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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 0-24343
Answerthink, Inc.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0750100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1001 Brickell Bay Drive, Suite 3000
Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
(305) 375-8005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 45,350,759 shares of Common Stock of the
Registrant issued and outstanding as of March 15, 2001, excluding 6,993,606
shares of Common Stock held by affiliates of the Registrant, was $174,525,046.
This amount is based on the average bid and asked price of the Common Stock on
the Nasdaq Stock Market of $4.55 per share on March 23, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2001 annual meeting of stockholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this report.
ANSWERTHINK, INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 3
ITEM 2. Properties 9
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for Registrants' Common Equity and Related
Stockholder Matters 10
ITEM 6. Selected Consolidated Financial Data 11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 8. Financial Statements and Supplementary Data 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant 41
ITEM 11. Executive Compensation 41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 41
ITEM 13. Certain Relationships and Related Transactions 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Signatures 42
Index to Exhibits 43
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans and forecasted demographic and economic trends relating to our
industry are forward-looking statements. These statements can sometimes be
identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," or "intend." 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 potential for contract cancellation
by our customers, changes in expectations regarding the information technology
industry, our ability to attract and retain skilled employees, possible changes
in collections of accounts receivable, risks of competition, price and margin
trends, changes in general economic conditions and interest rates. An additional
description of our risk factors is set forth in our Registration Statement on
Form S-3 (Registration Form 333-32342). 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. ("Answerthink") (www.answerthink.com) is a leading
provider of technology-enabled business transformation solutions. We bring
together multi-disciplinary expertise in benchmarking and research, business
transformation, interactive marketing, business applications and technology
integration to serve the needs of Global 2000 clients. Answerthink's solutions
span all functional areas of a company including finance, human resources,
information technology, sales, marketing, customer service, and supply chain
across a variety of industry sectors such as telecommunications, utilities,
automotive, financial services, retail, consumer packaged goods, life sciences
and manufacturing.
We were formed in April of 1997 and have focused on improving our clients'
businesses by leveraging technology and the Internet. In November 1999, we
merged with THINK New Ideas, Inc. ("THINK New Ideas"), a provider of
Internet-focused interactive marketing and branding services. We have offices in
15 cities across the United States, including our headquarters in Miami, as well
as offices in London, England and Frankfurt and Hamburg, Germany. As of December
29, 2000, we had approximately 1,650 associates.
INDUSTRY BACKGROUND
Following the unprecedented growth and valuations of the Information
Technology ("IT") services sector during 1999 and early 2000, the market
correction of last year presented a sobering of investor sentiment towards IT
service providers. Despite this volatility, businesses continue to require help
integrating technology that streamlines business processes, enhances revenue and
reduces expenses. In fact, International Data Corporation expects IT services to
be a $430 billion business globally in 2001.
In the face of growing competition and globalization, companies recognize
that the consistent use of IT standards correlates with their ability to
significantly reduce complexity and costs. However, the variety of applications,
tools, languages and platforms continues to challenge companies as they attempt
to adopt new technologies, gain access to information, integrate with partners
and operate in a more real-time global environment. As technology becomes an
increasingly critical component of business, companies require the capabilities
of IT service providers experienced in advanced and emerging technologies.
Over the next several years, well-positioned IT services providers will
benefit from this demand. In particular, we believe successful providers will
focus on acquiring and growing Global 2000 client relationships, offer
enterprise-wide systems integration and business knowledge, and develop robust
internal operating and delivery infrastructures.
Global 2000 clients and other large enterprises are demanding comprehensive
services that only true business technology consulting firms can deliver. We
believe successful IT services firms should be able to understand business
processes and
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implement the technology that increases operating performance. This requires
integrating large, sophisticated, and sometimes previously separate,
technologies. Firms must have strong skills in business consulting, package
implementation, technology and interactive integration and must know how to help
clients build strong business cases for their initiatives.
In today's business environment, clients require reliable, scalable and
flexible solutions that can be deployed effectively in an environment that may
involve integration with multiple computing platforms and technologies. In order
to support this emerging set of requirements, we believe that the next
generation of IT services firms should have both the business knowledge required
to understand emerging business models and the technical skills needed to
architect a solution that may involve the integration of software packages,
custom software components, and large and complex legacy systems in order to
increase efficiency, garner favorable return on investment and enable
multi-channel, enterprise-wide initiatives.
OUR APPROACH
At Answerthink, we employ a rich diversity of professionals who have a deep
understanding of how people, business and information technology interact. This
collective experience draws on the experiences of our professionals and lessons
learned from prior engagements. We also look to the future -- from the best
practices identified by our benchmarking practice to the latest innovations
developed by our newly formed advanced technology and media lab. By combining
knowledge drawn from the past and our views of the future, we are able to
rapidly develop client solutions that have long-term value. We believe
significant business change can only be effected by genuine collaboration.
Establishing partnerships with our clients both in strategy and implementation
is central to our style of working.
We believe that the following three elements differentiate us from our
competitors:
o Multi-disciplinary Solutions
Today's business problems are complex. They require a complete
understanding of the operational impact of emerging information technology,
the interaction of technology with customers and users, and changing
industry dynamics. At Answerthink, our associates have the diverse range of
skills and experiences required by our clients to take a comprehensive view
of each business problem. With strong skills in business transformation,
packaged business applications, custom integration and interactive
marketing, as well as expertise across a variety of industries, our
multi-disciplinary project teams have the experience to quickly and
thoroughly create unique solutions that are right for each client.
o The Way We Exploit Knowledge
We codify our intellectual capital in Mind~Share, our proprietary
intranet knowledge management system. From Mind~Share, we draw on lessons
learned from prior engagements, best practices identified by our Hackett
Benchmarking and Research group, as well as reference architectures and
methods developed by our project teams. The combination of our collective
knowledge base and the direct skills and experience of our people allows us
to rapidly develop quality solutions for our clients that provide maximum
value and minimize risk.
o Our Collaboration With Clients
We engage our clients throughout the consulting process, collaborating
closely with them as integral members of our project teams. We guide
clients toward solutions working together to achieve their objectives. This
enables us to provide not only the right solution, but also one our clients
feel they own.
STRATEGY
Our goal is to generate superior value for our clients through the leverage
of best practice intellectual capital, multi-disciplinary teams, an integrated
methodology and a collaborative work style. In this way, we help clients unlock
the full business value of technology. Specifically, we strive to:
o Enhance Our Brand Profile in the Marketplace
Awareness of the Answerthink brand within the business and technical
communities is critical to our business success. We desire our brand to be
associated with the highest quality and most comprehensive
technology-enabled business transformation services in our industry. Our
brand strategy is two-fold. Externally to the market, we continue to
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promote our brand through media relations activities and communications to
targeted industry analysts to ensure these key, influential communities
clearly understand how we are positioned, our competitive differentiation
and the breadth of our service offerings. In addition, we will launch
marketing campaigns targeted to current and prospective clients designed to
promote measurable impact on our lead generation and business development
activities. Internally, we have increased internal communications programs
to ensure our associates understand our brand positioning and are focused
on delivering our value proposition.
o Expand Global 2000 Client Relationships
In 2001, our goal is to increase focus on our Global 2000 client
relationships. To that end, we will focus on new opportunities with
existing customers, grow opportunities into long-term client relationships
and foster more effective cross-selling by fully leveraging the breadth of
our comprehensive service offering.
o Leverage and Expand Our Intellectual Capital and Thought Leadership
Intellectual capital and thought leadership lie at the core of
Answerthink's strategy and competitive differentiation. We provide value to
clients through our collective knowledge and practical experience. In order
to leverage that marketplace advantage, we must ensure that we continue to
build and evolve our intellectual capital so we stay ahead of the business
and technology forces that are affecting our clients. In 2001, we will
place particular emphasis on this area by enhancing the intellectual
capital knowledge base we leverage on client assignments. We will also
undertake a series of initiatives to further extend our insights and
knowledge to the marketplace.
o Extend Strategic Relationships
We actively target, assess and develop relationships with industry
leaders to stay at the cutting edge of business thought and technology
advances, to develop new business and to generate additional revenue. These
relationships generate business development opportunities as well as
provide us access to early product releases and technology developments. We
intend to continue to develop such alliances.
o Enhance Skill Sets and Increase Geographic Coverage
Since our formation, we have expanded our skill sets and geographic
presence aggressively through a combination of internal growth and
strategic acquisitions. We have successfully completed and integrated our
acquisitions and have offices in 18 cities in the United States and Europe.
We believe our broad geographic coverage allows us to serve our clients on
a local basis, helping us to build strong, long-term client relationships.
Our strategy is to continue to enhance our skill sets to meet evolving
market demand and to increase our geographic presence through internal
growth and targeted acquisitions of businesses that are aligned with our
strategy and culture.
THE ANSWERTHINK SOLUTION
Answerthink offers a comprehensive range of services. Our capabilities span
benchmarking and research, business transformation, packaged business
applications, technology integration and interactive marketing. With business
function expertise in customer service, sales and marketing, finance, human
resources, information technology and supply chain management, Answerthink's
expertise extends across an entire enterprise. We bring together expertise
across a variety of industries, including telecommunications, utilities,
automotive, financial services, retail, consumer packaged goods, life sciences
and manufacturing to deliver industry-specific solutions.
Service Capabilities
o Hackett Benchmarking and Research
Our Hackett Benchmarking and Research group is considered the world's
foremost best-practices benchmarking group. Its benchmarks include 80
percent of the Dow Jones Industrials, two-thirds of the Fortune 100, and
nearly 60 percent of the Dow Jones Global Titans Index. Hackett maintains
ongoing benchmark studies in a wide range
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of areas, including finance, human resources, information technology,
procurement and customer contact centers. It also works with sponsoring
companies to design focused inquiries into best practices in such topics as
external corporate communications and eROI.
o Business Transformation
We assist senior executives and their direct reports in applying
industry best practices and real-world tactics to help them fully achieve
their business objectives. Our team of business professionals helps clients
transform into world-class organizations by addressing issues such as how
to create an effective operating model, how to continue to grow the bottom
line while controlling costs and how to realize the full benefits of
investments made in people, processes and technology. Our business
transformation professionals enable clients to identify strategic
opportunities to improve their business by more effectively collecting,
assessing, filtering, sharing and using information across their enterprise
as well as with their clients and other strategic partners.
o Business Applications
The backbone of today's large, complex business environments continues
to be package software applications -- applications that run
mission-critical operations, such as customer relationship management,
finance, human resources, payroll and supply chain functions.
Our business applications professionals help clients choose,
integrate, and customize the software applications that best fit each
organization, both strategically and functionally. After implementation,
hands-on support and training are offered. We evaluate and selectively
choose vendors with proven reputations. Business alliances are formed only
with those partners who share our progressive vision of the current and
future marketplace. Business Applications services are designed to deliver
maximum benefit with minimal disruption. From planning, customization, data
conversion, integration and testing to the delivery of rapid implementation
methodologies, we help companies deploy new systems across the entire
enterprise or further enhance existing ones.
We offer the cost-effective, competitive advantages of packaged
software combined with deep experience in business transformation,
interactive marketing and technology architecture services to provide a
fully-integrated business solution.
o Technology and Interactive Integration
Our Technology Integration group offers a broad array of services to
develop innovative and practical solutions that transform technology into
efficient, proactive and successful business applications. We assist
clients by evaluating, designing, building and integrating both new and
legacy applications. Our capabilities span business intelligence
applications, custom application development, interactive marketing and
knowledge management. Because we understand business strategy, branding and
the needs of the user, we build interactive links between companies and
their target audiences to create effective, user-centered experiences.
Solution Offerings
o Customer Relationship Management
We provide services that leverage our branding, strategy, interactive
marketing, diagnostic, process, application and analytic capabilities in
the customer relationship management ("CRM") area. These offerings are
marketed and sold to senior executives who wish to grow revenue through the
identification, acquisition and retention of profitable customers across
all touch-points. The group takes a comprehensive view of a client's
lifecycle across all channels, including direct sales force, Internet,
broadcast, direct mail, call centers, storefronts and wireless. Our
experience helps clients select and implement technologies that make CRM a
reality within an enterprise.
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o Finance
Our finance solutions professionals are the trusted advisors to a
company's chief financial officer, controller and chief information officer
to help them rapidly identify and implement leading edge best practices
that result in dramatic improvements in efficiency and effectiveness. We
uniquely take clients from benchmarking through implementation to benefit
realization. We leverage our vast knowledge of best practices derived from
benchmarking the finance functions of more than 1,000 companies.
o Human Resources
We work with senior human resources executives and other senior
executives to help the human resource organization excel. Our human
resources solutions leverage our vast knowledge of best practices derived
from benchmarking the human resource functions of Fortune 500 companies. We
design solutions that help clients optimize human resource operations and
technology investments as well as maximize employee productivity and
organizational effectiveness. We identify business requirements, develop
best practice strategies and implement programs to increase efficiency,
employee satisfaction and ultimately shareholder value.
o Information Technology
We assist business and information technology leaders in the areas of
IT transformation and technology implementation. We help our clients in the
IT area by providing a set of technology skills that includes strategy,
architecture, design, custom application development and technology
integration. We believe our understanding of business software and our
ability to modify and integrate these applications into existing computing
environments differentiate us from our competitors. We also focus on how
emerging technologies in the wireless and broadband area will continue to
impact the architecture, devices and infrastructure of our clients. We help
the IT leadership of our clients maximize the business value received from
their IT investments.
o Supply Chain Management
We work with senior client executives and their direct reports to
manage and integrate the flow of information, currency and products within
and beyond the enterprise. We help companies, through a combination of
business transformation strategy, supply chain applications and supply-side
management technologies, improve their vendor and client relationships,
procurement practices and operational efficiencies.
CLIENTS
Answerthink focuses on long-term client relationships with Global 2000
firms and other sophisticated buyers of business consulting and IT services.
During 2000, our ten most significant clients accounted for approximately 34% of
revenue, and one client, Waste Management, accounted for approximately 11% of
revenues. Other key clients include: Bell South Corporation, Fannie Mae, General
Electric Company, Nextel Communications and Verizon.
BUSINESS DEVELOPMENT AND MARKETING
Our extensive client base and relationships with Global 2000 firms are our
most significant sources of new business. We have a business development team
comprised of a dedicated sales force, lead generation group and senior
consulting professionals.
Our sales force is geographically deployed in key markets and is primarily
focused on target accounts that Answerthink wants to penetrate and grow. Working
in partnership with the sales force, our lead generation group makes initial
contact with target companies to understand market opportunities and to identify
additional qualified leads. Our team of senior consulting professionals are
responsible for pursuing business opportunities and developing business for
their specific service areas. Our business development team establishes and
maintains long-term client relationships.
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In addition to our business development team, we have a corporate marketing
and communications organization responsible for overseeing Answerthink's brand
strategy, marketing programs, public relations and employee communications
activities.
COMPETITION
The market for our services is highly competitive and is characterized by
pressures to incorporate new capabilities and accelerate job completion
schedules. We face competition from a number of sources, including international
accounting firms, international and regional systems consulting and
implementation firms, the IT services divisions of application software firms,
marketing and communication firms, and national and regional advertising
agencies. Many competitors have greater financial, technical and marketing
resources, and name recognition than Answerthink. In addition, we compete with
our clients' internal resources, particularly where these resources represent a
fixed cost to the client. Such competition may impose additional pricing
pressures. We believe that the most significant competitive factors we face are
perceived value, breadth of services offered and price. We believe that our
multi-disciplinary, knowledge-based approach, broad and expanding framework of
services, and distinctive corporate culture allow us to compete favorably by
delivering strategic solutions that meet our clients' needs in an efficient
manner. Other important competitive factors that we believe are relevant to our
business include technical expertise, knowledge and experience in the industry,
quality of service and responsiveness to client needs, and speed in delivering
our solution offerings.
MANAGEMENT SYSTEMS
Our management control systems are comprised of various accounting,
billing, financial reporting, human resources, marketing and resource
allocations systems, many of which are integrated with our knowledge management
system, Mind~Share. We continuously work to improve Mind~Share as well as our
infrastructure and management control systems. We believe that Mind~Share
significantly enhances our ability to serve our clients efficiently by allowing
our knowledge base to be shared by all of our consultants worldwide on a
real-time basis. We also believe that our well-developed, flexible, scalable
infrastructure has allowed us to quickly integrate all of the employees and
systems of the businesses that we have acquired and positions us for future
growth.
HUMAN RESOURCES
We have dedicated resources to recruit consultants with both business and
technology expertise. We have built a recruiting team that drives our hiring
process by focusing on the highest demand solution areas of our business to
ensure an adequate pipeline of resources. In 2000, approximately 46% of our new
hires came from employee referrals.
We provide a thorough orientation and training curriculum for employees at
every level. In addition, we train our consultants in specific skill-sets that
best complement our multi-disciplinary teams. Much of the on-going development
of our consultants comes from their work on client engagements involving new
business models and technology, which is then captured in Mind~Share and is
available for training other consultants.
All of our associates own stock and/or stock options in the company. The
benefits package that we provide includes comprehensive health and welfare
insurance, work/life balance programs, 401(k), stock options and stock purchase
programs. Our associates are paid a salary and a cash bonus based upon market
conditions and performance.
As of December 29, 2000, we had approximately 1,650 associates,
approximately 1,380 of whom were billable professionals. None of our associates
are subject to collective bargaining arrangements. We have entered into
nondisclosure and non-solicitation agreements with virtually all of our
personnel. We engage consultants as independent contractors from time to time.
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ITEM 2. PROPERTIES
Our principal executive offices currently are located at 1001 Brickell Bay
Drive, Suite 3000, Miami, Florida 33131. The lease on these premises covers
16,036 square feet and expires March 31, 2003. We also lease facilities in
Atlanta, Boston, Chicago, Cleveland, Dallas, Frankfurt, Hamburg, Iselin (NJ),
London, Los Angeles, New York, Philadelphia, San Francisco, Sarasota (FL),
Seattle, Torrance (CA) and Washington, D.C. We believe that we will be able to
obtain suitable space as needed. We own no real estate and do not intend to
invest in real estate or real estate-related assets.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, we settled litigation in which we were the plaintiffs in a
lawsuit over tradename infringement. Pursuant to the settlement agreement, we
received $2.5 million in cash.
On September 25, 1998, Michael R. Farrell, a shareholder of THINK New
Ideas, filed a class action suit, Farrell v. THINK New Ideas, Inc., Scott
Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against THINK New
Ideas, Ronald Bloom, a former officer of THINK New Ideas and a former member of
the Company's Board of Directors, Melvin Epstein and Scott Mednick, both former
officers of THINK New Ideas. The suit was filed in the United States District
Court for the Southern District of New York on behalf of all persons who
purchased or otherwise acquired shares of THINK New Ideas' common stock in the
class period from November 14, 1997, through September 21, 1998.
On various dates in October 1998, six additional class action suits were
filed in the same court against the same parties by six different individuals,
each representing a class of purchasers of THINK New Ideas' common stock. All
seven of these lawsuits were consolidated by order of the court dated December
15, 1998 into one action titled In Re: THINK New Ideas, Inc., Consolidated
Securities Litigation, No. 98 Civ. 6809 (SHS).
Pursuant to an order of the court, the plaintiffs filed a Consolidated and
Amended Class Action Complaint on February 10, 1999 (the "Consolidated
Complaint"). The Consolidated Complaint superceded all prior complaints in all
of the cases and served as the operative complaint in the consolidated class
action. The Consolidated Complaint was filed on behalf of all individuals who
purchased THINK New Ideas' common stock from November 5, 1997 through September
21, 1998. The Consolidated Complaint contained substantially similar allegations
as the complaint filed by Farrell, including that THINK New Ideas and certain of
its current and former officers and directors disseminated materially false and
misleading information about THINK New Ideas' financial position and results of
operations through certain public statements and in certain documents filed by
THINK New Ideas with the Securities and Exchange Commission; that these
statements and documents caused the market price of THINK New Ideas' common
stock to be artificially inflated; that the plaintiffs purchased shares of
common stock at such artificially inflated prices and, as a consequence of such
purchases, suffered damages. The relief sought in the Consolidated Complaint was
unspecified, but included a plea for compensatory damages and interest, punitive
damages, reasonable costs and expenses, including attorneys' fees and expert
fees and such other relief as the court deemed just and proper.
This lawsuit became our responsibility upon the merger of Answerthink and
THINK New Ideas. Prior to the merger, THINK New Ideas filed a motion to dismiss
the Consolidated Complaint on a number of grounds. The plaintiffs filed a motion
in opposition. On March 15, 2000, the court granted the defendant's motion to
dismiss the Consolidated Complaint. The plaintiffs filed a Second Consolidated
and Amended Class Action Complaint (the "Second Amended Complaint") on April 14,
2000. The defendants filed a motion to dismiss the Second Amended Complaint on
May 1, 2000. On September 14, 2000, the court denied the motion. The defendants
filed an answer to the Second Amended Complaint on November 10, 2000. The
parties are engaged in discovery. No schedule has been set for the completion of
discovery or for further proceedings. We believe there are meritorious defenses
to the claims made in the Second Amended Complaint and we intend to contest
those claims vigorously. Although there can be no assurance as to the outcome of
these matters, an unfavorable resolution could have a material adverse effect on
the results of our operations and/or financial condition in the future.
In June 2000, pursuant to a confidential settlement agreement, the Company
settled litigation in which it was the plaintiff. We recorded a gain of $1.85
million as a result of this settlement.
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We are involved in legal proceedings, claims, and litigation arising in
the ordinary course of business not specifically discussed herein. In the
opinion of management, the final disposition of such other matters will not have
a material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market since our
initial public offering on May 28, 1998 under the Nasdaq symbol "ANSR". The
following table sets forth for the fiscal periods indicated the high and low
sales prices of the common stock, as reported on the Nasdaq National Market.
High Low
------------ ------------
2000
Fourth Quarter $18.75 $ 2.53
Third Quarter $19.94 $ 13.44
Second Quarter $28.50 $ 14.00
First Quarter $40.38 $ 20.13
1999
Fourth Quarter $36.81 $ 9.25
Third Quarter $23.75 $ 9.50
Second Quarter $28.94 $ 18.75
First Quarter $36.63 $ 24.50
The closing sale price for the common stock on March 15, 2001 was $5.28.
As of March 15, 2001, there were approximately 498 holders of record of our
common stock and 45,350,759 shares of common stock outstanding.
Company Dividend Policy
We do not expect to pay any cash dividends on our common stock in the
foreseeable future. Our present policy is to retain earnings, if any, for use in
the operation of our business. In addition, under the terms of our revolving
credit facility, we cannot pay dividends to our shareholders.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data sets forth selected
financial information for Answerthink as of and for each of the years in the
five-year period ended December 29, 2000, and has been derived from our audited
consolidated 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."
We merged with triSpan, Inc. ("triSpan") in February 1999 and THINK New
Ideas in November 1999 in transactions that were accounted for using the
pooling-of-interests method of accounting. All historical financial information
included in the selected consolidated financial data has been restated to
include the financial position and results of operations of triSpan and THINK
New Ideas. Prior to the merger with THINK New Ideas, THINK New Ideas used a
fiscal year ending June 30. The 1999 and 1998 consolidated financial statements
combine the Company's and THINK New Ideas' financial statements for the years
ended December 31, 1999 and January 1, 1999. The restated consolidated financial
statements as of and for the years ended January 2, 1998 and December 31, 1996
include the operating results of Answerthink as of and for the years ended
January 2, 1998 and December 31, 1996, respectively, and the operating results
of THINK New Ideas as of and for the years ended June 30, 1998 and 1997,
respectively. Due to the different fiscal year ends, THINK New Ideas' results
for the six months ended June 30, 1998 are included in the restated consolidated
financial statements for both fiscal years 1998 and 1997.
Year Ended
---------------------------------------------------------------
December 29, December 31, January 1, January 2, December 31,
2000 1999 1999 1998 1996
---------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues ........................................... $ 311,136 $ 260,460 $ 167,517 $ 77,144 $ 28,930
Costs and expenses:
Project personnel and expenses ...................... 182,191 154,531 99,054 45,975 16,769
Selling, general and administrative expenses ........ 114,733 83,661 63,530 37,147 19,614
Stock compensation expense .......................... -- -- 63,886 23,043 --
Merger related expenses ............................. -- 11,700 -- -- --
Purchased research and development expense .......... -- -- 5,200 9,200 --
Settlement costs .................................... -- -- -- 1,903
-------------------------------------------------------------
Total costs and operating expenses ............... 296,924 249,892 231,670 117,268 36,383
-------------------------------------------------------------
Income (loss) from operations .......................... 14,212 10,568 (64,153) (40,124) (7,453)
Other income (expense):
Litigation settlement ................................ 1,850 -- 2,500 -- --
Non-cash investment losses ........................... (2,350) -- -- -- --
Interest income (expense), net ....................... 1,128 281 (631) 556 167
-------------------------------------------------------------
Income (loss) before income taxes and
extraordinary loss .................................. 14,840 10,849 (62,284) (39,568) (7,286)
Income taxes ........................................... 6,939 7,602 (870) 340 246
-------------------------------------------------------------
Income (loss) before extraordinary loss ................ 7,901 3,247 (61,414) (39,908) (7,532)
Extraordinary loss on early extinguishment of debt
(net of taxes) ...................................... -- 2,113 -- -- --
-------------------------------------------------------------
Net income (loss) ...................................... $ 7,901 $ 1,134 $ (61,414) $ (39,908) $ (7,532)
=============================================================
Basic net income (loss) per common share ............... $ 0.20 $ 0.03 $ (2.47) $ (3.46) $ (1.88)
Weighted average common shares outstanding ............. 40,262 34,953 24,844 11,521 4,005
Diluted net income (loss) per common share ............. $ 0.18 $ 0.03 $ (2.47) $ (3.46) $ (1.88)
Weighted average common shares and common share
equivalents ......................................... 45,137 43,098 24,844 11,521 4,005
December 29, December 31, January 1, January 2, December 31,
2000 1999 1999 1998 1996
---------------------------------------------------------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents .............................. $ 51,662 $ 27,124 $ 36,931 $ 10,781 $ 3,658
Working capital ........................................ $ 73,337 $ 55,166 $ 49,711 $ 15,349 $ 7,949
Total assets ........................................... $ 228,676 $ 200,713 $ 153,394 $ 86,686 $ 25,002
Shareholders' equity ................................... $ 172,054 $ 140,270 $ 100,789 $ 35,351 $ 12,370
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Answerthink is a leading provider of technology-enabled business
transformation solutions. The Company brings together multi-disciplinary
expertise in benchmarking and research, business transformation, interactive
marketing, business applications and technology integration to serve the needs
of Global 2000 clients. Answerthink's solutions span all functional areas of a
company including finance, human resources, information technology, sales,
marketing, customer services, and supply chain across a variety of industry
sectors such as telecommunications, utilities, automotive, financial services,
retail, consumer packaged goods, life services and manufacturing.
Answerthink was formed on April 23, 1997. Since our formation, we have
grown through internal expansion as well as through mergers and acquisitions. In
February 1999, we merged with triSpan, a provider of Internet consulting, Web
application development and integration services. In November 1999, we merged
with THINK New Ideas, a provider of interactive marketing, branding and creative
Web site development services. The mergers with triSpan and THINK New Ideas were
accounted for using the pooling-of-interests method of accounting. Our
historical consolidated financial statements were restated to include the
financial position, results of operations and cash flows of triSpan and THINK
New Ideas. Financial information prior to Answerthink's date of incorporation of
April 23, 1997 represents only the combined results of triSpan and THINK New
Ideas. Our acquisitions (with the exception of the mergers with triSpan and
THINK New Ideas) were accounted for using the purchase method of accounting and
our historical consolidated financial statements include the operating results
of the companies we acquired from the date of each respective acquisition. Our
consolidated financial statements may lack comparability from period to period
because of acquisitions we made for which we used the purchase method of
accounting.
Our revenues are derived from fees for services generated on a
project-by-project basis. Clients are either charged on a time and materials
basis based on the number of hours worked by our consultants at an agreed upon
rate per hour or they enter into fixed-fee or capped-fee contracts. For
fixed-fee or capped-fee contracts, we recognize revenues on the percentage of
completion method of accounting based on our evaluation of actual costs incurred
to date compared to total estimated costs. Net revenues exclude reimbursable
expenses charged to clients.
The agreements entered into in connection with a project, whether time and
materials based or fixed-fee or capped-fee based, are typically terminable by
the client upon 30 days' notice. Upon early termination of an engagement, the
client is required to pay for all time, materials and expenses incurred by us
through the effective date of the termination. In addition, provisions in some
of the agreements we have with our clients limit our right to enter into
business relationships with specific competitors of that client for a specific
time period. These provisions typically prohibit us from performing a defined
range of our services that we might otherwise be willing to perform for
potential clients. These provisions are generally limited to six to 12 months
and usually apply only to specific employees or the specific project team.
Our most significant expense is costs associated with our billable
professionals. Project personnel costs consist primarily of salaries, benefits
and bonuses. We expect the salaries of our billable professionals will increase
over time due to intense competition in our industry for qualified
professionals. Our ability to manage employee utilization, contain payroll costs
and control employee turnover costs in this competitive environment will have a
significant impact on our profitability. To help address these concerns, we have
granted and expect to continue to grant shares of common stock or stock options
to all employees, including those of acquired companies, which generally vest
over four to six years.
-12-
Our selling, general and administrative expenses consist primarily of
salaries, bonuses and benefits for non-billable professionals, facility costs,
staff recruitment and training costs, depreciation and amortization costs,
general operating expenses, and selling and marketing expenses.
Results of Operations
Our fiscal year ends on the Friday closest to December 31. Our fiscal year
generally consists of a 52-week period. Fiscal years 2000, 1999 and 1998 ended
on December 29, 2000, December 31, 1999 and January 1, 1999, 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 net revenues of such results:
Year Ended
---------------------------------------------------------
December 29, 2000 December 31, 1999 January 1, 1999
------------------ ----------------- ------------------
(in thousands, except percentage data)
Net revenues $311,136 100.0% $260,460 100.0% $167,517 100.0%
Costs and expenses:
Project personnel and expenses 182,191 58.5% 154,531 59.3% 99,054 59.1%
Selling, general and administrative expenses 114,733 36.9% 83,661 32.1% 63,530 37.9%
Stock compensation expense -- -- -- -- 63,886 38.1%
Merger related expenses -- -- 11,700 4.5% -- --
Purchased research and development expense -- -- -- -- 5,200 3.1%
--------- ------ -------- ------ --------- -------
Total costs and operating expenses 296,924 95.4% 249,892 95.9% 231,670 138.2%
--------- ------ -------- ------ --------- -------
Income (loss) from operations 14,212 4.6% 10,568 4.1% (64,153) (38.2%)
Other income (expense):
Litigation settlement 1,850 0.6% -- -- 2,500 1.5%
Non-cash investment losses (2,350) (0.8%) -- -- -- --
Interest income (expense), net 1,128 0.3% 281 0.1% (631) (0.4%)
--------- ------ -------- ------ --------- -------
Income (loss) before income taxes and
extraordinary loss 14,840 4.7% 10,849 4.2% (62,284) (37.1%)
Income taxes 6,939 2.2% 7,602 2.9% (870) (0.5%)
--------- ------ -------- ------ --------- -------
Income (loss) before extraordinary loss 7,901 2.5% 3,247 1.3% (61,414) (36.6%)
Extraordinary loss on early extinguishment
of debt (net of taxes) -- -- 2,113 0.8% -- --
--------- ------ -------- ------ --------- -------
Net income (loss) $ 7,901 2.5% $ 1,134 0.5% $(61,414) (36.6%)
--------- ------ -------- ------ --------- -------
-13-
Comparison of 2000 to 1999
Overview. We reported net income of $7.9 million in 2000 compared to net
income of $1.1 million in 1999. Our $7.9 million net income during 2000 included
non-recurring items of $14.2 million related to reserves for dotcom related
receivables and a restructuring charge for costs associated with staff
reductions, $2.4 million for non-cash investment losses and $1.85 million of
income from a litigation settlement. In 1999, we incurred non-recurring charges
consisting primarily of $11.7 million for our mergers with triSpan and THINK New
Ideas and a $2.1 million extraordinary loss on the early extinguishment of debt
that was assumed in connection with our merger with triSpan. Excluding the
effect of non-recurring items and unusually high income tax expense in 1999, we
would have reported net income of $15.7 million in 2000 compared to $14.1
million in 1999.
Net Revenues. Net revenues increased 19.5% to $311.1 million in 2000 from
$260.5 million in 1999. The increase in revenues resulted primarily from
increases in the average size of our engagements both for new clients and
follow-up work with existing clients as well as higher billing rates. In 2000,
one customer accounted for approximately 11% of net revenues. No single customer
accounted for more than 5% of net revenues in 1999.
Project Personnel and Expenses. Project personnel costs and expenses
consist primarily of salaries, benefits and bonuses for consultants. Project
personnel costs and expenses increased 17.9% to $182.2 million in 2000 from
$154.5 million in 1999. This increase was primarily due to an increase in the
number of consultants required to serve our clients during the year. However,
due to staff reductions in the fourth quarter of 2000, our year-end billable
headcount remained relatively consistent at 1,376 at December 29, 2000 compared
to 1,396 at December 31, 1999. Project personnel costs and expenses as a
percentage of net revenues were 58.5% in 2000 compared to 59.3% during 1999.
This decrease was primarily due to an increase in the average billing rate for
consultants.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 37.1% to $114.7 million in 2000 from $83.7
million in 1999. The increase in selling, general and administrative expenses
primarily related to non-recurring charges of $14.2 million in the fourth
quarter of 2000 related to reserves for dotcom related receivables and a
restructuring charge for costs associated with staff reductions, an increase in
selling costs due to higher sales volume, increased marketing costs associated
with our name change and branding campaign, increased technology costs,
increased bad debt expense and additional goodwill amortization expense
associated with our acquired businesses. Selling, general and administrative
expenses as a percentage of net revenues increased to 36.9% in 2000 from 32.1%
during 1999. This increase was primarily attributable to the non-recurring
charges recorded in the fourth quarter of 2000.
Merger Related Expenses. Merger related expenses were $11.7 million in
1999. These expenses related to our mergers with triSpan in February 1999 and
THINK New Ideas in November 1999, which were accounted for as
poolings-of-interests. The expenses included investment banking, legal and
accounting fees as well as the costs of combining operations and eliminating
duplicate facilities.
Litigation Settlement. In June 2000, pursuant to a confidential settlement
agreement, we settled litigation in which we were the plaintiff. We recorded a
gain of $1.85 million as a result of this settlement.
Non-Cash Investment Losses. In the fourth quarter of 2000, we recorded
non-cash investment losses of $2.4 million related to the full impairment of all
our dotcom related investments.
Income Taxes. We recorded income tax expense of $6.9 million which
represented 46.8% of our pre-tax income in 2000. In 1999, we recorded an income
tax expense of $7.6 million which represented 70.0% of our pre-tax income. The
higher than expected tax rate in 1999 was primarily attributable to
non-deductible merger related expenses and the establishment of a deferred tax
liability for triSpan when it converted from an S corporation to a C corporation
at the time of the merger.
Extraordinary Loss on Early Extinguishment of Debt. The extraordinary loss
on early extinguishment of debt in 1999 was a result of the repayment of
subordinated notes that were assumed in connection with the triSpan merger.
These notes, which had a face amount of $8.0 million and a stated interest rate
of 8%, were originally issued at a substantial discount. Immediately following
the merger with triSpan, we repaid the notes in full, which resulted in an
extraordinary loss of $2.1 million, net of a $1.4 million tax benefit.
-14-
Comparison of 1999 to 1998
Overview. In 1999, net income increased to $1.1 million from a net loss of
$61.4 million in 1998. We incurred non-recurring charges during 1999 consisting
primarily of $11.7 million for our mergers with triSpan and THINK New Ideas and
a $2.1 million extraordinary loss on the early extinguishment of debt which was
assumed in connection with our merger with triSpan. Our $61.4 million net loss
during 1998 was primarily the result of a $63.9 million one-time charge for
stock compensation expense. Stock compensation expense of $63.9 million
represents the vesting of shares of common stock that had been issued to certain
members of management in connection with the formation of Answerthink and THINK
New Ideas. These charges were non-cash in nature and did not impact total
shareholders' equity. We believe that such issuances were critical to our
ability to attract and retain qualified personnel during the crucial start-up
phases of both Answerthink and THINK New Ideas. Included in the $63.9 million of
stock compensation expense in 1998 is $23.0 million of stock compensation
expense for THINK New Ideas. Excluding the effect of non-recurring items and
unusually high income tax expense resulting from the mergers, we would have
reported net income of $14.1 million for 1999 and $3.1 million for 1998.
Net Revenues. Net revenues increased 55.5% to $260.5 million in 1999 from
$167.5 million in 1998. This increase was the result of several factors
including revenues attributable to the companies we acquired, an increase in the
number of clients served and additional engagements with existing clients.
Project Personnel and Expenses. Project personnel and expenses increased
56.0% to $154.5 million in 1999 from $99.1 million in 1998. This increase was
primarily due to an increase in the number of our consultants resulting from
both internal hiring and acquisitions. Project personnel and expenses as a
percentage of revenue remained fairly constant between 1999 and 1998 at 59.3%
and 59.1%, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 31.7% to $83.7 million in 1999 from $63.5
million in 1998. The increase in selling, general and administrative expenses
related primarily to an increase in sales and administration headcount related
to the higher volume of business and additional amortization expense associated
with our 1999 and 1998 acquisitions. This increase was also the result of higher
property and facilities costs incurred as a result of the addition and expansion
of facilities to accommodate our growth. Selling, general and administrative
expenses as a percentage of net revenues decreased to 32.1% in 1999 from 37.9%
during 1998. This decrease was primarily attributable to the higher revenue
levels during 1999 as well as cost savings attributable to the elimination of
redundancies in infrastructures and support systems of our acquired companies.
Merger Related Expenses. Merger related expenses were $11.7 million in
1999. These expenses related to our mergers with triSpan in February 1999 and
THINK New Ideas in November 1999. The expenses included investment banking,
legal and accounting fees, severance costs for redundant employees as well as
the costs of combining operations and eliminating redundant facilities.
Income Taxes. We recorded income tax expense of $7.6 million, which
represented 70.1% of our pre-tax income, in 1999. The higher than expected tax
rate was primarily attributable to non-deductible merger related expenses and
the establishment of a deferred tax liability for triSpan when it converted from
an S corporation to a C corporation at the time of the merger. We recorded an
income tax benefit in 1998 of $870,000, which represented an effective tax rate
of 1.4%. The lower than expected tax rate in 1998 was primarily attributable to
the fact that, although we reported a net loss for financial reporting purposes
in 1998, for tax purposes we reported taxable income primarily as a result of
the non-deductibility of the stock compensation expense. The net tax benefit
reported in 1998 resulted from a reduction in the valuation allowance for our
deferred tax assets.
Extraordinary Loss on Early Extinguishment of Debt. The extraordinary loss
on early extinguishment of debt in 1999 was a result of the repayment of
subordinated notes that were assumed in connection with the triSpan merger.
These notes, which had a face amount of $8.0 million and a stated interest rate
of 8%, were originally issued at a substantial discount. Immediately following
the merger with triSpan, we repaid the notes in full, which resulted in an
extraordinary loss of $2.1 million, net of a $1.4 million tax benefit.
-15-
Liquidity and Capital Resources
We have funded our operations primarily with cash flow generated from
operations and the proceeds from our initial public offering. On May 28, 1998,
we completed our initial public offering of our common stock, which resulted in
net proceeds of $38.5 million. We also have a revolving credit facility for
$25.0 million. The credit facility is unsecured and contains, among other
things, the maintenance of certain financial covenants such as a maximum
leverage ratio, minimum level of tangible net worth, minimum ratio of earnings
to interest expense and minimum quick ratio. At December 29, 2000, we had no
borrowings under this facility. At December 29, 2000, we had $51.7 million of
cash, cash equivalents and short-term investments compared to $29.6 million at
December 31, 1999.
Net cash provided by operating activities was $20.2 million for 2000
compared to $7.3 million provided by operating activities during 1999. Net cash
provided by operating activities during 2000 related primarily to our net income
of $7.9 million and non-cash expenses of $25.9 million, partially offset by an
$8.8 million increase in prepaid expenses and other current and non-current
assets and a $9.2 million decrease in media payable. Media payables represent
media placement costs owed to media providers on behalf of our customers.
Amounts in media payables that have been billed to our customers are included in
other receivables. The level of media payables and the related receivables will
vary with the timing of our customers' media campaigns. During 1999, net cash
provided by operating activities related primarily to our net income, excluding
the effect of non-cash expenses, a $5.4 million decrease of other receivables, a
$4.4 million increase in media payables and a $13.6 million increase in accrued
expenses and other liabilities. These sources of cash were partially offset by a
$25.6 million increase in accounts receivable and unbilled revenue and a $3.5
million decrease in accounts payable.
Net cash used in investing activities was $11.0 million for 2000 compared
to $17.6 million used during 1999. The use of cash for investing activities in
2000 was primarily attributable to $8.9 million of purchases of property and
equipment and $4.6 million of additional contingent consideration paid for
certain prior acquisitions, offset by net sales and redemptions of short-term
investments of $2.4 million. In 1999, the primary uses of cash in investing
activities were $10.9 million used in the acquisition of businesses and $5.3
million used for the purchase of property and equipment, offset by net purchases
of short-term investments of $1.4 million.
Net cash provided by financing activities was $15.4 million in 2000
compared to $515,000 provided by financing activities during 1999. The primary
source of cash from financing activities during 2000 was $17.1 million of
proceeds from the sale of common stock as a result of exercises of stock options
and warrants as well as the sale of stock through our employee stock purchase
plan. This was offset by a repayment of $1.8 million of notes payable. The cash
provided by financing activities in 1999 was primarily the result of proceeds
from the issuance of common stock totaling $15.0 million, partially offset by
the repayment of $8.0 million of subordinated notes that were assumed in the
triSpan merger, the repayment of other notes payable totaling $4.7 million and
the repayment of $2.2 million of our revolving credit facilities.
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 12 months. Thereafter, we may
need to raise additional funds. We may decide to raise additional funds sooner
in order to fund more rapid expansion, to develop new or enhanced products and
services, to respond to competitive pressures or to acquire complementary
businesses or technologies. We cannot assure you, however, that additional
financing will be available when needed or desired on terms favorable to us or
at all.
-16-
Recently Issued Accounting Standards
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 138 ("SFAS 138"), Accounting for Certain Derivative
Instruments - an Amendment of FAS 133. SFAS 138 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives). SFAS 138 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We believe the adoption of SFAS 138 will not have
a material impact on our consolidated financial statements as we currently do
not use derivative instruments.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB 25 ("FIN 44"). This interpretation
clarifies certain issues relating to stock compensation. FIN 44 is effective
July 1, 2000; however, certain conclusions in this interpretation cover specific
events that occurred prior to July 1, 2000. FIN 44 did not have an impact on our
consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 did not have an impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that there is any material market risk exposure with
respect to derivative or other financial instruments, which would require
disclosure under this item.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANSWERTHINK, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Certified Public Accountants /
Independent Auditors 19
Consolidated Balance Sheets as of December 29, 2000 and
December 31, 1999 22
Consolidated Statements of Operations for the Years Ended
December 29, 2000, December 31, 1999 and January 1, 1999 23
Consolidated Statements of Shareholders' Equity for the Years
Ended December 29, 2000, December 31, 1999 and January 1, 1999 24
Consolidated Statements of Cash Flows for the Years Ended
December 29, 2000, December 31, 1999 and January 1, 1999 25
Notes to Consolidated Financial Statements 26
-18-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Answerthink, Inc.
Miami, Florida
In our opinion, based on our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, shareholders' equity, and cash flows present fairly, in all
material respects, the financial position of Answerthink, Inc. and its
subsidiaries (the "Company") at December 29, 2000 and December 31, 1999, and the
results of their operations and their cash flows for the three years in the
period ended December 29, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements give retroactive effect to the mergers of triSpan, Inc. on
February 26, 1999 and THINK New Ideas, Inc. on November 5, 1999 in transactions
accounted for as poolings of interests, as described in Note 2 to the financial
statements. We did not audit the financial statements of triSpan, Inc. and THINK
New Ideas, Inc. for the year ended December 31, 1998 which statements reflect
total revenues of $15,453,296 and $49,361,578, respectively for the year then
ended. Those statements were audited by other auditors whose reports thereon
have been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for triSpan, Inc. and THINK New Ideas, Inc., is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 13, 2001
-19-
REPORT OF INDEPENDENT AUDITORS
Board of Directors THINK New Ideas, Inc.
We have audited the consolidated statement of operations, shareholders' equity
and cash flows of THINK New Ideas, Inc. and subsidiaries ("THINK New Ideas") for
the year ended December 31, 1998 (not presented separately herein). These
consolidated financial statements are the responsibility of THINK New Ideas'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of THINK New Ideas,
Inc. and subsidiaries as of December 31, 1998, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
December 17, 1999
-20-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To triSpan, Inc. and triSpan Software, Inc.:
We have audited the combined statements of operations, shareholders' equity and
cash flows of triSpan, Inc. (a Pennsylvania S Corporation) and triSpan Software,
Inc. (a Pennsylvania S Corporation) for the year then ended December 31, 1998
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of triSpan, Inc. and
triSpan Software, Inc. as of December 31, 1998, and the combined results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 26, 1999
-21-
ANSWERTHINK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 29, December 31,
2000 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,662 $ 27,124
Short-term investments -- 2,432
Accounts receivable and unbilled revenue, net of allowance of $11,122 and
$1,510 in 2000 and 1999, respectively 59,706 72,655
Other receivables 3,547 5,340
Prepaid expenses and other current assets 15,044 8,058
------------------ -----------------
Total current assets 129,959 115,609
Property and equipment, net 14,655 11,191
Other assets 1,450 3,362
Goodwill, net 82,612 70,551
------------------ -----------------
Total assets $ 228,676 $ 200,713
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,006 $ 8,982
Accrued expenses and other liabilities 39,270 33,065
Media payable 7,346 16,500
Current portion of notes payable -- 1,896
------------------ -----------------
Total current liabilities 56,622 60,443
------------------ -----------------
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 and
outstanding: 44,234,837 shares at December 29, 2000; 42,731,976 shares at
December 31, 1999 44 43
Additional paid-in capital 243,299 219,884
Unearned compensation (348) (815)
Accumulated deficit (70,941) (78,842)
------------------ -----------------
Total shareholders' equity 172,054 140,270
------------------ -----------------
Total liabilities and shareholders' equity $ 228,676 $ 200,713
================== =================
The accompanying notes are an integral part of the consolidated
financial statements.
-22-
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended
-----------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
--------------- --------------- ---------------
Net revenues $ 311,136 $ 260,460 $ 167,517
Costs and expenses:
Project personnel and expenses 182,191 154,531 99,054
Selling, general and administrative expenses 114,733 83,661 63,530
Stock compensation expense -- -- 63,886
Merger related expenses -- 11,700 --
Purchased research and development expense -- -- 5,200
--------------- --------------- ---------------
Total costs and operating expenses 296,924 249,892 231,670
--------------- --------------- ---------------
Income (loss) from operations 14,212 10,568 (64,153)
Other income (expense):
Litigation settlement 1,850 -- 2,500
Non-cash investment losses (2,350) -- --
Interest income 1,383 926 958
Interest expense (255) (645) (1,589)
--------------- --------------- ---------------
Income (loss) before income taxes and extraordinary loss 14,840 10,849 (62,284)
Income taxes 6,939 7,602 (870)
--------------- --------------- ---------------
Income (loss) before extraordinary loss 7,901 3,247 (61,414)
Extraordinary loss on early extinguishment of debt (net of
taxes of $1,408) -- 2,113 --
--------------- --------------- ---------------
Net income (loss) $ 7,901 $ 1,134 $ (61,414)
=============== =============== ===============
Basic net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.20 $ 0.09 $ (2.47)
Extraordinary loss on early extinguishment of debt $ -- $ (0.06) $ --
Net income (loss) per common share $ 0.20 $ 0.03 $ (2.47)
Weighted average common shares outstanding 40,262 34,953 24,844
Diluted net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.18 $ 0.08 $ (2.47)
Extraordinary loss on early extinguishment of debt $ -- $ (0.05) $ --
Net income (loss) per common share $ 0.18 $ 0.03 $ (2.47)
Weighted average common and common equivalent
shares outstanding 45,137 43,098 24,844
The accompanying notes are an integral part of the consolidated
financial statements.
-23-
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Additional Total
---------------------- Paid-in Unearned Accumulated Shareholders'
Shares Amount Capital Compensation Deficit Equity
--------- --------- --------- --------- --------- ---------
Balance at January 2, 1998 30,040 $ 30 $ 83,090 $ (1,121) $ (46,648) $ 35,351
Issuance of common stock 3,485 3 39,640 -- -- 39,643
Purchase and retirement of stock (890) (1) (3,248) -- -- (3,249)
Vesting of shares -- -- 42,211 (1,045) -- 41,166
Conversion of 1,790 shares of convertible preferred
stock to common stock 7,160 7 11,133 -- -- 11,140
Issuance of common stock for business acquisitions 434 1 6,341 -- -- 6,342
Issuance of warrants in connection with redeemable
subordinated debt -- -- 3,761 -- -- 3,761
Amortization of deferred compensation expense, net
of forfeitures -- -- (813) 776 -- (37)
Net loss -- -- -- -- (61,414) (61,414)
Adjustment to conform THINK New Ideas' fiscal year -- -- -- -- 28,086 28,086
--------- --------- --------- --------- --------- ---------
Balance at January 1, 1999 40,229 $ 40 $ 182,115 $ (1,390) $ (79,976) $ 100,789
Issuance of common stock 1,631 2 14,978 -- -- 14,980
Purchase and retirement of stock (350) -- (3) -- -- (3)
Issuance of common stock for business acquisitions 1,222 1 22,794 -- -- 22,795
Amortization of deferred compensation expense, net
of forfeitures -- -- -- 575 -- 575
Net income -- -- -- -- 1,134 1,134
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 42,732 $ 43 $ 219,884 $ (815) $ (78,842) $ 140,270
Issuance of common stock 1,298 1 17,176 -- -- 17,177
Purchase and retirement of stock (172) -- (1,883) -- -- (1,883)
Issuance of common stock for business acquisitions 377 -- 8,122 -- -- 8,122
Amortization of deferred compensation expense, net
of forfeitures -- -- -- 467 -- 467
Net income -- -- -- -- 7,901 7,901
--------- --------- --------- --------- --------- ---------
Balance at December 29, 2000 44,235 $ 44 $ 243,299 $ (348) $ (70,941) $ 172,054
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-24-
ANSWERTHINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
----------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
------------ ------------ -----------
Cash flows from operating activities:
Net income (loss) $ 7,901 $ 1,134 $ (61,414)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Extraordinary loss on early exinguishment of debt -- 2,113 --
Depreciation and amortization 12,589 10,397 7,627
Provision for doubtful accounts 12,982 1,357 939
Deferred income taxes (175) (2,663) (2,411)
Investment losses 2,350 -- --
Gain on litigation settlement (1,850) -- --
Compensation charge relating to vesting of shares -- -- 63,886
Purchased research and development -- -- 5,200
Impairment of capitalized software -- 989 --
Restructuring costs -- -- 921
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable and unbilled revenue 1,716 (25,648) (9,354)
Decrease (increase) in other receivables 1,793 5,426 (4,794)
Increase in prepaid expenses and other current and non-current assets (8,836) (294) (1,169)
Increase (decrease) in accounts payable 1,024 (3,477) 658
Increase (decrease) in accrued expenses and other liabilities (181) 13,571 1,099
Increase (decrease) in media payable (9,154) 4,408 4,569
----------- ----------- -----------
Net cash provided by operating activities 20,159 7,313 5,757
Cash flows from investing activities:
Purchases of property and equipment (8,920) (5,285) (5,207)
Sale of property and equipment -- -- 456
Purchases of short-term investments (500) (2,432) (9,650)
Redemption, sales and maturities of short-term investments 2,932 1,000 9,312
Cash used in acquisition of businesses, net of cash acquired (4,560) (10,918) (4,865)
----------- ----------- -----------
Net cash used in investing activities (11,048) (17,635) (9,954)
Cash flows from financing activities:
Proceeds from issuance of common stock 17,177 14,980 40,587
Purchase and retirement of common stock -- (3) (3,249)
Proceeds from issuance of convertible preferred stock -- -- 1,100
Proceeds from revolving credit facility -- 400 7,545
Repayment of revolving credit facility -- (2,177) (15,250)
Proceeds from notes payable -- -- 750
Repayment of notes payable (1,750) (4,685) (7,423)
Proceeds from redeemable subordinated notes -- -- 8,000
Repayment of redeemable subordinated notes -- (8,000) --
----------- ----------- -----------
Net cash provided by financing activities 15,427 515 32,060
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 24,538 (9,807) 27,863
Cash and cash equivalents at beginning of year 27,124 36,931 9,068
----------- ----------- -----------
Cash and cash equivalents at end of year $ 51,662 $ 27,124 $ 36,931
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 100 $ 546 $ 1,177
Cash paid for income taxes $ 9,673 $ 8,268 $ 352
The accompanying notes are an integral part of the consolidated
financial statements.
-25-
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 provider of
technology-enabled business transformation solutions. The Company brings
together multi-disciplinary expertise in benchmarking and research, business
transformation, interactive marketing, business applications and technology
integration to serve the needs of Global 2000 clients. Answerthink's solutions
span all functional areas of a company including finance, human resources,
information technology, sales, marketing, customer service, and supply-chain
across a variety of industry sectors such as telecommunications, utilities,
automotive, financial services, retail, consumer packaged goods, life sciences
and manufacturing.
Principles of Consolidation and Capitalization
The consolidated financial statements include the accounts of Answerthink
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation. In February 1999, Answerthink merged with
triSpan, Inc. ("triSpan") and in November 1999, Answerthink merged with THINK
New Ideas, Inc. ("THINK New Ideas"). The mergers with triSpan and THINK New
Ideas were accounted for using the pooling-of-interests method of accounting.
All prior historical consolidated financial statements presented herein have
been restated to include the financial position, results of operations, and cash
flows of triSpan and THINK New Ideas. Accordingly, financial information
presented herein prior to Answerthink's date of incorporation of April 23, 1997
is solely that of triSpan and THINK New Ideas (see Note 2).
In May 1998, Answerthink completed its initial public offering (the
"Offering") whereby it sold 3,324,500 shares of common stock. Net proceeds from
the Offering, after expenses, were $38.5 million.
Fiscal Year
The Company's fiscal year ends on the Friday closest to December 31. The
fiscal year for the Company generally consists of a 52-week period. Fiscal years
2000, 1999 and 1998 ended on December 29, 2000, December 31, 1999 and January 1,
1999, respectively. References to a year in these consolidated financial
statements relate to a fiscal year rather than a calendar year. The fiscal year
ends of triSpan and THINK New Ideas have been conformed to that of the Company
for all periods presented. Prior to the merger with THINK New Ideas, THINK New
Ideas used a fiscal year ending June 30. The restated consolidated financial
statements for 1997 combined the Company's consolidated financial statements for
the year ended January 2, 1998 with THINK New Ideas' consolidated financial
statements for the year ended June 30, 1998. Due to the different fiscal year
ends, THINK New Ideas' results for the six months ended June 30, 1998 were
included in the restated consolidated financial statements for both fiscal years
1998 and 1997. THINK New Ideas' net loss for the six months ended June 30, 1998
was added to the opening balance of accumulated deficit at January 2, 1998 in
the accompanying statement of shareholders' equity.
Cash and Cash Equivalents
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
-26-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-Term Investments
The Company did not have short-term investments at December 29, 2000.
Short-term investments, consisting of interest bearing, investment-grade
securities, have been classified as available-for-sale securities and are
recorded at fair market value in the consolidated balance sheet as of December
31, 1999. Any unrealized holding gains or losses on available-for-sale
securities are reported as a separate component of shareholders' equity until
these gains or losses are realized. The difference between fair market value and
cost was not material at December 31, 1999. Realized gains or 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.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets ranging from two to seven years. Leasehold
improvements are amortized on a straight-line basis over the term of the lease
or the estimated useful life of the improvement, whichever is shorter.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for betterments and major improvements are capitalized. The
carrying amount of assets sold or retired and related accumulated depreciation
are removed from the accounts in the year of disposal and any resulting gains or
losses are included in the statement of operations.
Other Receivables and Media Payable
Media payables represent media placement costs due to media providers on
behalf of the Company's clients. Amounts in media payables that have been billed
to the Company's customers are included in other receivables. The level of media
payables and the related receivables vary with the timing of the Company's
clients' media campaigns.
Intangible Assets
Goodwill, related to business acquisitions, is being amortized over 15
years on a straight-line basis. The Company recorded amortization expense of
$6.1 million, $4.3 million and $2.8 million for the years ended December 29,
2000, December 31, 1999 and January 1, 1999, respectively. The carrying value of
goodwill is subject to periodic reviews of realizability. The agreements
pursuant to which the Company acquired certain companies (see Note 3) included
provisions that required the Company to pay additional consideration if the
acquired companies met certain goals. The value of any contingent consideration
paid was recorded as additional goodwill. Accumulated amortization of goodwill
amounted to $13.9 million and $7.8 million at December 29, 2000 and December 31,
1999, respectively.
Revenue Recognition
The Company recognizes revenues for services as work is performed on a
project-by-project basis adjusted for any anticipated losses in the period in
which any such losses are identified. For projects charged on a time and
materials basis, revenue is recognized based on the number of hours worked by
consultants at an agreed-upon rate per hour. The Company also undertakes
projects on a fixed-fee or capped-fee basis for which revenues are recognized on
the percentage of completion method of accounting based on the evaluation of
actual costs incurred to date compared to total estimated costs. Fee revenue
from advertising commissions is recognized when media placements appear on
television, radio or in print. Net revenues exclude reimbursable expenses
charged to clients.
-27-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Compensation
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. In accordance with APB Opinion No. 25, compensation expense, if
any, is generally based on the difference between the exercise price of an
option, or the amount paid for an award, and the market price or fair value of
the underlying common stock at the date of the award or at the measurement date
for variable awards. Stock-based compensation arrangements involving
non-employees are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, under which
such arrangements are accounted for based on the fair value of the option or
award. As required by SFAS No. 123, the Company discloses pro forma net income
(loss) and net income (loss) per share information reflecting the effect of
applying SFAS No. 123 fair value measurement to employee arrangements.
Income Taxes
The Company records income taxes using the liability method. Under this
method, the Company records deferred taxes based on temporary taxable and
deductible differences between the tax bases of the Company's assets and
liabilities and their financial reporting bases. A valuation allowance is
established when it is more likely than not that some or all of the deferred tax
assets will not be realized. Prior to its merger with Answerthink, triSpan was
taxed as an S Corporation, and no income tax was provided as the income or loss
was included in its shareholders' income tax returns.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. With regard to common shares issued to employees under employment
agreements, the calculation includes only the vested portion of such shares.
Accordingly, common shares outstanding for the basic net income (loss) per share
computation is lower than actual shares issued and outstanding. Included in the
common shares outstanding for the basic net income per share computation for the
year ended December 29, 2000 are an estimated 1,443,466 shares related to an
earn-out to be paid in the Company's common stock in March 2001 (see Note 3).
Income (loss) per share assuming dilution is computed by dividing the net
income (loss) by the weighted average number of common shares outstanding,
increased by the assumed conversion of other potentially dilutive securities
during the period. For the year ended December 29, 2000 and December 31, 1999,
potentially dilutive securities included 3,681,880 shares and 6,784,108 shares,
respectively, of unvested common stock issued under employment agreements and
1,193,050 shares and 1,360,669 shares, respectively, issuable upon the exercise
of stock options and warrants assuming the treasury stock method. Potentially
dilutive shares were excluded from the diluted loss per share calculation for
the year ended January 1, 1999 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 that year.
Potentially dilutive shares that were not included in the diluted loss per share
calculations as of January 1, 1999 included 9,508,192 shares of common stock
issued under employment agreements.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable and unbilled revenue, other
receivables, accounts payable, accrued expenses and other liabilities, and media
payable. At December 29, 2000 and December 31, 1999, the fair value of these
instruments approximated their carrying value.
Concentration of Credit Risk
The Company provides services primarily to Global 2000 companies and other
sophisticated buyers of business consulting and IT services. The Company
performs ongoing credit evaluations of its major customers and maintains
reserves for potential credit losses. For the year ended December 29, 2000, one
customer accounted for approximately 11% of net
-28-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
revenues. No single customer accounted for more than 5% of net revenues for the
years ended December 31, 1999 and January 1, 1999.
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.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 138 ("SFAS 138"), Accounting for Certain Derivative
Instruments - an Amendment of FAS 133. SFAS 138 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives). SFAS 138 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management believes the adoption of SFAS 138 will
not have a material impact on the Company's consolidated financial statements as
the Company currently does not use derivative instruments.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB 25 ("FIN 44"). This interpretation
clarifies certain issues relating to stock compensation. FIN 44 is effective
July 1, 2000; however, certain conclusions in this interpretation cover specific
events that occurred prior to July 1, 2000. FIN 44 did not have an impact on the
Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 did not have an impact on the Company's consolidated financial
statements.
Reclassifications
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
2. Mergers
On February 26, 1999, the Company merged with triSpan, an internet commerce
consulting firm that provides Internet consulting, web application development
and integration services. The merger was accomplished through an exchange of
689,880 shares of the Company's common stock for all the outstanding shares of
common stock of triSpan. Each outstanding share of common stock of triSpan was
converted into 0.311 shares of the Company's common stock.
On November 5, 1999, the Company merged with THINK New Ideas, a provider of
Internet-focused interactive marketing and branding services to Fortune 500 and
other high profile clients. The merger was accomplished through an exchange of
7,550,673 shares of the Company's common stock for all the outstanding shares of
common stock of THINK New Ideas. Each outstanding share of common stock of THINK
New Ideas was converted into 0.70 shares of the Company's common stock.
-29-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Mergers (continued)
The mergers with triSpan and THINK New Ideas were accounted for using the
pooling-of-interests method of accounting. All prior historical consolidated
financial statements presented herein have been restated to include the
financial position, results of operations, and cash flows of triSpan and THINK
New Ideas. The financial position, results of operations and cash flows of the
Company prior to April 23, 1997 are solely those of triSpan and THINK New Ideas.
Merger related expenses of $11.7 million during the year ended December 31,
1999 related to the Company's mergers with triSpan and Think New Ideas. The
expenses included investment banking, legal and accounting fees, severance costs
for redundant employees as well as the costs of combining operations and
eliminating redundant facilities.
Separate results of Answerthink, triSpan, and THINK New Ideas for the years
ended December 31, 1999 and January 1, 1999 prior to the consummation of the
mergers are as follows (in thousands):
THINK New
Answerthink triSpan Ideas Combined
------------ ------------ ------------- -------------
Year ended December 31, 1999
Total revenue $ 211,145 $ 2,274 $ 47,041 $ 260,460
Net income (loss) $ 5,665 $ (1,016) $ (3,515) $ 1,134
Year ended January 1, 1999
Total revenue $ 102,702 $ 15,453 $ 49,362 $ 167,517
Net loss $ (28,925) $ (2,732) $ (29,757) $ (61,414)
3. Acquisitions and Investing Activities
During the three year period ended December 29, 2000, the Company acquired
nine businesses providing information technology, e-commerce and marketing
services (collectively, the "Acquired Entities") in separate transactions
accounted for as purchase business combinations. Five were completed in 1998 and
four were completed in 1999. Aggregate consideration, including contingent
consideration earned, for the Acquired Entities was $76.7 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. Contingent consideration earned consisted of shares of common stock
and cash of approximately $20.2 million and was based on the Acquired Entities
achieving certain performance targets over various periods through March 2001.
Contingent consideration was recorded as additional goodwill. Amounts allocated
to goodwill are amortized over 15 years. During 2000, the Company recorded a
liability of $5.2 million for an earned contingent consideration to be paid in
the Company's common stock in March 2001. The amount is included in accrued
expenses and other liabilities in the consolidated balance sheet as of December
29, 2000.
The components of the purchase price allocation for the Acquired Entities,
contingent consideration earned for acquisitions made prior to January 2, 1998,
and fees and expenses incurred are as follows (in thousands):
2000 1999 1998
-------------- ------------- -------------
Fair value of net assets (excluding cash) acquired $ (250) $ (60) $ 5,821
Goodwill 18,165 33,773 25,804
Purchased research and development -- -- 5,200
Common stock issued (8,122) (21,435) (27,577)
Stock options issued -- (1,360) --
Earn-out payable in common stock (5,233) -- --
Notes payable -- -- (3,983)
Accrued expenses and other liabilities -- -- (400)
-------------- ------------- -------------
Cash used in acquisitions of businesses, net of cash acquired $ 4,560 $ 10,918 $ 4,865
============== ============= =============
-30-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Acquisitions and Investing Activities (continued)
The results of operations of the Acquired Entities are included in the
Company's consolidated results of operations from the respective dates of
acquisition. Unaudited pro forma condensed results of operations for the year
ended December 31, 1999 are presented below as if the acquisitions of the
Acquired Entities had occurred on January 2, 1999. For fiscal year 1999, pro
forma adjustments include additional amortization expense of $531,000 and
interest expense of $78,000. The pro forma results are presented for
informational purposes only and are not necessarily indicative of the future
results of operations of the Company or the results of operations of the Company
had the acquisitions occurred on January 1, 1999 (in thousands, except per share
data):
Year Ended
December 31,
1999
------------
Net revenues $270,628
Net income $ 1,236
Net income per common share--basic $ .03
Net income per common share--diluted $ .03
4. Property and Equipment
Property and equipment consists of the following (in thousands):
December 29, December 31,
2000 1999
------------ ------------
Equipment $ 16,750 $ 16,964
Furniture and fixtures 1,416 1,922
Leasehold improvements 7,237 3,579
------------ ------------
25,403 22,465
Less accumulated depreciation (10,748) (11,274)
------------ ------------
$ 14,655 $ 11,191
============ ============
Depreciation expense for the years ended December 29, 2000, December 31,
1999 and January 1, 1999 was $5.5 million, $4.5 million and $3.9 million,
respectively.
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following (in
thousands):
December 29, December 31,
2000 1999
------------ ------------
Accrued compensation and benefits $ 13,957 $ 14,580
Accrued merger related expenses 2,619 7,559
Earn-out payable in common stock 5,233 --
Accrued restructuring related expenses 2,900 --
Deferred revenue 7,818 5,159
Employee stock purchase plan payable 2,178 1,957
Income taxes payable -- 1,184
Other accrued expenses 4,565 2,626
------------ ------------
$ 39,270 $ 33,065
============ ============
-31-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Borrowings Under Revolving Credit Facilities
The Company has a $25.0 million revolving credit facility (the "Credit
Facility") which expires on November 28, 2003. Borrowings under this Credit
Facility bear interest at varying rates, principally LIBOR plus 1.50-2.00%. The
Company's obligation under the Credit Facility is unsecured. No borrowings were
outstanding under this line of credit as of December 29, 2000. The Credit
Facility contains, among other things, the maintenance of certain financial
covenants such as a maximum leverage ratio, minimum level of tangible net worth,
minimum ratio of earnings to interest expense and minimum quick ratio.
7. Redeemable Subordinated Notes
On June 26, 1998, triSpan received $8.0 million from the issuance of 8%
Redeemable Subordinated Notes (the "Subordinated Notes"). In connection with the
issuance of the Subordinated Notes, triSpan also issued detachable warrants
(which were exercised prior to triSpan's merger with Answerthink) to purchase
338,011 shares of common stock with an exercise price of $3.86 per share to the
holders of the Subordinated Notes. Using the Black-Scholes options-pricing
model, the estimated fair value of the warrants was calculated at $3.8 million
and was recorded as a reduction in the carrying amount of the Subordinated
Notes, with a corresponding increase in shareholders' equity during 1998. The
Subordinated Notes were repaid when triSpan and Answerthink merged, resulting in
an extraordinary loss on early extinguishment of debt, net of taxes, of $2.1
million during the year ended December 31, 1999.
8. Lease Commitments
The Company has operating lease agreements for its premises that expire on
various dates through 2015. Rent expense for the years ended December 29, 2000,
December 31, 1999 and January 1, 1999 was $6.1 million, $5.2 million and $4.3
million, respectively.
Future minimum lease commitments under non-cancelable operating leases for
premises having a remaining term in excess of one year at December 29, 2000 are
as follows (in thousands):
2001 $ 9,224
2002 9,599
2003 8,468
2004 7,211
2005 5,636
Thereafter 35,000
--------
Total minimum lease payments $ 75,138
========
-32-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes
The components of the provision for income taxes are as follows (in
thousands):
Year Ended
------------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
----------- ----------- ------------
Current tax expense
Federal $ 5,710 $ 8,531 $ 1,022
State 1,404 1,734 519
----------- ----------- ------------
7,114 10,265 1,541
Deferred tax benefit
Federal (388) (2,184) (2,385)
State 213 (479) (26)
----------- ----------- ------------
(175) (2,663) (2,411)
----------- ----------- ------------
Income taxes $ 6,939 $ 7,602 $ (870)
=========== =========== ============
A reconciliation of the Federal statutory tax rate with the effective tax
rate is as follows:
Year Ended
------------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
----------- ----------- ------------
U.S. statutory rate 35.0% 35.0% (35.0)%
State income taxes, net of Federal income tax benefit 7.1 7.5 0.7
Stock compensation expense -- -- 35.5
Purchased research and development expense -- -- 2.8
Valuation allowance (8.4) (6.0) (8.0)
Goodwill amortization 10.2 8.1 0.9
Merger related expenses -- 23.7 1.5
Miscellaneous items, net 2.9 1.8 0.2
----------- ----------- ------------
Effective rate 46.8% 70.1% (1.4)%
=========== =========== ============
-33-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes (continued)
The components of the net deferred income tax asset are as follows (in
thousands):
December 29, December 31,
2000 1999
------------- ------------
Deferred income tax assets
Purchased research and development $ 1,416 $ 1,459
Allowance for doubtful accounts 3,914 135
Net operating loss carryforward 413 3,708
Accrued expenses and other liabilities 1,452 1,654
------------- ------------
7,195 6,956
Valuation allowance (202) (1,444)
------------- ------------
6,993 5,512
Deferred income tax liabilities
Depreciation and amortization (976) (460)
Other items (1,216) (426)
------------- ------------
(2,192) (886)
------------- ------------
Net deferred income tax asset $ 4,801 $ 4,626
============= ============
An income tax receivable of $4.6 million is included in prepaid expenses
and other current assets in the consolidated balance sheet as of December 29,
2000. Current net deferred tax assets of $5.8 million and $3.7 million are
included in prepaid expenses and other current assets in the consolidated
balance sheets as of December 29, 2000 and December 31, 1999, respectively. A
net deferred tax liability of $974,000 is included in accrued expenses and other
liabilities in the consolidated balance sheet as of December 29, 2000. A
long-term deferred tax asset of $894,000 is included in other assets in the
consolidated balance sheet as of December 31, 1999.
At December 29, 2000 and December 31, 1999, the Company had established a
valuation allowance of $202,000 and $1.4 million, respectively, to reduce
deferred income tax assets related to net operating loss carryforwards. At
December 29, 2000 and December 31, 1999, the Company had $1.0 million and $9.3
million, respectively, of net operating loss carryforwards available. 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. The Company reduced the valuation allowance by $1.2
million for net operating loss carryforwards utilized during the year ended
December 29, 2000.
10. Shareholders' Equity
Common Stock Subject to Vesting Requirements
As of December 29, 2000 and December 31, 1999, the Company had outstanding
common stock totaling 3,098,238 and 5,411,900, respectively, that are subject to
certain vesting criteria. Answerthink sold the shares to its employees at
nominal purchase prices per share in connection with Answerthink's formation in
1997. Each employee executed an employment agreement or a stock agreement with
the Company providing for, among other things, the manner in which the shares
will vest. In general, a certain percentage of shares will begin to vest upon
the second anniversary from the purchase date of such shares and will become
fully vested either by the fourth or sixth anniversary from the purchase date so
long as the holder remains an employee.
-34-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Shareholders' Equity (continued)
In addition, certain of Answerthink's employees and one director purchased
3,520,000 shares of common stock that were subject to performance vesting
criteria in connection with Answerthink's formation in 1997. The Company
recorded a charge of approximately $40.8 million during the first quarter of
1998 relating to the accelerated vesting of these shares pursuant to agreements
dated as of March 27, 1998 by and among the relevant stockholders, Answerthink
and its Board of Directors. Pursuant to terms of the agreement, vesting was
accelerated for 3,320,000 shares in the first quarter of 1998 based on
Answerthink's results through that date and the expected completion of
Answerthink's initial public offering during the second quarter of 1998. The
remaining 200,000 shares were cancelled as part of the agreements. There are no
additional shares outstanding that are subject to performance criteria for
vesting.
Shares of common stock subject to vesting requirements were issued in
connection with certain acquisitions to the employees of those companies.
Employees of the acquired companies vest in these shares over periods up to five
years. The market value of the stock at the time of grant was recorded as
unearned compensation in a separate component of shareholders' equity and
amortized as compensation expense ratably over the vesting periods. At December
29, 2000 and December 31, 1999, there were 200,638 shares and 426,500 shares,
respectively, of unvested stock issued and outstanding under these agreements.
In connection with the initial public offering of THINK New Ideas, certain
of its stockholders placed an aggregate of 577,500 shares into escrow to be
released upon THINK New Ideas' attainment of certain performance targets
pursuant to an escrow agreement. During April 1998, the performance criterion
was fulfilled and the escrow shares were released. THINK New Ideas recorded a
non-cash charge to earnings of $21.7 million, equal to the fair market value of
the escrow shares on April 24, 1998, the date of release.
In 1998, THINK New Ideas reached a settlement agreement with Scott A.
Mednick, its former Chief Executive Officer and Chairman of the Board of
Directors. Pursuant to the terms of the agreement, THINK New Ideas agreed to
accelerate the exercise dates of Mr. Mednick's options to acquire 42,000 shares
of common stock. The acceleration of Mr. Mednick's options resulted in a charge
of $1.4 million for the difference between the exercise price of the options and
the market value of the underlying common stock on the date of the settlement.
Common Stock Redemption Agreement
During May 1998, triSpan entered into a stock redemption agreement (the
"Stock Redemption Agreement") with one of triSpan's shareholders. triSpan
redeemed 378,886 shares of its common stock for $2.6 million. In addition, the
shareholder received a contingent payment of $604,000 in accordance with the
terms of the Stock Redemption Agreement, representing a portion of the 1998
litigation settlement (see Note 11). The total amount paid to the shareholder of
$3.2 million has been recorded by the Company as a purchase and retirement of
common stock.
Securities Purchase Agreement
In March 1999, THINK New Ideas entered into a securities purchase agreement
(the "Securities Purchase Agreement") with Capital Ventures International and
Marshall Capital Management, Inc. (the "Purchasers") whereby the Purchasers
agreed to purchase shares of common stock and warrants to acquire shares of
common stock. Pursuant to the Securities Purchase Agreement, on March 5, 1999,
THINK New Ideas issued, for proceeds of $6 million, 609,799 shares of its common
stock at $9.84 per share and warrants to purchase an additional 121,961 shares
of common stock exercisable for a five-year term, at an exercise price of
$14.76.
-35-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Shareholders' Equity (continued)
At any time prior to March 5, 2000 the Purchasers also had the right but
not the obligation to purchase 371,353 additional shares of common stock at
$13.46 per share, together with warrants for 1/5 share for each additional share
purchased, exercisable at an exercise price of 150% of the market price on the
date the related additional shares were purchased. Pursuant to the Securities
Purchase Agreement, the additional shares were sold in March 2000 for $5.0
million and warrants to acquire 74,270 shares of common stock, exercisable for a
five-year term, were issued at an exercise price of $36.94.
Convertible Preferred Stock
In May 1998, 1,790,026 shares (the entire outstanding amount) of the
Company's Convertible Preferred Stock totaling $11.1 million were converted on a
four-for-one basis into 7,160,104 shares of common stock, pursuant to the
original terms.
Stock Plans
Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan
to provide substantially all employees who have completed three months of
service as of the beginning of an offering period an opportunity to purchase
shares of its common stock through payroll deductions, up to 10% of eligible
compensation. Participant account balances are used to purchase shares of stock
at the lesser of 85 percent of the fair market value of shares on the first
trading day of the 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 750,000 shares are available for purchase under the plan.
For plan years 1998 and 1999, 80,493 and 187,311 shares, respectively,
were issued. For plan year 2000, 203,192 shares were issued and 707,192 shares
were due to be issued for the six-month purchase period ended December 29, 2000
based on the provisions of the plan. The Company was unable to issue the entire
number of subscribed shares as of December 29, 2000 as it would have exceeded
the number of plan shares previously authorized by the Company's shareholders.
In January 2001, the Company issued to eligible employees 279,004 shares
representing the balance of the authorized limit of the plan. In order to
maintain this benefit for the employees, the Company issued to eligible
employees stock options for the remaining shares that could not be issued due to
the authorized limits. The stock options vested immediately with an exercise
price equal to the purchase price that would have been available under the
Employee Stock Purchase Plan. The Company also issued stock options for the
shares that employees subscribed to for the six-month purchase period ended June
30, 2001. The Company will record non-cash compensation charges in 2001 of
approximately $2.6 million after tax ($1.6 million in the first quarter of 2001
and $1.0 million in the second quarter of 2001 based on the vesting provisions
of the options) for the difference between the fair market value of the stock on
the option grant date and the exercise price.
The Company has granted stock options to employees and directors of the
Company at exercise prices equal to the market value of the stock at the date of
grant. The options generally vest ratably over periods ranging from four years
to six years with a maximum term of 10 years. The Company has authorized
17,723,850 shares of common stock for option grants.
-36-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Shareholders' Equity (continued)
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Under SFAS No. 123, compensation cost for the
Company's stock-based compensation plans would be determined based on the fair
value at the grant dates for awards under those plans. 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
29, 2000, December 31, 1999 and January 1, 1999 would have been reduced to the
pro forma amounts indicated as follows (in thousands, except per share data):
Year Ended
-------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
------------- ------------- --------------
Net income (loss)
As reported $ 7,901 $ 1,134 $ (61,414)
Pro forma $ 81 $ (7,816) $ (63,988)
Basic net income (loss) per common share
As reported $ 0.20 $ 0.03 $ (2.47)
Pro forma $ 0.00 $ (0.22) $ (2.58)
Diluted net income (loss) per common share
As reported $ 0.18 $ 0.03 $ (2.47)
Pro forma $ 0.00 $ (0.22) $ (2.58)
The following assumptions were used by the Company to determine the fair
value of stock options granted using the Black-Scholes options-pricing model:
Year Ended
----------------------------------------------
December 29, December 31, January 1,
2000 1999 1999
--------------- --------------- ------------
Expected volatility 100% 96% 72%
Average expected option life 4 years 4 years 4 years
Risk-free rate 5.5% 5.6% 5.7%
Dividend yield 0% 0% 0%
Stock option activity under the Company's stock option plans is summarized
as follows:
Year Ended
-------------------------------------------------------------------------------
December 29, 2000 December 31, 1999 January 1, 1999
-------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------- ---------- ------------ ---------- ------------- ---------
Outstanding at beginning of year 7,351,535 $ 16.58 4,511,096 $ 12.31 2,174,604 $ 7.47
Granted 6,312,584 23.08 4,772,630 20.02 3,097,622 14.84
Exercised (485,520) 7.84 (644,974) 8.90 (94,376) 6.30
Canceled (3,307,346) 20.35 (1,287,217) 18.30 (666,754) 9.11
------------- ---------- ------------ ---------- ------------- ---------
Outstanding at end of year 9,871,253 $ 19.84 7,351,535 $ 16.58 4,511,096 $12.31
============= ========== ============ ========== ============= =========
Weighted average fair value of
options granted during
the period $ 16.22 $ 13.97 $ 7.85
------------- ------------- -------------
-37-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Shareholders' Equity (continued)
The following table summarizes information about the Company's stock
options outstanding at December 29, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------
Weighted Average
Remaining
Range of Exercise Number Contractual Weighted Average Number Weighted Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
-------------------- ---------------- ----------------- ----------------- ---------------- ------------------
$1.16 - $2.50 326,998 6.3 $ 2.48 181,183 $ 2.50
$4.66 - $6.37 530,080 7.1 $ 5.70 240,292 $ 5.74
$7.08 - $10.46 566,969 7.6 $ 9.39 140,361 $ 8.91
$10.67 - $16.38 1,658,587 7.6 $ 13.49 431,159 $ 11.56
$16.50 - $18.75 2,485,398 8.2 $ 17.62 290,370 $ 17.77
$19.25 - $24.50 1,225,138 8.1 $ 21.57 97,829 $ 20.39
$25.25 - $28.00 1,029,119 7.8 $ 27.36 182,624 $ 26.84
$28.25 - $34.25 2,048,964 8.5 $ 32.22 48,250 $ 29.02
---------------- ----------------- ----------------- ---------------- ------------------
9,871,253 7.9 $ 19.84 1,612,068 $ 13.35
================ ================= ================= ================ ==================
11. Litigation
In July 1998, the Company settled litigation in which they were the
plaintiffs in a lawsuit over tradename infringement. Pursuant to the settlement
agreement, the Company received $2.5 million in cash.
On September 25, 1998, Michael R. Farrell, a shareholder of THINK New
Ideas, filed a class action suit, Farrell v. THINK New Ideas, Inc., Scott
Mednick, Melvin Epstein and Ronald Bloom, No. 98 Civ. 6809, against THINK New
Ideas, Ronald Bloom, a former officer of THINK New Ideas and a former member of
the Company's Board of Directors, Melvin Epstein and Scott Mednick, both former
officers of THINK New Ideas. The suit was filed in the United States District
Court for the Southern District of New York on behalf of all persons who
purchased or otherwise acquired shares of THINK New Ideas' common stock in the
class period from November 14, 1997, through September 21, 1998.
On various dates in October 1998, six additional class action suits were
filed in the same court against the same parties by six different individuals,
each representing a class of purchasers of THINK New Ideas' common stock. All
seven of these lawsuits were consolidated by order of the court dated December
15, 1998 into one action titled In Re: THINK New Ideas, Inc., Consolidated
Securities Litigation, No. 98 Civ. 6809 (SHS).
Pursuant to an order of the court, the plaintiffs filed a Consolidated and
Amended Class Action Complaint on February 10, 1999 (the "Consolidated
Complaint"). The Consolidated Complaint superceded all prior complaints in all
of the cases and served as the operative complaint in the consolidated class
action. The Consolidated Complaint was filed on behalf of all individuals who
purchased THINK New Ideas' common stock from November 5, 1997 through September
21, 1998. The Consolidated Complaint contained substantially similar allegations
as the complaint filed by Farrell, including that THINK New Ideas and certain of
its current and former officers and directors disseminated materially false and
misleading information about THINK New Ideas' financial position and results of
operations through certain public statements and in certain documents filed by
THINK New Ideas with the Securities and Exchange Commission; that these
statements and documents caused the market price of THINK New Ideas' common
stock to be artificially inflated; that the plaintiffs purchased shares of
common stock at such artificially inflated prices and, as a consequence of such
purchases suffered damages. The relief sought in the Consolidated Complaint was
unspecified, but included a plea for compensatory damages and interest, punitive
damages, reasonable costs and expenses, including attorneys' fees and expert
fees and such other relief as the court deemed just and proper.
-38-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Litigation (continued)
This lawsuit became the Company's responsibility upon the merger of
Answerthink and THINK New Ideas. Prior to the merger, THINK New Ideas filed a
motion to dismiss the Consolidated Complaint on a number of grounds. The
plaintiffs filed a motion in opposition. On March 15, 2000, the court granted
the defendant's motion to dismiss the Consolidated Complaint. The plaintiffs
filed a Second Consolidated and Amended Class Action Complaint (the "Second
Amended Complaint") on April 14, 2000. The defendants filed a motion to dismiss
the Second Amended Complaint on May 1, 2000. On September 14, 2000, the court
denied the motion. The defendants filed an answer to the Second Amended
Complaint on November 10, 2000. The parties are engaged in discovery. No
schedule has been set for the completion of discovery or for further
proceedings. The Company believes there are meritorious defenses to the claims
made in the Second Amended Complaint and intends to contest those claims
vigorously. Although there can be no assurance as to the outcome of these
matters, an unfavorable resolution could have a material adverse effect on the
results of operations and/or financial condition of the Company in the future.
In June 2000, pursuant to a confidential settlement agreement, the Company
settled litigation in which it was the plaintiff. The Company recorded a gain of
$1.85 million as a result of this settlement.
The Company is involved in legal proceedings, claims, and litigation
arising in the ordinary course of business not specifically discussed herein. In
the opinion of management, the final disposition of such other matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
12. Related Party Transactions
During 2000 and 1999, the Company recognized approximately $16.7 million
and $2.1 million, respectively, in sales to related parties in which the Company
has non-controlling equity interests or whereby a director of the Company holds
equity interests in such clients. The Company had gross receivables due from
these entities of approximately $7.9 million and $644,000 at December 29, 2000
and December 31, 1999, respectively.
13. Quarterly Financial Information (unaudited)
The following table presents unaudited supplemental quarterly financial
information for the years ended December 29, 2000 and December 31, 1999 (in
thousands, except per share data):
Quarter Ended
-------------------------------------------------------------
March 31, June 30, September 29, December 29,
2000 2000 2000 2000
-------------- -------------- -------------- --------------
Net revenues $ 76,297 $ 81,729 $ 84,064 $ 69,046
Income (loss) from operations 8,805 9,798 10,923 (15,314)
Income (loss) before income taxes 9,077 11,815 11,200 (17,252)
Net income (loss) 5,355 6,971 6,608 (11,033)
Basic net income (loss) per common share $ 0.14 $ 0.17 $ 0.16 $ (0.26)
Diluted net income (loss) per common share $ 0.12 $ 0.16 $ 0.15 $ (0.26)
-39-
ANSWERTHINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Quarterly Financial Information (unaudited) (continued)
Quarter Ended
-------------------------------------------------------------
April 2, July 2, October 1, December 31,
1999 1999 1999 1999
-------------- -------------- -------------- --------------
Net revenues $ 57,632 $ 62,738 $ 69,038 $ 71,052
Income (loss) from operations 1,416 3,375 7,187 (1,410)
Income (loss) before income taxes and extraordinary loss 1,358 3,498 7,231 (1,238)
Net income (loss) before extraordinary loss (722) 2,080 4,339 (2,450)
Net income (loss) (2,835) 2,080 4,339 (2,450)
Basic net income (loss) per common share $ (0.09) $ 0.06 $ 0.12 $ (0.07)
Diluted net income (loss) per common share $ (0.09) $ 0.05 $ 0.10 $ (0.07)
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.
-40-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responsive to this Item is incorporated herein to the Company's
definitive proxy statement for the 2001 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein to the Company's
definitive proxy statement for the 2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item is incorporated herein to the Company's
definitive proxy statement for the 2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein to the Company's
definitive proxy statement for the 2001 Annual Meeting of Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Exhibits: See Index to Exhibits on page 43.
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
2. Financial Statement Schedules.
Schedules 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.
(b) Reports on Form 8-K:
None.
-41-
SIGNATURES
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 28th day of March, 2001.
ANSWERTHINK, INC.
By: /s/ Ted A. Fernandez
---------------------------------
Ted A. Fernandez
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K
has been signed by the following persons in the capacities and on the date
indicated.
Signatures Title Date
---------- ----- ----
/s/ Ted A. Fernandez Chief Executive Officer and Chairman March 28, 2001
- ---------------------------------------- (Principal Executive Officer)
Ted A. Fernandez
/s/ John F. Brennan Executive Vice President, Finance and Chief March 28, 2001
- ---------------------------------------- Financial Officer (Principal Financial and
John F. Brennan Accounting Officer)
/s/ Allan R. Frank President and Director March 28, 2001
- ----------------------------------------
Allan R. Frank
/s/ David N. Dungan Chief Operating Officer and Director March 28, 2001
- ----------------------------------------
David N. Dungan
/s/ Ulysses S. Knotts, III Executive Vice President, Chief Sales and March 28, 2001
- ---------------------------------------- Marketing Officer and Director
Ulysses S. Knotts, III
/s/ Robert Bahash Director March 28, 2001
- ----------------------------------------
Robert Bahash
Director
- ----------------------------------------
Edwin A. Huston
/s/ Jeffrey Keisling Director March 28, 2001
- ----------------------------------------
Jeffrey Keisling
/s/ William C. Kessinger Director March 28, 2001
- ----------------------------------------
William C. Kessinger
/s/ Fernando Montero Director March 28, 2001
- ----------------------------------------
Fernando Montero
/s/ Bruce Rauner Director March 28, 2001
- ----------------------------------------
Bruce Rauner
Director
- ----------------------------------------
Alan Wix
-42-
INDEX TO EXHIBITS
Exhibit
No. Exhibit Description
3.1 Second Amended and Restated Articles of Incorporation of the
Registrant, as amended
3.2 Form of Amended and Restated Bylaws of the Registrant, as amended
9.1* 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
9.2* Amendment No. 1 to Shareholders Agreement dated February 24, 1998
9.3* Letter Agreement dated as of March 15, 1998 to amend Shareholders
Agreement
9.4* Form of Restricted Securities Agreement dated April 23, 1997 among
the Initial Investors and each of Messrs. Fernandez, Frank, Knotts
and Miller
10.1* Purchase Agreement dated April 23, 1997 among the Registrant, GTCR
V, MG, Gator and Tara
10.2* Series A Preferred Stock Purchase Agreement dated February 24, 1998
among the Registrant, GTCR V, GTCR Associates and Miller Capital
10.3* Stock Purchase Agreement dated March 5, 1998 between the Registrant
and FSC
10.4* 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
10.5* Second Amended and Restated Registration Rights Agreement dated as
of May 5, 1998 among the Registrant and the eight former
shareholders of RTI
10.6* Registrant's 1998 Stock Option and Incentive Plan
10.7* Form of Senior Management Agreement dated April 23, 1997 between the
Registrant and each of Messrs. Fernandez, Frank and Knotts
10.8 Senior Management Agreement dated July 11, 1997 between the
Registrant and Mr. Dungan
10.9* Form of Employment Agreement to be entered into between the
Registrant and each of Messers. Fernandez, Frank and Knotts
10.10* 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
10.11* Amendment No. 2 dated as of May 5, 1998 to Stock Purchase Agreement
dated March 5, 1998 between the Registrant and FSC
10.12* 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
10.13* Second Amendment to Certain Senior Management Agreements among the
Company, the Board of Directors and each of Messrs. Fernandez,
Frank, Knotts and Dungan
10.14** AnswerThink Consulting Group, Inc. Employee Stock Purchase Plan
10.15*** Employment Agreement dated March 23, 1999 between the Registrant and
Mr. Brennan
10.16*** Restricted Stock Agreement dated July 31, 1997 between the
Registrant and Mr. Brennan
10.17*** Amendment to Restricted Stock Agreement dated March 27, 1998 between
the Registrant and Mr. Brennan
10.18*** Form of Senior Management Agreement dated July 31, 1997 between the
Registrant and Mr. Brennan
10.19+ Agreement and Plan of Merger dated as of June 24, 1999 by and among
THINK New Ideas, Inc., AnswerThink Consulting Group, Inc. and Darwin
Acquisition Corp.
10.20+ Company Voting Agreement dated as of June 24, 1999 by and among
AnswerThink Consulting Group, Inc., Darwin Acquisition Corp. and the
Stockholders of THINK New Ideas, Inc.
10.21+ Acquiror Voting Agreement dated as of June 24, 1999 by and among
THINK New Ideas, Inc. and the Stockholders of AnswerThink Consulting
Group, Inc.
10.22+ Stock Option Agreement dated as of June 24, 1999 between THINK New
Ideas, Inc. and AnswerThink Consulting Group, Inc.
10.23++ Securities Purchase Agreement by and among THINK New Ideas, Inc.,
Capital Ventures International and Marshall Capital Management, Inc.
10.24++ Registration Rights Agreement dated as of March 3, 1999 by and among
THINK New Ideas, Inc., Capital Ventures International and Marshall
Capital Management, Inc.
10.25 Revolving Credit Agreement dated as of November 30, 2000 among
Answerthink, Inc. and Fleet National Bank
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
-43-
23.1.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.2.1 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (333-48123).
** Incorporated by reference from the Company's Registration Statement on
Form S-8 (333-69951).
*** Incorporated by reference from the Company's Form 10-K for the year ended
January 1, 1999.
+ Incorporated by reference from the Company's Form 8-K filed July 1, 1999.
++ Incorporated by reference from THINK New Ideas, Inc.'s Form 8-K dated
March 12, 1999.
-44-