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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1998
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 CONSULTING GROUP, INC.
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(EXACT NAME OF COMPANY 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 (ZIP CODE)
OFFICES)
(305) 375-8005
-----------------------------------------------
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section13 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 requirement for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of October 2, 1998, there were 34,157,692 shares of common stock
outstanding.
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ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 2, JANUARY 2,
1998 1998
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 24,417,048 $ 3,173,262
Short-term investments 3,150,000 --
Accounts receivable and unbilled revenue, net 26,143,854 10,157,720
Prepaid expenses and other current assets 657,195 412,388
------------- -------------
Total current assets 54,368,097 13,743,370
Property and equipment, net 2,901,557 2,495,295
Other assets 1,808,312 467,370
Goodwill, net 23,885,803 11,943,610
------------- -------------
Total assets $ 82,963,769 $ 28,649,645
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,545,712 $ 1,437,292
Accrued expenses and other liabilities 10,768,537 4,126,254
Notes payable to shareholders, current portion 2,239,000 --
------------- -------------
Total current liabilities 15,553,249 5,563,546
------------- -------------
Obligations under capital leases 222,612 --
Borrowings under revolving credit facility -- 8,150,000
Notes payable to shareholders 1,896,000 4,050,000
------------- -------------
Total long-term liabilities 2,118,612 12,200,000
------------- -------------
Total liabilities 17,671,861 17,763,546
------------- -------------
Commitments and contingencies
Convertible preferred stock -- 10,040,196
------------- -------------
Shareholders' equity
Preferred stock, $.001 par value, 1,250,000 authorized, none
issued and outstanding -- --
Common stock, $.001 par value, authorized 125,000,000 shares;
issued and outstanding: 34,157,692 shares at October 2,
1998; 23,378,592 shares at January 2, 1998 34,158 23,379
Additional paid-in capital 111,961,135 13,569,279
Unearned compensation-restricted stock (1,399,821) (656,303)
Accumulated deficit (45,303,564) (12,090,452)
------------- -------------
Total shareholders' equity 65,291,908 845,903
------------- -------------
Total liabilities and shareholders' equity $ 82,963,769 $ 28,649,645
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
2
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED NINE MONTHS APRIL 23, 1997
-------------------------------- ENDED (INCEPTION) TO
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net revenues $ 28,043,616 $ 2,697,654 $ 69,618,772 $ 2,759,744
Costs and expenses:
Project personnel and expenses 16,607,325 3,730,458 41,635,490 5,346,060
Selling, general and
administrative 7,674,349 2,931,638 20,058,587 4,221,996
Compensation related to vesting
of restricted shares -- -- 40,843,400 --
Settlement costs -- 124,761 -- 1,880,602
------------- ------------- ------------- -------------
Total costs and operating
expenses 24,281,674 6,786,857 102,537,477 11,448,658
------------- ------------- ------------- -------------
Income (loss) from operations 3,761,942 (4,089,203) (32,918,705) (8,688,914)
Other income (expense):
Interest income 242,917 194,390 374,214 445,906
Interest expense (67,949) -- (668,621) --
------------- ------------- ------------- -------------
Net income (loss) $ 3,936,910 $ (3,894,813) $ (33,213,112) $ (8,243,008)
============= ============= ============= =============
Basic net income (loss) per common
share $ 0.16 $ (0.51) $ (1.93) $ (1.87)
------------- ------------- ------------- -------------
Weighted average common shares
outstanding 24,105,838 7,625,986 17,239,565 4,413,233
------------- ------------- ------------- -------------
Diluted net income (loss) per
common share $ 0.11 $ (0.51) $ (1.93) $ (1.87)
------------- ------------- ------------- -------------
Weighted average common and common
equivalent shares outstanding 34,734,209 7,625,986 17,239,565 4,413,233
------------- ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
3
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
APRIL 23,
1997
NINE MONTHS (INCEPTION)
ENDED TO
OCTOBER 2, SEPTEMBER
1998 30, 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(33,213,112) $ (8,243,008)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation related to vesting of restricted shares 40,843,400 --
Depreciation and amortization 2,342,903 87,819
Provision for doubtful accounts 250,000 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue (13,404,545) (1,693,881)
Increase in prepaid expenses and other current and
non-current assets (392,195) (422,505)
Increase in accounts payable 385,283 913,797
Increase in accrued expenses and other liabilities 4,369,575 321,972
------------ ------------
Net cash provided by (used in) operating activities 1,181,309 (9,035,806)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,543,065) (1,034,825)
Sale of property and equipment under sale/leaseback
arrangement 456,040 --
Purchases of short-term investments (7,150,000) --
Sales of short-term investments 4,000,000 --
Cash used in acquisition of businesses, net of cash acquired (1,258,280) --
Other, net (142,919) --
------------ ------------
Net cash used in investing activities (5,638,224) (1,034,825)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 38,711,790 67,585
Repurchase of common stock (1,160) --
Proceeds from issuance of convertible preferred stock 1,099,639 21,000,000
Proceeds from revolving credit facility 3,000,000 --
Repayment of revolving credit facility (11,150,000) --
Repayment of shareholders notes (6,340,035) --
Proceeds from capital lease obligation 507,015 --
Repayment of obligation under capital lease (126,548) --
------------ ------------
Net cash provided by financing activities 25,700,701 21,067,585
------------ ------------
Net increase in cash and cash equivalents 21,243,786 10,996,954
Cash and cash equivalents at beginning of period 3,173,262 --
------------ ------------
Cash and cash equivalents at end of period $ 24,417,048 $ 10,996,954
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 783,068 $ --
Cash paid for income taxes $ -- $ --
The accompanying notes are an integral part of the consolidated financial
statements.
4
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of AnswerThink
Consulting Group, Inc. (the "Company") include the accounts of the Company and
all of its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. In the opinion of management,
the consolidated financial statements reflect all normal and recurring
adjustments, which are necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows as of the dates and
for the periods presented. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Consequently, these statements do not include all the
disclosures normally required by generally accepted accounting principles for
annual financial statements. Accordingly, these financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto for the period ended January 2, 1998, included in the Form S-1 filed by
the Company with the Securities and Exchange Commission. The condensed balance
sheet data as of January 2, 1998 was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. The consolidated results of operations for the quarter and nine
months ended October 2, 1998, are not necessarily indicative of results for the
full year.
2. SHORT TERM INVESTMENTS
Short-term investments, consisting of interest bearing, investment-grade
securities, are available-for-sale securities which are recorded at fair market
value. Any unrealized holding gains or losses on available-for-sale securities
are reported as a separate component of shareholders' equity. The difference
between fair market value and cost was not material at October 2, 1998. 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.
3. 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. The calculation includes only the vested portion of common shares issued
to employees under employment agreements and does not include shares that have
not yet vested. Accordingly, common shares outstanding for the basic net income
(loss) per share computation is significantly lower than actual shares issued
and outstanding.
Diluted net income per share is computed using the weighted average number
of common shares outstanding plus the dilutive effect of common stock
equivalents (using the treasury stock method). Potentially dilutive shares as of
October 2, 1998, which have not been included in the diluted per share
calculation for the nine months ended October 2, 1998, include 9,869,950
unvested shares issued pursuant to employment agreements. These shares were
excluded from the calculation because their effects would be anti-dilutive due
to the loss incurred by the Company for the nine months ended October 2, 1998.
Accordingly, for the nine months ended October 2, 1998, diluted net loss per
common share is the same as basic net loss per common share.
5
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
The following table presents the calculation of earnings per share:
QUARTER ENDED NINE MONTHS APRIL 23, 1997
---------------------------- ENDED (INCEPTION) TO
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ------------ ------------
Net income (loss) $ 3,936,910 $(3,894,813) $(33,213,112) $(8,243,008)
=========== =========== ============ ===========
Basic:
Weighted average common shares
outstanding 24,105,838 7,625,986 17,239,565 4,413,233
=========== =========== ============ ===========
Basic net income (loss) per
common share $ 0.16 $ (0.51) $ (1.93) $ (1.87)
=========== =========== ============ ===========
Diluted:
Weighted average common shares
outstanding 24,105,838 7,625,986 17,239,565 4,413,233
Dilutive effects of unvested
shares and stock options 10,628,371 -- -- --
----------- ----------- ------------ -----------
Weighted average common and
common equivalent shares
outstanding 34,734,209 7,625,986 17,239,565 4,413,233
=========== =========== ============ ===========
Diluted net income (loss) per
common share $ 0.11 $ (0.51) $ (1.93) $ (1.87)
=========== =========== ============ ===========
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131"), which specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. This statement is effective for fiscal
years beginning after December 15, 1997. Interim reporting disclosures are not
required in the first year of adoption. The Company will adopt SFAS 131 in the
fourth quarter of 1998 and is currently determining the impact of such adoption
on its reporting as currently presented.
5. ACQUISITION AND NON-CASH ACTIVITIES
In May 1998, the Company acquired all the outstanding shares of Legacy
Technology, Inc. ("Legacy") for $2.6 million in promissory notes, which were
paid during June 1998, plus 248,461 shares of the Company's common stock valued
at $3.0 million. The sellers are also entitled to contingent consideration of
approximately $1.3 million, payable in cash and the Company's common stock, if
certain performance targets are met over the 12-month period ending April 30,
1999. Legacy is a Massachusetts-based provider of decision support and data
warehouse solutions to Fortune 1000 companies.
In September 1998, the Company acquired all the outstanding shares of
Infinity Consulting Group, Inc. ("Infinity") for 186,000 shares of the Company's
common stock valued at $3.4 million and $2.8 million in cash. The sellers are
also entitled to contingent consideration of approximately $1.6 million, payable
in cash and the Company's common stock, if certain performance targets are met
over the 12-month period ending August 31, 1999. Infinity is an
Indiana-corporation engaged in the business of delivering PeopleSoft application
solutions.
6
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITION AND NON-CASH ACTIVITIES (CONTINUED)
The Company's acquisitions of Legacy and Infinity have been accounted for
using the purchase method of accounting. Accordingly, the results of operations
of the acquired companies are included in the Company's consolidated results of
operations from the date of acquisition. Contingent consideration, to the extent
earned, will be recorded as additional goodwill.
The aggregate consideration for the Company's acquisitions of Legacy and
Infinity has been allocated to the assets and liabilities acquired based upon
their respective fair values. The components of the purchase price allocation,
including fees and expenses, are as follows:
Fair value of net assets assumed excluding cash acquired $ 697,589
Goodwill 9,484,441
Common stock issued (6,341,250)
Note payable issued to shareholders (2,582,500)
-----------
Cash used in acquisitions of businesses, net of cash acquired $ 1,258,280
-----------
The following information presents the unaudited pro forma condensed
results of operations for the period January 3, 1998 through October 2, 1998 as
if the Company's acquisitions of Legacy and Infinity had occurred on January 3,
1998. The pro forma adjustments include additional amortization and interest
expense in the amount of approximately $314,000 and $72,000, respectively. 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 3,
1998.
PRO FORMA
RESULTS OF
OPERATIONS
--------------
Net revenues $ 78,272,540
Net loss $ (31,745,344)
Net loss per common share--basic and diluted $ (1.84)
On March 12, 1998, the Company amended the purchase agreement pursuant to
which it acquired The Hackett Group, Inc. ("Hackett") to waive the earn-out
provisions of the note payable and restricted shares that were issued at the
time of the Hackett acquisition. In connection with such amendment, the Company
recorded additional goodwill amounting to approximately $3.1 million, notes
payable to shareholders totaling $1.4 million, accrued expenses and other
liabilities of $338,000 and shareholders' equity of $1.3 million.
In May 1998, 1,790,026 shares 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.
6. INITIAL PUBLIC OFFERING
In May 1998, the Company completed its initial public offering whereby the
Company sold 3,324,500 shares of common stock. Net proceeds to the Company,
after expenses, aggregated $38.5 million. The Company used $15.3 million of the
proceeds from the offering to repay outstanding indebtedness, including $9
million for borrowings under the working capital line of credit and $6.3 million
for notes payable to shareholders. The Company has invested the remainder of the
net proceeds in short-term, interest bearing, investment-grade securities.
7
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. AVAILABILITY OF NET OPERATING LOSSES
The Company did not record any tax provision in the first nine months of
1998 as a result of the utilization of net operating loss carryforwards. As of
January 2, 1998, the Company had a net operating loss carryforward for financial
reporting purposes of approximately $12 million. As of October 2, 1998,
approximately $4 million of this net operating loss carryforward was available.
The $40.8 million compensation expense relating to the vesting of restricted
shares that the Company recorded during the first quarter of 1998 does not give
rise to a net operating loss carryforward since it was not deductible for income
tax purposes. In light of the recent organization of the Company and the loss
experienced in fiscal 1997, a valuation allowance has been established for the
entire deferred tax asset attributed to the remaining net operating loss
carryforwards.
8
ANSWERTHINK CONSULTING GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve known and unknown risks, uncertainties and other factors that may cause
the Company's actual results, performance or achievements to be materially
different from the results, performance or achievements expressed or implied by
the forward looking statements. Factors that impact such forward looking
statements include, among others, the ability of the Company to attract
additional business, changes in expectations regarding the information
technology industry, the ability of the Company to attract skilled employees,
possible changes in collections of accounts receivable, risks of competition,
price and margin trends, changes in general economic conditions and interest
rates.
OVERVIEW
AnswerThink Consulting Group, Inc. ("AnswerThink" or the "Company") is a
rapidly growing provider of knowledge-based consulting and information
technology ("IT") services to Fortune 1000 companies and other sophisticated
buyers. The Company addresses its clients' strategic business needs by offering
a wide range of integrated services or solutions, including benchmarking,
process transformation, software package implementation, electronic commerce,
decision support technology, technology architecture and integration and Year
2000 solutions. These solutions target a client's specific business functions
(finance and administration, human resources, IT, sales and customer support,
and supply chain management) and allow a business to reach beyond the enterprise
and link the people, processes and technologies of the extended organization or
"Interprise." AnswerThink markets its services to senior executives in
organizations where business transformation and technology-enabled change can
have a significant competitive impact.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
results of operations and the percentage relationship to net revenues of such
results.
QUARTER ENDED APRIL 23, 1997
------------------------------------------- NINE MONTHS ENDED (INCEPTION) TO
OCTOBER 2, 1998 JULY 3, 1998 OCTOBER 2, 1998 SEPTEMBER 30, 1997
----------------- ------------------ ----------------- -------------------
Net revenues $28,044 100.0% $23,043 100.0% 69,619 100.0% $ 2,760 100.0%
Costs and expenses:
Project personnel and
expenses 16,607 59.2% 13,834 60.0% 41,635 59.8% 5,346 193.7%
Selling, general and
administrative 7,675 27.4% 6,730 29.2% 20,059 28.8% 4,222 152.9%
Compensation related to
vesting of restricted
shares -- -- -- -- 40,843 58.7% -- --
Settlement costs -- -- -- -- -- -- 1,881 68.2%
------- ----- ------ ----- ------- ----- ------- -----
Total costs and
operating expenses 24,282 86.6% 20,564 89.2% 102,537 147.3% 11,449 414.8%
------- ----- ------- ----- ------- ------ ------- ------
3,762 13.4% 2,479 10.8% (32,918) (47.3%) (8,689) (314.8%)
Income (loss) from operations
Other income (expense):
Interest income (expense),
net 175 0.6% (176) (0.8%) (295) (0.4%) 446 16.1%
======= ===== ======= ===== ====== ===== ======= =====
Net income (loss) $ 3,937 14.0% $ 2,303 10.0% (33,213) (47.7%) $(8,243) (298.7%)
======= ===== ======= ===== ====== ===== ======= =====
In light of the Company's incorporation on April 23, 1997 and the absence
of significant operations during the period from April 23, 1997 to September 30,
1997 (the "Inception Period"), the following discussion presents a comparison of
results for the third quarter of 1998 versus the second quarter of 1998 as
management believes that this comparison provides a more meaningful presentation
and helps address the continuation of recent trends.
9
QUARTER ENDED OCTOBER 2, 1998 COMPARED TO QUARTER ENDED JULY 3, 1998
NET REVENUES. Net revenues for the third quarter of 1998 increased by $5.0
million or 21.7% over the prior quarter as the Company continued to increase the
number of clients served and also sold additional work to existing clients. The
comparison of revenues to the prior quarter was also positively impacted by the
Company's acquisition of Legacy Technology, Inc. ("Legacy") in May 1998, which
resulted in three months of operations of Legacy included in the third quarter
of 1998 compared to two months included in the second quarter.
PROJECT PERSONNEL AND EXPENSES. Project personnel and expenses for the
second quarter of 1998 increased by $2.8 million or 20.0% over the second
quarter of 1998. The increase in project personnel and expenses over the prior
quarter was primarily the result of the additional consultants hired during the
quarter. Project personnel and expenses as a percentage of net revenues
decreased slightly in the third quarter of 1998 to 59.2% compared to 60.0%
during the second quarter due primarily to a decrease in the average cost per
consultant. The number of consultants employed by the Company increased by 136
during the third quarter to 584 from 448 at the end of the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the third quarter of 1998 increased by $945,000 or 14.0% over the
second quarter of 1998, but decreased as a percentage of revenues to 27.4% from
29.2%. The increase in selling, general and administrative expenses is primarily
attributable to an increase in training and selling costs as well as a $250,000
provision for doubtful accounts relating primarily to the bankruptcy filing of a
client. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to the Company's ability to leverage
its infrastructure to acquired companies which helped control the increase in
functional support personnel.
INTEREST INCOME (EXPENSE), NET. Net interest income totaled $175,000 in the
third quarter of 1998 compared to $176,000 of net interest expense in the second
quarter of the year. Net interest income in the third quarter is due to the
interest earned on the Company's investments made using the proceeds of its
initial public offering which was completed in the second quarter. Net interest
expense in the second quarter is primarily the result of the Company's debt
outstanding during the quarter prior to its initial public offering.
NINE MONTHS ENDED OCTOBER 2, 1998 COMPARED TO INCEPTION PERIOD (APRIL 23, 1997
TO SEPTEMBER 30, 1997)
Net revenues for the nine months ended October 2, 1998 were $69.6 million
compared to $2.8 million during the Inception Period. Net revenues for the first
nine months of 1998 were significantly higher than the Inception Period as the
1998 period included the results of the Company's acquisitions and included nine
months compared to approximately five months in 1997. The Inception Period
consisted primarily of start-up activities.
The Company's net loss for the first nine months of 1998 was $33.2 million
compared to a net loss for the Inception Period of $8.2 million. The net loss
for the first nine months of 1998 was attributable to a one-time $40.8 million
charge for compensation related to the vesting of restricted shares issued to
key executives. Excluding the effect of the compensation charge, the Company
would have had net income of $7.6 million for the first nine months of 1998.
These results reflect the positive impact of the acquisitions on operations,
continued aggressive hiring of consultants by the Company, and an increase in
the number of clients served. The net loss during the Inception Period was
primarily a result of the Company's start-up activities. The Company's primary
activities during its initial stages in 1997 consisted of recruiting consultants
and developing and building a service delivery model and the underlying
information systems to support the future growth of the business. The Company
also incurred settlement costs of $1.9 million during the Inception Period.
AVAILABILITY OF NET OPERATING LOSSES
The Company did not record any tax provision in the first nine months of
1998 as a result of the utilization of net operating loss carryforwards. As of
January 2, 1998, the Company had a net operating loss carryforward for financial
reporting purposes of approximately $12 million. As of October 2, 1998,
approximately $4 million of this net operating loss carryforward was available.
The $40.8 million compensation expense relating to the vesting of
10
restricted shares that the Company recorded during the first quarter of 1998
does not give rise to a net operating loss carryforward since it was not
deductible for income tax purposes. In light of the recent organization of the
Company and the loss experienced in fiscal 1997, a valuation allowance has been
established for the entire deferred tax asset attributed to the remaining net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At October 2, 1998, the Company had $24.4 million of cash and cash
equivalents compared to $3.2 million at January 2, 1998. Prior to its initial
public offering in May 1998, the Company's primary source of liquidity had been
its initial capitalization, operating cash flows and borrowings under the
Company's revolving credit facility. The Company has a revolving credit facility
with BankBoston for up to $20 million. The credit facility is secured by
substantially all of the Company's assets and contains certain restrictive
covenants. There were no borrowings under this credit facility as of October 2,
1998.
Net cash provided by operating activities was $1.2 million for the nine
months ended October 2, 1998 compared to $9.0 million used during the Inception
Period. During the Inception Period, net cash used in operating activities was
primarily attributable to the operating loss of $8.2 million. During the first
nine months of 1998, the increase in cash provided by operations related
primarily to the Company's earnings, excluding the effects of non-cash charges,
and an increase in accrued expenses and other liabilities, partially offset by a
$13.4 million increase in accounts receivable and unbilled revenue.
Net cash used in investing activities was $5.6 million for the first nine
months of 1998 compared to $1.0 million used during the Inception Period. The
use of cash in 1998 was attributable to a net increase in short-term investments
of $3.2 million, $1.5 million of purchases of property and equipment and $1.3
million used in the acquisition of businesses. In May 1998, the Company acquired
Legacy Technology, Inc. The purchase price included the issuance of $2.6 million
in promissory notes (which were paid during June 1998) and $3.0 million (248,461
shares) of the Company's common stock. On September 30, 1998, the Company
acquired Infinity Consulting Group, Inc. The purchase price included $1.3
million in cash (net of cash acquired) and $3.4 million (186,000 shares) of the
Company's common stock.
Net cash provided by financing activities was $25.7 million in the first
nine months of 1998 compared to $21.1 million during the Inception Period.
During the Inception Period, the primary source of cash was $21.0 million raised
through the issuance of Series A Convertible Preferred Stock. In the first nine
months of 1998, $38.7 million of cash was provided from the issuance of common
stock primarily from the Company's initial public offering, $3.0 million
represented proceeds under the revolving credit facility and $1.1 million was
provided from the issuance of convertible preferred stock. The Company used the
proceeds from its initial public offering to repay $6.3 million in notes payable
to shareholders and to repay all outstanding amounts under the revolving credit
facility.
Based on the Company's current financial position and funds available under
its credit facility or that may be generated from operations, the Company
believes that it will be able to meet all of its currently anticipated
short-term and long-term financial requirements.
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century and consequently
use only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). All of the Company's systems have been recently
implemented and are Year 2000 compliant. The Company believes the Year 2000
Issue will not have a material adverse impact on the Company's financial
condition or results of operations.
11
ANSWERTHINK CONSULTING GROUP, INC.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On September 30, 1998, in connection with the Registrant's
acquisition of Infinity Consulting Group, Inc. ("Infinity"), the Registrant
issued 186,000 shares of common stock that were not registered under the
Securities Act of 1933 to the former stockholders of Infinity. These shares were
issued in reliance upon an exemption from registration under Section 4(2) of the
Securities Act of 1933. These transactions were effected without an underwriter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER EXHIBIT
------ -------
3.1 Second Amended and Restated Articles of Incorporation (incorporated
by reference to exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 declared effective by the Securities and
Exchange Commission on May 27, 1998 (File No. 333-48123)).
3.2 Amended and Restated Bylaws (incorporated by reference to exhibit 3.2
to the Registrant's Quarterly Report on Form 10-Q filed August 17,
1998 (File No. 000-24343)).
4.1 Specimen Common Stock Certificate (incorporated by reference to
exhibit 4.1 to the Registrant's Registration Statement on Form 8-A
filed May 21, 1998 ( File No. 000-24343)).
10.1 Stock Purchase Agreement, dated as of September 30, 1998, by and
among the Registrant, Infinity Consulting Group, Inc. ("Infinity")
and the Stockholders of Infinity (incorporated by reference to the
Registrant's Current Report on Form 8-K filed October 14, 1998 (File
No. 000-24343)).
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed a Form 8-K with the Securities and Exchange Commission
on October 14, 1998. In this filing, the Registrant disclosed its acquisition of
all of the issued and outstanding capital stock of Infinity Consulting Group,
Inc. ("Infinity") pursuant to that certain stock purchase agreement dated as of
September 30, 1998, by and among the Registrant, Infinity and the stockholders
of Infinity.
12
SIGNATURES
Pursuant to the requirements 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.
ANSWERTHINK CONSULTING GROUP, INC.
Date: November 13, 1998 By: /s/ LUIS E. SAN MIGUEL
------------------------------------
Luis E. San Miguel
Executive Vice President,
Finance and Chief Financial Officer
13
EXHIBIT INDEX
NUMBER EXHIBIT
------ -------
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule