The Hackett Group
Annual Report 2006

Plain-text annual report

2006 ANNUAL REPORT Our strategy is to build strategic recurring relationships with our clients by providing them with a number of different ways they can leverage our proprietary intellectual capital. Dear Shareholders, Over the last several years we have been transforming our organization around a series of services that di- rectly leverage the enterprise performance metrics and best practice insight obtained through our proprietary benchmarking studies. In 2002, The Hackett Group was a small benchmarking organization. Today our Hackett Group has a revenue run rate approaching $100 million with a combination of services that provides a great foundation for growth. As with any true and powerful transformation the path is never what one expects. Therefore, it is important to refl ect on what we have accomplished over the last fl four years: • We have expanded Hackett’s offerings be- yond benchmarking, providing new ways for our clients to consume our intellectual capital and implementation insight through a series of membership advisory programs and business transformation services that uniquely help clients achieve world-class performance. • We have expanded our intellectual property beyond performance metrics to include our one of a kind Best Practice Repository and Tools and a growing best practice research that now cov- ers topics such as globalization and cash fl ow improvement. fl • We have built important connective strategies between our services that strengthen them indi- vidually as well as collectively. • We now compete with and are held in the same high regard as the best global strategy consulting and research advisory fi rms in the world. fi As we look back on 2006, our primary strategic objec- tive was to grow our Membership Advisory programs by increasing our sales incentives for these offerings. This effort was successful, resulting in a year over year increase in both Membership Advisory revenue and in annualized contract value of over 50%. Our goal remains to have 1000 members and 500 clients as quickly as possible. Our membership counts are now at approximately 780, and client count is at approximately 260. Given the brief history of this offering, the growth is indicative of the strategic investment we have made in developing this emerging capability and membership base within our service portfolio. As we head into 2007 one thing remains clear, our strategy is to build strategic recurring relationships with our clients by providing them a number of different ways they can leverage our best practice intellectual capital and insight. In 2007 our goal is to drive higher total Hackett Group revenue growth by increasing our Benchmarking and Transformation services at normalized rates while continuing to grow our advisory services as aggressively as possible. In order to strike this balance we have moved to a sales incentive structure that equally emphasizes the sale of all Hackett Group offerings while tying accelerator and other special recognition rewards to the sale of our Membership Advisory programs. Additionally, we introduced a Transformational Bench- mark offering which is designed to develop the broad- est and most strategic relationship with a client. We believe that leading with this new offering will allow us to drive a higher revenue relationship with clients while also introducing them to the unique elements of our Membership Advisory offering -- our Benchmark metrics, Best Practices Repository and the know-how and insight of our advisors. It is this combination of revenue per client coupled with the ability to develop a recurring relationship with a client that will allow us to realize the maximum potential from our Hackett Group business model. On the Best Practice Solutions front, we are enter- ing 2007 with improved market focus and demand in both SAP and Oracle. Over the last couple of years we have seen our Oracle Group reposition itself around the leverage of Hackett and our Best Practice Imple- mentation intellectual capital. We expect our other Best Practices Solutions Groups to follow their lead in 2007. Relative to Business Intelligence, we believe we can regain the momentum we had in our Hyperion Practice as we increase our emphasis on the growing demand we are seeing in the Hyperion Analytics and Reporting and Planning areas. We also believe that the recently announced acquisition of Hyperion by Oracle could further boost demand for Hyperion. With the enhancements in our sales model and go-to market strategy, we also understand that it is important to make corresponding changes in our delivery and functional infrastructure to ensure that we realize the appropriate returns from the investments that we have made over the last several years. An appropriate return is as important to our associates, who invest their careers with us, as it is for our shareholders who invest their money in our organization. These changes include: • Flattening our organization to allow us to be more effective in the execution of global initiatives. • Increased focus of our senior leaders on the marketplace. • Increased utilization of our Best Practice Imple- mentation intellectual property. • Improvements in our product architecture to make sure we strike the right balance between value delivered and profi tability. fi • Rebalancing, and in some cases, reducing our SG&A in order to ensure that it is aligned with our performance goals. In summary, I believe the investments we have made over the last several years to transform our organiza- tion around our proprietary intellectual capital will re- sult in a powerful and valuable organization. Although work remains for the organization to be positioned exactly where we envisioned, much progress has been made and we believe we are on the right path toward achieving our goals. Lastly, it is important to recognize the outstanding contribution that our associates have made during this strategic transformation of our business model. I would like to thank them, along with our clients and share- holders, for their continued support. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 2006 OR (cid:133) 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: (Title of each class) (Name of each exchange on which registered) Common Stock, par value $.001 per share The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95) 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:133) No (cid:95) 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 (cid:95) NO (cid:133) 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. (cid:133) 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:133) Accelerated filer (cid:95) Non-accelerated filer (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95) The aggregate market value of the common stock held by non-affiliates of the registrant was $129,601,902 on June 30, 2006 based on the last reported sale price of the registrant’s common stock on the Nasdaq Global Market. The number of shares of the registrant’s common stock outstanding on March 9, 2007 was 44,887,809. DOCUMENTS INCORPORATED BY REFERENCE Part III of the Form 10-K incorporates by reference certain portions of the registrant’s proxy statement for its 2007 Annual Meeting of Stockholders 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 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ITEM 9A. Control and Procedures ITEM 9B. Other Information ITEM 10. Directors, Executive Officers and Corporate Governance ITEM 11. Executive Compensation PART III ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ITEM 13. Certain Relationships and Related Transactions, and Director Independence ITEM 14. Principal Accountant Fees and Services ITEM 15. Exhibits and Financial Statement Schedules PART IV Signatures Index to Exhibits Page 3 9 13 13 13 13 14 17 18 25 26 54 54 57 57 57 57 57 57 57 58 59 2 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 (“Hackett”), 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 Hackett empirically defines world-class performance in sales, general and administrative (“SG&A”) and supply chain activities with analysis gained through more than 3,500 benchmark studies over 15 years at 2,100 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 2006 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 their business consulting and information technology (“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 continue to look for ways to automate, centralize and standardize business processes by leveraging highly educated, low cost offshore labor markets and their investments in Enterprise Resource Planning (“ERP”) systems. 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. 3 OUR APPROACH Answerthink provides business and technology consulting services designed to enable companies to achieve world-class business performance by combining intellectual capital from Hackett, with its extensive database of business process best practices and performance measurement results, and our proprietary Best Practice Implementation (“BPI”) approach. Hackett is a strategic advisory firm that helps executives understand how well they are performing today 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 telephonic access, peer learning opportunities and annual events. Best practice implementation offerings include benchmarking, business transformation and working capital management 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 software 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. 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 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. 4 COMPETITION The strategic business advisory and technology consulting marketplace continues to be extremely competitive. The marketplace will remain competitive as companies continue to look for ways to improve 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 and solutions, ability to deliver results on a timely basis, availability of appropriate resources, and global reach and scale. Still, we believe our competitive position is strong. With Hackett intellectual capital and its direct link to our BPI approach, we believe we can uniquely assist our clients. 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 2,100 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 Hackett as an IP-centric strategic advisory organization. The Hackett brand is widely recognized for benchmarking metrics and best practices strategies. By building a series of highly complementary on-site and off-site offerings that allow our clients access to our Intellectual Property (“IP”) and best practice implementation insight, we are able to build trusted strategic relationships with our clients. Depending where our clients are in their assessment or implementation of performance improvement initiatives, we offer our clients a combination of offerings that supports their efforts. If they need on-site planning, design and/or implementation support, we offer them a combination of benchmarking and transformation support. If they need off-site access to our IP and advisors to help them either assess or execute on their own, then they can avail themselves to our Advisory Programs. The key is for the client to know that we can support them strategically by leveraging our unique IP and insight so that we are able to build a strategic relationship with a client which is appropriate for them. We also believe that clients that value our IP will turn to us for other services when the need arises allowing us over time to ascribe a larger amount of our total revenues to a growing client base which will also improve the predictability of our results. • Continue to expand our BPI tools. BPI incorporates intellectual capital from Hackett 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 BPI approach and tools. Our objective is to help clients make smarter business process and software configuration decisions as a result of our BPI methods and knowledge. We are continuously updating our BPI content and tools through benchmarking, transformation or research activities. Additional BPI updates are also driven by new software releases that drive new innovation in business process automation. • Create strategic relationships that help us leverage and expand our Hackett intellectual capital base as well as grow our revenues. We continue to believe that there are other organizations that can help us grow revenues and our intellectual capital consistent with our strategy. Examples of such relationships include programs that we have executed with Accenture, Lawson and Oracle. • 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 hour/5 day operations. With this infrastructure in place, we are expecting our headcount and utilization of our resources in India to further expand in 2007. • 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. We believe that 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 Group Limited (“REL”) in 2005 expanded our knowledge 5 and capabilities into working capital management and expanded our client base and exposure to additional markets abroad. 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 are used by clients for quick access to fact-based advice on proven approaches and methods to increase the efficiency and effectiveness of SG&A. Best Practice Research: Empirically based research and insight derived from Hackett benchmark and transformation 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. 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, it has measured and evaluated the efficiency and effectiveness of enterprise functions at over 2,100 global organizations. This includes 97% of the Dow Jones Industrials, 77% of the Fortune 100 and 90% 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 over 1,400 best practices for over 90 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, a global leader in generating cash improvement from working capital, we offer REL services which are designed to help companies improve cash flow from operations through improved working capital management, reduced costs and increased service quality. 6 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: 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. CLIENTS We focus on long-term client relationships with Global 2000 firms and other sophisticated strategic buyers of business and IT consulting services. During 2006, our ten most significant clients accounted for approximately 21% of revenues, and no client 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 2006, 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 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 2007 is to continue to increase awareness of our brand that we have created around Hackett empirical knowledge capital and BPI. Our Hackett and BPI message will remain the central focus of our marketing and communications programs this year to help expand 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 2007, the compensation programs for our associates reflect an emphasis optimizing our total revenue relationship with our clients while continuing to emphasize the growth of advisory programs. For our Best Practice Solutions Groups, we will continue to utilize Hackett intellectual capital as a way to differentiate the relationships we have with the software providers and with our clients. 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 and Senior Directors The Sales Organization • Business Development Associates • The Delivery Organization The Leadership Team and Senior Directors are 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 the 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 are aligned to our core practice areas within their target accounts. They also handle opportunities in their geographic territories as they arise. 7 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 resources, we have a corporate marketing and communications organization responsible for overseeing our marketing programs, public relations and employee communications activities. We have segmented our market focus into the following categories: • 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. Target account criteria include 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 mostly include large prospects, dormant clients, existing medium-sized clients and mid-tier market accounts and are 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 of greater scale or different skill sets or with software developers which enables all parties to jointly market their products and services to prospective clients. 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 and represent 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 Our human resources staff includes dedicated individuals 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 new associates. 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. As of December 29, 2006, we had approximately 800 associates, approximately 70% of whom were billable professionals. None of our 8 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. Our financial results may fluctuate from quarter to quarter. In future quarters, our operating results may not meet public market analysts’ and investors’ expectations. If that happens, the price of our common stock may fall. Many factors can cause these fluctuations, including: • • • • • • • • • • • • the number, size, timing and scope of client engagements; customer concentration; long and unpredictable sales cycles; contract terms of client engagements; degrees of completion of client engagements; client engagement delays or cancellations; competition for and utilization of employees; how well we estimate the resources and effort we need to complete client engagements; the integration of acquired businesses; pricing changes in the industry; economic conditions specific to business and information technology consulting; and general economic conditions. A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular quarter. As a result, if we experience unanticipated changes in client engagements or in employee utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors, we believe you should not compare our quarter-to-quarter operating results to predict future performance. 9 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 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 2006, our ten largest clients accounted for approximately 20% 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 of our large clients 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, 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 our inception, we have 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. 10 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 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. Revenue is not recognized on a project prior to receiving a signed contract. To the extent that we fail to have detailed written contracts in place, our ability to collect fees, protect our intellectual property and protect ourselves from liability to others may be impaired. Our corporate governance provisions may deter a financially attractive takeover attempt. Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders would receive a premium for their shares. These provisions include the following: • • stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders or nominating a director for election; our board of directors is staggered into three classes and the members may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares entitled to vote; • we would not be required to hold a special meeting to consider a takeover proposal unless holders of more than a majority of the shares entitled to vote on the matter were to submit a written demand or demands for us to do so; and • our Board of Directors may, without obtaining stockholder approval, classify and issue up to 1,250,000 shares of preferred stock with powers, preferences, designations and rights that may make it more difficult for a third party to acquire us. In addition, our Board of Directors has adopted a shareholder rights plan. Subject to certain exceptions, in the event that a person or group in the future becomes the beneficial owner of 15% or more of our common stock or commences, or publicly announces an intention to commence, a tender or exchange offer which would result in its ownership of 15% or more of our outstanding common stock (or in the case of Liberty Wanger Asset Management, L.P. (now known as Columbia 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. 11 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 renewed 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. In addition, the stock prices of many business and technology services 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. 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, where we 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. 12 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 City, Paris, Philadelphia and Hyderabad, India. As of December 29, 2006 we had operating leases that extended through July 2015. 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. 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 2006. 13 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 Global Market (formerly named 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 Global Market. 2006 Fourth Quarter Third Quarter Second Quarter First Quarter 2005 Fourth Quarter Third Quarter Second Quarter First Quarter High Low 3.15 $ 4.26 $ 6.65 $ 6.45 $ 2.05 2.40 3.65 4.10 4.72 $ 4.62 $ 4.20 $ 5.00 $ 3.49 3.56 3.10 3.70 $ $ $ $ $ $ $ $ The closing sale price for the common stock on March 9, 2007 was $3.21. As of March 9, 2007, there were approximately 300 holders of record of our common stock and 44,887,809 shares of common stock outstanding. 14 Performance Graph The following graph compares our cumulative total stockholder return since December 28, 2001 with the Nasdaq Composite Index and A Peer Group Index composed of other companies with similar business models. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 28, 2001. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Answerthink, Inc., The NASDAQ Composite Index And A Peer Group $140 $120 $100 $80 $60 $40 $20 $0 12/28/01 1/3/03 1/2/04 12/31/04 12/30/05 12/29/06 Answerthink, Inc. NASDAQ Composite Peer Group * $100 invested on 12/28/01 in stock or on 12/31/01 in index-including reinvestment of dividends. Indexes calculated on month-end basis. 12/28/01 1/3/03 1/2/04 12/31/04 12/30/05 12/29/06 Answerthink, Inc. NASDAQ Composite Peer Group $ 100.00 $ 100.00 $ 100.00 $ 41.19 $ 68.85 $ 38.42 $ 84.95 $ 101.86 $ 64.68 $ 70.82 $ 112.16 $ 64.46 $ 64.59 $ 115.32 $ 53.55 $ 46.81 $ 127.52 $ 57.45 Company Dividend Policy We have not paid any and 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, 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 $30.0 million, of which $1.7 million of repurchases of our common 15 stock were made during the year ended December 29, 2006 and approximately $6.1 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. The following table summarizes our share repurchases during the year ended December 29, 2006: Period Total Number of Shares Average Price Paid Per Share Total Number of Shares as Part of Publicly Announced Programs Maximum Dollar Value that may Yet Be Purchased Under the Program December 31, 2005 through July 28, 2006 July 29, 2006 through August 25, 2006 August 26, 2006 through September 29, 2006 September 30, 2006 through December 29, 2006 - $ 315,700 307,800 - - 2.81 2.80 - - $ 315,700 307,800 - 7,880,765 6,995,231 6,133,373 6,133,373 Total 623,500 $ 2.80 623,500 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 29, 2006, 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.” Year Ended December 29, 2006 December 30, 2005 December 31, 2004 January 2, 2004 January 3, 2003 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenues: Revenues before reimbursements Reimbursements Total revenues(1) Costs and expenses: Cost of service: $ 162,167 18,388 $ 146,693 16,625 $ 129,339 14,208 $ 117,945 14,442 $ 180,555 163,318 143,547 132,387 Personnel costs before reimbursable expenses Reimbursable expenses 93,102 18,388 83,380 16,625 76,626 14,208 73,551 14,442 Total cost of service 111,490 100,005 90,834 87,993 Selling, general and administrative costs Impairment of goodwill Restructuring costs Loss from misappropriation 67,053 — 6,313 341 59,844 — 2,923 1,037 49,960 — 3,749 592 44,697 — 4,875 278 Total costs and operating expenses 185,197 163,809 145,135 137,843 156,357 20,490 176,847 104,981 20,490 125,471 53,416 20,000 10,886 — 209,773 (32,926) Loss from operations Other income: Interest income, net (4,642) (491) (1,588) (5,456) 507 1,089 802 706 570 Income (loss) before income taxes, income (loss) from discontinued operations and cumulative effect of change in accounting principle Income tax expense (benefit) (4,135) 913 598 (6) (786) 324 (4,750) 350 Income (loss) from continuing operations Income (loss) from discontinued operations, net of income taxes (5,048) — 604 — (1,110) 370 (5,100) — Income (loss) before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle (5,048) — 604 — (740) — (5,100) — (32,356) (3,508) (28,848) (8,911) (37,759) (31,200) Net income (loss) $ (5,048) $ 604 $ (740) $ (5,100) $ (68,959) 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: $ (0.11) — $ $ — $ (0.11) 44,653 $ 0.01 $ — $ — $ 0.01 43,575 $ (0.03) $ 0.01 — $ (0.02) $ 44,188 $ $ (0.11) — $ $ — $ $ $ $ (0.11) 45,140 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 $ (0.11) — $ $ — $ (0.11) 44,653 $ 0.01 $ — $ — $ 0.01 45,302 $ (0.03) $ 0.01 — $ (0.02) $ 44,188 $ (0.11) $ $ $ (0.11) 45,140 $ — $ — $ $ Consolidated Balance Sheet Data: Cash and cash equivalents Restricted cash Marketable investments Working capital Total assets Shareholders’ equity $ $ $ $ $ $ 19,585 600 — 26,761 132,845 98,455 $ $ $ $ $ $ 18,103 4,257 9,902 27,293 151,881 99,039 $ 38,890 $ 3,000 $ 9,902 $ 48,916 $ 128,733 $ 98,910 $ $ $ $ $ $ 54,441 3,000 10,000 58,525 135,223 104,934 $ $ $ $ $ $ (0.62) (0.19) (0.68) (1.49) 46,348 (0.62) (0.19) (0.68) (1.49) 46,348 35,369 2,909 28,050 72,851 145,361 113,047 (1) In November 2005, the Company purchased REL Consultancy Group. As a result of the purchase, total revenues include $20.1 million in the 2006 results of operations. 17 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 (“Hackett”), 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. Hackett, 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 Hackett 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 15 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. 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 cost of service. 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. 18 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. The foregoing list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. Please see our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States. 19 Results of Operations Our fiscal year generally consists of a 52-week period and periodically consists of a 53-week period because each fiscal year ends on the Friday closest to December 31. Fiscal years 2006, 2005 and 2004 ended on December 29, 2006, December 30, 2005 and December 31, 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: Revenues: December 29, 2006 December 30, 2005 December 31, 2004 (in thousands, except percentage data) Year Ended Revenues before reimbursements Reimbursements $ 162,167 18,388 89.8% $ 146,693 16,625 10.2% 89.8% $ 129,339 14,208 10.2% 90.1% 9.9% Total revenues 180,555 100.0% 163,318 100.0% 143,547 100.0% Costs and expenses: Cost of service: Personnel costs before reimbursable expenses (includes $964, $749 and $852 of stock compensation expense in 2006, 2005 and 2004, respectively) Reimbursable expenses Total cost of service Selling, general and administrative costs (includes $3,135, $2,643 and $1,469 of stock compensation expense in 2006, 2005 and 2004, respectively) Restructuring costs Loss from misappropriation 93,102 18,388 51.6% 10.2% 83,380 16,625 111,490 61.8% 100,005 51.0% 10.2% 61.2% 76,626 14,208 90,834 53.4% 9.9% 63.3% 67,053 6,313 341 37.1% 3.5% 0.2% 59,844 2,923 1,037 36.7% 1.8% 0.6% 49,960 3,749 592 34.8% 2.6% 0.4% Total costs and operating expenses 185,197 102.6% 163,809 100.3% 145,135 101.1% Loss from operations Other income: (4,642) (2.6)% (491) (0.3)% (1,588) (1.1)% Interest income, net 507 0.3% 1,089 0.7% 802 0.6% Income (loss) before income taxes and income from discontinued operations Income tax expense (benefit) Income (loss) from continuing operations Income from discontinued operations, net of income taxes Net income (loss) Comparison of 2006 to 2005 (4,135) 913 (5,048) (2.3)% 0.5% (2.8)% 598 (6) 604 0.4% 0.0% 0.4% (786) 324 (0.5)% 0.2% (1,110) (0.7)% — — — — 370 0.2% $ (5,048) (2.8)% $ 604 0.4% $ (740) (0.5)% Overview. We reported a net loss of $5.0 million in 2006 compared to net income of $0.6 million in 2005. Our net loss of $5.0 million in 2006 included restructuring costs of $6.3 million, non-cash stock compensation expense of $4.1 million, and $0.3 million of loss from misappropriation. Non-cash compensation expense of approximately $1.0 million and $3.1 million is included in cost of service before reimbursable expenses and selling, general and administrative expenses, respectively, in our consolidated statement of operations. Our net income of $0.6 million in 2005 included restructuring costs of $2.9 million, non-cash stock compensation expense of $3.4 million and $1.0 million of loss from misappropriation. In 2005, non-cash compensation expense of approximately $0.8 million and $2.6 million is included in cost of service before reimbursable expenses and selling, general and administrative expenses, respectively, in our consolidated statement of operations. The restructuring costs in 2006 relate to $2.8 million for the consolidation of additional facilities and related exist costs, primarily as a result of the acquisition of REL Consultancy Group (“REL”) in November 2005, and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities. REL is a privately held UK company that provides working capital management advisory services primarily in Europe and the U.S. The restructuring costs in 2005 related to $1.1 million for the consolidation of additional facilities 20 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 closure and consolidation of facilities. The non-cash compensation expense was primarily related to the issuance of restricted stock units to employees at a senior director level or above. The loss from misappropriation in 2006 and 2005 related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue that were misappropriated by our former United Kingdom (“UK”) disbursement agent. Revenues. Revenues increased 11% to $180.6 million in 2006 from $163.3 million in 2005. The increase in revenues was primarily attributable to revenue of approximately $20.1 million relating to REL, which was acquired on November 29, 2005, increased revenue from our membership advisory program sales and related business transformation services and increased revenue from our Hyperion implementation practice. These impacts were partially offset by a decline in ERP and custom business intelligence revenues due to our continued de-emphasis of application staff augmentation work and increased price competition from offshore suppliers. Reimbursements as a percentage of revenues were comparable at 10% during fiscal years 2006 and 2005. In fiscal year 2006, no customer had revenues equal to or greater than 5% of total revenues. In fiscal year 2005, one customer had revenues equal to 5% of total revenues. Our contracts can be cancelled for convenience by the customer upon 30 days’ notice. The cancellation or significant reduction in the use of services from key customers could have a material adverse effect on our results of operations. 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 these key customers could have a material adverse effect on our results of operations. Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 12% to $93.1 million in 2006 from $83.4 million in 2005. This increase was primarily attributable to an increase in the average number of billable consultants as a result of the REL acquisition in November 2005, offset by a reduction in headcount in the Business Applications group. Cost of service as a percentage of revenue was 62% in 2006, comparable to 61% in 2005. Selling, General and Administrative. Selling, general and administrative expenses increased 12% to $67.1 million in 2006 from $59.8 million in 2005. The overall increase in selling, general and administrative expenses was primarily attributable to the acquisition of REL in November 2005. Selling, general and administrative expenses as a percentage of revenues were comparable at 37% in 2006 and 2005. Restructuring Costs. Restructuring costs were $6.3 million and $2.9 million in 2006 and 2005, respectively. The restructuring costs recorded in 2006 were comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million is a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifts to a proprietary best practice and intellectual capital and strategic advisory services firm. The $2.9 million of restructuring costs in 2005 is 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, we were fully released from $20.0 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. Loss From Misappropriation. The loss from misappropriation of $0.3 million in 2006 and $1.0 million in 2005 relates to funds that were misappropriated by our former UK disbursement agent. As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by our former UK disbursement agent which relates to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006. The Company and its former disbursement agent have agreed to settlement terms that, if satisfied, would include the full repayment of the misappropriation. In connection with the settlement, the agent made an initial cash payment to the Company in January 2007 of $0.4 million and has agreed to make additional payments to the Company on or before August 31, 2007 that, when taken together with the initial payment, approximate $2.5 million (at current foreign currency exchange rates). If the payments are not received by this date, the Company can foreclose certain assets pledged by the agent. The agent has guaranteed to pay any amount by which the initial payment, additional cash payments and the net proceeds from the sale of the pledged assets fall below approximately 21 $2.5 million (at current foreign currency exchange rates). This shortfall amount would be repaid in annual installments of not less than approximately $0.1 million per year (at current foreign currency exchange rates) beginning in 2007, together with interest thereon accruing from January 1, 2008. The Company cannot predict whether the former disbursement agent will satisfy the terms of the settlement agreement. Due to this uncertainty, any amounts recovered as a result of the Company’s claim have been and will be accounted for as income in the period collected. Income Taxes. In 2006, we recorded income tax expense of $0.9 million, which represented an effective tax rate of 22.2% of our loss before income taxes. These taxes are primarily attributable to federal and state taxes related to REL’s U.S. entity, which could not be offset against our federal net operating loss carryforward for the fist six months of 2006. In 2005, we recorded an income tax benefit of $6 thousand, which represented an effective tax rate of 1.0% of our income before income taxes. The 2005 tax benefit was comprised of a $0.2 million tax benefit related primarily to REL post acquisition losses in the U.S., partially offset by $0.2 million of income tax expense for certain state and foreign taxes related to non REL entities. 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 $69.9 million of U.S. federal net operating loss carryforwards as of December 29, 2006. A full valuation allowance has been provided for all net operating loss carryforwards. Comparison of 2005 to 2004 Overview. We reported net income of $0.6 million in 2005 compared to a net loss of $0.7 million in 2004. Our $0.6 million of net income during 2005 included restructuring costs of $2.9 million, non-cash stock compensation expense of $3.4 million, and $1.0 million of loss from misappropriation. Non-cash compensation expense of approximately $0.8 million and $2.6 million is included in cost of service before reimbursable expenses and selling, general and administrative expenses, respectively, in our consolidated statement of operations. Our $0.7 million net loss during 2004 included restructuring costs of $3.7 million, non-cash stock compensation expense of $2.3 million, and $0.6 million of loss from misappropriation. Non-cash compensation expense of approximately $0.8 million and $1.5 million is included in cost of service 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 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 was primarily related to the issuance of restricted stock units to employees at a senior director level or above. The loss from misappropriation in 2005 and 2004 related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue that were misappropriated by our former UK disbursement agent. 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 business transformation services and increased revenue from our Hyperion implementation practice. Additionally, the acquisition of REL contributed to the increase in revenues for 2005. REL revenues for 2005 amounted to $2.5 million. 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. Our contracts can be cancelled for convenience by the customer upon 30 days’ notice. The cancellation or significant reduction in the use of services from key customers could have a material adverse effect on our results of operations. 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 these key customers could have a material adverse effect on our results of operations. Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service 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. Cost of service as a percentage of revenues, excluding the impact of REL in 2005, decreased to 61% 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 22 transformation advisory services including the launch of the new fixed priced transformation advisory programs in March 2005 sold under the Hackett brand. 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 $20.0 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 $0.7 million 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 $0.4 million 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. Loss From Misappropriation. The loss from misappropriation of $1.0 million in 2005 and $0.6 million in 2004 relates to funds that were misappropriated by our former UK disbursement agent. As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by our former UK disbursement agent which relates to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements for our UK operations. The Company and the former disbursement agent have agreed to settlement terms that, if satisfied, would include the full repayment of the misappropriation. In connection with the settlement, the agent made an initial cash payment to the Company in January 2007 of $0.4 million and has agreed to make additional payments to the Company on or before August 31, 2007 that, when taken together with the initial payment, approximate $2.5 million (at current foreign currency exchange rates). If the payments are not received by this date, the Company can foreclose certain assets pledged by the agent. The agent has guaranteed to pay any amount by which the initial payment, additional cash payments and the net proceeds from the sale of the pledged assets fall below approximately $2.5 million (at current foreign currency exchange rates). This shortfall amount would be repaid in annual installments of not less than approximately $0.1 million per year (at current foreign currency exchange rates) beginning in 2007, together with interest thereon accruing from January 1, 2008. The Company cannot predict whether the former disbursement agent will satisfy the terms of the settlement agreement. Due to this uncertainty, any amounts recovered as a result of the Company’s claim have been and will be accounted for as income in the period collected. Income Taxes. In 2005, we recorded an income tax benefit of $6 thousand which represented an effective tax rate of 1.0% of our income before income taxes and income from discontinued operations. The 2005 tax benefit was comprised of a $0.2 million tax benefit related primarily to REL post acquisition losses in the U.S. partially offset by $0.2 million of income tax expense for certain state and foreign taxes related to non REL entities. In 2004, we recorded an income tax expense of $0.3 million which represented an effective tax rate of 41.2% of our loss before income taxes and income from discontinued operations, 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 $76.0 million of U.S. federal net operating loss carryforwards as of December 30, 2005. The loss from misappropriation increased the UK’s net operating loss carryforward by $1.9 million as of December 30, 2005. A full valuation allowance has been provided for all net operating loss carryforwards. Liquidity and Capital Resources We have funded our operations primarily with cash flows generated from operations and the proceeds from our initial public offering. At December 29, 2006, we had $19.6 million of cash and cash equivalents compared to $18.1 million at December 30, 23 2005. We had $0.6 million at December 29, 2006 and December 30, 2005, 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 REL and have classified this deposit as restricted cash on the accompanying consolidated balance sheet. This loan was repaid in March 2006. At December 29, 2006 the Company did not have any marketable investments. At December 30, 2005, we had marketable investments of $9.9 million. Net cash provided by operating activities was $6.7 million in 2006 compared to $5.7 million for 2005. During 2006, net cash provided by operating activities was primarily attributable to a decrease of $5.7 million in accounts receivable and unbilled revenue and a decrease of $2.1 million in prepaid expenses and other assets, partially offset by a decrease of $5.5 million in accrued expenses. During 2005, net cash provided by operating activities was primarily attributable to net income of $0.6 million, $9.1 million of non-cash expenses and increases in accounts payable of $1.0 million, and accrued expenses and other liabilities of $2.7 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, provision for doubtful accounts and the write-off of leasehold improvements. Net cash provided by investing activities was $1.0 million, compared to net cash used in investing activities of $22.6 million in 2005. During 2006, net cash provided by investing activities was primarily attributable to $10.0 million of proceeds from the sales, calls and maturities of marketable investments and a $3.7 million decrease in restricted cash, partially offset by $2.1 million of purchases of property and equipment and $10.5 million in cash used in the acquisition of businesses. 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. Net cash used in financing activities was $6.3 million in 2006 compared to $3.9 million during 2005. During 2006, the cash used in financing activities was primarily attributable to the repayment of the $3.7 million Employee Benefit Trust loan acquired as part of the acquisition of REL, $1.7 million for the repurchase of our common stock, $1.0 million for the repayment of bank overdrafts, and $0.7 million for payment of employee withholding tax related to vesting of restricted stock units, partially offset by $1.0 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. 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. 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 aggregate $25.0 million of our common stock, thereby increasing the total program size to $30.0 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 29, 2006, we had repurchased 7,157,655 shares of our common stock at an average price of $3.33 per share. We hold repurchased shares of our common stock as treasury stock. In November 2005, the Company purchased REL and under the terms of the Share Purchase Agreement, the stockholders of REL received aggregate cash of $21.3 million upon closing. During 2006, approximately $6.9 million of deferred consideration was paid. 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 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 2006 we paid $1.5 million and in both 2005 and 2004, we paid $1.1 million of earned contingent consideration, which totaled $3.7 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 24 complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired. There were no material capital commitments at December 29, 2006. The following summarizes our lease commitments under non-cancelable operating leases for premises at December 29, 2006 (in thousands): Less than 1 year 1-3 years 4-5 years After 5 years $ 3,433 6,542 4,381 249 $ 14,605 Off-Balance Sheet Arrangements We have no off-balance sheet arrangements at December 29, 2006. Recently Issued Accounting Standards In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard permits entities to choose to measure many financial instruments and certain other items at fair value. This standard is effective for our fiscal year beginning December 29, 2007. We do not expect that the implementation of this statement will have a material impact on our results of operations, financial position, or liquidity. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard is effective for our fiscal year beginning December 30, 2006. We do not expect that the implementation of this statement will have a material impact on our results of operations, financial position, or liquidity. In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109 by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. This standard is effective for our fiscal year beginning December 30, 2006. We are currently evaluating the impact that the adoption of FIN No. 48 will have on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 29, 2006, 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 29, 2006 and December 30, 2005 Consolidated Statements of Operations for the Years Ended December 29, 2006, December 30, 2005 and December 31, 2004 Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 29, 2006, December 30, 2005 and December 31, 2004 Consolidated Statements of Cash Flows for the Years Ended December 29, 2006, December 30, 2005 and December 31, 2004 Notes to Consolidated Financial Statements Schedule II — Valuation and Qualifying Accounts and Reserves Page 27 29 30 31 32 33 53 26 Report of Independence Registered Certified Public Accounting Firm Board of Directors and Shareholders Answerthink, Inc. Miami, Florida We have audited the accompanying consolidated balance sheets of Answerthink, Inc. as of December 29, 2006 and December 30, 2005 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended. 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 based on our audits. We conducted our audits 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 also 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 audits provide 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 29, 2006 and December 30, 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule for 2006 and 2005 presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for share- based compensation. 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 29, 2006, based on the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 13, 2007, expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Miami, Florida March 13, 2007 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 statements of operations, of shareholders’ equity and comprehensive income and of cash flows for the year ended December 31, 2004 present fairly, in all material respects, the results of operations of Answerthink, Inc. and its subsidiaries and their cash flows for the year 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 year ended December 31, 2004 listed in the accompanying index presents fairly, in all material respects, the information set forth therein 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Miami, Florida March 14, 2005, except for the effect of the restatement described in Note 1 included in the 2005 Form 10-K/A (not separately presented herein), as to which the date is February 15, 2007 28 ANSWERTHINK, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 29, 2006 December 30, 2005 ASSETS Current assets: Cash and cash equivalents Marketable investments Restricted cash Accounts receivable and unbilled revenue, net of allowance of $1,851 and $1,766 in 2006 and $ 19,585 $ — — 2005, respectively Prepaid expenses and other assets Total current assets 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: 51,816,910 shares at December 29, 2006; 51,020,343 shares at December 30, 2005 Additional paid-in capital Unearned compensation Treasury stock, at cost, 7,157,655 shares repurchased at December 29, 2006 and 6,534,155 shares repurchased at December 30, 2005 Accumulated deficit Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity 18,103 9,902 3,657 41,928 3,273 76,863 600 6,304 6,422 61,692 35,818 1,137 56,540 600 5,183 3,870 66,652 $ 132,845 $ 151,881 $ 5,427 $ 24,352 — 29,779 4,611 34,390 — 6,319 39,594 3,657 49,570 3,272 52,842 — — — 52 279,621 — 51 282,749 (8,003) (23,867) (158,703) 1,352 98,455 (22,119) (153,655) 16 99,039 $ 132,845 $ 151,881 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: Cost of service: Personnel costs before reimbursable expenses (includes $964, $749 and $852 of stock compensation expense in 2006, 2005 and 2004, respectively) Reimbursable expenses Total cost of service Selling, general and administrative costs (includes $3,135, $2,643 and $1,469 of stock compensation expense in 2006, 2005 and 2004, respectively) Restructuring costs Loss from misappropriation Total costs and operating expenses Loss from operations Other income (expense): Interest income Interest expense Income (loss) before income taxes and income from discontinued operations Income tax expense (benefit) Income (loss) from continuing operations Income from discontinued operations, net of income taxes Year Ended December 29, 2006 December 30, 2005 December 31, 2004 $ 162,167 $ 18,388 146,693 $ 129,339 14,208 16,625 180,555 163,318 143,547 93,102 18,388 83,380 16,625 76,626 14,208 111,490 100,005 90,834 67,053 6,313 341 59,844 2,923 1,037 49,960 3,749 592 185,197 163,809 145,135 (4,642) (491) (1,588) 673 (166) (4,135) 913 (5,048) — 1,168 (79) 866 (64) 598 (6) 604 — (786) 324 (1,110) 370 Net income (loss) $ (5,048) $ 604 $ (740) 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 Weighted average common shares outstanding 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 $ (0.11) $ $ — $ $ (0.11) $ 0.01 $ (0.03) — $ 0.01 0.01 $ (0.02) 44,653 43,575 44,188 $ (0.11) $ — $ $ $ (0.11) $ 0.01 $ (0.03) — $ 0.01 0.01 $ (0.02) Weighted average common and common equivalent shares outstanding 44,653 45,302 44,188 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) Unearned Compensation Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Comprehensive Income (Loss) Common Stock Shares Amount Additional Paid-in Capital 48,291 $ 678 — Shares 48 $ 274,481 (3,550) 2,910 — — (1,977) 1 — Amount $ (7,686) — (10,492) Treasury Stock $ (8,367) $ — — (153,519) $ — — — — — — — — — — (97) — — — 62 — — — — — — — — — — 48,969 $ 2,051 — — — — — — — 51,020 $ — — — — — — — — — 49 $ 277,356 (5,527) 269 — — (1,007) 2 — — — — $ (18,178) — (3,941) 5,135 — — — — — (11) — — — — — — — — — — — 51 $ 282,749 (6,534) — — — — — — $ (22,119) $ $ 97 2,259 — — — — — (6,011) $ — — (5,135) 3,143 — — — — (8,003) $ — — — (740) — — — (154,259) $ — — — — — 604 — — (153,655) $ (23) $ — — — — — — (98) 74 — (47) $ — — — — — — 63 — 16 $ 104,934 2,911 (10,492) — 2,259 62 (740) $ (98) 74 — 98,910 271 (3,941) $ — 3,143 (11) 604 63 — 99,039 $ $ (740) (98) 74 (764) 604 63 667 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 Reclassification upon implementation of SFAS No. 123R Issuance of common stock Treasury stock purchased Issuance of restricted stock units, net of — 797 — — (8,003) — 1 173 — — — (624) — — (1,748) 8,003 — — — — — — — — — 174 (1,748) cancellations — — 375 — — — — — 375 Stock compensation expense under SFAS No. 123R Amortization of restricted stock units Net loss Unrealized holding losses on available for sale marketable investments Foreign currency translation Total Comprehensive Loss Balance at December 29, 2006 — — 486 — 3,841 — — — — — — — — — — — — — — — — — (5,048) — 486 3,841 (5,048) — — — 51,817 $ — — — — — — — — — 52 $ 279,621 (7,158) — — — — — — $ (23,867) $ __ — — — $ 98 1,238 — (158,703) $ 1,352 $ 98 1,238 — 98,455 $ (5,048) 98 1,238 (3,712) $ The accompanying notes are an integral part of the consolidated financial statements. 31 ANSWERTHINK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 29, 2006 December 30, 2005 December 31, 2004 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating $ (5,048) $ 604 $ (740) activities: Depreciation and amortization Non-cash stock compensation expense Provision for doubtful accounts Write-off of leasehold improvements 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 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 5,168 4,099 413 719 4,870 3,392 797 — 5,177 2,321 1,060 — 5,697 2,056 (891) (5,503) 6,710 (2,134) 3,657 — 10,000 (10,481) (7,572) (88) 986 2,717 (3,210) 920 (707) (2,382) 5,706 2,439 (1,762) 2,400 (27,900) 27,900 (23,256) (3,199) — (39,750) 39,750 (7,210) Net cash provided by (used in) investing activities 1,042 (22,618) (10,409) 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 (repayments of) 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 907 (733) (1,748) (1,039) (3,657) (6,270) 1,482 18,103 1,704 (1,432) (3,941) 162 (368) 2,911 — (10,492) — — (3,875) (7,581) (20,787) 38,890 (15,551) 54,441 $ 19,585 $ 18,103 $ 38,890 $ 39 $ $ 176 $ 16 $ — 401 $ 193 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. Basis of Presentation and Consolidation The accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries we are required to consolidate. We consolidate the assets, liabilities, and results of operations of entities in accordance with Accounting Research bulletin (“ARB”) No. 51, Consolidated Financial Statements, Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries – an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12, and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, as revised. 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 2006, 2005, and 2004 ended on December 29, 2006, December 30, 2005 and December 31, 2004, respectively. References to a year included in this section refer to a fiscal year rather than a calendar year. Cash and Cash Equivalents and Restricted Cash The Company considers all short-term investments with maturities of three months or less when purchased to be cash equivalents. Due to the short maturity period of cash equivalents, the carrying amount of these instruments approximate fair market value. 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. Restricted cash in 2006 and 2005 primarily relates to a letter of credit to secure the Company’s obligations in various operating leases. Marketable Investments Marketable investments are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This standard requires that debt and equity securities be classified as trading, available-for-sale or held-to maturity. At December 29, 2006 we had no marketable securities in our accompanying consolidated balance sheet. At December 30, 2005, all of our marketable securities were 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. Interest on marketable investments is recognized when earned and is reported as a component of interest income in the accompanying consolidated statements of earnings. 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. Depreciation is calculated to amortize the depreciable assets over their useful lives using the straight-line method and commences when the asset is placed in service. The range of estimated useful lives is 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 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 1. Nature of Business and Significant Accounting Policies (continued) depreciation are removed from the balance sheet in the year of disposal and any resulting gains or losses are included in the statement of operations. The Company capitalizes the costs of internal-use software in accordance with Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 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. Long-Lived Assets (excluding Goodwill) We account for long-lived assets in accordance with the provisions of SFAS 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. Goodwill and Other Intangible Assets All of the Company’s goodwill and intangible assets have been accounted for under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets deemed to have indefinite lives not be amortized, but rather be tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment. Finite-lived intangible assets are required to be amortized over their useful lives and are subject to impairment evaluation under the provisions of SFAS No. 144. The excess cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Goodwill is tested at least annually for impairment and other intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable in accordance with SFAS No. 144. 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. Goodwill is tested for impairment at the reporting unit level at least annually utilizing a “fair value” methodology. The Company evaluates the fair values of its reporting units utilizing various techniques. 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 various factors to determine if impairment tests are met. These estimates contain management’s best estimates, using appropriate and customary assumptions available at the time. The Company performed its annual impairment test of goodwill in the fourth quarter of fiscal years 2006, 2005 and 2004, respectively, and determined that goodwill was not impaired. 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. 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 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 1. Nature of Business and Significant Accounting Policies (continued) include travel and out-of-pocket expenses, are included in revenues, and an equivalent amount of reimbursable expenses is included in cost of service. The agreements entered into in connection with a project, whether on a time and materials basis 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 Based Compensation In December 2004, the Financial Accounting Standards Board FASB issued SFAS No. 123R, Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. On December 31, 2005, the Company adopted the provisions of SFAS No. 123R using the modified-prospective-transition method. Under this transition method, compensation expense recognized during the year ended December 29, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified-prospective-transition method, results from prior periods have not been restated. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules. Upon the adoption of SFAS No. 123R, the Company recognized an immaterial one-time gain based on SFAS No. 123R’s requirement to apply an estimated forfeiture rate to unvested restricted stock and restricted stock unit awards. Previously, the Company recorded forfeitures as incurred for such awards. In November 2005, the FASB issued Staff Position (“FSP”) No. 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This pronouncement provides an alternative transition method of calculating the excess tax benefits available to absorb any tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R). The Company has elected to adopt the alternative transition method. As a result of adopting SFAS No. 123R, the charge to net earnings for the year ended December 29, 2006 was $486 thousand. The impact of adopting SFAS No. 123R on basic and diluted earnings per share for the year ended December 29, 2006 was $0.01 per share. Prior to the adoption of SFAS No. 123R, the company followed the intrinsic value method in accordance with APB No. 25 to account for its employee stock plans. Accordingly, no compensation expense was recognized for the issuance of stock options or shares granted through the Employee Share Purchase Plan (the “ESPP”); however, the Company recognized the full fair-value of the shares of nonvested restricted stock awards and common stock subject to vesting requirements and recorded an offsetting deferred compensation balance within equity for the unrecognized cost. SFAS No. 123R prohibits this “gross up” of shareholders’ equity. As a result, the Company reclassified the unearned compensation balance into equity upon the effective date of the adoption of SFAS No. 123R, compensation expense is recognized over the requisite service period with an offsetting credit to equity, and the full fair-value of the share-based payment is not recognized until the instrument is vested. The adoption of SFAS No. 123R primarily resulted in the Company estimating forfeitures for all unvested common stock subject to vesting requirements and restricted stock unit awards and the recognition of compensation expense for the unvested portion of previously granted stock options. The following table illustrates the effect on net earnings and earnings per share for the years ended December 30, 2005 and December 31, 2004, if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, to stock option awards granted under the Company’s 35 ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) stock-based compensation plans. The assumptions underlying the fair value calculations of the stock option grants are presented in Note 12. 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 and December 31, 2004 would have been adjusted to the pro forma amounts indicated as follows (in thousands, expect per share data): Net income (loss), as reported Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 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 Income Taxes December 30, 2005 December 31, 2004 $ 604 $ (740) 3,392 2,321 (5,195) (5,354) $ (1,199) $ (3,773) $ 0.01 $ (0.02) $ (0.03) $ (0.09) $ 0.01 $ (0.02) $ (0.03) $ (0.09) Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Deferred income taxes also reflect the impact of certain state operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance, if any, that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current tax provision. 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. Potentially dilutive shares were excluded from the diluted loss per share calculation for the years ended December 29, 2006 and December 31, 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 29, 2006 and December 31, 2004 were 1,165,748 shares and 2,368,180 shares, respectively, of underlying unvested restricted stock units issued to employees and 178,419 shares and 667,728 shares, respectively, of common stock issuable upon the exercise of stock options and warrants following the treasury stock method. 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. 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, loan payable and accrued expenses and other liabilities. At December 29, 2006 and December 30, 2005, the fair value of these instruments approximated their carrying value. 36 ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) Concentration of Credit Risk The Company provides services primarily to Global 2000 companies and other sophisticated buyers of business consulting and IT services. The Company performs ongoing credit evaluations of its major customers and maintains reserves for potential credit losses. In fiscal year 2006, no customer accounted for more than 5% of total revenues. 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. 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. Other Comprehensive Income (Loss) We report our comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presenting comprehensive income (loss) and its components in a full set of financial statements. Other comprehensive income (loss) consists of unrealized gains and losses on available-for-sale securities, and cumulative currency translation adjustments. Translation of Non-U.S. Currency Amounts The assets and liabilities held by our foreign entities with a functional currency other than the U.S. dollar are translated into U.S. dollars at exchange rates in effect at the end of each reporting period. Foreign entity revenues and expenses are translated into U.S. dollars at the average rates that prevailed during the period. The resulting net translation gains and losses are reported as foreign currency translation adjustments in shareholders’ equity as a component of accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in net income (loss). Segment Reporting The Company reports business segment information under the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. In accordance with this standard, the Company engages in business activities in one operating segment, which provides business and technology consulting services. Recent Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard permits entities to choose to measure many financial instruments and certain other items at fair value. This standard is effective for our fiscal year beginning January 1, 2008. We do not expect that the implementation of this statement will have a material impact on our results of operations, financial position, or liquidity. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard is effective for our fiscal year beginning December 30, 2006. We do not expect that the implementation of this statement will have a material impact on our results of operations, financial position, or liquidity. In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109 by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. This standard is effective for our fiscal year beginning December 30, 2006. We are currently evaluating the impact that the adoption of FIN No. 48 will have on our financial statements. 37 ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Nature of Business and Significant Accounting Policies (continued) 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 29, 2006, the Company acquired three businesses providing information technology services (collectively, the “Acquired Entities”) in separate transactions. Two were completed in 2005 and one was completed in 2004. Aggregate consideration for the Acquired Entities was $40.9 million. This amount has been allocated, on an entity-by-entity basis, to the assets acquired and liabilities assumed based on their respective fair values on the dates of acquisition. The components of the purchase price allocation for the Acquired Entities, contingent consideration earned for previous acquisitions, and fees and expenses incurred are as follows (in thousands): Fair value of net assets (excluding cash) acquired Goodwill Intangible assets Deferred payment accrued Deferred payment paid 2006 2005 2004 $ — 2,050 — — 8,431 $ (4,146) 27,690 5,332 (7,120) 1,500 $ 1,121 7,066 1,943 (2,920) — Cash used in acquisition of businesses, net of cash acquired $ 10,481 $ 23,256 $ 7,210 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 tangible and intangible assets acquired has been recorded as goodwill. For each of the acquisitions made, goodwill is deductible for tax purposes except in the case of goodwill for the REL Consultancy Group Limited (“REL”) acquisition, which amounted to $25.8 million. In November 2005, the Company purchased REL, a privately-held UK 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. During 2006, approximately $6.9 million of deferred consideration was paid. 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 Emerging Issues Task Force (“EITF”) No. 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 majority of these obligations were paid during 2006. The following unaudited pro forma consolidated information is provided for the REL acquisition assuming it occurred as of January 1, 2005 and as of January 3, 2004, respectively, (in thousands, except per share amounts): Total revenues Net loss Basic and diluted net loss per share Other Acquisitions 2005 2004 $ $ $ 200,075 $ (3,768) $ (0.09) $ 178,922 (2,080) (0.05) 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 cash. The 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 2. Acquisitions and Investing Activities (continued) 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 final installment of the deferred payments was paid in 2006. 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. The pro forma impact of the acquisition of Active Interest, Inc. in 2005 and the acquisitions completed in 2004 were not significant to the results of the Company’s consolidated operations for the years ended December 30, 2005 and December 31, 2004. The Company includes its acquired intangible assets with definitive lives in other assets in the accompanying consolidated balance sheets. As of December 29, 2006 and December 30, 2005, intangible assets totaled approximately $3.5 million and $5.9 million, respectively, which is net of accumulated amortization of $7.5 million and $4.9 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 $2.6 million, $1.8 million and $2.0 million for the fiscal years ended December 29, 2006, December 30, 2005 and December 31, 2004, respectively. The estimated future amortization expense of intangible assets as of December 29, 2006 is as follows (in thousands): Fiscal Year 2007 2008 2009 2010 2011 Amount 1,338 $ 762 752 690 - $ 3,542 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 3. Loss from Misappropriation As described in the Form 8-K filed on November 1, 2006, on or about October 26, 2006, the Company learned of a misappropriation by our former UK disbursement agent which relates to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements for our UK operations. The Company initiated a review of the matter, and concluded that the total loss resulting from the misappropriation was approximately $2.2 million, of which $1.9 million related to 2005, 2004 and 2003. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million, and the write-off of funds owed back to the Company from the agent of approximately $0.3 million. The Company and its former disbursement agent have agreed to settlement terms that, if satisfied, would include the full repayment of the misappropriation. In connection with the settlement, the agent made an initial cash payment to the Company in January 2007 of $0.4 million and has agreed to make additional payments to the Company on or before August 31, 2007 that, when taken together with the initial payment, approximate $2.5 million (at current foreign currency exchange rates). If the payments are not received by this date, the Company can foreclose certain assets pledged by the agent. The agent has guaranteed to pay any amount by which the initial payment, additional cash payments and the net proceeds from the sale of the pledged assets fall below approximately $2.5 million (at current foreign currency exchange rates). This shortfall amount would be repaid in annual installments of not less than approximately $0.1 million per year (at current foreign currency exchange rates) beginning in 2007, together with interest thereon accruing from January 1, 2008. The Company cannot predict whether the former disbursement agent will satisfy the terms of the settlement agreement. Due to this uncertainty, any amounts recovered as a result of the Company’s claim will be accounted for as income in the period collected. 4. 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 5. Marketable Investments December 29, 2006 December 30, 2005 $ $ 32,974 $ 4,695 (1,851) 35,818 $ 35,870 7,824 (1,766) 41,928 At December 29, 2006, the Company did not have any marketable investments. At December 30, 2005, all of the Company’s marketable securities were invested in securities issued by U.S. Government Agencies and were classified as available- for-sale and are carried on the accompanying consolidated balance sheet at fair value. The following tables summarize the Company’s marketable investments at December 30, 2005 (in thousands): 2005 U.S. Government Agencies Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Market Value $ 10,000 $ — $ (98) $ 9,902 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 29, 2006, December 30, 2005 and December 31, 2004. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 6. 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 29, 2006 December 30, 2005 $ 10,160 $ 7,425 1,716 1,076 35 20,412 (15,229) $ 5,183 $ 9,459 6,237 3,426 377 35 19,534 (13,230) 6,304 Depreciation expense for the years ended December 29, 2006, December 30, 2005 and December 31, 2004 was $2.5 million, $3.1 million and $3.2 million, respectively, and is included in selling, general and administrative costs on the accompanying consolidated statements of operations. 7. 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 Other accrued expenses – non-current Non-current accrued expenses and other liabilities Total accrued expenses and other liabilities December 29, 2006 December 30, 2005 $ 3,110 $ 2,496 2,655 9,498 6,395 198 7,037 4,778 1,844 7,715 9,604 8,616 24,352 39,594 4,611 — 4,611 2,990 282 3,272 $ 28,963 $ 42,866 Bank Overdrafts At December 29, 2006, the Company did not have any bank overdrafts outstanding. At December 30, 2005 the Company had $1.6 million in bank overdrafts outstanding, classified as current other accrued expenses in the accompanying consolidated balance sheet. The Company’s bank overdraft facility was secured by its assets, and carried floating interest of 1.5% over National Westminster Bank’s base rate, which was 4.5% at December 30, 2005. Interest expense related to the overdraft for the year ended December 30, 2005 was approximately $16 thousand. 8. Loan Payable At December 29, 2006, the Company did not have any outstanding loans. At December 30, 2005, the Company had a loan with a financial institution of $3.7 million, classified as short term borrowings in the accompanying consolidated balance sheet. The loan was secured by $3.7 million of cash and was classified as current restricted cash in the accompanying balance sheet. This bank loan carried 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 in March 2006. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 9. Letters of Credit The Company had outstanding letters of credit of $0.6 million to secure the Company’s obligations on various operating leases as of December 29, 2006 and December 30, 2005, respectively. The Company has deposited $0.6 million at December 29, 2006 and December 30, 2005 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. 10. Lease Commitments The Company has operating lease agreements for its premises that expire on various dates through July 2015. Rent expense, net of subleases for the years ended December 29, 2006, December 30, 2005 and December 31, 2004 was $1.3 million, $2.0 million and $2.0 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 29, 2006 are as follows (in thousands): 2007 2008 2009 2010 2011 Thereafter Total Rental Payments Sublease Receipts $ 3,433 $ 3,272 3,270 2,878 1,503 249 1,370 1,262 1,275 1,219 721 — $ 14,605 $ 5,847 11. 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 Income taxes Year Ended December 29, 2006 December 30, 2005 December 31, 2004 $ 588 291 34 $ (204) $ — 231 110 93 88 913 (6) 324 — — — — — — — — — — — — $ 913 $ (6) $ 324 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 11. Income Taxes (continued) 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 Meals and entertainment Intangible amortization Other, net Effective tax rate December 29, 2006 (35.0)% 4.6 — 20.9 5.0 16.0 10.6 Year Ended December 30, 2005 35.0% 11.9 — (124.2) 41.2 11.8 23.3 December 31, 2004 (35.0)% 19.1 633.4 (603.6) 17.2 — 10.1 22.1% (1.0)% 41.2% The components of the net deferred income tax asset (liability) are as follows (in thousands): December 29, 2006 December 30, 2005 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 $ 606 $ 711 34,922 6,949 43,188 (38,059) 5,129 (4,188) (941) (5,129) Net deferred income tax asset (liability) $ — $ 711 693 34,625 5,812 41,841 (37,194) 4,647 (3,729) (918) (4,647) — At December 29, 2006, the Company had $69.9 million, of U.S. federal net operating loss carryforwards available for tax purposes, most of which expire in 2022 if not utilized. Additionally, at December 29, 2006, the Company had approximately $19.9 million of foreign net operating loss carryforwards, of which $14.1 million related to operations in the UK. In connection with the REL acquisition in 2005, the Company acquired approximately $8.5 million of the foreign net operating loss carryforwards, including $6.0 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 $1.0 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. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 11. Income Taxes (continued) 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 29, 2006 and December 30, 2005, the Company had established a valuation allowance of $38.1 million and $37.2 million, respectively, to reduce deferred income tax assets primarily related to net operating loss carryforwards. 12. Stock Based Compensation In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. On December 31, 2005, the Company adopted the provisions of SFAS No. 123R using the modified-prospective-transition method. Under this transition method, compensation expense recognized during the year ended December 29, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified-prospective-transition method, results from prior periods have not been restated. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules. Upon the adoption of SFAS No. 123R, the Company recognized an immaterial one-time gain based on SFAS No. 123R’s requirement to apply an estimated forfeiture rate to unvested restricted stock and restricted stock unit awards. Previously, the Company recorded forfeitures as incurred for such awards. As a result of adopting SFAS No. 123R, the charge to net earnings for the year ended December 29, 2006 was $486 thousand. The impact of adopting SFAS No. 123R on basic and diluted earnings per share for the year ended December 29, 2006 was $0.01 per share. Prior to the adoption of SFAS No. 123R, the company followed the intrinsic value method in accordance with APB No. 25 to account for its employee stock plans. Accordingly, no compensation expense was recognized for the issuance of stock options or shares granted through the Employee Share Purchase Plan (the “ESPP”); however, the Company recognized the full fair-value of the shares of nonvested restricted stock awards and common stock subject to vesting requirements and recorded an offsetting deferred compensation balance within equity for the unrecognized cost. SFAS No. 123R prohibits this “gross up” of shareholders’ equity. As a result, the Company reclassified the unearned compensation balance into equity upon the effective date of the adoption of SFAS No. 123R, compensation expense is recognized over the requisite service period with an offsetting credit to equity, and the full fair-value of the share-based payment is not recognized until the instrument is vested. The adoption of SFAS No. 123R primarily resulted in the Company estimating forfeitures for all unvested common stock subject to vesting requirements and restricted stock unit awards and the recognition of compensation expense for the unvested portion of previously granted stock options. Stock Plans Total share based compensation included in net loss for the year ended December 29, 2006 was $4.1 million. The number of shares available for future issuance under the plans at December 29, 2006 is 10,657,186 shares. The Company issues new shares as shares are required to be delivered under the plan. Stock Options 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, based on continued employment, with a maximum term of 10 years. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 12. Stock Based Compensation (continued) Stock option activity under the Company’s stock option plans is summarized as follows: December 29, 2006 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Option Shares Aggregate Intrinsic Value Outstanding at December 31, 2005 2,445,321 $ Granted Exercised Forfeited or expired - (141,043) (304,761) 5.63 - 3.55 5.39 Outstanding at December 29, 2006 1,999,517 $ 5.80 5.29 $199,837 Exercisable at December 29, 2006 1,547,070 $ 5.85 4.76 $173,417 A summary of the Company’s stock option activity for the years ended December 30, 2005 and December 31, 2004 was as follows: Outstanding at beginning of year Granted Exercised Forfeited or expired Outstanding at end of year Exercisable at end of year December 30, 2005 December 31, 2004 Option Shares Weighted Average Exercise Price Option Shares Weighted Average Exercise Price 3,259,452 $ 45,000 (107,649) (751,482) 5.68 3,013,625 $ 5.69 6.19 3.96 1,425,744 4.26 2.82 (361,652) 7.19 6.17 (818,265) 2,445,321 $ 5.63 3,259,452 $ 5.68 1,488,362 $ 5.80 1,423,522 $ 6.13 Other information pertaining to option activity during the year was as follows (in thousands): Weighted average grant-date fair value of stock options granted $ - $ 1,475 Total fair value of stock options vested $ 306 Total intrinsic value of stock options exercised $ 2.30 $ 1,796 $ 127 $ 6.18 $ 1,407 $ 855 December 29, 2006 December 30, 2005 December 31, 2004 Year Ended No options were granted during the year ended December 29, 2006. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 12. Stock Based Compensation (continued) SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimate expected life of the Company’s stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The following assumptions were used by the Company to determine the fair value of stock options granted during 2005 and 2004 using the Black-Scholes options-pricing model: Expected volatility Average expected option life Risk-free rate Dividend yield Year Ended December 30, 2005 December 31, 2004 75% 4 years 3.9% 0% 75% to 100% 4 years 3.5% 0% The following table summarizes information about the Company’s stock options outstanding at December 29, 2006: Range of Exercise Prices $1.45 - $4.06 $4.07 - $8.13 $8.14 - $12.19 $12.20 - $16.25 $16.26 - $20.32 $20.33 - $24.38 $24.39 - $28.44 $28.45 - $36.57 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price 5.2 $ 5.7 2.6 3.1 3.1 2.1 3.0 3.1 2.97 6.08 9.78 13.69 17.61 21.98 25.11 32.56 466,030 $ 920,354 104,089 11,061 30,786 3,350 5,750 5,650 2.96 6.04 9.78 13.69 17.61 21.98 25.11 32.56 Number Outstanding 541,901 1,296,930 104,089 11,061 30,786 3,350 5,750 5,650 1,999,517 5.3 $ 5.80 1,547,070 $ 5.85 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 12. Stock Based Compensation (continued) Restricted Stock Units Under the stock plans, participants may be granted restricted stock units, each of which represents a conditional right to receive a common share in the future. The restricted stock units granted under this plan generally vest over a four-year period, with 50% vesting on the second anniversary and 25% of the shares vesting on the third and fourth anniversaries of the grant date. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amount of expense relating to the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the four-year requisite service period. Restricted stock unit activity for the year ended December 29, 2006 was as follows: Nonvested balance at December 31, 2005 Granted Vested Forfeited Nonvested balance at December 29, 2006 Number of Restricted Stock Units Weighted Average Grant-Date Fair Value 2,828,633 $ 3.43 4.48 887,005 2.79 (720,313) 3.97 (873,798) 2,121,527 $ 4.02 The Company recorded stock based compensation expense of $3.4 million and $3.1 million, respectively, in 2006 and 2005, based on the vesting provisions of the restricted stock units and the fair market value of the stock on the grant date. As of December 29, 2006, there was $4.7 million of total restricted stock unit compensation expense related to the nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 1.24 years. As of July 1, 2005, the Company had 169,295 of stock options which were accounted for under variable plan accounting pursuant to FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Variable plan accounting resulted in a reduction of stock compensation expense of approximately $11 thousand for the year ended December 30, 2005 and no reduction of stock compensation expense was recorded for the year ended December 29, 2006. Common Stock Subject to Vesting Requirements Shares of common stock subject to vesting requirements were issued in connection with an acquisition to the employees of REL. Employees of the acquired company vest in these shares over a period of four years. Compensation was based on the market value of the Company’s common stock at the time of grant and is recognized on a straight-line basis. Restricted stock activity for the year ended December 29, 2006 was as follows: Nonvested balance at December 31, 2005 Granted Vested Forfeited Nonvested balance at December 29, 2006 Number of Shares of Common Stock Subject to Vesting Requirements - 676,695 - - Weighted Average Grant-Date Fair Value $ - 3.99 - - 676,695 $ 3.99 The recorded compensation expense totaling $731 thousand during the year ended December 29, 2006 related to common stock subject to vesting requirements. As of December 29, 2006, there was $2.0 million of total stock based compensation expense related to common stock subject to vesting requirements not yet recognized, which is expected to be recognized over a weighted average period of 1.67 years. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 13. Shareholders’ Equity Employee Stock Purchase Plan 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. 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 year 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. For plan years 2006, 2005 and 2004, 138,911 shares, 460,735 shares and 316,889 shares, respectively, were issued. 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. No shares of common stock were issued or deferred in 2006. 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 $25.0 million of the Company’s common stock, thereby increasing the total program size to $30.0 million. Under the repurchase plans, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. As of December 29, 2006 and December 30, 2005, the Company had repurchased 7,157,655 shares and 6,534,155 shares of its common stock at an average price of $3.33 and $3.39 per share, respectively. The Company holds repurchased shares of its common stock as treasury stock and accounts for treasury stock under the cost method. Shareholder Rights Plan On February 13, 2004, the Board of Directors of the Company adopted a Shareholder Rights Plan. Under the plan, a dividend of one preferred share purchase right (a “Right”) was declared for each share of common stock of the Company that was outstanding on February 26, 2004. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a purchase price of $32.50, subject to adjustment. 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. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 13. Shareholders’ Equity (continued) Equity Related Commitments In the event of an Initial Public Offering (“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. 14. 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 2006, 2005 and 2004, the Company made matching contributions of 25% of employee contributions up to 4% of their gross salaries. The Company’s matching contributions were $0.3 million in each of the fiscal years ended December 29, 2006, December 30, 2005 and December 31, 2004. 15. 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 the closure and consolidation of facilities and related exit costs. These actions were taken as a result of the continued decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services. In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease excess facilities. The 2004 and 2003 restructuring costs consisted of additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million and $1.8 million to the 2001 restructuring accrual, respectively. Also in 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the 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, primarily as a result of the REL acquisition on November 29, 2005, and $1.8 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million is specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of our New York City lease obligation. As a result of the buyout, the Company was fully released from $20.0 million of future lease obligations, assigned two subleases to the lessor, wrote-off $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. In 2006, the Company recorded restructuring costs of $6.3 million, which was comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL acquisition and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million is a further reduction of occupied space in our technology focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifts to a proprietary best practice and intellectual capital and strategic advisory services firm. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 15. Restructuring Costs (continued) The following tables set forth the detail and activity in the restructuring expense accruals during the years ended December 29, 2006, December 30, 2005 and December 31, 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 2006 Severance and other employee costs Closure and consolidation of facilities and related exit costs $ — $ — $ 3,694 559 — (3,186) (1,067) — — — — 6,528 2,311 (1,205) (248) (1,965) (933) (839) (645) (878) Total — 10,222 2,870 (1,205) (3,434) (3,032) (933) (839) (645) (878) Accrual balance at December 29, 2006 $ — $ 2,126 $ 2,126 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 2006 Severance and other employee costs Closure and consolidation of facilities and related exit costs Total $ — $ — $ 1,528 616 — — (855) (1,289) — — 18,311 2,747 (5,217) (1,374) (584) (2,198) (3,362) (4,078) (528) — 19,839 3,363 (5,217) (1,374) (1,439) (3,487) (3,362) (4,078) (528) Accrual balance at December 29, 2006 $ — $ 3,717 $ 3,717 2005 Restructuring Accrual Accrual balance at December 31, 2004 Additions to accrual from continuing operations 2006 asset write-offs Expenditures: 2005 2006 Accrual balance at December 29, 2006 Severance and other employee costs Closure and consolidation of facilities and related exit costs Total — $ 1,278 — (35) (1,096) 147 $ — $ — 3,898 (719) 2,620 (719) — (625) (35) (1,721) 1,276 $ 1,423 $ $ 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ANSWERTHINK, INC. 16. Discontinued Operations As a result of a decline in the demand for interactive marketing services, during 2002, the Company discontinued the interactive marketing business which was acquired in the merger with THINK New Ideas in 1999. In accordance with SFAS No. 144, 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, income tax benefit and income from discontinued operations for the year ended December 31, 2004 (in thousands): Revenues 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. There were no discontinued operations for the years ended December 29, 2006 and December 30, 2005. 17. 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. 18. Geographic and Service Group Information Revenues are attributed to geographic areas as follows (in thousands): Total Revenues: Domestic Foreign Total December 29, 2006 Year Ended December 30, 2005 December 31, 2004 $ $ 158,926 21,629 $ 152,421 $ 10,897 180,555 $ 163,318 $ 133,916 9,631 143,547 Long-lived assets are attributed to geographic areas as follows (in thousands): Long-Lived Assets: Domestic Foreign Total December 29, 2006 December 30, 2005 $ $ 57,148 $ 43,112 31,306 18,557 75,705 $ 74,418 In 2006, foreign assets included $16.5 million of goodwill and intangible assets related to REL, a UK based company. 51 ANSWERTHINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. Geographic and Service Group Information (continued) The Company’s revenue is derived from the following service groups (in thousands): Year Ended December 29, 2006 December 30, 2005 December 31, 2004 The Hackett Group: Benchmarking and Membership Advisory Programs Business Transformation $ 29,792 $ 27,802 $ 63,037 42,309 48,806 54,888 38,920 38,319 $ 180,555 $ 163,318 $ 143,547 22,093 30,861 58,601 31,992 Best Practices Solutions: Business Applications Business Intelligence Total Revenues 19. Quarterly Financial Information (unaudited) The following table presents unaudited supplemental quarterly financial information for the years ended December 29, 2006 and December 30, 2005 (in thousands, except per share data): Quarter Ended March 31, 2006 June 30, 2006 September 29, 2006 December 29, 2006 Total revenues Income (loss) from operations Income (loss) before income taxes Net income (loss) Basic and diluted net income (loss) per common share Total revenues Income (loss) from operations Income (loss) before income taxes Net income (loss) Basic and diluted net income (loss) per common share 49,831 $ $ (5,951) $ $ (5,868) (6,233) 43,552 $ 48,996 $ $ 38,176 $ 2,328 $ 627 $ (1,644) (1,442) $ (1,409) $ 2,453 $ 2,121 $ 722 $ 473 $ $ (0.14) $ 0.05 $ 0.01 $ (0.03) Quarter Ended April 1, 2005 July 1, 2005 September 30, 2005 December 29, 2005 36,872 $ $ (2,029) $ $ (1,790) (1,676) 40,005 $ 41,700 $ 44,741 $ $ 746 $ 1,670 $ (878) (667) $ (506) $ 2,004 $ 1,830 $ 1,051 $ 956 $ $ (0.04) $ 0.02 $ 0.04 $ (0.01) 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. 52 SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004 ANSWERTHINK, INC. (in thousands) Allowance for Doubtful Accounts Year Ended December 29, 2006 Year Ended December 30, 2005 Year Ended December 31, 2004 Balance at Beginning of Year Charge to Expense Write-offs Balance at End of Year $ $ $ 1,766 $ 413 $ (328) $ 1,851 2,109 $ 797 $ (1,140) $ 1,766 1,757 $ 1,060 $ (708) $ 2,109 53 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 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 year ended December 31, 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, and the remediation of the material weakness identified in our internal control over financial reporting as of December 30, 2005, as described below, 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 on Form 10-K. Material Weakness Previously Identified As described in the Company’s Report on Form 10-K/A filed on February 15, 2007, on or about October 26, 2006, the Company learned of a misappropriation by its former UK disbursement agent which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The disbursement agent had been utilized by the Company from early 2003 to January 2006 to make payroll, payroll tax and vendor disbursements in the UK. The Company initiated a review of the matter, and concluded that the loss resulting from the misappropriation was approximately $2.2 million. The total loss is comprised of payroll taxes that were not disbursed to the United Kingdom Inland Revenue of approximately $1.8 million, interest owing on past due payroll tax amounts of approximately $0.1 million and the write-off of funds owed back to the Company from the agent of approximately $0.3 million. This material weakness has caused the Company to amend its Annual Report on Form 10-K and amend and restate financial statements and other financial information for the years 2005, 2004 and 2003 and for each of the quarters in the years 2005 and 2004. Solely as a result of this material weakness, we concluded that our internal controls over financial reporting were not effective as of the end of December 30, 2005. Remediation of Material Weakness During 2006, management remediated the previously reported material weakness in its internal control over financial reporting relating to the UK disbursement agent described above. The following remedial actions were undertaken: (cid:131)(cid:3) The Company opened its European financial shared service center in London, England in December 2005, and ceased its agency relationship with the UK disbursement agent in January 2006. (cid:131)(cid:3) Vendor disbursements are now processed in-house by our European financial shared service center, and payroll and related tax disbursements have been migrated to ADP UK, a unit of the largest global payroll processing organization. (cid:131)(cid:3) All tax filings in the Company’s European operations are now subject to review by the Company’s European Chief Financial Officer. 54 (cid:131)(cid:3) Management conducted an audit of its existing agency relationships in relation to payroll taxes in Germany, France, Switzerland and Netherlands for 2005 and 2006. There were no material issues identified. (cid:131)(cid:3) Management assessed the professionalism and services provided by all its European agents and instituted an Agent Summary tracking log to track key data attributes about each agent used and ensure that it is reviewed periodically by the Chief Financial Officer. Management has concluded that controls were in place and operating effectively as of December 29, 2006 to properly apply accounting policies in relation to foreign payroll taxes. Except for the remediation discussed in “Remediation of Material Weakness” herein, there were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 29, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 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 as of and for the year ended December 29, 2006. 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. 55 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. (the Company) maintained effective internal control over financial reporting as of December 29, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 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 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. In our opinion, management’s assessment that Answerthink, Inc. maintained effective internal control over financial reporting as of December 29, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Answerthink, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2006, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Answerthink, Inc. as of December 29, 2006 and December 30, 2005, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended and our report dated March 13, 2007 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Miami, Florida March 13, 2007 56 ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2007 Proxy Statement for the 2007 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2007 Proxy Statement for the 2007 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2007 Proxy Statement for the 2007 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information responsive to this Item is incorporated herein by reference to the Company’s definitive 2007 Proxy Statement for the 2007 Annual Meeting of Shareholders. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information appearing under the caption “Fees Paid to Independent Accountants” in the 2007 Proxy Statement is hereby incorporated by reference. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as a part of this Form: 1. Financial Statements PART IV 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 59 The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. 57 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 March 13, 2007. SIGNATURES 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. ANSWERTHINK, INC. By: /s/ Ted A. Fernandez Ted A. Fernandez Chief Executive Officer and Chairman Signatures /s/ Ted A. Fernandez Ted A. Fernandez /s/ Grant M. Fitzwilliam Grant M. Fitzwilliam /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 Title Chief Executive Officer and Chairman (Principal Executive Officer) Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Date March 13, 2007 March 13, 2007 Chief Operating Officer and Director March 13, 2007 March 13, 2007 March 13, 2007 March 13, 2007 March 13, 2007 Director Director Director Director 58 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*+ 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 10.7*+++++ Amendment to Registrant’s 1998 Stock Option and Incentive Plan 10.8*+ Form of Senior Management Agreement dated April 23, 1997 between the Registrant and each of Messrs. Fernandez, Frank and Knotts 10.9*++++ Senior Management Agreement dated July 11, 1997 between Registrant and Mr. Dungan 10.10*+++++ Form of Employment Agreement entered into between the Registrant and Mr. Dungan 10.11*+ 10.12+ 10.13+ 10.14*+ 10.15*+ Form of Employment Agreement entered into between the Registrant and each of Messers. Fernandez, Frank and Knotts Amendment No. 2 dated as of May 5, 1998 to Purchase Agreement dated April 23, 1997 among the Registrant, GTCR V, MG, Gator and Tara Amendment No. 2 dated as of May 5, 1998 to Stock Purchase Agreement dated March 5, 1998 between the Registrant and FSC Amendment to Certain Senior Management Agreements dated March 27, 1998 among the Company, the Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan Second Amendment to Certain Senior Management Agreements dated May 26, 1998 among the Company, the Board of Directors and each of Messrs. Fernandez, Frank, Knotts and Dungan 10.16*++ AnswerThink Consulting Group, Inc. Employee Stock Purchase Plan 10.17*+++++ Amendment to Registrant’s Employee Stock Purchase Plan dated February 16, 2001 10.18*+++ 10.19*+++ 10.20*+++ 10.21*+++ 10.22++++++ 10.23++++++ 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. 10.24+++++++ Joint Marketing and Alliance Agreement, dated October 7, 2003, by and among Answerthink, Inc., The Hackett Group, Inc. and Accenture, L.L.P. 59 10.25++++++++ Amendment to Executive Agreement between Answerthink, Inc. and Ted A. Fernandez 10.26++++++++ Amendment to Executive Agreement between Answerthink, Inc. and David N. Dungan 10.27++++++++ Amendment to Executive Agreement between Answerthink, Inc. and Allan R. Frank 10.28++++++++ Amendment to Executive Agreement between Answerthink, Inc. and John F. Brennan 10.29+++++++++ Lawson Software & The Hackett Group Advisory Alliance Agreement dated May 9, 2005 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 10.33++++++++++++ Share Purchase Agreement dated November 29, 2005 between The Hackett Group Limited, Answerthink, Inc. and the Sellers of REL Consultancy Group Limited 21.1^ 23.1^ 23.2^ 31.1^ 31.2^ 32^ 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. 60 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] Corporate Headquarters Board of Directors Answerthink, Inc. 1001 Brickell Bay Drive Suite 3000 Miami, FL 33131 Telephone: 305-375-8005 Facsimile: 305-379-8810 www.answerthink.com Annual Meeting Answerthink shareholders are invited to attend our Annual Meeting on Wednesday, May 9, 2007 at 11:00 am at: JW Marriott Hotel Miami 1109 Brickell Avenue Miami, FL 33131 Transfer Agent Computershare Trust Company, NA PO Box 43078 Providence, RI 02940-3078 1-877-282-1168 http://www.computershare.com Independent Auditors BDO Seidman, LLP Miami, FL Ted A. Fernandez Chairman & Chief Executive Officer Answerthink, Inc. David N. Dungan Vice Chairman & Chief Operating Officer Answerthink, Inc. Richard N. Hamlin Retired Partner KPMG LLP John R. Harris President and Chief Executive Officer eTelecare Global Solutions Edwin A. Huston Retired Vice Chairman Ryder System, Inc. Alan T.G. Wix Chairman Fiva Marketing, Ltd In 2002, The Hackett Group was a small benchmarking organization. Today our Hackett Group has a revenue run rate approaching $100 million with a combination of services that provides a great foundation for growth. 2006 

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