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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 26, 1999
ANSWERTHINK CONSULTING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Florida 0-24343 65-0750100
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(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1001 Brickell Bay Drive, Suite 3000, Miami, Florida 33131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 375-8005
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Not Applicable
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(Former name or former address, if changed since last report)
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<PAGE>
ITEM 5. OTHER EVENTS
This current report on Form 8-K provides supplemental financial
information pertaining to the retroactive effect of the February 26, 1999
business combination of AnswerThink Consulting Group, Inc. ("AnswerThink" or the
"Company") and triSpan, Inc. ("triSpan"), which was accounted for under the
pooling-of-interests method of accounting.
ANSWERTHINK SELECTED CONSOLIDATED FINANCIAL DATA
The tables below contain selected historical financial data for
AnswerThink. In February 1999, AnswerThink merged with triSpan in a transaction
accounted for as a pooling of interests. All financial data presented in the
tables below has been restated to include the operating results and financial
position of triSpan. The information as of and for the quarters ended April 2,
1999 and April 3, 1998 and for the years ended January 1, 1999, January 2, 1998
and December 31, 1996 has been derived from AnswerThink's consolidated financial
statements. The information as of and for the years ended December 31, 1995 and
1994 has been derived from the historical information of triSpan.
<TABLE>
<CAPTION>
Quarter Ended Year Ended
-------------------- ------------------------------------------------------------------
April 2, April 3, January 1, January 2, December 31, December 31, December 31,
1999 1998 1999(1) 1998(1) 1996 1995 1994
---- ---- ------- ------- ---- ---- ----
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Net revenues............................ $44,805 $ 22,836 $118,156 $ 34,500 $11,493 $8,221 $5,206
Costs and expenses:
Project personnel and expenses........ 26,809 14,102 71,890 24,627 6,560 4,904 2,868
Selling, general and administrative... 12,787 7,508 38,517 16,682 4,909 2,672 2,259
Compensation related to vesting of
common shares(2)................... -- 40,843 40,843 -- -- -- --
Settlement costs...................... -- -- -- 1,903 -- -- --
In-process research and development
technology......................... -- -- -- 4,000 -- -- --
Merger related expenses............... 2,500 -- -- -- -- -- --
------- -------- -------- -------- ------- ------ ------
Total costs and operating expenses. 42,096 62,453 151,250 47,212 11,469 7,576 5,127
------- -------- -------- -------- ------- ------ ------
Income (loss) from operations........... 2,709 (39,617) (33,094) (12,712) 24 645 79
Other income (expense):
Litigation settlement................... -- -- 2,500 -- -- -- --
Interest income......................... 198 30 680 509 20 15 14
Interest expense........................ (290) (354) (1,418) (152) (5) (15) --
------- -------- -------- -------- ------- ------ ------
Income (loss) before income taxes and
extraordinary loss.................... 2,617 (39,941) (31,332) (12,355) 39 645 93
Income taxes............................ 2,111 -- 325 -- -- -- --
------- -------- -------- -------- ------- ------ ------
Income (loss) before extraordinary loss. 506 (39,941) (31,657) (12,355) 39 645 93
Extraordinary loss on early
extinguishment of debt................ 2,113 -- -- -- -- -- --
------- -------- -------- -------- ------- ------ ------
Net income (loss)....................... $(1,607) $(39,941) $(31,657) $(12,355) $ 39 $ 645 $ 93
======= ======== ======== ======== ======= ====== ======
Net income (loss) per common share:
basic................................. $ (0.06) $ (3.64) $ (1.62) $ (1.74) $ 0.05 $ 0.85 $ 0.12
======= ======== ======== ======== ======= ====== ======
Weighted average common shares
outstanding........................... 25,193,425 10,984,103 19,602,520 7,100,092 757,773 757,773 757,773
========== ========== ========== ========= ======= ======= =======
Net income (loss) per common share:
diluted............................... $ (0.04) $ (3.64) $ (1.62) $ (1.74) $ 0.05 $ 0.85 $ 0.12
======= ======== ======== ======== ======= ====== ======
Weighted average common and common
equivalent shares outstanding......... 35,711,862 10,984,103 19,602,520 7,100,092 757,773 757,773 757,773
========== ========== ========== ========= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
April 2, January 1, January 2, December 31, December 31, December 31,
1999 1999 1998 1996 1995 1994
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Working capital.................................... $36,138 $45,107 $ 8,843 $ 340 $ 937 $ 394
Total assets....................................... 92,998 96,010 34,433 3,599 3,146 1,507
Total long-term liabilities........................ -- 6,833 12,215 12 -- --
Convertible preferred stock........................ -- -- 10,040 -- -- --
Total shareholders' equity......................... 71,626 68,959 2,848 996 1,302 656
</TABLE>
(1) AnswerThink completed three purchase acquisitions during 1997 and two during
1998. The results of operations of the acquired companies are included in
AnswerThink's consolidated results of operations from the respective dates of
acquisitions.
(2) Represents charges in connection with accelerated vesting of common stock
upon attainment of certain performance criteria.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
Certain statements in this Form 8-K 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).
OVERVIEW
The Company provides integrated consulting and technology-enabled
solutions focused on the emerging Internet-driven electronic commerce
marketplace. The Company 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.
AnswerThink began operations on April 23, 1997. AnswerThink's primary
activities during its initial stages of operations 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.
Concurrent with this effort, AnswerThink embarked on an aggressive acquisition
strategy that resulted in three acquisitions during 1997 and two acquisitions
during 1998. The Company expects to continue its acquisition strategy. In
February 1999, AnswerThink merged with triSpan, Inc. ("triSpan"). triSpan is an
Internet commerce consulting firm that provides Internet consulting, web
application development and integration services. The merger with triSpan was
accounted for using the pooling-of-interests method of accounting. All
historical consolidated financial statements presented herein have been restated
to include the financial position, results of operations, and cash flows of
triSpan. Accordingly, financial information presented herein prior to
AnswerThink's date of incorporation of April 23, 1997 is solely that of triSpan.
The Company recognizes revenues on contracts as work is performed,
principally on a time and materials basis. For projects billed on a time and
materials basis, the Company recognizes revenue based on the number of hours
worked by consultants at an agreed-upon rate per hour. The Company believes the
financial risk under these types of arrangements is mitigated by the fact that
clients retain the financial risk associated with implementing projects. The
Company also undertakes certain projects, usually short-term, on a fixed-fee or
capped-fee basis for which revenues are recognized on a percentage of completion
method based on project hours worked.
The Company's revenue growth is directly tied to its ability to attract
and retain new consultants to service its increasing client base. The most
significant expense for the Company is the project personnel and related costs
associated with its consultants. The market for skilled consultants is highly
competitive and is characterized by very high demand with a relatively small
pool of qualified personnel. The ability of the Company to manage consultant
utilization, contain payroll costs and control employee turnover costs in light
of these market forces will have a significant impact on its profitability. To
help address these concerns, the Company grants shares of common stock or stock
options to all employees, including those of acquired companies, which generally
vest over four to six years.
3
<PAGE>
ACQUISITIONS
Since its inception, AnswerThink has expanded through acquisitions. In
the future, a key element of the Company's growth strategy will be to pursue
additional acquisitions in order to obtain well-trained, high quality
professionals, new service offerings, additional industry experience, a broader
client base or an expanded geographic presence. All acquisitions completed by
the Company during 1997 and 1998 were accounted for under the purchase method of
accounting. Accordingly, the historical Consolidated Financial Statements of the
Company include the operating results of the acquired businesses from the date
of each respective acquisition.
1997 ACQUISITIONS
On August 1, 1997, the Company acquired Relational Technologies, Inc.
("RTI"), a Georgia-based information technology consulting and Oracle software
implementation company. RTI focuses on the implementation of Oracle
manufacturing, financial and human resources applications. Through the
acquisition of RTI, the Company became an Oracle Business Alliance Member, which
enables the Company to market Oracle applications products to its customers. RTI
was acquired for 1,220,700 shares of common stock issued to RTI's shareholders.
On October 13, 1997, the Company completed its acquisition of The Hackett
Group, an Ohio-based consulting firm specializing in benchmarking and process
transformation. The Hackett Group, through its proprietary "best-practice"
database focuses on the efficiency of such organizational functions as finance,
human resources, IT services and supply chain management. The Company acquired
all of The Hackett Group's outstanding shares from its sole stockholder, Gregory
P. Hackett. The original purchase price was paid in the form of $6.5 million in
cash, a $5.1 million promissory note, and 444,000 shares of common stock. The
note and the shares were subject to certain earn-out provisions. On March 12,
1998, Mr. Hackett and the Company amended the terms of the acquisition to waive
the earn-out provisions.
On November 12, 1997, the Company acquired all the outstanding shares of
Delphi Partners, Inc., ("Delphi"), a New Jersey-based PeopleSoft application
solutions and information technology consulting company. Delphi focuses on the
implementation of PeopleSoft financial, human resources and manufacturing
applications. Through the acquisition of Delphi, the Company became a PeopleSoft
Implementation Partner. The total acquisition consideration paid consisted of
$7.4 million in cash and 560,000 shares of common stock issued to Delphi
shareholders. The sellers of Delphi will also receive up to $2.5 million to be
paid by April 30, 1999 upon the achievement of certain pre-tax profit targets
related to the performance of Delphi during 1998.
1998 ACQUISITIONS
On May 20, 1998, the Company acquired all of the outstanding shares of
Legacy Technology, Inc. ("Legacy"), a Massachusetts-based provider of decision
support and data warehouse solutions to Fortune 1000 companies. The total
consideration consisted of $2.6 million in promissory notes and 248,461 shares
of common stock. The stockholders of Legacy will also receive up to $1.3 million
in additional consideration, half of which will be in the form of cash and half
of which will be in shares of common stock, upon the achievement of certain
revenue and pre-tax profit targets related to the performance of Legacy during
the 12-month period ending April 30, 1999.
On September 30, 1998, the Company acquired all of the outstanding shares
of Infinity Consulting Group, Inc. ("Infinity") for 186,000 shares of the
Company's common stock 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-based corporation
engaged in the business of delivering PeopleSoft application solutions.
MERGER WITH TRISPAN
On February 26, 1999, AnswerThink merged with 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 AnswerThink'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 AnswerThink 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.
4
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW. AnswerThink began operations on April 23, 1997. The operating
results included in the Company's financial statements prior to April 23, 1997
represent only those of triSpan, which are presented as a result of
AnswerThink's merger with triSpan in February 1999. The Company reported net
income of approximately $39,000 in 1996 compared to a $12.4 million net loss in
1997 and a $31.7 million loss in 1998. The loss during 1997 was primarily
attributable to the developmental nature of AnswerThink's business during its
start-up phase and to a $4.0 million charge for in-process research and
development technology recognized in connection with AnswerThink's acquisition
of The Hackett Group. The $31.7 million net loss during 1998 was primarily the
result of a one-time charge of $40.8 million. The charge represented vesting of
3,320,000 shares of common stock that had been issued to members of
AnswerThink's management in connection with its formation. This charge was
non-cash in nature and did not negatively impact shareholders' equity. The
Company believes that such issuances were critical to its ability to attract and
retain qualified personnel during AnswerThink's crucial start-up phase.
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:
<TABLE>
<CAPTION>
For the Year Ended
----------------------------------------------------------------
January 1, 1999 January 2, 1998 December 31, 1996
--------------- --------------- -----------------
(in thousands, except percentage data)
<S> <C> <C> <C> <C> <C> <C>
Net revenue $118,156 100.0% $ 34,500 100.0% $11,493 100.0%
Costs and expenses:
Project personnel and expenses 71,890 60.8% 24,627 71.4% 6,560 57.1%
Selling, general and administrative 38,517 32.6% 16,682 48.3% 4,909 42.7%
Compensation related to vesting of
common shares 40,843 34.6% -- -- -- --
Settlement costs -- -- 1,903 5.5% -- --
In-process research and development
technology -- -- 4,000 11.6% -- --
-------- ----- -------- ----- ------- -----
Total costs and operating expenses 151,250 128.0% 47,212 136.8% 11,469 99.8%
-------- ----- -------- ----- ------- -----
(Loss) income from operations (33,094) (28.0%) (12,712) (36.8%) 24 0.2%
Other income (expense):
Litigation settlement 2,500 2.1% -- -- -- --
Interest income (expense), net (738) (0.6%) 357 1.0% 15 0.1%
-------- ----- -------- ----- ------- -----
Net (loss) income before income taxes (31,332) (26.5%) (12,355) (35.8%) 39 0.3%
Income taxes 325 0.3% -- -- -- --
-------- ----- -------- ----- ------- -----
Net (loss) income $(31,657) (26.8%) $(12,355) (35.8%) $ 39 0.3%
-------- ----- -------- ----- ------- -----
</TABLE>
NET REVENUES. Net revenues increased from $11.5 million in 1996 to $34.5
million in 1997 and $118.2 million in 1998. These increases were attributable to
several factors including (i) the Company's acquisitions during 1997 and 1998,
(ii) an increase in the number of clients served each year, (iii) the sale of
additional projects to existing clients, and (iv) additional service offerings
provided by the Company during 1997 and 1998. In addition to the factors listed
above, the 1996 results included only the operations of triSpan and the 1997
results represented only eight months of activities for AnswerThink during which
time it was primarily in its start-up phase.
PROJECT PERSONNEL AND EXPENSES. Project personnel costs and expenses
consist of salaries and payroll-related expenses for consultants. These costs
increased to $71.9 million in 1998 from $24.6 million in 1997 and $6.6 million
in 1996. The increase from 1997 to 1998 resulted from the Company's 1997 and
1998 acquisitions, the fact that 1998 included a full year of operations for
AnswerThink opposed to only eight months during 1997, as well as the hiring of
additional consultants to support the Company's growth and expanded service
offerings. The number of consultants increased by 357 during 1998 to 741 at
January 1, 1999 from 384 at January 2, 1998. Project personnel and expenses
decreased as a percentage of net revenues to 60.8% during 1998 from 71.4% during
1997. This decrease was due to a decline in the average cost per consultant and
a higher level of employee utilization during 1998 as a result of the Company's
improved sales results and project backlog that was assumed in connection with
the 1997 and 1998 acquisitions.
5
<PAGE>
The increase in project personnel and expenses from $6.6 million in 1996
to $24.6 million in 1997 was a result of hiring additional consultants to
support the Company's growth and expanded service offerings and the fact that
1997 included eight months of operations of AnswerThink and 1996 included only
the operations of triSpan. The number of consultants increased from 85 at
December 31, 1996 to 384 at January 2, 1998. Project personnel and expenses
increased as a percentage of net revenues to 71.4% during 1997 from 57.1% during
1996. This increase was due primarily to salaries incurred during AnswerThink's
start-up phase during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $38.5 million in 1998 compared to $16.7 million
during 1997. Selling, general and administrative expenses as a percentage of net
revenues decreased to 32.6% in 1998 from 48.3% during 1997. This decrease was
attributable to the higher revenue levels during 1998, as well as the Company's
ability to leverage its infrastructure to acquired companies. The overall
increase in selling, general and administrative expenses related to an increase
in salaries and benefits for functional support personnel, increased selling
costs related to higher sales volume and additional amortization expense
associated with the Company's acquisitions. In addition, AnswerThink incurred
higher training and recruiting costs as a result of the increase in the number
of consultants and higher property and facilities costs as it moved from
smaller, temporary offices established during its start-up phase into larger,
permanent offices during late 1997 and during the first half of 1998.
Selling, general and administrative expenses were $16.7 million in 1997
which was 48.3% of net revenues compared to $4.9 million or 42.7% of net
revenues in 1996. This increase was primarily attributable to AnswerThink's
start up activities during 1997, additional support and selling costs related to
higher sales volume as well as amortization expense associated with the
Company's 1997 acquisitions.
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 common 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 common shares outstanding that are subject to performance
criteria for vesting.
SETTLEMENT COSTS. Settlement costs totaled $1.9 million, or 5.5% of net
revenues, in 1997. Settlement costs consisted primarily of (i) payments to
certain key executives and certain other management employees of the Company
relating to the obligations assumed by the Company for compensation earned
during the period from December 1, 1996 to the date of AnswerThink's inception
(the "Dispute Period") by such employees, and (ii) legal fees incurred in
connection with the ensuing litigation.
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. The in-process research
and development technology charge of $4.0 million during 1997 resulted from the
acquisition of The Hackett Group. At the date of acquisition, there were four
benchmark applications that had not met technological feasibility requirements
and did not have any alternative future use and therefore the value of such
applications was charged to operations.
INTEREST INCOME (EXPENSE), NET. Net interest expense totaled $738,000 for
1998 compared to $357,000 of net interest income for 1997. Net interest expense
in 1998 was related primarily to the Company's borrowings under the revolving
credit facilities which were repaid upon the completion of the initial public
offering in June 1998 and triSpan's redeemable subordinated notes which were
outstanding from June 26, 1998 through January 1, 1999, partially offset by
$680,000 of interest income earned during the year primarily from the investment
of proceeds from AnswerThink's initial public offering. Net interest income for
1997 was due to interest income earned from the initial capitalization of
AnswerThink which was placed in short-term investments, partially offset by
$152,000 of interest expense primarily incurred during the last three months of
the year attributable to borrowings under the facility used to fund the
Company's acquisitions of The Hackett Group and Delphi Partners, Inc.
INCOME TAXES. The Company recorded income tax expense in 1998 of
$325,000. Although the Company reported a net loss for financial reporting
purposes in 1998, for tax purposes the Company reported taxable income primarily
as a result of the non-deductibility of the $40.8 million compensation expense
relating to the vesting of shares. The impact of the compensation expense on the
Company's effective tax rate was partially offset by the Company's reduction of
its deferred tax asset valuation allowance from $4.5 million to $200,000. During
1997, the Company established a valuation allowance for the entire deferred tax
asset related to the net operating loss carryforward and purchased research and
development expense as a result of its limited operating history as of that
time.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On May 28, 1998, AnswerThink completed an initial public offering of
its common stock, which resulted in net proceeds to it of $38.5 million. At
January 1, 1999, the Company had $30.0 million of cash and cash equivalents
compared to $3.3 million at January 2, 1998. Prior to AnswerThink's initial
public offering in May 1998, its primary source of liquidity had been its
initial capitalization, operating cash flows and borrowings under its revolving
credit facility. The Company has a revolving credit facility with BankBoston
which allows for up to $20.0 million of borrowings. The credit facility is
unsecured and contains certain restrictive covenants. There were no borrowings
under this credit facility as of January 1, 1999.
Net cash provided by operating activities was $1.7 million for the year
ended January 1, 1999 compared to $10.7 million used during 1997. During the
year ended January 1, 1999, 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
$15.9 million increase in accounts receivable and unbilled revenue. During 1997,
net cash used in operating activities was primarily attributable to the
operating loss of $12.4 million.
Net cash used in investing activities was $4.4 million for the year ended
January 1, 1999 compared to $16.0 million used during 1997. The use of cash in
1998 was attributable to $2.4 million of purchases of property and equipment,
$1.3 million used in the acquisition of Infinity and a net increase in
short-term investments of $1 million. During 1997, the use of cash was
attributable to $12.7 million for the acquisition of The Hackett Group, Inc. and
Delphi, and $3.2 million to purchase computer hardware and software and
telecommunications equipment.
Net cash provided by financing activities was $29.3 million for the year
ended January 1, 1999 compared to $29.8 million during 1997. During the year
ended January 1, 1999, $38.6 million of cash was provided from the issuance of
common stock primarily from AnswerThink's initial public offering and $1.1
million was provided from the issuance of convertible preferred stock. triSpan
also issued redeemable subordinated notes with detachable warrants in the amount
of $8 million. The Company used the proceeds from AnswerThink's initial public
offering to repay $6.5 million in notes payable and to repay all outstanding
amounts under the revolving credit facility with BankBoston. During 1997, the
primary source of cash was $21.0 million raised through the issuance of
convertible preferred stock and $8.7 million of borrowings under the Company's
credit facilities.
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 capital 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 their criticality to the Company's operations. Its
mission critical components, which include Oracle Financials, Personal, 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 targeted April 30, 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 to December 31, 1999.
However there can be no assurances that all required tests and updates will be
completed by that date.
7
<PAGE>
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 their 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 projects. 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 year ended December 31, 1998 was related to assisting clients assess Year
2000 readiness and in 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 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 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.
8
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements of AnswerThink Consulting Group, Inc.
Reports of Independent Certified Public Accountants 10
Consolidated Balance Sheets as of January 1, 1999 and January 2, 1998 12
Consolidated Statements of Operations for the Years Ended January 1, 1999,
January 2, 1998 and December 31, 1996 13
Consolidated Statements of Shareholders' Equity for the Years Ended January 1, 1999,
January 2, 1998 and December 31, 1996 14
Consolidated Statements of Cash Flows for the Years Ended January 1, 1999,
January 2, 1998 and December 31, 1996 15
Notes to Consolidated Financial Statements 16
</TABLE>
9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of AnswerThink Consulting Group, Inc.
Miami, Florida
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, shareholders' equity, and cash flows present fairly, in all
material respects, the financial position of AnswerThink Consulting Group, Inc.
(the "Company") at January 1, 1999 and January 2, 1998, and the results of its
operations and its cash flows for the two years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of triSpan, Inc. on
February 26, 1999 in a transaction accounted for as a pooling-of-interests, as
described in Note 2 to the consolidated financial statements. We did not audit
the financial statements of triSpan, Inc. which statements reflect total assets
of $6,945,676 and $5,783,428 as of December 31, 1998 and December 31, 1997,
respectively, and total revenues of $15,453,296 and $19,651,574 for the two
years then ended. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for triSpan, Inc., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 26, 1999, except for
Note 16, as to which the
date is June 24, 1999
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To triSpan, Inc. and triSpan Software, Inc.:
We have audited the combined balance sheets of triSpan, Inc. (a Pennsylvania S
Corporation) and triSpan Software, Inc. (a Pennsylvania S Corporation) as of
December 31, 1998 and 1997, and the related combined statements of operations,
shareholders' equity and cash flows for the three years in the period ended
December 31, 1998 (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of triSpan, Inc. and
triSpan Software, Inc. as of December 31, 1998 and 1997, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/S/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 26, 1999
11
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, January 2,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,965,976 $ 3,277,121
Short-term investments 1,000,000 --
Accounts receivable and unbilled revenue, net 32,943,585 14,249,788
Prepaid expenses and other current assets 1,415,321 646,150
------------ ------------
Total current assets 65,324,882 18,173,059
Property and equipment, net 4,046,570 3,708,931
Other assets 3,052,384 607,473
Goodwill, net 23,585,946 11,943,610
------------ ------------
Total assets $ 96,009,782 $ 34,433,073
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,869,684 $ 1,685,929
Accrued expenses and other liabilities 13,894,848 6,373,421
Income taxes payable 1,059,474 --
Current portion of borrowings under revolving credit facility -- 1,250,000
Current portion of notes payable 2,393,611 20,764
------------ ------------
Total current liabilities 20,217,617 9,330,114
------------ ------------
Borrowings under revolving credit facility -- 8,150,000
Notes payable 2,324,329 4,064,894
Redeemable subordinated notes 4,508,811 --
------------ ------------
Total liabilities 27,050,757 21,545,008
------------ ------------
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: 34,228,428 shares at January 1, 1999; 24,136,365 shares at
January 2, 1998 34,229 24,137
Additional paid-in capital 113,391,771 15,363,853
Unearned compensation (1,390,630) (1,121,136)
Accumulated deficit (43,076,345) (11,418,985)
------------ ------------
Total shareholders' equity 68,959,025 2,847,869
------------ ------------
Total liabilities and shareholders' equity $ 96,009,782 $ 34,433,073
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
12
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------------------------
January 1, 1999 January 2, 1998 December 31, 1996
--------------- --------------- -----------------
<S> <C> <C> <C>
Net revenues $ 118,155,676 $ 34,499,746 $ 11,492,825
Costs and expenses:
Project personnel and expenses 71,889,880 24,626,831 6,559,278
Selling, general and administrative 38,515,933 16,681,885 4,909,191
Compensation related to vesting of common shares 40,843,400 -- --
Settlement costs -- 1,902,608 --
In-process research and development technology -- 4,000,000 --
------------- ------------- -----------
Total costs and operating expenses 151,249,213 47,211,324 11,468,469
------------- ------------- -----------
Income (loss) from operations (33,093,537) (12,711,578) 24,356
Other income (expense):
Litigation settlement 2,500,000 -- --
Interest income 679,018 508,470 19,898
Interest expense (1,418,021) (151,668) (5,280)
------------- ------------- -----------
Income (loss) before income taxes (31,332,540) (12,354,776) 38,974
Income taxes 324,820 -- --
------------- ------------- -----------
Net income (loss) $ (31,657,360) $ (12,354,776) $ 38,974
============= ============= ===========
Basic and diluted net income (loss) per common share $ (1.62) $ (1.74) $ 0.05
============= ============= ===========
Weighted average common shares outstanding 19,602,520 7,100,092 757,773
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
13
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Unearned Accumulated Shareholders'
Shares Amount Capital Compensation Deficit Equity
------ ------ ------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 757,773 $ 758 $ 59,242 $ -- $ 896,817 $ 956,817
Net income -- -- -- -- 38,974 38,974
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1996 757,773 758 59,242 -- 935,791 995,791
Issuance of 13,734,850 shares of common stock 13,734,850 13,735 757,879 (702,447) -- 69,167
Conversion of 1,826,634 shares of convertible
preferred stock to common stock 7,306,536 7,307 10,952,497 -- -- 10,959,804
Issuance of 2,337,206 shares of common stock
for business acquisitions 2,337,206 2,337 1,858,903 -- -- 1,861,240
Deferred compensation related to stock
appreciation right conversion -- -- 1,735,332 (464,833) -- 1,270,499
Amortization of deferred compensation expense -- -- -- 46,144 -- 46,144
Net loss -- -- -- -- (12,354,776) (12,354,776)
---------- ------- ------------ ----------- ------------ ------------
Balance at January 2, 1998 24,136,365 $24,137 $ 15,363,853 $(1,121,136) $(11,418,985) $ 2,847,869
Issuance of 3,387,100 shares of common stock 3,387,100 3,388 38,643,737 -- -- 38,647,125
Purchase and retirement of stock (889,602) (890) (3,247,903) -- -- (3,248,793)
Vesting of shares -- -- 42,210,920 (1,045,440) -- 41,165,480
Conversion of 1,790,026 shares of convertible
preferred stock to common stock 7,160,104 7,160 11,132,675 -- -- 11,139,835
Issuance of 434,461 shares of common stock for
business acquisitions 434,461 434 6,340,816 -- -- 6,341,250
Issuance of warrants in connection with
redeemable subordinated debt -- -- 3,760,423 -- -- 3,760,423
Amortization of deferred compensation expense,
net of forfeitures -- -- (812,750) 775,946 -- (36,804)
Net loss -- -- -- -- (31,657,360) (31,657,360)
---------- ------- ------------ ----------- ------------ ------------
Balance at January 1, 1999 34,228,428 $34,229 $113,391,771 $(1,390,630) $(43,076,345) $ 68,959,025
========== ======= ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
14
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
---------------------------------------------------------
January 1, 1999 January 2, 1998 December 31, 1996
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(31,657,360) $ (12,354,776) $ 38,974
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Compensation charge related to vesting of shares 40,843,400 -- --
In-process research and development technology -- 4,000,000 --
Depreciation and amortization 3,718,674 1,469,247 547,160
Deferred income taxes (960,994) -- --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable and unbilled revenue (15,862,208) (5,920,776) (229,548)
Increase in prepaid expenses and other current and non-current
assets (1,156,839) (930,119) (68,112)
Increase in accounts payable 460,618 804,488 28,623
Increase (decrease) in accrued expenses and other liabilities 5,284,449 2,195,133 (85,898)
Increase in income taxes payable 1,059,474 -- --
------------ -------------- ------------
Net cash provided by (used in) operating activities 1,729,214 (10,736,803) 231,199
Cash flows from investing activities:
Purchase of property and equipment (2,409,417) (3,241,683) (463,120)
Sale of property and equipment under sale/leaseback arrangement 456,040 -- --
Purchases of short-term investments (9,650,000) -- --
Redemption, sales and maturities of short-term investments 8,650,000 -- --
Cash used in acquisition of businesses, net of cash acquired (1,258,280) (12,728,991) --
Other, net (142,920) -- --
------------ -------------- ------------
Net cash used in investing activities (4,354,577) (15,970,674) (463,120)
Cash flows from financing activities:
Proceeds from issuance of common stock 38,647,125 76,748 --
Purchase and retirement of common stock (3,248,793) -- --
Proceeds from issuance of convertible preferred stock 1,099,639 21,000,000 --
Proceeds from revolving credit facility 3,000,000 8,700,000 --
Repayment of revolving credit facility (12,400,000) -- (50,000)
Proceeds from notes payable 750,000 27,333 46,614
Repayment of notes payable (6,533,753) (26,635) (11,654)
Proceeds from redeemable subordinated notes 8,000,000 -- --
------------ -------------- ------------
Net cash provided by (used in) financing activities 29,314,218 29,777,446 (15,040)
------------ -------------- ------------
Net increase (decrease) in cash and cash equivalents 26,688,855 3,069,969 (246,961)
Cash and cash equivalents at beginning of year 3,277,121 207,152 454,113
------------ -------------- ------------
Cash and cash equivalents at end of year $ 29,965,976 $ 3,277,121 $ 207,152
============ ============== ============
Supplemental disclosure of cash flows information:
Cash paid for interest $ 1,075,168 $ 26,771 $ 5,280
Cash paid for income taxes $ 231,119 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
15
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business
AnswerThink Consulting Group, Inc. and its subsidiaries (the "Company" or
"AnswerThink") provide integrated consulting and technology enabled solutions
focused on the emerging Internet-driven electronic commerce marketplace. The
Company 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.
Principles of Consolidation and Capitalization
The Consolidated Financial Statements include the accounts of AnswerThink
Consulting Group, Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation. In February 1999,
AnswerThink 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. Accordingly, financial information presented herein prior to
AnswerThink's date of incorporation of April 23, 1997 is solely that of triSpan
(See Note 2).
On April 23, 1997, AnswerThink and its initial investors (the "Initial
Investors") entered into a stock purchase agreement (the "Stock Purchase
Agreement") pursuant to which AnswerThink sold 3,400,000 shares to the Initial
Investors of its Class A Convertible Preferred Stock (the "Class A Preferred
Stock"). Such shares of Class A Preferred Stock were sold at $6.00 per share,
for total proceeds of $20.4 million. In May 1997, certain senior executives of
AnswerThink purchased an additional 100,000 shares of Class A Preferred Stock at
$6.00 per share. Each share of Class A Preferred Stock is convertible into four
shares of common stock. Pursuant to the Stock Purchase Agreement, certain of the
Initial Investors had the option to purchase an additional 100,000 shares of
Class A Preferred Stock at $6.00 per share which shares were purchased on
February 24, 1998.
All preferred stock issued by AnswerThink in connection with its formation
was converted, pursuant to the original terms, to shares of common stock prior
to AnswerThink's initial public offering.
In May 1998, AnswerThink completed its initial public offering (the
"Offering") whereby it sold 3,324,500 shares of common stock. Net proceeds,
after expenses, aggregated $38.5 million.
Fiscal Year
The Company's fiscal year ends on the Friday closest to December 31. The
fiscal year for the Company will generally consist of a 52-week period. Fiscal
years 1998 and 1997 ended on January 1, 1999 and January 2, 1998, respectively.
Fiscal year 1996 ended on December 31, 1996. References to a year in these
financial statements relate to a fiscal year rather than a calendar year. The
fiscal year end of triSpan, which was December 31, has been conformed to that of
the Company starting in fiscal year 1997.
Cash and Cash Equivalents
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
16
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Short-Term Investments
Short-term investments, consisting of interest bearing, investment-grade
securities, have been classified as available-for-sale securities and are
recorded at fair market value. Any unrealized holding gains or losses on
available-for-sale securities are reported as a separate component of
shareholders' equity until these gains or losses are realized. The difference
between fair market value and cost was not material at January 1, 1999. Realized
gains or losses from sales of available-for-sale securities were not material
for any period presented. For the purpose of determining realized gains and
losses, the cost of securities sold is based upon specific identification.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets ranging from two to five years. Expenditures for
repairs and maintenance are charged to expense as incurred. Expenditures for
betterments and major improvements are capitalized. The carrying amount of
assets sold or retired and related accumulated depreciation are removed from the
accounts in the year of disposal and any resulting gains or losses are included
in the statement of operations.
Intangible Assets
Goodwill, related to business acquisitions, is being amortized over 15
years on a straight-line basis. The Company recorded amortization expense of
$1.3 million and $138,000 for the years ended January 1, 1999 and January 2,
1998, respectively. The carrying value of goodwill is subject to periodic review
of realizability.
Revenue Recognition
The Company recognizes revenues as work is performed on a contract by
contract basis, adjusted for any anticipated losses in the period in which any
such losses are identified. To date, the Company has not experienced any
material losses. Out-of-pocket expenses are reimbursed by clients and are offset
against expenses incurred.
Income Taxes
The Company records income taxes using the liability method. Under this
method, the Company records deferred taxes based on temporary taxable and
deductible differences between the tax bases of the Company's assets and
liabilities and their financial reporting bases. A valuation allowance is
established when it is more likely than not that some or all of the deferred tax
assets will not be realized. Prior to its merger with AnswerThink, triSpan was
taxed as an S Corporation and no income tax was provided as the income or loss
was included in its shareholders' income tax returns.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. With regard to common shares issued to employees under employment
agreements, the calculation includes only the vested portion of such shares.
Accordingly, common shares outstanding for the basic net income (loss) per share
computation is significantly lower than actual shares issued and outstanding.
Income (loss) per share assuming dilution is computed by dividing the net
income (loss) by the weighed average number of common shares outstanding,
increased by the assumed conversion of other potentially dilutive securities
during the period. Potentially dilutive shares were excluded from the diluted
loss per share calculation for the years ended January 1, 1999 and January 2,
1998 because their effects would have been anti-dilutive to the loss incurred by
the Company. Therefore, the amounts reported for basic and diluted net loss per
share were the same for those years. Potentially dilutive shares which were not
included in the diluted loss per share calculations as of January 1, 1999 and
January 2, 1998 include 9,508,192 shares and 8,901,652 shares, respectively, of
common stock issued under employment agreements and 8,928,404 shares for the
period ended January 2, 1998 from the assumed conversion of the convertible
preferred stock. There were no potentially dilutive shares for the year ended
December 31, 1996.
17
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Concentration of Credit Risk
The Company provides its services primarily to Fortune 1000 companies and
other sophisticated buyers of IT consulting services. The Company performs
ongoing credit evaluations of its major customers and maintains reserves for
potential credit losses. For the years ended January 2, 1998 and December 31,
1996, three and two customers accounted for approximately 28% and 26% of net
revenues, respectively. No single customer accounted for 5% or more of net
revenues for the year ended January 1, 1999.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
On January 1, 1999, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The new rules establish
revised standards for public companies relating to the reporting of financial
and descriptive information about their operating segments in financial
statements. Since AnswerThink only has one business segment, which is providing
consulting services to its clients, the adoption of SFAS 131 did not have an
effect on the Company's financial statements.
Reclassifications
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
2. Merger With triSpan
On February 26, 1999, the Company exchanged 689,880 shares of its common
stock for all the outstanding shares of common 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. The financial position, results of operations and cash flows
of the Company prior to April 23, 1997 are solely those of triSpan.
Separate results of AnswerThink and triSpan for the years prior to the
consummation of the merger are as follows:
<TABLE>
<CAPTION>
AnswerThink TriSpan Combined
----------- ------- --------
<S> <C> <C> <C>
Year ended January 1, 1999
Total revenue $102,702,380 $15,453,296 $118,155,676
Net loss $(28,925,688) $(2,731,672) $(31,657,360)
Year ended January 2, 1998
Total revenue $ 14,848,172 $19,651,574 $ 34,499,746
Net loss $(12,090,452) $ (264,324) $(12,354,776)
Year ended December 31, 1996
Total revenue $ -- $11,492,825 $ 11,492,825
Net income $ -- $ 38,974 $ 38,974
</TABLE>
18
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Acquisitions and Investing Activities
On August 1, 1997, the Company acquired Relational Technologies, Inc.,
("RTI") an Atlanta, Georgia, based information technology consulting and Oracle
software implementation company for 1,220,700 shares of common stock issued to
RTI's stockholders valued at approximately $610,000.
On October 13, 1997, the Company acquired all of the outstanding shares of
The Hackett Group, Inc. ("Hackett"), an Ohio based consulting firm specializing
in benchmarking and process transformation primarily to Fortune 500 companies.
The original purchase price payable to the sole stockholder of Hackett consisted
of approximately $6.5 million in cash, a $5.1 million promissory note and
444,000 shares of common stock valued at approximately $355,000. The note and
the shares were subject to certain earn-out provisions. The note was payable in
three separate installments. As of January 2, 1998, the Company had recorded
$3.8 million bearing interest at a rate of 12% per annum, for additional
purchase consideration under the note due to the seller on March 31, 1998 based
on achievement of earnings targets for 1997. On March 12, 1998, the Company
entered into an amendment with the sole stockholder of Hackett to waive the
remaining earn-out provisions and to extend the due date on the $3.8 million
note obligation owed to such stockholder from March 31, 1998 to the earlier of
the completion of a public offering of shares by the Company or January 15,
1999. In connection with such amendment, the Company recorded additional
goodwill amounting to $3.1 million comprised of notes payable to shareholders
totaling $1.4 million, accrued expenses and other liabilities of $338,000 and
shareholders' equity of $1.3 million. The $3.8 million note was paid-off in June
1998 upon the completion of the Company's initial public offering. The second
installment obligation of $497,000 is due March 31, 1999, and the third
installment obligation of $896,000 is due March 31, 2000. The obligations for
the second and third installment payments bear interest at a rate of 8% per
annum.
A significant portion of the purchase price for the Hackett acquisition was
allocated to in-process research and development technology, resulting in a $4.0
million charge to the Company's operations in the quarter ended January 2, 1998.
These charges were valued using a risk adjusted cash flow model, under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted for risks and
uncertainties, including the stage of development of the technology, viability
of target markets, rapidly changing nature of the industry and other factors.
On November 12, 1997, the Company acquired all of the outstanding shares of
Delphi Partners, Inc. ("Delphi") for approximately $7.4 million in cash plus
560,000 shares of the Company's common stock valued at $840,000. The sellers are
also entitled to contingent consideration of up to a maximum of $2.5 million to
be paid by April 30, 1999 based on the achievement of certain pre-tax profit
targets as defined. Delphi is an information systems consulting services firm
focused primarily on applications developed by PeopleSoft, Inc.
On May 20, 1998, the Company acquired all the outstanding shares of Legacy
Technology, Inc. ("Legacy") for $2.6 million in promissory notes, which were
paid-off 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.
On September 30, 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.
The results of operations of the acquired companies are included in the
Company's consolidated results of operations from the respective dates of
acquisition. Contingent consideration, to the extent earned, is recorded as
additional goodwill.
19
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The aggregate consideration for the above acquisitions treated as purchases
has been allocated to the assets and liabilities acquired based upon their
respective fair values. The components of the purchase price allocation for the
1998 and 1997 acquisitions, including contingent consideration earned, fees and
expenses, are as follows:
<TABLE>
<CAPTION>
1998 1997
Acquisitions Acquisitions
------------ ------------
<S> <C> <C>
Fair value of net assets acquired (primarily accounts receivable)
excluding cash acquired $ 574,181 $ 1,920,602
Goodwill 9,607,849 15,154,709
In-process research and development technology -- 4,000,000
Common stock issued (6,341,250) (3,203,320)
Note payable-earned additional purchase consideration -- (3,750,000)
Notes payable issued to shareholders (2,582,500) (1,393,000)
---------- ------------
Cash used in acquisitions of businesses, net of cash acquired $1,258,280 $12,728,991
========== ===========
</TABLE>
The following information presents the unaudited pro forma condensed
results of operations for the years ended January 1, 1999 and January 2, 1998 as
if the Company's acquisitions of RTI, Hackett, Delphi, Legacy and Infinity had
occurred on January 1, 1997. For fiscal year 1998, pro forma adjustments include
additional amortization expense and interest expense of $314,000 and $72,000,
respectively. The 1997 fiscal period includes $1.3 million and $1.0 million of
additional amortization expense and interest expense, 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 1,
1997.
<TABLE>
<CAPTION>
Pro Forma Results of Operations (unaudited) Year Ended
--------------------------------
January 1, 1999 January 2, 1998
--------------- ---------------
<S> <C> <C>
Net revenues $ 126,809,444 $ 65,447,395
Net loss $ (30,838,356) $(11,237,730)
Net loss per common share--basic and diluted $ (1.55) $ (1.24)
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
January 1, January 2,
1999 1998
---- ----
Equipment $ 5,264,544 $ 3,902,410
Furniture and fixtures 833,560 770,795
Leasehold improvements 791,902 209,870
----------- -----------
6,890,006 4,883,075
Less accumulated depreciation (2,843,436) (1,174,144)
----------- -----------
$ 4,046,570 $ 3,708,931
=========== ===========
Depreciation expense for the years ended January 1, 1999, January 2, 1998
and December 31, 1996 was $1,739,265, $730,004 and $216,367, respectively.
20
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following:
January 1, January 2,
1999 1998
---------- ----------
Accrued compensation and benefits $ 9,229,747 $ 4,247,827
Deferred revenue 1,817,699 590,171
Employee stock purchase plan payable 1,372,126 --
Other accrued expenses 1,475,276 1,535,423
----------- -----------
$13,894,848 $ 6,373,421
=========== ===========
6. Borrowings Under Revolving Credit Facilities
The Company has a $20 million revolving credit facility (the "Credit
Facility") which expires in November 7, 2000. Borrowings under this Credit
Facility bear interest at varying rates, principally LIBOR plus 1.25-2.25%. The
Company's obligation under the Credit Facility is unsecured. The total amount
outstanding as of January 2, 1998 was $8,150,000 with a weighted average
interest rate of 8.5%. No borrowings were outstanding under this Credit Facility
as of January 1, 1999. The Credit Facility contains, among other things, the
maintenance of certain financial covenants such as a minimum level of tangible
net worth, maximum leverage ratio, and minimum ratio of earnings to interest
expense.
7. Notes Payable
Notes payable consists of notes payable to shareholders and term notes
payable to banks as follows:
January 1, January 2,
1999 1998
---- ----
Notes payable to shareholders $ 4,093,000 $ 4,050,000
Term notes payable to banks 624,940 35,658
----------- -----------
4,717,940 4,085,658
Less current portion (2,393,611) (20,764)
----------- -----------
Long-term portion $ 2,324,329 $ 4,064,894
=========== ===========
The shareholder notes are payable in March 1999 and 2000 and bear interest
ranging from 0% to 8% per annum. The term notes, issued by triSpan, are payable
in monthly installments through March 2002 and bear interest ranging from 7.4%
to 9.95% per annum. The shareholder and term notes are unsecured.
At January 1, 1999, notes payable mature in the following fiscal years:
1999 $2,393,611
2000 2,089,954
2001 187,500
2002 46,875
----------
$4,717,940
==========
21
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Redeemable Subordinated Notes
On June 26, 1998, triSpan received $8 million from the issuance of
Redeemable Subordinated Notes ("Subordinated Notes"). The Subordinated Notes
bear interest at 8%, which is due quarterly. The principal on the Subordinated
Notes is due on June 26, 2003.
In connection with the issuance of the Subordinated Notes, triSpan also
issued detachable warrants to purchase 338,011 shares of common stock with an
exercise price of $3.86 per share to the holders of the Subordinated Notes. The
warrants expire on June 26, 2005. Using the Black-Scholes model, the estimated
fair value of the warrants was calculated at $3,760,423 and was recorded as a
reduction in the carrying amount of the Subordinated Notes, with a corresponding
increase in shareholders' equity. The discount on the Subordinated Notes is
being recorded as additional interest expense over the term of the Subordinated
Notes. During 1998, the Company recorded $242,260 of interest expense relating
to the amortization of the discount. The Subordinated Notes were repaid when
triSpan and AnswerThink merged resulting in an extraordinary loss on early
extinguishment of debt, net of taxes, of $2,112,591.
9. Lease Commitments
The Company has operating lease agreements for its premises and certain
computer equipment that expire on various dates through 2004. The operating
lease agreements for premises are subject to escalation. Rent expense for the
years ended January 1, 1999, January 2, 1998 and December 31, 1996, was
approximately $2,764,000, $929,000 and $554,000, respectively. The Company
recorded a deferred rent liability of approximately $100,000 and $101,000 at
January 1, 1999 and January 2, 1998, respectively, relating to annual rent
escalations.
Future minimum lease commitments under noncancelable operating leases
having a remaining term in excess of one year at January 1, 1999, are as
follows:
1999 $ 2,843,759
2000 2,154,215
2001 1,538,948
2002 1,518,439
2003 and thereafter 905,525
-----------
Total minimum lease payments $ 8,960,886
===========
10. Income Taxes
The components of the provision for income taxes are as follows:
Year Ended
-------------------------------------------
January 1, January 2, December 31,
1999 1998 1996
---------- ---------- ------------
Current tax expense
Federal $ 1,021,700 $ -- $ --
State 264,114 -- --
----------- ---- ----
1,285,814 -- --
Deferred tax benefit
Federal (934,614) -- --
State (26,380) -- --
----------- -- --
(960,994) -- --
----------- ---- ----
Income taxes $ 324,820 $ -- $ --
=========== ==== ====
22
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the Federal statutory tax rate with the effective tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
January 1, January 2, December 31,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate (35.0)% (35.0)% --
State income taxes, net of Federal income tax benefit 0.5 % -- --
Non cash compensation 49.4 % -- --
Valuation allowance (14.7)% 35.0 % --
Other 0.8 % -- --
------ ----- ----
Effective rate 1.0 % -- --
------ ----- ----
</TABLE>
The components of the net deferred income tax asset are as follows:
January 1, January 2,
1999 1998
---- ----
Deferred income tax assets:
Purchased research and development $ 1,519,455 $ 1,629,973
Net operating loss carryforward -- 3,134,450
Allowance for doubtful accounts 67,235 --
----------- -----------
1,586,690 4,764,423
Valuation allowance (202,489) (4,549,212)
----------- -----------
1,384,201 215,211
Deferred income tax liabilities:
Depreciation and amortization (184,489) (215,211)
Other items (238,718) --
----------- -----------
(423,207) (215,211)
----------- -----------
Net deferred income tax asset $ 960,994 $ --
=========== ===========
A deferred tax asset of $961,000 is included in other assets in the
accompanying consolidated balance sheet at January 1, 1999.
As of January 1, 1999, the Company had established a valuation allowance in
the amount of $202,000 to reduce deferred income tax assets related to state
income tax loss carryforwards. As of January 2, 1998, the Company had a
valuation reserve of $4.5 million which represented the entire amount of the
deferred tax asset attributable to the Company's net operating loss
carryforward. This allowance was established in light of the Company's limited
operating history as of that time.
11. Shareholders' Equity
Common Stock Subject to Vesting Requirements
As of January 1, 1999 the Company had outstanding common stock totaling
9,349,950 that are subject to certain vesting criteria. AnswerThink sold the
shares to its employees at nominal purchase prices per share in connection with
AnswerThink's formation in 1997. Each employee executed an employment agreement
or a stock agreement with the Company providing for, among other things, the
manner in which the shares will vest. In general, a certain percentage of shares
will begin to vest upon the second anniversary from the purchase date of such
shares and will become fully vested either by the fourth or sixth anniversary
from the purchase date so long as the holder remains an employee.
23
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition, certain of AnswerThink's employees and one director purchased
3,520,000 shares of common stock that were subject to performance vesting
criteria in connection with AnswerThink's formation in 1997. The Company
recorded a charge of approximately $40.8 million during the first quarter of
1998 relating to the accelerated vesting of these shares pursuant to agreements
dated as of March 27, 1998 by and among the relevant stockholders, AnswerThink
and its Board of Directors. Pursuant to terms of the agreement, vesting was
accelerated for 3,320,000 shares in the first quarter of 1998 based on the
AnswerThink's results to date and the expectation of completion of AnswerThink's
initial public offering during the second quarter of 1998. The remaining 200,000
shares were cancelled as part of the agreements. There are no additional shares
outstanding that are subject to performance criteria for vesting.
Shares of common stock subject to vesting requirements were issued in
connection with the acquisitions of RTI, Hackett, and Delphi to the employees of
those companies. Employees of the acquired companies vest in these shares over
periods up to five years. The market value of the stock at the time of grant was
recorded as unearned compensation in a separate component of shareholders'
equity and amortized as compensation expense ratably over the vesting periods.
At January 1, 1999 and January 2, 1998, 920,350 shares and 931,650 shares,
respectively, of such unvested stock were issued and outstanding.
Common Stock Redemption Agreement
During May 1998, triSpan entered into a Stock Redemption Agreement (the
"Redemption Agreement") with one of triSpan's shareholders (the "Seller").
triSpan redeemed 378,886 shares of its common stock for $2.6 million. In
addition, the Seller received a contingent payment of $604,000 in accordance
with the terms of the Redemption Agreement, representing a portion of the
litigation settlement (see Note 14). The total amount paid to the Seller of $3.2
million has been recorded by the Company as a purchase and retirement of common
stock.
Distribution in Lieu of Bonus
During 1998, triSpan paid distributions in lieu of bonuses totalling $1.1
million which have been reflected in selling, general and administrative
expenses in the consolidated financial statements.
Stock Plans
Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan
to provide substantially all employees who have completed three months of
service as of the beginning of an offering period, as defined, an opportunity to
purchase shares of its common stock through payroll deductions, up to 10% of
eligible compensation. Participant account balances are used to purchase shares
of stock at the lesser of 85 percent of the fair market value of shares on the
first trading day of the offering period or on the last trading day of such
offering period. The aggregate fair market value, determined as of the first
trading date of the offering period, as to shares purchased by an employee may
not exceed $25,000 annually. The Employee Stock Purchase Plan expires on July 1,
2008. A total of 750,000 shares are available for purchase under the plan. As of
January 1, 1999, 80,493 shares of the Company's common stock were due to be
issued under the plan.
On June 25, 1998, triSpan adopted the 1998 Nonqualified Stock Option Plan
(the "1998 Plan") for triSpan employees. The option term is ten years. triSpan
is authorized to grant options for up to 171,000 shares of common stock under
the 1998 plan. The exercise prices and vesting terms are determined by the Board
of Directors; however, the exercise price may not be less than the fair market
value of the common stock at the option grant date, as determined by the Board
of Directors.
On May 5, 1998, the Company adopted a stock option plan (the "Stock Option
Plan") under which certain employees may be granted the right to purchase shares
of common stock at not less than 100% of the fair market value on the date of
grant. The maximum option term is ten years. The Company has reserved an
aggregate of 10,000,000 shares of common stock for issuance under the plan.
Stock options may be exercised only to the extent they have vested in accordance
with provisions determined by the Board of Directors.
triSpan maintained a Stock Appreciation Right Plan (the "SAR Plan") for
triSpan employees until December 30, 1997. The total value of stock appreciation
rights granted through December 30, 1997 was $1,532,000 based upon the value
established under an annual revenue growth formula. Based on vesting schedules,
the Company recorded cumulative deferred compensation expense under the SAR Plan
of $1,151,000 through January 2, 1998.
Effective December 30, 1997, triSpan terminated the SAR Plan and replaced
it with the 1997 Nonqualified Stock Option Plan ("1997 Plan"). triSpan is
authorized to grant options for up to 622,000 shares of common stock under the
1997 Plan. The option term is ten years. In consideration for the obligations
due to employees for stock appreciation rights surrendered, triSpan issued
options to purchase 132,894 shares of common stock at an exercise price and
vesting terms identical to the surrendered rights. The
24
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$1,151,000 liability recorded for the SAR Plan through December 30, 1997 was
reclassified to additional paid-in capital. The difference between the
$1,151,000 SAR Plan liability and the $1,735,000 fair market value of the
options issued was recorded as additional deferred compensation in the amount of
$465,000 for unvested options and compensation expense in the amount of $119,000
for vested options.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
option plans. Accordingly, no compensation expense has been recognized other
than in connection with the options issued under the 1997 Plan to settle the SAR
Plan termination. Under SFAS No. 123, compensation cost for the Company's
stock-based compensation plans would be determined based on the fair value at
the grant dates for awards under those plans. Had the Company adopted SFAS No.
123 in accounting for fixed stock option plans, the Company's consolidated net
loss and net loss per share for the year ended January 1, 1999 would have been
reduced to the pro forma amounts indicated as follows:
Year Ended
January 1, 1999
---------------
Net loss
As reported $ 31,657,360
Pro forma $ 33,350,486
Basic and diluted net loss per common share
As reported $ 1.62
Pro forma $ 1.70
The pro forma net loss for the year ended January 2, 1998 reflecting
compensation cost for options issued in 1997 was not materially different than
the net loss as reported.
The following assumptions were used by the Company to determine the fair
value of stock options granted using the Black-Scholes options-pricing model:
<TABLE>
<CAPTION>
Year Ended January 1, 1999 Year Ended January 2, 1998
------------------------------ ----------------------------
Stock Option 1998 Plan and Stock Option
Plan 1997 Plan Plan 1997 Plan
------------ ------------- --------------- ---------
<S> <C> <C> <C> <C>
Expected volatility 65.0% 0.0% 0.0% 0.0%
Average expected option life 4 years 5 years 10 years 5 years
Risk-free rate 6.0% 4.0% - 5.8% 6.0% 5.8%
Dividend yield 0.0% 0.0% 0.0% 0.0%
</TABLE>
Stock option activity under the Company's stock option plan is summarized
as follows:
<TABLE>
<CAPTION>
Year Ended January 1, 1999 Year Ended January 2, 1998
-------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 885,067 $ 3.78 -- $ --
Granted 2,486,519 13.46 908,667 3.75
Exercised -- -- -- --
Canceled (425,324) 7.39 (23,600) 2.50
--------- -------- ------- ------
Outstanding at end of year 2,946,262 $ 11.43 885,067 $ 3.78
========= ======== ======= ======
Weighted average grant date fair value of options
granted during the year $ 7.14 $ .18
--------- -------
</TABLE>
No options were exercisable as of January 1, 1999.
25
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about the Company's stock
options outstanding at January 1, 1999:
Options Outstanding
-------------------
Weighted Average
Number Remaining Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price
------------------------ ----------- ---------------- --------------
$ 2.50 to $ 2.88 822,309 8.5 $ 2.51
$ 4.66 17,088 6.0 4.66
$ 6.00 to $ 8.00 495,785 8.8 7.03
$ 9.97 to $12.00 373,705 9.2 11.90
$17.25 to $17.56 307,679 9.6 17.44
$18.06 to $19.38 690,946 9.4 18.38
$21.50 to $21.63 166,980 9.4 21.56
$26.88 71,770 10.0 26.88
--------- ---- -----------
2,946,262 9.0 $ 11.43
========= ==== ===========
12. Convertible Preferred Stock
Holders of Class A Convertible Preferred Stock were entitled to a $6.00
liquidation preference per share in the event of liquidation, dissolution or
winding up of the Company. Each share of Class A Convertible Preferred Stock was
convertible on a four-for-one basis to Common Stock and was entitled to
non-cumulative dividends if and when declared by the Board of Directors. Holders
of Class A Convertible Preferred Stock had certain redemption rights defined in
the Amended and Restated Articles of Incorporation but did not have preemptive
rights.
On March 5, 1998, the Company issued 16,666 shares of Class B Convertible
Preferred Stock with a liquidation value of $30.00 per share to an affiliate of
BankBoston at a price of $30.00 per share. Each share of Class B Convertible
Preferred Stock was convertible into four shares of Common Stock. The Class B
Convertible Preferred Stock contained the same redemption provisions as the
Class A Convertible Preferred Stock. To the extent not redeemed or converted,
remaining shares of the Class A Convertible Preferred Stock would have been
redeemed at their liquidation value on April 22, 2004.
In May 1998, 1,790,026 shares (the entire outstanding amount) of the
Company's Convertible Preferred Stock totaling $11.1 million were converted on a
four-for-one basis into 7,160,104 shares of common stock, pursuant to the
original terms.
13. Settlement Costs
Certain of the Company's key executives and other management employees
resigned from an international accounting firm during the first quarter of 1997.
The accounting firm initiated litigation in connection with such resignations
and the formation of the Company arising out of activities alleged to have
constituted a breach of non-competition and non-solicitation obligations. This
litigation was settled, and the Company, its key executives, certain other
management employees and certain of its shareholders were subject to certain
provisions contained in the Settlement Agreement through its expiration date of
December 31, 1998.
Settlement costs incurred during the year ended January 2, 1998 consist
primarily of payments to certain key executives and certain other management
employees of the Company relating to the obligations assumed by the Company for
compensation earned during the period from December 1, 1996 to April 23, 1997 by
such employees and legal fees incurred in connection with the ensuing
litigation.
26
<PAGE>
ANSWERTHINK CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Litigation
The Company is involved in legal proceedings, claims, and litigation
arising in the ordinary course of business. In the opinion of management, the
final disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
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 $2,500,000 in cash.
15. Related Party Transaction
The Company purchases most of its computer hardware and software from a
distributor that is owned in part by three senior executives and directors of
the Company. During the years ended January 1, 1999 and January 2, 1998, the
Company purchased from this distributor approximately $1.7 million and $1.5
million, respectively.
16. Subsequent Event
On June 24, 1999, the Company entered into an Agreement and Plan of Merger
with Think New Ideas, Inc. (the "Merger Agreement"). Under the Merger Agreement,
the Company would be merged with and into Think New Ideas and each issued and
outstanding share of Think New Ideas common stock will be converted into and
exchanged for 0.70 shares of the Company's common stock (collectively, the
"Merger"). The Merger is intended to be qualified as a tax-free reorganization
and to be accounted for as a pooling-of-interests. The Merger is subject to
approval by Think New Ideas' shareholders. Also, AnswerThink's shareholders must
approve the issuance of the common stock being offered as consideration in
connection with the Merger. Accordingly, no assurance can be given that the
Merger will occur as contemplated.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL DATA AND EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
27.1 Restated Financial Data Schedule (filed electronically only with the
SEC)
</TABLE>
28
<PAGE>
SIGNATURE
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 hereunto duly authorized.
ANSWERTHINK CONSULTING GROUP, INC.
Date: August 12, 1999 By: /s/ John F. Brennan
----------------------------------------------
John F. Brennan
Executive Vice President
and Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
27.1 Restated Financial Data Schedule (filed electronically only with the
SEC)
</TABLE>
Exhibit 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of our report dated February 26, 1999, except for Note 16,
as to which the date is June 24, 1999, relating to the financial statements,
which appear in the Current Report on Form 8-K dated August 12, 1999.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Miami, Florida
August 12, 1999
Exhibit 23.2
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Company's previously filed
Registration Statement File No. 333-69951.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.
August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001057379
<NAME> AnswerThink Consulting Group, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<EXCHANGE-RATE> 1.000
<CASH> 29,965,976
<SECURITIES> 1,000,000
<RECEIVABLES> 33,728,992
<ALLOWANCES> 785,407
<INVENTORY> 0
<CURRENT-ASSETS> 65,324,882
<PP&E> 6,890,006
<DEPRECIATION> 2,843,436
<TOTAL-ASSETS> 96,009,782
<CURRENT-LIABILITIES> 20,217,617
<BONDS> 0
0
0
<COMMON> 34,229
<OTHER-SE> 68,924,796
<TOTAL-LIABILITY-AND-EQUITY> 96,009,782
<SALES> 0
<TOTAL-REVENUES> 118,155,676
<CGS> 0
<TOTAL-COSTS> 151,249,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,418,021
<INCOME-PRETAX> (31,332,540)
<INCOME-TAX> 324,820
<INCOME-CONTINUING> (31,657,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,657,360)
<EPS-BASIC> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
