| ANSWERTHINK INC ITEM 1A RISK FACTORS The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or printed elsewhere by management from time to time |
| -10- ______________________________________________________________________ [37]Table of Contents Our financial results may fluctuate from quarter to quarter |
| In future quarters, our operating results may not meet public market analysts’ and investors’ expectations |
| If that happens, the price of our common stock may fall |
| Many factors can cause these fluctuations, including: • the number, size, timing and scope of client engagements; • customer concentration; • long and unpredictable sales cycles; • contract terms of client engagements; • degrees of completion of client engagements; • client engagement delays or cancellations; • competition for and utilization of employees; • how well we estimate the resources and effort we need to complete client engagements; • the integration of acquired businesses; • pricing changes in the industry; • economic conditions specific to business and information technology consulting; and • general economic conditions A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance of any particular quarter |
| As a result, if we experience unanticipated changes in client engagements or in employee utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter |
| If we are unable to maintain our reputation and expand our name recognition, we may have difficulty attracting new business and retaining current clients and employees |
| We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining clients and employees in our industry |
| We also believe that the importance of reputation and name recognition is increasing and will continue to increase due to the number of providers of business consulting and IT services |
| If our reputation is damaged or if potential clients are not familiar with us or with the solutions we provide, we may be unable to attract new, or retain existing, clients and employees |
| Promotion and enhancement of our name will depend largely on our success in continuing to provide effective solutions |
| If clients do not perceive our solutions to be effective or of high quality, our brand name and reputation will suffer |
| In addition, if solutions we provide have defects, critical business functions of our clients may fail, and we could suffer adverse publicity as well as economic liability |
| We depend heavily on a limited number of clients |
| We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of clients for which we perform large projects |
| In 2005, our ten largest clients accounted for approximately 30prca of our revenues in the aggregate |
| In addition, revenues from a large client may constitute a significant portion of our total revenues in a particular quarter |
| Our customer contracts generally can be cancelled for convenience by the customer upon 30 days’ notice |
| The loss of any principal client for any reason, including as a result of the acquisition of that client by another entity, our failure to meet that client’s expectations, the client’s decision to reduce spending on technology-related projects, -11- ______________________________________________________________________ [38]Table of Contents or failure to collect amounts owed to us from our client could have a material adverse effect on our business, financial condition and results of operations |
| We have risks associated with potential acquisitions or investments |
| Since we were founded, we have significantly expanded through acquisitions |
| In the future, we plan to pursue additional acquisitions as opportunities arise |
| We may not be able to integrate successfully businesses which we may acquire in the future without substantial expense, delays or other operational or financial problems |
| We may not be able to identify, acquire or profitably manage additional businesses |
| Also, acquisitions may involve a number of risks, including: • diversion of management’s attention; • failure to retain key personnel; • failure to retain existing clients; • unanticipated events or circumstances; • unknown claims or liabilities; • amortization of certain acquired intangible assets; and • operating in new or unfamiliar geographies Client dissatisfaction or performance problems at a single acquired firm could have a material adverse impact on our reputation as a whole |
| Further, we cannot assure you that our recent or future acquired businesses will generate anticipated revenues or earnings |
| Difficulties in integrating businesses we have recently acquired or may acquire in the future may demand time and attention from our senior management |
| Integrating businesses we have recently acquired or may acquire in the future may involve unanticipated delays, costs and/or other operational and financial problems |
| In integrating acquired businesses, we may not achieve expected economies of scale or profitability or realize sufficient revenues to justify our investment |
| If we encounter unexpected problems at one of the acquired businesses as we try to integrate it into our business, our management may be required to expend time and attention to address the problems, which would divert their time and attention from other aspects of our business |
| Our markets are highly competitive |
| We may not be able to compete effectively with current or future competitors |
| The business consulting and IT services market is highly competitive |
| We expect competition to further intensify as these markets continue to evolve |
| Some of our competitors have longer operating histories, larger client bases, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical and marketing resources than we do |
| As a result, our competitors may be in a stronger position to respond more quickly to new or emerging technologies and changes in client requirements and to devote greater resources than we can to the development, promotion and sale of their services |
| Competitors could lower their prices, potentially forcing us to lower our prices and suffer reduced operating margins |
| We face competition from international accounting firms; international, national and regional strategic consulting and systems implementation firms; and the IT services divisions of application software firms |
| -12- ______________________________________________________________________ [39]Table of Contents In addition, there are relatively low barriers to entry into the business consulting and IT services market |
| We do not own any patented technology that would stop competitors from entering this market and providing services similar to ours |
| As a result, the emergence of new competitors may pose a threat to our business |
| Existing or future competitors may develop and offer services that are superior to, or have greater market acceptance, than ours, which could significantly decrease our revenues and the value of your investment |
| We may not be able to hire, train, motivate, retain and manage professional staff |
| To succeed, we must hire, train, motivate, retain and manage highly skilled employees |
| Competition for skilled employees who can perform the services we offer is intense |
| This could hinder our ability to complete existing client engagements and bid for new client engagements |
| Hiring, training, motivating, retaining and managing employees with the skills we need is time consuming and expensive |
| We could lose money on our contracts |
| As part of our strategy, we enter into capped or fixed-price contracts, in addition to contracts based on payment for time and materials |
| Because of the complexity of many of our client engagements, accurately estimating the cost, scope and duration of a particular engagement can be a difficult task |
| We maintain an office of risk management that evaluates and attempts to mitigate delivery risk associated with complex projects |
| In connection with their review, the office of risk management analyzes the critical estimates associated with these projects |
| If we fail to make these estimates accurately, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation |
| To the extent that an expenditure of additional resources is required on an engagement, this could reduce the profitability of, or result in a loss on, the engagement |
| In the past, we have, on occasion, engaged in negotiations with clients regarding changes to the cost, scope or duration of specific engagements |
| To the extent we do not sufficiently communicate to our clients, or our clients fail to adequately appreciate, the nature and extent of any of these types of changes to an engagement, our reputation may be harmed and we may suffer losses on an engagement |
| Lack of detailed written contracts could impair our ability to recognize revenue for services performed, collect fees, protect our intellectual property and protect ourselves from liability to others |
| We try to protect ourselves by entering into detailed written contracts with our clients covering the terms and contingencies of the client engagement |
| In some cases, however, consistent with what we believe to be industry practice, work is performed for clients on the basis of a limited statement of work or verbal agreements before a detailed written contract can be finalized |
| To the extent that we fail to have detailed written contracts in place, our ability to collect fees, protect our intellectual property and protect ourselves from liability to others may be impaired |
| Our corporate governance provisions may deter a financially attractive takeover attempt |
| Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders would receive a premium for their shares |
| These provisions include the following: • stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders or nominating a director for election; • our board of directors is staggered into three classes and the members may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares entitled to vote; • we would not be required to hold a special meeting to consider a takeover proposal unless holders of more than a majority of the shares entitled to vote on the matter were to submit a written demand or demands for us to do so; and • our board of directors may, without obtaining stockholder approval, classify and issue up to 1cmam250cmam000 shares of preferred stock with powers, preferences, designations and rights that may make it more difficult for a third party to acquire us |
| -13- ______________________________________________________________________ [40]Table of Contents In addition, our board of directors has adopted a shareholder rights plan |
| Subject to certain exceptions, in the event that a person or group in the future becomes the beneficial owner of 15prca or more of our common stock or commences, or publicly announces an intention to commence, a tender or exchange offer which would result in its ownership of 15prca or more of our outstanding common stock (or in the case of Liberty Wanger Asset Management, LP (now known as Columbia Wanger Asset Management, LP) and its affiliates, 20prca) then the rights issued to our shareholders in connection with this plan will allow our shareholders to purchase shares of our common stock at 50prca of its then current market value |
| In addition, if we are acquired in a merger, or 50prca or more of our assets are sold in one or more related transactions, our shareholders would have the right to purchase the common stock of the acquiring company at half the then current market price of such common stock |
| We may lose large clients or not be able to secure targeted follow-on work or client retention rates |
| Our client engagements are generally short-term arrangements, and most clients can reduce or cancel their contracts for our services with 30 days notice and without penalty |
| As a result, if we lose a major client or large client engagement, our revenues will be adversely affected |
| We perform varying amounts of work for specific clients from year to year |
| A major client in one year may not use our services in another year |
| In addition, we may derive revenue from a major client that constitutes a large portion of total revenue for particular quarters |
| If we lose any major clients or any of our clients cancel programs or significantly reduce the scope of a large client engagement, our business, financial condition and results of operations could be materially and adversely affected |
| Also, if we fail to collect a large account receivable, we could be subjected to significant financial exposure |
| Consequently, you should not predict or anticipate our future revenue based upon the number of clients we currently have or the number and size of our existing client engagements |
| We also derive an increasing portion of our revenues from annual memberships for our business advisory programs |
| Our growth prospects therefore depend on our ability to achieve and sustain high retention rates on programs and to successfully launch new programs |
| Failure to achieve high renewal rate levels or to successfully launch new programs and services could have a material adverse effect on our operating results |
| If we are unable to protect our intellectual property rights or infringe on the intellectual property rights of third parties, our business may be harmed |
| We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property |
| Although we enter into confidentiality agreements with our employees and limit distribution of proprietary information, there can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights |
| Although we believe that our services do not infringe on the intellectual property rights of others and that we have all rights necessary to utilize the intellectual property employed in our business, we are subject to the risk of claims alleging infringement of third-party intellectual property rights |
| Any claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of asserted infringement |
| The market price of our common stock may fluctuate widely |
| The market price of our common stock could fluctuate substantially due to: • future announcements concerning us or our competitors; • quarterly fluctuations in operating results; • announcements of acquisitions or technological innovations; or • changes in earnings estimates or recommendations by analysts |
| -14- ______________________________________________________________________ [41]Table of Contents In addition, the stock prices of many technology companies fluctuate widely for reasons which may be unrelated to operating results |
| Fluctuations in our common stock’s market price may impact our ability to finance our operations and retain personnel |
| Our initiatives that leverage The Hackett Group’s best practices knowledge may not be successful |
| Enhancements to The Hackett Group’s advisory product offerings introduced in 2005 which include business transformation programs represent a departure from its traditional benchmarking offerings |
| We may not be able to adequately support these new offerings |
| Clients or prospects may view The Hackett Group as a new and unproven entrant into this space |
| As such, clients and client prospects may choose to purchase these types of products and services from companies with a longer track record of providing these types of offerings |
| Our Joint Marketing and Alliance Agreement with Accenture has expired |
| Our Joint Marketing and Alliance Agreement with Accenture expired on October 7, 2005 |
| We are working with Accenture in efforts to extend and expand the terms of the relationship |
| We also continue to jointly pursue opportunities and work on engagements that were won prior and subsequent to the expiration of the Agreement |
| However, while we continue to pursue opportunities with Accenture, there is no contractual agreement in place at this time that governs the relationship, including how positions are allocated on engagements won as a result of a joint pursuit |
| We earn revenues, incur costs and maintain cash balances in multiple currencies, and currency fluctuations could adversely affect our financial results |
| We have increasing international operations, which earn revenues and incur costs in various foreign currencies, primarily the British pound and the euro |
| Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues, purchases, payroll and investments |
| Certain foreign currency exposures are naturally offset within an international business unit, because revenues and costs are denominated in the same foreign currency, and certain cash balances are held in US dollar denominated accounts |
| However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our results |
| Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future |
| Our cash position includes amounts denominated in foreign currencies |
| We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed |
| The repatriation of cash balances from certain of our subsidiaries outside the United States could have adverse tax consequences and be limited by foreign currency exchange controls |
| However, those balances are generally available without legal restrictions to fund ordinary business operations |
| We have transferred, and will continue to transfer, cash from those subsidiaries to the parent company, and to other international subsidiaries, when it is cost effective to do so |
| However, any fluctuations in foreign currency exchange rates could materially impact the availability and size of these funds for repatriation or transfer |