Zanett Announces 24% Rise in Revenue

NEW YORK--(BUSINESS WIRE)--Zanett, Inc. (NasdaqCM: ZANE), a leading consulting firm specializing in business process outsourcing (BPO), IT enabled services (ITES), and information technology (IT) serving Fortune 500 corporations and mid-market companies, has announced its financial results for the first quarter of 2008.

“We are now about halfway through the second quarter, and despite the nervousness in some parts of the economy, we see no adverse macroeconomic effects on Zanett’s business.”

Financial Highlights for Q1 2008 include (all comparisons are for the Commercial Unit only):

• 17^th consecutive quarter of positive revenue growth.
• 24% revenue growth to $12.4 million compared to just shy of $10 million in Q1 2007.
• 20% organic revenue growth of $2.0 million.
• GAAP profitability achieved.
• GAAP profit (ex-PDI sale gain) from continuing operations before tax, less one-time expenses related to the PDI sale, was $254,924, or $0.01 EPS.
• GAAP loss from continuing operations after tax fell to $0.01 per fully diluted share from $0.03 per fully diluted share in Q1 2007 (from $873,000 loss to $387,000 loss, includes one-time expenses related to PDI sale).
• The $9.4 million sale of the Government Solutions segment (PDI) resulting in an EPS gain of $0.04 per fully diluted share.
• Repayment of $7.9 million in debt, including the high coupon notes.

Claudio Guazzoni, Chairman and CEO of Zanett, said, “We are extremely happy with the first quarter financial results, and the first-rate execution of our business plan in Q1. The sale of the Government Solutions segment allows us to pursue the commercial end of the market with greater focus and vigor. We have expanded our sales force in this arena and expect both strong organic and acquisitive growth to continue.”

“Dennis Harkins was named President of Zanett Inc, augmenting his responsibility as Chief Financial Officer. As CFO, Dennis had created a plan to reduce costs and increase revenues that resulted in the GAAP profitability achieved in Q1. The board is highly confident that Dennis will continue to lead our soundly focused Company as Zanett continues to execute this plan.”

“Also in this quarter, Zanett’s board of directors authorized a one-for-four reverse stock split of the Company’s common stock to regain compliance with the $1 minimum bid price requirement and remain listed on the NASDAQ Capital Market. We also believe that the higher stock price that should result might allow new buyers into the market who are now precluded from purchasing stock at these lower levels. The reverse stock split must be approved by a majority of the Company’s shareholders. The Company will seek such shareholder approval at the Company’s 2008 annual meeting of shareholders, which we will hold on May 20^th 2008.”

Dennis Harkins, President and CFO of Zanett, said, “The restructuring and realignment of Zanett is largely complete now, and we have used some of the money from the sale of PDI to retire a substantial amount of our debt. We have trimmed our expenses such that, allowing for the extraordinary charges related to the sale of PDI, our G&A expenses actually declined 2% year over year. Moreover, our first quarter results include a pre-tax charge of $600,000, or about $0.02 a share, for costs related to the sale of PDI. We intend to hold down corporate expenses and continue to cut where we can without endangering revenue growth. Zanett is leaner and more tightly focused on the commercial sector’s BPO, ITES, IT and Management Consulting Services needs.”

FIRST QUARTER FINANCIAL RESULTS

In the first quarter ended March 31, 2008, Zanett generated revenues of $12.4 million an increase of 24% over the $9.96 million generated in the first quarter of 2007. This increase was partly attributable to an additional $460,000 contribution from the inclusion of the DBA Group Inc. for the full quarter in 2008 as compared to one month in 2007. The additional $2.0 million, or 20%, was attributable to organic growth for the quarter. This organic growth was a direct result of the alignment in the beginning of 2007 which has enabled the Company to expand its national practice expertise. Zanett believes the alignment of the different Oracle platforms will drive future efficiencies, improve our bill rates and better position us for future growth.

While revenue increased 24%, costs of revenues increased 16% from the comparable prior year period primarily due to increased revenue in the first quarter of 2008 from the first quarter of 2007.

Since competition for new customers and consulting engagements continues to intensify in the commercial solutions marketplace, Zanett increased its marketing activities, which resulted in a 9% increase in its selling and marketing expense to $1.3 million for the quarter ended March 31, 2008, as compared with $1.2 million during the first quarter ended March 31, 2007. This increase in costs is related to additional salespeople and expenses in connection with trade shows and conferences.

General and administrative expenses for the first quarter of 2008 were $2,431,909 as compared to $1,871,859 in the first quarter of 2007, representing an increase of $560,050, or 30%. This increase is a result of one-time expenses incurred at the corporate level, related to the sale of PDI. Without these expenses which are not recurring, Zanett would have had administrative expenses of $1.8 million, or a 2% reduction of $40,000.

		2008			2007
General and administrative expenses		$	2,431,909		$	1,871,859
Nonrecurring expenses related to the sale of
discontinued operations			(600,000)			-
General and administrative expenses after
effect for nonrecurring expenses		$	1,831,909		$	1,871,859

For the reasons discussed above, operating income in the first quarter of 2008 was $102,000, compared to an operating loss of $459,457 in the comparable prior year period. Included in operating income of $102,362 are one-time expenses incurred at the corporate level of $600,000, related but not offset against the gain from the sale of PDI. Without these expenses, Zanett would have had operating income of $702,362.

		2008			2007
Operating income (loss)		$	102,362		$	(459,457)
Nonrecurring expenses related to the
sale of discontinued operations			600,000			-
Operating income after effect on
nonrecurring expenses		$	702,362		$	(459,457)

General and administrative expenses after effect for nonrecurring expenses and operating income after effect on nonrecurring expenses are non-GAAP performance measures and are not intended to be regarded as an alternative to or more meaningful than GAAP earnings. Zanett's management believes the presentation of these non-GAAP performance measures provide useful information to Zanett's investors regarding Zanett's financial condition and result of operations as they reflect how the operations of the Company are performing and the Company's expenses independent of non-recurring expensed.

On a consolidated basis, the effect of the increases and decreases in revenue and the components of operating expenses discussed above resulted in operating loss from continuing operations of $345,076 for the quarter ended March 31, 2008 compared to an operating loss of $862,971 for the comparable period last year. This decrease in operating loss from continuing operations for the period was due largely to the increase in revenue which was partially offset by an increase in general and administrative costs.

Net interest expense increased $44,000, or 11%, to $447,000 in the quarter ended March 31, 2008 from $403,514 in the quarter ended March 31, 2007. This resulted from an increase in working capital borrowings. As a result of the PDI transaction, Zanett expects that interest expense will decrease in the upcoming quarters.

In the first quarter of 2008, the Company recorded an income tax provision of $42,000 versus a provision of $9,774 in the same quarter last year.

Loss from the discontinued operations of PDI net of tax was $286,000 for the three months ended March 31, 2008. In addition, the Company recorded a $1.9 million gain on the sale of PDI in the quarter ended March 31, 2008. The Company tax basis exceeds the gain and therefore there is no tax effect. PDI was classified as a discontinued operation in the fourth quarter of 2007 and sold in the first quarter of 2008.

As a result of the above, for the quarter ended March 31, 2008, Zanett reported a net gain of $1.3 million compared to a net loss of $776,000 for the quarter ended March 31, 2007.

Harkins concluded, “We are now about halfway through the second quarter, and despite the nervousness in some parts of the economy, we see no adverse macroeconomic effects on Zanett’s business.”

Management of Zanett will host a conference call today at 11 a.m. EDT to discuss the company’s financial results and achievements. Those who wish to participate in the conference call may telephone 888-335-6674 from the U.S. or for international callers, 973-321-1100, conference ID# 46721784, approximately 15 minutes before the call. A digital replay will be available approximately 2 hours after the completion of the call by telephone for two weeks and may be accessed by dialing 800-642-1687, from the U.S., or 706-645-9291, for international callers, conference ID# 46721784.

About Zanett, Inc

Zanett is a leading business process outsourcing (BPO), IT enabled services (ITES), and information technology (IT) consulting firm serving Fortune 500 corporations, mid-market companies, and highly classified federal agencies involved in Homeland Defense and Homeland Security. The company has historically operated in two segments, Government Solutions and Commercial Solutions. With the sale of PDI, Zanett will focus exclusively on its Commercial Solutions business.

The Commercial Solutions segment provides BPO, ITES, IT and Management Consulting Services, as well as delivers custom business solutions that integrate and implement Oracle's full suite of product offerings - Oracle, JD Edwards, PeopleSoft, Seibel, together with associated Oracle Fusion technologies. A wide range of industry-focused delivery expertise is provided to clients, including Managed Services, Enterprise Applications, Business Intelligence, SOA, and Middleware Technologies. Zanett also provides full infrastructure and application hosting, utilizing local and international resources, remote and onsite DBA support, all on a 24x7 basis.

Zanett currently employs over 198 people nationwide, is headquartered in New York City, and operates out of 8 offices (Atlanta, Boston, Cincinnati, Indianapolis, Jacksonville, New York City and the Philippines). For more information, please visit http://www.zanett.com.

Certain statements in this news release regarding projected results of operations, or, projected results of financial plans or future strategies and initiatives, including, but not limited to, projections of revenue, projections of profitability, any and all future expectation, and plans for future activities may and should be regarded as ``forward-looking statements'' within the meaning of the Securities Litigation Reform Act. These statements involve, among other things, known and unknown risks, uncertainties and other factors that may cause Zanett, Inc.'s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Zanett currently is considering, but in reality may or may not in the future implement any or all of the items and issues listed in any planned budget or strategic initiative, due to, among other things, known and unknown risks, uncertainties and other factors.

Circumstances do change, and if and when the landscape changes, Zanett shall endeavor to remain as flexible as possible, and adjust its strategy accordingly. Zanett, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, change in strategy, or otherwise. The aforementioned listing of risks and uncertainties is not inclusive. For a more detailed discussion of some, but not all, of the risks and uncertainties that may affect Zanett, Inc., see Zanett, Inc.'s filings with the Securities and Exchange Commission.

Neither Zanett, Inc. nor Zanett Oracle Solutions is a part of, a division of, nor a subsidiary of, nor in any other manner connected with Oracle Corporation, and no implication is made whatsoever to suggest as such.

Zanett, Inc.
Condensed Consolidated Balance Sheets
		March 31,			December 31,
			2008			2007
		(unaudited)
Assets
Current assets:
Cash and cash equivalents $		$	96,706		$	1,261,065
Accounts receivable net of allowance for doubtful accounts of $40,039 and $106,843, respectively			8,521,457			7,531,980
Income tax receivable			80,853			132,364
Unbilled revenue			274,343			406,452
Prepaid expenses			254,963			270,672
Customer deposits			535,000			643,188
Other current assets			329,125			258,547
Assets held for sale			-			6,618,678
Total current assets			10,092,447			17,122,946
Property and equipment, net			1,009,829			1,005,162
Goodwill			15,149,341			14,538,761
Other intangibles, net			1,286,555			1,394,644
Other assets			390,916			427,929
Total assets		$	27,929,088		$	34,489,442
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	1,312,118		$	2,117,931
Accrued expenses			3,912,108			2,513,619
Short-term debt			2,151,670			7,140,075
Short-term debt-related party			2,300,000			2,300,000
Short-term renewable unsecured subordinated debt			1,548,494			1,340,888
Other current liabilities			605,977			679,978
Deferred revenue			807,287			984,697
Deferred income taxes			21,924			19,359
Capital lease obligations			8,178			8,200
Liabilities held for sale		-				2,059,388
Total current liabilities			12,667,756			19,164,135
Long-term notes payable-related party			5,325,000			6,825,000
Long term renewable unsecured subordinated debt			639,178			780,784
Other non-current liabilities			436,000			472,000
Deferred rent expense			67,301			66,401
Deferred income taxes			218,295			230,449
Total liabilities			19,353,530			27,538,769
Commitments and contingencies		-			-
Stockholders' equity
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized; 30,434,024 and 29,925,206 shares issued and outstanding, respectively			30,434			29,925
Additional paid-in capital			31,567,965			31,203,565
Treasury stock, at cost; 59,658 shares			(179,015)			(179,015)
Accumulated deficit			(22,843,826)			(24,103,802)
Total stockholders' equity			8,575,558			6,950,673
Total liabilities and stockholders' equity		$	27,929,088		$	34,489,442

ZANETT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Three Months ended March 31,
		2008			2007
Revenue		$	12,381,092		$	9,957,027
Operating expenses:
Cost of revenue			8,517,779			7,322,007
Selling and marketing			1,329,042			1,222,618
General and administrative			2,431,909			1,871,859
Total operating expenses			12,278,730			10,416,484
Operating income/(loss)			102,362			(459,457)
Other income/ (expense):
Interest income			44			153
Interest expense			(447,482)			(403,667)
Total other expense			(447,438)			(403,514)
Loss from continuing operations
before income taxes			(345,076)			(862,971)
Income tax provision			41,942			9,774
Loss from continuing operations
after taxes		$	(387,018)		$	(872,745)
(Loss)/income from discontinued operations, net of taxes		$	(285,919)		$	97,084
Gain on sale of discontinued operations			1,932,913		-
Net income/(loss)		$	1,259,976		$	(775,661)
Basic and diluted income/(loss) per share:
Continuing operations		$	(0.01)		$	(0.03)
Discontinued operations		$	0.05		$	-
Net income/(loss) per common share to common
stockholders (basic and diluted)		$	0.04		$	(0.03)
Weighted average shares outstanding - basic
and diluted			30,111,773			29,798,178