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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 April 2, 1999
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 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
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(REGISTRANT'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 April 2, 1999, there were 34,699,042 shares of common stock
outstanding.
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ANSWERTHINK CONSULTING GROUP, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of April 2, 1999 and January 1, 1999 3
Consolidated Statements of Operations for the Quarter ended April 2, 1999
and April 3 1998 4
Consolidated Statements of Cash Flows for the Quarter ended April 2, 1999
and April 3, 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
APRIL 2, JANUARY 1,
1999 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,432,717 $ 29,965,976
Short-term investments -- 1,000,000
Accounts receivable and unbilled revenue, net 40,165,494 32,943,585
Prepaid expenses and other current assets 1,911,761 1,415,321
------------- -------------
Total current assets 57,509,972 65,324,882
Property and equipment, net 4,232,424 4,046,570
Other assets 3,427,386 3,052,384
Goodwill, net 27,827,798 23,585,946
------------- -------------
Total assets $ 92,997,580 $ 96,009,782
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,395,791 $ 2,869,684
Accrued expenses and other liabilities 13,509,836 13,894,848
Income taxes payable 2,570,228 1,059,474
Current portion of notes payable 1,896,000 2,393,611
------------- -------------
Total current liabilities 21,371,855 20,217,617
Notes payable -- 2,324,329
Redeemable subordinated notes, net -- 4,508,811
------------- -------------
Total liabilities 21,371,855 27,050,757
------------- -------------
Commitments and contingencies
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: 34,699,042 shares at April 2, 1999; 33,849,542 shares at
January 1, 1999 34,699 34,539
Additional paid-in capital 117,520,996 113,391,461
Unearned compensation-restricted stock (1,246,782) (1,390,630)
Accumulated deficit (44,683,188) (43,076,345)
------------- -------------
Total shareholders' equity 71,625,725 68,959,025
------------- -------------
Total liabilities and shareholders' equity $ 92,997,580 $ 96,009,782
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED
----------------------------
APRIL 2, APRIL 3,
1999 1998
------------ ------------
Net revenues $ 44,805,186 $ 22,836,120
Costs and expenses:
Project personnel and expenses 26,809,217 14,101,404
Selling, general and administrative 12,787,087 7,508,275
Compensation related to vesting of restricted shares -- 40,843,400
Merger related expenses 2,500,000 --
------------ ------------
Total costs and operating expenses 42,096,304 62,453,079
------------ ------------
Income (loss) from operations 2,708,882 (39,616,959)
Other income (expense):
Interest income 198,107 30,072
Interest expense (290,487) (353,739)
------------ ------------
Income (loss) before income taxes and extraordinary loss 2,616,502 (39,940,626)
Income taxes 2,110,754 --
------------ ------------
Income (loss) before extraordinary loss 505,748 (39,940,626)
Extraordinary loss on early extinguishment of debt (net of taxes of $1,408,000) 2,112,591 --
------------ ------------
Net loss $ (1,606,843) $(39,940,626)
============ ============
Basic net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.02 $ (3.64)
Extraordinary loss on early extinguishment of debt $ (0.08) $ --
Net loss per common share $ (0.06) $ (3.64)
Weighted average common shares outstanding 25,193,425 10,984,103
Diluted net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.01 $ (3.64)
Extraordinary loss on early extinguishment of debt $ (0.06) $ --
Net loss per common share $ (0.04) $ (3.64)
Weighted average common and common equivalent shares outstanding 35,711,862 10,984,103
The accompanying notes are an integral part of the consolidated financial
statements.
4
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED
----------------------------
APRIL 2, APRIL 3,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,606,843) $(39,940,626)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary loss on early extinguishment of debt 2,112,591 --
Compensation related to vesting of restricted shares -- 40,843,400
Depreciation and amortization 1,242,273 743,334
Deferred income taxes 600,000 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue (6,916,935) (3,962,068)
Increase in prepaid expenses and other current and non-current assets (330,343) (391,784)
Increase in accounts payable 520,808 507,966
(Decrease) increase in accrued expenses and other liabilities (204,940) 1,367,243
Increase in income taxes payable 1,510,754 --
------------ ------------
Net cash used in operating activities (3,072,635) (832,535)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (494,300) (814,286)
Sale of property and equipment under sale/leaseback arrangement -- 456,041
Sales of short-term investments 1,000,000 --
Cash used in acquisition of businesses, net of cash acquired (2,428,691) --
------------ ------------
Net cash used in investing activities (1,922,991) (358,245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,371,796 126
Repurchase of common stock -- (1,018)
Proceeds from issuance of convertible preferred stock -- 1,099,995
Proceeds from revolving credit facility -- 3,265,827
Repayment of revolving credit facility -- (3,760,000)
Proceeds from issuance of notes payable -- 1,712,500
Repayment of notes payable (2,865,790) (985,328)
Repayment of redeemable subordinated notes (8,000,000) --
Proceeds from capital lease obligation -- 507,015
Repayment of obligation under capital lease (43,639) (25,112)
------------ ------------
Net cash (used in) provided by financing activities (9,537,633) 1,814,005
------------ ------------
Net (decrease) increase in cash and cash equivalents (14,533,259) 623,225
Cash and cash equivalents at beginning of period 29,965,976 3,277,121
------------ ------------
Cash and cash equivalents at end of period $ 15,432,717 $ 3,900,346
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
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 February 1999, the Company
merged with triSpan, Inc ("triSpan"). The merger with triSpan was 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. (See
Note 3.)
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 year ended January 1,
1999, included in the Form 10-K filed by the Company with the Securities and
Exchange Commission. The consolidated results of operations for the quarter
ended April 2, 1999, are not necessarily indicative of results for the full
year. Certain prior period amounts have been reclassified to conform with
current period presentation.
2. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. With regard to restricted 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 significantly lower than actual shares issued and
outstanding.
Income (loss) per common share assuming dilution is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding, increased by the assumed conversion of other potentially dilutive
securities during the period. Potentially dilutive shares as of April 3, 1998,
were excluded from the fully diluted loss per share calculation for the quarter
ended April 3, 1998 because their effect would have been anti-dilutive to the
operating loss incurred by the Company during the first quarter of 1998.
Accordingly, the amount reported for basic and diluted net loss per share were
the same. Potentially dilutive shares which were not included in the diluted
loss per share calculation for the three months ended April 3, 1998 include
9,797,442 shares of unvested restricted common stock issued under employment
agreements and 6,881,742 shares from the assumed conversion of the convertible
preferred stock outstanding at that time.
6
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
The following table presents the calculation of earnings per share:
QUARTER ENDED
----------------------------
APRIL 2, APRIL 3,
1999 1998
------------ ------------
Net income (loss) before extraordinary loss $ 505,748 $(39,940,626)
Extraordinary loss on early extinguishment of debt $ (2,112,591) $ --
------------ ------------
Net loss $ (1,606,843) $(39,940,626)
============ ============
Basic net income per common share:
Weighted average common shares outstanding 25,193,425 10,984,103
============ ============
Income (loss) before extraordinary loss $ 0.02 $ (3.64)
Extraordinary loss on early extinguishment of debt $ (0.08) $ --
Net loss per common share $ (0.06) $ (3.64)
Diluted net income (loss) per common share:
Weighted average common shares outstanding 25,193,425 10,984,103
Dilutive effects of unvested restricted common shares and stock options 10,518,437 --
------------ ------------
Weighted average common and common equivalent shares outstanding 35,711,862 10,984,103
============ ============
Income (loss) before extraordinary loss $ 0.01 $ (3.64)
Extraordinary loss on early extinguishment of debt $ (0.06) $ --
Net loss per common share $ (0.04) $ (3.64)
3. MERGER WITH TRISPAN
On February 26, 1999, the Company merged with triSpan, Inc ("triSpan").
triSpan is 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 outstanding shares of capital stock of triSpan. Each outstanding share
of common stock of triSpan was converted into 0.311 shares of the Company's
common stock. The transaction was accounted for under the pooling-of-interests
method and, accordingly, the accompanying financial statements and footnotes
have been restated to include the operations of triSpan for all periods
presented. For the quarters ended April 2, 1999 and April 3, 1998, triSpan's
revenues were $3.7 million and $4.3 million, respectively. For the quarters
ended April 2, 1999 and April 3, 1998, triSpan's net losses, excluding merger
related expenses and an extraordinary loss on early extinguishment of debt, were
$419,000 and $487,000, respectively. Merger related expenses included investment
banking, legal and accounting fees as well as the costs of combining operations
and the elimination of duplicate facilities.
7
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITIONS AND NON-CASH INVESTING ACTIVITIES
In February 1999, the Company acquired all the outstanding shares of
Group Cortex, Inc. ("Group Cortex") for 70,839 shares of the Company's common
stock valued at $2.0 million. Group Cortex is a Philadelphia-based provider of
Internet consulting, web application development and integration services. Group
Cortex develops customized business applications that leverage the Internet. Its
project teams provide strategic guidance and hands-on-know how, in the delivery
of complex, scalable Intranet and Internet commerce projects.
In February 1999, the Company acquired certain assets of the Call
Center Enterprises ("CCE") consulting organization of the Quintus Corporation
for $2.5 million in cash. CCE plans, designs and implements modern large scale
call centers. CCE continues to support the eContact Quintus software product
suite for routing and managing customer transactions across all electronic
media.
The Company's acquisitions of Group Cortex and CCE 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 respective dates of acquisitions. The excess of
the purchase prices of Group Cortex and CCE over the estimated fair values of
the net identifiable assets acquired totaled $4.6 million and has been recorded
as goodwill which is being amortized on a straight-line basis over fifteen
years. The pro forma impact of these acquisitions was not significant to the
results of the Company's consolidated operations for the quarter ended April 2,
1999.
5. INCOME TAXES
The Company's effective tax rate for the first quarter of 1999 was
80.7% compared with no income tax provision in the first quarter of 1998. The
high effective tax rate in the first quarter of 1999 was the result of the
Company incurring non-deductible merger related expenses and the establishment
of a deferred tax liability for triSpan as a result of its conversion from an S
corporation to a C corporation. The Company's effective tax rate, excluding
these items, was 40.0%. The Company did not record a tax provision in the first
quarter of 1998 due to the utilization of net operating loss carryforwards.
6. EXTRAORDINARY LOSS
The extraordinary loss on early extinguishment of debt related to the
repayment of subordinated notes which 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 8.0%, were originally issued at a substantial discount
and were due on June 26, 2003. Immediately following the merger with triSpan,
the Company repaid these notes in full, which resulted in an extraordinary loss
of $2.1 million, net of a $1.4 million tax benefit.
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 and the Year 2000 issue including the potential reduction in demand for
information technology services if customers redirect resources to solve their
Year 2000 issues. A discussion of the Company's risk factors is set forth in the
Company's Registration Statement on Form S-1 (Registration Form 333-48123) under
the caption "Risk Factors".
OVERVIEW
AnswerThink Consulting Group, Inc. ("AnswerThink" or the "Company")
provides integrated consulting and technology enabled solutions focused on the
emerging Internet-driven electronic commerce marketplace. AnswerThink offers a
wide range of integrated solutions, including benchmarking, business process
transformation, software package implementation, Internet commerce, decision
support technology and Year 2000 solutions. These solutions span across
multi-entity functional areas and include supply chain, sales and marketing,
customer support, finance, human resources and information technology. The
Company markets its services to senior executives in organizations where
business transformation and technology-enabled change can have a significant
competitive impact.
In February 1999, the Company merged with triSpan, Inc ("triSpan"). The
merger was accomplished through an exchange of 689,880 shares of the Company's
common stock for all outstanding shares of capital stock of triSpan. The merger
with triSpan was 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.
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
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APRIL 2, 1999 APRIL, 3, 1998
---------------------- --------------------
Net revenues $ 44,805 100.0% $ 22,836 100.0%
Costs and expenses:
Project personnel and expenses 26,809 59.8% 14,102 61.7%
Selling, general and administrative 12,787 28.6% 7,508 32.9%
Compensation related to vesting of restricted shares -- -- 40,843 178.9%
Merger related expenses 2,500 5.6% -- --
-------------------- --------------------
Total costs and operating expenses 42,096 94.0% 62,453 273.5%
-------------------- --------------------
Income (loss) from operations 2,709 6.0% (39,617) (173.5%)
Other income (expense):
Interest income (expense), net (92) (0.2%) (324) (1.4%)
-------------------- --------------------
Income (loss) before income taxes and extraordinary loss 2,617 5.8% (39,941) (174.9%)
Income taxes 2,111 4.7% -- --
-------------------- --------------------
Income (loss) before extraordinary loss on early extinguishment of debt 506 1.1% (39,941) (174.9%)
Extraordinary loss on early extinguishment of debt (net of taxes of $1,408) 2,113 4.7% -- --
-------------------- --------------------
Net loss $ (1,607) (3.6%) $(39,941) (174.9%)
==================== ====================
9
NET REVENUES. Net revenues for the first quarter of 1999 increased by
$22.0 million or 96.2% over the comparative quarter of 1998. This increase was
attributable to several factors, including: an increase in the number of clients
served, sales of additional projects to existing clients, additional service
offerings provided by the Company and the Company's acquisitions in 1998 and
1999.
PROJECT PERSONNEL AND EXPENSES. Project personnel costs and expenses
consist of salaries and payroll-related expenses for consultants. Project
personnel and expenses for the first quarter of 1999 increased by $12.7 million
or 90.1% over the comparative quarter of 1998. The increase in project personnel
and expenses is attributable to an increase in the number of consultants from
438 at the end of the first quarter of 1998 to 838 at the end of the first
quarter of 1999. This increase was the result of hiring additional consultants
to support the Company's internal growth and expanded service offerings as well
as the Company's four acquisitions since the end of the first quarter of 1998.
Project personnel and expenses as a percentage of net revenues decreased
slightly in the first quarter of 1999 to 59.8% compared to 61.7% during the
comparative 1998 quarter due primarily to an increase in the average billing
rate for consultants.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were $12.8 million in the first quarter of 1999 compared
to $7.5 million during the first quarter of 1998. Selling, general and
administrative expenses as a percentage of net revenues decreased to 28.6% in
the first quarter of 1999 from 32.9% during the first quarter of 1998. This
decrease was due primarily to higher revenue levels during the first quarter of
1999, as well as the Company's ability to leverage its infrastructure to the
acquired companies. The increased dollar amount of selling, general and
administrative expenses was primarily attributable to an increase in the number
of sales and functional support associates, additional selling costs related to
the higher sales volume as well as higher recruiting and training costs
resulting from the increase in the number of consultants.
COMPENSATION RELATED TO VESTING OF RESTRICTED SHARES. The Company
recorded a charge in the first quarter of 1998 of approximately $40.8 million
relating to the vesting of restricted shares held by seven of the Company's
senior managers and one director that were subject to certain performance
vesting criteria. There are no additional restricted shares outstanding that are
subject to performance criteria for vesting.
MERGER RELATED EXPENSES. Merger related expenses were $2.5 million for
the three months ended April 2, 1999. These expenses related primarily to the
Company's merger with triSpan in February 1999, which was accounted for as a
pooling-of-interests. The expenses included investment banking, legal and
accounting fees as well as the costs of combining operations and eliminating
duplicate facilities.
INTEREST INCOME (EXPENSE), NET. Net interest expense totaled $92,000 in
the first quarter of 1999 compared to $324,000 of net interest expense in the
comparative quarter of 1998. Net interest expense was lower in 1999 primarily as
a result of lower debt levels as the Company utilized the proceeds of its
initial public offering in the second quarter of 1998 to repay the majority of
its long-term borrowings.
INCOME TAXES. The Company's effective tax rate for the first quarter of
1999 was 80.7% compared with no income tax provision in the first quarter of
1998. The high effective tax rate in the first quarter of 1999 was attributable
to the non-deductibility of merger related expenses and the establishment of a
deferred tax liability for triSpan as a result of its conversion from an S
corporation to a C corporation. The Company's effective tax rate, excluding
these items, was 40.0%. The Company did not record a tax provision in the first
quarter of 1998 due to the utilization of net operating loss carryforwards.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. The extraordinary
loss on early extinguishment of debt was a result of the repayment of
subordinated notes which 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 8.0%, were originally issued at a substantial discount and were due on June
26, 2003. Immediately following the merger with triSpan, the Company repaid
these notes in full, which resulted in an extraordinary loss of $2.1 million,
net of a $1.4 million tax benefit.
10
LIQUIDITY AND CAPITAL RESOURCES
At April 2, 1999, the Company had $15.4 million of cash and cash
equivalents compared to $3.9 million at April 3, 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 unsecured and
contains certain restrictive covenants. There were no borrowings under this
credit facility as of April 2, 1999.
Net cash used in operating activities was $3.1 million for the quarter
ended April 2, 1999 compared to $833,000 used during the comparable period of
1998. During the quarter ended April 2, 1999, net cash used in operating
activities was primarily attributable to an increase in accounts receivable and
unbilled revenue, partially offset by an increase in income taxes payable and
the Company's operating income. During the comparable period of 1998, net cash
used in operating activities was primarily attributable to an increase in
accounts receivable and unbilled revenue, which was partially offset by
increases in accrued expenses and other liabilities and the Company's earnings
excluding non-cash charges.
Net cash used in investing activities was $1.9 million for the first
quarter of 1999 compared to $358,000 during the first quarter of 1998. The use
of cash for investing activities in 1999 was attributable to $2.4 million used
in the acquisition of businesses and $494,000 of purchases of property and
equipment, partially off-set by sales of short-term investments of $1.0 million.
During the comparable period of 1998, net cash used in investing activities was
for purchases of property and equipment, which were offset by a sale of property
and equipment under a sale/leaseback arrangement.
Net cash used in financing activities was $9.5 million in the first
three months of 1999 compared to $1.8 million provided by financing activities
during the first three months of 1998. The use of cash for financing activities
during 1999 was primarily the result of the repayment of $8.0 million of
subordinated notes which were assumed in connection with the triSpan merger as
well as the repayment of other notes payable totaling $2.9 million, which were
partially offset by the proceeds from the employee stock purchase plan. The
primary source of cash from financing activities during the first three months
of 1998 was $1.1 million received from the issuance of convertible preferred
stock.
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 READINESS
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 internal systems were implemented during 1997 and
1998. The Company has prepared an inventory of information technology and
non-information technology system components and has begun to classify system
components in terms of its criticality to the Company's operations. Its mission
critical components, which include Oracle Financials, Personnel, Time and
Expense, and Project Billing software modules, are considered by the vendors to
be Year 2000 compliant. In December of 1998, as part of its overall Year 2000
readiness assessment effort, the Company kicked off its efforts to confirm this
fact. The Company is in the process of confirming the Year 2000 compliance of
its mission critical system vendors, and has currently targeted May 31, 1999 as
the completion date for this assessment. The Company anticipates that the Year
2000 compliance of mission critical components will be confirmed in all material
respects. If compliance is not successfully confirmed, the Company anticipates
that components that are not compliant will be able to be fixed using software
vendor release updates in connection with existing maintenance agreements that
include as a component a Year 2000 remedy. The Company estimates that the cost
to apply the Year 2000 release updates will not be material. The testing of
critical applications will begin during the second quarter of 1999. If, as a
result of this testing, further updates are required, the Company believes that
all required updates will be installed and tested prior
11
to December 31, 1999. However there can be no assurances that all required tests
and updates will be completed by that date.
As part of its overall Year 2000 program the Company plans to assess
the readiness of its external business relationships on which it relies in the
conduct of its business. For example, a third party vendor performs the payroll
function for the Company. The Company also relies on the services of
telecommunications companies, Internet service providers, banks, utilities and
commercial airlines, among others. The Company is in the process of inventorying
and classifying these relationships according to its criticality to the
Company's operations. The Company plans to seek assurances from its material
vendors and suppliers that there will be no interruption of service as a result
of the Year 2000 issue, and to the extent not given, the Company intends to
devise contingency plans designed to mitigate the impact on the Company's
business in the event the Year 2000 issue results in the unavailability of
services. There can be no assurance that any contingency plans developed by the
Company will prevent any such service interruption on the part of one or more of
the Company's third party suppliers from having a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
failure on the part of the accounting systems of the Company's clients due to
the Year 2000 issue could result in a delay in the payment of invoices issued by
the Company for services and expenses. A failure of the accounting systems of a
significant number of the Company's clients would have a material adverse effect
on the Company's business, operating results and financial condition.
The Company believes the Year 2000 Issue as it relates to its internal
information technology and non-information technology system components will not
have material impact on the Company's financial condition or results of
operations. However, the potential failure of the systems of its external
business relationships discussed above and the potential for failures at its
material clients which cause the postponement or cancellation of ongoing
projects could result in an interruption of normal business activities and
operations and result in the cancellation of future project. Such failures could
materially and adversely affect the Company's results of operations. Due to the
general uncertainty inherent in the Year 2000 Issue, resulting in part from the
uncertainty of the Year 2000 readiness of external business relationships, the
Company is unable to determine at this time whether the consequences of external
Year 2000 failures will have a material impact on the Company's results of
operations.
The services offered by the Company do not include actual Year 2000
code remediation services. However, approximately 6% of the Company's revenues
for the three months ended April 2, 1999 were related to assisting clients
assess Year 2000 readiness and assist clients designing and managing the process
whereby necessary remediation is accomplished. The Company's clients are
ultimately responsible for the actual remediation process. However, these
clients could assert that certain services performed by the Company contributed
to their failure to resolve their Year 2000 issues on a timely basis. In
addition, the Company's principal service offerings include software package
recommendation and implementation as well as system design. These software
packages are created by third parties. Further, the hardware and software
components of the systems designed by the Company are created by third parties.
Clients could assert that the services rendered in connection with the
recommendation and installation of software packages and system design,
installation, and implementation and the interfacing of software packages with
existing client systems involved or are related to the Year 2000 issue. There
can be no way of assuring that all such software packages and systems components
will be Year 2000 compliant. Further, clients have the ability to alter and
upgrade software and system components after project completion. These client
activities may render these software packages or systems non-compliant. Due to
the potential significance of the Year 2000 issue upon client operations, upon
any failure of critical client systems or processes that may be directly or
indirectly connected or related to services provided by the Company, the Company
may be subjected to claims regardless of whether the failure is related to the
services provided by the Company. If asserted, such claims (and the associated
cost of defending such claims) could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's policy has been to attempt to include provisions in its
client contracts that, among other things, disclaim implied warranties, limit
the Company's liability to the amount of fees paid by the client to the Company
in connection with the project, and disclaim liability arising from third party
software that is implemented or installed by the Company. There can be no
assurance that the Company will be able to obtain these contractual protections
in agreements concerning future projects or that any contractual provisions
governing current completed projects will prevent clients from asserting claims
against the Company with respect to the Year 2000 issue. There
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can also be no assurance that the contractual protections, if any, obtained by
the Company will effectively operate to protect the Company from, or limit the
amount of, any liability arising from claims asserted against the Company.
The forgoing discussion of the Company's Year 2000 readiness contains
forward looking statements including estimated timeframes and costs for
addressing the known Year 2000 issues confronting the Company and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of the Company to identify and correct all Year 2000 problems
and the success of external business relationships in addressing their Year 2000
issues.
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ANSWERTHINK CONSULTING GROUP, INC.
PART II - - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) (i) On February 12, 1999, in connection with the Registrant's
acquisition of Group Cortex, Inc. ("Group Cortex"), the Registrant issued 70,839
shares of common stock that were not registered under the Securities Act of 1933
to the former stockholders of Group Cortex. These shares were issued in reliance
upon an exemption from registration under Section 4(2) of the Securities Act of
1933.
(ii) On February 26, 1999, in connection with the Registrant's
merger with triSpan, Inc. ("triSpan"), the Registrant exchanged 689,880 shares
of common stock for all outstanding shares of capital stock of triSpan. These
shares of common stock were not registered under the Securities Act of 1933 and
were issued in reliance upon an exemption from registration under Section 4(2)
of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(c) EXHIBITS
NUMBER EXHIBIT
------ -------
4.1 Registration Rights Agreement by and among AnswerThink
Consulting Group, Inc. and certain shareholders of triSpan,
Inc.
10.36 Merger Agreement, dated as of February 26, 1999, by and
among the Registrant, triSpan, Inc. ("triSpan") and the
Shareholders of triSpan.
10.37 Escrow Agreement by and among AnswerThink Consulting Group,
Inc., First Union National Bank and those certain
shareholders, vested option holders and warrant holders of
triSpan, Inc. listed on the signature page thereof.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended April 2, 1999.
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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: May 17, 1999 By: /s/ LUIS E. SAN MIGUEL
------------------------------------
Luis E. San Miguel
Executive Vice President, Finance
and Chief Financial Officer
15
EXHIBIT INDEX
NUMBER EXHIBIT
------ -------
4.1 Registration Rights Agreement by and among AnswerThink
Consulting Group, Inc. and certain shareholders of triSpan,
Inc.
10.36 Merger Agreement, dated as of February 26, 1999, by and
among the Registrant, triSpan, Inc. ("triSpan") and the
Shareholders of triSpan.
10.37 Escrow Agreement by and among AnswerThink Consulting Group,
Inc., First Union National Bank and those certain
shareholders, vested option holders and warrant holders of
triSpan, Inc. listed on the signature page thereof.
27.1 Financial Data Schedule
16