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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 1, 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.
(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)
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 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 1, 1999, there were 35,199,005 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 October 1, 1999 and January 1, 1999 3
Consolidated Statements of Operations for the Quarters ended October 1, 1999 and
October 2, 1998 and for the Nine Months Ended October 1, 1999 and October 2,
1998 4
Consolidated Statements of Cash Flows for the Nine Months ended October 1,
1999 and October 2, 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
2
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCTOBER 1, JANUARY 1,
1999 1999
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,771,508 $ 29,965,976
Short-term investments 500,000 1,000,000
Accounts receivable and unbilled revenue, net 52,141,561 32,943,585
Prepaid expenses and other current assets 1,480,388 1,415,321
--------------- ----------------
Total current assets 71,893,457 65,324,882
Property and equipment, net 5,243,891 4,046,570
Other assets 4,224,282 3,052,384
Goodwill, net 44,964,660 23,585,946
--------------- ----------------
Total assets $126,326,290 $ 96,009,782
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,510,713 $ 2,869,684
Accrued expenses and other liabilities 22,038,216 13,894,848
Income taxes payable 3,467,389 1,059,474
Current portion of notes payable 1,896,000 2,393,611
--------------- ----------------
Total current liabilities 31,912,318 20,217,617
Notes payable -- 2,324,329
Redeemable subordinated notes, net -- 4,508,811
--------------- ----------------
Total liabilities 31,912,318 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: 35,199,005 shares at October 1, 1999; 34,228,428 shares at
January 1, 1999 35,199 34,228
Additional paid-in capital 131,256,350 113,391,772
Unearned compensation (972,760) (1,390,630)
Accumulated deficit (35,904,817) (43,076,345)
--------------- ----------------
Total shareholders' equity 94,413,972 68,959,025
--------------- ----------------
Total liabilities and shareholders' equity $126,326,290 $ 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 NINE MONTHS ENDED
------------------------------------ ------------------------------------
OCTOBER 1, 1999 OCTOBER 2, 1998 OCTOBER 1, 1999 OCTOBER 2, 1998
----------------- ----------------- ----------------- -----------------
Net revenues $ 54,001,138 $ 31,341,524 $ 148,314,733 $ 81,642,736
Costs and expenses:
Project personnel and expenses 32,388,082 19,047,245 88,387,192 49,648,226
Selling, general and administrative 13,967,347 10,586,691 40,086,374 26,876,225
Compensation related to vesting of common shares -- -- -- 40,843,400
Merger related expenses -- -- 2,500,000 --
----------------- ----------------- ----------------- -----------------
Total costs and operating expenses 46,355,429 29,633,936 130,973,566 117,367,851
----------------- ----------------- ----------------- -----------------
Income (loss) from operations 7,645,709 1,707,588 17,341,167 (35,725,115)
Other income (expense):
Litigation settlement -- 2,500,000 -- 2,500,000
Interest income 73,232 287,856 366,262 428,285
Interest expense (104,636) (363,522) (460,309) (1,044,611)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes and
extraordinary loss 7,614,305 4,131,922 17,247,120 (33,841,441)
Income taxes 3,045,722 -- 7,963,001 --
----------------- ----------------- ----------------- -----------------
Income (loss) before extraordinary loss 4,568,583 4,131,922 9,284,119 (33,841,441)
Extraordinary loss on early extinguishment of debt
(net of taxes of $1,408,000) -- -- 2,112,591 --
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 4,568,583 $ 4,131,922 $ 7,171,528 $ (33,841,441)
================= ================= ================= =================
Basic net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.16 $ 0.17 $ 0.34 $ (1.89)
Extraordinary loss on early extinguishment of debt $ -- $ -- $ (0.08) $ --
Net income (loss) per common share $ 0.16 $ 0.17 $ 0.26 $ (1.89)
Weighted average common shares outstanding 29,269,575 24,484,724 27,594,654 17,865,491
Diluted net income (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ 0.12 $ 0.26 $ (1.89)
Extraordinary loss on early extinguishment of debt $ -- $ -- $ (0.06) $ --
Net income (loss) per common share $ 0.13 $ 0.12 $ 0.20 $ (1.89)
Weighted average common and common equivalent
shares outstanding 35,843,276 35,429,171 35,726,889 17,865,491
The accompanying notes are an integral part of the consolidated financial
statements.
4
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------------
OCTOBER 1, OCTOBER 2,
1999 1998
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,171,528 $ (33,841,441)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt 2,112,591 --
Compensation related to vesting of common shares -- 40,843,400
Depreciation and amortization 4,086,636 3,134,112
Deferred income taxes 600,000 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue (15,425,540) (13,114,843)
Increase in prepaid expenses and other current and non-current assets (740,763) (651,086)
Increase in accounts payable 878,727 286,915
Increase in accrued expenses and other liabilities 6,281,468 3,606,193
Increase in income taxes payable 2,407,915 --
---------------- ---------------
Net cash provided by operating activities 7,372,562 263,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,046,203) (1,975,845)
Sale of property and equipment under sale/leaseback arrangement -- 456,041
Purchases of short-term investments (500,000) (7,150,000)
Sales and redemptions of short-term investments 1,000,000 4,000,000
Cash used in acquisition of businesses, net of cash acquired (10,313,619) (1,401,197)
---------------- ---------------
Net cash used in investing activities (11,859,822) (6,071,001)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,365,240 38,711,790
Repurchase of common stock (586) (3,247,294)
Proceeds from issuance of convertible preferred stock -- 1,099,639
Proceeds from revolving credit facility -- 3,000,000
Repayment of revolving credit facility -- (12,400,000)
Proceeds from issuance of notes payable -- 750,000
Repayment of notes payable (4,071,862) (6,451,745)
Proceeds from redeemable subordinated notes -- 8,000,000
Repayment of redeemable subordinated notes (8,000,000) --
---------------- ---------------
Net cash provided by (used in) financing activities (7,707,208) 29,462,390
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (12,194,468) 23,654,639
Cash and cash equivalents at beginning of period 29,965,976 3,277,121
---------------- ---------------
Cash and cash equivalents at end of period $ 17,771,508 $ 26,931,760
================ ===============
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 and as updated in the Form 8-K filed by the Company with the
Securities and Exchange Commission on August 12, 1999. The consolidated results
of operations for the quarter ended October 1, 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 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 October 2, 1998,
were excluded from the fully diluted loss per share calculation for the nine
months ended October 2, 1998 because their effect would have been anti-dilutive
to the operating loss incurred by the Company during the first nine months of
1998. Accordingly, the amount reported for basic and diluted net loss per share
were the same.
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 consolidated financial statements and
footnotes have been restated to include the operations of triSpan for all
periods presented. Merger related expenses include investment banking, legal and
accounting fees as well as the costs of combining operations and the elimination
of duplicate facilities.
6
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. MERGER WITH TRISPAN (CONTINUED)
Separate results of AnswerThink and triSpan for the nine months ended
October 1, 1999 and October 2, 1998 prior to the consummation of the merger are
as follows.
ANSWERTHINK TRISPAN COMBINED
----------------- ------------------ ------------------
Nine months ended October 1, 1999
Net revenues $ 146,040,413 $ 2,274,320 $ 148,314,733
Net income (loss) 8,187,642 (1,016,114) 7,171,528
Nine months ended October 2, 1998
Net revenues 69,618,772 12,023,964 81,642,736
Net loss (33,213,112) (628,329) (33,841,441)
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. Contingent
consideration, to the extent earned, will be recorded as additional goodwill.
The excess of the purchase prices of Group Cortex and CCE over the estimated
fair values of the net identifiable assets acquired totaled $4.7 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 nine months ended
October 1, 1999.
In April 1999, the Company paid $2.8 million in cash to the former
shareholders of Delphi Partners, Inc. entitled to contingent consideration upon
the achievement of certain pre-tax profit targets, as defined. In addition, in
April 1999, the Company paid a total of $1.3 million, $625,000 in cash and
$625,000 in the Company's common stock, to the former shareholders of Legacy
Technology, Inc. entitled to contingent consideration as certain performance
targets were met over the 12-month period ending April 30, 1999. In connection
with these payments, the Company recorded additional goodwill of $4.1 million in
the second quarter of 1999.
On July 6, 1999, the Company acquired all the issued and outstanding
capital stock of CFT Consulting, Inc. ("CFT") for 398,920 shares of the
Company's common stock, valued at approximately $8.8 million, and $4.8 million
in cash. The sellers are also entitled to contingent consideration of
approximately $8.6 million payable in cash and the Company's common stock to be
paid by February 29, 2000, upon the achievement of certain revenue targets
related to the performance of CFT through the period ending December 31, 1999.
The sellers are also entitled to receive additional contingent consideration of
up to $1.6 million payable in cash and the Company's common stock to be paid by
August 4, 2000, upon the achievement of other revenue targets related to the
performance of CFT during the 12-month period ending July 6, 2000. CFT is a
Florida-corporation engaged in the business of management and information
technology consulting and is a provider of e-business consultancy with a focus
on the retail industry.
7
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITIONS AND NON-CASH INVESTING ACTIVITIES (CONTINUED)
The Company's acquisition of CFT has been accounted for using the
purchase method of accounting. Accordingly, the results of operations of CFT 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 consideration for the Company's acquisition of CFT 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 $ 363,806
Goodwill 14,203,484
Common stock issued (8,826,105)
Conversion of CFT options to ACG options (1,359,541)
-----------------
Cash used in acquisition of CFT, net of cash acquired $ 4,381,644
-----------------
The following information presents the unaudited pro forma condensed
results of operations for the nine months ended October 1, 1999 and October 2,
1998 as if the Company's acquisition of CFT had occurred on January 1, 1998. The
pro forma adjustments include additional amortization and interest expense in
the amount of approximately $473,000 and $78,000, respectively, for 1999 and
$710,000 and $220,000, respectively, for 1998. 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 acquisition occurred on January 2, 1999.
PRO FORMA RESULTS OF OPERATIONS NINE MONTHS ENDED
-------------------------------------
OCTOBER 1, 1999 OCTOBER 2, 1998
----------------- ------------------
Net revenues $ 157,106,662 $ 88,168,169
Net income $ 7,169,689 $ (34,944,758)
Net income per common share-basic $ 0.26 $ (1.91)
Net income per common share-diluted $ 0.20 $ (1.91)
5. INCOME TAXES
The Company's effective tax rate for the first nine months of 1999 was
46% compared with no income tax provision in the first nine months of 1998. The
high effective tax rate in the first nine months 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 in the first quarter of 1999. The Company's
effective tax rate excluding these items was 40%. The Company did not record a
tax benefit in the first nine months of 1998 due to the non-deductibility of the
$40.8 million compensation expense relating to the vesting of common shares.
8
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
in the first quarter of 1999 of $2.1 million, net of a $1.4 million tax benefit.
7. SUBSEQUENT EVENT
On November 5, 1999, the Company merged with THINK New Ideas, Inc.
("Think New Ideas"). The merger was accomplished through an exchange of all of
the outstanding shares of capital stock of Think New Ideas for shares of the
Company's common stock. Each outstanding share of common stock of Think New
Ideas was converted into 0.70 of a share of the Company's common stock. This
transaction will be accounted for under the pooling-of-interests method and,
accordingly, historical financial data in future reports will be restated to
include Think New Ideas. The following pro forma data summarizes the combined
results of operations of the Company and Think New Ideas as though the merger
had occurred on January 2, 1998. Think New Ideas is a provider of e-business,
e-marketing, e-community, e-commerce and e-technology solutions to Fortune 500
and other high profile clients.
QUARTER ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
PRO FORMA RESULTS OF OPERATIONS 1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Net revenues $ 69,038,493 $ 42,711,266 $ 189,408,261 $118,632,997
Net income (loss) $ 4,338,872 $ 2,696,407 $ 3,754,221 $(63,363,446)
Basic net income (loss) per common share $ 0.12 $ 0.09 $ 0.11 $ (2.76)
Diluted net income (loss) per common share $ 0.10 $ 0.07 $ 0.09 $ (2.76)
9
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 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 and the Year 2000 issue. 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) and updated in the Company's Registration
Statements on Form S-4 (Registration Form 333-87379) and Form S-3 (Registration
Form 333-87749).
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:
(DOLLARS IN THOUSANDS) QUARTER ENDED NINE MONTHS ENDED-
----------------------------------- --------------------------------------
OCTOBER 1, 1999 OCTOBER 2, 1998 OCTOBER 1, 1999 OCTOBER 2, 1998
----------------- ---------------- ----------------- -------------------
Net revenues $54,001 100.0% $ 31,342 100.0% $ 148,315 100.0% $ 81,643 100.0%
Costs and expenses:
Project personnel and expenses 32,388 60.0% 19,047 60.8% 88,387 59.6% 49,648 60.8%
Selling, general and administrative 13,967 25.8% 10,587 33.8% 40,086 27.0% 26,876 32.9%
Compensation related to vesting of shares -- -- -- -- -- -- 40,843 50.0%
Merger related expenses -- -- -- -- 2,500 1.7% -- --
----------------- ---------------- ----------------- -------------------
Total costs and operating expenses 46,355 85.8% 29,634 94.6% 130,973 88.3% 117,367 143.7%
----------------- ---------------- ----------------- -------------------
Income (loss) from operations 7,646 14.2% 1,708 5.4% 17,342 11.7% (35,724) (43.7%)
Other income (expense):
Litigation settlement -- -- 2,500 8.0% -- -- 2,500 3.1%
Interest income (expense), net (31) (0.1%) (76) (0.2%) (94) (0.1%) (617) (0.8%)
----------------- ---------------- ----------------- -------------------
Income (loss) before income taxes and 7,615 14.1% 4,132 13.2% 17,248 11.6% (33,841) (41.4%)
extraordinary loss
Income taxes 3,046 5.6% -- -- 7,963 5.4% -- --
----------------- ---------------- ----------------- -------------------
Income (loss) before extraordinary loss on
early extinguishment of debt 4,569 8.5% 4,132 13.2% 9,285 6.2% (33,841) (41.4%)
Extraordinary loss on early extinguishment
of debt (net of taxes of $1,408) -- -- -- -- 2,113 1.4% -- --
----------------- ---------------- ----------------- -------------------
Net income (loss) $ 4,569 8.5% $ 4,132 13.2% $ 7,172 4.8% $(33,841) (41.4%)
================= ================ ================= ===================
10
NET REVENUES. Net revenues for the third quarter of 1999 increased by
$22.7 million or 72.3% over the comparative quarter of 1998. For the first nine
months of 1999, net revenues increased $66.7 million or 81.7% over the first
nine months of 1998. The increase in net revenues in both periods 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 third quarter of 1999 increased by $13.3 million
or 70.0% over the comparative quarter of 1998. For the first nine months of
1999, project personnel and expenses increased $38.7 million or 78.0% over the
first nine months of 1998. The increase in project personnel and expenses is
attributable to an increase in the number of consultants from 682 at the end of
the third quarter of 1998 to 1,048 at the end of the third 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 five acquisitions since the beginning of 1998. Project personnel and
expenses as a percentage of net revenues decreased slightly in the third quarter
of 1999 to 60.0% compared to 60.8% during the comparative 1998 quarter and in
the first nine months of 1999 to 59.6% from 60.8%. These decreases were
primarily due to an increase in the average billing rate for consultants.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were $14.0 million in the third quarter of 1999 compared
to $10.6 million during the third quarter of 1998. For the first nine months of
1999, selling, general and administrative expenses were $40.1 million compared
to $26.9 during the first nine months of 1998. Selling, general and
administrative expenses as a percentage of net revenues decreased to 25.8% in
the third quarter of 1999 from 33.8% during the third quarter of 1998. For the
first nine months of 1999, selling, general and administrative expenses as a
percentage of net revenues decreased to 27.0% from 32.9% during the first nine
months of 1998. These decreases were primarily due to higher revenue levels
during the third quarter of 1999 and the first nine months 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 COMMON SHARES. The Company recorded
a charge in the first quarter of 1998 of approximately $40.8 million relating to
the vesting of 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 nine months ended October 1, 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.
LITIGATION SETTLEMENT. In July 1998, the Company settled litigation in
which they were the plaintiffs in a lawsuit over tradename infringement.
Pursuant to the settlement agreement, the Company received $2.5 million in cash.
INTEREST EXPENSE, NET. Net interest expense totaled $31,000 in the
third quarter of 1999 compared to $76,000 in the comparative quarter of 1998.
For the first nine months of 1999, net interest expense totaled $94,000 compared
to $617,000 of net interest expense in the first nine months of 1998. Interest
expense was lower in the 1999 periods 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 nine
months of 1999 was 46% compared with no income tax provision in the first nine
months of 1998. The high effective tax rate in the first nine months 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 in the first quarter of
1999. The Company's effective tax rate excluding these items was 40%. The
Company did not record a tax benefit in the first nine months of 1998 due to the
non-deductibility of the $40.8 million compensation expense relating to the
vesting of common shares.
11
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. The extraordinary
loss on early extinguishment of debt was a result of the repayment of
subordinated notes in the first quarter of 1999 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.
LIQUIDITY AND CAPITAL RESOURCES
At October 1, 1999, the Company had $17.8 million of cash and cash
equivalents compared to $26.9 million at October 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 unsecured and
contains certain restrictive covenants. There were no borrowings under this
credit facility as of October 1, 1999.
Net cash provided by operating activities was $7.4 million for the nine
months ended October 1, 1999 compared to $263,000 provided during the comparable
period of 1998. During the nine months ended October 1, 1999, net cash provided
by operating activities was primarily attributable to the Company's earnings and
an increase in accrued expenses and other liabilities, partially offset by an
increase in accounts receivable and unbilled revenue. During the comparable
period of 1998, net cash provided by operating activities was primarily
attributable to the Company earnings, excluding the effects of non-cash charges,
and an increase in accrued expenses and other liabilities, which was partially
offset by an increase in accounts receivable and unbilled revenue.
Net cash used in investing activities was $11.9 million for the first
nine months of 1999 compared to $6.1 million used during the comparative period
of 1998. The use of cash for investing activities in 1999 was primarily
attributable to $10.3 million used in the acquisition of businesses and $2.0
million of purchases of property and equipment. During the comparable period of
1998, net cash used in investing activities was for purchases of short-term
investments and 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 $7.7 million for the nine
months ended October 1, 1999 compared to $29.5 million provided by financing
activities during the first nine 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 $4.1 million. These
uses were partially offset by the proceeds from the employee stock purchase plan
and the exercise of stock options. The primary sources of cash from financing
activities during the first nine months of 1998 was $38.7 million received from
the issuance of common stock primarily from the Company's initial public
offering, $3.0 million from the revolving credit facility and $8.0 million from
the proceeds of triSpan's subordinated notes, partially offset by the repayment
of $12.4 million under the revolving credit facility and repayment of notes
payable totaling $6.5 million.
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 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
12
efforts to confirm this fact. The Company completed the process of confirming
the Year 2000 compliance of its mission critical system vendors prior to May 31,
1999. The Company determined that its financials and human resources software
applications required software vendor release updates in order to achieve Year
2000 compliance. The process of installing release updates into production
system is in progress. The Company estimates that the cost to apply the Year
2000 release updates will not be material. The testing of remediated critical
applications was completed prior to September 30, 1999. Based on this testing,
upgrades either have been or will be implemented. The Company believes that all
required upgrades will be installed prior to December 31, 1999. However there
can be no assurances that all required 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 completed an inventory and
classification of these relationships according to its criticality to the
Company's operations. The Company has sought assurances from its material
vendors and suppliers that there will be no interruption of service as a result
of the Year 2000 Issue via correspondence and inquiry via the vendors' and
suppliers' Internet websites. All material vendors and suppliers confirmed that
they would be able to provide products and services without interruption after
December 31, 1999. To the extent these responses prove inaccurate, the Company
devised and continues to refine 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 5% of the Company's revenues
for the nine months ended October 1, 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.
13
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 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.
14
ANSWERTHINK CONSULTING GROUP, INC.
PART II- - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NUMBER EXHIBIT
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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 July 21, 1999. In this filing the
Registrant disclosed that on July 6, 1999 it acquired all of
the issued and outstanding capital stock of CFT Consulting,
Inc., ("CFT") a Florida corporation, pursuant to a merger
agreement dated as of July 6, 1999 (the "Agreement") by and
among the Registrant, CFT and CFT Acquisition, Inc., a wholly
owned subsidiary of Registrant and the shareholders of CFT. In
consideration for the CFT stock, the Registrant issued stock
and paid cash to the former CFT shareholders all as more fully
described in the Agreement that is included as an exhibit to
the Form 8-K.
The Registrant filed a Form 8-K with the Securities and
Exchange Commission on August 12, 1999. In this filing the
Registrant provided supplemental financial information
pertaining to the retroactive effect of the February 26, 1999
business combination of Registrant and triSpan, Inc. which was
accounted for under the pooling-of-interests method of
accounting.
The Registrant filed a Form 8-K/A with the Securities and
Exchange Commission on September 13, 1999. In this filing the
Registrant amended and restated in its entirety Item 7
Financial Statements, Pro Forma Financial Information and
Exhibits in its Form 8-K filed on July 21, 1999.
15
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 15, 1999 By: /s/ John F. Brennan
----------------------------------------
John F. Brennan
Executive Vice President and Chief
Financial Officer
16
EXHIBIT INDEX
NUMBER EXHIBIT
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27.1 Financial Data Schedule