<PAGE>
===============================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-21040
CAMBRIDGE TECHNOLOGY PARTNERS
(MASSACHUSETTS), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1320610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
304 VASSAR STREET,
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
(617) 374-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of October 31, 1996, there were 46,380,598 shares of common stock
outstanding.
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION:
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
PART II - OTHER INFORMATION:
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
2
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,457 $ 6,338
Investments held to maturity 12,248 8,544
Accounts receivable, less allowance of $750 and $600 at
September 30, 1996 and December 31, 1995, respectively 62,004 35,958
Unbilled revenue on contracts 3,055 1,115
Prepaid expenses and other current assets 2,014 2,261
-------- -------
Total current assets 90,778 54,216
Property and equipment, net 18,177 11,278
Other assets 2,313 1,529
Deferred income taxes 60 60
Goodwill, net 2,712 3,311
-------- -------
Total assets $114,040 $70,394
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,422 $ 6,502
Accrued expenses 14,706 8,719
Deferred revenue 9,113 2,993
Deferred income taxes 142 251
Income taxes payable 3,441 2,163
Other current liabilities 126 163
-------- -------
Total current liabilities 37,950 20,791
Other liabilities 98 204
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000
shares; issued and outstanding 46,076,822 and 44,148,618
at September 30, 1996 and December 31, 1995, respectively 461 441
Additional paid-in capital 36,778 23,644
Retained earnings 39,088 25,046
Foreign currency translation adjustment (335) 268
-------- -------
Total stockholders' equity 75,992 49,399
-------- -------
Total liabilities and stockholders' equity $114,040 $70,394
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $54,334 $34,837 $141,862 $94,259
Costs and expenses:
Project personnel 23,896 14,662 62,831 42,238
General and administration 6,100 4,010 16,431 11,551
Sales and marketing 4,248 4,195 10,937 10,108
Other costs 11,517 6,307 28,783 16,127
Business combination costs - 700 - 700
------- ------- -------- -------
Total operating expenses 45,761 29,874 118,982 80,724
------- ------- -------- -------
Income from operations 8,573 4,963 22,880 13,535
Other income (expense):
Interest income 254 210 652 519
Interest expense (7) (145) (29) (252)
Gain on sale of AdValue - - - 909
Foreign exchange (loss) gain (84) 23 (99) 165
------- ------- -------- -------
Income before income taxes 8,736 5,051 23,404 14,876
Provision for income taxes 3,495 1,913 9,362 5,806
------- ------- -------- -------
Net income $ 5,241 $ 3,138 $ 14,042 $ 9,070
======= ======= ======== =======
Net income per share $.10 $.06 $.27 $.18
======= ======= ======== =======
Pro forma data:
Historical income before taxes $ 8,736 $ 5,051 $ 23,404 $14,876
Provision for income taxes:
Historical income taxes 3,495 1,913 9,362 5,806
Pro forma increase to
historical income taxes - 107 - 215
------- ------- -------- -------
Pro forma net income $ 5,241 $ 3,031 $ 14,042 $ 8,855
======= ======= ======== =======
Pro forma net income per share $.10 $.06 $.27 $.18
======= ======= ======== =======
Weighted average number of
common and common
equivalent shares outstanding 53,858 50,538 52,784 49,890
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,042 $ 9,070
Amounts that reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,861 2,495
Tax benefit from exercise of stock options 5,498 2,936
Provision for deferred income taxes (109) (75)
Gain on Sale of AdValue - (909)
Increase in accounts receivable (26,077) (13,059)
Increase in unbilled revenue on contracts (1,960) (1,768)
Increase in prepaid expenses and other current assets (553) (294)
Increase in accounts payable 3,957 1,404
Increase in accrued expenses 6,034 5,065
Increase in deferred revenue 6,144 716
Increase in income taxes payable 1,278 845
Other, net (37) 100
-------- --------
Net cash provided by operating activities 11,078 6,526
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (9,252) (7,386)
Purchase of investments held to maturity (15,450) (13,429)
Maturity of investments held to maturity 11,746 15,201
Proceeds from Sale of AdValue - 909
-------- --------
Net cash used in investing activities (12,956) (4,705)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under credit arrangements - (916)
Obligations under capitalized leases (106) (102)
Proceeds from employee stock purchase plan 2,071 579
Dividend distributions - (599)
Proceeds from exercise of stock options 5,584 1,302
-------- --------
Net cash provided by financing activities 7,549 264
-------- --------
Effect of foreign exchange rate changes on cash (552) 22
Net increase in cash and cash equivalents 5,119 2,107
Cash and cash equivalents at beginning of period 6,338 3,365
-------- --------
Cash and cash equivalents at end of period $ 11,457 $ 5,472
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements of Cambridge Technology
Partners (Massachusetts), Inc. (the "Company") include the accounts of all of
the Company's wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Certain prior period amounts
have been reclassified to conform with current period presentation. In the
opinion of management, the consolidated financial statements reflect all normal
and recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows as of the
dates and for the periods presented. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Consequently, these statements do not include
all the disclosures normally required by generally accepted accounting
principles for annual financial statements nor those normally made in the
Company's Annual Report on Form 10-K. Accordingly, reference should be made to
the Company's Annual Report on Form 10-K for additional disclosures, including a
summary of the Company's accounting policies, which have not changed. The
consolidated results of operations for the three and nine months ended September
30, 1996, are not necessarily indicative of results for the full year.
The accompanying consolidated financial statements of the Company have been
prepared to give retroactive effect to the Company's 1995 acquisitions of The
Systems Consulting Group, Inc. ("SCG") and Axiom Management Consulting, Inc.
("Axiom"), which were accounted for using the pooling of interests method of
accounting. All prior period historical consolidated financial statements
presented herein have been restated to include the financial position, results
of operations, and cash flows of SCG and Axiom.
B. REVOLVING CREDIT FACILITY
-------------------------
On June 26, 1996, the Company amended its uncollateralized revolving credit
facility (the "Facility") with Fleet National Bank, the successor to Fleet Bank
of Massachusetts, N.A. ("Fleet Bank"). The Facility was amended, among other
things, to increase the amount available under the Facility from $10.0 million
to $20.0 million, to extend the expiration date to June 30, 1998, from June 30,
1996, and to decrease the facility cost to .15% from .25%. In addition, the
Facility was also amended to permit the Company to elect an interest rate of
either, Fleet Bank's prime rate in effect from time to time or a eurodollar
rate, as defined, payable monthly in arrears commencing with the advance of
funds. The Facility requires, among other things, the Company to maintain
certain financial ratios. At September 30, 1996, and December 31, 1995, the
Company was in compliance with these financial ratio requirements and no
borrowings have been made under the Facility.
C. STOCK SPLIT
-----------
In March 1996, the Board of Directors approved a three-for-one stock split of
the Company's common stock and an amendment to the Company's corporate charter
to increase authorized common stock from 30 million to 120 million shares. Upon
stockholder approval in May 1996, the stock split was completed on June 19,
1996, via a 200% stock dividend to stockholders of record on May 29, 1996.
Accordingly, stockholders' equity in the consolidated balance sheets has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from paid-in-capital to common stock the par value of
the additional shares arising from the stock split.
6
<PAGE>
All references in the accompanying footnotes to consolidated financial
statements to the applicable share and per share data, for all periods
presented, have been retroactively restated to reflect the increased number of
common shares outstanding from the stock split.
D. NET INCOME PER SHARE
--------------------
Net income per share data is computed using the weighted average number of
common shares outstanding, the assumed exercise of stock options and warrants
(using the treasury stock method), and the assumed issuance of a stock dividend
at the beginning of each period to effect a stock split. Net income per share
data also reflects, when applicable, the assumed issuance, at the beginning of
the period, of 2,168,292 shares of common stock and an option to purchase
105,702 shares of the Company's common stock in connection with the acquisition
of SCG, and the assumed issuance, at the beginning of the period, of 978,360
shares of common stock and options to purchase 29,538 shares of the Company's
common stock in connection with the acquisition of Axiom. Primary and fully
diluted income per share are the same for each period presented.
E. LEGAL PROCEEDINGS
-----------------
In July 1996, a suit was filed against the Company in the United States District
Court for the District of Colorado in Denver by Rocky Mountain Healthcare
Corporation ("RMHC"). RMHC is seeking, among other things, a refund of
$1,772,212 of contract payments and related damages arising from the Company's
alleged breach of an agreement pursuant to which the Company provided software
system design and consulting services to RMHC. The suit includes breach of
contract and tort claims. The Company plans to vigorously defend itself against
the suit and anticipates bringing counterclaims against RMHC.
In July 1996, Axiom was served a demand for arbitration by a former shareholder
of Axiom. The American Arbitration Association arbitration is currently pending
in northern California. The claims arise from Axiom's alleged failure to inform
such shareholder of the Company's interest in acquiring Axiom at the time he
sold his stock back to Axiom. The demand seeks damages in excess of $3.3
million plus punitive damages, costs and attorney's fees. The Company plans to
vigorously defend itself in this arbitration.
F. SUBSEQUENT EVENTS
-----------------
On October 15, 1996, the Company acquired all of the outstanding shares of
capital stock of NatSoft S.A. ("NatSoft"), a Switzerland-based information
technology consulting and software implementation firm, with approximately 105
employees at the time of the acquisition. This acquisition was accomplished
through an exchange of approximately 272,000 shares of the Company's common
stock for all outstanding shares of capital stock of NatSoft. This acquisition
has been accounted for using the pooling of interests method of accounting.
The unaudited pro forma combined statements of operations assume the acquisition
of NatSoft occurred on January 1, 1993, and the unaudited pro forma combined
balance sheet assumes the acquisition of NatSoft occurred on September 30, 1996,
and are presented in the following pages. Costs related to the acquisition,
which consist primarily of legal,
7
<PAGE>
accounting, and consulting fees, are expected to approximate $500,000 and will
be charged to operating expenses in the fourth quarter of 1996. The unaudited
pro forma combined financial statements of the Company and NatSoft are intended
for informational purposes and are not necessarily indicative of future
consolidated financial position or results of operations of the combined entity.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
AS OF SEPTEMBER 30, 1996
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL
-------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY --------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
---------- ------- ----------- --------
(Note B)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,457 $ 567 $ - $ 12,024
Investments held to maturity 12,248 - - 12,248
Accounts receivable 62,004 1,116 - 63,120
Unbilled revenue on contracts 3,055 1,210 - 4,265
Other current assets 2,014 130 - 2,144
-------- ------ -------- --------
Total current assets 90,778 3,023 - 93,801
Property and equipment, net 18,177 429 - 18,606
Other assets 2,313 89 - 2,402
Deferred income taxes 60 (60)(a) -
Goodwill, net 2,712 - - 2,712
-------- ------ -------- --------
Total assets $114,040 $3,541 $ (60) $117,521
======== ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,422 $ 101 $ - $ 10,523
Accrued expenses 14,706 1,354 - 16,060
Deferred revenue 9,113 - - 9,113
Deferred income taxes 142 339 - 481
Income taxes payable 3,441 - - 3,441
Other current liabilities 126 33 - 159
-------- ------ ------- --------
Total current liabilities 37,950 1,827 - 39,777
Other liabilities 98 - - 98
Deferred income taxes - 78 (60)(a) 18
Stockholders' equity:
Common stock 461 85 (82)(b) 464
Additional paid-in capital 36,778 - 82 (b) 36,860
Retained earnings 39,088 1,445 - 40,533
Foreign currency translation adjustment (335) 106 - (229)
-------- ------ -------- --------
Total stockholders' equity 75,992 1,636 - 77,628
-------- ------ -------- --------
Total liabilities and stockholders' equity $114,040 $3,541 $ (60) $117,521
======== ====== ======== ========
</TABLE>
8
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
----------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY -----------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
------------ -------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenues $141,862 $ 8,046 $ - $149,908
Costs and expenses:
Project personnel 62,831 5,241 115 (d) 68,187
General and administration 16,431 1,618 (115)(d) 17,934
Sales and marketing 10,937 607 - 11,544
Other costs 28,783 329 - 29,112
-------- ------- ----- ---------
Total operating expenses 118,982 7,795 - 126,777
-------- ------- ----- ---------
Income from operations 22,880 251 - 23,131
Other income (expense):
Interest income 652 3 - 655
Interest expense (29) (4) - (33)
Foreign exchange (loss) gain (99) 17 - (82)
-------- ------- ----- ---------
Income before income taxes 23,404 267 - 23,671
Provision for income taxes 9,362 104 - 9,466
-------- ------- ----- ---------
Net income $ 14,042 $ 163 $ - $ 14,205
======== ======= ===== =========
Net income per share $.27 $.27
======== =========
Weighted average number of
common and common equivalent
shares outstanding 52,784 53,056 (c)
======== =========
</TABLE>
9
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY ------------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $94,259 $ 9,211 $ - $103,470
Costs and expenses:
Project personnel 42,238 5,992 195 (d) 48,425
General and administration 11,551 1,799 (195)(d) 13,155
Sales and marketing 10,108 635 - 10,743
Other costs 16,127 568 - 16,695
Business combination costs 700 - - 700
------- ------- -------- --------
Total operating expenses 80,724 8,994 - 89,718
------- ------- -------- --------
Income from operations 13,535 217 - 13,752
Other income (expense):
Interest income 519 1 - 520
Interest expense (252) (5) - (257)
Gain on sale of AdValue 909 - - 909
Foreign exchange gain 165 - - 165
------- ------- -------- --------
Income before income taxes 14,876 213 - 15,089
Provision for income taxes 5,806 72 - 5,878
------- ------- -------- --------
Net income $ 9,070 $ 141 $ - $ 9,211
======= ======= ======== ========
Net income per share $ .18 $ .18
======= ========
Pro forma data:
Historical income before taxes $14,876 $ 213 $ - $ 15,089
Provision for income taxes:
Historical income taxes 5,806 72 - 5,878
Pro forma increase to
historical income taxes 215 - - 215
------- ------- -------- --------
Pro forma net income $ 8,855 $ 141 $ - $ 8,996
======= ======= ======== ========
Pro forma net income per share $ .18 $ .18
======= ========
Weighted average number of
common and common equivalent
shares outstanding 49,856 50,128(c)
======= =======
</TABLE>
10
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY --------------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
----------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Net revenues $132,416 $12,254 $ - $144,670
Costs and expenses:
Project personnel 58,744 7,750 260 (d) 66,754
General and administration 15,997 2,476 (260)(d) 18,213
Sales and marketing 13,989 844 - 14,833
Other costs 23,004 852 - 23,856
Business combination costs 1,333 - - 1,333
-------- ------- -------- --------
Total operating expenses 113,067 11,922 - 124,989
-------- ------- -------- --------
Income from operations 19,349 332 - 19,681
Other income (expense):
Interest income 706 6 - 712
Interest expense (298) (20) - (318)
Gain on sale of AdValue 909 - - 909
Foreign exchange gain (loss) 124 (18) - 106
-------- ------- -------- --------
Income before income taxes 20,790 300 - 21,090
Provision for income taxes 8,107 95 - 8,202
-------- ------- -------- --------
Net income $ 12,683 $ 205 $ - $ 12,888
======== ======= ======== ========
Net income per share $ .25 $ .25
======== ========
Pro forma data:
Historical income
before taxes $ 20,790 $ 300 $ - $ 21,090
Provision for income taxes:
Historical income taxes 8,107 95 - 8,202
Pro forma increase to
historical income taxes 215 - - 215
-------- ------- -------- --------
Pro forma net income $ 12,468 $ 205 $ - $ 12,673
======== ======= ======== ========
Pro forma net income per share $ .25 $ .25
======== ========
Weighted average number of
common and common equivalent
shares outstanding 50,415 50,687 (c)
======== =======
</TABLE>
11
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
FOR THE YEAR ENDED DECEMBER 31, 1994
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY ---------------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
--------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenues $83,477 $ 7,825 $ - $91,302
Costs and expenses:
Project personnel 37,489 4,538 256 (d) 42,283
General and administration 10,524 1,344 (256)(d) 11,612
Sales and marketing 9,564 971 - 10,535
Other costs 14,161 496 - 14,657
------- ------- -------- -------
Total operating expenses 71,738 7,349 - 79,087
------- ------- -------- -------
Income from operations 11,739 476 - 12,215
Other income (expense):
Interest income 368 - - 368
Interest expense (145) (3) - (148)
Foreign exchange gain (loss) 48 (6) - 42
------- ------- -------- -------
Income before income taxes 12,010 467 - 12,477
Provision for income taxes 4,453 131 - 4,584
------- ------- -------- -------
Net income $ 7,557 $ 336 $ - $ 7,893
======= ======= ======== =======
Net income per share $ .16 $ .17
======= =======
Pro forma data:
Historical income before taxes $12,010 $ 467 $ - $12,477
Provision for income taxes:
Historical income taxes 4,453 131 - 4,584
Pro forma increase to
historical income taxes 517 - - 517
------- ------- -------- -------
Pro forma net income $ 7,040 $ 336 $ - $ 7,376
======= ======= ======== =======
Pro forma net income per share $ .15 $ .16
======= =======
Weighted average number of common
and common equivalent shares
outstanding 46,680 46,952(c)
======= =======
</TABLE>
12
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS OF
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. AND
NATSOFT S.A.
FOR THE YEAR ENDED DECEMBER 31, 1993
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
CAMBRIDGE PRO FORMA
TECHNOLOGY -------------------------
PARTNERS NATSOFT ADJUSTMENTS COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $49,961 $ 5,342 $ - $55,303
Costs and expenses:
Project personnel 22,445 3,610 256 (d) 26,311
General and administration 6,728 821 (256)(d) 7,293
Sales and marketing 6,443 558 - 7,001
Other costs 8,268 224 - 8,492
------- ------- -------- -------
Total operating expenses 43,884 5,213 - 49,097
------- ------- -------- -------
Income from operations 6,077 129 - 6,206
Other income (expense):
Interest income 97 4 - 101
Interest expense (120) (3) - (123)
Foreign exchange gain - 7 - 7
------- ------- -------- -------
Income before income taxes 6,054 137 - 6,191
Provision for income taxes 2,217 12 - 2,229
------- ------- -------- -------
Income before cumulative effect of
change in accounting principle 3,837 125 3,962
Cumulative effect of change in
accounting principle 1,204 - - 1,204
------- ------- -------- -------
Net income $ 5,041 $ 125 $ - $ 5,166
======= ======= ======== =======
Net income per share:
Income before cumulative effect of
change in accounting principle $ .09 $ .09
Cumulative effect of change in
accounting principle .03 .03
------- -------
Net income per share $ .12 $ .12
======= =======
Pro forma data:
Historical income before taxes $ 6,054 $ 137 $ - $ 6,191
Provision for income taxes:
Historical income taxes 2,217 12 - 2,229
Pro forma increase to
historical income taxes 225 - - 225
------- ------- -------- -------
Income before cumulative effect of change in
accounting principles 3,612 125 - 3,737
Cumulative effect if change in
accounting for income taxes 1,204 - - 1,204
------- ------- -------- -------
Proforma net income $ 4,816 $ - $ - $ 4,941
======= ======== ======== =======
Pro forma net income per share:
Income before cumulative effect of
change in accounting principle $ .08 $ .08
Cumulative effect of change in
accounting principle .03 .03
------- -------
Net income per share $ .11 $ .11
======= =======
Weighted average number of
common and common equivalent
shares outstanding 42,732 43,004(c)
======= =======
</TABLE>
13
<PAGE>
(a) To reclassify long term deferred tax assets to offset long term deferred
tax liabilities in accordance with Statement of Financial Accounting Standards
No. 109, " Accounting for Income Taxes."
(b) Reflects the pro forma effect related the issuance of approximately 272,000
shares of the Company's common stock for all of the outstanding shares of
common stock of NatSoft.
(c) Pro forma net income per share are computed using the weighted average
number of common and common equivalent shares outstanding, the assumed exercise
of stock options and warrants (using the treasury stock method), and the
assumed issuance, at the beginning of each period presented, of approximately
272,000 shares of the Company's common stock in connection with the
acquisition of NatSoft. Primary and fully diluted income per common share
are the same for each period presented.
(d) Certain salaries and benefits relating to NatSoft's project personnel and
general and administration expenses have been reclassified to conform with the
Company's presentation and to reflect the ongoing role of personnel.
On October 31, 1996, the Company entered into a definitive agreement to acquire
all of the outstanding capital stock of Ramos & Associates, Inc. ("Ramos"). The
acquisition will be accomplished through a merger of the Company's acquisition
subsidiary and Ramos in an exchange of approximately 1,175,200 shares of the
Company's common stock for all the outstanding shares of capital stock of Ramos.
Ramos, founded in 1991 and based in San Ramon, California, is an information
technology consulting and software implementation firm which specializes in the
Enterprise Resource Planning service market. With offices in San Ramon, Dallas,
Islia, New Jersey, and Chicago, Ramos has approximately 215 employees worldwide
at October 31, 1996. This acquisition will be accounted for using the pooling of
interests method of accounting and is expected to be completed in November 1996.
Costs relating to the acquisition are expected to be approximate $700,000 and
will be charged to operating expenses in the fourth quarter of 1996.
14
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Cambridge Technology Partners (Massachusetts), Inc. (the "Company") is a
software consulting and integration firm which provides services for the
development and deployment of client/server distributed applications, including
internet-based applications. Working with a fixed time/fixed fee price model,
the Company's system development expertise also includes package implementation
and business renewal services. The Company continued to generate strong
operating results in the third quarter ended September 30, 1996, increasing net
revenues and net income by 56% and 67%, respectively, compared to the same
period in 1995. The third quarter of 1996 results continued to reflect
increased demand for the Company's services, in both North America and Europe.
In October 1996, the Company formed a subsidiary in Brazil to capitalize on the
increased demand for its services. In addition, the Company also performed
consulting services in Mexico during the third quarter of 1996. In order to
meet increased demand for the Company's services, total Company staff increased
to 1,446 employees at September 30, 1996, from 1,062 employees at December 31,
1995. The Company expects to continue to hire personnel to support the
anticipated increase in demand for its services for the remainder of 1996 and
into 1997.
In October 1996, the Company acquired all of the outstanding shares of capital
stock of NatSoft S.A. ("NatSoft") (see Note F of Notes to Consolidated Financial
Statements), a Switzerland-based information technology consulting and software
implementation firm, with approximately 105 employees at the time of the
acquisition. This acquisition establishes the Company's entry into the Swiss
market and provides the Company with a pool of multi-lingual professionals who
can support projects in Southern Europe.
On October 31, 1996, the Company entered into a definitive agreement to acquire
all the outstanding capital stock of Ramos & Associates, Inc. ("Ramos") (see
Note F of Notes to Consolidated Financial Statements). Ramos is expected to
provide the Company with expertise for the deployment of the Enterprise Resource
Planning service market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
Net revenues increased 56% to $54.3 million in 1996 compared to $34.8 million in
1995 due principally from an increase in the volume of services delivered to new
clients, as well as leveraging the client base by undertaking additional
projects for existing clients. North America net revenues grew 52% to $41.7
million from $27.5 million in 1995. European operations together with
activities in Latin America continued to make significant contributions to net
revenues by increasing 72% from 1995, to $12.6 million or 23% of consolidated
net revenues for the 1996 period, while for the same period in 1995, net
revenues were $7.3 million or 21% of net revenues.
Project personnel costs consist principally of payroll and payroll related
expenses for personnel dedicated to client assignments and are directly related
to the level of client services being delivered. Project personnel costs were
$23.9 million or 44% of net revenues in 1996 compared to $14.7 million or 42%
15
<PAGE>
of net revenues in 1995. The dollar and percentage increase resulted from hiring
of additional project personnel over 1995 staff levels to support the increased
volume of services delivered to clients and the related increase in payroll and
payroll related expenses over 1995. Worldwide project personnel headcount
increased 44% to 1,244 employees at September 30, 1996, from 863 employees at
September 30, 1995. The Company expects to maintain its project personnel costs
as a percentage of net revenues at the current quarterly level for the remainder
of 1996, with any cost improvements resulting from continuing focus on
utilization rates for project personnel.
General and administration expenses were $6.1 million or 11% of net revenues in
1996 compared to $4.0 million or 12% of net revenues in 1995. The dollar
increase primarily reflects expenses associated with increased staff headcount
and increased company-wide recruiting and relocation expenses to support the
Company's continued growth and geographic expansion in North America, Europe,
and Latin America. The Company expects to maintain general and administration
expenses as a percentage of net revenues at the year-to-date 1996 level while
continuing to provide sufficient support for the Company's global growth
strategy.
Sales and marketing expenses were $4.3 million or 8% of net revenues in 1996
compared to $4.2 million or 12% of net revenues in 1995. The dollar increase is
primarily attributable to an increase in payroll and payroll related expenses
associated with the hiring of an additional 13 sales and marketing personnel in
1996 compared to an additional 8 sales and marketing personnel in 1995,
partially offset by a decrease in travel related expenses. The Company
continued its investment in maintaining marketing initiatives and educational
and training programs that provide clients with an opportunity to learn about
new technologies and client/server trends, such as seminars for chief
information officers and interactive management lab programs. The percentage
decrease is due principally to the significant increase in net revenues from
1995 and the addition of the SCG and Axiom whose sales and marketing expenses as
a percentage of net revenues are lower than the Company's historical level. The
Company expects that sales and marketing expenses will increase in future
periods, due to anticipated hiring of additional sales and marketing staff and
the anticipated increase in marketing programs.
Other costs consist primarily of non-billable expenses directly incurred for
client projects and other associated business costs, including facilities costs
and related expenses, non-billable staff travel, and staff training. Other
costs were $11.5 million or 21% of net revenues in 1996 compared to $6.3 million
or 18% of net revenues in 1995. The dollar and percentage increase from 1995
resulted principally from increased facility, travel, and employee training
costs, including costs related to maintaining newly opened and expanded offices
in both North America and Europe as the Company continues to execute its global
expansion strategy. As the Company continues its headcount and facilities
growth to support current and anticipated increase in demand for its services,
the Company expects to maintain its other costs as a percentage of net revenues
at the current quarterly level for the remainder of 1996.
Interest income increased to $254,000 in 1996 from $210,000 in 1995. The
increase is principally due to higher average cash equivalent and investment
balances and higher average interest rates in 1996 compared to 1995. The
Company's investments consist primarily of tax exempt investment grade municipal
bonds which mature within one year from the date of purchase.
16
<PAGE>
Interest expense of $145,000 in 1995 consisted primarily of interest on amounts
outstanding under lines of credit maintained by SCG and Axiom. Following the
acquisitions, all outstanding amounts were repaid and the Company terminated
these revolving credit facilities.
Foreign exchange loss of $84,000 in 1996 related to foreign currency exchange
rate fluctuations associated with intercompany balances. In May 1995, the
Company began entering into foreign exchange forward contracts to hedge against
the risk of changes in foreign currency exchange rates to the Company associated
with intercompany balances. As of September 30, 1996, the Company held foreign
exchange contracts of approximately $7.2 million.
The Company's income tax rate in 1996 increased to 40% from 38% a year ago.
This increase is primarily due to SCG's non-taxable S-Corporation income in
1995. The Company's effective tax rate may vary from period to period based on
the Company's future expansion into areas of varying country, state, and local
statutory income tax rates.
Net income was $5.2 million or $.10 per share for the 1996 period as compared to
$3.1 million or $.06 per share for the same period in 1995. The Company
increased its net income per share by 67% despite a 7% increase in the number of
common and common equivalent shares outstanding due to stock options granted to
employees and shares issued under the Company's employee stock purchase plan.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
Net revenues increased 51% to $141.9 million in 1996 compared to $94.3 million
in 1995 due principally from an increase in the volume of services delivered to
new clients, as well as leveraging the client base by undertaking additional
projects for existing clients. North America net revenues grew 45% to $109.2
million from $75.2 million in 1995. European operations together with
activities in Latin America continued to make significant contributions to net
revenues by growing 72% from 1995, accounting for $32.7 million or 23% of
consolidated net revenues for the 1996 period compared to $19.1 million or 20%
of consolidated net revenues for the same period a year ago.
Project personnel costs were $62.8 million or 44% of net revenues in 1996
compared to $42.2 million or 45% of net revenues in 1995. The dollar increase
resulted from hiring of additional project personnel over 1995 staff levels to
support the increased volume of services delivered to clients and the related
increase in payroll and payroll related expenses over 1995. The decrease as a
percentage of revenues is primarily due to improvements in project personnel
costs as a percentage of net revenues in the Company's North American
operations.
General and administration expenses were $16.4 million in 1996 compared to $11.5
million in 1995, representing 12% of net revenues for both periods. The dollar
increase primarily reflects expenses associated with increased staff headcount
and increased company-wide recruiting and relocation expense to support the
Company's continued growth and geographic expansion in both North America and
Europe.
17
<PAGE>
Sales and marketing expenses were $10.9 million or 8% of net revenues in 1996
compared to $10.1 million or 11% of net revenues in 1995. The dollar increase
is primarily attributable to an increase in payroll and payroll related expenses
associated with the increase in sales and marketing personnel from 58 in 1995 to
87 in 1996, partially offset by a decrease in travel related expenses. In
addition, the Company continued its investment in maintaining marketing
initiatives and educational and training programs that provide clients with an
opportunity to learn about new technologies and client/server trends, such as
seminars for chief information officers and interactive management lab programs.
The percentage decrease is due principally to the significant increase in net
revenues from 1995 and the addition of SCG and Axiom whose sales and marketing
expenses as a percentage of net revenues are lower than the Company's historical
level.
Other costs were $28.8 million or 20% of net revenues in 1996 compared to $16.1
million or 17% of net revenues in 1995. The dollar and percentage increase from
1995 resulted principally from increased facility, travel, and employee training
costs, including costs related to opening of new offices and expansion of
existing offices in both North America and Europe as the Company continues to
execute its global expansion strategy.
Interest income increased to $652,000 in 1996 from $519,000 in 1995. This
increase is principally due to higher average cash equivalent and investment
balances and higher average interest rates in 1996 compared to 1995.
Interest expense of $252,000 in 1995 consisted primarily of interest on amounts
outstanding under lines of credit maintained by SCG and Axiom. Following the
acquisitions, all outstanding amounts were repaid and the Company terminated
these revolving credit facilities.
Foreign exchange loss amounted to $99,000 in 1996 compared to a gain of $165,000
in 1995. The gain in 1995 is primarily due to weakening of the U.S. dollar
against European currencies related to intercompany balances.
The Company's income tax rate in 1996 increased to 40% from 39% a year ago.
This increase is primarily due to SCG's non-taxable S-Corporation income in
1995. The Company's effective tax rate may vary from period to period based on
the Company's future expansion into areas of varying country, state, and local
statutory income tax rates.
Net income was $14.0 million or $.27 per share for the 1996 period as compared
to $9.1 million or $.18 per share for the same period in 1995. Net income for
1995 includes a gain of $541,000, net of taxes, or $.01 per share on the sale
of the Company's interest in AdValue. The Company increased its net income per
share by 55% despite a 6% increase in the number of common and common equivalent
shares outstanding due to stock options granted to employees and shares issued
under the Company's employee stock purchase plan.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $52.8 million at September 30, 1996, from $33.4
million at December 31, 1995. This increase was primarily due to an increase in
accounts receivable and an increase in cash equivalents and investment balances,
partially offset by cash used for capital expenditures. The Company's days
sales in accounts receivable for the nine months ended September 30, 1996,
increased to 79 days compared to 72 days for the same period in 1995. The
18
<PAGE>
increase in days sales in accounts receivable is primarily due to a large volume
of service contracts executed during September 1996. The Company continues to
focus on its outstanding receivables by involving its project management staff
in the collection process. In February 1996, the Company established a treasury
function primarily responsible for worldwide collection efforts. The Company's
cash equivalent and investment balances increased 59% to $23.7 million at
September 30, 1996, from $14.9 million at December 31, 1995.
Net cash provided by operating activities during the first nine months of 1996
increased by $4.6 million to $11.1 million from $6.5 million for the comparable
period in 1995. The increase in net income, tax benefit from exercise of stock
options and deferred revenue was partially offset by the increase in accounts
receivable, unbilled revenue on contracts, and prepaid expenses and other
current assets.
Capital expenditures of $9.2 million in the first nine months of 1996 were
comprised principally of computer equipment and employee workstations to support
the Company's expanding operations and the opening and expansion of offices
across North America and Europe. Total capital expenditures for 1996 are
expected to approximate $15.0 million, principally for leasehold improvements,
personal computers, employee workstations, telecommunication and video
conferencing equipment, and other equipment to support both current and
anticipated levels of customer activities in North America and Europe. Capital
expenditures could vary from quarter to quarter, as the Company evaluates
potential acquisitions of companies or technologies that may complement its
business.
On June 26, 1996, the Company amended its uncollateralized revolving credit
facility (the "Facility") with Fleet National Bank, the successor to Fleet Bank
of Massachusetts, N.A. ("Fleet Bank"). The Facility was amended, among other
things, to increase the amount available under the Facility from $10.0 million
to $20.0 million, to extend the expiration date to June 30, 1998, from June 30,
1996, and to decrease the facility cost to .15% from .25%. In addition, the
Facility was also amended to permit the Company to elect an interest rate of
either, Fleet Bank's prime rate in effect from time to time or a eurodollar
rate, as defined, payable monthly in arrears commencing with the advance of
funds. The Facility requires, among other things, the Company to maintain
certain financial ratios. At September 30, 1996, and December 31, 1995, the
Company was in compliance with these financial ratio requirements. As of
September 30, 1996, and December 31, 1995, no borrowings have been made under
the Facility.
The Company expects that cash flows from operations will provide the principal
source of future liquidity for the Company. However, the Company is currently
experiencing a period of growth which could place a strain on the Company's
financial resources. In order to meet client demand for the Company's services,
the Company expects to continue to increase its professional staff and to open
additional sales and operating offices in 1996 and 1997 in both North America
and Europe. Although the Company's plans to open offices and hire personnel are
driven in response to increased demand for the Company's information technology
and management consulting, and software development and evaluation services, a
portion of these expenses will be incurred in anticipation of increased demand.
Operating results and liquidity may be adversely affected if market demand and
revenues do not increase as anticipated. As the Company expands its
international operations, a number of factors, including market acceptance of
the Company's services, significant fluctuations in currency exchange rates, and
changes in general economic conditions could also adversely affect future
results and liquidity.
19
<PAGE>
The Company currently anticipates that existing cash and investment balances
combined with cash generated from operations and amounts available under the
Facility will be sufficient, at least through 1997, to meet the Company's short-
term and long-term working capital requirements and to fund the expansion of the
Company's business.
This Form 10-Q includes forward-looking statements which involve risks and
uncertainties, particularly as to capital expenditures, future liquidity needs,
working capital needs, and project personnel costs, general and administrative
expenses, sales and marketing expenses, and other costs as a percentage of net
revenues. The Company's actual future results may differ significantly from
those stated in any forward looking statements. While it is impossible to
identify each factor and event that could affect the Company's results,
variations in the Company's revenues and operating results occur from time to
time as a result of a number of factors, such as the significance of client
engagements commenced and completed during the quarter, the number of working
days in a quarter and employee hiring and utilization rates. The timing of
revenues is difficult to forecast because the Company's sales cycle is
relatively long in the case of new clients and may depend on factors such as the
size and scope of the assignments and general economic conditions. Because a
high percentage of the Company's expenses are relatively fixed, a variation in
the timing of the initiation or the completion of client assignments,
particularly at or near the end of any quarter, can cause significant variations
in operating results from quarter to quarter.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS (SEE NOTE
F OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
The following discussion is based on the unaudited pro forma combined statements
of operations of the Company and NatSoft for the nine months ended September 30,
1996 and 1995 (see Note F of Notes to Consolidated Financial Statements).
Pro forma combined net revenues for the nine months ended September 30, 1996,
increased 45% to $149.9 million in 1996 compared to $103.4 million in 1995. The
increase in pro forma net revenues is principally attributable to increased
volume of services delivered to new and existing clients in both North America
and Europe. European operations together with Latin American activities
accounted for $40.7 million or 27% of pro forma consolidated net revenues, up
from $28.3 million or 27% for the same period a year ago. NatSoft's 1996 net
revenues declined 13% to $8.0 million from net revenues in 1995 of $9.2 million.
The Company expects NatSoft's net revenues to remain at the current level for
1996. In 1997, the Company expects net revenues to increase due to expansion of
NatSoft's business into Zurich, Switzerland from its current base in Geneva.
Pro forma combined net income was $14.2 million or $.27 per share for the 1996
period as compared to $9.2 million or $.18 per share for the same period in
1995. Pro forma combined net income for 1995 includes a gain of $541,000, net
of taxes, or $.01 per share on the sale of the Company's interest in AdValue.
Pro forma combined net income per share increased by 54% despite an 6% increase
in the number of common and common equivalent shares outstanding due to stock
options granted to employees and shares issued under the employee stock purchase
plan.
20
<PAGE>
Costs related to the acquisition of NatSoft, which consist principally of legal,
accounting, and consulting fees, are expected to approximate $500,000 and will
be charged to operating expenses in the fourth quarter of 1996.
21
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ------- --------------------------------
a. Exhibits:
(11.1) Statement Regarding Computation of Earnings Per Share
b. There were no reports on Form 8-K filed for the quarter ended
September 30, 1996
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
Date: November 8, 1996 By: \s\ Arthur M. Toscanini
--------------------------
Arthur M. Toscanini
Executive Vice President and
Chief Financial Officer
23
<PAGE>
EXHIBIT 11.1
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Net income $ 5,241 $ 3,138 $14,042 $ 9,070
======= ======= ======= =======
Pro forma net income $ 5,241 $ 3,031 $14,042 $ 8,855
======= ======= ======= =======
Weighted average number of
common shares outstanding 45,880 43,899 45,537 43,623
Dilutive effect of common
equivalent shares of stock
options and warrants 7,978 6,639 7,247 6,267
------- ------- ------- -------
Weighted average number of
common and common
equivalent shares outstanding 53,858 50,538 52,784 49,890
======= ======= ======= =======
Net income per share (1) $ .10 $ .06 $ .27 $ .18
======= ======= ======= =======
Pro forma net income per share (1) $ .10 $ .06 $ .27 $ .18
======= ======= ======= =======
</TABLE>
(1) Primary and fully diluted income per share are the same for each
periods presented.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,457
<SECURITIES> 12,248
<RECEIVABLES> 62,754
<ALLOWANCES> 750
<INVENTORY> 0
<CURRENT-ASSETS> 90,778
<PP&E> 26,368
<DEPRECIATION> 8,191
<TOTAL-ASSETS> 114,040
<CURRENT-LIABILITIES> 37,950
<BONDS> 0
0
0
<COMMON> 461
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 114,040
<SALES> 0
<TOTAL-REVENUES> 141,862
<CGS> 0
<TOTAL-COSTS> 118,982
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 23,404
<INCOME-TAX> 9,362
<INCOME-CONTINUING> 14,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,042
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
