UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
(Mark One)
|X| ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 2003
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Securities Exchange Act of 1934). YES |X| NO |_|
The aggregate market value of the common stock held by non-affiliates of the registrant was $167,944,352 on June 28, 2002 based on the last reported sale price of the registrant’s common stock on the Nasdaq National Market on June 28, 2002.
The number of shares of the registrant’s common stock outstanding on March 14, 2003 was 46,415,527.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2003 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
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Factors that impact such forward looking statements include, among others, our ability to attract additional business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the information technology industry, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends, changes in general economic conditions and interest rates, the risk that the Internal Revenue Service or the courts may not accept the amount or nature of one or more items of deduction, loss, income or gain as reported by Answerthink for tax purposes and the possible outcome of pending litigation and our actions in connection with such litigation. An additional description of our risk factors is described in Part 1—Item 1 “Business—Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Answerthink, Inc. (“Answerthink”) (www.answerthink.com) is a leading business and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive database of our Hackett Group business, with its world-renowned repository of enterprise best practice metrics and business process knowledge, our business and technology solutions help clients improve performance and optimize returns on technology investments. Our capabilities include performance measurement, business transformation, business applications, technology integration, and offshore application maintenance and support.
In this Form 10-K, unless the context otherwise requires, “Answerthink”, the “Company”, “we”, “us”, and “our” refer to Answerthink, Inc. and its subsidiaries and predecessors.
INDUSTRY BACKGROUND
For the third straight year, business and technology consultancies experienced a weak spending outlook and generally soft market in 2002. For 2003, some market observers are predicting a slight increase or “uptick” in IT spending, though a return to the boom years of the late 1990s is unlikely. Throughout the downturn, companies have placed heavy emphasis on risk management and tangible return on their business and technology investments. As the economy recovers, large enterprises will center their IT spending on tools that help them generate more value from past investments. Specifically, they will be looking to derive maximum value from their existing enterprise applications. Enabling technologies will be used to complement and extend the capabilities of enterprise and key functional systems. For example, Business Process Management, or BPM, tools will give companies increased visibility into key business processes that reach across functional and organizational boundaries. Not only will BPM help reduce error rates and cycle times by automating workflow, it will also increase the efficiency and productivity of all the people and systems that collaborate on individual processes.
There will also be market opportunity around the need for better real-time performance measurement and strategic decision-making. Many companies are seeking to link optimized processes directly to technology and consolidate the gains of their business process re-engineering efforts. Enterprise applications and BPM software will both play a role. Companies will embed optimized processes directly into ERP systems, and use BPM and other enabling technologies to improve ongoing management and control, so they can ensure that streamlined or re-engineered processes continue to deliver cost and performance improvements in the future. Business intelligence, analytics and knowledge management applications will also play an increasingly significant role in the future as
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companies seek to generate more valuable insight and analysis from their operational and financial data. These enabling technologies point the way to tomorrow’s real-time enterprises which will be capable of nearly instantaneous views of current performance and more accurate and efficient planning, forecasting and reporting.
OUR APPROACH
Answerthink enables companies to achieve world-class business performance by combining intellectual capital from The Hackett Group, with its world-renowned database of business process best practices and performance measurement results, and Answerthink’s proprietary Business Process Intelligence (BPI) approach, which is based on proven implementation techniques. Hackett’s services help clients understand how well they are performing today compared with the world’s most effective companies, while Answerthink specialists have the skills and experience to implement solutions, based on client performance measurement results, to drive them toward world-class performance. Hackett provides deep insight into how top-performing companies operate, and Answerthink applies those best practices to generate cost and performance gains for clients. Specifically, Answerthink uses best practice process flows and configuration guides to integrate Hackett’s empirically proven best practices directly into enterprise applications and enabling technologies.
Because our solutions are based on Hackett-certified best practices, clients gain a significant advantage. They can have confidence that their solutions are based on strategies from the world’s leading companies. This clearly defined path to world-class performance delivers enhanced efficiency, improved effectiveness, increased flexibility, maximized ROI, reduced risk and sustainability of performance improvements moving forward.
The BPI approach begins with a clear understanding of current performance, which is gained through measuring key processes and comparing the results to world-class levels and industry standards captured in the Hackett database. We then, help clients prioritize and select the appropriate best practices to implement through a coordinated performance improvement strategy. Without a coordinated strategy that addresses the four key business drivers of people, process, technology and information, companies risk losing a significant portion of business case benefits. Based on Hackett’s deep knowledge of world-class business performance, we have designed detailed best practice process flows which enable clients to streamline and automate key processes, and generate performance improvements quickly and efficiently at both the functional and enterprise level.
Similarly, we integrate Hackett Best Practices directly into technology solutions. Because today’s business applications are flexible, it is imperative to simplify and automate processes to meet best practice standards before new technology implementations and upgrades are completed. Otherwise, old, inefficient processes will simply be automated and continue to drive up costs, cycle times and error rates. Answerthink has completed detailed fit-gap analyses, in certain functional areas of major business application packages from Lawson, Oracle, PeopleSoft and SAP to determine their ability to support best practices. Application-specific tools, implementation guides and process flows allow us to optimize the configuration of ERP software, while limiting customization. These best practice implementations establish the foundation for improved performance. Building on that foundation a new breed of enabling technologies complement enterprise systems to drive further performance gains. These technologies, which include business process management software, portals, business intelligence and analytics, and knowledge management, enhance real-time business process management, visibility and decision-making.
This combination of optimized processes, a best practices-based business application environment and the right enabling technologies allows our clients to achieve and sustain significant business performance improvement.
COMPETITION
Even as the economy has slowed these last few years, competition in the technology consulting marketplace has heated up. Our competitors include international, national and regional systems consulting and implementation firms, international accounting firms and the IT services divisions of application software firms. Mergers, consolidation and bankruptcies throughout our industry have resulted in higher levels of competition. There is great pressure to complete projects quickly, control costs and maintain efficient operations.
Still, we believe our competitive position is strong. Because of our Hackett intellectual capital and its direct link to our BPI implementation approach, we believe we can assist clients better than our competitors. Our ability to apply best practices to client operations via proven techniques further strengthens our competitive standing.
Answerthink’s culture of collaboration leverages the power of our cross-functional and service line teams to increase revenue, strengthen relationships. We believe that this culture, along with our multidisciplinary approach, allows the company to compete favorably.
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STRATEGY
Moving forward, Answerthink’s focus is on executing those strategies that will lead to significant growth. They include:
THE ANSWERTHINK SOLUTION
Answerthink offers a comprehensive range of services, including performance measurement and research, business transformation, enterprise business applications, technology integration and offshore application maintenance and support. With strategic and functional knowledge in customer service, sales and marketing, finance, human resources, information technology, procurement and supply chain management, our expertise extends across the entire enterprise. We have completed successful engagements in a variety of industries, including automotive, consumer goods, financial services, high tech, life sciences, manufacturing, media and entertainment, retail, telecommunications, transportation and utilities.
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Service Capabilities
The Hackett Group has measured and evaluated the efficiency and effectiveness of staff functions at nearly 2,000 global organizations since 1991. Hackett’s clients include 97 percent of the Dow Jones Industrials, 83 percent of the Fortune 100, and 86 percent of the Dow Jones Global Titans Index. Ongoing studies are conducted in a wide range of areas, including finance, human resources, information technology, procurement, SG&A and shared service centers. Hackett has nearly 1,200 best practices for approximately 100 processes in these key functional areas.
Hackett uses proprietary performance measurement tools and a data collection model that enables companies to complete the performance measurement cycle and identify and quantify improvement opportunities in as little as four weeks. Additionally, Hackett offers subscription-based group learning opportunities and access to an online library of best practices data.
Answerthink’s Business Transformation services help clients develop a coordinated strategy for process improvements across the enterprise. Our expert teams use reliable performance measurement data to link performance gains to industry best practices. Our strategic capabilities include operational planning, process and organization design, change management and the effective application of technology. Because Answerthink combines best practices knowledge with our business expertise and broad technology capabilities, our solutions maximize return on client investments in people, processes, technology and information.
Our Business Applications professionals help clients choose and deploy the software applications that best meet their needs and objectives. The group offers comprehensive services from strategic planning, architecture, and vendor evaluation and selection through implementation, customization, testing and integration. Our expertise is focused on the following application providers: Lawson, Oracle, PeopleSoft, SAP, Siebel, and several leading time and attendance providers. Furthermore, comprehensive fit-gap analyses of all major packages against Hackett Best Practices have been completed. Proven tools and templates integrate best practices into business applications. The group also offers post-implementation support, change management, system documentation and end-user training, all of which are designed to enhance return on investment.
Based on our extensive best practices knowledge, our Technology Integration group designs, develops and implements IT solutions for more effective Business Process Management (BPM) and increased business intelligence (BI). Our Technology Integration experts know how to apply BPM tools to increase process transparency, improve efficiency in workflow and exception management, and create continuous improvement environments. Similarly, our BI services are designed to increase visibility into current performance, improve access to key financial and operational data, and enhance strategic decision making. The group offers strategy and management services, including operational diagnostics and planning and enterprise architecture. Further, we assist clients in improving business performance by rationalizing IT infrastructures, and selecting the right enabling technologies, such as Web services, portals and BPM software, to complement enterprise systems and facilitate information sharing and process integration inside and outside the enterprise.
JOINT VENTURE
Application Maintenance and Support: HCL-Answerthink
Through a joint venture with HCL Technologies, Answerthink provides offshore custom application development and maintenance services. HCL-Answerthink brings together the skills and experience of one of India’s top IT services and product engineering firms with the world-class business process and best practices knowledge of Answerthink. The joint venture offers outsourcing diagnostics, post-implementation support for enterprise systems, legacy system and custom application maintenance, custom development and application reporting services.
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CLIENTS
Answerthink focuses on long-term client relationships with Global 2000 firms and other sophisticated buyers of business consulting and IT services. During 2002, our ten most significant clients accounted for approximately 57% of revenues. Two clients, Waste Management and Exelon, each had revenues greater than 10% of total revenues.
The continuing high level of satisfaction across our client base offers more evidence of our success in 2002. The responses to the surveys we send to clients continue to be extremely positive. During 2002, we received surveys from a significant number of our engagements with a weighted average score of 4.5 on a 5.0 scale. The direct feedback and suggestions we receive on surveys are captured and used to continuously improve our delivery execution, sales processes, methodologies and training.
BUSINESS DEVELOPMENT AND MARKETING
Our extensive client base and relationships with Global 2000 firms remains our most significant sources of new business. Our revenue generation strategy is formulated to ensure we are addressing the multiple facets of business development. The categories below define our business development resources and market segmentation. Expanding awareness of our brand by leveraging the unique value proposition we have created around BPI is our main goal for 2003. Our BPI message will be the hallmark of our marketing and communications programs this year as we drive both an understanding of and demand for this approach. Similarly, we have increased our Hackett sales resources and established compensation programs that reward the linkage between sales of Hackett services and Answerthink implementation solutions.
BUSINESS DEVELOPMENT RESOURCES
Although virtually all of our consultants have a responsibility to impact revenue, our primary internal business development resources are comprised of the following:
The Leadership Team is comprised of the senior leaders within Answerthink who have a combination of executive, functional, practice and anchor account responsibilities. In addition to their management responsibilities, this group of associates is responsible for growing business by fostering executive level relationships within accounts and leveraging their existing contacts in the marketplace.
The Sales Organization is comprised of associates who are 100% dedicated to increasing revenue. They are deployed geographically in key markets and are primarily focused on developing new account relationships within their target accounts (described below). Each sales associate has between two and 10 target accounts split between existing clients and select Global 2000 prospects. They represent the entire Answerthink offering. They also handle geographic-related opportunities as they arise.
The Solution Strategist Network is comprised of associates throughout our various practices who are primarily dedicated to developing business. Solution strategists possess deep subject matter expertise within a specific discipline and receive incentive compensation on the amount of revenue they generate. Solution strategists sell new business in geographic accounts and collaborate with the sales organization on target account opportunities to provide content expertise.
Telemarketing. Answerthink has trained groups of telemarketers to be conversant with its various solution areas. Telemarketing is coordinated to ensure that our inbound and outbound efforts are synchronized.
The Delivery Organization is comprised of our billable associates who work at client locations. Their job is to find additional opportunities through their normal course of delivering existing projects, thereby helping the company expand our business within existing accounts.
In addition to our business development team, we have a corporate marketing and communications organization responsible for overseeing Answerthink’s marketing programs, public relations and employee communications activities. Our Business Process Intelligence approach will form the main thrust of our market
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message in 2003. It will continue to be our defining voice and differentiating point of view in the marketplace. During 2002, we formally launched the BPI message to clients and industry analysts through a variety of communications initiatives, including collateral, white papers, a series of executive breakfasts and Web casts.
MARKET SEGMENTATION
We have segmented our market focus into the following categories:
Top 25 Accounts are a mix of our largest existing clients and our most strategic prospects. To facilitate proper account management, each top 25 account has a leadership team member assigned to perform the role of client executive, an associate from the sales, solution strategist or delivery organizations to perform the role of account manager, and an associate from the delivery organizations to perform the role of delivery leader.
Target Accounts are comprised of prospects and clients who are geographically situated where a sales representative resides. Criteria for inclusion as a target account includes the size of the company, industry affiliation, propensity to buy external consulting services and contacts within the account. The sales representative is primarily responsible to identify business opportunities in the account, act as the single point of coordination for the client and perform the general duties of account manager.
Geographic Focus Accounts are accounts within a specified geography that fall neither within the top 25 or target account lists. These accounts can include large prospects, dormant clients, existing medium-sized clients and mid-tier market accounts. This account set is handled primarily on an opportunistic basis, except for active clients where delivery teams are focused on driving additional revenue.
MANAGEMENT SYSTEMS
Our management control systems are comprised of various accounting, billing, financial reporting, human resources, marketing and resource allocations systems, many of which are integrated with our knowledge management system, Mind~Share. We continuously work to improve Mind~Share, as well as our infrastructure and management control systems, which we believe represents a competitive advantage for us. We believe that Mind~Share significantly enhances our ability to serve our clients efficiently by allowing our knowledge base to be shared by all of our consultants worldwide on a real-time basis. Our well-developed, flexible, scalable infrastructure has allowed us to quickly integrate the new employees and systems of businesses we have acquired.
HUMAN RESOURCES
Our culture fosters intellectual rigor and creativity, collaboration and innovation. We believe in building relationships with our clients. We believe the best solutions come from teams of diverse individuals addressing problems collectively and from multiple dimensions, including the business, technological and human dimensions. We maintain that the most effective working environment is one where everyone is encouraged to contribute.
We believe that Answerthink’s central values are the strongest expression of our working style. They represent the behavior we want to encourage and the people we want to develop. They are what, at our core, we really stand for. These central values are:
Answerthink’s working style is how those values get translated in daily life, how clients experience working with the Answerthink individuals and how we deliver on our promises. Our work style is:
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Our HR staff includes dedicated resources to recruit consultants with both business and technology expertise. Our recruiting team drives our hiring process by focusing on the highest demand solution areas of our business to ensure an adequate pipeline of resources. We also have an employee referral program, which rewards existing employees who source new hires.
Training and development are keys to our success—and therefore, our clients’ successes. That is why we provide a thorough orientation and training curriculum for employees at every level. New hires complete “OnBoarding” training to gain a complete picture of Answerthink, our mission, core objectives and values, as well as our organization, clients and structure. Key executives regularly attend these sessions. In addition, we train our consultants via Answerthink University in specific skill sets, such as business strategy, technology and project management, that best complement our multidisciplinary teams. To fully leverage our “front-line” experiences and support our culture, we often use our own people as trainers. Many of our practices maintain technology and development labs, so our implementation specialists can stay current on the latest software releases from leading vendors. Much of the ongoing 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 made available for training other consultants.
The benefits package that we provide includes comprehensive health and welfare insurance, work/life balance programs, a 401(k) program including a company match, stock options and a stock purchase program. Our associates are paid competitive salaries and cash bonuses based upon market conditions and our performance.
As of January 3, 2003, we had approximately 750 associates, approximately 80% of whom were billable professionals. None of our associates are subject to collective bargaining arrangements. We have entered into nondisclosure and non-solicitation agreements with virtually all of our personnel. We engage consultants as independent contractors from time to time.
COMMUNITY INVOLVEMENT
One important way we put our values into action is through our commitment to the communities where we work. The mission of Answerthink’s Community Council, which operates in each of the cities where we have offices, is to leave the markets, communities and clients we serve better than we found them. We do it by building a strong sense of community, collaboration and personal interaction among all of our associates, through both volunteer and service programs and social gatherings. Not only do the Community Council’s efforts make our towns and cities better places to live and do business, but they also make Answerthink a better place to work. Answerthink’s associates are actively involved in many valuable and high-impact community programs, including United Way, Ronald McDonald House, Big Brothers & Sisters, Race for the Cure, Make-A-Wish Foundation, Habitat for Humanity, the National Adoption Center, the National Heart Association and Special Olympics.
AVAILABLE INFORMATION
We make our public filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at our web site http://www.answerthink.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Any material that we file with the Securities and Exchange Commission may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330.
RISK FACTORS
The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or printed elsewhere by management from time to time.
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Our quarterly operating results may vary.
Our financial results may fluctuate from quarter to quarter. In future quarters, our operating results may not meet public market analysts’ and investors’ expectations. If that happens, the price of our common stock may fall. Many factors can cause these fluctuations, including:
A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular quarter. As a result, if we experience unanticipated changes in client engagements or in employee utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter. Due to these factors, we believe you should not compare our quarter-to-quarter operating results to predict future performance.
If we are unable to maintain our reputation and expand our name recognition, we may have difficulty attracting new business and retaining current clients and employees.
We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining clients and employees. We also believe that the importance of reputation and name recognition is increasing and will continue to increase due to the number of providers of IT services. If our reputation is damaged or if potential clients are not familiar with us or with the solutions we provide, we may be unable to attract new, or retain existing, clients and employees. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective solutions. If clients do not perceive our solutions to be effective or of high quality, our brand name and reputation will suffer. In addition, if solutions we provide have defects, critical business functions of our clients may fail, and we could suffer adverse publicity as well as economic liability.
We depend heavily on a limited number of clients.
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of clients for which we perform large projects. In 2002, our ten largest clients accounted for approximately 57% of our revenues in the aggregate, with two clients each accounting for more than 10% of revenues. In addition, revenues from a large client may constitute a significant portion of our total revenues in a particular quarter. The loss of any principal client for any reason, including as a result of the acquisition of that client by another entity, our failure to meet that client’s expectations, or that client’s decision to reduce spending on technology-related projects, could have a material adverse effect on our business, financial condition and results of operations.
We have risks associated with potential acquisitions or investments.
Since we were founded, we have significantly expanded through acquisitions. In the future, we plan to pursue additional acquisitions. We will do this to:
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We may not be able to integrate successfully businesses which we may acquire in the future without substantial expense, delays or other operational or financial problems. We may not be able to identify, acquire or profitably manage additional businesses. Also, acquisitions may involve a number of risks, including:
We cannot assure you that client satisfaction or performance problems at a single acquired firm will not have a material adverse impact on our reputation as a whole. Further, we cannot assure you that our recent or future acquired businesses will generate anticipated revenues or earnings.
We may be unable to achieve anticipated benefits from acquisitions and joint ventures.
The anticipated benefits from our acquisitions may not be achieved. For example, when we acquire a company or certain assets of a company, we cannot be certain that customers acquired in the transaction will continue to do business with us or that employees of the acquired operations will continue their employment or become well integrated into our operations. The identification, consummation and integration of acquisitions and joint ventures require substantial attention from management. The diversion of this attention from management, as well as any difficulties encountered in the integration process, could have an adverse impact on our business, financial condition and results of operations.
We may be subject to claims for past acts of the companies that we acquire, which may subject us to increased expenses.
We could experience financial or other setbacks if any of the businesses that we acquire had problems in the past of which we are not aware. To the extent any client or other third party asserts any legal claim against any of the companies we have acquired, our business, results of operations and financial condition could be materially and adversely affected.
We may not be able to hire, train, motivate, retain and manage professional staff.
To succeed, we must hire, train, motivate, retain and manage highly skilled employees. Competition for skilled employees who can perform the services we offer is intense. We might not be able to hire enough of them or to train, motivate, retain and manage the employees we hire. This could hinder our ability to complete existing client engagements and bid for new client engagements. Hiring, training, motivating, retaining and managing employees with the skills we need is time-consuming and expensive.
We could lose money on our contracts.
As part of our strategy, we enter into capped or fixed-price contracts, in addition to contracts based on payment for time and materials. Because of the complexity of many of our client engagements, accurately estimating the cost, scope and duration of a particular engagement can be a difficult task. If we fail to make these estimates accurately, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation. To the extent that an expenditure of additional resources is required on an engagement, this could reduce the profitability of, or result in a loss on, the engagement. In the past, we have, on occasion, engaged in negotiations with clients regarding changes to the cost, scope or duration of specific engagements. To the extent we do not sufficiently communicate to our clients, or our clients fail to adequately appreciate, the nature and extent of any of these types of changes to an engagement, our reputation may be harmed and we may suffer losses on an engagement.
Lack of detailed written contracts could impair our ability to collect fees, protect our intellectual property and protect ourselves from liability to others.
We try to protect ourselves by entering into detailed written contracts with our clients covering the terms and contingencies of the client engagement. In some cases, however, consistent with what we believe to be industry practice,
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work is performed for clients on the basis of a limited statement of work or verbal agreements before a detailed written contract can be finalized. To the extent that we fail to have detailed written contracts in place, our ability to collect fees, protect our intellectual property and protect ourselves from liability to others may be impaired.
Our corporate governance provisions may deter a financially attractive takeover attempt.
Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders would receive a premium for their shares. These provisions include the following:
Our markets are highly competitive.
We may not be able to compete effectively with current or future competitors. The IT services market is highly competitive. We expect competition to further intensify as this market continues to evolve. Some of our competitors have longer operating histories, larger client bases, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical and marketing resources than we do. As a result, our competitors may be in a stronger position to respond more quickly to new or emerging technologies and changes in client requirements and to devote greater resources than we can to the development, promotion and sale of their services. Competitors could lower their prices, potentially forcing us to lower our prices and suffer reduced operating margins. We face competition from international accounting firms; international, national and regional systems consulting and implementation firms; the IT services divisions of application software firms; and marketing and communication firms.
In addition, there are relatively low barriers to entry into the IT services market. We do not own any patented technology that would stop competitors from entering this market and providing services similar to ours. As a result, the emergence of new competitors may pose a threat to our business. Existing or future competitors may develop and offer services that are superior to, or have greater market acceptance, than ours, which could significantly decrease our revenues and the value of your investment.
We may lose large clients or significant client engagements.
Our client engagements are generally short-term arrangements, and most clients can reduce or cancel their contracts for our services with 30 days notice and without penalty. As a result, if we lose a major client or large client engagement, our revenues will be adversely affected. We perform varying amounts of work for specific clients from year to year. A major client in one year may not use our services in another year. In addition, we may derive revenue from a major client that constitutes a large portion of total revenue for particular quarters. If we lose any major clients or any of our clients cancel or significantly reduce the scope of a large client engagement, our business, financial condition and results of operations could be materially and adversely affected. Also, if we fail to collect a large account receivable, we could be subjected to significant financial exposure. Consequently, you should not predict or anticipate our future revenue based upon the number of clients we currently have or the number and size of our existing client engagements.
We rely on our intellectual property rights.
We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. Although we enter into confidentiality agreements with our employees and limit distribution of proprietary information, there can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.
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Although we believe that our services do not infringe on the intellectual property rights of others and that we have all rights necessary to utilize the intellectual property employed in our business, we are subject to the risk of claims alleging infringement of third-party intellectual property rights. Any claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of asserted infringement.
The market price of our common stock may fluctuate widely.
The market price of our common stock could fluctuate substantially due to:
In addition, the stock prices of many technology companies fluctuate widely for reasons which may be unrelated to operating results. Fluctuations in our common stock’s market price may impact our ability to finance our operations and retain personnel.
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 June 30, 2003. We also have offices in Atlanta, Boston, Chicago, Cleveland, Frankfurt, New York, Philadelphia, London and Iselin, New Jersey. We believe that we will be able to obtain suitable space as needed. We own no real estate and do not intend to invest in real estate or real estate-related assets.
ITEM 3. LEGAL PROCEEDINGS
Between November, 2002 and January, 2003, six class actions seeking unspecified damages were filed against Answerthink and certain of its current and former officers and directors alleging violations of the Securities and Exchange Act of 1934. The complaints allege misstatements and omissions concerning related party transactions during the alleged class period of February 8, 2000 to April 25, 2002. On January 7, 2003 the federal district court entered an order closing and consolidating these cases and any subsequently filed related cases (the “Consolidation Order”) into Druskin, et al. v. Answerthink, Inc., et al., Case No. 02-23304-CIV-GOLD. The Consolidated Amended Complaint is due to be filed on April 18, 2003. We intend to file a motion seeking the dismissal of the Consolidated Amended Complaint. Based on the status of these actions it is not possible to determine the range of loss to us, if any. We believe that the plaintiffs’ claims are without merit and intend to defend the lawsuits vigorously.
Between September and October 1998, seven purported class action suits were filed against THINK New Ideas, Inc. (“THINK New Ideas”) and certain of its then current and former officers and directors alleging violations of the Securities Exchange Act of 1934. All seven of these lawsuits were consolidated by order of the court. This lawsuit became our responsibility upon the merger of Answerthink and THINK New Ideas. On April 18, 2002, the parties reached an agreement in principle to settle this action. The Court approved the settlement in September 2002 in all respects and dismissed the complaint with prejudice. The time for appeal has expired and the settlement has become final. The full amount of the settlement has been paid by THINK New Ideas’ insurance carrier.
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 2002.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Our common stock has been traded on the Nasdaq National Market since our initial public offering on May 28, 1998 under the Nasdaq symbol “ANSR”. The following table sets forth for the fiscal periods indicated the high and low sales prices of the common stock, as reported on the Nasdaq National Market.
| High | Low | ||||
| 2002 | |||||
| Fourth Quarter | $ | 3.29 | $ | 1.43 | |
| Third Quarter | $ | 3.91 | $ | 1.52 | |
| Second Quarter | $ | 7.30 | $ | 3.60 | |
| First Quarter | $ | 8.34 | $ | 4.65 | |
| 2001 | |||||
| Fourth Quarter | $ | 6.80 | $ | 3.15 | |
| Third Quarter | $ | 9.81 | $ | 3.50 | |
| Second Quarter | $ | 9.99 | $ | 3.50 | |
| First Quarter | $ | 9.06 | $ | 3.25 | |
The closing sale price for the common stock on March 14, 2003 was $2.43.
As of March 14, 2003, there were approximately 386 holders of record of our common stock and 46,415,527 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.
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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 January 3, 2003, and has been derived from our audited financial statements. The selected consolidated financial data should be read together with our consolidated financial statements and related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Year Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | |||||||||||||||
| January
3, 2003 |
December
28, 2001 |
December
29, 2000 |
December
31, 1999 |
January
1, 1999 |
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| (in thousands, except per share data) | |||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||
| Revenues: | |||||||||||||||
| Revenues before reimbursements | $ | 156,357 | $ | 220,966 | $ | 260,892 | $ | 202,318 | $ | 118,155 | |||||
| Reimbursements | 20,490 | 29,377 | 35,811 | 29,255 | 14,648 | ||||||||||
| Total revenues | 176,847 | 250,343 | 296,703 | 231,573 | 132,803 | ||||||||||
| Costs and expenses: | |||||||||||||||
| Project personnel and expenses: | |||||||||||||||
| Project personnel and expenses before | |||||||||||||||
| reimbursable expenses | 104,981 | 132,843 | 147,040 | 118,844 | 71,890 | ||||||||||
| Reimbursable expenses | 20,490 | 29,377 | 35,811 | 29,255 | 14,648 | ||||||||||
| Total project personnel and expenses | 125,471 | 162,220 | 182,851 | 148,099 | 86,538 | ||||||||||
| Selling, general and administrative expenses | 53,416 | 77,087 | 92,321 | 57,297 | 38,516 | ||||||||||
| Impairment of goodwill | 20,000 | — | — | — | — | ||||||||||
| Restructuring costs | 10,886 | 5,619 | 3,268 | — | — | ||||||||||
| Stock compensation expense | — | 4,855 | 853 | 960 | 40,843 | ||||||||||
| Total costs and operating expenses | 209,773 | 249,781 | 279,293 | 206,356 | 165,897 | ||||||||||
| Income (loss) from operations | (32,926 | ) | 562 | 17,410 | 25,217 | (33,094 | ) | ||||||||
| Other income (expense): | |||||||||||||||
| Litigation settlement | — | — | 1,850 | — | 2,500 | ||||||||||
| Non-cash investment losses | — | — | (2,350 | ) | — | — | |||||||||
| Interest income (expense), net | 570 | 843 | 589 | (26 | ) | (739 | ) | ||||||||
| Income (loss) before income taxes, loss from | |||||||||||||||
| discontinued operations, extraordinary loss and | |||||||||||||||
| cumulative effect of change in accounting principle | (32,356 | ) | 1,405 | 17,499 | 25,191 | (31,333 | ) | ||||||||
| Income taxes | (3,508 | ) | 1,807 | 8,571 | 11,431 | 1,719 | |||||||||
| Income (loss) from continuing operations | (28,848 | ) | (402 | ) | 8,928 | 13,760 | (33,052 | ) | |||||||
| Loss from discontinued operations, net of | |||||||||||||||
| income taxes | (8,911 | ) | (8,117 | ) | (1,027 | ) | (10,513 | ) | (28,362 | ) | |||||
| Income (loss) before extraordinary loss and | |||||||||||||||
| cumulative effec | |||||||||||||||