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 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 0-24343
Answerthink, Inc.
(Exact name of registrant as specified in its charter)
FLORIDA
(State or other jurisdiction of
incorporation or organization)
1001 Brickell Bay Drive, Suite 3000
Miami, Florida
(Address of principal executive offices)
65-0750100
(I.R.S. Employer
Identification Number)
33131
(Zip Code)
(305) 375-8005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:31) No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:31) No [X]
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:31)
Accelerated filer [X]
Non-accelerated filer (cid:31)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:31) No [X]
The aggregate market value of the common stock held by non-affiliates of the registrant was $141,151,839 on July 1, 2005 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 3, 2006 was 45,217,826.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the registrant's proxy statement for its 2006 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 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
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
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10
15
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25
26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
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ITEM 9A. Control and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
Signatures
Index to Exhibits
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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 due to the bankruptcy or
financial difficulties of our customers, 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 1A. “Risk Factors”.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Answerthink, Inc. is a leading business and technology consulting firm that enables companies to achieve world-
class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository
of enterprise business process performance metrics and best practice intellectual capital, our business and technology
solutions help clients improve performance and maximize returns on technology investments.
The Hackett Group, a strategic advisory firm and an Answerthink company, is a world leader in best practice
research, benchmarking, business transformation and working capital management services that empirically define and
enable world-class enterprise performance. Only The Hackett Group empirically defines world-class performance in sales,
general and administrative (SG&A) and supply chain activities with analysis gained through 3,500 benchmark studies over
14 years at 2,000 of the world’s leading companies.
Answerthink’s combined capabilities include business advisory programs, benchmarking, business transformation,
working capital management, business applications, and business intelligence, with corresponding offshore 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 improved growth in 2005 triggering interest rate increases to mitigate the risk of inflation.
Business and technology consultancies in the U.S. had increases in business activity that followed the growth rate of the
economy.
We believe organizations are required to continually evaluate how to optimize their performance in order to remain
competitive. Their goal is to ensure that the underlying business processes are allowing them to strategically support their
operations and achieve their financial targets. To do so, organizations will have to understand and decide how best to
organize, enable, source and manage their critical business processes.
We believe companies will continue to place increased 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
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their business consulting and IT spending on strategies and tools that help them generate more value from their business
investments in the form of enhanced productivity and efficiency.
We expect companies to look for ways to further leverage their investments in Enterprise Resource Planning (ERP)
systems to continue to deliver cost and performance improvements. We also believe that Business Intelligence (BI) systems
and business performance management applications will 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 systems will produce real-
time enterprises, capable of nearly instantaneous views of current performance and more accurate and efficient planning,
forecasting and reporting.
OUR APPROACH
Answerthink provides business and technology consulting 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.
The Hackett Group is a strategic advisory firm that helps executives understand how well they are performing today
compared to a peer group and to world-class levels. Hackett enables world-class performance by defining what is possible,
providing objective performance comparisons to establish priorities, developing strategic alternatives to address performance
improvements, creation of initiative roadmaps, best practice solutions designs and implementation services.
Hackett is differentiated through its use of empirical data, a large repository of proven best practices,
implementation tools and global implementation insight that are used to provide advice and solutions.
Hackett provides both continuous and best practice implementation programs. Continuous services are referred to
as Advisory Programs, which include: membership-based offerings providing a mix of best practice research, on-demand
advisor access, peer learning opportunities and annual events. Best practice implementation offerings include benchmarking,
business transformation and total working capital services.
Hackett business advisors have the skills, experience and access to proprietary data sets to advise, develop, design
and implement solutions grounded in actual client performance measurement results. Hackett provides deep insight into how
top-performing companies operate, and applies those best practices to generate performance gains for clients.
Our BPI approach leverages our inventory of Hackett-Certified™ practices, approaches observed through
benchmark and other best practice implementation engagements to correlate with superior performance levels. We use
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. The pre-populated collection of best practice process flows and technology configuration guides is
referred to as the BPI Tool Kit and used throughout the term of a project to ensure that best practices are identified and
implemented. This coordinated approach addresses people, process, information access and technology.
Because Answerthink solutions are based on Hackett-Certified™ practices, clients gain significant advantages. 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
benchmarking 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, we believe 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.
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Similarly, we integrate Hackett-Certified™ Practices directly into technology solutions. We believe it is imperative
that companies 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.
We believe the combination of optimized processes, a best practices-based business application and business
intelligence environment 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, the IT services divisions of application software firms, and business consulting firms providing
subscriptions to peer networking and research-based services. Mergers, consolidation and bankruptcies throughout our
industry have resulted in higher levels of competition. We believe that the principal competitive factors in the industries in
which we compete include: skills and capabilities of people, innovative service and product offerings, perceived ability to
add value, reputation and client references, price, scope of services, service delivery approach, technical and industry
expertise, quality of services, ability to deliver results on a timely basis, availability of appropriate resources, and global
reach and scale.
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.
Similarly, we believe that Hackett is the definitive source for best practice performance metrics and strategies.
Hackett is the only organization that has conducted over 3,500 benchmark studies for over 2,000 clients, generating
proprietary data sets spanning performance metrics and correlating best practices. The combination of Hackett data along
with deep expertise and know how in evaluating, designing and implementing business transformation strategies for clients
deliver a powerful and distinct value proposition for our clients.
Our culture of client 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 offering approach, gives us a competitive
advantage.
STRATEGY
Moving forward, our focus will be on executing the following strategies:
• Continue to position and grow The Hackett Group as an IP-centric strategic advisory organization. The Hackett
brand is widely recognized for benchmarking metrics and best practices strategies. Our objective is to continue to
grow our Advisory Program memberships. We believe that our advisory programs and supporting intellectual
capital deliver a distinct value proposition and that our clients will naturally turn to our other service offerings when
the need arises. Therefore, as we grow our Advisory Program membership base, we expect the revenue growth for
our benchmarking and best practice implementation offerings will grow. Our advisory programs target executives
seeking guidance and proven strategies on operational and strategic issues. During 2005, we experienced strong
growth in our membership-based advisory programs. We continue to develop advisory programs that offer a source
of empirically based insight and on-demand advice for executives tasked with performance improvement in an
unpredictable business environment. As advisory sales continue to grow, an increasing number of sales will involve
multi-year commitments which will improve the predictability of our results.
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• 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
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 version of our
tools and methods to further differentiate our ability to serve our clients.
• Create incremental revenue and intellectual capital channels through strategic relationships that help us
leverage and expand our Hackett intellectual capital base as well as grow our revenues. Our strategic
relationships with Accenture and Lawson Software represent examples of this strategy at work. We continue to
believe that there are other organizations that can help us grow revenues and our intellectual capital consistent with
our strategy.
• Seek out strategic acquisitions. We will continue to pursue strategic acquisitions that strengthen our ability to
compete and expand our intellectual property. 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. For example, our acquisition of REL Consultancy expands our knowledge
and capabilities into working capital management and expanded our client base and exposure to additional markets
abroad.
• Expand and leverage our dual shore capabilities. Developing an offshore resource capability to support all of our
offerings has been a key strategy for our organization. Our facility in Hyderabad, India allows us to increase
operational efficiencies while maintaining 24/5 operations. With this improved infrastructure in place, we are
expecting our headcount and utilization of India resources to further expand in 2006.
OUR OFFERINGS
We offer a comprehensive range of services, including advisory programs, benchmarking, business transformation,
working capital, business applications and business intelligence implementation. With strategic and functional knowledge in
finance, human resources, information technology, procurement, supply chain management, corporate services, 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
• Advisory Programs
On-demand access to world-class performance metrics, peer-learning opportunities and best practice advice. The
scope of Hackett’s advisory programs is defined by business function (Executive Advisory) and by end-to-end process
coverage (Process Advisory). Our advisory programs include a mix of the following deliverables:
Advisor Inquiry: Hackett’s inquiry services is used by clients for quick access to fact-based advice on proven
approaches and methods to increase the efficiency and effectiveness of selling, general and administrative activities.
Best Practice Research: Empirically based research and insight derived from over 3,500 individual Hackett
benchmark studies. Our research provides detailed insights into the most significant, proven approaches in use at
world-class organizations that yield superior business results.
Peer Interaction: Regular member-led webcasts, annual Best Practices Conference, annual Member Forums,
membership surveys and client-submitted content provide ongoing peer learning and networking opportunities.
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Hackett Knowledge Center: Online, searchable repository of Best Practices, Quick Wins, Conference Presentations
and associated research available to Advisory Program Members and their support teams.
• Benchmarking Services
Since Hackett’s inception in 1991, The Hackett Group has measured and evaluated the efficiency and effectiveness
of enterprise functions at over 2,000 global organizations. This includes 96 percent of the Dow Jones Industrials, 77 percent
of the Fortune 100, and 92 percent of the Dow Jones Global Titans Index. Ongoing studies are conducted in a wide range of
areas, including SG&A, finance, human resources, information technology, procurement, 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 processes that enables companies to complete the
performance measurement cycle and identify and quantify improvement opportunities in as little as four weeks. Benchmarks
are used by our clients to objectively establish priorities, generate organizational consensus, align compensation to establish
performance goals and develop the required business case for investment.
• 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.
• Total Working Capital
Through the acquisition of REL Consultancy Group, a global leader in generating cash improvement from working
capital, we offer Hackett-REL Total Working Capital services which are designed to help companies improve cash flow from
operations through improved working capital management, reduced costs and increased service quality.
Answerthink Best Practices Solutions
• 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.
• Business Intelligence
Based on our extensive best practices knowledge, our Business Intelligence group designs, develops and implements
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.
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CLIENTS
We focus on long-term client relationships with Global 2000 firms and other sophisticated strategic buyers of
business and IT consulting services. During 2005, our ten most significant clients accounted for approximately 30% 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. The responses to the surveys we send to clients continue to be extremely positive. During
2005, we received surveys from a significant number of our engagements with an average score of 4.5 on a 5.0 scale. The
direct feedback and suggestions we receive on surveys are 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 2006 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 aligned our sales force so it can market working capital and business
transformation services along with our benchmarking and advisory programs. In 2006, the compensation programs reflect an
emphasis on advisory programs while rewarding the linkage between sales of benchmarking, business transformation and
working capital services 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 advisors and 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
• Business Development Associates
• 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 and who are aligned to our
core practice areas within their target accounts. They also handle geographic-related opportunities as they arise.
Business Development Associates are comprised of trained groups of telemarketing specialists who are conversant
with their respective 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.
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.
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We have segmented our market focus into the following categories:
• Target Accounts
• Geographic Focus Accounts
• Strategic Alliance Accounts
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 are contained on the target
account list. 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 is
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 believe that Mind~Share significantly enhances our ability to serve our clients efficiently by allowing our
knowledge base to be shared by all associates 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.
Our core values are the strongest expression of our working style. They are what we stand for. These core values
are:
• Continuous development of our associates, our unique content business model and knowledge base
• Diversity of backgrounds, skills and experiences
• Knowledge capture, contribution and utilization
• Collaboration with one another, with our partners and with our clients
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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 practice leaders and senior practice members is based upon practice margin, sales contributions, client
management and practice management. Incentive pay for management is based on company or division performance
depending on the level of management.
As of December 30, 2005, we had approximately 800 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 also 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 the March of Dimes.
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 100 F Street, N.E., 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.
ITEM 1A. 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.
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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:
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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 in our industry. 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 2005, our ten largest clients accounted for approximately 30% 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. Our customer contracts generally can be cancelled for convenience by the customer upon 30
days’ notice. 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, the client’s decision to reduce spending on technology-related projects,
-11 -
or failure to collect amounts owed to us from our client could have a material adverse effect on our business, financial
condition and results of operations.
We have risks associated with potential acquisitions or investments.
Since we were founded, we have significantly expanded through acquisitions. In the future, we plan to pursue
additional acquisitions as opportunities arise. We may not be able to integrate successfully businesses which we may acquire
in the future without substantial expense, delays or other operational or financial problems. We may not be able to identify,
acquire or profitably manage additional businesses. Also, acquisitions may involve a number of risks, including:
•
•
•
•
•
•
•
diversion of management’s attention;
failure to retain key personnel;
failure to retain existing clients;
unanticipated events or circumstances;
unknown claims or liabilities;
amortization of certain acquired intangible assets; and
operating in new or unfamiliar geographies
Client dissatisfaction or performance problems at a single acquired firm could 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 have recently acquired or may acquire in the future may demand time
and attention from our senior management.
Integrating businesses we have recently acquired or 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.
-12 -
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 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 recognize revenue for services performed, 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.
-13 -
In addition, our board of directors has adopted a shareholder rights plan. Subject to certain exceptions, in the event
that a person or group in the future becomes the beneficial owner of 15% or more of our common stock or commences, or
publicly announces an intention to commence, a tender or exchange offer which would result in its ownership of 15% or
more of our outstanding common stock (or in the case of Liberty Wanger Asset Management, L.P. (now known as Columbia
Wanger Asset Management, L.P.) and its affiliates, 20%) then the rights issued to our shareholders in connection with this
plan will allow our shareholders to purchase shares of our common stock at 50% of its then current market value. In
addition, if we are acquired in a merger, or 50% or more of our assets are sold in one or more related transactions, our
shareholders would have the right to purchase the common stock of the acquiring company at half the then current market
price of such common stock.
We may lose large clients or 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.
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
-14 -
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.
Enhancements to The Hackett Group’s advisory product offerings introduced in 2005 which 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.
Our Joint Marketing and Alliance Agreement with Accenture has expired.
Our Joint Marketing and Alliance Agreement with Accenture expired on October 7, 2005. We are working with
Accenture in efforts to extend and expand the terms of the relationship. We also continue to jointly pursue opportunities and
work on engagements that were won prior and subsequent to the expiration of the Agreement. However, while we continue
to pursue opportunities with Accenture, there is no contractual agreement in place at this time that governs the relationship,
including how positions are allocated on engagements won as a result of a joint pursuit.
We earn revenues, incur costs and maintain cash balances in multiple currencies, and currency fluctuations
could adversely affect our financial results.
We have increasing international operations, which earn revenues and incur costs in various foreign currencies,
primarily the British pound and the euro. Doing business in these foreign currencies exposes us to foreign currency risks in
numerous areas, including revenues, purchases, payroll and investments. Certain foreign currency exposures are naturally
offset within an international business unit, because revenues and costs are denominated in the same foreign currency, and
certain cash balances are held in U.S. dollar denominated accounts. However, due to the increasing size and importance of
our international operations, fluctuations in foreign currency exchange rates could materially impact our results. Currently,
we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.
Our cash position includes amounts denominated in foreign currencies. We manage our worldwide cash
requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be
accessed. The repatriation of cash balances from certain of our subsidiaries outside the United States could have adverse tax
consequences and be limited by foreign currency exchange controls. However, those balances are generally available
without legal restrictions to fund ordinary business operations. We have transferred, and will continue to transfer, cash from
those subsidiaries to the parent company, and to other international subsidiaries, when it is cost effective to do so. However,
any fluctuations in foreign currency exchange rates could materially impact the availability and size of these funds for
repatriation or transfer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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, 2010. We also have offices in Atlanta, Frankfurt,
London, New York, Paris, Philadelphia and Hyderabad, India. As of December 30, 2005 we had operating leases that
extended through July 2011. We believe that we will be able to obtain suitable new or replacement space as needed. We
own no real estate and do not intend to invest in real estate or real estate-related assets.
-15 -
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings, claims, and litigation arising in the ordinary course of business not
specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material
adverse effect on our financial position, cash flows or results of operations.
ITEM 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 2005.
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.
2005
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2004
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$4.72
$4.62
$4.20
$5.00
$5.49
$6.35
$8.45
$8.19
Low
$3.49
$3.56
$3.10
$3.70
$3.51
$3.87
$4.22
$5.50
The closing sale price for the common stock on March 3, 2006 was $6.01.
As of March 3, 2006, there were approximately 300 holders of record of our common stock and 45,217,826 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
We have an ongoing authorization, as amended, from the Board of Directors to repurchase shares of our common
stock in the open market or in negotiated transactions. The authorization is for up to $30 million, of which approximately
$7.9 million is currently still available. All repurchases are made in the open market, subject to market conditions and
trading restrictions. There is no expiration date on the current authorization and no determination was made by the Company
to suspend or cancel purchases under the program. We did not make any repurchases of our common stock during the three
months ended December 30, 2005.
-16 -
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 30, 2005, 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:
December 30,
2005
Year Ended
January 2,
December 31,
2004
2004
(in thousands, except per share data)
January 3,
2003
December 28,
2001
$ 146,693
16,625
163,318
$ 129,339
14,208
143,547
$ 117,945 $ 156,357 $ 220,966
29,377
20,490
14,442
176,847 250,343
132,387
Project personnel and expenses before reimbursable expenses
Reimbursable expenses
Total project personnel and expenses
83,380
16,625
100,005
76,626
14,208
90,834
73,551
14,442
87,993
104,981
20,490
125,471
136,758
29,377
166,135
Selling, general and administrative expenses
Impairment of goodwill
Restructuring costs
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Interest income (expense), net
59,844
49,960
—
—
2,923
162,772
546
3,749
144,543
(996)
44,697
—
4,875
137,565
(5,178)
53,416
20,000
10,886
209,773
(32,926)
78,027
—
5,619
249,781
562
1,089
802
706
570
843
Income (loss) before income taxes, income (loss) from discontinued
operations and cumulative effect of change in accounting principle 1,635
(6)
1,641
—
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
(194)
324
(518)
370
(4,472)
350
(4,822)
—
(32,356)
(3,508)
(28,848)
(8,911)
1,405
1,807
(402)
(8,117)
principle
Cumulative effect of change in accounting principle
Net income (loss)
1,641
(148)
(4,822)
—
$ 1,641
—
—
$ (148) $ (4,822)
(37,759)
(31,200)
$ (68,959)
(8,519)
—
$ (8,519)
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
$ 0.04
$ —
—
$
$ 0.04
43,575
$ (0.01) $ (0.11)
—
$ 0.01 $
—
$
—
$
$ (0.00) $ (0.11)
45,140
44,188
$ (0.62)
$ (0.19)
$ (0.68)
$ (1.49)
46,348
$ (0.01)
$ (0.18)
$
$ (0.19)
43,999
—
$ 0.04
$ —
$
—
$ 0.04
45,302
$ (0.01) $ (0.11)
—
$ 0.01 $
$
—
$
—
$ (0.00) $ (0.11)
45,140
44,188
$ (0.62)
$ (0.19)
$ (0.68)
$ (1.49)
46,348
$ (0.01)
$ (0.18)
$
$ (0.19)
43,999
—
-17-
December 30,
2005
December 31,
2004
January 2,
2004
(in thousands)
January 3,
2003
December 28,
2001
Consolidated Balance Sheet Data:
Cash and cash equivalents ..................................................
Restricted cash .....................................................................
Marketable investments.......................................................
Working capital ..................................................................
Total assets ..........................................................................
Shareholders’ equity ............................................................
$ 18,103 $ 38,890 $ 54,441 $ 35,369 $ 35,679
$ 3,000
$ 4,257
$ 10,000
$ 9,902
$ 58,826
$ 29,136
$ 135,223
$ 151,881
$ 105,235
$ 100,882
$ 2,909
$ 28,050
$ 72,851
$ 145,361
$ 113,047
$ 3,000
$ 9,902
$ 49,860
$ 128,733
$ 99,854
$ —
$ 24,209
$ 81,313
$ 211,919
$ 177,701
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Answerthink, Inc. is a leading business and technology consulting firm that enables companies to achieve world-
class business performance. By leveraging the comprehensive database of The Hackett Group, the world’s leading repository
of enterprise business process performance metrics and best practice intellectual capital, our business and technology
solutions help clients improve performance and maximize returns on technology investments.
The Hackett Group, a strategic advisory firm and an Answerthink company, is a world leader in best practice
research, benchmarking, business transformation and working capital management services that empirically define and
enable world-class enterprise performance. Only The Hackett Group empirically defines world-class performance in sales,
general and administrative (SG&A) and supply chain activities with analysis gained through 3,500 benchmark studies over
14 years at 2,000 of the world’s leading companies.
Answerthink’s combined capabilities include business advisory programs, benchmarking, business transformation,
working capital management, business applications, and business intelligence, with corresponding offshore support.
Answerthink was formed on April 23, 1997.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of
results of operations and financial position in conformity with generally accepted accounting principles. Actual results could
differ significantly from those estimates under different assumptions and conditions. We believe the following discussion
addresses our most critical accounting policies. These policies require management to exercise judgments 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.
-18 -
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 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 and Long-Lived Identifiable Assets
We assess goodwill and long-lived identifiable assets 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 judgments 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.
-19 -
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.
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 2005, 2004 and 2003 ended on December 30, 2005,
December 31, 2004 and January 2, 2004, respectively. 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
total revenues of such results:
December 30, 2005
January 2, 2004
Year Ended
December 31, 2004
(in thousands, except percentage data)
Revenues:
Revenues before reimbursements
Reimbursements
Total revenues
Costs and expenses:
$ 146,693
16,625
163,318
89.8% $ 129,339 90.1%
14,208
10.2%
143,547
100.0%
9.9%
100.0%
117,945 89.1%
10.9%
14,442
100.0%
132,387
Project personnel and expenses:
Project personnel and expenses before reimbursable expenses
Reimbursable expenses
Total project personnel and expenses
Selling, general and administrative expenses
Restructuring costs
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Interest income (expense), net
Income (loss) before income taxes and income from discontinued operations
Income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss)
83,380
16,625
100,005
59,844
2,923
162,772
546
1,089
1,635
(6)
1,641
—
$ 1,641
51.0%
10.2%
61.2%
76,626
14,208
90,834
53.4%
9.9%
63.3%
73,551
14,442
87,993
55.6%
10.9%
66.5%
36.7%
1.8%
99.7%
0.3%
0.7%
1.0%
0.0%
1.0%
—
1.0%
49,960
3,749
144,543
(996)
34.8%
2.6%
100.7%
(0.7%)
44,697
4,875
137,565
(5,178)
33.7%
3.7%
103.9%
(3.9%)
802
(194)
324
(518)
370
$ (148)
0.6%
(0.1%)
0.3%
(0.4%)
0.3%
(0.1%)
706
(4,472)
350
(4,822)
—
$ (4,822)
0.5%
(3.4%)
0.2%
(3.6%)
—
(3.6%)
Comparison of 2005 to 2004
Overview. We reported net income of $1.6 million in 2005 compared to a net loss of $148 thousand in 2004. Our
$1.6 million of net income during 2005 included restructuring costs of $2.9 million and non-cash stock compensation
expense of $3.4 million. Non-cash compensation expense of approximately $800 thousand and $2.6 million is included in
project personnel and expenses before reimbursable expenses and selling, general and administrative expenses, respectively,
in our consolidated statement of operations. Our $148 thousand net loss during 2004 included restructuring costs of $3.7
million and non-cash stock compensation expense of $2.3 million. Non-cash compensation expense of approximately $800
thousand and $1.5 million is included in project personnel and expenses before reimbursable expenses and selling, general
and administrative expenses, respectively, in our consolidated statement of operations. The restructuring costs in 2005
related to $1.1 million for the consolidation of additional facilities and related exit costs not included in previous
restructuring charges and $1.8 million for increases in previously established reserves in 2002 and 2001 for the
-20 -
closure and consolidation of facilities. The restructuring costs in 2004 related to increases in previously established reserves in
2002 and 2001 for the closure and consolidation of facilities. The non-cash compensation expense in 2005 and 2004 was primarily
related to the issuance of restricted stock units to employees at a senior director level or above.
Revenues. Revenues increased 14% to $163.3 million in 2005 from $143.5 million in 2004. The increase in revenues was
primarily attributable to increased revenue from benchmarking and membership advisory program sales and related transformation
advisory services and increased revenue from our Hyperion implementation practice. Additionally, the acquisition of REL
Consultancy Group Limited (“REL”), a U.K. company that provides working capital management advisory services primarily in
Europe and the U.S. on November 29, 2005 contributed $2.5 million to the increase in revenues for 2005. These impacts were
partially offset by a decline in ERP and custom business intelligence revenues due to increased price competition from offshore
suppliers. Reimbursements as a percentage of revenues were comparable at 10% during fiscal years 2005 and 2004. In fiscal year
2005, one customer had revenues equal to or greater than 5% of total revenues, accounting for 5% of total revenues. In fiscal year
2004, one customer had revenues greater than 5% of total revenues, accounting for 7% of total revenues. With respect to our largest
customer in 2005, our contracts can be cancelled for convenience by the customer upon 30 days’ notice. Our projects with this
customer expire on various dates ranging from January 2006 to October 2006. 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 these initiatives progress into subsequent phases. However, there is no assurance that we will be able to renew
these contracts. The cancellation or significant reduction in the use of services from this 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
before reimbursable expenses increased 9% to $83.4 million in 2005 from $76.6 million in 2004. This increase was primarily
attributable to an increase in the average number of consultants in order to balance workforce capacity with market demand for
services. Average consultant headcount excluding REL was 584 in 2005 and 557 in 2004. In addition, we had a slightly higher
average cost per consultant in 2005 and the acquisition of REL added approximately 100 consultants during the month of December
2005.
Project personnel and expenses as a percentage of revenues, excluding the impact of REL in 2005, decreased to 60% in
2005 from 63% in 2004. The decrease was primarily the result of higher revenue per consultant during 2005 due to an increase in
the average gross billing rate per hour to $190 in 2005 from $178 in 2004, which was partially offset by a slightly higher cost per
consultant. The rate increase is a result of our continuing shift in mix to higher rate benchmarking and membership advisory
programs and related transformation advisory services including the launch of the new fixed priced transformation advisory
programs in March 2005 sold under the Hackett brand. Utilization was comparable at 69% for 2005 and 2004.
Selling, General and Administrative. Selling, general and administrative expenses increased 20% to $59.8 million in
2005 from $50.0 million in 2004. Selling, general and administrative expenses as a percentage of revenues were 37% in 2005 and
35% in 2004. The overall increases in selling, general and administrative expenses were primarily attributable to increased sales
personnel and related commissions to accommodate the growth in our benchmarking, membership advisory programs,
transformation advisory and Hyperion implementation services.
Restructuring Costs. Restructuring costs were $2.9 million and $3.7 million in 2005 and 2004, respectively. The $2.9
million of restructuring costs in 2005 related to $1.1 million for the consolidation of additional facilities and related exit costs not
included in previously established reserves and $1.8 million for increases in previously established reserves in 2002 and 2001 for
the closure and consolidation of facilities of which $1.1 million specifically related to increase previously established reserves in
order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, we were fully released from
$20 million of future lease obligations and we assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the
lessor, and paid $3.1 million in cash to the lessor. The remaining $700 thousand related to increases in reserves to account for
higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time
estimates to sublease facilities based on current market conditions. The $3.7 million of restructuring costs in 2004 related to
increases in previously established reserves in 2002 and 2001 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 which was recorded as income from discontinued
operations in the consolidated statement of operations in 2004.
-21 -
Income Taxes. In 2005, we recorded an income tax benefit of $6 thousand which represented an effective tax rate
of 0.4% of our pre-tax income. The 2005 tax benefit was comprised of a $229 thousand tax benefit related primarily to REL
post acquisition losses in the U.S. partially offset by $223 thousand of income tax expense for certain state and foreign taxes
related to non REL entities. In 2004, we recorded an income tax expense of $324 thousand which represented an effective
tax rate of 167.6% of our pre-tax loss for certain state and foreign taxes. The estimated annual effective tax rates include an
income tax benefit attributable to a decrease in the valuation allowance as a result of the expected utilization of tax net
operating loss carryforwards in 2005 and 2004. The liability method of accounting for deferred income taxes requires that a
change in the valuation allowance for deferred tax assets be included in income tax expense or benefit for the current year.
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 have approximately $76 million of U.S. federal net operating loss carryforwards as of December 30, 2005.
Comparison of 2004 to 2003
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. Non-cash compensation expense of approximately $800 thousand and $1.5 million is included in project
personnel and expenses before reimbursable expenses and selling, general and administrative expenses, respectively, in our
consolidated statement of operations. Our $4.8 million loss during 2003 included restructuring costs of $4.9 million and non-
cash stock compensation expense of $1.2 million. Non-cash compensation expense of approximately $500 thousand and
$700 thousand is included in project personnel and expenses before reimbursable expenses and selling, general and
administrative expenses, respectively, in our consolidated statement of operations. 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 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. 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 3.2% to $90.8 million in 2004 from $88.0 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 EZCommerce.
Selling, General and Administrative. Selling, general and administrative expenses increased 11.8% to $50.0 million
in 2004 from $44.7 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
-22 -
services, partially offset by lower legal fees. Selling, general and administrative expenses as a percentage of revenues
increased to 35% in 2004 from 34% 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.
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 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.
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 30, 2005, we had $18.1 million of cash and cash equivalents compared to $38.9 million at
December 31, 2004. We had $600 thousand and $3.0 million, respectively, at December 30, 2005 and December 31, 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. In addition, we had $3.7 million at December 30, 2005 on deposit with a
financial institution as collateral for an Employee Benefit Trust loan acquired as part of the REL Consultancy Group and
have classified this deposit as restricted cash on the accompanying consolidated balance sheet. This loan was repaid during
March 2006. We also had marketable investments of $9.9 million at December 30, 2005 and December 31, 2004.
-23 -
Net cash provided by operating activities was $5.7 million in 2005 compared to $2.4 million for 2004. During 2005,
net cash provided by operating activities was primarily attributable to net income of $1.6 million, $9.1 million of non-cash
expenses and increases in accounts payable of $1.0 million, and accrued expenses and other liabilities of $1.7 million,
primarily attributable to the REL acquisition, partially offset by a $7.6 million increase in accounts receivable and unbilled
revenue, primarily attributable to the REL acquisition. Non-cash expenses included depreciation and amortization, non-cash
compensation expense and provision for doubtful accounts. During 2004, net cash provided by operating activities was
primarily attributable to $8.6 million of non-cash expenses partially 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.
Net cash used in investing activities was $22.6 million in 2005 compared to $10.4 million in 2004. The uses of
cash for investing activities in 2005 were primarily attributable to $23.3 million used in the acquisition of businesses,
purchases of $27.9 million of marketable investments and $1.8 million for purchases of property and equipment, partially
offset by $27.9 million of proceeds from sales, calls and maturities of marketable investments and $2.4 million of proceeds
from a decrease in restricted cash. The uses of cash for investing activities in 2004 were primarily attributable to purchases
of $39.8 million of marketable investments, $7.2 million used in the acquisition of a business and $3.2 million for purchases
of property and equipment, partially offset by $39.8 million of proceeds from the sales, calls and maturities of marketable
investments.
Net cash used in financing activities was $3.9 million in 2005 compared to $7.6 million during 2004. During 2005
cash used in financing activities was primarily attributable to $3.9 million for the repurchase of our common stock and $1.4
million for payment of employee withholding tax related to vesting of restricted stock units, partially offset by proceeds of
$1.7 million from the sale of stock as a result of exercises of stock options and the sale of stock through our Employee Stock
Purchase Plan. Cash used in financing activities during 2004 consisted $10.5 million for the repurchase of our common
stock, partially offset by proceeds of $2.9 million from the sale of stock as a result of exercises of stock options and the sale
of stock through our Employee Stock Purchase Plan.
On July 30, 2002, we announced that our Board of Directors approved the repurchase of up to $5.0 million of our
common stock. In 2003, 2004 and the second quarter of 2005, our Board of Directors approved the repurchase of an
additional $25.0 million of our common stock, thereby increasing the total program size to $30 million. Under the repurchase
plan, we may buy back shares of our outstanding stock from time to time either on the open market or through privately
negotiated transactions, subject to market conditions and trading restrictions. As of December 30, 2005, we had repurchased
6,534,155 shares of our common stock at an average price of $3.39 per share. We hold repurchased shares of our common
stock as treasury stock.
In November 2005, the Company acquired REL for a purchase price of $21.3 million in cash upon closing and
deferred consideration of approximately $7.1 million to be paid at various dates though May 15, 2006, provided that the
Company does not identify any warranty or indemnity claims. During the first quarter of 2006, approximately $1.7 million
of deferred consideration was paid. These amounts do not include additional consideration in a sum not to exceed $9 million
due upon the achievement of certain revenue targets related to the performance of REL during the 12-month period ending
December 31, 2005 and the adjustment to the consideration paid to the shareholders based on the final value of net tangible
assets acquired at closing which was not determinable as of December 30, 2005. 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. The first installment of the deferred payments was paid in 2005. 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 both 2005 and 2004, we paid $1.1
million of earned contingent consideration, which totaled $2.2 million in the aggregate.
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
on acceptable terms will be available when needed or desired.
-24 -
Obligations and Commitments
There were no material capital commitments at December 30, 2005. The following summarizes our lease
commitments under non-cancelable operating leases for premises at December 30, 2005 (in thousands):
Less than 1 year
1-3 years
4-5 years
After 5 years
Total minimum lease payments
$ 4,770
6,722
5,803
1,320
$ 18,615
Off-Balance Sheet Arrangements
We have no off balance sheet arrangements at December 30, 2005.
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 operations. SFAS 123R will be effective for fiscal years beginning after June 15, 2005 and
allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based
payments under SFAS 123R. The Company will adopt SFAS 123R effective December 31, 2005 using the Modified
Prospective Application (“MPA”) method. The MPA method will require the Company to record expense for unvested stock
options that were awarded prior to December 31, 2005 through the remaining vesting period. The expense for unvested stock
options at December 31, 2005 will be based on the grant-date fair value of those awards as calculated for pro forma
disclosure under SFAS No. 123. We expect to record additional compensation expense of approximately $500 thousand and
$200 thousand, pre-tax, in fiscal years 2006 and 2007, respectively, related to previously issued unvested stock options. We
are currently evaluating the impact that the other provisions of SFAS No. 123R will have on its consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 30, 2005, our exposure to market risk related primarily to changes in interest rates on our investment
portfolio. Our marketable investments consist primarily of short-term fixed interest rate securities. We invest only with high
credit quality issuers and we do not use derivative financial instruments in our investment portfolio. We do not believe that a
significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.
Exchange Rate Sensitivity
We face exposure to adverse movements in foreign currency exchange rates, as a significant portion of our revenues,
expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British pound and the
euro. These exposures may change over time as business practices evolve. Currently, we do not hold any derivatives
contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.
For a discussion of the risks we face as a result of foreign currency fluctuations, please see “Item 1A. Risk Factors”
in Part I.
-25 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANSWERTHINK, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Certified Public Accounting Firms
Consolidated Balance Sheets as of December 30, 2005 and December 31, 2004
Consolidated Statements of Operations for the Years Ended December 30, 2005, December 31,
2004 and January 2, 2004
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the
Years Ended December 30, 2005, December 31, 2004 and January 2, 2004
Consolidated Statements of Cash Flows for the Years Ended December 30, 2005, December 31,
2004 and January 2, 2004
Notes to Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts and Reserves
Page
27
29
30
31
32
33
51
-26-
Report of Independent Registered Certified Public Accounting Firm
Board of Directors and Shareholders
Answerthink, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheet of Answerthink, Inc. as of December 30, 2005 and the related
consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the year
ended December 30, 2005. We have also audited the financial statement schedule listed in the accompanying index. These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and financial statement schedule, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements and financial statement schedule. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Answerthink, Inc. and its subsidiaries at December 30, 2005, and the results of its operations and its cash flows
for the year ended December 30, 2005, in conformity with accounting principles generally accepted in the United States of
America.
Also, in our opinion, the financial statement schedule for 2005 presents fairly, in all material respects, the information set
forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of Answerthink, Inc.’s internal control over financial reporting as of December 30, 2005, based on criteria
established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 14, 2006 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Miami, Florida
March 14, 2006
-27-
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 sheet as of December 31, 2004 and the related consolidated
statements of operations, of shareholders’ equity and comprehensive income and of cash flows for each of the two years in
the period ended December 31, 2004 present fairly, in all material respects, the financial position of Answerthink, Inc. and
its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the
period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule for the years ended December 31, 2004 and January
2, 2004 listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance
with 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
-28-
ANSWERTHINK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Marketable investments
Restricted cash
Accounts receivable and unbilled revenue, net of allowance of $1,766 and $2,109
in 2005 and 2004, 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
Loan payable
Total current liabilities
Accrued expenses and other liabilities, non-current
Total liabilities
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 1,250,000 shares authorized, none issued and
outstanding
Common stock, $.001 par value, authorized 125,000,000 shares; issued: 51,020,343
shares at December 30, 2005; 48,969,181 shares at December 31, 2004
Additional paid-in capital
Unearned compensation
Treasury stock, at cost, 6,534,155 shares at December 30, 2005 and 5,526,855 shares at
December 31, 2004
Accumulated deficit
Accumulated other comprehensive income (loss)
Total shareholders' equity
Total liabilities and shareholders' equity
December 30,
2005
December 31,
2004
$
$
$
18,103
9,902
3,657
41,928
3,273
76,863
—
600
6,304
6,422
61,692
151,881
6,319
37,751
3,657
47,727
3,272
50,999
—
—
$
$
$
38,890
—
—
28,883
3,459
71,232
9,902
3,000
7,568
3,245
33,786
128,733
3,462
17,910
—
21,372
7,507
28,879
—
—
51
282,749
(8,003)
49
277,356
(6,011)
(22,119)
(151,748)
(48)
100,882
151,881
$
(18,178)
(153,389)
27
99,854
128,733
$
The accompanying notes are an integral part of the consolidated financial statements.
-29-
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues:
Revenues before reimbursements
Reimbursements
Total revenues
Costs and expenses:
December 30,
2005
Year Ended
December 31,
2004
January 2,
2004
$
146,693 $
16,625
163,318
129,339 $
14,208
143,547
117,945
14,442
132,387
83,380
76,626
73,551
Project personnel and expenses:
Project personnel and expenses before reimbursable expenses
(includes $749, $852, and $490 of stock compensation expense
in 2005, 2004 and 2003, respectively)
Reimbursable expenses
Total project personnel and expenses
Selling, general and administrative expenses (includes $2,643,
$1,469, and $746 of stock compensation expense in 2005, 2004
and 2003, respectively)
Restructuring costs
Total costs and operating expenses
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Income (loss) before income taxes and income from discontinued
operations
Income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss)
$
16,625
100,005
59,844
2,923
162,772
546
1,168
(79)
1,635
(6)
1,641
—
1,641
14,208
90,834
49,960
3,749
144,543
(996)
866
(64)
(194)
324
(518)
370
(148)
$
Basic net income (loss) per common share:
Income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss) per common share
$ 0.04
—
$
$ 0.04
(0.01)
$
$ 0.01
(0.00)
$
Weighted average common shares outstanding
43,575
44,188
Diluted net income (loss) per common share:
Income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss) per common share
$
$
$
0.04
—
0.04
$
(0.01)
$ 0.01
(0.00)
$
14,442
87,993
44,697
4,875
137,565
(5,178)
706
—
(4,472)
350
(4,822)
—
(4,822)
(0.11)
—
(0.11)
45,140
(0.11)
—
(0.11)
$
$
$
$
$
$
$
Weighted average common and common equivalent shares
outstanding
45,302
44,188
45,140
The accompanying notes are an integral part of the consolidated financial statements.
-30-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
ANSWERTHINK, INC.
(in thousands)
Additional
Paid-in
Amount Capital
Common Stock
Shares
Treasury Stock
Unearned
Shares
Amount Compensation
Accumulated
Other
Accumulated Comprehensive Shareholders’
Income (Loss)
Equity
Deficit
Total
47,728 $
563
—
48 $ 263,626
1,252
—
—
—
(1,146) $ (2,208)
—
(5,478)
—
(2,404)
$ — $ (148,419) $ — $ 113,047
1,252
—
(5,478)
—
—
—
—
—
—
9,487
—
—
(9,487)
—
—
—
—
—
13
—
103
—
—
—
—
—
48 $ 274,481
2,910
—
1
—
—
—
—
—
—
—
—
—
—
—
1,120
—
—
—
—
(3,550) $ (7,686) $ (8,367)
—
—
—
(10,492)
—
(1,977)
—
—
—
(4,822)
—
1,120
13
103
(4,822)
—
$ (153,241) $ — $ 105,235
2,911
(10,492)
—
—
—
—
—
—
—
—
—
—
(97)
—
—
97
—
—
—
—
—
62
—
—
—
—
—
—
—
2,259
—
—
—
—
(148)
—
—
—
—
—
2,259
62
(148)
—
—
—
—
—
—
49 $ 277,356
269
—
2
—
—
—
—
(5,527)
—
(1,007)
—
—
—
—
—
—
$(18,178) $ (6,011)
—
—
—
(3,941)
—
—
—
(98)
(98)
125
125
—
—
$ (153,389) $ 27 $ 99,854
271
(3,941)
—
—
—
—
Comprehensive
Income
(Loss)
$ (4,822)
$ (4,822)
$ (148)
(98)
125
$ (121)
—
—
—
—
—
—
—
5,135
—
—
(5,135)
—
—
—
—
—
(11)
—
—
—
—
—
—
—
51 $ 282,749
—
—
—
—
—
(6,534)
3,143
—
—
—
—
—
—
—
—
—
$(22,119) $ (8,003)
—
—
1,641
—
—
—
—
—
(75)
—
$ (151,748) $ (48)
3,143
(11)
$ 1,641
1,641
(75)
(75)
— $ 1,566
$ 100,882
—
—
—
—
—
—
48,291 $
678
—
—
—
—
—
—
—
—
48,969 $
2,051
—
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 translation
Total Comprehensive Loss
Balance at December 31, 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 income
Foreign currency translation
Total Comprehensive Income
Balance at December 30, 2005
51,020 $
The accompanying notes are an integral part of the consolidated financial statements.
-31-
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
Non-cash compensation expense
Provision for doubtful accounts
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
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Decrease (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
Payment of employee withholding tax related to restricted stock units
Repurchases of common stock
Proceeds from borrowings
Repayments of loan payable
Net cash 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 30,
Year Ended
December 31,
2005
2004
January 2,
2004
$ 1,641 $ (148) $ (4,822)
4,870
3,392
797
(7,572)
(88)
986
1,680
5,706
(1,762)
2,400
(27,900)
27,900
(23,256)
(22,618)
5,177
2,321
1,060
(3,210)
920
(707)
(2,974)
2,439
(3,199)
—
(39,750)
39,750
(7,210)
(10,409)
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
1,704
(1,432)
(3,941)
162
(368)
(3,875)
(20,787)
38,890
$ 18,103
2,911
—
(10,492)
—
—
(7,581)
(15,551)
54,441
$ 38,890
1,252
—
(5,478)
—
—
(4,226)
19,072
35,369
$ 54,441
$ 16
$ 401
$ —
$ 193
$ —
$ 110
The accompanying notes are an integral part of the consolidated financial statements.
-32-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business
Answerthink, Inc. (the “Company” or “Answerthink”) is a leading business and technology consulting firm that enables
companies to achieve world-class business performance. Answerthink’s combined capabilities include business advisory
programs, benchmarking, business transformation, working capital management, business applications, and business
intelligence, with corresponding offshore 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 2005, 2004, and 2003 ended on December 30, 2005,
December 31, 2004 and January 2, 2004, respectively. 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
shareholders’ 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 Receivable and Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from our clients not making
required payments. Management makes estimates of the collectibility 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.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
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
All of the Company’s goodwill and intangible assets has been accounted for under the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Goodwill represents the cost of
acquired businesses in excess of the estimated fair value assigned to the net assets acquired. Other intangible assets arise
from business combinations and consist of customer relationships, restricted covenants related to employment agreements,
customer backlog and trademarks that are amortized, on a straight-line basis, over periods of up to five years. The Company
follows the impairment provisions and disclosure requirements of SFAS No. 142. Goodwill and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. In addition, goodwill is tested for impairment at the reporting unit level at least annually 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 techniques including discounted cash flow analysis. The reporting units
consist of The Hackett Group, Business Applications and Business Intelligence. In assessing the recoverability of goodwill
and intangible assets, the Company makes 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. The Company performed its annual impairment test of goodwill in the
fourth quarters of fiscal 2005, 2004 and 2003, respectively, and determined that goodwill was not impaired.
Long-Lived Assets (excluding Goodwill)
We follow the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of
Long-Lived Assets” which requires that long-lived assets be reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized if the sum of
the long-term undiscounted cash flows is less than the carrying amount of the long-lived assets being evaluated.
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 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.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
1. Nature of Business and Significant Accounting Policies (continued)
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.
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.
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 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 income (loss) and net income (loss) per share for the years ended December
30, 2005, December 31, 2004 and January 2, 2004 would have been adjusted to the pro forma amounts indicated as follows
(in thousands, except per share data):
Net income (loss), as reported
Add: Stock-based employee compensation expense included in reported net income (loss), net
December 30,
2005
$ 1,641
Year Ended
December 31,
2004
$ (148)
January 2,
2004
$ (4,822)
of related tax effects
3,392
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 income (loss) per common share
As reported
Pro forma
Diluted net income (loss) per common share
As reported
Pro forma
(5,195)
$ (162)
(5,354)
$ (3,181)
$ 0.04
$ (0.00)
$ (0.00)
$ (0.07)
$ 0.04
$ (0.00)
$ (0.00)
$ (0.07)
(6,702)
$ (10,288)
$ (0.11)
$ (0.23)
$ (0.11)
$ (0.23)
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
1. Nature of Business and Significant Accounting Policies (continued)
Income Taxes
The Company records income taxes using the liability method. Under this method, the Company records deferred taxes
based on temporary taxable and deductible differences between the tax bases of the Company’s assets and liabilities and their
financial reporting bases. The liability method of accounting for deferred income taxes requires a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. With regard to 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. For the year ended December 30, 2005, potentially dilutive securities included 1,506,707 of unvested restricted
stock units issued to employees and 220,832 of common stock issuable upon the exercise of stock options following the
treasury stock method.
Potentially dilutive shares were excluded from the diluted loss per share calculation for the years ended December 31,
2004 and January 2, 2004 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 and January 2, 2004 were
2,368,180 shares and 777,265 shares, respectively, of shares underlying unvested restricted stock units issued to employees
and 667,728 shares and 289,647 shares, respectively, of common stock issuable upon the exercise of stock options and
warrants following the treasury stock units 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 30,
2005 and December 31, 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 years 2005 and 2004, one customer had revenues greater than 5% of total revenues,
accounting for approximately 5% and 7% of total revenues, 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.
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.
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
1. Nature of Business and Significant Accounting Policies (continued)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) 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
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 operations. SFAS 123R will be effective for fiscal years beginning after June 15, 2005 and
allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based
payments under SFAS 123R. The Company will adopt SFAS 123R effective December 31, 2005 using the Modified
Prospective Application (“MPA”) method. The MPA method will require the Company to record expense for unvested stock
options that were awarded prior to December 31, 2005 through the remaining vesting period. The expense for unvested stock
options at December 31, 2005 will be based on the grant-date fair value of those awards as calculated for pro forma
disclosure under SFAS No. 123. The requirements of SFAS 123R are effective for the Company beginning in the first
quarter of fiscal year 2006. The Company expects to record additional compensation expense of approximately $500
thousand and $200 thousand, pre-tax, in fiscal years 2006 and 2007, respectively, related to previously issued unvested stock
options. The Company is currently evaluating the impact that the other provisions of SFAS No. 123R will have on its
consolidated financial statements.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform current year
presentation.
2. Acquisitions and Investing Activities
During the three year period ended December 30, 2005, the Company acquired four businesses providing
information technology services (collectively, the “Acquired Entities”) in separate transactions. Two were completed in
2005, one was completed in 2004, and one was completed in 2003. Aggregate consideration for the Acquired Entities was
$33.8 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.
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
2. Acquisitions and Investing Activities (continued)
The components of the purchase price allocation for the Acquired Entities, contingent consideration earned for previous
acquisitions, and fees and expenses incurred are as follows (in thousands):
2005
2004
2003
Fair value of net assets (excluding cash) acquired
Goodwill
Intangible assets
Deferred payment accrued
Deferred payment paid
Accrued earn-out
Cash used in acquisitions of businesses, net of cash acquired
$ (4,146) $ 1,121 $ 1,264
—
2,287
—
—
(250)
$ 3,301
27,690
5,332
(7,120)
1,500
—
$ 23,256
7,066
1,943
(2,920)
—
—
$ 7,210
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. For each of the acquisitions made,
goodwill is deductible for tax purposes except in the case of goodwill for the REL acquisition, which amounted to $25.8
million.
In November 2005, the Company purchased REL Consultancy Group Limited (“REL”), a privately-held U.K. company
that provides working capital management advisory services primarily in Europe and the U.S. Under the terms of the Share
Purchase Agreement, the stockholders of REL received aggregate cash of $21.3 million upon closing. Deferred
consideration of approximately $7.1 million, which was recorded as part of the acquisition cost, will be paid at various dates
through May 15, 2006, provided that the Company does not identify any warranty or indemnity claims. During the first
quarter of 2006, approximately $1.7 million of deferred consideration was paid. These amounts do not include additional
consideration in a sum not to exceed $9 million due upon the achievement of certain revenue targets related to the
performance of REL during the 12-month period ending December 31, 2005 and the adjustment to the consideration paid to
the shareholders based on the final value of net tangible assets acquired at closing, which was not determinable as of
December 30, 2005. Any payments related to the contingent consideration will be recorded as an adjustment to goodwill.
The excess of the purchase price of the acquisition over the estimated fair value of the net identifiable assets acquired has
been recorded as $5.3 million of intangible assets and $25.8 million of goodwill. The intangible assets are being amortized
over periods ranging from 6 months to 5 years.
In connection with the acquisition, the Company recorded liabilities of $2.6 million for termination obligations, in
accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. The
Company has recognized these obligations as a liability assumed as of the acquisition date. These termination obligations
consisted of $1.4 million of employee separation costs and $1.2 million related to the closure of redundant REL real estate
facilities. The Company expects to complete the severance payments by fiscal year 2006. Lease termination activities for all
but $208 thousand are expected to be completed by fiscal year 2006.
The following unaudited pro forma information is provided for the REL acquisition assuming it occurred as of January 1,
2005 and as of January 3, 2004, respectively, (in millions, except per share amounts):
Revenues
Net loss
2005
$ 200,075
$ (2,731)
2004
$ 178,922
$ (1,488)
Basic and diluted net loss per share
$ (0.06)
$ (0.03)
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
2. Acquisitions and Investing Activities (continued)
The unaudited pro forma financial information presented above does not reflect any operating efficiencies and cost
savings that the Company may achieve with respect to the entities nor any expenses associated with achieving those benefits.
The unaudited pro forma information presented above is based on currently available information and upon certain
assumptions that the Company believes are reasonable and is for illustrative purposes only. It is not necessarily indicative of
the future results of operations of the Company or the results of operations of the Company had the acquisition occurred on
January 1, 2005 or January 3, 2004.
Other Acquisitions
In January 2005, the Company purchased the operations of Active Interest, Inc., a company that specializes in the
implementation of Hyperion Brio data warehouse software. The purchase price for this acquisition was $607 thousand in
aggregate cash. The excess of the purchase price of the acquisition over the estimated fair value of the net identifiable assets
acquired has been recorded as $42 thousand of intangible assets and $565 thousand of goodwill.
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. The first installment of the deferred payments was paid in 2005. 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 $6.7 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. (“Beacon”), 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. During 2005, the Company paid $1.1 million for earned contingent consideration related to the purchase of
Beacon which was recorded as goodwill.
The pro forma impact of the acquisition of Active Interest, Inc. in 2005 and the acquisitions completed in 2004 and 2003
were not significant to the results of the Company’s consolidated operations for the years ended December 30, 2005,
December 31, 2004 and January 2, 2004.
The Company includes its acquired intangible assets with definitive lives in other assets in the accompanying
consolidated balance sheets. As of December 30, 2005 and December 31, 2004, intangible assets totaled approximately $5.9
million and $2.3 million, respectively, net of accumulated amortization of $4.9 million and $3.1 million, respectively.
Acquired intangible assets with definite lives are amortized over periods ranging from 6 months to 5 years. Amortization
expense for such intangible assets was $1.8 million, $2.0 million and $893 thousand for the fiscal years ended December 30,
2005, December 31, 2004 and January 2, 2004, respectively.
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
2. Acquisitions and Investing Activities (continued)
The estimated future amortization expense of intangible assets as of December 30, 2005 is as follows (in thousands):
Fiscal Year
2006
2007
2008
2009
2010
Amount
$ 2,550
1,249
709
700
642
$ 5,850
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
4. Marketable Investments
December 30,
2005
December 31,
2004
$ 35,870
7,824
(1,766)
$ 41,928
$ 24,932
6,060
(2,109)
$ 28,883
At December 30, 2005 and December 31, 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):
2005
U.S. Government Agencies
2004
U.S. Government Agencies
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Market Value
$ 10,000 $ — $ (98) $ 9,902
$ 10,000
$ —
$ (98)
$ 9,902
Contractual maturities of marketable investments at December 30, 2005 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
Market Value
$ 10,000
$ 9,902
—
—
—
—
—
—
$ 10,000 $ 9,902
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
4. Marketable Investments (continued)
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 30, 2005, December 31, 2004 and January 2, 2004.
5. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
Equipment
Software
Leasehold improvements
Furniture and fixtures
Automobile
Less accumulated depreciation
December 30,
2005
December 31,
2004
$ 9,459 $ 8,997
5,478
6,237
3,310
3,426
149
377
35
—
17,934
19,534
(10,366)
(13,230)
$ 7,568
$ 6,304
During fiscal year 2004 write-offs of $1.2 million for leasehold improvements and other assets were recorded as part of
the restructuring costs.
Depreciation expense for the years ended December 30, 2005, December 31, 2004 and January 2, 2004 was $3.1 million,
$3.2 million and $4.1 million, respectively.
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
Accrued compensation and benefits
Accrued bonuses
Accrued restructuring related expenses
Deferred revenue
Other accrued expenses
Acquisition related deferred payments
Current accrued expenses and other liabilities
Accrued restructuring related expenses- non-current
Acquisition related deferred payment- non-current
Other accrued expenses – non-current
Non-current accrued expenses and other liabilities
Total accrued expenses and other liabilities
-41-
December 30,
2005
December 31,
2004
$ 5,194 $ 3,447
971
4,778
2,021
1,844
4,680
7,715
5,355
9,604
1,436
8,616
17,910
37,751
6,023
2,990
1,484
—
282
—
7,507
3,272
$ 25,417
$ 41,023
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
6. Accrued Expenses and Other Liabilities (continued)
Bank Overdrafts
At December 30, 2005 the Company had $1.6 million in bank overdrafts outstanding, classified as current other accrued
expenses in the accompanying balance sheet. The Company’s bank overdraft facility is secured by its assets, and carries
floating interest of 1.5% over National Westminster Bank’s base rate, which was 4.5% at December 30, 2005. Interest
expense for the year ended December 30, 2005 was approximately $16,000.
7. Loan Payable
At December 30, 2005, the Company had a loan with a financial institution of $3.7 million, classified as loan payable in
the accompanying balance sheet. The loan is secured by $3.7 million of cash, classified as current restricted cash in the
accompanying balance sheet. This bank loan carries interest on the balance, net of restricted cash, of 2% over National
Westminster Bank’s base rate, which was 4.5% at December 30, 2005. The loan was repaid during March 2006.
8. Letters of Credit
The Company had outstanding letters of credit of $600 thousand and $2.6 million to secure the Company’s obligations
on various operating leases as of December 30, 2005 and December 31, 2004, respectively. The Company has deposited
$600 thousand and $3.0 million at December 30, 2005 and December 31, 2004, respectively, 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.
9. Lease Commitments
The Company has operating lease agreements for its premises that expire on various dates through 2011. Rent expense
for the years ended December 30, 2005, December 31, 2004 and January 2, 2004 was $2.0 million, $2.0 million and $2.2
million, respectively.
Future minimum lease commitments and sublease receipts under non-cancelable operating leases for premises having a
remaining term in excess of one year at December 30, 2005 are as follows (in thousands):
2006
2007
2008
2009
2010
Thereafter
Total
Rental
Payments
$ 4,770
3,557
3,165
3,120
2,683
1,320
$ 18,615
Sublease
Receipts
$ 1,549
1,370
1,262
1,275
1,219
721
$ 7,396
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
10.
Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Current tax expense (benefit)
Federal
State
Foreign
Deferred tax expense
Federal
State
Foreign
December 30,
2005
Year Ended
December 31,
2004
January 2,
2004
$ (204)
110
88
(6)
$ — $ —
262
88
350
231
93
324
—
—
—
—
—
—
—
—
—
—
—
—
Income taxes
$ (6)
$ 324
$ 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
Other, net
Effective rate
December 30,
2005
35.0 %
4.4
—
(67.6)
27.8
(0.4) %
Year Ended
December 31,
2004
(35.0) %
77.7
2,573.4
(2,559.2)
110.7
167.6 %
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):
December 30,
2005
December 31,
2004
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
693
34,053
$ 711 $ 817
833
30,581
6,373
38,604
(35,360)
3,244
5,812
41,269
(36,622)
4,647
(3,729)
(918)
(4,647)
$ —
(2,060)
(1,184)
(3,244)
$ —
-43-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
10. Income Taxes (continued)
At December 30, 2005 and December 31, 2004, the Company had $76.0 million and $74.0 million, respectively, of U.S.
federal net operating loss carryforwards available for tax purposes, most of which expire in 2022 if not utilized.
Additionally, in connection with the REL acquisition in 2005, the Company acquired approximately $8.5 million in foreign
net operating loss carryforwards, including $6 million in REL UK net operating losses. Most of the foreign net operating
losses may be carried forward indefinitely.
In connection with the acquisition of REL, the Company recorded net deferred tax assets amounting to approximately $1
million, which have been fully reserved by a valuation allowance as of the acquisition date. Upon a change to any portion of
the valuation allowance in the future, the Company will adjust goodwill associated with the acquisition.
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 30, 2005 and December 31, 2004, the Company had established a valuation allowance of $36.6
million and $35.4 million, respectively, to reduce deferred income tax assets primarily related to net operating loss
carryforwards.
11. Shareholders’ Equity
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 % 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 2005, 2004 and 2003, 460,735 shares, 316,889 shares and 455,482 shares, respectively, were
issued.
During the fourth quarter of fiscal 2005, the Board of Directors approved a change to the common stock purchase
discount and approved the elimination of the related look back period. As a result, effective beginning in fiscal 2006, shares
of our common stock may be purchased by employees at six months intervals at 95% of the fair market value on the last
trading day of each six month period.
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 30, 2005 is 10,365,632 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.
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
11. 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 30, 2005 the Company had 169,295 outstanding stock options which are accounted for under variable plan
accounting. The weighted average exercise price of these remaining eligible options is $3.96. Variable plan accounting
resulted in a reduction of stock compensation expense of approximately $11 thousand and $62 thousand of stock
compensation expense for the years ended December 30, 2005 and December 31, 2004, respectively.
Stock option activity under the Company’s stock option plans is summarized as follows:
December 30, 2005
Weighted
Average
Exercise
Price
Option
Shares
Year Ended
December 31, 2004
Weighted
Average
Exercise
Price
Option
Shares
January 2, 2004
Option
Shares
Weighted
Average
Exercise
Price
$ 6.78
2.96
5.29
6.15
$ 5.69
Outstanding at beginning of year
3,259,452 $ 5.68
Granted
Exercised
Canceled
Outstanding at end of year
Exercisable at end of year
Weighted average fair value of options
45,000
(107,649)
(751,482)
2,445,321
1,488,362
3.96
2.82
6.17
$ 5.63
3,013,625 $ 5.69
1,425,744
(361,652)
(818,265)
6.19
4.26
7.19
3,259,452 $ 5.68
8,263,971
2,149,238
(125,779)
(7,273,805)
3,013,625
1,423,522
1,623,177
granted during the period
$ 2.30
$ 4.33
$ 2.08
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
-45-
Year Ended
December 30,
2005
December 31,
2004
January 2,
2004
75%
4 years
3.9%
0%
75% to 100%
4 years
3.5%
0%
100%
4 years
2.5%
0%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
11. Shareholders’ Equity (continued)
The following table summarizes information about the Company’s stock options outstanding at December 30, 2005:
Range of Exercise
Prices
$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
Options Outstanding
Options Exercisable
Number
Outstanding
268,446
403,975
185,169
232,015
319,082
658,750
156,306
121,361
100,217
2,445,321
Weighted Average
Remaining
Contractual Life
(Years)
6.1
5.8
8.0
6.4
3.6
8.0
7.6
5.0
3.8
6.3
Weighted
Average
Exercise Price
$ 2.20
3.31
4.69
5.58
6.04
6.25
6.41
8.40
16.03
$ 5.63
Number
Exercisable
Weighted
Average
Exercise Price
172,407 $ 2.19
3.42
316,096
4.96
71,844
5.56
170,111
6.04
319,082
6.25
173,125
6.41
70,369
8.64
95,111
16.03
100,217
$ 5.81
1,488,362
As of December 30, 2005 and December 31, 2004, the Company had 2,828,633 and 3,476,996 restricted stock units
outstanding, respectively. The Company recorded non-cash compensation expense of $3.1 and $2.3 million, respectively, in
2005 and 2004, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant
date. In addition, during 2005 the Company recorded $260 thousand of stock compensation expense as a result of stock
awards granted to certain executives whereby the number of shares ultimately received, if any, is dependent on the
Company’s performance against specified performance targets. During fiscal 2005 the company issued 1,482,783 common
shares related to the vesting of restricted stock units. The Company expects to incur approximately $850 thousand of stock
compensation expense per quarter over the remaining vesting period of the restricted stock units through the second quarter
of 2007 and approximately $323 thousand per quarter from the third quarter of 2007 through the third quarter of 2009.
Common Stock
The delivery of 403,751 shares of our common stock classified as issued as of December 30, 2005 in the accompanying
balance sheet was deferred by employees entitled to receive these shares in connection with the vesting of restricted stock
units. The shares will be delivered to the employees at the expiration of the deferral period elected by the employees or upon
their termination of employment.
Treasury Stock
On July 30, 2002, the Company announced that its Board of Directors approved the repurchase of up to $5.0 million of
the Company’s common stock. In 2003, 2004 and the second quarter of 2005, the Board of Directors approved the repurchase
of an additional $25 million of the Company’s common stock, thereby increasing the total program size to $30 million.
Under the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the open
market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of December 30,
2005 and December 31, 2004, the Company had repurchased 6,534,155 shares and 5,526,855 shares of its common stock at
an average price of $3.39 and $3.29 per share, respectively. The Company holds repurchased shares of its common stock as
treasury stock and accounts for treasury stock under the cost method.
-46-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
11. Shareholders’ Equity (continued)
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.
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% 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
In the event of an IPO or sale of The Hackett Group, Inc. (“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.
12. 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 2005, 2004 and 2003, the Company made matching
contributions of 25% of employee contributions up to 4% of their gross salaries. The Company’s matching contributions
were $315,000, $289,000 and $169,000 for the years ended December 30, 2005, December 31, 2004 and January 2, 2004,
respectively.
13. 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.
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
13. Restructuring Costs (continued)
In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase
existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than
expected sublease rates and longer than expected time estimates to sublease excess facilities. The 2004 and 2003
restructuring costs consisted of additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million
and $1.8 million to the 2001 restructuring accrual, respectively. Also in 2004, the 2002 restructuring accrual was reduced by
$370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued
operations in the accompanying consolidated statement of operations for year ended December 31, 2004.
In 2005, the Company recorded restructuring costs of $2.9 million which related to $1.1 million for the consolidation of
additional facilities and related exit costs not included in previously established reserves and $1.8 million for increases in
previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million is
specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of our New
York City lease obligation. As a result of the buyout, the Company was fully released from $20 million of future lease
obligations, assigned two subleases to the lessor, wrote-off $1.4 million receivable from the lessor, and paid $3.1 million in
cash to the lessor. The remaining $700 thousand related to increases in the reserves to account for higher estimated losses on
the sublease of facilities as a result of lower than expected sublease rates and longer than expected times estimates to sublease
facilities based on current market conditions. The 2005 restructuring costs of $1.8 million related to previously established
reserves consisted of additions of $1.2 million and $600 thousand to the 2002 and 2001 restructuring accruals, respectively.
The following table sets forth the detail and activity in the restructuring expense accruals during the years ended
December 30, 2005, December 31, 2004 and January 2, 2004 (in thousands):
2001 Restructuring Accrual
Accrual balance at December 29, 2000
Additions to accrual from continuing operations
Additions to accrual from discontinued operations
2004 asset write-offs
Expenditures:
2001
2002
2003
2004
2005
Accrual balance at December 30, 2005
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
2005 write-off of lessor receivables
Expenditures:
2002
2003
2004
2005
Accrual balance at December 30, 2005
Severance and other
employee costs
Closure and consolidation of
facilities and related exit
costs
Total
$ — $ — $ —
9,835
6,141
2,870
2,311
(1,205) (1,205)
3,694
559
—
(3,186)
(3,434)
(1,067)
(3,032)
—
(933)
—
(839)
(645)
—
$ — $ 2,617 $ 2,617
(248)
(1,965)
(933)
(839)
(645)
Severance and other
employee costs
Closure and consolidation of
facilities and related exit
costs
Total
$ — $ — $ —
16,745
3,363
(5,217) (5,217)
(1,374)
1,528
616
—
—
15,217
2,747
(1,374)
(1,439)
(855)
(3,487)
(1,289)
(3,362)
—
—
(4,078)
$ — $ 1,151 $ 1,151
(584)
(2,198)
(3,362)
(4,078)
-48-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
13. Restructuring Costs (continued)
2005 Restructuring Accrual
Accrual balance at December 31, 2004
Additions to accrual from continuing operations
Expenditures:
2005
Accrual balance at December 30, 2005
14. Discontinued Operations
Severance and other
employee costs
Closure and consolidation of
facilities and related exit
costs
Total
$ —
407
$ — $ —
1,101
694
(35)
$ 372
—
(35)
$ 694 $ 1,066
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 30, 2005, December 31, 2004 and January 2, 2004 (in thousands):
Revenues
December 30,
2005
December 31,
2004
$ — $ — $ —
January 2,
2004
Pre-tax income from discontinued operations
Income taxes
Income from discontinued operations
$ —
$ —
$ —
$ 370
$ —
$ 370
$ —
$ —
$ —
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.
15. Litigation
The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not
specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material
adverse effect on the Company's financial position, cash flows or results of operations.
16. Geographic and Service Group Information
Revenues are attributed to geographic areas as follows (in thousands):
Total Revenues
Domestic
Foreign
Total
December 30,
2005
Year Ended
December 31,
2004
January 2,
2004
$ 152,421 $ 133,916
9,631
10,897
$ 143,547
$ 163,318
$ 128,085
4,302
$ 132,387
-49-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
16. Geographic and Service Group Information (continued)
Long-lived assets are attributed to geographic areas as follows (in thousands):
Long-Lived Assets
Domestic
Foreign
Total
December 30,
2005
December 31,
2004
January 2,
2004
$ 43,112
31,306
$ 74,418
$ 44,374
225
$ 44,599
$ 38,551
94
$ 38,645
In 2005, foreign assets included $30.9 million of goodwill and intangible assets related to REL, a UK based company.
The Company’s revenue is derived from the following service groups (in thousands):
December 30,
2005
Year Ended
December 31,
2004
January 2,
2004
The Hackett Group
Benchmarking and Membership Advisory Programs
$ 27,802
$ 22,093
$$ 12,667
Business Transformation
Best Practices Solutions
Business Applications
Business Intelligence
Total Revenues
17. Related Party Transactions
42,309
30,861
22,159
54,888
58,601
64,205
31,992
38,319
$ 163,318 $ 143,547
33,356
$ 132,387
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 30, 2005,
December 31, 2004 and January 2, 2004, the Company’s net equity income (loss) from the joint venture was ($36,000),
$32,000 and $30,000, respectively. During 2004 and 2003, the Company sold services of $22,000 and $232,000
respectively, to the joint venture. The Company also incurred costs of $27,000 and $194,000 for consulting services
provided by the joint venture to Answerthink in 2004 and 2003, respectively. In addition, the Company reduced general and
administrative expenses by $11,000 and $14,000 for administrative services billed to the joint venture during 2005 and 2003,
respectively. At December 30, 2005 and December 31, 2004, the Company had receivables of $11,000, and $1,000
respectively, due from the joint venture. At December 30, 2005, the Company had payables due to the joint venture of
$47,000.
-50-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ANSWERTHINK, INC.
18. Quarterly Financial Information (unaudited)
The following table presents unaudited supplemental quarterly financial information for the years ended December 30,
2005 and December 31, 2004 (in thousands, except per share data):
Total revenues
Income (loss) from operations
Income (loss) before income taxes
Net income (loss)
Quarter Ended
April 1,
2005
$ 36,872
(1,783)
(1,544)
$ (1,430)
July 1,
2005
September 30,
2005
December 30,
2005
$ 41,700
1,024
1,329
$ 1,234
$ 40,005 $ 44,741
(642)
(431)
$ (270)
1,947
2,281
$ 2,107
Basic and diluted net income (loss) per common share $ (0.03)
$ 0.03
$ 0.05
$ (0.01)
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)
April 2,
2004
$ 35,089
820
1,010
967
—
$ 967
Quarter Ended
July 2,
2004
October 1,
2004
December 31,
2004
$ 37,649
(1,871)
$ 37,131
806
$ 33,678
(751)
(1,675)
(1,579)
370
$ (1,209)
950
824
—
$ 824
(479)
(730)
—
$ (730)
$ 0.02
$ —
$ 0.02
$ (0.04)
$ 0.01
$ (0.03)
$ 0.02
$ —
$ 0.02
$ (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.
-51-
ANSWERTHINK, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 30, 2005, DECEMBER 31, 2004 AND JANUARY 2, 2004
(in thousands)
Allowance for Doubtful Accounts
Year Ended December 30, 2005
Year Ended December 31, 2004
Year Ended January 2, 2004
Balance at
Beginning of
Year
$ 2,109
$ 1,757
$ 3,526
Balance at
Charge to
Ending of
Expense
Year
Write-offs
$ 1,766
$ (1,140)
$ 797
$ 2,109
$ (708)
$ 1,060
$ (235) $ (1,534) $ 1,757
-52-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On August 26, 2005, Answerthink, Inc. dismissed its then current independent registered certified public accounting
firm, PricewaterhouseCoopers LLP (“PwC”). On August 31, 2005, the Company engaged BDO Seidman, LLP (“BDO”) as
the Company’s independent registered certified public accounting firm to audit the Company’s financial statements for its
fiscal year ending December 30, 2005. The dismissal of PwC and the engagement of BDO were approved by the Audit
Committee of the Board of Directors of the Company.
The reports of PwC on the consolidated financial statements of the Company for the fiscal years ended December 31,
2004 and January 2, 2004 did not contain any adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope or accounting principle. During the fiscal years ended December 31, 2004 and January 2, 2004
and through August 26, 2005, there were no disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not resolved to PwC’s satisfaction, would have
caused PwC to make reference thereto in connection with its reports on the financial statements of the Company for such
years; and for the same periods there were no reportable events as described in Item 304 (a)(1)(v) of Regulation S-K.
Prior to the Company’s engagement of BDO, the Company did not consult with BDO regarding: (i) the application of
accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be
rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice
was provided that BDO concluded was an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (iii) any other matters or reportable events described in Item 304(a)(2)(ii)
of Regulation S-K.
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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by
the Committee of Sponsoring Organizations of the Treadway Commission, excluding the internal control over financial
reporting of REL Consultancy Group Limited, which was acquired on November 29, 2005, and whose financial statements
reflect total assets and total revenues constituting 29.1% and 1.5%, respectively, of related consolidated financial statement
amounts as of and for the year ended December 30, 2005. Based on our evaluation under the framework in “Internal Control
– Integrated Framework,” our management concluded that our internal control over financial reporting was effective as of the
end of the period covered by this annual report.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the
period covered by this annual report, has been audited by BDO Seidman, LLP, an independent registered certified public
accounting firm, as stated in their report which is included herein.
-53-
Report of Independent Registered Certified Public Accounting Firm on Internal Control over Financial Reporting
Board of Directors and Shareholders
Answerthink, Inc.
Miami, Florida
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial
Reporting, that Answerthink, Inc. maintained effective internal control over financial reporting as of December 30, 2005, based on criteria
established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Answerthink, Inc.’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of REL Consultancy Group
Limited (“REL”), which is included in the 2005 consolidated financial statements of Answerthink, Inc. and constituted approximately
29.1% of consolidated total assets and 1.5% of consolidated total revenues as of and for the year December 30, 2005. Management did not
assess the effectiveness of internal control over financial reporting at REL because the Company acquired this entity during 2005. Refer to
Note 2 to the consolidated financial statements for further discussion of this acquisition and its impact on the Company’s consolidated
financial statements. Our audit of internal control over financial reporting of Answerthink, Inc. also did not include an evaluation of the
internal control over financial reporting of REL.
In our opinion, management’s assessment that Answerthink, Inc. maintained effective internal control over financial reporting as of
December 30, 2005, is fairly stated, in all material respects, based on the criteria established in “Internal Control – Integrated Framework”
issued by COSO. Also in our opinion, Answerthink, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 30, 2005, based on the criteria established in “Internal Controls – Integrated Framework” issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Answerthink, Inc. as of December 30, 2005, and the related consolidated statements of operations,
shareholders’ equity and comprehensive income (loss) and cash flows for the year ended December 30, 2005 and our report dated March
14, 2006 expressed an unqualified opinion.
/s/BDO Seidman, LLP
Miami, Florida
March 14, 2006
-54-
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during our most recently completed
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
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 2006 proxy
statement for the 2006 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to the Company's definitive 2006 proxy
statement for the 2006 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 2006 proxy
statement for the 2006 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 2006 proxy
statement for the 2006 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information appearing under the caption “Fees Paid to Independent Accountants” in the 2006 Proxy Statement is
hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1.
The following documents are filed as a part of this Form:
Financial Statements
The Consolidated Financial Statements filed as part of this report are listed and indexed on page 26. Schedules other
than those listed in the index have been omitted because they are not applicable or the required information has been included
elsewhere in this report.
2.
Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and Reserves are included in this report. Schedules other than
those listed in the index have been omitted because they are inapplicable or the information required to be set forth therein is
contained, or incorporated by reference, in the Consolidated Financial Statements of Answerthink or notes thereto.
3.
Exhibits: See Index to Exhibits on page 56
The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this
report.
-55-
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, 2006.
SIGNATURES
ANSWERTHINK, INC.
By:
/s/Ted A. Fernandez
Ted A. Fernandez
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed by the following persons
in the capacities and on the date indicated.
Signatures
Title
/s/ Ted A. Fernandez
Ted A. Fernandez
Chief Executive Officer and Chairman (Principal
Executive Officer)
/s/ Grant M. Fitzwilliam
Grant M. Fitzwilliam
Executive Vice President, Finance and Chief
Financial Officer (Principal Financial and Accounting
Officer)
Date
March 16, 2006
March 16, 2006
/s/ Allan R. Frank
Allan R. Frank
/s/ David N. Dungan
David N. Dungan
/s/ Richard Hamlin
Richard Hamlin
/s/ John R. Harris
John R. Harris
/s/ Edwin A. Huston
Edwin A. Huston
/s/ Alan T. G. Wix
Alan T. G. Wix
President and Director
March 16, 2006
Chief Operating Officer and Director
March 16, 2006
Director
Director
Director
Director
March 16, 2006
March 16, 2006
March 16, 2006
March 16, 2006
-56-
Exhibit
No.
3.1++++
3.2++++
9.1+
9.2+
9.3+
9.4+
10.1+
10.2+
10.3+
10.4+
10.5+
10.6*+
10.7*+++++
10.8*+
10.9*++++
10.10*+++++
10.11*+
10.12+
10.13+
10.14*+
10.15*+
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
Registrant's 1998 Stock Option and Incentive Plan
Amendment to Registrant’s 1998 Stock Option and Incentive Plan
Form of Senior Management Agreement dated April 23, 1997 between the Registrant and each of Messrs.
Fernandez, Frank and Knotts
Senior Management Agreement dated July 11, 1997 between Registrant and Mr. Dungan
Form of Employment Agreement entered into between the Registrant and Mr. Dungan
Form of Employment Agreement entered into between the Registrant and each of Messrs. Fernandez,
Frank and Knotts
Amendment No. 2 dated as of May 5, 1998 to Purchase Agreement dated April 23, 1997 among the
Registrant, GTCR V, MG, Gator and Tara
Amendment No. 2 dated as of May 5, 1998 to Stock Purchase Agreement dated March 5, 1998 between the
Registrant and FSC
Amendment to Certain Senior Management Agreements dated March 27, 1998 among the Company, the
Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan
Second Amendment to Certain Senior Management Agreements dated May 26, 1998 among the Company,
the Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan
AnswerThink Consulting Group, Inc. Employee Stock Purchase Plan
10.16*++
10.17*+++++ Amendment to Registrant’s Employee Stock Purchase Plan dated February 16, 2001
10.18*+++
10.19*+++
10.20*+++
10.21*+++
10.22++++++
Employment Agreement dated March 23, 1999 between the Registrant and Mr. Brennan
Restricted Stock Agreement dated July 31, 1997 between the Registrant and Mr. Brennan
Amendment to Restricted Stock Agreement dated March 27, 1998 between the Registrant and Mr. Brennan
Form of Senior Management Agreement dated July 31, 1997 between the Registrant and Mr. Brennan
Securities Purchase Agreement by and among THINK New Ideas, Inc., Capital Ventures International and
Marshall Capital Management, Inc.
Registration Rights Agreement dated as of March 3, 1999 by and among THINK New Ideas, Inc., Capital
Ventures International and Marshall Capital Management, Inc.
Joint Marketing and Alliance Agreement, dated October 7, 2003, by and among Answerthink, Inc., The
Hackett Group, Inc. and Accenture, L.L.P.
Amendment to Executive Agreement between Answerthink, Inc. and Ted A. Fernandez
Amendment to Executive Agreement between Answerthink, Inc. and David N. Dungan
Amendment to Executive Agreement between Answerthink, Inc. and Allan R. Frank
Amendment to Executive Agreement between Answerthink, Inc. and John F. Brennan
10.25++++++++
10.26++++++++
10.27++++++++
10.28++++++++
10.29+++++++++ Lawson Software & The Hackett Group Advisory Alliance Agreement dated May 9, 2005
10.23++++++
10.24+++++++
-57-
10.30*++++++++++ Amendment dated June 10th, 2005 to Executive Agreement between Answerthink, Inc. and Ted A.
Fernandez
10.31*+++++++++++ Employment Agreement dated November 9, 2005 between the Registrant and Grant M. Fitzwilliam
10.32^
Amendment Number 2 to the Answerthink, Inc. Employee Stock Purchase Plan (as amended on February
16, 2001).
10.33++++++++++++ Share Purchase Agreement dated November 29, 2005 between The Hackett Group Limited, Answerthink,
21.1^
23.1^
23.2^
31.1^
31.2^
32^
Inc. and the Sellers of REL Consultancy Group Limited
Subsidiaries of the Registrant
Consent of BDO Seidman, LLP
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
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.
Incorporated herein by reference to the Company’s Form 10-Q dated November 10, 2004.
*
^
+
++
+++
++++
+++++
++++++
+++++++
++++++++
Incorporated herein by reference to the Company’s Form 8-K dated May 13, 2005.
+++++++++
++++++++++ Incorporated herein by reference to the Company’s Form 8-K dated June 16, 2005.
+++++++++++ Incorporated herein by reference to the Company’s Form 10-Q dated November 9, 2005.
++++++++++++ Incorporated herein by reference to the Company’s Form 8-K dated December 1, 2005.
-58-