The Hackett Group, Inc. Annual Report 2004

FY2004 Annual Report · The Hackett Group, Inc.

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Ted A. Fernandez
Chairman and Chief Executive Officer

We are pleased with

“

the progress we made across

many areas of our business.

More importantly, we look

forward to further capitalizing on

the strategic investments we’ve

made over the last several years.

”

Dear Shareholders,

As we reflect on 2004 we are pleased with the progress we made across many areas of our

business. More importantly, we look forward to further capitalizing on the strategic

investments we ve made over the last several years in driving the growth and positioning of

The Hackett Group, the enhancement of our Best Practice Implementation tools and the

expansion of our strategic alliances.

We saw real progress in 2004 driven by our strong growth in Hackett and Business

Transformation service lines and the emergence of our alliance with Accenture. A key driver

of the Hackett growth was our ability to further emphasize the sale of renewable multi-year

subscription-driven advisory services which grew very strongly throughout the year.

Leveraging the proprietary best practices intellectual capital from The Hackett Group, our

benchmarking and business process advisory organization, remains the keystone of our growth

strategy. Utilizing Hackett s comprehensive enterprise performance and best practice database,

we provide empirically based, and therefore independent, and objective advice in a timeframe

and at a price point which is impossible to match by our competitors without our Hackett

assets. Additionally, by using this proprietary knowledge base as the foundation for our Best

Practice Implementation tools, we can uniquely help clients validate targeted results and get

greater ROI from their business and technology investments.

In 2005 we plan to further leverage the sales and marketing investments we made in The

Hackett Group to sell a series of new Transformation advisory products along with our

existing benchmarking and business advisory product offerings. We think this will allow us to

extend the value we currently deliver to our Hackett clients and will also result in increased

consulting opportunities for our other Answerthink service offerings. We also plan to further

leverage our Answerthink Best Practice Implementation tools and the related best practices

research to further expand the value and the offerings that Hackett currently provides to its

advisory clients. The tighter integration of Hackett content with our strategic consulting and

technology implementation services is a key element of our 2005 strategy.

Clients consistently attribute their decision to engage us to our Best Practice

Implementation approach and tools. Clients make smarter business process and software

configuration decisions as a result of our knowledge of best practices. We expanded our

capability in this area in January 2005 with the launch of version 2 of our BPI tools. This

new version incorporates an expanded best practice repository along with key revisions in

business process areas recently impacted by emerging information technologies. We expect

this new and expanded version of our tools and methods to further differentiate our ability to

serve clients and contribute to the future success of our strategic partnerships.

In the first year of our strategic alliance with Accenture, we demonstrated the ability to

consistently win new work. Most encouraging was our ability to turn benchmark and

diagnostic engagements into sizeable application implementation joint wins. Throughout the

year, we also saw an increase in the number of joint registered pursuits. Registered pursuits

are very important because they mean we have formally agreed to pursue specific initiatives

at agreed upon clients. This sets the stage for joint proposals and wins. When we consider

the joint wins and increasing number of registered pursuits, we remain very optimistic about

the favorable impact this alliance can have, especially on our technology implementation

service lines.

In 2004 we opened our new global development center in Hyderabad, India. The facility will

allow us to more aggressively market and leverage our offshore capability in all of our offerings.

Finally, Sarbanes-Oxley presented us with both opportunities and challenges in 2004. We

were successful at developing a Sarbanes-Oxley compliance support practice. However,

Sarbanes-Oxley also caused disruption of client IT integration projects in the second half of

the year. Many companies chose to freeze their control environments through the end of

their fiscal reporting periods in order to ensure Sarbanes-Oxley compliance for the year. As

we move through 2005, we expect IT implementation opportunities to increase as the

remediation recommendations that emanate from the 2004 compliance reviews are

permanently addressed.

Although great progress was made in 2004, we know there is still great progress to be made.

Lastly, it is important to acknowledge the great work and dedication of our associates, and

recognize the loyalty of our clients and shareholders. As we look forward, we remain

focused on our strategic priorities and look to build on our past achievements and fully

realize the opportunities available to our organization.

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 DECEMBER 31, 2004

[ ] 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 $271,840,816 on July 2, 2004

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 4, 2005 was 43,451,221.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of the Form 10-K incorporates by reference certain portions of the registrant’s proxy statement for its 2005 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

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

PART II

Purchases of Equity Securities

ITEM 6.

Selected 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

ITEM 9B. Other Information

ITEM 10. Directors and Executive Ofﬁcers of the Registrant

ITEM 11. Executive Compensation

PART III

ITEM 12.

Security Ownership of Certain Beneﬁcial Owners and Management

ITEM 13. Certain Relationships and Related Transactions

ITEM 14.

Principal Accountant Fees and Services

ITEM 15. Exhibits and Financial Statement Schedules

PART IV

Signatures

Index to Exhibits

Page

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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 business and
information technology advisory and consulting industries, our ability to attract and retain skilled employees, possible
changes in collections of accounts receivable, risks of competition, price and margin trends, and changes in general
economic conditions and interest rates. An additional description of our risk factors is described in Part 1—Item 1
“Business—Risk Factors.” We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.

ITEM 1. BUSINESS

GENERAL

PART I

Answerthink, Inc. is a strategic business advisory 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 advisory, 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

The economy showed modest growth in 2004 as interest rates and inﬂation continued to remain low and
employment rates increased. Business and technology consultancies had modest increases in business activity that
followed the growth rate of the economy. There was some disruption of client IT integration projects in the latter part
of 2004 as a result of the need to freeze control environments through the end of ﬁscal reporting periods in order to support
Sarbanes-Oxley compliance. We feel that this demand disruption in the IT implementation marketplace will continue
until Sarbanes-Oxley adoption efforts are substantially completed. Companies continue to place heavy emphasis on risk
management and tangible return on their business and technology investments. As the economy continues to grow, we
believe large enterprises will continue to focus their business consulting and IT spending on strategies and tools that
help them generate more value from past investments in the form of enhanced productivity and efﬁciency. Speciﬁcally,
we still believe they will be looking to derive maximum value from their existing enterprise applications. We believe
enabling technologies will continue to 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 still be market opportunities around the need for better real-time performance
measurement and strategic decision-making. Many companies seek to link optimized processes directly to
technology and consolidate the gains of their business process re-engineering efforts. Enterprise applications and
BPM software will continue to play a key role. We expect companies to continue to embed optimized processes
directly into Enterprise Resource Planning (ERP) systems, and use BPM and other enabling technologies to improve

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ongoing management and control, so they can ensure that streamlined or re-engineered processes continue to deliver
cost and performance improvements in the future. Business intelligence, analytics and knowledge management
applications are expected to also play an increasingly signiﬁcant role as companies seek to generate more valuable
insight and analysis from their operational and ﬁnancial data. We believe that these enabling technologies will
produce real-time enterprises, capable of nearly instantaneous views of current performance and more accurate and
efﬁcient planning, forecasting and reporting.

OUR APPROACH

We provide 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 our proprietary Best Practice Implementation (BPI) approach. Our BPI
approach leverages our knowledge of world-class best practices gathered through Hackett benchmarks and
incorporates that detail throughout a tool set to ensure that best practices are identiﬁed and implemented throughout
a project. This coordinated approach addresses people, process, information and technology. Hackett services help
clients understand how well they are performing today compared with the world’s most effective companies. Its
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 applies those best practices to generate cost and performance gains for clients. Answerthink uses
Hackett intellectual capital in the form of best practice process ﬂows and conﬁguration guides to integrate Hackett’s
empirically proven best practices directly into business processes and workﬂow and functionality that is enabled
by enterprise applications.

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 often 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. We have designed detailed best practice process ﬂows based on Hackett’s deep knowledge
of world-class business performance 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. It is imperative to simplify
and automate processes to meet best practice standards before new technology implementations and upgrades are
completed. The automation of inefﬁcient processes only serves to continue to drive up costs, cycle times and error
rates. We have 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. 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.

The 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

The strategic business advisory and technology consulting marketplace continues to be extremely competitive.
The marketplace will remain competitive as the economy grows and companies begin to spend more on improving
their business models and IT infrastructure. Our competitors include international, national and regional strategic
consulting and technology 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.

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Still, we believe our competitive position is strong. With 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.

Our 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, our focus is on executing the following strategies:

• Continue to rapidly grow The Hackett Group with new and renewable multi-year offerings. Our
benchmarking offerings help companies identify and quantify opportunities for operational improvements
and efﬁciently measure and track the degree of improvement against speciﬁc internal and peer performance
targets over multi-year periods. Our business advisory services target executives seeking guidance and
proven strategies on operational and strategic issues. During 2004 we experienced strong growth in our
Hackett benchmarking and subscription based advisory programs. We continue to develop subscription
advisory products that will allow clients to efﬁciently realize the beneﬁts identiﬁed in the Hackett
benchmarking services. As subscription sales continue to grow an increasing number of sales will involve
multi-year commitments which will improve the predictability of our results.

• Continue to expand our Best Practices Implementation tools. BPI incorporates intellectual capital from
The Hackett Group into our implementation tools and techniques. For clients, the end results are tangible
cost and performance gains and the improved return on investment. Our clients attribute their decision
to use us to our Best Practice Implementation (BPI) approach and tools. Our objective is to help clients
make smarter business process and software conﬁguration decisions as a result of our Best Practice
Implementation methods and knowledge. The recent launch of version two of our BPI tools resulted in
an expanded best practice repository along with key revisions in business process areas that have been
impacted by emerging information technologies. We expect this new and expanded version of our tools
and methods to further differentiate our ability to serve our clients. 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.

• Continue to leverage our unique best practice knowledge through select strategic alliances. Because of
our 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 best practices benchmarking services and our BPI tools in designated functional areas,
including ﬁnance, accounting, performance management, business intelligence and procurement. In
situations where Accenture uses our intellectual capital, we have an opportunity to staff up to 15% of the
project positions of each engagement jointly pursued. If we are the lead source on jointly pursued
opportunities with Accenture, then we 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. In addition, we continue to build upon joint marketing initiatives with
Oracle, SAP, Lawson, and Hyperion and other strategic business and IT providers.

• Seek out strategic acquisitions. We will continue to pursue strategic acquisitions that strengthen our ability
to compete. We believe that our unique Hackett access and our BPI approach coupled with our strong
balance sheet and infrastructure can be utilized to support a larger organization. Acquisitions must be
accretive or have strong growth prospects, but most importantly, have strong synergy with our best practice
intellectual capital focus.

• Expand our dual shore capabilities. Developing an offshore resource capability to support all of our
offerings has been a key strategy for our organization. In late 2004, we opened our new facility in
Hyderabad, India which will allow us to more aggressively market this capability in our proposals in 2005.
With this improved infrastructure in place, we are expecting our headcount and utilization of India
resources to expand in 2005.

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OUR SOLUTION

We offer a comprehensive range of services, including benchmarking, business advisory programs and
business transformation, enterprise business applications implementation, 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, technology, life sciences, manufacturing, media and entertainment,
retail, telecommunications, transportation and utilities.

The Hackett Group

Á Benchmarking & Executive Advisory Programs

Since Hackett’s inception in 1991, The Hackett Group has measured and evaluated the efﬁciency and
effectiveness of enterprise functions at nearly 2000 global organizations. This includes 93 percent of the Dow Jones
Industrials, 80 percent of the Fortune 100, and 90 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 1,300 best practices for approximately 100 processes
in these key functional areas. Hackett uses proprietary performance measurement tools and data collection process
that enables companies to complete 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 accounting and ERP optimization to planning and performance management and outsourcing
considerations.

Á Business Transformation

Our Business Transformation programs help clients develop a coordinated strategy for achieving performance
improvements across the enterprise. Our experienced teams use Hackett 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. We combine best practices
knowledge with business expertise and broad technology capabilities, which we believe enables our programs to
optimize return on client investments in people, processes, technology and information.

Best Practices Solutions

Á Business Applications

Our Business Applications professionals help clients choose and deploy the software applications that best
meet their needs and objectives. Our expertise is focused on the following application providers: Lawson, Oracle,
PeopleSoft, SAP, and several leading time and attendance providers. The group offers comprehensive services from
planning, architecture, and vendor evaluation and selection through implementation, customization, testing and
integration. Comprehensive ﬁt-gap analyses of all major packages against Hackett Best Practices are utilized by
our Business Applications teams. BPI 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. We also provide offshore application
development and support services. These services include post-implementation support for select business
application platforms. Our Business Applications group also includes a division responsible for the sale and
maintenance support of the SAP suite of enterprise resource planning applications.

Á 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

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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.

CLIENTS

We focus on long-term client relationships with Global 2000 ﬁrms and other sophisticated strategic buyers
of business and IT consulting. During 2004, our ten most signiﬁcant clients accounted for approximately 28% 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 2004. The responses
to the surveys we send to clients continue to be extremely positive. During 2004, we received surveys from a
signiﬁcant number of our engagements with an average score of 4.6 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 AND MARKET SEGMENTATION

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 multiple facets of business
development. The categories below deﬁne our business development resources and market segmentation. Our
primary goal in 2005 is to continue to increase awareness of our brand that we have created around Hackett and
BPI. Our Hackett and BPI message will remain the central focus of our marketing and communications programs
this year as we drive both an understanding of and demand for this approach. Similarly, we have realigned our sales
force so it can market business transformation programs along with our benchmarking and executive advisory
programs. We continue to maintain compensation programs that reward the linkage between sales of benchmarking
and business advisory programs provided by The Hackett Group and best practices solutions provided by our
Business Applications and Business Intelligence groups.

BUSINESS DEVELOPMENT RESOURCES

Although virtually all of our consultants have the ability to and are expected 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 our senior leaders 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 our entire 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. Solution strategists sell new business in geographic accounts and collaborate with
the sales organization on speciﬁc 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.

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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 and help us expand our business within existing accounts.

In addition to our business development team, we have a corporate marketing and communications organization

responsible for overseeing our marketing programs, public relations and employee communications activities.

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 for identifying business opportunities in the account, acting as the single
point of coordination for the client, and performing the general duties of account manager.

Geographic Focus Accounts are accounts within a speciﬁed geographic location 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 us 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 late 2003. This agreement gives Accenture the exclusive right to collaborate with us in offering its clients
our best practice benchmarking programs and best practices solutions in designated functional areas, including
ﬁnance, accounting, performance management, business intelligence and procurement. Under the agreement,
we have the ability to expand into additional enterprise functional areas and geographic locations. The
agreement gives us access to Accenture’s global client base and sales distribution channel. By working with
more clients, The Hackett Group 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. Our alliance allows
us to staff a portion of the consulting positions for each engagement that is jointly closed with Accenture. We
continue to seek alliances that broaden our distribution channel.

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 both our associates and 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 and is rewarded for that contribution.

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Our core values are the strongest expression of our working style. They are what we stand for. These core

values are:

• Development of our associates our unique content business model and knowledge base creates a highly

unique learning opportunity

• Diversity of backgrounds, skills and experiences
• Knowledge capture, contribution and utilization
• 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. Our human resources staff also includes
seasoned professionals that support our practices by, among other things, administering our beneﬁt programs and
facilitating the hiring process. 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 and a 401(k) program including a company match for associates below the level of senior director. Our
associates are paid competitive salaries and incentive pay. Incentive pay for delivery resources is based on an
individual’s contribution to the projects on which he or she is staffed. Incentive pay for sales associates is based
on achievement of sales quotas. Incentive pay for management is based on company performance, sales
contributions, client management and practice management.

As of December 31, 2004, we had approximately 720 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 our 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. Our associates are actively involved in many valuable and
high-impact community programs, including United Way, Ronald McDonald House, Big Brothers & Sisters, Race
for the Cure, Make-A-Wish Foundation, Habitat for Humanity, the National Adoption Center, the National Heart
Association and Special Olympics.

AVAILABLE INFORMATION

We make our public ﬁlings with the Securities and Exchange Commission, including our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to
these reports, available free of charge at our web site http://www.answerthink.com as soon as reasonably practicable
after we electronically ﬁle such material with, or furnish it to, the Securities and Exchange Commission. Any
material that we ﬁle with the Securities and Exchange Commission may be read and copied at the Securities
and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 [or at
www.sec.gov]. 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.

-9-

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 and effort we need to complete client engagements;

the integration of acquired businesses;

pricing changes in the industry;

economic conditions speciﬁc to business and information technology consulting; and

general economic conditions.

A high percentage of our operating expenses, particularly personnel and rent, are ﬁxed in advance of any particular
quarter. As a result, if we experience unanticipated changes in client engagements or in employee utilization rates, we
could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors,
we believe you should not compare our quarter-to-quarter operating results to predict future performance.

If we are unable to maintain our reputation and expand our name recognition, we may have difﬁculty
attracting new business and retaining current clients and employees.

We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and
retaining clients and employees. We also believe that the importance of reputation and name recognition is increasing
and will continue to increase due to the number of providers of business consulting and 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 2004, our ten largest clients accounted for approximately 28%
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

-10-

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.

Our markets are highly competitive.

We may not be able to compete effectively with current or future competitors. The business consulting and IT
services market is highly competitive. We expect competition to further intensify as these markets continue 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 strategic
consulting and systems implementation ﬁrms; and the IT services divisions of application software ﬁrms.

In addition, there are relatively low barriers to entry into the business consulting and 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

-11-

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:

•

stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders
or nominating a director for election;

our board of directors is staggered into three classes and the members may be removed only for cause upon
the afﬁrmative vote of holders of at least two-thirds of the shares entitled to vote;

• we would not be required to hold a special meeting to consider a takeover proposal unless holders of more than
a majority of the shares entitled to vote on the matter were to submit a written demand or demands for us to
do so; and

•

our board of directors may, without obtaining stockholder approval, classify and issue up to 1,250,000 shares
of preferred stock with powers, preferences, designations and rights that may make it more difﬁcult for a third
party to acquire us.

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 WangerAsset 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 not be able to secure targeted follow-on work or client retention rates.

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 programs or signiﬁcantly reduce the scope of a large client engagement, our business, ﬁnancial condition and
results of operations could be materially and adversely affected. Also, if we fail to collect a large account receivable,
we could be subjected to signiﬁcant ﬁnancial exposure. Consequently, you should not predict or anticipate our future
revenue based upon the number of clients we currently have or the number and size of our existing client engagements.

We also derive an increasing portion of our revenues from annual memberships for our business advisory programs.
Our growth prospects therefore depend on our ability to achieve and sustain high retention rates on programs and to
successfully launch new programs. Failure to achieve high renewal rate levels or to successfully launch new programs
and services could have a material adverse effect on our operating results.

-12-

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:
•

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 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 continue to be introduced to our existing
client base and to client prospects. We still 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.

Planned enhancements to The Hackett Group’s advisory product offerings which will

include business
transformation programs represent a departure from its traditional benchmarking 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.

The initial term of our Joint Marketing and Alliance Agreement expires on October 7th of 2005. It may be renewed
upon mutual agreement of the parties. We are still developing 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, Frankfurt, London, New York, Philadelphia, Princeton, San Jose and Hyderabad, India.
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.

-13-

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 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 judgment
dismissing the case against all parties with prejudice and closed the case. The time for appeal has expired. 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 2004.

-14-

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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.

2004
Fourth Quarter
Third Quarter
Second Quarter
First Quarter

2003
Fourth Quarter
Third Quarter
Second Quarter
First Quarter

High

$5.49
$6.35
$8.45
$8.19

$6.35
$4.03
$2.59
$2.97

Low

$3.51
$3.87
$4.22
$5.50

$3.21
$2.19
$1.75
$1.95

The closing sale price for the common stock on March 4, 2005 was $4.00.

As of March 4, 2005, there were approximately 358 holders of record of our common stock and 43,451,221

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.

Purchases of Equity Securities

Period

October 2, 2004 to October 29, 2004
October 30, 2004 to November 26, 2004
November 27, 2004 to December 31, 2004

Total

Total Number
of Shares
Purchased

Average Price
paid per Share

433,950
82,200
52,000
568,150

$3.96
$4.48
$4.52
$4.09

Total Number of
Shares Purchased
as Part of the
Repurchase
Program

Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Repurchase
Program

433,950
82,200
52,000
568,150

$7,425,645
$7,057,098
$6,822,058

The Company has an ongoing authorization, as amended, from the Board of Directors to repurchase shares
of the Company’s common stock in the open market or in negotiated transactions. The Company’s authorization
is for up to $25 million, of which approximately $6.8 million is currently still available. All repurchases were made
in the open market, subject to market conditions and trading restrictions. There is no expiration date on the current
authorization and during the period covered by the table, no determination was made by the Company to suspend
or cancel purchases under the program.

-15-

ITEM 6. SELECTED 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 December 31, 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.”

Consolidated Statement of Operations Data:
Revenues:

Revenues before reimbursements
Reimbursements
Total revenues

Costs and expenses:

Project personnel and expenses:
Project personnel and expenses before

reimbursable expenses

Reimbursable expenses

Total project personnel and expenses

Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Stock compensation expense

Total costs and operating expenses

Income (loss) from operations
Other income (expense):
Litigation settlement
Non-cash investment losses
Interest income (expense), net

Income (loss) before income taxes, income (loss)
from discontinued operations, and cumulative
effect of change in accounting principle

Income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations,

net of income taxes

Income (loss) before cumulative effect of change

in accounting principle

Cumulative effect of change in accounting principle
Net income (loss)

Basic net income (loss) per common share:
Income (loss) from continuing operations
Income (loss) from discontinued operations,

net of income taxes

Cumulative effect of change in accounting

principle

Net income (loss) per common share

Weighted average common shares outstanding

Diluted net income (loss) per common share:
Income (loss) from continuing operations
Income (loss) from discontinued operations,

net of income taxes

Cumulative effect of change in accounting

principle

Net income (loss) per common share

Weighted average common shares and common

share equivalents

December 31,
2004

Year Ended
January 3,
2003

January 2,
2004
(in thousands, except per share data)

December 28,
2001

December 29,
2000

$129,339
14,208
143,547

$117,945
14,442
132,387

$156,357
20,490
176,847

$220,966
29,377
250,343

$260,892
35,811
296,703

75,774
14,208
89,982

48,491
—
3,749
2,321
144,543
(996)

—
—
802

(194)
324
(518)

370

(148)
—
(148)

(0.01)

0.01

—
(0.00)
44,188

(0.01)

0.01

—
(0.00)

$
$

73,061
14,442
87,503

43,951
—
4,875
1,236
137,565
(5,178)

—
—
706

104,981
20,490
125,471

53,416
20,000
10,886
—
209,773
(32,926)

—
—
570

132,843
29,377
162,220

77,087
—
5,619
4,855
249,781
562

—
—
843

(4,472)
350
(4,822)

(32,356)
(3,508)
(28,848)

1,405
1,807
(402)

147,040
35,811
182,851

92,321
—
3,268
853
279,293
17,410

1,850
(2,350)
589

17,499
8,571
8,928

—

(8,911)

(8,117)

(1,027)

(4,822)
—
$ (4,822)

(37,759)
(31,200)
$ (68,959)

(8,519)
—
$ (8,519)

$
$

(0.11)

(0.62)

— $

(0.19)

— $
$

(0.11)
45,140

(0.68)
(1.49)
46,348

(0.11)

(0.62)

— $

(0.19)

— $
$

(0.11)

(0.68)
(1.49)

$
$

(0.01)

(0.18)

—
(0.19)
43,999

(0.01)

(0.18)

—
(0.19)

7,901
—
7,901

0.22

(0.02)

—
0.20
40,262

0.20

(0.02)

—
0.18

$
$

44,188

45,140

46,348

43,999

45,137

-16-

Consolidated Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Marketable investments
Working capital
Total assets
Shareholders’ equity

December 31,
2004

January 2,
2004

January 3,
2003

December 28,
2001

December 29,
2000

(in thousands)

$ 38,890
3,000
$
$
9,902
$ 49,860
$128,733
$ 99,854

$ 54,441
$
3,000
$ 10,000
$ 58,826
$135,223
$105,235

$ 35,369
$
2,909
$ 28,050
$ 72,851
$145,361
$113,047

$ 35,679
$
—
$ 24,209
$ 81,313
$211,919
$177,701

$ 35,862
$
—
$ 15,800
$ 74,787
$228,676
$172,054

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

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 principally derived from fees for services generated on a project-by-project basis. Revenues
for services rendered are recognized on a time and materials basis or on a ﬁxed-fee or capped-fee basis. Revenues
for time and materials contracts are recognized based on the number of hours worked by our consultants at an agreed
upon rate per hour and are recognized in the period in which services are performed. Revenues related to ﬁxed-fee
or capped-fee contracts are recognized on the proportional performance method of accounting based on the ratio
of labor hours incurred to estimated total labor hours. This percentage is multiplied by the contracted dollar amount
of the project to determine the amount of revenue to recognize in an accounting period. The contracted dollar amount
used in this calculation excludes the amount the client pays us for reimbursable expenses. There are situations where
the number of hours to complete projects may exceed our original estimate. These increases can be as a result of
an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulﬁll
their responsibilities. On an on-going basis, our project delivery, ofﬁce of risk management and ﬁnance personnel
review hours incurred and estimated total labor hours to complete projects and any revisions in these estimates are
reﬂected 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 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 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, typically allow our clients to terminate early due to breach or for convenience with 30 days’
notice. In the event of termination, the client is contractually required to pay for all time, materials and expenses

-17-

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 provisions typically prohibit us from performing a deﬁned range of our services that
we might otherwise be willing to perform for potential clients. These provisions are generally limited to six to twelve
months and usually apply only to speciﬁc employees or the speciﬁc project team.

Accounts Receivable and Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from our clients not making
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.

-18-

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 2004, 2003 and 2002 ended on December 31,
2004, January 2, 2004 and January 3, 2003, 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

Loss from operations
Other income (expense):

December 31, 2004

Year Ended
January 2, 2004
(in thousands, except percentage data)

January 3, 2003

$129,339
14,208
143,547

90.1%
9.9%
100.0%

$117,945
14,442
132,387

89.1%
10.9%
100.0%

$156,357
20,490
176,847

88.4%
11.6%
100.0%

75,774
14,208
89,982

48,491
—
3,749
2,321
144,543
(996)

52.8%
9.9%
62.7%

33.8%
—
2.6%
1.6%
100.7%
(0.7%)

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%
11.6%
71.0%

30.2%
11.3%
6.2%
—
118.7%
(18.7%)

Interest income (expense), net

802

0.6%

706

0.5%

570

0.4%

Loss before income taxes, income (loss)

from discontinued operations
and cumulative effect of change in
accounting principle

Income taxes
Loss from continuing operations
Income (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 2004 to 2003

(194)
324
(518)

(0.1%)
0.3%
(0.4%)

(4,472)
350
(4,822)

(3.4%)
0.2%
(3.6%)

(32,356)
(3,508)
(28,848)

(18.3%)
(2.0%)
(16.3%)

370

0.3%

—

(8,911)

(5.1%)

(148)

(0.1%)

(4,822)

(3.6%)

(37,759)

(21.4%)

—
(148)

—
(0.1%)

—
$ (4,822)

—
(3.6%)

(31,200)
$ (68,959)

(17.6%)
(39.0%)

Overview. We reported a net loss of $148 thousand in 2004 compared to a net loss of $4.8 million in 2003.
Our $148 thousand loss during 2004 included restructuring costs of $3.7 million and non-cash stock compensation
expense of $2.3 million. 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.

Revenues. Revenues increased 8.4% to $143.5 million in 2004 from $132.4 million in 2003. The increase in
revenues was primarily attributable to increased revenue from benchmarking and business advisory sales and related
follow-on consulting projects, and the acquisitions of EZCommerce, a dual-shore ERP implementation company,
and Beacon Analytics, Inc., a business performance management consulting company, focusing on the
implementation of Hyperion software. These impacts were partially offset by a decline in IT implementation
revenues due to the disruption of client IT integration projects in 2004 as a result of the need to freeze control

-19-

environments through the end of ﬁscal reporting periods in order to support Sarbanes-Oxley compliance.
Reimbursements as a percentage of revenues were 10% and 11% during ﬁscal years 2004 and 2003, respectively.
In ﬁscal year 2004, one customer had revenues greater than 5% of total revenues, accounting for 7% of total
revenues. 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. With respect to our largest customer in 2004, our
contract can be cancelled for convenience by the customer upon 30 days’ notice. Our project with this customer
expires on September 2005. We do not anticipate any credit and/or collection issues with this customer. As is
customary with most of our signiﬁcant relationships, we may be able to continue with new and follow-on projects
as this initiative progresses into subsequent phases. However, there is no assurance that we will be able to renew
this contract. The cancellation or signiﬁcant reduction in the use of services from our key customer could have
a material adverse effect on our results of operations.

Project Personnel and Expenses. Project personnel costs and expenses primarily consist of salaries, beneﬁts
and incentive compensation for consultants and reimbursable expenses associated with projects. Project personnel
costs and expenses increased 2.8% to $90.0 million in 2004 from $87.5 million in 2003. This slight increase was
primarily attributable to an increase in the number of consultants in order to balance workforce capacity with market
demand for services, partially offset by lower average cost per consultant. Consultant headcount was 550 as of
December 31, 2004 compared to 483 as of January 2, 2004. Project personnel and expenses as a percentage of
revenues decreased to 63% during 2004 from 66% in 2003, primarily as the result of lower average cost per
consultant attributable to the addition of lower cost offshore resources as part of the acquisition of EZ Commerce.

Selling, General and Administrative. Selling, general and administrative expenses increased 10.3% to
$48.5 million in 2004 from $44.0 million in 2003. The overall increases in selling, general and administrative
expenses were primarily due to additional sales personnel and recruiting expenses to accommodate the growth in
our benchmarking and business advisory services, partially offset by lower legal fees. Selling, general and
administrative expenses as a percentage of revenues increased to 34% in 2004 from 33% in 2003. The increase
is primarily attributable to the increase in selling and recruiting expenses for our benchmarking and business
advisory services, partially offset by the impact of ﬁxed expenses on higher levels of revenue in 2004 as compared
to 2003.

Restructuring Costs and Discontinued Operations. Restructuring costs were $3.7 million and $4.9 million in
2004 and 2003, respectively. Restructuring costs in 2004 and 2003 relate to increases in previously established
reserves for the closure and consolidation of facilities. Existing reserves were increased to account for higher
estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than
expected time estimates to sublease facilities based on current market conditions. Also in 2004, the restructuring
accrual was reduced by $370 thousand relating to the ﬁnal settlement of a lease obligation for our discontinued
interactive marketing business. This amount was recorded as income from discontinued operations in the
consolidated statement of operations for the year ended December 31, 2004.

Stock Compensation Expense. Stock compensation expense of $2.3 million and $1.2 million in 2004 and 2003,
respectively, primarily related to our outstanding restricted stock units which were granted in July 2003 in
connection with a voluntary stock exchange program. Restricted stock unit expense is based on the vesting
provisions of the restricted stock units and the fair market value of the stock on the grant date. We expect to incur
approximately $600 thousand of stock compensation expense per quarter over the remaining vesting period of the
restricted stock units. Most of the restricted stock units fully vest in the third quarter of 2007. In addition, as of
December 31, 2004 we had 182,858 stock options accounted under variable plan accounting pursuant to FASB
Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
During 2004 and 2003, variable plan accounting resulted in $62 thousand and $103 thousand of stock compensation
expense, respectively.

Income Taxes. In 2004 and 2003, we recorded $324 thousand and $350 thousand, respectively, of income tax
expense for certain state and foreign taxes, which represented 167.6% and 7.8% of our pre-tax loss, respectively.
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 2004 and 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.

In 2002, we discontinued our interactive marketing business which was acquired with THINK New Ideas. In
connection therewith, we claimed a worthless stock deduction for our investment in THINK New Ideas in our 2002

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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. On August 5, 2004, we reached an agreement with the
IRS representing the ﬁnal step in the review process. Pursuant to the agreement, the IRS agreed that we are entitled
to a worthless stock deduction of $77.3 million on our 2002 tax return. Including this deduction, we have
approximately $74 million of U.S. federal net operating loss carryforwards as of December 31, 2004.

Comparison of 2003 to 2002

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.

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.

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 was primarily due to our continued cost control initiatives and reduced discretionary spending. We reduced
functional support headcount and as a result incurred $755 thousand of severance costs in 2003 compared to $202
thousand 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 our benchmarking and business advisory services 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 selling, general and
administrative expenses in our benchmarking and business advisory services 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

-21-

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 non-cash compensation expense 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 thousand of income tax expense for state and foreign taxes, which
represented 7.8% of our pre-tax loss. 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.

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.

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 December 31, 2004, we had $38.9 million of cash and cash equivalents compared
to $54.4 million at January 2, 2004. We had $3.0 million at December 31, 2004 and January 2, 2004, on deposit
with a ﬁnancial institution as collateral for letters of credit and have classiﬁed this deposit as restricted cash on
the accompanying consolidated balance sheets. We also had marketable investments of $9.9 million and $10 million
at December 31, 2004 and January 2, 2004, respectively.

There were no material capital commitments at December 31, 2004. The following summarizes our lease

commitments under non-cancelable operating leases for premises at December 31, 2004 (in thousands):

Less than 1 year
1–3 years
4–5 years
After 5 years

Less: sublease income

Total minimum lease payments, less sublease income

-22-

$ 5,240
10,050
9,096
14,558
38,944
8,581
$30,363

Net cash provided by operating activities was $2.4 million in 2004 compared to $9.9 million for 2003. During
2004, net cash provided by operating activities was primarily attributable to $8.6 million of non-cash expenses offset
by a $3.2 million increase in accounts receivable and unbilled revenue and a decrease of $3.0 million in accrued
expenses and other liabilities. Non-cash expenses included depreciation and amortization, non-cash compensation
expense and provision for doubtful accounts. During 2003, net cash provided by operating activities was primarily
attributed 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.

Net cash used in investing activities was $10.4 million in 2004 compared to net cash provided by investing
activities of $13.4 million in 2003. The uses of cash for investing activities in 2004 were primarily attributable to
$7.2 million used in the acquisition of a business and $3.2 million for purchases of property and equipment. Net
cash provided by investing activities in 2003 was attributable to proceeds of $76.5 million from sales of marketable
investments, partially offset by purchases of $58.5 million of marketable investments, $1.2 million for purchases
of property and equipment and $3.3 million used in the acquisition of a business.

Net cash used in ﬁnancing activities was $7.6 million in 2004 compared to $4.2 million during 2003. During
2004 cash used in ﬁnancing activities consisted of $10.5 million for the repurchase of our common stock, partially
offset by proceeds of $2.9 million from the sale of stock through our Employee Stock Purchase Plan, and from
the exercises of our common stock options. 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.

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, and the second, third and fourth quarters of 2004, our
Board of Directors approved the repurchase of an additional $5.0 million of our common stock for each of these
four quarters, thereby increasing the total program size to $25 million. 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 December 31, 2004, we had repurchased
5,526,855 shares of our common stock at an average price of $3.29 per share. In June 2003, we repurchased 465,120
shares from the Company’s President, who is also a director, at $2.15 per share. We hold repurchased shares of
our common stock as treasury stock.

In May 2004, the Company purchased the U.S. and India operations of EZCommerce Global Solutions, Inc.,
a business specializing in the dual-shore implementation of primarily SAP and, to a lesser extent, Oracle software.
The purchase price for this acquisition was $9.0 million in cash, which included $3.0 million of deferred payments
payable in equal installments on the ﬁrst and second anniversary of the purchase. In addition, approximately
$3.0 million of contingent consideration will be payable over the next two years if certain earnings goals are
achieved. 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. In 2004, we paid $1.1 million of earned contingent consideration.

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.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004), Share-Based
Payment, (“SFAS 123R”). SFAS 123R addresses the accounting for share-based payments to employees, including
grants of employee stock options. Under the new standard, companies will no longer be able to account for share-
based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting
for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for periods
beginning after June 15, 2005 and allows, but does not require, companies to restate the full ﬁscal year of 2005

-23-

to reﬂect the impact of expensing share-based payments under SFAS 123R. We have not yet determined which
fair-value method and transitional provision we will follow, or if the adoption of SFAS 123R will have a signiﬁcant
impact on our results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 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 variable interest rate securities.
We invest only with high credit quality issuers and we do not use derivative ﬁnancial instruments in our investment
portfolio. We do not believe that a signiﬁcant increase or decrease in interest rates would have a material impact
on the fair value of our investment portfolio.

-24-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANSWERTHINK, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Certiﬁed Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and January 2, 2004

Consolidated Statements of Operations for the Years Ended December 31, 2004, January 2, 2004 and

January 3, 2003

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years

Ended December 31, 2004, January 2, 2004 and January 3, 2003

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, January 2, 2004 and

January 3, 2003

Notes to Consolidated Financial Statements

Schedule II—Valuation and Qualifying Accounts and Reserves

Page

-25-

Report of Independent Registered Certiﬁed Public Accounting Firm

To the Board of Directors and Shareholders
of Answerthink, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
of shareholders’ equity and comprehensive income (loss) and of cash ﬂows present fairly, in all material respects,
the ﬁnancial position of Answerthink, Inc. and its subsidiaries at December 31, 2004 and January 2, 2004, and the
results of their operations and their cash ﬂows for each of the three years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States of America. These ﬁnancial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
ﬁnancial statements based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Oversight Board (United States). Those standards 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.

/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 14, 2005

-26-

ANSWERTHINK, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

ASSETS
Current assets:

Cash and cash equivalents
Accounts receivable and unbilled revenue, net of allowance of $2,109 and

$ 38,890

$ 54,441

December 31,
2004

January 2,
2004

$1,757 in 2004 and 2003, 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

Accrued expenses and other liabilities, non-current

Total liabilities

Commitments and contingencies

Shareholders’ equity:

28,883
3,459
71,232

9,902
3,000
7,568
3,245
33,786
$ 128,733

24,877
4,260
83,578

10,000
3,000
8,714
3,211
26,720
$ 135,223

3,462
17,910
21,372
7,507
28,879

3,793
20,959
24,752
5,236
29,988

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:

48,969,181 shares at December 31, 2004; 48,290,640 shares at
January 2, 2004

Additional paid-in capital
Unearned compensation
Treasury stock, at cost, 5,526,855 shares at December 31, 2004 and

3,550,279 shares at January 2, 2004

Accumulated deﬁcit
Accumulated other comprehensive income

Total shareholders’ equity
Total liabilities and shareholders’ equity

49
277,356
(6,011)

48
274,481
(8,367)

(18,178)
(153,389)
27
99,854
$ 128,733

(7,686)
(153,241)
—
105,235
$ 135,223

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

-27-

ANSWERTHINK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Revenues:

Revenues before reimbursements
Reimbursements

Total revenues

Costs and expenses:

Project personnel and expenses:

Project personnel and expenses before reimbursable expenses
Reimbursable expenses

Total project personnel and expenses

Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Stock compensation expense

Total costs and operating expenses

Loss from operations
Other income (expense):
Interest income
Interest expense

Loss before income taxes, income (loss) from discontinued operations

and cumulative effect of change in accounting principle

Income taxes
Loss from continuing operations
Income (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
Income (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
Income (loss) from discontinued operations, net of income taxes
Cumulative effect of change in accounting principle
Net loss per common share

December 31,
2004

Year Ended
January 2,
2004

$129,339
14,208
143,547

$117,945
14,442
132,387

75,774
14,208
89,982

48,491
—
3,749
2,321
144,543
(996)

866
(64)

(194)
324
(518)
370
(148)
—
(148)

(0.01)
0.01
—
(0.00)

44,188

(0.01)
0.01
—
(0.00)

$
$
$
$

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)

January 3,
2003

$156,357
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)

Weighted average common and common equivalent

shares outstanding

44,188

45,140

46,348

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

-28-

ANSWERTHINK, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)

(in thousands)

Common Stock

Shares Amount

Additional
Paid-In
Capital

Treasury Stock

Amount

Unearned
Compensation

Accumulated
Deﬁcit

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity

Comprehensive
Income
(Loss)

Balance at December 28, 2001 45,880
1,848
Issuance of common stock
Treasury stock purchased
Net loss

$46
2
— —
— —

$257,115
6,511

— $
—
— (1,146)
—
—

— $ — $ (79,460)
—
—
(2,208)
—
(68,959)
—

—
—
—

Total Comprehensive Loss

— —

—

$ —
—
—
—

—

$ —
—
—

—

—
—
—
—

—

$177,701
6,513
(2,208)
(68,959)

$(68,959)

— $(68,959)

$113,047
1,252
(5,478)

—

1,120
13
103
(4,822)

$ (4,822)

— $ (4,822)

47,728

$48
563 —
— —

$263,626 (1,146) $ (2,208)
—
(5,478)

—
— (2,404)

1,252

— —

9,487

—

—
—
—
—

—

—
—
—
—

—

—
13
103
—

—

$ — $(148,419)
—
—

—
—

(9,487)

—

1,120
—
—
—

—

—
—
—
(4,822)

—

— —
— —
— —
— —

— —

48,291
678

$48
1
— —

$274,481 (3,550) $ (7,686)
—
(10,492)

—
— (1,977)

2,910

$(8,367)
—
—

$(153,241)
—
—

$ —
—
—

$105,235
2,911
(10,492)

— —

(97)

— —
— —
— —

— —
— —

— —

—
62
—

—
—

—

—
—
—

—
—

—

—
—
—

—
—

—

2,259
—
—

—
—

—

—
—
(148)

—
—

—

—
—
—

(98)
125

—

2,259
62
(148)

(148)

(98)
125

— $

(121)

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

Total Comprehensive Loss

Balance at January 2, 2004
Issuance of common stock
Treasury stock purchased
Issuance of restricted stock
units, net of cancellations

Amortization of restricted

stock units

Variable stock options
Net loss
Unrealized holding losses on

available for sale
marketable investments
Foreign currency translations

Total Comprehensive Loss

Balance at December 31, 2004 48,969

$49

$277,356 (5,527) $(18,178)

$(6,011)

$(153,389)

$ 27

$ 99,854

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

-29-

ANSWERTHINK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Cash ﬂows from operating activities:
Net loss

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 (increase) 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
Proceeds from sales, calls and maturities of

marketable investments

Cash used in acquisition of businesses, net of cash acquired
Net cash provided by (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

December 31,
2004

Year Ended
January 2,
2004

January 3,
2003

(148)

$ (4,822)

$(68,959)

—
—
—
5,177
2,321
1,060
—

(3,210)
920
(707)
(2,974)
2,439

(3,199)
—
(39,750)

39,750
(7,210)
(10,409)

2,911
(10,492)
(7,581)
(15,551)
54,441
$ 38,890

—
—
—
4,954
1,236
(235)
—

1,309
10,075
(2,066)
(586)
9,865

(1,225)
(91)
(58,458)

76,508
(3,301)
13,433

1,252
(5,478)
(4,226)
19,072
35,369
$ 54,441

31,200
20,000
5,217
5,327
—
779
4,961

18,930
(5,419)
(230)
(4,776)
7,030

(4,044)
(2,909)
(43,191)

39,350
(851)
(11,645)

6,513
(2,208)
4,305
(310)
35,679
$ 35,369

$
$

—
193

$
$

—
110

$
$

72
133

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

-30-

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 strategic business advisory and technology
consulting ﬁrm. Answerthink’s capabilities include benchmarking, business advisory, 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 2004, 2003, and 2002 ended on
December 31, 2004, January 2, 2004 and January 3, 2003, 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. 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). Realized gains and losses from sales of available-for-sale securities
were not material for any period presented. For the purpose of determining realized gains and losses, the cost of
securities sold is based upon speciﬁc identiﬁcation.

Accounts Receivables and Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the our
clients not making 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.

-31-

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. The Company capitalizes certain costs, which
generally include hardware, software, and payroll related costs for employees who are directly associated with and
who devote time to the development of internal-use computer software.

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. 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 2004 and 2003 annual analysis conducted in the fourth quarters of ﬁscal
2004 and 2003, respectively, we concluded that we did not have any additional impairment of goodwill.

Revenue Recognition

The Company principally derives revenues from fees for services generated on a project-by-project basis.
Revenues for services rendered are recognized on a time and materials basis or on a ﬁxed-fee or capped-fee basis.
Revenues for time and materials contracts are recognized based on the number of hours worked by the Company’s
consultants at an agreed upon rate per hour and are recognized in the period in which services are performed.
Revenues related to ﬁxed-fee or capped-fee contracts are recognized on the proportional performance method of
accounting based on the ratio of labor hours incurred to estimated total labor hours. This percentage is multiplied
by the contracted dollar amount of the project to determine the amount of revenue to recognize in an accounting
period. The contracted dollar amount used in this calculation excludes the amount the client pays for reimbursable
expenses. There are situations where the number of hours to complete projects may exceed the Company’s original
estimate. These increases can be as a result of an increase in project scope, unforeseen events that arise, or the
inability of the client or the delivery team to fulﬁll their responsibilities. On an on-going basis, the Company’s project
delivery, ofﬁce of risk management and ﬁnance personnel review hours incurred and estimated total labor hours
to complete projects and any revisions in these estimates are reﬂected in the period in which they become known.

Unbilled revenues represent revenues for services performed that have not been invoiced. If the Company does
not accurately estimate the scope of the work to be performed, or does not manage the projects properly within
the planned periods of time or does not meet the clients’ expectations under the contracts, then future consulting
margins may be 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 the Company’s 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.

-32-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Nature of Business and Signiﬁcant Accounting Policies (continued)

The agreements entered into in connection with a project, whether time and materials based or ﬁxed-fee or capped-
fee based, typically allow the Company’s clients to terminate early due to breach or for convenience with 30 days’ notice.
In the event of termination, the client is contractually required to pay for all time, materials and expenses incurred by
the Company through the effective date of the termination. In addition, from time to time the Company enters into
agreements with clients that limit the Company’s right to enter into business relationships with speciﬁc competitors of
that client for a speciﬁc time period. These provisions typically prohibit the Company from performing a deﬁned range
of services that it 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.

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. 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 11. 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 December 31, 2004, January 2, 2004, January 3, 2003 would have been adjusted to the pro forma
amounts indicated as follows (in thousands, expect per share data):

Net loss, as reported
Add: Stock-based employee compensation expense included

December 31,
2004

Year Ended
January 2,
2004

January 3,
2003

$ (148)

$ (4,822)

$(68,959)

in reported net loss, net of related tax effects

2,321

1,236

—

Deduct: Total stock-based employee pro forma compensation
expense determined under fair value based method for all
awards, net of related tax effects

Pro forma net loss

Basic net loss per common share

As reported
Pro forma

Diluted net loss per common share

As reported
Pro forma

-33-

(5,354)
$(3,181)

(6,702)
$(10,288)

(27,802)
$(96,761)

$ (0.00)
$ (0.07)

$
$

(0.11)
(0.23)

$
$

(1.49)
(2.09)

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
December 31, 2004, January 2, 2004 and January 3, 2003 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 December 31, 2004, January 2, 2004 and January 3, 2003 were 3,601,100 shares, 1,806,963
shares and 333,644 shares, respectively, of unvested restricted stock issued to employees and 667,728 shares,
289,647 shares and 310,478 shares, respectively, of common stock issuable upon the exercise of stock options and
warrants following 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 December 31, 2004, and January 2, 2004, 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 2004, one customer had revenues greater than 5% of total revenues,
accounting for approximately 7% of total revenues. 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.

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.

-34-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Nature of Business and Signiﬁcant Accounting Policies (continued)

Other Comprehensive Income (Loss)

Other comprehensive income consists of unrealized gains and losses on available-for-sale securities, and

cumulative foreign currency translation adjustments.

Translation of Non-U.S. Currency Amounts

The net assets and operations of entities outside of the United States are translated into U.S. dollars. Assets
and liabilities are translated at year-end exchange rates and income and expense items are translated at average
exchange rates prevailing during the year. Translation adjustments are included in accumulated other comprehensive
income (loss). Gains and losses arising from intercompany foreign currency transactions that are of a long-term-
investment nature are reported in the same manner as translation adjustments.

Segment Reporting

The Company engages in business activities in one operating segment, which provides business and technology

consulting services.

Recent Accounting Pronouncements

Reclassiﬁcations

Certain prior year amounts in the consolidated ﬁnancial statements have been reclassiﬁed to conform current
year presentation, including reﬂecting the gross purchases and sales of investment grade variable rate securities
as investing activities rather than as a component of cash and equivalents. This reclassiﬁcation did not affect
previously reported cash ﬂows from operations.

2. Acquisitions and Investing Activities

During the three year period ended December 31, 2004, the Company acquired four businesses providing
information technology services (collectively, the “Acquired Entities”) in separate transactions. One was completed
in 2004, one was completed in 2003, and two were completed in 2002. Aggregate consideration for the Acquired
Entities was $11.4 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.

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
Deferred payment
Accrued earn-out
Cash used in acquisitions of businesses, net of cash acquired

-35-

2004

$ 1,121
7,066
1,943
(2,920)
—
$ 7,210

2003

$1,264
—
2,287
—
(250)
$3,301

2002

$851
—
—
—
—
$851

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Acquisitions and Investing Activities (continued)

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 2004, 2003 and 2002 was not signiﬁcant to the
results of the Company’s consolidated operations for the years ended December 31, 2004, January 2, 2004 and
January 3, 2003.

In May 2004, the Company purchased the US and India operations of EZCommerce Global Solutions, Inc.,
a business specializing in the dual-shore implementation of primarily SAP and, to a lesser extent, Oracle software.
The purchase price for this acquisition was $9.0 million in cash, which included $3.0 million of deferred payments
payable in equal installments on the ﬁrst and second anniversary of the purchase. In addition, approximately
$3.0 million of contingent consideration will be payable over the next two 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 has been recorded as $1.4 million of intangible assets and $6.5 million of goodwill. The intangible
assets are being amortized over periods ranging from 8 months to 4 years.

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 which totaled $2.0 million has been recorded as intangible assets and are
being amortized over periods ranging from 6 months to 3 years. During 2004, the Company paid $1.1 million for
earned contingent consideration related to the purchase of Beacon. Of this amount, $566 thousand was recorded
as intangible assets and $528 thousand as goodwill.

The Company includes its acquired intangible assets with deﬁnitive lives in other assets in the accompanying
consolidated balance sheets. As of December 31, 2004 and January 2, 2004, intangible assets totaled approximately
$2.3 million and $2.4 million, respectively, net of accumulated amortization of $3.1 million and $1.1 million,
respectively. Acquired intangible assets with deﬁnite lives are amortized over periods ranging from 6 months to
4 years. Amortization expense for such intangible assets was $2.0 million, $893 thousand and $208 thousand for
the ﬁscal years ended December 31, 2004, January 2, 2004 and January 3, 2003, respectively. As of December 31,
2004, the Company estimates remaining amortization expense to be approximately $1.6 million, $645 thousand
and $90 thousand in ﬁscal years 2005, 2006 and 2007, respectively.

3. Accounts Receivable and Unbilled Revenue, Net

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

Accounts receivable
Unbilled revenue
Allowance for doubtful accounts

December 31,
2004

$24,932
6,060
(2,109)
$28,883

January 2,
2004

$18,632
8,002
(1,757)
$24,877

-36-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Marketable investments

At December 31, 2004 and January 2, 2004, all of the Company’s marketable securities were U.S. Government
Agencies and were classiﬁed as available for sale. Marketable investments are carried on the balance sheet at their
fair value.

The following tables summarize the Company’s marketable investments (in thousands):

2004
U.S. Government Agencies

2003
U.S. Government Agencies

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Market
Value

$10,000

$ —

$(98)

$ 9,902

$10,000

$ —

$10,000

Contractual maturities of marketable investments at December 31, 2004 are as follows (in thousands):

Less than one year
Due in 1–2 years
Due in 3–5 years
Due after 5 years

Amortized
Cost

$ —
10,000
—
—
$10,000

Market
Value

$ —
9,902
—
—
$9,902

Actual maturities may differ from contractual maturities because some borrowers have the right to call or
prepay obligations. Gross realized gains and losses on the sale of securities were not material to the Company’s
consolidated results of operations for the years ended December 31, 2004, January 2, 2004 and January 3, 2003.

5. Property and Equipment

Property and equipment consists of the following (in thousands):

Equipment
Furniture and ﬁxtures
Software
Leasehold improvements

Less accumulated depreciation

December 31,
2004

$ 8,997
149
5,478
3,310
17,934
(10,366)
$ 7,568

January 2,
2004

$ 12,736
385
6,892
5,123
25,136
(16,422)
$ 8,714

During ﬁscal years 2004 and 2002, write-offs of $1.2 million and $5.0 million for leasehold improvements

and other assets were recorded as part of the restructuring costs.

Depreciation expense for the years ended December 31, 2004, January 2, 2004 and January 3, 2003 was
$3.2 million, $4.1 million and $5.1 million, respectively. Of these amounts, $1.0 million was included in the loss
from discontinued operations in the consolidated statements of operations for the year ended January 3, 2003.

-37-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):

Accrued compensation and beneﬁts
Accrued restructuring related expenses
Deferred revenue
Other accrued expenses
Acquisition related deferred payment

Current accrued expenses and other liabilities

Accrued restructuring related expenses — non-current
Acquisition related deferred payment — non-current
Non-current accrued expenses and other liabilities
Total accrued expenses and other liabilities

December 31,
2004

January 2,
2004

$ 4,418
2,021
4,680
5,355
1,436
17,910
6,023
1,484
7,507
$25,417

$ 5,364
4,835
4,850
5,910
—
20,959
5,236
—
5,236
$26,195

7. Letters of Credit

The Company has outstanding letters of credit of $2.6 million to secure our obligations on various operating
leases. The Company has deposited $3.0 million at December 31, 2004 and January 2, 2004, with a ﬁnancial
institution as collateral for these letters of credit and has classiﬁed this deposit as restricted cash on the accompanying
consolidated balance sheets.

8. Lease Commitments

The Company has operating lease agreements for its premises that expire on various dates through 2015. Rent
expense for the years ended December 31, 2004, January 2, 2004 and January 3, 2003 was $2.0 million, $2.2 million
and $4.9 million, respectively.

Future minimum lease commitments under non-cancelable operating leases for premises having a remaining

term in excess of one year at December 31, 2004 are as follows (in thousands):

2005
2006
2007
2008
2009
Thereafter

Less: sublease income

Total minimum lease payments, less sublease income

$ 5,240
5,246
4,804
4,573
4,523
14,558
38,944
8,581
$30,363

-38-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Income Taxes

The components of the tax expense (beneﬁt) for income taxes are as follows (in thousands):

December 31,
2004

Year Ended
January 2,
2004

January 3,
2003

Current tax expense (beneﬁt)

Federal
State
Foreign

Deferred tax expense

Federal
State
Foreign

Income taxes

$ —
231
93
324

—
—
—
—
$324

$ —
262
88
350

—
—
—
—
$350

A reconciliation of the federal statutory tax rate with the effective tax rate is as follows:

U.S. statutory income tax (beneﬁt) rate
State income taxes, net of Federal income tax beneﬁt
Loss on investment in subsidiary
Valuation allowance
Impairment of goodwill
Other, net
Effective rate

December 31,
2004

(35.0)%
77.7
2,573.4
(2,559.2)
—
110.7
167.6%

Year Ended
January 2,
2004

(35.0)%
3.8
(129.6)
166.4
—
2.2
7.8%

The components of the net deferred income tax asset are as follows (in thousands):

$(8,469)
—
—
(8,469)

4,697
—
264
4,961
$(3,508)

January 3,
2003

(35.0)%
—
(85.2)
87.2
21.6
0.6
(10.8)%

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

-39-

December 31,
2004

January 2,
2004

817
833
30,581
6,373
38,604
(35,360)
3,244

(2,060)
(1,184)
(3,244)
—

921
615
36,121
5,906
43,563
(40,818)
2,745

(1,627)
(1,118)
(2,745)
—

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Income Taxes (continued)

At December 31, 2004 and January 2, 2004, the Company had $74.0 million and $88.0 million, respectively, of
U.S. federal net operating loss carryforwards available for tax purposes, most of which expire in 2022 if not utilized.

In 2002, the Company discontinued its interactive marketing business which was acquired with THINK New
Ideas. The Company claimed a 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. On August 5, 2004, the Company reached
an agreement with the IRS representing the ﬁnal step in the review process. Pursuant to the agreement, the Company
and the IRS agreed that the Company was entitled to a worthless stock deduction of $77.3 million on the Company’s
2002 tax return.

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 December 31, 2004 and January 2, 2004, the Company had established a valuation
allowance of $35.4 million and $40.8 million, respectively, to reduce deferred income tax assets primarily related
to net operating loss carryforwards.

10. 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. In connection with this agreement, 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 December 31, 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 4,275,000 shares of common stock are available for purchase under the
plan with a limit of 400,000 shares of common stock to be issued per offering period. For plan years 2004, 2003
and 2002, 316,889 shares, 455,482 shares and 734,047 shares, respectively, were issued.

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 December 31, 2004 is 10,882,169 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)

10. 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 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
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. Eligible options that were not exchanged are required to be
accounted for under variable plan accounting pursuant to FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans. As of December 31, 2004, 182,858 remaining
eligible options were outstanding. The weighted average exercise price of these remaining eligible options is $2.07.
Variable plan accounting resulted in approximately $62 thousand and $103 thousand of stock compensation expense
for the years ended December 31, 2004 and January 2, 2004, respectively.

As of December 31, 2004 and January 2, 2004 the Company had 3,476,996 and 3,618,209 restricted stock
units outstanding, respectively, of which 3,385,223 and 3,585,636 related to the exchange program. The Company
recorded non-cash compensation expense of $2.3 million and $1.2 million, respectively in 2004 and 2003, based
on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. The
Company expects to incur approximately $600 thousand of stock compensation expense per quarter over the
remaining vesting period of the restricted stock units which fully vest in the third quarter of 2007.

Stock option activity under the Company’s stock option plans is summarized as follows:

December 31, 2004

Weighted
Average
Exercise
Price

Option
Shares

Year Ended
January 2, 2004

January 3, 2003

Weighted
Average
Exercise
Price

Option
Shares

Weighted
Average
Exercise
Price

Option
Shares

3,013,625
1,425,744
(361,652)
(818,265)
3,259,452

$5.69
6.19
4.26
7.19
$5.68

8,263,971
2,149,238
(125,779)
(7,273,805)
3,013,625

$6.78
2.96
5.29
6.15
$5.69

6,812,444
5,594,518
(824,356)
(3,318,635)
8,263,971

$8.42
5.46
3.47
8.69
$6.78

4.33

2.08

3.83

Outstanding at beginning

of year

Granted
Exercised
Canceled

Outstanding at end of year

Weighted average fair

value of options granted
during the period

-41-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. 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

Year Ended

December 31,
2004

January 2,
2004

January 3,
2003

75% to 100%
4 years
3.5%
0%

100%
4 years
2.5%
0%

100%
4 years
3.0%
0%

The following table summarizes information about the Company’s stock options outstanding at December 31, 2004:

Options Outstanding

Options Exercisable

Range of Exercise
Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual Life
(Years)

Weighted Average
Exercise Price

$1.45–$2.74
$2.75–$3.79
$3.80–$5.35
$5.36–$5.99
$6.00–$6.20
$6.21–$6.25
$6.26–$6.99
$7.00–$9.99
$10.00–$32.56

Treasury Stock

400,661
493,725
195,499
392,868
408,948
817,500
216,146
186,099
148,006
3,259,452

7.6
6.6
8.0
7.8
4.4
9.1
8.5
6.4
4.2
7.3

$ 2.19
3.34
4.85
5.58
6.03
6.25
6.42
8.34
15.82
$ 5.68

Number
Exercisable

158,829
340,420
56,832
180,126
405,450
—
21,297
112,562
148,006
1,423,522

Weighted
Average
Exercise Price

$ 2.17
3.52
4.98
5.55
6.03
—
6.68
8.73
15.82
$ 6.14

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, and the second, third and fourth
quarters of 2004, the Board of Directors approved the repurchase of an additional $5 million of the Company’s
common stock for each of the these four quarters, thereby increasing the total program size to $25 million. Under
the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the
open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As
of December 31, 2004 and January 2, 2004, the Company had repurchased 5,526,855 shares and 3,550,279 shares
of its common stock at an average price of $3.29 and $2.16 per share, respectively. The amount of shares repurchased
includes 465,120 shares purchased in 2003 from the Company’s 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)

10. 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.

11. 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 2004, 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 $289,000, $169,000 and $656,000 for the years ended December 31, 2004, January 2, 2004 and
January 3, 2003, respectively.

-43-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. 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. These actions were taken as a result of the continued decline in demand for
technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall
cost structure and organization with anticipated demand for its services. In 2004 and 2003, the Company recorded
restructuring costs of $3.7 and $4.9 million, respectively, to increase existing reserves to account for potentially
higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer
than expected time estimates to sublease excess facilities. The 2004 and 2003 restructuring costs consisted of
additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million and $1.8 million to
the 2001 restructuring accrual, respectively. Also in 2004, the 2002 restructuring accrual was reduced by $370
thousand relating to the ﬁnal settlement of a lease obligation which was recorded as income from discontinued
operations in the accompanying consolidated statement of operations for year ended December 31, 2004.

The following table sets forth the detail and activity in the restructuring expense accruals during the years ended

December 31, 2004, January 2, 2004 and January 3, 2003 (in thousands):

2001 Restructuring Accrual

Accrual
Balance at
December 29,
2000

Additions to
Accrual from
Continuing
Operations

Additions to
Accrual from
Discontinued
Operations

2001
Expenditures

2002
Expenditures

2003
Expenditures

2004
Expenditures

2004
Asset
Write-offs

Accrual
Balance at
December 31,
2004

Severance

and other
employee costs

Closure and

consolidation of
facilities and
related exit costs

Total restructuring

$ —

$3,694

$ 559

$(3,186)

$(1,067)

$ —

$ — $ — $ —

—

5,553

2,311

(248)

(1,965)

(933)

(839)

(1,205)

2,674

accrual

$ —

$9,247

$2,870

$(3,434)

$(3,032)

$(933)

$(839)

$(1,205)

$2,674

2002 Restructuring Accrual

Accrual
Balance at
December 28,
2001

Additions to
Accrual from
Continuing
Operations

Additions to
Accrual from
Discontinued
Operations

2002
Asset
Write-offs

2002
Expenditures

2003
Expenditures

2004
Expenditures

Accrual
Balance at
December 31,
2004

Severance

and other
employee costs

Closure and

consolidation of
facilities and
related exit costs

Total restructuring

accrual

$ —

$ 1,528

$ 616

$ — $ (855)

$(1,289)

$ —

$13,984

$2,747

$(5,217)

$ (584)

$(2,198)

$(3,362)

$5,370

$ —

$15,512

$3,363

$(5,217)

$(1,439)

$(3,487)

$(3,362)

$5,370

-44-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. 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 income (loss), income tax beneﬁt and income (loss) from
discontinued operations for the years ended December 31, 2004, January 2, 2004 and January 3, 2003 (in thousands):

Revenues

Pre-tax income (loss) from discontinued operations
Income tax beneﬁt
Income (loss) from discontinued operations

December 31,
2004

January 2,
2004

$ —

$370
$ —
$370

$ —

$ —
$ —
$ —

January 3,
2003

$ 7,235

$(8,911)
$ —
$(8,911)

During 2004, the Company reduced the restructuring accrual by $370 thousand relating to the ﬁnal settlement

of a lease obligation resulting in income from discontinued operations.

Included in the loss from discontinued operations for ﬁscal year 2002 were restructuring costs of $3.4 million,

for reduction in consultants and for closure and consolidation of facilities and related exit costs.

14. Litigation

The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business
not speciﬁcally discussed herein. In the opinion of management, the ﬁnal disposition of such other matters will
not have a material adverse effect on the Company’s ﬁnancial position or results of operations.

-45-

ANSWERTHINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. 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
December 31, 2004 and January 2, 2004, the Company’s net equity income from the joint venture was $32,000
and $30,000, respectively. During 2004, 2003 and 2002, the Company sold services of $22,000, $232,000 and
$233,000, respectively, to the joint venture. The Company also incurred costs of $27,000, $194,000 and $230,000
for consulting services provided by the joint venture to Answerthink in 2004, 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 December 31, 2004 and January 2, 2004,
the Company had receivables of $1,000 and $258,000, respectively, due from the joint venture. At January 2, 2004
the Company had payables due to the joint venture of $193,000.

16. Quarterly Financial Information (unaudited)

The following table presents unaudited supplemental quarterly ﬁnancial information for the years ended

December 31, 2004 and January 2, 2004 (in thousands, except per share data):

Total revenues
Income (loss) from operations
Income (loss) before income taxes and income

from discontinued operations

Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)

Basic and diluted income (loss) per common share

Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)

Total revenues
Income (loss) from operations
Income (loss) before income taxes
Net income (loss)

Basic net income (loss) per common share
Diluted net income (loss) per common share

April 2,
2004

$35,089
820

1,010
967
—
967

$
0.02
$ —
0.02
$

April 4,
2003

$36,785
(1,246)
(1,022)
$ (1,022)

$ (0.02)
$ (0.02)

Quarter Ended

July 2,
2004

$37,649
(1,871)

(1,675)
(1,579)
370
$ (1,209)

$ (0.04)
0.01
$
$ (0.03)

October 1,
2004

$37,131
806

950
824
—
824

$
0.02
$ —
0.02
$

December 31,
2004

$33,678
(751)

(479)
(730)
—
$ (730)

$ (0.02)
$ —
$ (0.02)

Quarter Ended

July 4,
2003

$31,497
(5,962)
(5,824)
$ (5,974)

$ (0.13)
$ (0.13)

October 3,
2003

January 2,
2004

$32,918
1,055
1,210
$ 1,135

$
$

0.03
0.02

$31,187
975
1,164
$ 1,039

$ 0.02
$ 0.02

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.

-46-

ANSWERTHINK, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003

(in thousands)

Allowance for Doubtful Accounts
Year Ended December 31, 2004

Year Ended January 2, 2004

Year Ended January 3, 2003

Balance at
Beginning of
Year

$1,757

$3,526

$6,810

Charge to
Expense

$1,060

$(235)

$ 779

Write-offs

$ (708)

$(1,534)

$(4,063)

Balance at
Ending of
Year

$2,109

$1,757

$3,526

-47-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROL AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive ofﬁcer
and principal ﬁnancial ofﬁcer, we conducted an evaluation of our disclosure controls and procedures, as such term
is deﬁned under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Based on this evaluation, our principal executive ofﬁcer and our principal ﬁnancial ofﬁcer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

SEC rules require us to include in our Annual Report on Form 10-K, beginning with this Annual Report on
Form 10-K, (1) a report of our management on internal control over ﬁnancial reporting as of December 31, 2004
and (2) a report of our independent certiﬁed registered public accounting ﬁrm, on such assessment by our
management of internal control over ﬁnancial reporting. We have omitted these two reports from this Annual Report
on Form 10-K as originally ﬁled in reliance on the SEC’s Order Under Section 36 of the Securities Exchange Act
of 1934 Granting an Exemption from Speciﬁed Provisions of Exchange Act Rules 13a-1 and 15d-1, as set forth
in SEC Release No. 34-50754 (the “Order”). In accordance with the Order, we will ﬁle the foregoing two reports
in an amendment to this Annual Report on Form 10-K within the period, and subject to the other conditions,
prescribed in the Order.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information responsive to this Item is incorporated herein by reference to the Company’s deﬁnitive 2005 proxy

statement for the 2005 Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

Information responsive to this Item is incorporated herein by reference to the Company’s deﬁnitive 2005 proxy

statement for the 2005 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information responsive to this Item is incorporated herein by reference to the Company’s deﬁnitive 2005 proxy

statement for the 2005 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information responsive to this Item is incorporated herein by reference to the Company’s deﬁnitive 2005 proxy

statement for the 2005 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information appearing under the caption “Fees Paid to Independent Accountants” in the 2005 Proxy Statement

is hereby incorporated by reference.

-48-

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 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 25. 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.

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.

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.

-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 16th day of March, 2005.

SIGNATURES

ANSWERTHINK, INC.

By:

/s/ Ted A. Fernandez
Ted A. Fernandez
Chief Executive Ofﬁcer and Chairman

Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed by the following

persons in the capacities and on the date indicated.

Signatures

Title

Date

/s/ Ted A. Fernandez
Ted A. Fernandez

/s/ John F. Brennan
John F. Brennan

/s/ Allan R. Frank
Allan R. Frank

/s/ David N. Dungan
David N. Dungan

/s/ Richard Hamlin
Richard Hamlin

/s/ Edwin A. Huston
Edwin A. Huston

/s/ Jeffrey E. Keisling
Jeffrey E. Keisling

/s/ Alan T. G. Wix
Alan T. G. Wix

Chief Executive Ofﬁcer and Chairman
(Principal Executive Ofﬁcer)

Executive Vice President, Finance and
Chief Financial Ofﬁcer (Principal Financial
and Accounting Ofﬁcer)

March 16, 2005

President and Director

March 16, 2005

Chief Operating Ofﬁcer and Director

March 16, 2005

Director

-50-

Exhibit
No.

3.1++++

3.2++++

9.1+

9.2+

9.3+

9.4+

10.1+

10.2+

10.3+

10.4+

10.5+

INDEX TO EXHIBITS

Exhibit Description

Second Amended and Restated Articles of Incorporation of the Registrant, as amended

Amended and Restated Bylaws of the Registrant, as amended

Shareholders Agreement dated April 23, 1997 among the Registrant, GTCR V, MG, the
Miller Group, Messrs. Fernandez, Frank, Knotts and Miller and certain other shareholders
of the Registrant parties thereto

Amendment No. 1 to Shareholders Agreement dated February 24, 1998

Letter Agreement dated as of March 15, 1998 to amend Shareholders Agreement

Form of Restricted Securities Agreement dated April 23, 1997 among the Initial Investors
and each of Messrs. Fernandez, Frank, Knotts and Miller

Purchase Agreement dated April 23, 1997 among the Registrant, GTCR V, MG, Gator
and Tara

Series A Preferred Stock Purchase Agreement dated February 24, 1998 among the Registrant,
GTCR V, GTCR Associates and Miller Capital

Stock Purchase Agreement dated March 5, 1998 between the Registrant and FSC

Second Amended and Restated Registration Rights Agreement dated as of May 5, 1998
among the Registrant, GTCR V, MG, GTCR Associates, Miller Capital, FSC, Messrs.
Fernandez, Frank, Knotts and Miller and certain other shareholders of the Registrant
named therein

Second Amended and Restated Registration Rights Agreement dated as of May 5, 1998
among the Registrant and the eight former shareholders of RTI

10.6*+

Registrant’s 1998 Stock Option and Incentive Plan

10.7*+++++

Amendment to Registrant’s 1998 Stock Option and Incentive Plan

10.8*+

Form of Senior Management Agreement dated April 23, 1997 between the Registrant and
each of Messrs. Fernandez, Frank and Knotts

10.9*++++

Senior Management Agreement dated July 11, 1997 between Registrant and Mr. Dungan

10.10*+++++

Form of Employment Agreement entered into between the Registrant and Mr. Dungan

10.11*+

10.12+

10.13+

10.14*+

10.15*+

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*+++

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

-51-

10.20*+++

10.21*+++

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

10.22++++++

Securities Purchase Agreement by and among THINK New Ideas, Inc., Capital Ventures
International and Marshall Capital Management, Inc.

10.23++++++

Registration Rights Agreement dated as of March 3, 1999 by and among THINK New Ideas,
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 Hackett Group, Inc. and Accenture, L.L.P.

11.1++++++++ Amendment to Executive Agreement between Answerthink, Inc. and Ted A. Fernandez

11.2++++++++ Amendment to Executive Agreement between Answerthink, Inc. and David N. Dungan

11.3++++++++ Amendment to Executive Agreement between Answerthink, Inc. and Allan R. Frank

11.4++++++++ Amendment to Executive Agreement between Answerthink, Inc. and John F. Brennan

21.1^

23.1^

31.1^

31.2^

32^

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

*
^
+
++
+++
++++
+++++
++++++
+++++++
++++++++ Incorporated herein by reference to the Company’s Form 10-Q dated November 10, 2004

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-

(This page intentionally left blank.)

Utilizing Hackett’s

Corporate Headquarters

Board of Directors

“

comprehensive enterprise

performance and best

practice database, we

provide empirically based,

and therefore independent,

and objective advice in a

Answerthink, Inc.
1001 Brickell Bay Drive
Suite 3000
Miami, FL 33131

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 11, 2005
at 11:00 am at:
JW Marriott Hotel Miami
1109 Brickell Avenue
Miami, FL 33131

timeframe and at a price

Transfer Agent

point which is impossible

EquiServe Trust Company, NA
Braintree, MA
877-282-1168

to match by our competitors

Independent Auditors

without our Hackett assets.

”

PricewaterhouseCoopers LLP
Miami, FL

Ted A. Fernandez
Chairman & Chief Executive Officer
Answerthink, Inc.

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
Fiva Marketing, Ltd
Chairman of the Board
Farsight PLC

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