Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2006
 
OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to ________

Commission file number 000-50781

HILL INTERNATIONAL, INC.
(Exact name of Registrant as Specified in its Charter)

Delaware
20-0953973
(State or other jurisdiction of
(I.R.S. Employment
incorporation or organization)
Identification No.)
 
303 Lippincott Centre, Marlton, NJ
08053
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (856) 810-6200

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes  x       No  o  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o       No  x  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” (in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer  o       Accelerated Filer  o       Non-Accelerated Filer  x  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  o       No  x  
 
As of November 6, 2006 there were 22,300,148 shares of the Registrant's Common Stock outstanding.


 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Quarter Ended September 30, 2006
Index
 
 
 
 
 
Page
PART I:
 
FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1
 
Consolidated Financial Statements (unaudited)
 
3
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005
 
3
 
 
 
 
 
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and October 1, 2005 (unaudited)
 
4
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006 (unaudited)
 
5
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and October 1, 2005 (unaudited)
 
6
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
7
 
 
 
 
 
Item 2
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
29
 
 
 
   
Item 3
 
Quantitative and Qualitative Disclosures of Market Risk
 
50
 
 
 
   
Item 4
 
Controls and Procedures
 
50
 
 
 
   
PART II:
 
OTHER INFORMATION
 
51
 
 
 
   
Item 1
 
Legal Proceedings
 
52
         
Item 1A
 
Risk Factors
 
52
         
Item 2
 
Unregistered Sales of Entity Securities and Use of Funds
 
52
         
Item 3
 
Defaults Upon Senior  Securities 
 
52
         
Item 4
 
Submission of Matters to a Vote of Security Holders.
 
52
         
Item 5
 
Other Information
 
52
 
 
 
   
Item 6
 
Exhibits
 
52
 
 
 
   
Signatures
 
54
         
Index to Exhibits
 
55
 
2

 

PART I: FINANCIAL INFORMATION
 
  Item 1: Consolidated Financial Statements

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
   
September 30,
 
December 31,
 
   
2006
 
2005
 
     
(Unaudited)
   
(Audited)
 
Assets
             
Current assets:
   
 
 
 
 
 
Cash and cash equivalents
 
$
3,900
 
$
2,716
 
Cash-restricted
   
5,481
   
1,040
 
Accounts receivable, less allowance for doubtful accounts of $3,092 and $845
   
60,268
   
27,623
 
Accounts receivable-affiliate
   
453
   
611
 
Prepaid expenses and other current assets
   
3,474
   
1,361
 
Total current assets
   
73,576
   
33,351
 
Property and equipment - net
   
5,670
   
2,842
 
Cash - restricted
   
3,151
   
2,169
 
Retainage receivable, less allowance for doubtful accounts of $98 and $88
   
804
   
964
 
Cost in excess of net assets acquired
   
18,311
   
148
 
Deferred income taxes
   
-
   
451
 
Investment in affiliate
   
656
   
393
 
Other assets
   
557
   
405
 
Total assets
 
$
102,725
 
$
40,723
 
Liabilities and Stockholders’ Equity
             
Current liabilities:
             
Due to bank
 
$
14
 
$
190
 
Current maturities of long-term debt
   
6,866
   
10,156
 
Current maturities of capital lease obligations
   
302
   
186
 
Accounts payable and accrued expenses
   
37,616
   
13,757
 
Deferred tax liabilities
   
65
   
2,136
 
Income taxes payable
   
3,267
   
1,923
 
Other current liabilities
   
3,941
   
3,359
 
Total current liabilities
   
52,071
   
31,707
 
Long-term debt, net of current maturities
   
1,455
   
-
 
Capital lease obligations, net of current maturities
   
195
   
32
 
Retainage payable
   
3,453
   
877
 
Deferred income taxes
   
151
   
-
 
Minority interest
   
253
   
-
 
Other liabilities
   
3,803
   
1,948
 
Total liabilities
   
61,381
   
34,564
 
Commitments and contingencies
             
Stockholders' equity:
             
Preferred stock, $.0001 par value; 1,000,000 shares authorized, none issued
   
   
 
Common stock, $.0001 par value; 75,000,000 shares authorized, 22,826,100 shares issued and 22,300,148 shares outstanding at September 30, 2006; 30,000,000 shares authorized, 15,624,000 shares issued and 11,760,000 shares outstanding at December 31, 2005
   
2
   
1
 
Additional paid-in capital
   
36,691
   
2,009
 
Retained earnings
   
11,472
   
5,582
 
Accumulated other comprehensive loss
   
(168
)
 
(25
)
 
   
47,997
   
7,567
 
Less treasury stock of 525,952 and 3,864,000 shares at cost at September 30, 2006 and December 31, 2005
   
(2,788
)
 
(583
)
Stock held in escrow of 729,391 shares at September 30, 2006
   
(3,865
)
 
 
Due from stockholder
   
   
(825
)
Total stockholders' equity
   
41,344
   
6,159
 
Total liabilities and stockholders’ equity
 
$
102,725
 
$
40,723
 

See accompanying notes to condensed consolidated financial statements.
 
3

 
 
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
2006
 
October 1,
2005
 
September 30,
2006
 
October 1,
2005
 
                   
Revenue
 
$
49,866
 
$
29,765
 
$
130,156
 
$
80,372
 
Reimbursable expenses
   
15,837
   
8,415
   
42,778
   
21,427
 
Revenue, less reimbursable expenses
   
34,029
   
21,350
   
87,378
   
58,945
 
Direct expenses
   
18,774
   
10,931
   
48,611
   
30,981
 
Gross profit
   
15,255
   
10,419
   
38,767
   
27,964
 
                           
Operating expenses (income)
                         
Selling, general and administrative expenses 
   
11,892
   
7,684
   
31,317
   
22,644
 
Equity in affiliate
   
(331
)
 
(274
)
 
(533
)
 
(559
)
                           
Operating income
   
3,694
   
3,009
   
7,983
   
5,879
 
                           
Interest (income) expense, net
   
(36
)
 
148
   
345
   
419
 
                           
Minority interest
   
13
   
-
   
13
   
-
 
                           
Income before provision for income taxes
   
3,717
   
2,861
   
7,625
   
5,460
 
                           
Provision for income taxes
   
806
   
1,057
   
1,735
   
2,015
 
                           
Net income
 
$
2,911
 
$
1,804
 
$
5,890
 
$
3,445
 
                           
Basic net income per share
 
$
0.13
 
$
0.16
 
$
0.38
 
$
0.30
 
Basic weighted average shares outstanding
   
22,284
   
11,586
   
15,504
   
11,586
 
                           
Diluted net income per share
 
$
0.12
 
$
0.14
 
$
0.35
 
$
0.25
 
Diluted weighted average shares outstanding
   
23,513
   
13,105
   
16,931
   
13,749
 
 
See accompanying notes to condensed consolidated financial statements.
 
4

 
 
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For The Nine Months Ended September 30, 2006
(Dollars in thousands, except per share data)
(Unaudited)
 
   
Common Stock
 
Additional Paid in
 
Retained
 
Accumulated Other Comprehensive
 
Treasury Stock
 
Shares Held in Escrow
 
Due from
 
Total Stockholders’
 
   
Shares
 
Amount
 
Capital
 
Earnings
 
(Loss) Income
 
Shares
 
Amount
 
Shares
 
Amount
 
stockholder
 
Equity
 
Balances at December 31, 2005
   
15,624
 
$
1
 
$
2,009
 
$
5,582
 
$
(25
)
 
3,864
 
$
(583
)
 
-
 
$
-
 
$
(825
)
$
6,159
 
Advances to stockholders
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(183
)
 
(183
)
Repayment of advances to stockholders
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
1,008
   
1,008
 
Retirement of treasury shares
   
(3,864
)
 
-
   
(583
)
 
-
   
-
   
(3,864
)
 
583
   
-
   
-
   
-
   
-
 
Exercise of employee stock options
   
2,740
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Shares held in escrow for indemnification by shareholders
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
729
   
(3,865
)
 
-
   
(3,865
)
Purchase of shares for employees income tax withholdings
   
-
   
-
   
-
   
-
   
-
   
526
   
(2,788
)
 
-
   
-
   
-
   
(2,788
)
Issuance of common stock in connection with reverse acquisition of Arpeggio, net of acquisition cost
   
8,300
   
1
   
34,118
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
34,119
 
Shares converted on vote against merger
   
(4
)
 
-
   
(24
)
 
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(24
)
Stock based compensation expense
   
-
   
-
   
59
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
59
 
Stock issued to Board of Directors
   
30
   
-
   
155
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
155
 
Tax benefit from stock plan
   
-
   
-
   
957
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
957
 
Net income
   
-
   
-
   
-
   
5,890
   
-
   
-
   
-
   
-
   
-
   
-
   
5,890
 
Foreign currency translation adjustment
   
-
   
-
   
-
   
-
   
(143
)
 
-
   
-
   
-
   
-
   
-
   
(143
)
Balances at September 30, 2006
   
22,826
 
$
2
 
$
36,691
 
$
11,472
 
$
(168
)
 
526
 
$
(2,788
)
 
729
 
$
(3,865
)
$
-
 
$
41,344
 
 
See accompanying notes to condensed consolidated financial statements.
 
5

 
 
HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and October 1, 2005
(Dollars in thousands)
(Unaudited)
 
   
September 30,
 
October 1,
 
   
2006
 
2005
 
Cash flows from operating activities:
         
Net income
 
$
5,890
 
$
3,445
 
Adjustments to reconcile net income to net cash used in
             
operating activities
             
Depreciation
   
887
   
547
 
Amortization
   
145
   
114
 
Equity in affiliate
   
(533
)
 
(559
)
Provision for bad debts
   
840
   
495
 
Deferred tax (benefit) provision
   
(833
)
 
252
 
Stock based compensation
   
59
   
191
 
Tax benefit from stock plan
   
957
   
 
Stock issued to Board of Directors
   
77
   
 
(Increase) decrease in assets,
             
Accounts receivable
   
(20,304
)
 
(7,396
)
Accounts receivable-related party
   
158
   
361
 
Other accounts receivable
   
   
223
 
Prepaid expenses and other current assets
   
(605
)
 
(318
)
Retainage receivable
   
160
   
(4
)
Other assets
   
(152
)
 
(42
)
Increase (decrease) in liabilities
             
Accounts payable and accrued expenses
   
3,730
   
1,217
 
Income taxes payable
   
744
   
2,018
 
Deferred revenue
   
   
(75
)
Other current liabilities, primarily advance payments from clients
   
(3,301
)
 
542
 
Minority interest
   
13
   
 
Retainage payable
   
2,576
   
 
Other liabilities
   
(41
)
 
(118
)
Total adjustments
   
(15,423
)
 
(2,552
)
Net cash flow (used in) provided by operating activities
   
(9,533
)
 
893
 
Cash flows from investing activities:
             
Purchase of acquisitions, net of cash acquired
   
(10,444
)
 
 
Restricted cash
   
(3,350
)
 
 
Payments for purchase of property and equipment
   
(1,411
)
 
(694
)
Net cash flows used in investing activities
   
(15,205
)
 
(694
)
Cash flows from financing activities:
             
Distributions from affiliate
   
269
   
618
 
Due to bank
   
(176
)
 
141
 
Proceeds from long-term debt
   
2,801
   
 
Payments on long-term debt
   
(12,757
)
 
(4
)
Net proceeds on revolving loan borrowings
   
1,174
   
126
 
Advances to stockholder
   
(183
)
 
(14
)
Repayments from stockholder
   
1,008
   
 
Proceeds from issuance of common stock in merger, net of acquisition costs
   
34,095
   
 
Payment on capital lease obligations
   
(166
)
 
(269
)
Net cash flow provided by financing activities
   
26,065
   
598
 
Effect of exchange rate changes on cash
   
(143
)
 
(49
)
Net increase in cash and cash equivalents
   
1,184
   
748
 
Cash and cash equivalents - beginning of period
   
2,716
   
802
 
Cash and cash equivalents - end of period
 
$
3,900
 
$
1,550
 
 
See accompanying notes to condensed consolidated financial statements.
 
6

 

HILL INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1— Basis of Presentation

Arpeggio Acquisition Corporation
 
Arpeggio Acquisition Corporation (“Arpeggio”) was incorporated in Delaware on April 2, 2004 as a blank check company, the objective of which was to acquire an operating business in the United States or Canada. The Company’s initial stockholders purchased 1,500,000 common shares, $.0001 par value, for $25,000 on April 2, 2004.
 
On June 30, 2004, Arpeggio consummated an Initial Public Offering (“Offering”) and raised net proceeds of $36,772,000. Arpeggio sold 6,800,000 units (“Units”) in the Offering, which included 800,000 Units subject to the underwriters’ over allotment option. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”) as described in Note 13. An amount of $36,666,000 (which included accrued interest of $6,000) as of December 31, 2005, was being held in an interest bearing trust account (“Trust Fund”) until the earlier of (i) the consummation of its first Business Combination or (ii) the liquidation of Arpeggio. The remaining net proceeds (not held in trust) have been used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
 
Merger and Accounting Treatment
 
On June 28, 2006, Arpeggio consummated a merger with Hill International, Inc., a Delaware corporation ("Hill"), in which Hill merged with and into Arpeggio pursuant to an Agreement and Plan of Merger dated December 5, 2005, as amended (the "Merger Agreement"), among Arpeggio, Hill and certain stockholders of Hill. Pursuant to the Merger Agreement, Hill stockholders party to the merger agreement and other persons who exercised options to purchase common stock of Hill prior to the closing of the merger, in exchange for all of the securities of Hill outstanding immediately prior to the merger, received from Arpeggio 14,500,000 shares of Arpeggio’s common stock. Immediately following the merger, the stockholders of Hill owned approximately 63.6% of the total issued and outstanding Arpeggio common stock. Twelve percent (12%) or 1,740,000 of the 14,500,000 shares of Arpeggio common stock being issued to the Hill stockholders at the time of the merger were placed into escrow to secure the indemnity rights of Arpeggio under the Merger Agreement and are governed by the terms of an escrow agreement. One Arpeggio shareholder, owning 3,900 shares of Arpeggio common stock, voted against the merger and requested to receive the pro rata share of cash in the Trust Fund. The combined company remitted to that shareholder approximately $24,000 in exchange for his shares.
 
The Merger Agreement also provides for Hill’s then stockholders to receive up to an additional 6,600,000 shares of the combined company’s common stock, contingent upon the combined company attaining certain earnings targets.

7

 

In connection with the approval of the above described transaction, the Arpeggio stockholders adopted, among other matters, the following:
 
·
An amendment to the Certificate of Incorporation of Arpeggio to change the name of Arpeggio from Arpeggio Acquisition Corporation to Hill International, Inc.;
 
·
An amendment to the Certificate of Incorporation of Arpeggio to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000; and
 
·
The 2006 Employee Stock Option Plan, which reserves 1,140,000 shares of common stock for issuance in accordance with the plan's terms.
 
Upon the Closing, Arpeggio changed its name to Hill International, Inc. and is hereinafter referred to as the "Company."
 
Upon consummation of the merger, approximately $37,500,000 was released from trust to be used by the combined company. After payments totaling approximately $3,400,000 for professional fees and other costs related to the merger, the net proceeds amounted to approximately $34,100,000. In connection with the merger, the Company incurred approximately $105,000 of acquisition costs as of December 31, 2005, which were recorded within “other assets” in the accompanying Consolidated Balance Sheet. The total direct and incremental costs of approximately $3,400,000 incurred by the Company in connection with the merger were reflected as a reduction to additional paid-in capital as of the effective date of the merger.
 
The merger was accounted for under the purchase method of accounting as a reverse acquisition in accordance with accounting principles generally accepted in the United States for accounting and financial reporting purposes. Under this method of accounting, Arpeggio was treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, this merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the merger was treated as the equivalent of Hill issuing stock for the net monetary assets of Arpeggio, accompanied by a recapitalization. All historical share and per share amounts have been retroactively adjusted to give effect to the reverse acquisition of Hill and related recapitalization.
 
Note 2 - Acquisitions
 
James R. Knowles (Holdings) PLC
 
On August 31, 2006, Hill International S.A., a wholly-owned subsidiary of the Company, acquired approximately 96.5% of the outstanding shares of James R. Knowles (Holdings) PLC, (“Knowles”) a construction and engineering industry claims consulting and dispute resolution company with 36 offices worldwide, headquartered in Daresbury, United Kingdom, for a price of 33 pence (or approximately $0.62 at the exchange rate current as of the date of the acquisition) per share in cash. The consideration paid by Hill International S.A. for 96.5% of the outstanding shares of Knowles was approximately $13,000,000 excluding direct acquisition costs. Under applicable law, Hill International S.A. is entitled to compulsorily acquire the remaining 3.5% of the outstanding shares of Knowles at the same purchase price per share. Hill International S.A. intends to acquire those shares as soon as practicable at that purchase price.
 
8

 
 
The following table sets forth the determination of the consideration paid for Knowles at the date of acquisition:
 
( in thousands)
     
Cash
 
$
13,017
 
Other direct acquisition costs
   
947
 
Total purchase price
 
$
13,964
 
 
The transaction was accounted for as a purchase and, accordingly, the preliminary purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. Independent consultants have been engaged to conduct a detailed valuation using the guidance as set forth in Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations”, to assist management with the final determination of fair value of the intangible assets and goodwill acquired in the acquisition. The purchase price allocation is, therefore, preliminary and may be adjusted for up to one year after the acquisition.
 
The following table sets forth the preliminary allocation of the purchase price:
 
(in thousands)
     
Total purchase price
 
$
13,964
 
Less assets acquired:
       
Cash
   
(2,892
)
Accounts receivable
   
(11,978
)
Other current assets
   
(1,791
)
Long - term assets
   
(3,522
)
Total assets acquired
   
(20,183
)
         
Liabilities assumed
   
23,283
 
            
Cost in excess of net assets acquired
 
$
17,064
 
 
The operating results for Knowles are included in the accompanying Condensed Consolidated Statements of Operations from the date of the acquisition.

9

 

The following unaudited pro forma information assumes the Knowles acquisition had occurred on January 2, 2005. The pro forma information, as presented below, is not necessarily indicative of the results that would have been obtained had the Knowles acquisition occurred on January 2, 2005, nor is it necessarily indicative of the Company's future results:
 
   
Three Months Ended
 
Nine Months Ended
 
(in thousands)
 
September 30, 2006
 
October 1, 2005
 
September 30, 2006
 
October 1, 2005
 
Total revenues
 
$
58,321
 
$
43,219
 
$
166,940
 
$
120,992
 
Net income (loss)
 
$
(5,813
)
$
1,625
 
$
(3,947
)
$
3,259
 
Earnings per share, basic and diluted
 
$
(0.26
)
$
0.16
 
$
(0.25
)
$
0.25
 
 
The pro forma net income (loss) reflects the following items:
 
 
i.
adjustments to depreciation and interest expense arising from the recording of a liability for conditional asset retirement costs associated with the future expiration of certain real estate operating leases in which Knowles is the lessee, in accordance with Financial Accounting Standards Board Interpretation No. 47, Conditional Asset Retirement Obligations.
 
 
ii.
the related income tax effects of the above items based upon a pro forma effective income tax rate.
 
The Pickavance Group Ltd.
 
On January 23, 2006, Hill International (UK) Ltd. (“Hill UK”), a wholly owned subsidiary of the Company, purchased all of the outstanding common stock of The Pickavance Group Ltd. (“Pickavance”) from the existing shareholders of Pickavance. The results of Pickavance’s operations from January 23, 2006 are included in the Company’s consolidated statements of operations. The Pickavance acquisition is not a material business combination to the Company’s operations.
 
The present value of the anticipated payments was calculated by discounting back to the acquisition date the future payments using an 8% imputed interest cost (the Company’s approximate average borrowing cost at the acquisition date). The discounted price was then converted into U.S. dollars using an exchange rate of approximately $1.78/₤1, the exchange rate on the date of the acquisition.
 
10

 
 
The purchase price of the outstanding stock, not including liabilities assumed, was in the form of future payments as follows:

Date Paid / Payable
Amount in British Pounds
Discounted Value
U.S. Dollar Equivalent
 
February 1, 2006
  £ 
 153
  £ 
 153
 
$
273
 
January 1, 2007
   
70
   
65
   
116
 
February 1, 2007
   
154
   
142
   
253
 
February 1, 2008
   
315
   
269
   
479
 
February 1, 2009
   
315
   
248
   
442
 
Total
  £ 
1,007
  £ 
 877
 
$
1,563
 
 
The net assets acquired and liabilities assumed were as follows in U.S. dollars:
 
(in thousands)
     
Cash
 
$
165
 
Accounts receivable, net
   
772
 
Prepaid expenses
   
71
 
Property, plant and equipment, net
   
160
 
Total tangible assets
   
1,168
 
 
       
Accounts payable
   
555
 
Other liabilities
   
34
 
Total liabilities assumed
   
589
 
 
       
Net assets acquired
 
$
579
 
 
       
Purchase price
 
$
1,563
 
Net assets acquired
   
579
 
Costs in excess of net assets acquired
   
984
 
Associated deferred taxes
   
295
 
Total intangible assets
 
$
1,279
 
 
Pending a final valuation, cost in excess of net assets acquired will be identified as goodwill and contractual and non-contractual customer relationships upon completion of the valuation.
 
11

 
 
Note 3 - Summary of Significant Accounting Policies
 
Operations
 
The Company is a professional services firm providing program management, project management, construction management and construction claims services worldwide. Revenue from international services was approximately 53.0% and 36.8 % of total revenue for the three-month periods ended September 30, 2006 and October 1, 2005, respectively and 49.4% and 36.2% of total revenue for the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.

General
 
The accompanying unaudited interim Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States and the interim financial statement rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report on Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Fiscal Year 2005 Audited Financial Statements included in the Definitive Proxy Statement dated on June 5, 2006 filed on June 6, 2006.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. The estimates affecting the consolidated financial statements that are particularly significant include revenue recognition, recoverability of long-lived assets, income taxes, allowance for doubtful accounts and commitments and contingencies.
 
Principles of Consolidation
 
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

12

 
 
Accounting Periods
 
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to December 31. The three months ended September 30, 2006 began on July 2, 2006 and the nine months ended September 30, 2006 began on January 1, 2006. The three months ended October 1, 2005 began on July 3, 2005 and the nine months ended October 1, 2005 began on January 2, 2005. Each three-month period includes 13 weeks and each nine-month period includes 39 weeks.
 
Share-Based Compensation
 
On January 2, 2005 the Company adopted SFAS No. 123(R), “Share-Based Payment,” using the “Modified Prospective Application Method” which requires that compensation cost be recorded, as earned, for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS No. 123(R). As a result of adopting SFAS No. 123(R), the Company’s compensation expense was approximately $59,000 ($45,000 net of taxes) for both the three and nine months ended September 30, 2006, as compared to $191,000 ($119,000 net of taxes) for the nine months ended October 1, 2005. There was no compensation expense for the three months ended October 1, 2005. The compensation cost is recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. The Company’s Condensed Consolidated Financial Statements of prior fiscal years do not reflect any restated amounts. No modifications were made to outstanding options prior to the adoption of SFAS No. 123(R). The Company used the Black-Scholes option pricing model to measure the estimated fair value of the options under SFAS No. 123(R). The Company did not change the quantity, type or payment arrangements of any share-based payment programs. Since the modified prospective application method was used there was no cumulative effect adjustment upon the adoption of SFAS No. 123(R). The Company’s policy is to use newly issued shares to satisfy the exercise of stock options.
 
Earnings per Share
 
Basic net income (loss) per share is determined by dividing net income (loss) available to stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential increase in the weighted average number of common shares used in the basic income (loss) per share calculation for the weighted average number of common shares that would be issued if all options outstanding during the year had been exercised using the treasury stock method.

Dilutive stock options increased average common shares outstanding by approximately 1,200,000 and 1,500,000 shares for the three months ended September 30, 2006 and October 1, 2005, respectively and by approximately 1,400,000 and 2,200,000 shares for the nine months ended September 30, 2006 and October 1, 2005, respectively.

Options to purchase 25,000 shares of the Company’s common stock were not included in the calculation of common shares outstanding for the three months ended September 30, 2006 because they were anti-dilutive.

Warrants to purchase 13,600,000 shares of the Company’s common stock increased average common shares outstanding by approximately 1,200,000 shares for the three months ended September 30, 2006 and were not included in the calculation of common shares outstanding for the nine months ended September 30, 2006 because they were anti-dilutive.
 
13

 
 
Recent Accounting Pronouncements
 
FASB Interpretation No. 48
 
In July 2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in the consolidated financial statements the impact of a tax provision that is more likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 will be effective for the Company as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.

FASB Interpretation No. 157
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial statements.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss), as defined, includes all changes to equity except those resulting from investments by or distribution to owners and consists of a foreign currency translation adjustment.
 
Components of other comprehensive income (loss) for the three and nine month periods ended September 30, 2006 and October 1, 2005 are as follows:
 
   
Three-Months Ended  
 
Nine-Months Ended
 
(in thousands)
September 30, 2006
October 1, 2005
September 30, 2006
October 1, 2005
 
Net income
   
2,911
   
1,804
   
5,890
   
3,445
 
Foreign currency adjustment (loss) income
   
(133
)
 
204
   
(185
)
 
(78
)
Income tax benefit (expense)
   
29
   
(75
)
 
42
   
29
 
Net foreign currency adjustment
   
(104
)
 
129
   
(143
)
 
(49
)
Total Comprehensive Income
 
$
2,807
 
$
1,933
 
$
5,747
 
$
3,396
 
 
14

 
 
Note 4 - Receivables

   
September 30,
 
December 31,
 
(in thousands)
 
2006
 
2005
 
Billed
 
$
56,752
 
$
25,630
 
Retainage, current portion
   
3,194
   
663
 
Unbilled
   
3,414
   
2,175
 
     
63,360
   
28,468
 
Less allowance for doubtful accounts
   
(3,092
)
 
(845
)
   
$
60,268
 
$
27,623
 
 
Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.
 
Included in billed receivables are $2,100,000 and $2,700,000 of amounts due from various branches of the U.S. Government and $10,700,000 and $3,900,000 of receivables from foreign governments at September 30, 2006 and December 31, 2005, respectively.
 
Note 5 - Prepaid Expenses and Other Current Assets

   
September 30,
 
December 31,
 
(in thousands)
 
2006
 
2005
 
Prepaid subcontractor fees
 
$
406
 
$
445
 
Prepaid insurance
   
733
   
241
 
Prepaid rent
   
811
   
188
 
Employee advances
   
153
   
227
 
Professional fees
   
242
   
-
 
Other assets
   
1,129
   
260
 
Total
 
$
3,474
 
$
1,361
 

Prepaid subcontractor fees represent advance payments from clients remitted to subcontractors in advance of future services being performed.
 
15

 

Note 6 - Property and Equipment

   
September 30,
 
December 31,
 
(in thousands)
 
2006
 
2005
 
Furniture and equipment
 
$
3,189
 
$
1,790
 
Leasehold improvements
   
442
   
241
 
Computer equipment and software
   
4,938
   
2,918
 
Automobiles
   
95
   
 
 
   
8,664
   
4,949
 
Less accumulated depreciation
   
(2,994
)
 
(2,107
)
Property and equipment, net
 
$
5,670
 
$
2,842
 

Depreciation expense of $373,000 and $181,000 was recorded for the three months ended September 30, 2006 and October 1, 2005, respectively, and $887,000 and $547,000 was recorded for the nine months ended September 30, 2006 and October 1, 2005, respectively. Depreciation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
 
Assets recorded under capital leases include furniture and equipment, computer equipment and computer software totaling $994,000 and $817,000 as of September 30, 2006 and December 31, 2005, respectively. Related accumulated depreciation was approximately $365,000 and $324,000 as of September 30, 2006 and December 31, 2005, respectively.
 
Note 7 -  Cost in Excess of Net Assets Acquired

The following table summarizes the Company’s cost in excess of net assets acquired as of September 30, 2006 and December 31, 2005:
 
   
September 30, 2006
 
December 31, 2005
 
   
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(in thousands)
                 
Acquired contract rights
 
$
2,139
 
$
2,104
 
$
2,139
 
$
1,991
 
Knowles cost in excess of net assets acquired
   
17,064
   
-
   
-
   
-
 
Pickavance cost in excess of net assets acquired
   
1,279
   
32
   
-
   
-
 
Total
 
$
20,482
 
$
2,136
 
$
2,139
 
$
1,991
 
                           
Intangible assets, net
   
18,346
         
148
       
Foreign currency adjustment
   
(35)
         
-
       
Intangible assets, net
 
$
18,311
       
$
148
       

The Company plans to finalize the fair value of the cost in excess of net assets acquired in connection with both the Knowles and Pickavance acquisitions during the fourth quarter of 2006.

Amortization expense related to cost in excess of net assets acquired totaled $38,000 for the three months ended September 30, 2006 and October 1, 2005, respectively, and totaled $145,000 and $114,000 for the nine months ended September 30, 2006 and October 1, 2005, respectively.
 
16

 
 
Note 8 -Advance Payments from Clients
 
In certain instances the Company may collect advance payments from clients for future services. As the services are performed these advance payments are recognized as revenue. The balance of advance payments from clients was $2,400,000 and $3,300,000 at September 30, 2006 and December 31, 2005, respectively, and is included in “other current liabilities” on the Condensed Consolidated Balance Sheets.
 
Note 9-Long-term Debt

   
September 30,
2006
 
December 31, 2005
 
   
(in thousands)
 
Revolving credit loan payable to Merrill Lynch up to $9,750,000, with interest rates at December 31, 2005 of 3.25% plus the one-month LIBOR 4.38% at December 31, 2005, collateralized by certain assets of the Company and guaranteed by the principal stockholder. The loan was repaid in June 2006.
 
$
 
$
9,637
 
               
 
Revolving credit loan payable to Egnatia Bank up to 1,000,000 Euros ($1,269,000), with interest rates at September 30, 2006 and December 31, 2005 of 2.5% plus the Egnatia Bank prime base rate of 6.75% and 5.5%, as of September 30, 2006 and December 31, 2005, respectively, collateralized by certain assets of the Company. The maturity date of July 15, 2006 was extended to March 16, 2007 in July 2006.
   
165
   
157
 
               
Revolving credit loan payable to National Bank of Abu Dhabi up to 5,000,000 AED ($1,400,000), with interest rates of 2% plus the 3 month EIBOR rate (5.5% and 4.6% at September 30, 2006 and December 31, 2005, respectively), collateralized by certain assets of the Company. The maturity date is November 15, 2006.
   
30
   
362
 
               
Revolving credit loan payable to Barclays Bank up to £2,250,000 ($4,223,000), with interest rate of 2% plus the Bank of England rate (4.75% at September 30, 2006). The maturity date is December 1, 2006. The loan balance at September 30, 2006 exceeded the loan commitment amount and was subsequently reduced to within the credit limit in the first week of October 2006.
   
4,661
   
 
               
Revolving credit loan payable to National Bank of Abu Dhabi, up to 2,000,000 AED ($544,000) with interest rate of 2% plus the 3 month EIBOR rate (5.5% at September 30, 2006). The maturity date is January 1, 2007. The loan balance at September 30, 2006 exceeded the loan commitment amount and was subsequently reduced to within the credit limit in the first week of October 2006.
   
550
   
 
               
Revolving credit loan payable to First National Bank up to $400,000, with interest rate of 8.75% at September 30, 2006. The maturity date is December 31, 2006.
   
400
   
 
               
Revolving credit loan payable to Bank of Scotland up to £100,000 ($188,000), with interest rate of 2% plus the Bank of Scotland rate (4.75 % at September 30, 2006). The maturity date is December 31, 2006.
   
150
   
 
               
Various other notes payable with interest rates ranging from 6.69% to 7.8% as of September 30, 2006, collateralized by the related financed equipment.
   
974
   
 
               
Note payable for Pickavance acquisition with an original issue discount of $231,000 at an imputed interest rate of 8% including foreign currency adjustment of approximately $126,000
   
1,391
   
 
     
8,321
   
10,156
 
Less current maturities
   
6,866
   
10,156
 
Long-term debt, net of current maturities
 
$
1,455
 
$
 
 
17

 

Note 10-Noncash Investing and Financing Activities

On March 24, 2006, options to purchase 482,767 shares of the Company’s common stock with an exercise price of $0.37 per share and options to purchase 48,277 shares of the Company’s common stock with an exercise price of $0.53 per share were exercised on a cashless basis when the fair market value was $5.47 resulting in the Company issuing 493,465 shares of its common stock.
 
On June 28, 2006 options to purchase 2,838,669 shares of the Company’s common stock with exercise prices ranging from $0.37 to $3.08 were exercised on a cashless basis resulting in the issuance of 2,246,852 shares of the Company’s stock. The March 24, 2006 and June 28, 2006 exercises resulted in 3,369,713 options exercised, 629,396 shares surrendered and 2,740,317 shares issued. The Company agreed to withhold its common stock due to certain option holders, including the Company’s Chief Operating Officer and Senior Vice President of Finance, and to remit to the proper taxing authorities’ payment for income taxes due on the exercise of options. The total amount due to the taxing authorities was approximately $2,800,000 of which $128,000 remains and is included in “accounts payable and accrued expenses” in the Condensed Consolidated Balance Sheet as of September 30, 2006. The Company withheld common stock from it's option holders, which it has recorded as treasury stock 525,952 shares of its common stock.
 
The Company also entered into an agreement whereby the option holders and other Company shareholders agreed to escrow 1,450,000 shares to indemnify the Company against identified litigation claims in excess of amounts recorded at September 30, 2005 and other indemnifications. As of September 30, 2006 the Company had specifically identified judgments and awards totaling $3,865,000 as described in Note 19 and accordingly, approximately 729,000 shares in escrow have been reserved for these claims. The $3,865,000 is included in “accounts payable and accrued expenses” and “shares held in escrow” in the contra equity section of the Condensed Consolidated Balance Sheets. See Notes 1 and 19 for further information. 
 
18

 
 
On August 16, 2006, the Company issued 30,000 shares to its non-employee directors as partial compensation for services as directors on the Company’s Board through the next annual stockholders meeting of the Company. The Company recorded an expense of $78,000 as directors’ compensation in general and administrative expense and an amount of $77,000 included in prepaid expenses and other current assets.
 
   
Nine-Months Ended
 
(in thousands)
 
September 30, 2006
 
October 1, 2005
 
Supplemental disclosures:
             
Interest paid
 
$
513
 
$
442
 
Income taxes paid
 
$
303
 
$
243
 
Tangible assets acquired
 
$
1,168
       
Intangible assets acquired
   
1,279
       
Associated deferred taxes
   
(295
)
     
Note payable at acquisition
   
(1,563
)
     
Liabilities assumed
 
$
589
       

Note 11- Investment in Affiliate
 
Investment in affiliate reflects ownership by the Company of 33.33% of the members’ equity of Stanley Baker Hill, LLC (“SBH”).
 
Stanley Baker Hill, LLC is a joint venture formed in February 2004 between Stanley Consultants, Inc. Michael Baker, Jr. and Hill. SBH provides various architect-engineer services in Iraq. SBH has a contract for an indefinite delivery and indefinite quantity for construction management and general architect-engineer services for facilities in Iraq with the US Army of Corps of Engineers Transatlantic Program Center.
 
Summary information of the affiliate follows:
 
(in thousands)
 
September 30,
2006
 
December 31,
2005
 
Current assets
 
$
4,467
 
$
3,650
 
Current liabilities
   
2,513
   
2,467
 
Working capital
   
1,954
   
1,183
 
Property and equipment, net
   
22
   
5
 
Members’ equity
 
$
1,976
 
$
1,188
 
 
19

 

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
2006
 
October 1,
2005
 
September 30,
2006
 
October 1,
2005
 
(in thousands)
                         
Sales
 
$
5,241
 
$
3,770
 
$
12,572
 
$
9,970
 
Net income
 
$
993
 
$
822
 
$
1,598
 
$
1,677
 
Summary information of the Company’s ownership interest is as follows:
                         
Equity in affiliate
 
$
331
 
$
274
 
$
533
 
$
559
 
Undistributed earnings included in consolidated retained earnings
 
$
331
 
$
274
 
$
655
 
$
559
 
Distributions from affiliate
 
$
-
 
$
-
 
$
270
 
$
618
 

Accounts Receivable - Affiliate
 
At September 30, 2006 and December 31, 2005 the Company reported receivables totaling $453,000 and $611,000, respectively, from SBH for work performed by the Company as a subcontractor to SBH. Such amounts were payable in accordance with the subcontract agreement between the Company and SBH.

Revenue Earned by the Company
 
Revenue from SBH pursuant to such subcontract agreement for the three-month periods ended September 30, 2006 and 2005 was $1,300,000 and $781,000, respectively and $2,600,000 and $2,500,000 for the nine-month periods ended September 30, 2006 and 2005, respectively.
 
Note 12 -Stock Options
 
On August 16, 2006, five-year options to purchase 5,000 shares of the Company's common stock were granted to each of the five non-employee members of the Company's Board of Directors. The options have an exercise price of $5.22 and are immediately vested and exercisable. The total value of the options was computed under the Black-Scholes method using a volatility rate of 44.1% and a risk-free interest rate of 4.81%. The value of the options of $59,000 has been recorded as directors’ compensation expense in general and administrative expense for the quarter ended September 30, 2006.
 
A summary of the status and changes of the stock options under the Company’s stock option plan as of September 30, 2006 and for the nine months then ended is as follows:
 
   
Shares
 
Weighted-Average
Exercise Price
 
Outstanding at December 31, 2005
   
3,417,990
 
$
1.02
 
Granted
   
25,000
   
5.22
 
Exercised
   
(3,369,713
)
 
.99
 
Forfeited
   
(48,277
)
 
3.08
 
Outstanding at September 30, 2006
   
25,000
 
$
5.22
 
Vested and exercisable at September 30, 2006
   
25,000
 
$
5.22
 
 
20

 
 
Note 13 -Warrants

The Company has 13,600,000 Redeemable Common Stock Purchase Warrants (the “Warrants”) issued and outstanding. Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing on June 28, 2006 (the completion of the Hill and Arpeggio merger) and expiring on June 23, 2008 (four years from the effective date of Arpeggio’s Offering). The Warrants are redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.
 
In connection with the Offering, Arpeggio issued an option for $100 to the representative of the underwriters to purchase 300,000 Units at an exercise price of $9.90 per Unit. The warrants underlying such Units are exercisable at $6.25 per share. The option expires in June 2009.
 
Note 14 -Due from Stockholder 

From time to time the Company made cash advances to its principal stockholder. These advances were non-interest bearing, had no set repayment term and were classified in Stockholders’ Equity in the Condensed Consolidated Balance Sheets. The entire amount due from the Company’s principal stockholder of $1,008,000 was repaid to the Company on April 21, 2006. The Company has adopted a policy that no longer allows executive officers advances or loans.
 
Note 15 - Selling, General and Administrative Expenses

Legal expenses related to an investment transaction (the Tickets.com litigation) for the three and nine months ended September 30, 2006 and October 1, 2005 of $175,000 and $409,000 were included in “selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations. Such litigation was concluded in April 2004 resulting in an award against the Company and an entity controlled by the Chief Executive Officer of the Company (“the Other Defendant”) for court costs plus interest of approximately $575,000. The Chief Executive Officer and the Other Defendant have made full payment of this amount in October 2006. Accordingly, no amount has been provided for by the Company for this matter in the accompanying financial statements.
 
Also included in “selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations is bad debt expense of $408,000 and $171,000 for the three-month periods ended September 30, 2006 and October 1, 2005, respectively and of $840,000 and $495,000 for the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.
 
21

 
 
Note 16 - Income Taxes 

The effective tax rates for the three months ended September 30, 2006 and October 1, 2005 are 22% and 37% respectively and 23% and 37%, respectively for the nine months ended September 30, 2006 and October 1, 2005. The effective rate for the three and nine months ended September 30, 2006 is lower than in previous periods because a greater portion of the Company’s profit in the three and nine months ended September 30, 2006 came from foreign operations which are taxed at lower rates.
 
Note 17 -Business Segment Information 

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims services) and secondarily by their geography (United States, Europe and Middle East).
 
The Project Management segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, staff augmentation, management consulting and estimating services.
 
The Construction Claims segment provides such services as claims consulting, litigation support, expert witness testimony, cost and damages assessment and delay and disruption analysis to clients worldwide.
 
The Company evaluates the performance of its segments primarily on operating income before corporate overhead allocations and income taxes.
 
For purposes of business segment information the assets, revenue and operating income for Knowles as of September 30, 2006 and for the month of September 2006 have been included in the Construction Claims business segment and the geographic region of Europe. The assets, revenue, and operating income of Knowles outside of Europe during the one month ended September 30, 2006 was immaterial.
 
The following tables reflect the required disclosures (in thousands) for the Company’s reportable segments:
 
(in thousands)
     
Revenue and Income from Operations
         
Three months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
               
Project Management
             
Revenue
 
$
40,457
 
$
25,337
 
Income from operations pre-Corporate overhead allocation
   
4,531
   
3,905
 
Equity in affiliate
   
331
   
274
 
Less: Corporate overhead allocation
   
1,905
   
1,534
 
Operating income
 
$
2,957
 
$
2,645
 
               
Construction Claims
             
Revenue
 
$
9,409
 
$
4,428
 
Income from operations pre-Corporate overhead allocation
   
702
   
911
 
Less: Corporate overhead allocation
   
363
   
383
 
Operating income
 
$
339
 
$
528
 
               
Total Reportable Segments
             
Revenue
 
$
49,866
 
$
29,765
 
Income from operations pre-Corporate overhead allocation
   
5,233
   
4,816
 
Equity in affiliate
   
331
   
274
 
Less: Corporate overhead allocation
   
2,268
   
1,917
 
Operating income
   
3,296
   
3,173
 
Excess of corporate overhead allocations over (under) actual expenses
   
398
   
(164
)
Total Company - Operating income
 
$
3,694
 
$
3,009
 
               
               
 
22

 

           
(in thousands)
         
Depreciation and Amortization Expense
         
For the three-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
               
Project Management
 
$
156
 
$
151
 
Construction Claim Services
   
192
   
41
 
Subtotal -Segments
   
348
   
192
 
Corporate
   
62
   
27
 
Total
 
$
410
 
$
219
 
 
 
(in thousands)
         
Revenue and Income from Operations
         
Nine months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
               
Project Management
           
Revenue
 
$
111,317
 
$
69,306
 
Income from operations pre-Corporate overhead allocation
   
12,385
   
10,205
 
Equity in affiliate
   
533
   
559
 
Less: Corporate overhead allocation
   
5,817
   
4,694
 
Operating income
 
$
7,101
 
$
6,070
 
               
Construction Claims
             
Revenue
 
$
18,839
 
$
11,066
 
Income from operations pre-Corporate overhead allocation
   
1,881
   
1,562
 
Less: Corporate overhead allocation
   
1,108
   
1,173
 
Operating income (loss)
 
$
773
 
$
389
 
               
Total Reportable Segments
             
Revenue
 
$
130,156
 
$
80,372
 
Income from operations pre-Corporate overhead allocation
   
14,266
   
11,767
 
Equity in affiliate
   
533
   
559
 
Less: Corporate overhead allocation
   
6,925
   
5,867
 
Operating income
   
7,874
   
6,459
 
Excess of corporate overhead allocations over (under) actual expenses
   
109
   
(580
)
Total Company - Operating income
 
$
7,983
 
$
5,879
 
 
23

 

           
(in thousands)
         
Depreciation and Amortization Expense
         
           
For the nine-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
Project Management
 
$
504
 
$
389
 
Construction Claim Services
   
357
   
115
 
Subtotal -Segments
   
861
   
504
 
Corporate
   
171
   
157
 
Total
 
$
1,032
 
$
660
 
 
(in thousands)
Total Assets As Of:
 
September 30,
2006
 
December 31,
2005
 
   
(unaudited)
 
(audited)
 
United States
 
$
28,986
 
$
21,346
 
Europe
   
54,286
   
7,075
 
Middle East
   
19,453
   
12,302
 
Total
 
$
102,725
 
$
40,723
 
 
(in thousands)
         
The Company’s enterprise-wide disclosures are as follows:
         
           
Total Revenue By Service Type
         
For the three-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
Project Management
 
$
40,457
 
$
25,337
 
Construction Claims
   
9,409
   
4,428
 
Total
 
$
49,866
 
$
29,765
 
               
 
(in thousands)
         
Total Revenue By Geographic Region
         
           
For the three-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
United States
 
$
23,415
 
$
18,812
 
Europe
   
11,307
   
3,149
 
Middle East
   
15,144
   
7,804
 
Total
 
$
49,866
 
$
29,765
 
 
24

 

           
(in thousands)
         
Total Revenue By Client Type
         
           
For the three-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
U.S. federal government
 
$
4,394
 
$
4,038
 
State, local and quasi-governmental agencies
   
14,321
   
12,022
 
Foreign governments
   
8,547
   
4,409
 
Private sector
   
22,604
   
9,296
 
Total
 
$
49,866
 
$
29,765
 
 
(in thousands)
         
Total Revenue By Service Type
         
           
For the nine-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
Project Management
 
$
111,317
 
$
69,306
 
Construction Claims
   
18,839
   
11,066
 
Total
 
$
130,156
 
$
80,372
 
               
 
(in thousands)
         
Total Revenue By Geographic Region
         
           
For the nine-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
United States
 
$
65,945
 
$
51,241
 
Europe
   
22,105
   
10,227
 
Middle East
   
42,106
   
18,904
 
Total
 
$
130,156
 
$
80,372
 
 
(in thousands)
         
Total Revenue By Client Type
         
           
For the nine-months ended:
 
September 30,
2006
 
October 1,
2005
 
   
(unaudited)
 
(unaudited)
 
U.S. federal government
 
$
12,499
 
$
13,784
 
State, local and quasi-governmental agencies
   
41,305
   
29,305
 
Foreign governments
   
21,343
   
14,439
 
Private sector
   
55,009
   
22,844
 
Total
 
$
130,156
 
$
80,372
 
               
 
(in thousands)
         
Property, Plant and Equipment, Net by Geographic Location
         
           
As of:
 
September 30,
2006
 
December 31,
2005
 
   
(unaudited)
 
(audited)
 
United States
 
$
1,813
 
$
1,832
 
Europe
   
2,847
   
283
 
Middle East
   
1,010
   
727
 
Total
 
$
5,670
 
$
2,842
 
 
25

 
 
Note 18 -Concentrations 
 
The Company has two clients that collectively account for a total of 29% of total revenue, and 17% of revenue less reimbursable expenses (“RLRE”), for the three-month period ended September 30, 2006 and one client that accounted for 20% of total revenue and 4% of RLRE, during the three-month period ended October 1, 2005.
 
The Company has two clients that collectively account for 31% of total revenue, and 18.6% of RLRE, for the nine-month period ended September 30, 2006 and one client that accounted for 14% of total revenue and 3% of RLRE, during the nine-month period ended October 1, 2005.
 
The Company has no clients that account for at least 10% of accounts receivable at September 30, 2006 and one client that accounted for 15% of accounts receivable as of December 31, 2005.
 
The Company has several contracts with U.S. federal government agencies that account for 9% and 14% of total revenue during the three-month periods ended September 30, 2006 and October 1, 2005, respectively.
 
The Company has several contracts with U.S. federal government agencies that account for 10% and 17% of total revenue during the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.
 
Note 19-Commitments and Contingencies

Litigation
 
On September 23, 1996, William Hughes General Contractors, Inc. (“Hughes”) filed a complaint in the Superior Court of New Jersey, Law Division, Gloucester County, against the Monroe Township Board of Education, the Company and other parties, alleging breach of contract and other causes of action in connection with its performance of a construction project for Monroe Township, seeking in excess of $3,500,000 in damages. Monroe Township, which had terminated Hughes from the construction project prior to the commencement of the litigation on the basis of Hughes’ performance, made a cross claim against the Company and other parties for contribution and indemnification. Monroe Township is seeking approximately $89,000 in damages from the Company, in addition to an indemnification for Hughes’ claims. In relation to the Hughes claims, a claim was made against the Company by Fidelity and Deposit Company of Maryland (“F&D”). F&D is claiming damages in the range of $425,000 to $470,000. The F&D claim is being defended by the New Jersey Professional Liability Insurance Guarantee Association (NJPLIGA) and losses are covered up to $300,000. The Company believes that the claims of Hughes, Monroe Township and F&D are without merit.
 
On September 22, 1999, Wartsila NSD North America, Inc. filed a complaint against the Company in the United States District Court for the District of New Jersey. Wartsila alleged negligence, breach of contract and fraud against the Company in connection with plaintiff’s hiring of a former Company employee and sought damages in excess of $7,300,000. A jury verdict was rendered on March 6, 2006. The jury found that the Company was negligent and breached the contract with plaintiff but that the Company did not commit fraud. The jury established damages at $2,000,000. The Company filed a Motion to Mold the Verdict and to Enter Judgment consistent with the parties’ contract which contains a limitation of liability clause which limits the Company’s liability, absent fraud, to direct damages. On March 28, 2006, the Court entered judgment in the case on the jury’s verdict in the amount of $2,000,000 plus pre-judgment interest, but the Court stayed enforcement of that judgment pending the decision on the Company’s Motion to Mold the Verdict. In connection with the Arpeggio and Hill merger described in Note 1 to the Condensed Consolidated Financial Statements, stockholders of the pre-merger Hill International, Inc. have escrowed a total 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters. Liability in this matter in excess of amounts accrued as of September 30, 2005 will be satisfied from such escrowed shares. Following the satisfaction of its indemnification claims arising out of this matter, the Company intends to maintain such shares as treasury stock. On June 28, 2006 the Court denied the Company’s motion and the Company subsequently filed a Notice of Appeal on July 26, 2006 with the Third Circuit Court of Appeals. The Company has posted a letter of credit securing the judgment and pre- and post-judgment interest in the amount of $3,350,000 secured by cash collateral and included in “cash-restricted” on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2006. The Company also recorded a corresponding accrued liability in the amount of $3,350,000 included in “accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2006. See Note 10. From the shares held in escrow, shares totaling 632,075 representing $3,335,000 has been allocated to the Company for satisfaction of the judgment and will be placed in treasury stock once the judgment is paid.

26

 

On April 27, 1999, Dirk Epperson and Betty Schneider filed a complaint in the United States District Court of Connecticut against the Company seeking to enforce against the Company and others a default judgment against HAESI Software, Inc. (“HAESI”) in the approximate amount of $423,000. Plaintiff alleged that the Company was the alter ego of HAESI and is liable for its debts and that the Company engaged in a fraudulent transfer of HAESI to a third party. The court dismissed the fraudulent conveyance case and on December 12, 2005 the Second Circuit denied plaintiffs’ appeal of the dismissal. On March 21, 2006, the plaintiff filed a Petition for Writ of Certiorari with the United States Supreme Court which was denied on May 22, 2006. The Company believes that the plaintiffs’ remaining claim is without merit.

On May 28, 2004, Sims Group, Inc. (“Sims”) filed a Demand for Arbitration with the American Arbitration Association alleging breach of contract against the Company. The plaintiff was a subcontractor to the Company and sought the alleged contract balance owed of $1,300,000. The Company filed a counterclaim on July 2, 2004 alleging fraud and breach of contract. This matter was arbitrated during April 2006 and an arbitration award was issued on June 28, 2006 awarding Sims $1,250,000 plus costs of $33,000. The Company had accrued a liability of $772,000 related to this matter prior to September 30 2005. In connection with the Arpeggio and Hill merger described in Note 1 to the Consolidated Financial Statements, stockholders of the pre-merger Hill International, Inc. have escrowed 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters. Liability in this matter in excess of amounts accrued as of September 30, 2005 will be satisfied from such escrowed shares. Following the satisfaction of its indemnification claims arising out of this matter, the Company intends to maintain such shares as treasury stock. In October 2006, the Company made a payment of $1,300,000 to claimant to satisfy this matter. See Notes 1 and 10. From the shares held in escrow, shares totaling 97,316 representing $515,777 has been allocated to the Company for satisfaction of the judgment and will be placed in treasury stock once the judgment is paid.

Litigation related to an investment made by the Company (the “Tickets.com litigation”) was concluded in April 2004 and resulted in an award against the Company and R4 Holdings, LLC (“R4”) for legal court costs plus interest of approximately $575,000. R4 is 100% owned and controlled by Irvin E. Richter, the Company’s Chief Executive Officer. The Company and R4 appealed this ruling and on June 20, 2006 the appeal was denied. R4 and Mr. Richter have made full payment of this amount in October 2006.

27

 
 
General Litigation
 
From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse