grow the Hackett offerings by reorganizing our benchmarking products and launching our business advisory services. We have also developed renewable collaborative learning products that allow executives to compare performance and share insights and learn from their peers in a confidential environment. Our benchmarking offerings help 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 launched our business advisory service (BAS) in 2003 which targets executives seeking guidance and proven strategies on operational and strategic issues. We continue to develop advisory products that will allow clients to efficiently realize the benefits identified in the Hackett benchmarking services. • Further leveraging our unique best practice knowledge through strategic alliances. Because of Answerthink’s understanding of how to optimize processes and software configuration with proven best practices, a relationship with a larger provider of comprehensive business and IT services represents a logical opportunity to expand our client base. Our strategic relationship with Accenture, L.L.P., a leading provider of consulting services, gives them the exclusive right to collaborate with Answerthink and The Hackett Group in offering to their clients business process and best practices benchmarking services in designated functional areas, including finance, accounting, performance management, and business intelligence. In situations where Accenture uses Hackett or Answerthink intellectual capital, Answerthink has an opportunity to staff up to 15% of the project positions of each engagement jointly pursued. If Hackett or Answerthink is the lead source on jointly pursued opportunities with Accenture, then Answerthink will have the opportunity to staff up to 25% of the positions. Our strategy is to execute on this current alliance and expand to other functional areas as well as geographic locations outside of North America. • Strategic Acquisitions. We will continue to pursue strategic acquisitions that strengthen our ability to compete. In 2003, we acquired Beacon Analytics, Inc., a business performance management consulting company focused on the implementation of Hyperion software. Given our current financial position and distinct value proposition, Answerthink is well positioned to pursue acquisition opportunities such as Beacon Analytics, Inc. in the U.S., as well as offshore firms in India. -5 - THE ANSWERTHINK SOLUTION Answerthink offers a comprehensive range of services, including benchmarking and business advisory services, business transformation, enterprise business applications, business intelligence and offshore application development support. With strategic and functional knowledge in finance, human resources, information technology, procurement supply chain management, customer service and sales and marketing, our expertise extends across the 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. Service Capabilities (cid:1) The Hackett Group The Hackett Group has measured and evaluated the efficiency and effectiveness of enterprise functions at over 2,000 global organizations since 1991. Since Hackett’s inception, it has served 97 percent of the Dow Jones Industrials, 81 percent of the Fortune 100, and 92 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 identified nearly 1,200 best practices for approximately 100 processes in these key functional areas. Hackett uses proprietary performance measurement tools and a data collection software that enables companies to comp lete the performance measurement cycle and identify and quantify improvement opportunities in as little as four weeks. Additionally, Hackett offers a full range of services to executives such as advisory inquiries, peer interaction, and access to an online repository of best practices data. Topics range from finance and ERP optimization to forecasting and accounts payable. (cid:1) Business Transformation Answerthink’s Business Transformation services help clients develop a coordinated strategy for process imp rovements across the enterprise. Our experienced 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. Answerthink combines best practices knowledge with business expertise and broad technology capabilities, which we believe enables our solutions to optimize return on client investments in people, processes, technology and information. (cid:1) 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 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 help 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. (cid:1) Business Intelligence Based on our extensive best practices knowledge, our Business Intelligence group designs, develops and implements IT solutions for more effective enterprise performance management (EPM) and business intelligence (BI). Our BI experts know how to apply and implement custom or packaged analytical applications such as Hyperion and Cognos to increase process transparency, 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. -6 - (cid:1) Off-Shore Application Development and Support Through strategic alliance partners, Answerthink provides offshore application development and support services. Services include post-implementation support for enterprise systems, legacy system and custom application maintenance, custom development and application reporting services. CLIENTS Answerthink focuses on long-term client relationships with Global 2000 firms and other sophisticated buyers of business and IT consulting. During 2003, our ten most significant clients accounted for approximately 39% of revenues. No clients generated more than 10% of total revenues. We believe that we have achieved a high level of satisfaction across our client base in 2003. The responses to the surveys we send to clients continue to be extremely positive. During 2003, 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 remain 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. Our primary goal in 2004 is to increase awareness of our brand that we have created around Hackett and BPI. Our Hackett and BPI message will be the focus 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 the ability to contribute to new revenue opportunities, our primary internal business development resources are comprised of the following: • The Leadership Team • The Sales Organization • The Solution Strategist Network • Lead Generation Specialists • 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 generating sales. They are deployed geographically in key markets and are primarily focused on developing new relationships within their target accounts. Each sales associate has between two and ten 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 new business. Solution strategists possess deep subject matter expertise within a specific discipline and receive incentive compensation on the amount of revenue they generate in addition to other criteria. -7 - Solution strategists sell new business in geographic accounts and collaborate with the sales organization on target account opportunities to provide content expertise. Lead Generation Specialists are comprised of trained groups of lead development specialists who are conversant with its various solution areas. Lead generation is coordinated with our marketing and sales groups to ensure that our inbound and outbound efforts are synchronized with targeted marketing and sales programs. This group is targeted for expansion in 2004. The Delivery Organization is comprised of our billable associates who work at client locations. We encourage associates to pursue additional business development 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. MARKET SEGMENTATION We have segmented our market focus into the following categories: • Top 25 Accounts • Target Accounts • Geographic Focus Accounts • Strategic Alliance 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. Strategic Alliance Accounts are accounts that allow Answerthink and The Hackett Group to partner with organizations with greater scale or different skill sets or with software developers so that all parties can jointly market their products and services to prospective clients. An example of this type of alliance is the agreement with Accenture that was signed in 2003. This agreement gives Accenture the exclusive right to collaborate with Answerthink and The Hackett Group in offering its clients business process and best practice benchmarking services provided by Answerthink and The Hackett Group in designated functional areas, including finance, accounting, performance management, and business intelligence. Under the agreement, we have the ability to expand into additional enterprise functional areas and geographies. The agreement gives Answerthink access to Accenture's global client base and sales distribution channel and by working with more clients, Hackett will be able to broaden the base of critical metrics and best practices, thereby creating even richer benchmark data to help companies achieve world-class performance. But most importantly this type of alliance allows Answerthink to staff a portion of the consulting positions for each engagement that is jointly closed with Accenture. Answerthink continues to seek alliances that broaden its distribution channel. -8 - 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 We believe that 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 believe 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: (cid:120)(cid:3) Diversity: of backgrounds, skills and experiences (cid:120)(cid:3) Knowledge: as individuals and a system of individuals (cid:120)(cid:3) Collaboration: with one another, with our partners and with our clients Our human resources 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. The benefits package that we provide includes comprehensive health and welfare insurance, work/life balance programs, a 401(k) program including a company match for associates below the level of senior director, stock options for directors and above and a stock purchase program. Our associates are paid competitive salaries and incentive pay. Incentive pay for delivery resources is based on an individuals utilization while incentive pay for management is based on company performance. As of January 2, 2004, we had approximately 620 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 strive 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. 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. -9 - 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. Also available on our web site, free of charge, are copies of our Code of Conduct and Ethics, and the charter for our audit committee of our Board of Directors. We intend to disclose any amendment to, or waiver from, a provision of our Code of Conduct and Ethics on our web site within five business days following the date of the amendment or waiver. 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. 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 -10 - 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 2003, our ten largest clients accounted for approximately 39% of our revenues in the aggregate. 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 as opportunities arise. 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; unknown claims or liabilities; and amortization of certain 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. Difficulties in integrating businesses we may acquire in the future may demand time and attention from our senior management. Integrating businesses we may acquire in the future may involve unanticipated delays, costs and/or other operational and financial problems. In integrating acquired businesses, we may not achieve expected economies of scale or profitability or realize sufficient revenues to justify our investment. If we encounter unexpected problems at one of the acquired businesses as we try to integrate it into our business, our management may be required to expend time and attention to address the problems, which would divert their time and attention from other aspects of our business. -11 - 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 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. We maintain an office of risk management that evaluates and attempts to mitigate delivery risk associated with complex projects. In connection with their review, the office of risk management analyzes the critical estimates associated with these projects. 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, 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: -12 - • • 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 memb ers 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. In addition, our board of directors has adopted a shareholder rights plan. Subject to certain exceptions, in the event that a person or group in the future becomes the beneficial owner of 15% or more of our common stock or commences, or publicly announces an intention to commence, a tender or exchange offer which would result in its ownership of 15% or more of our outstanding common stock (or in the case of Liberty Wanger Asset Management, L.P. (now known as Columbia Wanger Asset Management, L.P.) and its affiliates, 20%) then the rights issued to our shareholders in connection with this plan will allow our shareholders to purchase shares of our common stock at 50% of its then current market value. In addition, if we are acquired in a merger, or 50% or more of our assets are sold in one or more related transactions, our shareholders would have the right to purchase the common stock of the acquiring company at half the then current market price of such common stock. 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. If we are unable to protect our intellectual property rights or infringe on the intellectual property rights of third parties, our business may be harmed. 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. 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: -13 - • • • • 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. Our recent and planned initiatives that leverage The Hackett Group’s best practices knowledge may not be successful. The BPI tools that we developed using Hackett best practice knowledge are still being introduced to our existing client base and to client prospects. We do not have enough experience with them to ensure that clients and prospects will perceive any additional benefit associated with the BPI tools versus other traditional implementation methodologies. As such, BPI may not enable us to differentiate ourselves in the marketplace, and we may not achieve any benefits from this new methodology. The recent and planned enhancements to the Hackett Group’s product and service offerings represent a departure from its traditional offerings. We may not be able to adequately support these new offerings. Clients or prospects may view The Hackett Group as a new and unproven entrant into this space. As such, clients and client prospects may choose to purchase these types of products and services from companies with a longer track record of providing these types of offerings. The anticipated benefits from the Joint Marketing and Alliance Agreement with Accenture LLP may not be achieved. We are still in the early stages of our relationship with Accenture. Accenture client partners may choose not to involve Answerthink or The Hackett Group in their client pursuits. This would have an adverse affect on our ability to achieve the participation entitlements contained in the agreement. The client engagements won jointly may be of a complex nature and very large in scale. We may not be able to staff all of the positions that we would have a right to staff on a timely basis, and Accenture may not be satisfied with the quality or performance of the resources that we staff. This may lead to the termination of the agreement, which either party can seek upon ninety days notice. 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 10,780 square feet and expires June 30, 2005. We also have offices in Atlanta, Boston, Chicago, Cleveland, Frankfurt, New York, Philadelphia, and London. 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 alleged misstatements and omissions concerning, among other things, 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 into Druskin, et al. v. Answerthink, Inc., et al., Case No. 02-23304-CIV-GOLD. A consolidated amended complaint was filed on May 9, 2003. The Company filed a -14 - motion to dismiss the consolidated amended complaint on July 15, 2003. The court granted the Company’s motion to dismis s the consolidated and amended complaint on January 5, 2004 and allowed the plaintiffs leave to amend the consolidated amended complaint. The plaintiffs did not file an amended complaint within the time allowed by the court. On February 11, 2004, the court entered a final judgement dismissing the case against all parties with prejudice and closed the case. The time for appeal has expired. This matter is concluded. 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. On November 5, 1999, THINK New Ideas merged with and into a wholly owned subsidiary of the Company. On April 18, 2002, the parties reached an agreement in principle to settle this action. On September 16, 2002 the court approved the terms of the settlement 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. On November 10, 2003, the court issued its final order approving the distribution of the net settlement funds in this case. This matter is concluded. 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 2003. -15 - 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. 2003 Fourth Quarter Third Quarter Second Quarter First Quarter 2002 Fourth Quarter Third Quarter Second Quarter First Quarter High $6.35 $4.03 $2.59 $2.97 $3.29 $3.91 $7.30 $8.34 Low $3.21 $2.19 $1.75 $1.95 $1.43 $1.52 $3.60 $4.65 The closing sale price for the common stock on March 5, 2004 was $7.71. As of March 5, 2004, there were approximately 325 holders of record of our common stock and 44,872,006 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. -16 - 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 2, 2004, 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.'' January 2, 2004 Year Ended December 28, 2001 January 3, December 29, 2003 2000 (in thousands, except per share data) December 31, 1999 Consolidated Statement of Operations Data: Revenues: Revenues before reimbursements Reimbursements $ 117,945 14,442 $ 156,357 20,490 $220,966 29,377 $ 260,892 35,811 $ 202,318 29,255 Total revenues 132,387 176,847 250,343 296,703 231,573 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 princip le Income taxes Income (loss) from continuing operations Loss from discontinued operations, net of income taxes 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) 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 $ $ $ $ $ $ $ $ $ $ $ 73,061 14,442 87,503 43,951 — 4,875 1,236 137,565 (5,178) — — 706 (4,472) 350 (4,822) — (4,822) — — (4,822) 104,981 20,490 125,471 53,416 20,000 10,886 — 209,773 (32,926) — — 570 (32,356) (3,508) (28,848) (8,911) 132,843 29,377 162,220 77,087 — 5,619 4,855 249,781 562 — — 843 1,405 1,807 (402) (8,117) (37,759) — (31,200) $ (68,959) (8,519) — — $ (8,519) (0.11) $ — $ — $ — $ $ (0.11) 45,140 (0.11) $ — $ — $ — $ $ (0.11) 45,140 (0.62) (0.19) $ $ — $ $ $ (0.68) (1.49) 46,348 (0.62) (0.19) $ $ — $ $ $ (0.68) (1.49) 46,348 (0.01) (0.18) — — (0.19) 43,999 (0.01) (0.18) — — (0.19) 43,999 147,040 35,811 182,851 92,321 — 3,268 853 279,293 17,410 1,850 (2,350) 589 17,499 8,571 8,928 (1,027) 7,901 — — 7,901 0.22 (0.02) — — 0.20 40,262 0.20 (0.02) — — 0.18 45,137 $ $ $ $ $ $ $ $ $ $ $ 118,844 29,255 148,099 57,297 — — 960 206,356 25,217 — — (26) 25,191 11,431 13,760 (10,513) 3,247 (2,113) — 1,134 0.39 (0.30) (0.06) — 0.03 34,953 0.32 (0.24) (0.05) — 0.03 43,098 $ $ $ $ $ $ $ $ $ $ $ -17- January 2, 2004 January 3, 2003 December 28, 2001 (in thousands) December 29, 2000 December 31, 1999 Consolidated Balance Sheet Data: Cash and cash equivalents ............................................ Restricted cash............................................................. Marketable investments................................................. Working capital ........................................................... Total assets ................................................................. Shareholders’ equity..................................................... $ 54,441 $ 3,000 $ 10,000 $ 53,590 $135,223 $105,235 $ 63,419 $ 2,909 $ — $ 72,851 $145,361 $113,047 $ 59,888 — $ $ — $ 81,313 $211,919 $177,701 $ 51,662 — $ $ — $ 74,787 $228,676 $172,054 $ 27,124 $ — $ 2,432 $ 55,166 $200,713 $140,270 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 provides services designed to enable companies to achieve world-class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository of enterprise best practice metrics and business process knowledge, Answerthink’s business and technology solutions help clients improve performance and maximize returns on technology investments. Answerthink’s capabilities include benchmarking, business transformation, business applications, business intelligence, and offshore application development and support. Answerthink was formed on April 23, 1997. 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 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 invoiced. 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. Revenues before reimbursements exclude reimbursable expenses charged to clients. Reimbursements, which include travel and out-of-pocket expenses, are included in revenues and an equivalent amount of reimbursable expenses is included in project personnel and expenses. 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, from time to time we enter into agreements with our clients that limit our right to enter into business relationships with specific competitors of that client for a specific time period. These provis ions 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. -18 - 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. Periodically, we review accounts receivable to assess our estimates of collectibility. 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 their inability 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 Reserves Restructuring reserves reflect judgements and estimates of our ultimate costs of severance, closure and consolidation of facilities and settlement of contractual obligations under our operating leases, including sublease rental rates, absorption period to sublease 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. 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. Contingent Liabilities We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Reserves for contingent liabilities are reflected in our consolidated financial statements based on management’s assessment, along with legal counsel, of the expected outcome of the contingencies. If the final outcome of our contingencies differs adversely from that currently expected, it would result in a charge to earnings when determined. The foregoing list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. Please see our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States. -19 - 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 2003, 2002 and 2001 ended on January 2, 2004, January 3, 2003 and December 28, 2001, 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): Interest income (expense), net Income (loss) before income taxes, loss from discontinued operations and cumulative effect of change in accounting principle Income taxes Loss from continuing operations Loss from discontinued operations, net of income taxes Loss before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net loss Comparison of 2003 to 2002 January 2, 2004 Year Ended January 3, 2003 December 28, 2001 (in thousands, except percentage data) $117,945 14,442 132,387 89.1% $156,357 20,490 10.9% 176,847 100.0% 88.4% $220,966 29,377 11.6% 100.0% 250,343 88.3% 11.7% 100.0% 73,061 14,442 87,503 43,951 — 4,875 1,236 137,565 (5,178) 55.2% 10.9% 66.1% 33.2% — 3.7% 0.9% 103.9% (3.9%) 104,981 20,490 125,471 53,416 20,000 10,886 — 209,773 (32,926) 59.4% 132,843 11.6% 29,377 71.0% 162,220 77,087 30.2% — 11.3% 5,619 6.2% 4,855 — 118.7% 249,781 562 (18.7%) 53.1% 11.7% 64.8% 30.8% — 2.2% 2.0% 99.8% 0.2% 706 0.5% 570 0.4% 843 0.3% (4,472) 350 (4,822) — (4,822) — $ (4,822) (3.4%) 0.2% (3.6%) — (3.6%) — (3.6%) (32,356) (3,508) (28,848) (8,911) (37,759) (31,200) $ (68,959) (18.3%) (2.0%) (16.3%) (5.1%) (21.4%) (17.6%) (39.0%) 1,405 1,807 (402) (8,117) (8,519) — $ (8,519) 0.5% 0.7% (0.2%) (3.2%) (3.4%) — (3.4%) Overview. We reported a net loss of $4.8 million in 2003 compared to a net loss of $69.0 million in 2002. Our $4.8 million loss during 2003 included restructuring costs of $4.9 million and non-cash stock compensation expense of $1.2 million. The restructuring costs related to increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities. The compensation expense was primarily related to the issuance of restricted stock units to employees at a senior director level or above pursuant to a voluntary stock option exchange program which ended on July 14, 2003. 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 during those years. Revenues. Revenues decreased 25.1% to $132.4 million in 2003 from $176.8 million in 2002. The decrease in revenues was primarily attributable to lower revenues from a few of our larger customers due to the completion of some of their larger projects, as well as lower demand for information technology services as clients continued to reduce or defer expenditures for these services in 2003. Reimbursements as a percentage of revenues were 11% and 12% during fiscal years 2003 and 2002, respectively. In fiscal year 2003, three customers had revenues greater than 5% of total revenues, which, in the aggregate, accounted for approximately 20% of total revenues. In fiscal year 2002, three customers had revenues greater than 5% of total revenues, which, in the aggregate, accounted for 36% of total revenues. -20 - Project Personnel and Expenses. Project personnel costs and expenses consist primarily of salaries, benefits and incentive compensation for consultants. Project personnel costs and expenses decreased 30.3% to $87.5 million in 2003 from $125.5 million in 2002. 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 483 as of January 2, 2004 compared to 620 as of January 3, 2003. Project personnel and expenses as a percentage of revenues decreased to 66.1% in 2002 from 71.0% in 2002. This decrease was primarily the result of higher utilization of consultants during 2003 compared to 2002, partially offset by slightly higher average cost per consultant attributable to a greater percentage of senior resources during 2003 compared to 2002. Selling, General and Administrative. Selling, general and administrative expenses decreased 17.7% to $44.0 million in 2003 from $53.4 million in 2002. The overall decrease in selling, general and administrative expenses were primarily due to our continued cost control initiatives and reduced discretionary spending. We reduced functional support headcount and as a result incurred $755,000 of severance costs in 2003 compared to $202,000 in 2002. Additionally, we incurred lower recruiting, selling, marketing and bad debt expenses and reduced property and facility expenses as a result of a decrease in the number of offices from 12 at the end of 2002 to 9 at the end of 2003. These reductions in expenses were partially offset by an increase in selling, general and administrative expenses for The Hackett Group related to an increased sales force and other administrative personnel. Selling, general and administrative expenses as a percentage of revenues increased to 33% in 2003 from 30% in 2002. This is primarily attributable to increased Hackett Group selling, general and administrative expenses and the impact of fixed expenses on a lower level of revenues in 2003 compared to 2002. Impairment of Goodwill and Cumulative Effect of Change in Accounting Principle. We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, 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. 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. Restructuring Costs. Restructuring costs were $4.9 million and $10.9 million in 2003 and 2002, respectively. Restructuring costs in 2003 relate to an increase in previously established reserves recorded in the fourth quarters of 2002 and 2001 for the closure and consolidation of facilities. Existing reserves were increased to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities. The 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 termination of approximately 100 employees. These actions were taken as a result of the continued decline in demand for technology services throughout 2002 and 2003. 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 2003 primarily related to the issuance of restricted stock units under a voluntary stock option exchange program, which ended on July 14, 2003. This program involved voluntary stock option exchanges for employees at a senior director level or above who had been with the Company since July 4, 2002. We recorded a non-cash compensation charge of $1.1 million for the year ended January 2, 2004 based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. Income Taxes. In 2003, we recorded $350,000 of income tax expense for state and foreign taxes, which represented 7.8% of our pre-tax income. We did not recognize an income tax benefit for federal and state taxes due to the establishment of a valuation allowance for the tax benefit generated on losses during 2003. 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. 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. 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. -21 - In 2002, we discontinued our interactive marketing business which we acquired with THINK New Ideas. We claimed a $92.0 million worthless stock deduction for our investment in THINK New Ideas in our 2002 tax return as a result of the discontinuance of THINK New Ideas. We voluntarily requested that the Internal Revenue Service (“IRS”) review this position on an expedited basis. This review is currently in process. Although we believe our tax position is sustainable, there is no assurance that the IRS will agree with our conclusion or the amount of the deduction. The final resolution of this matter could result in a deduction materially less than the amount claimed. At the end of 2003, we had a net operating loss carryforward available for tax purposes of $92.0 million, which we will use in future years to offset future taxable income. 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. The 2002 loss from discontinued operations includes restructuring costs of $3.4 million for reduction in consultants and for closure and consolidation of facilities and related exit costs. For the year ended January 3, 2003, total revenues for discontinued operations were $7.2 million. Comparison of 2002 to 2001 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 SFAS No. 142, 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. 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 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 incentive compensation 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. -22 - Impairment of Goodwill and Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 142 during the first quarter of 2002. As a result of this adoption, we eliminated the amortization of goodwill and 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. In the third quarter of 2002, we performed an impairment test primarily as a result of the decline in our stock price and that of our peer group and recorded a non-cash impairment charge of $20.0 million. 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 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 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. 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. 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. 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 2, 2004, we had $54.4 million of cash and cash equivalents compared to $63.4 million at January 3, 2003. We had $3.0 million and $2.9 million at January 2, 2004 and January 3, 2003, respectively, on deposit with a financial institution as collateral for letters of credit and have classified these deposits as restricted cash on the accompanying consolidated balance sheets. At January 2, 2004 the Company also had $10 million in marketable investments. In August 2002, we cancelled our $15.0 million revolving credit facility. At the time of cancellation and at all times throughout 2002, we had no borrowings outstanding under the facility. There were no material capital commitments at January 2, 2004. The following summarizes our lease commitments under non-cancelable operating leases for premises at January 2, 2004 (in thousands): -23 - Less than 1 year 1-3 years 4-5 years After 5 years Less: sublease income Total minimum lease payments, less sublease income $ 6,367 10,467 9,231 18,506 44,571 13,328 $ 31,243 Net cash provided by operating activities was $9.9 million for 2003 compared to $7.0 million during 2002. During 2003, net cash provided by operating activities was primarily attributable to $6.0 million of non-cash expenses, a $10.1 million decrease in prepaid expenses and other assets primarily related to an $8.5 million tax refund received in the second quarter of 2003, and a $1.3 million decrease in accounts receivable and unbilled revenue. These effects were partially offset by our net loss of $4.8 million, a $2.1 million decrease in accounts payable and a $600 thousand decrease in accrued expenses and other liabilities. 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 income taxes and provision for doubtful accounts. Net cash used in investing activities was $14.6 million for 2003 compared to $7.8 million used during 2002. The uses of cash for investing activities in 2003 were attributable to the purchase of $10.0 million of marketable securities, $1.2 million for purchases of property and equipment and $3.3 million used in the acquisition of a business. 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 thousand used in acquisitions of businesses. Net cash used in financing activities was $4.2 million in 2003 compared to cash provided of $4.3 million during 2002. Cash used in financing activities during 2003, consisted of $5.5 million for repurchases of our common stock, offset by $1.3 million of proceeds from the sale of stock through our Employee Stock Purchase Plan, and from exercises of stock options. Cash provided by financing activities during 2002 consisted of $6.5 million of proceeds from the sale of common stock through our Employee Stock Purchase Plan and from exercises of stock options, offset by repurchases of our common stock of $2.2 million. On June 11, 2003, we commenced two tender offer programs involving voluntary stock option exchanges for our employees. The offering periods for the two stock option exchange programs ended on July 14, 2003. One program was offered to employees at a director level or below. Under this exchange program, employees holding nonqualified or incentive stock options to purchase our common stock with an exercise price of $4.50 or more were given the opportunity to exchange their existing options for new options to purchase shares of our common stock equal to an amount depending on the exercise price of the surrendered options. Options for 521,991 shares were tendered on July 14, 2003 in the exchange program. On January 15, 2004, the Company granted 163,995 options to purchase shares of the Company’s common stock in exchange for the options tendered. The new options were granted six months and one day after acceptance of the old options for exchange and cancellation. The exercise price of the new options was $6.34, which was the last reported sale price of the Company’s common stock on the Nasdaq Stock Market’s National Market on January 15, 2004. The new options will vest over a two- year period from the date of grant. The other program was offered to employees at a senior director level or above, who had been with the Company since July 4, 2002. Under this exchange program, employees holding nonqualified options to purchase our common stock with an exercise price of $2.80 or more were given the opportunity to exchange their existing options for restricted stock units which were granted on a one-to-one ratio and are subject to a new four-year vesting schedule. On July 14, 2003, we accepted for cancellation options to purchase 3,826,561 shares of our common stock representing 95% of the 4,045,182 options that were eligible to be tendered in the exchange program. Pursuant to the terms of the exchange program, we issued 3,826,561 restricted stock units on July 14, 2003 in exchange for the options surrendered. The issuance of these restricted stock units resulted in $1.1 million of stock compensation expense for the year ended January 2, 2004 and is expected to result in approximately $580 thousand of stock compensation expense per quarter over the next four years. The remaining 218,621 eligible options that were not exchanged are required to be accounted for under variable plan accounting under APB Opinion No. 25. The weighted average exercise price of these remaining eligible options is $4.01. Variable plan accounting resulted in approximately $103 thousand of stock compensation expense for the year ended January 2, 2004. -24 - On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our common stock. During the second quarter of 2003, our Board of Directors approved the repurchase of an additional $5.0 million of our common stock. Under the repurchase plans, 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 2, 2004, we had repurchased 3,550,279 shares of our common stock at an average price of $2.16 per share. The amount of shares repurchased to date includes 465,120 shares purchased from our president, who is also a director, at $2.15 per share. We hold repurchased shares of our common stock as treasury stock and account for treasury stock under the cost method. In July 2003, we purchased the assets of Beacon Analytics, Inc., a business performance management consulting company focusing on the implementation of Hyperion software. The purchase price for this acquisition was $4.0 million in cash and approximately $2.5 million of contingent consideration due over the next three years if certain earnings goals are achieved. This acquisition is expected to add approximately $8.0 million in annualized revenues. 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. There is no assurance, however, that additional financing will be available when needed or desired. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At January 2, 2004, our exposure to market risk related primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed 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. -25 - 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 2, 2004 and January 3, 2003 Consolidated Statements of Operations for the Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 Consolidated Statements of Shareholders' Equity for the Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 Consolidated Statements of Cash Flows for the Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 Notes to Consolidated Financial Statements Schedule II -- Valuation and Qualifying Accounts and Reserves Page 27 28 29 30 31 32 47 -26- 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 2, 2004 and January 3, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2004 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 indexpresents 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 the year ended January 3, 2003. /s/ PricewaterhouseCoopers LLP Miami, Florida March 1, 2004 -27- 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 $1,757 and $3,526 in 2003 and 2002, respectively Prepaid expenses and other assets Total current assets Marketable investments Restricted cash Property and equipment, net Other assets Goodwill, net Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses and other liabilities Total current liabilities Commitments and contingencies Shareholders' equity: 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: 48,290,640 shares at January 2, 2004; 47,728,129 shares at January 3, 2003 Additional paid-in capital Unearned compensation Treasury stock, at cost, 3,550,279 shares at January 2, 2004 and 1,146,000 shares at January 3, 2003 Accumulated deficit Total shareholders' equity Total liabilities and shareholders' equity January 2, 2004 January 3, 2003 $ 54,441 — 24,877 4,260 83,578 10,000 3,000 8,714 3,211 26,720 $ 135,223 $ 63,419 2,909 24,159 14,678 105,165 — — 11,790 1,686 26,720 $ 145,361 $ 3,793 26,195 29,988 $ 5,684 26,630 32,314 — 48 274,481 (8,367) — 48 263,626 — (7,686) (153,241) 105,235 $ 135,223 (2,208) (148,419) 113,047 $ 145,361 The accompanying notes are an integral part of the consolidated financial statements. -28- ANSWERTHINK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) January 2, 2004 Year Ended January 3, 2003 December 28, 2001 Revenues: Revenues before reimbursements $ 117,945 $ 156,357 $ 220,966 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): Interest income Interest expense Income (loss) before income taxes, loss from discontinued operations and cumulative effect of change in accounting principle Income taxes Loss from continuing operations Loss from discontinued operations, net of income taxes Loss before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net loss Basic net loss per common share: Loss from continuing operations Loss from discontinued operations, net of income taxes Cumulative effect of change in accounting principle Net loss per common share Weighted average common shares outstanding Diluted net loss per common share: Loss from continuing operations Loss from discontinued operations, net of income taxes Cumulative effect of change in accounting principle Net loss per common share Weighted average common and common equivalent shares outstanding 14,442 132,387 73,061 14,442 87,503 43,951 — 4,875 1,236 137,565 (5,178) 706 — (4,472) 350 (4,822) — (4,822) — (4,822) (0.11) — — (0.11) 45,140 (0.11) — — (0.11) 45,140 $ $ $ $ $ $ $ $ $ 20,490 176,847 104,981 20,490 125,471 53,416 20,000 10,886 — 209,773 (32,926) 766 (196) (32,356) (3,508) (28,848) (8,911) (37,759) (31,200) (68,959) (0.62) (0.19) (0.68) (1.49) 46,348 (0.62) (0.19) (0.68) (1.49) 46,348 $ $ $ $ $ $ $ $ $ 29,377 250,343 132,843 29,377 162,220 77,087 — 5,619 4,855 249,781 562 1,008 (165) 1,405 1,807 (402) (8,117) (8,519) — (8,519) (0.01) (0.18) — (0.19) 43,999 (0.01) (0.18) — (0.19) 43,999 $ $ $ $ $ $ $ $ $ The accompanying notes are an integral part of the consolidated financial statements. -29- ANSWERTHINK, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) Common Stock Additional Paid-in Treasury Stock Unearned Accumulated Total Shareholders’ Shares Amount Capital Shares Amount Compensation Deficit Equity 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 Issuance of common stock Treasury stock purchased Issuance of restricted stock units, net of cancellations Amortization of restricted stock units Stock compensation expense Variable stock options Net loss Balance at January 2, 2004 44,235 890 — 755 — — 45,880 1,848 — — 47,728 563 — — — — — — 48,291 $ $ $ $ 44 1 — 1 — — 46 2 — — 48 — — — — — — — 48 $ 243,299 4,366 4,218 5,232 — — $ 257,115 6,511 — — $ 263,626 1,252 — 9,487 — 13 103 — $ 274,481 — — — — — — — — (1,146) — (1,146) — (2,404) — — — — — (3,550) $ $ $ $ — — — — — — $ — — (2,208) — $ (2,208) — (5,478) — — — — — $ (7,686) $ (348) — — — 348 — — — — — — — — (9,487) 1,120 — — — (8,367) $ (70,941) $ — — — — (8,519) (79,460) $ — — (68,959) $ (148,419) — — — — — — (4,822) $ (153,241) $ $ $ 172,054 4,367 4,218 5,233 348 (8,519) 177,701 6,513 (2,208) (68,959) 113,047 1,252 (5,478) — 1,120 13 103 (4,822) 105,235 The accompanying notes are an integral part of the consolidated financial statements. -30- ANSWERTHINK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net loss Year Ended January 2, 2004 January 3, 2003 December 28, 2001 $ (4,822) $ (68,959) $ (8,519) Adjustments to reconcile net 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 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 Decrease in accounts payable Decrease in accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Increase in restricted cash Purchases of marketable 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 Net cash provided by (used in) financing activities Net increase (decrease) 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 — — — 4,954 1,236 (235) — 1,309 10,075 (2,066) (586) 9,865 (1,225) (91) (10,000) (3,301) (14,617) 1,252 (5,478) (4,226) (8,978) 63,419 54,441 — 110 $ $ $ 31,200 20,000 5,217 5,327 — 779 4,961 18,930 (5,419) (230) (4,776) 7,030 (4,044) (2,909) — (851) (7,804) 6,513 (2,208) 4,305 3,531 59,888 63,419 72 133 $ $ $ — — — 12,531 4,855 5,279 (160) 17,959 740 (4,819) (12,351) 15,515 (9,514) — — (2,142) (11,656) 4,367 — 4,367 8,226 51,662 59,888 92 1,524 $ $ $ The accompanying notes are an integral part of the consolidated financial statements. -31- 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 benchmarking, business transformation, business applications, business intelligence, and offshore application development 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. 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 2003, 2002 and 2001 ended on January 2, 2004, January 3, 2003 and December 28, 2001, 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. Marketable investments Marketable investments are available-for-sale securities which are recorded at fair market value. Unrealized gains and losses on these investments are reported in comprehensive income or loss and accumulated as a separate component of stockholders’ equity, net of any related tax effect. The difference between fair market value and cost was not material at January 2, 2004. Declines in value that are judged to be other than temporary result in a reduction of the carrying amount of the investment to fair value and the recognition of an impairment charge in other income (expense). 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. 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. -32- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) 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. 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. 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. In our fiscal 2003 annual analysis conducted in the fourth quarter of fiscal 2003, we concluded that we did not have any additional impairment of goodwill. Goodwill amortization for the year ended December 28, 2001 was $6.7 million, of which, $2.8 million is included in the loss from discontinued operations in the consolidated statements of operations. The following schedule reconciles net loss and per share amounts for the year ended December 28, 2001 adjusted for SFAS No. 142 (in thousands, except per share data): Net loss as reported Add back: Goodwill amortization Adjusted net loss Basic net loss per share: Net loss as reported Goodwill amortization Adjusted net loss per share Diluted net loss per share: Net loss as reported Goodwill amortization Adjusted net loss per share January 2, 2004 Year Ended January 3, 2003 $ (4,822) $ (68,959) — — $ (4,822) $ (68,959) $ $ $ $ (0.11) — (0.11) (0.11) — (0.11) $ $ $ $ (1.49) — (1.49) (1.49) — (1.49) December 28, 2001 $ $ $ $ $ $ (8,519) 6,657 (1,862) (0.19) 0.15 (0.04) (0.19) 0.15 (0.04) -33- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) Revenue Recognition 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. 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 statement of operations for the year ended December 28, 2001 was reclassified to comply with the guidance in EITF Issue No. 01-14. Adoption of the provisions had no impact on the reported net loss or net 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 of 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 loss and net loss per share for the years ended January 2, 2004, January 3, 2003 and December 28, 2001 would have been adjusted to the pro forma amounts indicated as follows (in thousands, expect per share data): Net 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 loss Basic net loss per common share As reported Pro forma Diluted net loss per common share As reported Pro forma January 2, 2004 (4,822) $ Year Ended January 3, 2003 $ (68,959) December 28, 2001 $ (8,519) $ (5,466) $ (10,288) $ (27,802) $ (96,761) $ (0.11) $ (0.23) $ (1.49) $ (2.09) $ (0.11) $ (0.23) $ (1.49) $ (2.09) $ (4,929) $ (13,448) $ (0.19) $ (0.31) $ (0.19) $ (0.31) -34- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) 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. 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 restricted stock or restricted stock units issued to employees, the calculation includes only the vested portion of such stock. 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 2, 2004, 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 which were not included in the diluted loss per share calculation for the years ending January 2, 2004, January 3, 2003 and December 28, 2001 included 1,806,963 shares, 333,644 shares and 1,444,392 shares, respectively, of unvested restricted stock issued to employees and 289,647 shares, 310,478 shares, and 860,751 shares, respectively, of common stock 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, restricted cash, marketable investments, accounts receivable and unbilled revenue, accounts payable, and accrued expenses and other liabilities. At January 2, 2004, and January 3, 2003, 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 2003, three customers had revenues greater than 5% of total revenues, which, in the aggregate, accounted for approximately 20% of total revenues. 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. -35- 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. 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 2, 2004, the Company acquired four businesses providing information technology services (collectively, the “Acquired Entities”) in separate transactions. One was completed in 2003, two were completed in 2002 and one was completed in 2001. Aggregate consideration for the Acquired Entities was $6.3 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. 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 Intangible assets Common stock issued Accrued earn-out Cash used in acquisitions of businesses, net of cash acquired 2003 2002 2001 $ 1,264 — 2,287 — (250) $ 3,301 $ 851 — — — — $ 851 $ 150 1,992 — (5,233) 5,233 $ 2,142 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 including any contingent consideration over the estimated fair value of the net identifiable assets acquired has been recorded as goodwill and/or intangible assets. The pro forma impact of the acquisitions completed in 2003, 2002 and 2001 was not significant to the results of the Company’s consolidated operations for the years ended January 2, 2004, January 3, 2003 and December 28, 2001. -36- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Acquisitions and Investing Activities (continued) In July 2003, the Company purchased the assets of Beacon Analytics, Inc., a business performance management consulting company focusing on the implementation of Hyperion software. The purchase price for this acquisition was $4.0 million in cash and approximately $2.5 million of contingent cash consideration due over the next three years if certain earnings goals are achieved. The excess of the purchase price of the acquisition over the estimated fair value of the net identifiable assets acquired which totaled $2.0 million has been recorded as intangible assets and are being amortized over periods ranging from 6 months to 3 years. The Company includes its acquired intangible assets with definitive lives in other assets in the accompanying consolidated balance sheets. As of January 2, 2004, and January 3, 2003 intangible assets totaled approximately $2.4 million and $953 thousand, respectively, net of accumulated amortization of $1.1 million and $208 thousand, respectively. Acquired intangible assets with definite lives are amortized over periods ranging from 6 months to 3 years. Amortization expense for such intangible assets was $893 thousand and $208 thousand for the fiscal years ended January 2, 2004 and January 3, 2003, respectively. As of January 2, 2004 the Company estimates remaining amortization expense to be approximately $1.3 million, $800 thousand and $300 thousand in fiscal years 2004, 2005 and 2006, respectively. 3. Property and Equipment Property and equipment consists of the following (in thousands): Equipment Furniture and fixtures Software Leasehold improvements Less accumulated depreciation January 2, 2004 January 3, 2003 $ 12,736 385 6,892 5,123 25,136 (16,422) $ 8,714 $ 12,320 738 6,114 5,057 24,229 (12,439) $ 11,790 During fiscal year 2002, write-offs of $5.0 million for leasehold improvements and other assets were recorded as part of the restructuring costs. Depreciation expense for the years ended January 2, 2004, January 3, 2003 and December 28, 2001 was $4.1 million, $5.1 million and $5.5 million, respectively. Of these amounts, $1.0 million and $2.0 million for the years ended January 3, 2003 and December 28, 2001, 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 Other accrued expenses -37- January 2, 2004 January 3, 2003 $ 5,364 10,071 4,850 5,910 $ 26,195 $ 5,521 9,616 6,453 5,040 $ 26,630 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 $3.0 million and $2.9 million at January 2, 2004 and at January 3, 2003, respectively, with a financial institution as collateral for these letters of credit and has classified these as restricted cash on the accompanying consolidated balance sheets. 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 2, 2004, January 3, 2003 and December 28, 2001 was $2.2 million, $4.9 million and $6.5 million, respectively. Future minimum lease commitments under non-cancelable operating leases for premises having a remaining term in excess of one year at January 2, 2004 are as follows (in thousands): 2004 2005 2006 2007 2008 Thereafter Less: sublease income Total minimum lease payments, less sublease income 7. Income Taxes The components of the tax expense (benefit) for income taxes are as follows (in thousands): $ 6,367 5,356 5,111 4,721 4,510 18,506 44,571 13,328 $ 31,243 Current tax expense (benefit) Federal State Foreign Deferred tax expense Federal State Foreign January 2, 2004 $ — 262 88 350 — — — — Year Ended January 3, 2003 $ (8,469) — — (8,469) 4,697 — 264 4,961 December 28, 2001 $ 1,173 514 — 1,687 379 5 (264) 120 Income taxes $ 350 $ (3,508) $ 1,807 -38- 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 Other, net Effective rate January 2, 2004 (35.0)% 3.8 (129.6) 166.4 — 2.2 7.8% Year Ended January 3, 2003 (35.0)% — (85.2) 87.2 21.6 0.6 (10.8)% December 28, 2001 35.0% 24.0 — 7.4 52.1 10.1 128.6% 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 2, 2004 January 3, 2003 $ 1,267 615 33,742 5,420 41,044 (38,459) 2,585 (1,973) (612) (2,585) — $ $ 1,267 1,234 25,538 4,816 32,855 (30,101) 2,754 (1,869) (885) (2,754) — $ An income tax receivable of $199,000 and $11.0 million is included in prepaid expenses and other assets in the consolidated balance sheets as of January 2, 2004 and January 3, 2003, respectively. Net deferred tax assets of $-0- were reflected in the consolidated balance sheets as of January 2, 2004 and January 3, 2003. At January 2, 2004 and January 3, 2003, the Company had $92.0 million and $68.0 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 Company claimed a $92.0 million worthless stock deduction for its investment in THINK New Ideas in its 2002 tax return as a result of the discontinuance of THINK New Ideas. The Company voluntarily requested that the Internal Revenue Service (“IRS”) review this position on an expedited basis. This review is currently in process. Although the Company believes its tax position is sustainable, there is no assurance that the IRS will agree with the Company’s conclusion or the amount of the deduction. The final resolution of this matter could result in a deduction materially less than the amount claimed. 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. At January 2, 2004 and January 3, 2003, the Company had established a valuation allowance of $38.5 million and $30.1 million, respectively, to reduce deferred income tax assets primarily related to net operating loss carryforwards. -39- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Shareholders’ Equity 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 2, 2004. 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 2, 2004. 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. Purchases on any one grant are limited to 10% of eligible compensation. Participant account balances are used to purchase shares of stock at the lesser of 85 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 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 2003, 2002 and 2001, 455,482 shares, 734,047 shares and 298,210 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. 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 four years with a maximum term of 10 years. The number of shares available for future issuance at January 2, 2004 is 11,345,018 shares. On June 11, 2003, the Company commenced two tender offer programs involving voluntary stock option exchanges for the Company’s employees. The offering periods for the two stock option exchange programs ended on July 14, 2003. -40- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Shareholders’ Equity (continued) One program was offered to employees at a director level or below. Under this exchange program, employees holding nonqualified or incentive stock options to purchase the Company’s common stock with an exercise price of $4.50 or more were given the opportunity to exchange their existing options for new options to purchase shares of the Company’s common stock equal to an amount depending on the exercise price of the surrendered options. Options for 521,991 shares were tendered on July 14, 2003 in the exchange program. On January 15, 2004, the Company granted 163,995 options to purchase shares of the Company’s commo n stock in exchange for the options tendered. The new options were granted six months and one day after acceptance of the old options for exchange and cancellation. The exercise price of the new options was $6.34, which was the last reported sale price of the Company’s common stock on the Nasdaq Stock Market’s National Market on January 15, 2004. The new options will vest over a two-year period from the date of grant. The other program was offered to employees at a senior director level or above who had been with the Company since July 4, 2002. Under this exchange program, employees holding nonqualified options to purchase the Company’s common stock with an exercise price of $2.80 or more were given the opportunity to exchange their existing options for restricted stock units which were granted on a one-to-one ratio and are subject to a new four-year vesting schedule. On July 14, 2003, the Company accepted for cancellation options to purchase 3,826,561 shares of the Company’s common stock representing 95% of the 4,045,182 options that were eligible to be tendered in the exchange program. Pursuant to the terms of the exchange program, the Company issued 3,826,561 restricted stock units in exchange for the options surrendered. The issuance of these restricted stock units resulted in approximately $1.1 million of stock compensation expense for the year ended January 2, 2004 and is expected to result in approximately $580 thousand of stock compensation expense per quarter over the next four years. As of January 2, 2004, there were 3,585,636 restricted stock units outstanding under this exchange program. The remaining 218,621 eligible options that were not exchanged are required to be accounted for under variable plan accounting under APB Opinion No. 25. The weighted average exercise price of these remaining eligible options is $4.01. Variable plan accounting resulted in approximately $103 thousand of stock compensation expense for the year ended January 2, 2004. 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: Year Ended January 3, 2003 January 2, 2004 December 28, 2001 Option Shares 8,263,971 2,149,238 (125,779) (7,273,805) 3,013,625 Weighted Average Exercise Price $ 6.78 2.96 5.29 6.15 $ 5.69 Weighted Average Exercise Price $ 8.42 5.46 3.47 8.69 $ 6.78 Option Shares 6,812,444 5,594,518 (824,356) (3,318,635) 8,263,971 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 Outstanding at beginning of year Granted Exercised Canceled Outstanding at end of year Weighted average fair value of options granted during the period $ 2.08 $ 3.83 $ 3.43 -41- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Shareholders’ Equity (continued) 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 2, 2004 100% 4 years 2.5% 0% Year Ended January 3, 2003 December 28, 2001 100% 4 years 3.0% 0% 100% 4 years 4.5% 0% The following table summarizes information about the Company’s stock options outstanding at January 2, 2004: Options Outstanding Options Exercisable Number Outstanding 619,037 715,108 571,854 652,790 186,763 103,237 105,139 30,155 29,542 3,013,625 Weighted Average Remaining Contractual Life (Years) 8.3 7.7 8.4 5.7 6.2 5.0 5.3 5.5 4.3 7.2 Weighted Average Exercise Price $ 2.23 3.37 5.46 6.07 8.77 11.78 17.40 20.92 30.19 $ 5.69 Number Exercisable 140,072 321,769 203,856 567,083 139,876 103,237 96,648 27,388 23,248 1,623,177 Weighted Average Exercise Price $ 2.28 3.63 5.41 6.06 8.80 11.78 17.42 20.89 29.63 $ 7.08 Range of Exercise Prices $1.45 - $2.74 $2.80 - $3.79 $4.66 - $5.98 $6.00 - $6.86 $7.08 - $9.97 $10.46 - $12.38 $16.25 - $18.50 $19.25 - $25.25 $25.94 - $32.56 Treasury Stock On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to $5.0 million of the Company’s common stock. During the second quarter of 2003, the Board of Directors approved the repurchase of an additional $5 million of the Company’s common stock. Under the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of January 2, 2004, the Company had repurchased 3,550,279 shares of its common stock at an average price of $2.16 per share. The amount of shares repurchased to date includes 465,120 shares purchased from our president, who is also a director, at $2.15 per share. The Company holds repurchased shares of its common stock as treasury stock and accounts for treasury stock under the cost method. Shareholder Rights Plan On February 13, 2004, the Board of Directors of the Company adopted a Shareholder Rights Plan. Under the plan, a dividend of one preferred share purchase right (a “Right”) was declared for each share of common stock of the Company that was outstanding on February 26, 2004. Each right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a purchase price of $32.50, subject to adjustment. -42- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Shareholders’ Equity (continued) The Rights will trade automatically with the common stock and will not be exercisable until a person or group has become an “acquiring person” by acquiring 15% or more of the Company’s outstanding common stock, or a person or group commences or publicly announces a tender offer that will result in such a person or group owning 15% or more of the Company’s outstanding common stock. However, Liberty Wanger Asset Management, L.P. (now known as Columbia Wanger Asset Management, L.P.), together with its affiliates and associates will be permitted to acquire up to 20% or more of the common stock without making the rights exercisable. Upon announcement that any person or group has become an acquiring person, each Right will entitle all rightholders (other than the acquiring person) to purchase, for the exercise price of $32.50, a number of shares of the Company’s common stock having a market value equal to twice the exercise price. Rightholders would also be entitled to purchase common stock of the acquiring person having a value of twice the exercise price if, after a person had become an acquiring person, the Company were to enter into certain mergers or other transactions. If any person becomes an acquiring person, the Board of Directors may, at its option and subject to certain limitations, exchange one share of common stock for each right. The rights have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. In the event that the Board of Directors determines a transaction to be in the best interests of the Company and its stockholders, the Board of Directors may redeem the Rights for $0.001 per share at any time prior to a person or group becoming an acquiring person. The Rights will expire on February 13, 2014. Equity Related Commitments Pursuant to an agreement with the Chief Executive Officer (“CEO”) of the Hackett Group, Inc. (“Hackett”), one of our wholly owned subsidiaries, in the event of an initial public offering (“IPO”) of common stock or sale of Hackett, the CEO will receive a 5% pre-sale/distributed equity ownership interest in Hackett. This ownership interest will be given in exchange for the surrender of Answerthink stock options held by the CEO. The equity value distributed will vest 50% at the IPO or sale and 50% on the first anniversary of such IPO or sale. In addition, in the event of an IPO or sale of Hackett and subject to meeting certain performance criteria, certain employees of Hackett may elect to convert on a 1:1 to 3:1 basis, the in-the-money cash value of each of their Answerthink options or restricted stock units to an equivalent number of options or shares of Hackett common stock at the IPO price. 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 2003 and 2002, the Company made matching contributions of 25% of employee contributions up to 4% of their gross salaries. The Company’s matching contributions were $169,000, $656,000 and $736,000 for the years ended January 2, 2004, January 3, 2003 and December 28, 2001, respectively. 10. Restructuring Costs The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions in consultants and functional support personnel and for closure and consolidation of facilities and related exit costs. Thes e actions were taken as a result of the continued decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services. In 2003 the Company recorded restructuring costs of $4.9 million to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates -43- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Restructuring Costs (continued) and longer than expected time estimates to sublease excess facilities. The 2003 restructuring costs consisted of additions to the 2002 and 2001 restructuring accruals of $3.1 million and $1.8 million, respectively. The following table sets forth the detail and activity in the restructuring expense accruals during the years ended January 2, 2004, January 3, 2003 and December 28, 2001 (in thousands): 2001 Restructuring Accrual Accrual Balance at December 29, 2000 Severance and other employee costs Closure and consolidation of facilities and related exit costs Total restructuring accrual $ $ — — — Additions to Accrual from Continuing Operations 3,694 $ Additions to Accrual from Discontinued Operations 559 $ 2001 Expenditures $ (3,186) 2002 Expenditures $ (1,067) 2003 Expenditures — $ 3,675 7,369 $ 2,311 2,870 $ (248) $ (3,434) (1,965) $ (3,032) (933) (933) $ 2002 Restructuring Accrual Accrual Balance at December 28, 2001 Severance and other employee costs Closure and consolidation of facilities and related exit costs Total restructuring accrual $ $ — — — Additions to Accrual from Continuing Operations 1,528 $ Additions to Accrual from Discontinued Operations 616 $ 2002 Asset Write -offs — $ 2002 Expenditures (855) $ 2003 Expenditures $ (1,289) 12,483 $ 14,011 2,747 3,363 $ (5,217) $ (5,217) (584) $ (1,439) (2,198) $ (3,487) Accrual Balance at January 2, 2004 $ $ — 2,840 2,840 Accrual Balance at January 2, 2004 $ $ — 7,231 7,231 11. Discontinued Operations 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 in 1999. In accordance with Financial 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. The following table sets forth revenues, pre-tax loss, income tax benefit and loss from discontinued operations for the years ended January 3, 2003, and December 28, 2001 (in thousands): Revenues Pre-tax loss from discontinued operations Income tax benefit Loss from discontinued operations January 3, 2003 $ 7,235 $ (8,911) $ $ (8,911) — December 28, 2001 $ 28,942 $ (10,085) $ (1,968) $ (8,117) -44- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Included in the loss from discontinued operations for fiscal years 2002 and 2001 were 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. 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 alleged misstatements and omissions concerning, among other things, 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 into Druskin, et al. v. Answerthink, Inc., et al., Case No. 02-23304-CIV-GOLD. A consolidated amended complaint was filed on May 9, 2003. The Company filed a motion to dismiss the consolidated amended complaint on July 15, 2003. The court granted the Company’s motion to dismiss the consolidated and amended complaint on January 5, 2004 and allowed the plaintiffs leave to amend the consolidated amended complaint. The plaintiffs did not file an amended complaint within the time allowed by the court. On February 11, 2004, the court entered a final judgement dismissing the case against all parties with prejudice and closed the case. The time for appeal has expired. This matter is concluded. 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. On November 5, 1999, THINK New Ideas merged with and into a wholly owned subsidiary of the Company. On April 18, 2002, the parties reached an agreement in principle to settle this action. On September 16, 2002 the court approved the terms of the settlement 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. On November 10, 2003, the court issued its final order approving the distribution of the net settlement funds in this case. This matter is concluded. 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 support services. The Company has a non-controlling equity interest of 50% in this joint venture. For the year ended January 2, 2004 and January 3, 2003, the Company’s net equity income (loss) from the joint venture was $30,000 and ($687,000), respectively. During 2003 and 2002, the Company sold services of $232,000 and $233,000, respectively, to the joint venture. The Company also incurred costs of $194,000 and $230,000 for consulting services provided by the joint venture to Answerthink in 2003 and 2002, respectively. In addition, the Company reduced general and administrative expenses by $14,000 and $856,000 for administrative services billed to the joint venture during 2003 and 2002, respectively. At January 2, 2004 and January 3, 2003, the Company had receivables of $258,000 and $550,000, respectively, due from the joint venture and payables of $193,000 and $230,000, respectively, due to the joint venture. -45- ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. Quarterly Financial Information (unaudited) The following table presents unaudited supplemental quarterly financial information for the years ended January 2, 2004 and January 3, 2003 (in thousands, except per share data): Total revenues Income (loss) from operations Income (loss) before income taxes Net income (loss) Basic and diluted net income (loss) per common share 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 Cumulative effect of change in accounting principle Net loss per common share Quarter Ended April 4, 2003 July 4, 2003 October 3, 2003 January 2, 2004 $ $ $ 36,785 (1,246) (1,022) (1,022) (0.02) $ $ $ 31,497 (5,962) (5,824) (5,974) (0.13) $ $ $ 32,918 1,055 1,210 1,135 0.03 March 29, 2002 $ 49,688 (192) (82) 534 (1,457) (31,200) (32,123) 0.01 (0.03) (0.68) (0.70) $ $ $ $ $ Quarter Ended June 28, 2002 September 27, 2002 $ 46,364 (607) $ 41,418 (20,332) (481) 544 (2,082) — (1,538) 0.01 (0.04) — (0.03) $ $ $ $ $ (20,220) (19,820) (780) — $ (20,600) $ $ $ $ (0.42) (0.02) — (0.44) $ $ $ 31,187 975 1,164 1,039 0.02 January 3, 2003 $ 39,377 (11,795) (11,573) (10,106) (4,592) — (14,698) (0.22) (0.10) — (0.32) $ $ $ $ $ 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 (see Note 11). -46- ANSWERTHINK, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED JANUARY 2, 2004, JANUARY 3, 2003 AND DECEMBER 28, 2001 (in thousands) Allowance for Doubtful Accounts Year Ended January 2, 2004 Year Ended January 3, 2003 Year Ended December 28, 2001 Balance at Beginning of Year Charge to Expense Write-offs Balance at Ending of Year $ 3,526 $ (235) $ 779 $ 6,810 $ 5,279 $ 11,122 $ (1,534) $ (4,063) $ (9,591) $ 1,757 $ 3,526 $ 6,810 -47- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 9A. CONTROL AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) pursuant to Rule 13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934. Based upon that evaluation, the CEO and CFO concluded that, 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 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. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT PART III Information responsive to this Item is incorporated herein to the Company's definitive 2004 proxy statement for the 2004 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this Item is incorporated herein to the Company's definitive 2004 proxy statement for the 2004 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 2004 proxy statement for the 2004 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to this Item is incorporated herein to the Company's definitive 2004 proxy statement for the 2004 Annual Meeting of Shareholders. -48- ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information appearing under the captions “Fees to Independent Auditors for fiscal 2003 and 2002” in the 2004 Proxy Statement is hereby incorporated by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following documents are filed as a part of this Form: Financial Statements The Consolidated Financial Statements filed as part of this report are listed and indexed on page 26. 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 51. 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: A Current Report on Form 8-K was furnished with the Securities and Exchange Commission on October 14, 2003 in connection with the announcement of the Joint Marketing and Alliance Agreement dated October 7, 2003 by and among Answerthink Inc., The Hackett Group, Inc. and Accenture, L.L.P. -49- 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 15th day of March, 2004. 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 /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) Date March 15, 2004 March 15, 2004 President and Director March 15, 2004 Chief Operating Officer and Director March 15, 2004 Director Director Director Director March 15, 2004 March 15, 2004 March 15, 2004 March 15, 2004 -50- Exhibit No. Exhibit Description INDEX TO EXHIBITS 10.5+ 10.3+ 10.4+ 10.1+ 10.2+ 9.2+ 9.3+ 9.4+ 3.1++++ 3.2++++ 9.1+ 10.6*+ 10.7*+++++ 10.8*+ 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 Registrant's 1998 Stock Option and Incentive Plan Amendment to Registrant’s 1998 Stock Option and Incentive Plan 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 Form of Employment Agreement entered into between the Registrant and Mr. Dungan 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 10.16*++ AnswerThink Consulting Group, Inc. Employee Stock Purchase Plan 10.17*+++++ Amendment to Registrant’s Employee Stock Purchase Plan dated February 16, 2001 10.18*+++ 10.19*+++ 10.20*+++ 10.21*+++ 10.22++++++ Securities Purchase Agreement by and among THINK New Ideas, Inc., Capital Ventures International and 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 10.9*++++ 10.10*+++++ 10.11*+ 10.14*+ 10.15*+ 10.13+ 10.12+ Marshall Capital Management, Inc. 10.23++++++ Registration Rights Agreement dated as of March 3, 1999 by and among THINK New Ideas, Inc., Capital Ventures International and Marshall Capital Management, Inc. 10.24+++++++ Joint Marketing and Alliance Agreement, dated October 7, 2003, by and among Answerthink, Inc., The 21.1^ 23.1^ 31.1^ 31.2^ 32^ Hackett Group, Inc. and Accenture, L.L.P. Subsidiaries of the Registrant Consent of PricewaterhouseCoopers LLP Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by CFO pursuant to Section 302 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 -51- * ^ + ++ +++ ++++ +++++ ++++++ +++++++ 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. Incorporated herein by reference to the Company’s Form 8-K dated October 14, 2003. -52- 907201 DP_CVR_R1 3/31/04 11:42 PM Page 4 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 12, 2004 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 Retired Partner KPMG LLP 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 Chairman of the Board Fiva Marketing, Ltd We are clearly seeing an increasing number of clients directly attribute their decision to engage us to our BPI tools and Hackett knowledge base. 907201 DP_CVR_R1 3/31/04 11:42 PM Page 1

Continue reading text version or see original annual report in PDF format above