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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
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 06-132-0610
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
304 Vassar Street
Cambridge, Massachusetts 02139
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 374-9800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant was $750,913,850 based on the last reported sale price of $24.00 on
The Nasdaq Stock Market on February 28, 1997 as reported by Nasdaq.
As of February 28, 1997, there were 48,724,477 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1996. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS.
Introduction
Cambridge Technology Partners (Massachusetts), Inc. ("Cambridge Technology
Partners" or the "Company") is an international professional services firm that
works with clients to design, develop, and deploy client/server and Internet
applications. The Company's information technology development offerings also
include third-party software implementation and management consulting services.
The Company provides the majority of its services on a fixed-price, fixed-
timetable model with client involvement at all stages of the process. In
performing its services, the Company employs a rapid development methodology
using an iterative approach and features facilitated workshops that bring
together key client users, executives and IT professionals to achieve consensus
on the business case, strategic objectives, and functionality of a software
application. The Company believes that this approach permits the delivery of
results in unprecedented time frames - typically within three to twelve months.
In the fourth quarter of 1996, the Company strengthened its software package
implementation service offering through the acquisition of Ramos & Associates,
Inc. ("Ramos"). Based in San Ramon, California, Ramos provides strategic
information solutions and consulting services in the Enterprise Resource
Planning ("ERP") services market. The ERP market includes enterprise-wide
applications for human resources, finance, and manufacturing and distribution.
Ramos' ERP implementation experience, particularly with PeopleSoft's human
resource management systems, provides the Company's clients with a more
comprehensive information technology solution by expanding its package
deployment capability. Currently, Ramos is known as the Company's Enterprise
Resource Solutions business unit.
The Company's information technology and management consulting services are
offered at the enterprise-wide, specific business process and application
software levels of an organization. Upon the completion of initial management
consulting engagements or Scopes, the Company typically designs, and develops
one or more strategic software applications, which often include custom and
third-party package software, and then rolls-out such applications to the
organization's end-users. These software applications are selected and designed
to achieve a competitive advantage, enhance the efficiency and functionality of
specific business processes, and support financial goals. The Company may also
assist its clients in providing end-user training for managing the
organizational changes that accompany the roll-out of new applications and the
assimilation of such applications into production environments. Cambridge
Technology Partners also provides enterprise-wide consulting services, including
network consulting and IT strategy services, to help clients establish their
internal IT strategies and implement the recommended technology solutions. While
the early stages of a client engagement may result in a relatively small amount
of revenues, a client engagement which involves the design and development of a
strategic software application typically results in fees ranging from $1,000,000
to $6,000,000.
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The Company's headquarters are located in Cambridge, Massachusetts. The Company
has established regional sales offices in Detroit, Minneapolis, Phoenix,
Philadelphia, and Redbank, N.J., as well as sales and operations facilities in
the Atlanta, Chicago, Columbus, Ohio, Dallas, Lansing, Los Angeles, Miami, New
York, Princeton, San Francisco, San Juan, P.R., San Mateo and San Ramon, CA, and
Seattle metropolitan areas. As part of the Company's strategy to capitalize on
opportunities for growth in international markets, the Company has established
sales and operations facilities in Brazil, England, Germany, Ireland, Mexico,
Norway, the Netherlands, and Sweden. Through the acquisition of NatSoft S.A.,
("NatSoft"), which occurred in the fourth quarter of 1996, the Company expanded
its presence into Switzerland. International revenues were 25% of total
consolidated net revenues for 1996. The Company had approximately 560 employees
in offices located outside the United States as of January 31, 1996.
Strategy
The Company's objective is to be a leading provider of enterprise-wide
information technology solutions ("IT solutions") for organizations with large-
scale information processing and distribution needs. By adhering to its core
values of speed, fixed time/fixed price, knowledge transfer and integrated,
behavior-driven methodologies, the Company believes it is able to quickly adapt
to changing technologies and new solutions to better serve its clients. The
Company's strategy for achieving this objective includes the following elements:
- - Structure Client Projects at Fixed Prices and Fixed Timetables. The Company
helps clients to identify strategic uses of technology; align technology
initiatives with business objectives; and develop and deploy high-impact,
technology enabled business solutions, in rapid time frames. The Company
delivers the majority of its services on a fixed time/fixed price basis with the
remaining services delivered on a time and material basis. In addition, the
Company transfers its methodologies and technical expertise to its clients. At
the commencement of a project engagement, the Company and its clients agree on
the nature of project deliverables and a fixed price and fixed timetable for the
project. The Company's goal is to keep individual application software
deployment projects under nine months in duration in order to increase the
client's ability to utilize the IT solution to maximize competitive advantage.
The Company continually updates its library of object-oriented software
components that are reused in the software development process in order to
further improve the efficiency and quality of the development process.
- - Develop Strong Partnering Relationships with Clients. The Company's
interactive approach to problem solving and software application deployment
involves consensus building among a client's executives, computer system end-
users and MIS professionals, and helps strengthen client relationships. This
approach also enables the Company to effectively evaluate, design, develop and
implement IT solutions that allow the client to achieve a competitive advantage,
enhance the efficiency and functionality of specific business processes, and
support financial goals. Whether developing custom applications or implementing
third-party software solutions for client/server or Internet environments, the
Company seeks to establish itself as the client's preferred source for strategic
IT solutions. The Company also extends its partnering relationships with
clients beyond specific engagements by offering education and training services
to shorten the learning curve associated with implementing and maintaining new
applications. In addition, the Company
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shares its information technology experience through its interactive management
lab, CIO Lycea and the Cambridge Information Network ("CIN"), a Web-based
interactive forum. These forums provide clients with opportunities to exchange
ideas with their peers, as well as learn about new information technologies and
client/server and Internet trends.
- - Promote Flexible Computing Environments. The Company's application software
deployment process enables clients to operate in an open computing environment
incrementally by implementing strategic software applications that can operate
across existing hardware platforms and leverage existing information processing
infrastructure. The Company's approach to implementing IT solutions in most
cases involves the introduction or further implementation of client/server and
Internet architectures. In the early 1990s, the Company worked with clients to
assist in their migration to client/server systems from mainframe-based
computing. As client/server has become a preferred computing environment, the
Company is working with clients to deploy client/server applications, as well as
Internet-based applications. In 1996, many of the applications deployed by the
Company contained an Internet component. The Company believes that this trend
will continue as Internet applications become more widely utilized.
- - Provide Additional Service Offerings. In 1996, Cambridge Technology Partners
introduced its Rapid Process Implementation service offering ("RPI"). RPI is a
methodology that combines management consulting services with software
development and third-party software implementation services to aid clients in
moving from the identification of a business process that needs changing, to a
full technological implementation of that process in less than twelve months.
The Company believes that the combination of these services gives Cambridge
Technology Partners a competitive advantage by providing an additional source of
software deployment projects. In addition, the Company expanded its package
implementation expertise through the acquisition of Ramos. The Company believes
that its agile corporate structure and culture enable it to continue to provide
additional services in order to satisfy the IT needs of its clients.
- - Capitalize on Domain Expertise. As a result of the Company's information
technology consulting and development activities, the Company has developed
strategic expertise in certain client applications. The areas of expertise, or
domains, include Customer Management Systems (customer service, electronic
commerce, and sales force automation applications), Knowledge Management
Solutions (data warehouses, intranets, groupware, document management and
imaging systems), Enterprise Resource Solutions (applications for enterprise-
wide human resources, finance, and manufacturing and distribution), and Money
Management and Trading Solutions (portfolio management, trading, market makers,
and defined contribution processing). Although the Company believes that
domain expertise in an industry is not required to develop and deploy the
effective IT applications in that industry, it intends to capitalize on its
experience in these domains and deliver this expertise to clients in diverse
industries.
- - Market Expansion. The Company believes that a strong domestic and
international presence enhances competitiveness. The Company has established
regional sales offices in Detroit, Minneapolis, Phoenix, Philadelphia, and
Redbank, N.J., as well as sales and operations facilities in the Atlanta,
Cambridge, Chicago, Columbus, Ohio, Dallas, Lansing, Los Angeles, Miami, New
York, Princeton, San Francisco, San Juan, P.R., San Mateo and San Ramon, CA, and
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Seattle metropolitan areas. The Company plans to continue to expand domestically
through the establishment of additional regional sales offices and operations
facilities in major North American cities.
To capitalize on market opportunities in Europe and Latin America, the Company
has established sales and operations facilities in Brazil, England, Germany,
Ireland, Mexico, Norway, the Netherlands, Sweden and Switzerland. The Company
had approximately 560 employees as of January 31, 1996 in offices located
outside the United States. The Company also plans to continue to increase its
international presence in Europe and Latin America and create a presence in the
Pacific Rim through the establishment of sales offices and operation facilities,
and joint ventures.
Services
Cambridge Technology Partners provides information technology, management
consulting, software development and software package implementation services
designed to achieve a competitive advantage, enhance the efficiency and
functionality of specific business processes and support financial goals. To
achieve these objectives, the Company utilizes its rapid deployment methodology
using an iterative approach and features facilitated workshops that bring
together key client users, executives and IT professionals to reach agreement on
an application's business case, strategic objectives, and functionality. The
Company believes that this approach enables them to deliver results in time
frames significantly shorter than those of its competitors, typically within
three to twelve months.
Cambridge Technology Partners delivers IT solutions which are specific to each
client's business goals. The Company's process for projects involving
consulting and software deployment is divided into multiple stages with Rapid
Business Renewal ("RBR"), the starting point for consulting services, and Rapid
Application Deployment ("RAD"). RBR and RAD services are broken into four- and
five- stage delivery processes, respectively. For both services, the Company
and its clients agree on a fixed price prior to the commencement of each stage
of the project. Such a client engagement, which involves the completion of all
stages in the process described below, and which results in the implementation
of a custom strategic software application, typically results in fees to the
Company ranging from approximately $1,000,000 to $6,000,000. Software design and
development services generate the largest portion of these fees and typically
range from $750,000 to $5,500,000 depending on the type of application and the
anticipated complexity of the development process. The stages for package
implementation are similar to those for custom software development, however the
range of fees is lower. The commencement of a particular stage of a project
does not necessarily result in the commencement of any other stage.
Furthermore, not all clients commence a project at the RBR stage. Currently, the
software package implementation services being performed by Ramos and the
software solutions implemented by NatSoft are performed on a time and material
basis. The Company's goal, however, is to transition these services to a fixed
price/fixed time model in 1997.
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Although not every client progresses through an identical process, the services
and stages of those services are generally illustrated by the following diagram:
[Diagram of the Company's Rapid Process Implementation, summarizing the services
and stages of the services of Rapid Business Renewal and Rapid Application
Deployment.]
RAPID BUSINESS RENEWAL/R/ ("RBR") is a proprietary management consulting
methodology developed by Cambridge's Management Consulting division, formerly
known as Axiom Management Consulting, Inc. RBR assists in the identification,
design and implementation of opportunities for improvement to one or more
aspects of the clients' business operations, such as business processes,
organizational structures, people and culture, and technology within the context
of the client's strategic goals. RBR focuses on identifying and instituting
targeted, innovative improvements, especially in customer-facing processes.
Phases of RBR:
Discovery is the first phase of RBR which lasts three to five weeks. During
Discovery, the Company gathers information and analyzes the client's current
processes, technology, people and organizational structure in order to identify
the root causes leading to operational challenges. The Company then works with
key client representatives to identify and prioritize opportunities for
strategic, competitive advantage. Once the opportunities are prioritized, the
Company develops a business case and a workplan to illustrate and quantify the
changes required to achieve targeted results.
Innovation is the second phase which lasts eight to twelve weeks. During
Innovation, the Company and client employees work together in intensive off-site
workshops to develop
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innovative solutions for business opportunities identified in Discovery. In most
cases, this will involve the adoption of a new business process, modified
employee roles and responsibilities, and modified or new enabling technology.
Once the solution is designed, the Company will analyze and simulate the
viability of the solution during a workshop. Once the Company and client
employees are certain that the new solution is viable (from financial and
cultural perspectives), the Company develops a business case and a detailed
workplan including costs to further develop and implement the solution at a
pilot location during the next phase.
Implementation is the third phase in which the Company develops a prototype
of the business solution and tests it at a pilot location. The Company and the
client team develops detailed processes, role descriptions, methods and
procedures, training materials and communications materials. The Company and
client team also work to develop any technological solutions necessary to
support the innovated process. At the end of Implementation, the new process,
roles and responsibilities, methods and procedures and technological solution
"go live" at a pilot location so that they can be tested and "tweaked" if
necessary before being rolled out across all of the affected locations.
Roll-Out is the final stage where the new business system is implemented
across the client organization.
RAPID APPLICATION DEPLOYMENT ("RAD") is a fast, flexible approach to software
application deployment, incorporating custom software development, third-party,
package software implementation, or a combination of both. The Company's
methodology uses an iterative approach and features facilitated workshops that
bring together key client users, executives and IT professionals to reach
agreement on an application's business case, strategic objectives, and
functionality. Generally, RAD services are delivered over a three- to twelve-
month time frame.
Phases of Custom RAD:
Scope is the first phase of RAD which lasts one to four weeks. During a
Scope, the Company works with a client's users, IT professionals and executives
to clarify business goals, establish critical success factors, build cross-
functional consensus on the application, develop the business case, define the
technical architecture and review fit between application and business
processes. The Company also matrixes the application's functionality and
prioritizes each function by its business benefit and technical complexity. The
functionality matrix provides the Company with a plan for deployment and aids in
determining whether a custom or a package solution will be necessary. The
Company believes that "scoping" of the technical, business and organizational
issues early in the development cycle allows for time to address potential risks
and limitations, thereby facilitating a more rapid and cost efficient process.
Rapid Solutions Workshop ("RSW") is used if a custom solution is required.
The three-week process involves a team of the Company's project managers,
analysts, and software developers, as well as a team of the client's executives,
information system end-users and MIS professionals. The first two weeks of the
process involves a cooperative effort with the client to
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identify the scope of the prototype, to design the features of it, and to build
a business case supporting the application. During the final week of the
process, the teams participate in an intensive workshop process held at one of
the Company's facilities locations. Together, the client and Company teams
develop a functional prototype of the chosen strategic application, define
required functionality based on the jointly created business case and resolve
key business and technical implementation issues. The RSW concludes with a
presentation of the application prototype by the client team to the client's
executives. The inclusive nature of the RSW, coupled with the technical proof of
the application concept offered by a prototype demonstration, builds consensus
for the chosen application and adds momentum to the process. The Company
believes that this momentum is critical in moving a client to the design stage
of application development.
Design is the next phase in the process which lasts approximately six to
twelve weeks. During this phase the Company defines architectures, recommends
technical solutions, and develops external system specifications. In addition,
the Company consults with its Network Consulting Services Group to evaluate
network design, deployment, and support. The Company employs an N-Tier design
philosophy which includes the separation of the presentation of information and
storage of that information from the functionality of the application. This
design philosophy allows the development of the application to be implemented in
the most effective manner for the application, e.g. simple 2 tier client/server,
3 tier, or fully distributed. The Company may employ prototyping techniques
during Design to demonstrate directions or options for the future application.
At the conclusion of Design, the client receives a technical blueprint of the
software application to be developed along with a fixed-price and a fixed-
timetable plan for developing and implementing the application.
Development is the phase in which the Company implements the custom
application. This includes writing the software, integrating the application
with existing and/or third-party applications, and testing of the application.
The Company will implement the system in a manner that is best suited to the
needs of the application, the tools employed, and the environment in which the
application will run. The implementation philosophy is built on the open
systems and standards cornerstones. This, in concert with the design
philosophy, allows the partitioning of functionality between the client hardware
and server hardware to any degree from a fat client implementation, to a thin
client, to a browser implementation, to even monolithic, if appropriate. The
Company typically implements on platforms that support this approach, such as
Unix and the Windows/Intel platforms. Toolsets available on these platforms
allow for integration with most of the legacy platforms in client environments.
The Company takes specific steps in order to gain efficiencies for their clients
in custom implementations. Teams are structured to take advantage of the
parallelism inherent in the design philosophy. Subteams are organized around
tasks defined by the tiers, e.g. User Interface teams around presentation,
Functionality teams, and Data teams, with architecture and integration
coordinated by the team management. Reuse of software components, techniques,
and processes is a core element of development methodology and the Company's
process. The Company maintains an internal staff that coordinates the
maintenance, harvesting, and communications around reuse efficiencies.
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Package Rapid Application Deployment
With client/server as a preferred computing environment, many clients are
choosing package software solutions over custom solutions. The Company has
aligned itself with a number of software package partners including Arbor
Software Corp., Aurum Software Inc., Lotus Development Corp., Netscape, Inc.,
Oracle Corp., Peoplesoft, Inc., Scopus Technology, Inc., Siebel Systems, and
Vantive Corporation, in order to provide these software package solutions to
clients. If a third-party package software solution is appropriate, the Company
conducts a Package Evaluation Workshop.
During the Package Evaluation Workshop, the Company along with the client
team work to quickly define business processes and outline the functionality,
performance, support, and standards required from a package. The Company then
creates business scenarios that represent the strategic business processes that
the software application must address. The Company and client evaluate and
select a software package application based on the software vendor's ability to
support the client organization's business goals. The Package Evaluation
Workshops delivers a functionality matrix, a business case outlining return on
investment, business scenarios, a technical readiness review, and a project plan
for implementation.
The next phase of the Package RAD process is the Package Optimization
Workshop which typically lasts from two to four weeks. During this phase, the
Company reviews business needs and existing infrastructure, including hardware,
applications, and interfaces. The Company uses business process scenarios
created during the Package Evaluation/Selection process to establish the
application and related business processes, and then performs a detailed mapping
and gap analysis. At the conclusion of this phase, the Company delivers a fully
functional pilot, which is presented to key client executives for the purpose of
gaining consensus and sponsorship for the project.
The final phase prior to roll-out of the Package RAD process is a six-to
eight-month phase called Package Enhancement/Implementation. During this phase
the Company enhances and deploys the package application in parallel, by
distinct teams. The Company then delivers the application's business rules;
technical and architectural integration; conversion of legacy data; interfaces
with existing systems; user and administration documentation; and testing of
network and system performance.
Roll-out
Upon completion of the software Development process or the Package
Enhancement/Implementation phase, the Company assists its clients in the roll-
out of the application into the workplace and its assimilation into the
production environment. The Company also assists its clients in managing the
organizational changes that accompany such roll-out of the application. For
example, end-user training and distribution of the application for general use
are coordinated so that end-users of the application are able to immediately use
skills acquired in recent training sessions. This facilitates acceptance of the
application and any new related business processes and enhances utilization of
the application.
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Rapid Process Implementation is the integration of RBR with RAD to innovate and
implement strategic, technology-enabled business solutions in time frames
ranging from six to twelve months. The purpose of RPI is to provide consulting
and implementation services in parallel. The Company forms an integrated team
that makes strategic business decisions and technology decisions in unison.
This integration enables the Company to develop the four components of the
business solution - process, organization, people, and technology and help
ensure that the solutions provide long-term strategic value for the client.
An RPI engagement begins with the Discovery phase of RBR. During this phase
the Company's team conducts a consensus-building workshop with a client team to
reach agreement on the goals and strategies for change initiatives. A specific
business process is identified for change and a preliminary business case is
developed to quantify the changes required to achieve targeted results.
The next phase of RPI combines RBR's Innovation phase with the Scoping
phase of RAD. To speed the process, the Company conducts intense, off-site
workshop sessions that enable the Company and client team to create a practical
solution that addresses all business components. In addition, the Company
defines high-level functionality for the technology solution and prioritizes
each function by its business benefit and technical complexity. The Company then
factors in the client's real-world considerations, including physical, budget,
and staffing constraints, to create a realistic view of future operations. This
stage of RPI concludes with the presentation of a solid business case for moving
forward, including a detailed plan and costs for implementing the solution.
As an RPI engagement progresses, the Company executes RBR's Implementation
phase in parallel with the Rapid Solutions Workshop, Design, and Development
phases of RAD. The Company develops a prototype of the renewed business system,
creating the conditions that will exist for the roll-out. Over a period of three
to nine months, the Company repeatedly tests the prototype and revises the
business models until implementation is completed according to the agreed upon
plan. During the final phase of RPI, the Company configures physical locations,
deploys skills through training or recruiting, and rolls out and fine tunes
technology solutions. By the end of an RPI engagement, a new business system is
delivered with the supporting people, technology and organizational structures
in place.
ENTERPRISE CONSULTING SERVICES:
Network Consulting Services combine network assessment, design, and deployment
services with a comprehensive set of integration skills to support client's open
systems. Network services are offered as an integral part of RAD and as an
independent service offering. The Company's services range from assessment
projects, such as performance analysis, to network design, deployment, and
support. Analysis services are designed to help clients gain a detailed
understanding of their current network environment and include reviewing the
architecture and security of the existing client network, and analyzing the
costs and risks associated with that network. Design services assist clients in
defining a network infrastructure capable of supporting strategic business goals
and developing plans to build and manage this network. Deployment
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services help ensure that network hardware and software are installed correctly
and within the fixed time frame. Throughout a networking engagement, the Company
transfers technical expertise and methodologies to the client to enable them to
maintain the deployed network. The Company believes that network performance and
reliability are critical in a distributed computing environment and its network
services provide clients with expertise that helps ensure applications perform
as planned.
IT Strategy Services begin with several workshops involving client's business
executives, end users, and information technology staff. During the workshops,
the Company works with clients to identify business drivers and critical success
factors and define the strategic results expected from IT. The information
obtained in the workshops forms the foundation for a business-focused IT
capability in an open systems, distributed environment. During the subsequent
assessment phase, the Company evaluates how well the client's current
applications and data support business goals. The Company then develops a plan
for improving the strategic value of the application portfolio by prioritizing
new applications to be developed, ranking application enhancements, and identify
applications to retire. The next stage in the process is the evaluation of the
technology architecture to determine which technologies should be replaced and
the recommendation of future investments in networks, databases, tools, servers,
and software. Because changes in technology have an impact on an organization's
people and processes, the Company develops an IT organization strategy to
establish the technical skills and management practices needed to manage an open
environment effectively.
Educational Services help to shorten learning curves for implementing and
maintaining new applications, decrease risks of migrating to a new technology
environment, and reduce dependency on outside vendors. In order to provide
training solutions that are customized for the client, the Company focuses on
four key areas of training and development: technical training, package
applications training (for both end users and IT professionals), methodology
training, and professional skills training. To assure that newly-implemented
technologies are used completely and correctly, Cambridge Technology Partners
offers Rapid Roll-out assimilation and Support ("RRAS") Services. RRAS
facilitates all aspects of training, development, and support. During a
Training and Development Workshop, the Company evaluates training needs and
delivers a detailed project plan and price estimate for the training. Next, the
Company develops courses, curriculum, and materials; manages training logistics;
and conducts instructor-lead training. In addition, the Company offers other
creative delivery methods including computer-based training, Internet-based
training, and distance learning. To ensure that training delivers anticipated
results, the Company reviews the program's quality, conduct focus groups, and
test students to gauge the effectiveness of knowledge transfer.
Markets and Client Projects
The Company markets its services to a wide variety of industries, and its
clients include a diverse group of business and governmental organizations with
large-scale information access and processing needs. To date, the Company's
marketing efforts have been directed toward clients on the basis of information
processing needs rather than industry group and the Company believes that no
single industry has been material to the Company's success. The projects
described below are representative of the types of projects undertaken by the
Company's clients. Because of the
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costs involved in implementing a strategic software application, clients may
undertake projects on an irregular basis and level of services performed for
clients varies from year to year.
Since its inception, the Company has utilized client/server technology, and
increasingly in 1996 the Internet, to deliver innovative IT solutions for
clients. The Company believes that these solutions have helped provide clients
with competitive advantages by focusing on high value-added areas such as
distribution, sales and marketing, and customer management.
One such solution was a Disease Management System ("DMS") for Memorial Sloan-
Kettering Cancer Center ("MSKCC"). The Company worked with MSKCC to integrate
patient information from previously unconnected databases including those in
administration, laboratory, radiology, pharmacy, and surgery to provide a
comprehensive view of each patient. The DMS is accessible from all clinical
areas and physician desktops which enables MSKCC's staff to make patient care
decisions based on complete, up-to date information. Since the DMS has been in
place, MSKCC reports maximized efficiencies, increased patient and physician
satisfaction, and improved quality of patient care.
Another system deployed by the Company is an information service for Nasdaq.
The Company worked with Nasdaq to deploy Nasdaq Online, an Internet-based market
information service developed exclusively for Nasdaq listed companies. Nasdaq
Online gives corporate executives access to current market and financial data,
news and analytical tools. The new system provides Nasdaq's clients with better
information to manage shareholder relationships, respond to questions from the
investment community, and target financial institutions.
Internationally, the Company worked with Interpay Netherlands, an organization
owned by several leading Dutch banks, to develop a back-office system that
handles the administrative functions of a debit card. Chipknips or "smart cards"
debit money from a "charged" computer chip on the card. Consumers in the
Netherlands can now uses Chipknips to debit money from their bank account to pay
for a wide variety of low-cost goods and services, including newspapers, parking
meters and telephone calls. Cambridge Technology Partners implemented the system
in a four-month time frame, enabling Interpay to provide this service to its
clients before its competition.
Concentration of Revenues
No customer accounted for more than 5% of net revenues in either 1996, 1995 or
1994. The acquisitions of Natsoft and Ramos were accounted for using the
pooling-of-interests method of accounting and, accordingly, the net revenues of
Natsoft and Ramos are included for three years. The Company has in the past
derived, and may in the future derive, a significant portion of its net revenues
from a relatively small number of major projects. In many cases the Company's
information technology consulting and software development and implementation
services are delivered in connection with a major information technology project
initiated by a customer's MIS department. Since the implementation of a
strategic software application may result in fees to the Company ranging from $1
million to $6 million, most customers undertake these projects on an irregular
basis. Accordingly, the Company expects that the existence and identity of its
largest customers may change from year to year.
11
<PAGE>
Sales and Marketing
The Company markets its services in North America through a direct sales force
of 40 employees operating out of its domestic offices located in the Atlanta,
Chicago, Cambridge, Columbus, Ohio, Dallas, Detroit, Lansing, Los Angeles,
Miami, Minneapolis, New York, Philadelphia, Phoenix, Princeton, San Francisco,
San Juan, P.R., San Mateo and San Ramon, CA, and Seattle metropolitan areas.
In addition, the Company markets its services internationally through a direct
sales force of 7 employees operating out of its offices Brazil, England,
Germany, Ireland, Mexico, Norway, the Netherlands, Sweden and Switzerland.
Because the Company's services typically require a substantial financial
obligation and a strategic business decision, approximately two to six months
is required for prospective clients to authorize the commencement of an
engagement.
The Company also conducts cooperative marketing programs with certain computer
hardware and software vendors, such as Arbor Software Corp., Aurum Software
Inc., Clarify Inc., Hewlett-Packard Company, Informix Software Inc., Netscape,
Inc., Oracle Corporation, Scopus Technology, Inc., Seibel Systems, Inc., SUN
Microsystems Computer Corporation, Sybase Inc., and The Vantive Corporation. By
working directly with these vendors on specific marketing programs, the Company
has developed relationships which can result in sales leads for its services.
The Company hosts, either independently or in conjunction with hardware and
software vendors, a variety of marketing programs for IT and line of business
professionals that explain the Company's methodology for achieving competitive
advantages through open systems and distributed computing. These vendors are not
contractually obligated to continue to participate in any of these programs and
are not prohibited from entering into similar arrangements with the Company's
competitors. The Company receives commissions on the sale of hardware
manufactured by certain of these vendors. The amount of these commissions is not
material to the Company's results of operations.
Existing clients are also an important component of the Company's marketing
strategy. The Company's process of building open systems applications on an
incremental basis results in flexible systems which can support additional
applications as a client's needs develop or change. For example, the result of a
Scope and a Rapid Solutions Workshop may be a proposal involving several
applications to be implemented over time. Follow-on projects leverage sales and
marketing resources and strengthen the Company's client relationships. The
Company also extends its relationships with its clients by offering educational
programs through its interactive management lab, CIO and CIN Forums and other
information-sharing programs.
Another component of the Company's marketing strategy is to expand on the
experience developed in certain horizontal domain areas in order to gain
additional experience and increase the likelihood of further client assignments.
The Company has developed expertise with respect to business applications that
are useful across a wide range of industry groups, and believes that this
expertise will enable it to expand into new industries. For example, the Company
intends to capitalize on its expertise with respect to customer management and
sales force automation systems, enterprise resource solutions, knowledge
management, electronic commerce, and money management and trading solutions.
These domains are complimented with the Company's educational and network
services offerings.
12
<PAGE>
Backlog
For the software development services, the Company and its clients generally
agree on a contractually-fixed price for each stage of the software development
process. The Company only includes in backlog that stage of the software
deployment process for which it has obtained a signed contract. Accordingly,
backlog does not reflect revenues expected to be derived from future stages of a
software development engagement. The Company's fixed-price contract backlog
totaled $14.9 million at January 31, 1997, compared to $25.2 million at January
31, 1996. The decrease in backlog is due to numerous engagements ending on
January 31, 1997. Contracts not included in backlog but signed in February
1997, total $9 million. Because the Company employs a rapid deployment
methodology providing for completion periods of approximately nine moths,
contracts included in client backlog are generally performed within 12 months.
In accordance with industry practice, many of the Company's contracts are
terminable by the Company or the client upon short notice. The Company believes
that there can be no assurance that contracts reflected in backlog will not be
canceled or delayed and, therefore backlog is not a measure of future revenues.
The Company's newly acquired companies (Natsoft and Ramos) maintain a majority
of their engagements on time and materials-based contracts, such that revenue is
recognized when services are performed. These engagements generally can be
terminated by the Company or the client at any time. Therefore, estimated
backlog amounts are not included in the Company's backlog amount.
Competition
The information technology consulting and software development market comprises
a large number of participants, is subject to rapid changes, and is highly
competitive. The market includes participants from a variety of market segments,
including systems consulting and integration firms, contract programming
companies, application software firms, the professional service groups of
computer equipment companies such as Hewlett-Packard Company, IBM, and Digital
Equipment Corporation, facilities management and MIS outsourcing companies, "Big
Six" accounting firms, and general management consulting firms. The Company's
competitors also include companies such as Andersen Consulting, Technology
Solutions Corporation, American Management Systems, Cap Gemini America, the
consulting division of Computer Sciences Corporation, Electronic Data Systems
Corporation, Sapient Corporation, and Renaissance Solutions Inc. The Company
also faces competition from information services organizations within potential
clients.
Many participants in the information technology consulting and software
development market have significantly greater financial, technical and marketing
resources and, given the Company's short history, greater name recognition than
Cambridge Technology Partners, and generate greater systems consulting and
integration revenues. In addition, the custom software development and systems
integration market is highly fragmented and served by numerous firms, many of
which serve only their respective local markets. However, the Company believes
that its rapid development methodology, coupled with its high quality standards,
open systems
13
<PAGE>
philosophy, client/server architecture approach, and fixed-price contracting
practices, distinguish it from its competitors. The Company believes that the
principal competitive factors in the information technology consulting and
software development industry include responsiveness to client needs, speed of
application software development, quality of service, price, project management
capability and technical expertise. The Company believes it competes favorably
with respect to these factors.
The Company believes that its ability to compete also depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the ownership
by competitors of software used by potential clients, the development by others
of software that is competitive with the Company's products and services, the
price at which others offer comparable services, and the extent of its
competitors' responsiveness to customer needs.
Human Resources
As of January 31, 1996, the Company had a total staff of 1,926 employees,
comprised of 12 senior executives, 37 vice presidents, 117 client partners, 191
project managers, 1,311 application developers and systems consultants, 108
sales and marketing personnel, and an administrative staff of 150 employees.
A project manager oversees all phases of a client assignment. Project managers
are typically responsible for a single client assignment. At any one time,
clients may be involved with Cambridge Technology Partners on the implementation
of more than one strategic application. Client partners are responsible for
coordinating all of the Company's services to a client, ensuring the system
meets the client's business needs and maintaining client relationships.
The Company's success will depend in large part upon its ability to attract,
retain and motivate highly-skilled employees, particularly project managers and
client partners and other senior technical personnel. Qualified project managers
are in particularly great demand and are likely to remain a limited resource for
the foreseeable future. However, the Company believes that it has been
successful in its efforts to attract, develop and retain the number of high-
quality professionals needed to support present operations and future growth, in
part because of its emphasis on training, its policy of promoting from within,
and its methodology, which allows associates to progress with one client through
multiple phases of a project, thereby maximizing the learning process and
maintaining the professional challenge. Although the Company expects to continue
to attract sufficient numbers of highly skilled employees and to retain its
existing project managers and other senior personnel for the foreseeable future,
there can be no assurance that the Company will be able to do so.
None of the Company's employees is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are excellent.
14
<PAGE>
Intellectual Property Rights
The Company's success is dependent upon its software deployment and consulting
methodology and other proprietary intellectual property rights. The Company
relies upon a combination of trade secret, nondisclosure and other contractual
arrangements and technical measures, and copyright and trademark laws, to
protect its proprietary rights. The Company holds no patents or registered
copyrights. The Company generally enters into confidentiality agreements with
its employees, consultants, clients and potential clients and limits access to
and distribution of its proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights.
The Company's business includes the development of custom software applications
in connection with specific client engagements. Ownership of such software is
generally assigned to the client. In addition, the Company also develops object-
oriented software components that can be reused in software application
development and certain foundation and application software products, or
software "tools," most of which remain the property of the Company.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 62,000
square feet of leased space in Cambridge, Massachusetts. The approximate minimum
payment due from the Company to the landlord under this lease for 1997 is
$784,000. This payment includes base rent charges, a management fee equal to
one percent of base rent and a monthly parking charge. From September 1995,
annual increases in base rent under the lease are based on increases in the
Consumer Price Index-Urban Wage Earners and Clerical Workers, U.S. City Average,
All Items ("CPI"). The Company is also responsible for all operating expenses,
real estate taxes and utility charges, and most insurance and maintenance
obligations for the leased premises. This lease expires in 2007, but permits two
five-year term extensions. See Note I of Notes to the Company's Consolidated
Financial Statements.
In addition, the Company leases domestic offices in Atlanta, Chicago, Columbus,
Ohio, Dallas, Detroit, Lansing, Los Angeles, Miami, Minneapolis, New York,
Phoenix, Philadelphia, Redbank, N.J, San Francisco, San Juan, P.R., San Mateo
and San Ramon, CA, and metropolitan areas as well as international offices in
Brazil, England, Germany, Ireland, Mexico, Norway, the Netherlands, Sweden, and
Switzerland.
The Company anticipates that additional space will be required as business
expands and believes that it will be able to obtain suitable space as needed.
15
<PAGE>
ITEM 3. 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 $1.7
million 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 is vigorously defending 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 is
vigorously defending itself in this arbitration.
From time to time, the Company is engaged in litigation or involved with claims
arising in the normal course of business. The Company does not currently expect
to suffer any material liability as a result of such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Price Range of Common Stock
The Company's Common Stock is currently included in the Nasdaq National Market
system under the symbol CATP. The following table sets forth, on a per share
basis for the periods shown, the range of high and low sales prices of the
Company's Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year
1995:
First Quarter $12.08 $ 7.08
Second Quarter 12.00 9.08
Third Quarter 17.58 10.33
Fourth Quarter 20.33 13.83
1996:
First Quarter 19.25 14.63
Second Quarter 30.75 17.75
Third Quarter 37.25 22.25
Fourth Quarter 35.75 25.50
1997:
First Quarter (through February 28, 36.00 22.50
1997)
</TABLE>
Dividend Policy
The Company has never paid any cash dividends on its Common Stock. The Company's
current borrowing arrangements prohibit the payment of dividends without the
lender's prior consent. The Company currently intends to retain future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In June, 1996 the Company completed a
3-for-1 stock split.
Stockholders
As of February 28, 1997, there were approximately 1,621 stockholders of record.
Recent Sales of Unregistered Securities
On October 15, 1996, the Company issued 271,714 shares of its Common Stock in
reliance on Regulation D under the Securities Act of 1933 ("Regulation D") in
connection with the acquisition of all of the outstanding capital stock of
NatSoft S.A. On November 18, 1996, the Company issued 1,175,119 shares of
Common Stock in reliance on Regulation D in connection with the acquisition of
all of the outstanding capital stock of Ramos & Associates, Inc.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the fiscal years ended
December 31, 1996, 1995, 1994, 1993, and 1992, have been derived from the
Company's consolidated financial statements, which have been audited by Coopers
& Lybrand L.L.P., independent accountants. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Consolidated Financial Statements and
related notes thereto, and other financial information appearing elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
========================================================
(in thousands, except per share data) 1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net revenues $236,554 $156,266 $94,287 $56,205 $35,716
Costs and expenses:
Project personnel 109,207 73,386 44,331 27,061 15,972
General and administration 27,859 20,078 11,949 7,313 5,065
Sales and marketing 18,150 15,610 10,908 7,017 5,461
Other costs 45,530 25,338 14,829 8,530 5,536
Business combination costs 1,195 1,333 - - -
-------- -------- ------- ------- -------
Total operating expenses 201,941 135,745 82,017 49,921 32,034
-------- -------- ------- ------- -------
Income from operations 34,613 20,521 12,270 6,284 3,682
Other income (expense):
Interest income 874 712 368 102 27
Interest expense (46) (365) (154) (123) (346)
Gain on sale of AdValue - 909 - - -
Foreign exchange (loss) gain (226) 106 42 7 -
Equity in net loss of affiliate - - - - (123)
-------- -------- ------- ------- -------
Income before income taxes 35,215 21,883 12,526 6,270 3,240
Provision for income taxes 14,115 8,535 4,604 2,261 975
-------- -------- ------- ------- -------
Income before cumulative effect of change in
accounting principle 21,100 13,348 7,922 4,009 2,265
Cumulative effect of change in accounting
for income taxes - - - 1,204 -
-------- -------- ------- ------- -------
Net income $21,100 $13,348 $7,922 $5,213 $2,265
======== ======== ======= ======= =======
Net income per share:
Income before cumulative effect of change
in accounting principle $ .39 $ .25 $ .16 $ .09 $ .06
Cumulative effect of change in accounting
for income taxes - - - .03 -
-------- -------- ------- ------- -------
Net income $ .39 $ .25 $ .16 $ .12 $ .06
======== ======== ======= ======= =======
Pro forma data (unaudited):
Historical income before income taxes $35,215 $21,883 $12,526 $6,270 $3,240
Provision for income taxes:
Historical income taxes 14,115 8,535 4,604 2,261 975
Pro forma increase to historical income taxes - 215 517 225 393
-------- -------- ------- ------- -------
Income before cumulative effect of change
in accounting principle 21,100 13,133 7,405 3,784 1,872
Cumulative effect of change in accounting
for income taxes - - - 1,204 -
-------- -------- ------- ------- -------
Pro forma net income $21,100 $13,133 $7,405 $4,988 $1,872
======== ======== ======= ======= =======
Pro forma net income per share:
Income before cumulative effect of change
in accounting principle $ .39 $ .25 $ .15 $ .08 $ .05
Cumulative effect of change in accounting
for income taxes - - - .03 -
-------- -------- ------- ------- -------
Pro forma net income $ .39 $ .25 $ .15 $ .11 $ .05
======== ======== ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 54,637 51,862 48,127 44,179 39,427
======== ======== ======= ======= =======
</TABLE>
18
<PAGE>
SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 19,817 $ 7,490 $ 4,021 $ 3,772 $ 2,704
Investments held to maturity 12,727 8,544 10,311 500 --
Working Capital 68,482 34,835 21,796 9,282 3,059
Total assets 130,400 77,546 52,051 22,416 14,389
Stockholders' equity 92,850 51,594 32,453 12,843 4,337
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Cambridge Technology Partners (Massachusetts), Inc. is an international
professional services firm that works with clients to design, develop, and
deploy client/server and Internet applications. The Company's information
technology development offerings also include third-party software
implementation and management consulting services. The Company provides a
majority of its services on a fixed-price, fixed-timetable model with client
involvement at all stages of the process. The Company continued to post strong
operating results for the year ended December 31, 1996. Net revenues for 1996
increased 51% to $236.6 million compared to $156.3 million for the same period
in 1995, reflecting increased demand for the Company's services, in both North
America and Europe. Net income for the year ended December 31, 1996, increased
58% to $21.1 million, or $.39 per share compared to $13.3 million, or $.25 per
share for the same period in 1995. Excluding the effect of business combination
costs, net income for the year ended December 31, 1996, amounted to $21.8
million, or $.40 per share, up 54% compared to $14.2 million, or $.27 per share
for 1995.
In the second half of 1996, the Company formed subsidiaries in Brazil and Mexico
to capitalize on the growing demand for its services in Latin America. In order
to meet increased demand for its services, the Company increased its staff by
43% to 1,824 at December 31, 1996, from 1,278 at December 31, 1995, and added
additional offices to close the year with 31 offices worldwide. The Company
currently expects to increase head count in 1997 at approximately the 1996 level
to support the anticipated demand for its services.
As part of the Company's strategy to continually better serve its clients, the
Company introduced two new services, Rapid Business Renewal ("RBR") and Rapid
Process Implementation ("RPI") in the second quarter of 1996. RBR is a newly
developed consulting method that focuses on renewing customer-oriented processes
for profitable growth rather than cost-cutting. RPI is the Company's management
consulting and systems integration service offering that closes the gap between
information technology strategy and implementation and helps clients revitalize
specific business operations. Client response to these new services has been
positive.
Acquisitions
In the fourth quarter of 1996, the Company acquired NatSoft S.A. ("NatSoft") and
Ramos & Associates, Inc. ("Ramos") (see Note B of Notes to Consolidated
Financial Statements). NatSoft is a Switzerland-based information technology
consulting and software implementation firm, with approximately 105 employees at
the time of the acquisition. This acquisition established the Company's entry
into the Swiss market and provided the Company with a pool of multi-lingual
professionals who can support projects in Southern Europe. Ramos, founded in
1991 and based in San Ramon, California, provides strategic information
solutions and consulting services in the Enterprise Resource Planning services
market. With offices in San Ramon, Chicago, Dallas, and
20
<PAGE>
Islin, New Jersey, Ramos had approximately 215 employees at the time of the
acquisition. These acquisitions complement the Company's comprehensive
information technology and consulting service offerings and provide a critical
mass of professional staff in key geographic service markets. The Company
currently expects to continue seeking opportunities for potential acquisitions
of companies or technologies that may enhance the Company's global growth
initiatives.
It has been the Company's strategy to supplement its internal growth initiatives
with selected strategic acquisitions. Since 1993, the Company has acquired two
companies in Europe and three companies in the U.S. The following table
compares the Company's reported income from operations as a percentage of net
revenues to pro forma information which excludes the results of all acquisitions
and the related costs and restatements in accordance with the purchase and
pooling of interests methods of accounting requirements for the years ended
1996, 1995, and 1994. The pro forma net revenues and income from operations
information described below is for informational purposes only and are not
indicative of results in future periods.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
As reported:
Net revenues $236,554 $156,266 $94,287
Income from operations $ 34,613 $ 20,521 $12,270
Income from operations as a
percentage of net revenues 15% 13% 13%
Pro forma:
Net revenues $141,700 $ 84,000 $52,600
Income from operations $ 28,100 $ 16,900 $10,500
Income from operations as a
percentage of net revenues 20% 20% 20%
</TABLE>
21
<PAGE>
RESULTS OF OPERATIONS
To facilitate comparisons, selected statements of operations data are presented
below as percentage of net revenues and the period-to-period percentage changes
for net revenues, costs and expenses, and income from operations.
<TABLE>
<CAPTION>
Years Ended December 31, Percentage Increase
------------------------ ------------------------
1996 1995 1994 '95 to '96 '94 to '95
------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues 100% 100% 100% 51% 66%
Costs and expenses:
Project personnel 46 47 47 49 66
General and
administration 12 13 13 39 68
Sales and marketing 8 10 11 16 43
Other costs 19 16 16 80 71
Business combination costs - 1 - (10) -
----- ---- ----
Total operating expenses 85 87 87 49 66
----- ---- ----
Income from operations 15 13 13 69% 67%
Other income, net - 1 -
----- ---- ----
Income before income taxes 15% 14% 13%
===== ==== ====
</TABLE>
All prior period amounts have been restated to reflect the acquisitions of
NatSoft and Ramos, in October and November 1996, respectively, accounted for
using the pooling of interests method of accounting (see Note B of Notes to
Consolidated Financial Statements).
A majority of the Company's revenues have been historically generated from
software development activities. Software development revenues are primarily
recognized on the percentage of completion method, which requires revenues to be
recorded over the term of a client contract based on the percentage of work
performed. The cumulative impact of any revision in estimates of the percentage
of work completed is reflected in the fiscal quarter in which the changes become
known. The Company's operating results may be adversely affected by inaccurate
estimates of contract completion costs. Although the Company from time to time
is required to make revisions to its work completion estimates, to date, none of
such revisions has had a material adverse effect on the Company's operating
results. There can be no assurance of the accuracy of the Company's future work
completion estimates. Losses expected to be incurred on projects in progress
are recognized when known. Revenues related to time and materials engagements
are recognized when services are performed.
A major portion of the Company's services are provided on a fixed-price basis
and, therefore, the Company bears the risk of cost overruns and inflation.
Client project margins and personnel utilization are critical components of the
Company's financial performance. The Company regularly reviews staff
compensation and overhead costs to ensure that its consulting and software
development services are properly priced. In addition, senior management
monitors the progress of client projects on a monthly basis. The Company
attempts to manage its personnel utilization rates by closely monitoring project
timetables and staffing requirements for new projects. Because the Company's
client engagements are generally terminable without client penalty, an
unanticipated termination of a client project could require the Company to
maintain or terminate under-utilized employees, resulting in a higher than
expected number of unassigned
22
<PAGE>
persons or higher severance expenses. While the level of professional staff must
be adjusted to reflect active projects, the Company must maintain a sufficient
number of senior professionals to oversee existing client projects and
participate with the Company's sales force in securing new client assignments.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Net revenues increased 51% to $236.6 million in 1996 compared to $156.3 million
in 1995 due principally to an increase in the volume of services delivered to
new clients, leveraging the existing client base by undertaking additional
projects for existing clients, as well as expanding the Company's service
offerings to include new services such as RBR, RPI, and the deployment of
Enterprise Resource Planning services. North American net revenues grew 54% to
$178.0 million in 1996 from $115.4 million in 1995. This increase reflects the
continued marketplace demand for information technology services in North
America. European operations, together with activities in Latin America,
continued to make significant contributions to the growth in net revenues,
accounting for $58.6 million or 25% of consolidated net revenues in 1996
compared to $40.9 million or 26% for the same period in 1995. This percentage
decrease from 1995 is primarily due to the Ramos acquisition. Ramos' net
revenues were generated solely in North America and these net revenues increased
by 117% from 1995 to 1996.
Project personnel costs consist principally of payroll and payroll-related
expenses for personnel dedicated to client assignments and are directly
associated with, and vary with, the level of client services being delivered.
Project personnel costs were $109.2 million or 46% of net revenues in 1996
compared to $73.4 million or 47% of net revenues in 1995. The dollar increase
resulted from the hiring of additional project personnel over 1995 staff levels,
the related increase in payroll and payroll-related expenses, and increased use
of critically skilled subcontractors on projects. Worldwide project personnel
headcount increased 43% to 1,561 employees at December 31, 1996, from 1,094
employees at December 31, 1995. The improvements as a percentage of net
revenues is primarily due to the significant increase in net revenues coupled
with the continued focus on staff utilization and project delivery. The Company
currently expects to maintain project personnel costs as a percentage of net
revenues at the 1996 level, as new employees are hired and assimilated to
support its business growth.
General and administration expenses were $27.9 million or 12% of net revenues in
1996 compared to $20.1 million or 13% of net revenues in 1995. The percentage
decrease from 1995 is primarily attributable to the Company's continued focus on
cost containment and the significant increase in net revenues. The dollar
increase 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. General and administration head count increased 32% to 151
employees at December 31, 1996, from 114 at December 31, 1995. The Company
currently expects to improve general and administration expenses as a percentage
of net revenues while providing sufficient support for the Company's global
growth strategy.
23
<PAGE>
Sales and marketing expenses were $18.2 million or 8% of net revenues in 1996
compared to $15.6 million or 10% 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 70 in 1995 to 103 in
1996 and the increased participation in trade shows and marketing publications
in order to provide existing and potential clients with essential information
about the Company and its service offerings. The Company continued its
investment in marketing initiatives and educational and training programs that
provide clients with opportunities to learn about new technologies and
client/server trends, such as seminars for chief information officers, an
Internet-based CIO information network, and interactive management lab programs.
The percentage decrease is due principally to the significant increase in net
revenues from 1995 and the addition of NatSoft and Ramos whose sales and
marketing expenses as a percentage of net revenues are lower than the Company's
historical level. The Company currently expects that sales and marketing
expenses as a percentage of net revenues will increase in future periods, due to
anticipated hiring of additional sales and marketing staff and the anticipated
increase in marketing programs to support the Company's global growth strategy.
Other costs consist 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 $45.5 million or 19% of net revenues in 1996 compared to $25.3 million or
16% 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 North America, Latin 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 increases in demand for its
services, the Company currently expects to maintain its other costs as a
percentage of net revenues at the 1996 level.
Business combination costs of $1.2 million in 1996 and $1.3 million in 1995,
which consist primarily of legal, accounting, and consulting fees, were incurred
in connection with the acquisitions of NatSoft and Ramos in 1996 and The Systems
Consulting Group, Inc. ("SCG") and Axiom Management Consulting, Inc. ("Axiom")
in 1995 (see Note B of Notes to Consolidated Financial Statements).
Interest income increased to $874,000 in 1996 from $712,000 in 1995. This
increase is principally due to increased cash and investment balances and higher
average interest rates obtained in 1996 compared to 1995.
Interest expense of $365,000 in 1995 consisted primarily of interest on amounts
outstanding under revolving credit facilities maintained by SCG, Axiom, and
Ramos. Following the acquisitions, all outstanding amounts were repaid and the
Company terminated these revolving credit facilities.
The Company recorded a gain of $909,000, in the second quarter of 1995, related
to the sale of its 6.3% interest in AdValue Media Technologies, Inc. ("AdValue,"
formed in 1991 to develop,
24
<PAGE>
test, and market a centralized spot advertising computer software package) (see
Note D of Notes to Consolidated Financial Statements).
Foreign exchange loss was $226,000 in 1996 compared to a gain of $106,000 in
1995 related to foreign currency exchange rate fluctuations associated with
intercompany balances. The current year loss is primarily due to more
unfavorable fluctuations in European currencies in the fourth quarter of 1996.
The Company maintains monthly foreign exchange forward contracts to hedge
against the risk of changes in foreign exchange rates associated with
intercompany balances. This risk coverage is dependent upon forecasted
intercompany activities at the beginning of each month and the exchange rate
gains and losses are directly related to the accuracy of such forecasted
amounts. As of December 31, 1996, the Company held foreign exchange contracts
of approximately $7.9 million.
The Company's effective income tax rate in 1996 increased to 40.1% from 39.0% a
year ago. This increase is primarily due to SCG's non-taxable S-Corporation
income, prior to the acquisition, of $569,000 in 1995 (see Note K of Notes to
Consolidated Financial Statements). 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. The pro forma
increase to historical income taxes represents the pro forma provision for
income taxes for SCG's S-Corporation net income prior to the date of acquisition
(see Note K of Notes to Consolidated Financial Statements). The pro forma
income tax rate in 1995 was 40%.
Net income was $21.1 million or $.39 per share for 1996 compared to $13.3
million or $.25 per share for the same period in 1995. The Company increased
its net income per share by 56% despite a 5% 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.
Excluding business combination costs, net income per share amounted to $.40 and
$.27 in 1996 and 1995, respectively.
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Net revenues increased 66% to $156.3 million in 1995 compared to $94.3 million
in 1994. The increase in net revenues resulted 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 American
net revenues grew 55% to $115.4 million in 1995 from $74.6 million in 1994.
European operations made significant contributions to the growth in net revenues
accounting for $40.8 million or 26% of consolidated net revenues in 1995, up
from $19.6 million or 21% of net revenues in 1994.
Project personnel costs were $73.4 million in 1995 compared to $44.3 million in
1994, reflecting 47% of net revenues for both periods. The dollar increase
resulted from the hiring of additional project personnel over 1994 staff levels
to provide the increased volume of services delivered to clients and the related
increase in payroll and payroll-related expenses over 1994. Worldwide project
personnel headcount increased 51% to 1,094 employees at December 31, 1995, from
723 employees at December 31, 1994.
25
<PAGE>
General and administration expenses were $20.1 million in 1995 compared to $11.9
million in 1994, representing 13% of net revenues in both periods. The dollar
increase reflected expenses associated with increased staff headcount to support
the Company's continued growth and geographic expansion in both North America
and Europe.
Sales and marketing expenses were $15.6 million or 10% of net revenues in 1995
compared to $10.9 million or 11% in 1994. The dollar increase was primarily due
to an increase in payroll and payroll- related expenses associated with the
increase in sales and marketing personnel from 53 at December 31, 1994, to 70 at
December 31, 1995, and the increase in sales commissions related to the
significant increase in net revenues. In addition, the Company continued its
investment in marketing initiatives and educational and training programs that
provide clients with opportunities 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 primarily due
to the significant increase in net revenues from 1994 and the addition of SCG,
Axiom, NatSoft, and Ramos whose sales and marketing expenses as a percentage of
net revenues are lower than the Company's historical level.
Other costs were $25.3 million in 1995 compared to $14.8 million in 1994
representing 16% of net revenues in both periods. The dollar increase from 1994
was attributable in large part to increased facility costs, including costs
related to new offices and expansion of existing offices in both North America
and Europe as the Company continued to execute its global expansion strategy.
Business combination costs of $1.3 million, which consist primarily of legal,
accounting, and consulting fees, were incurred in connection with the
acquisitions of SCG and Axiom (see Note B of Notes to Consolidated Financial
Statements).
Interest income increased to $712,000 in 1995 from $368,000 in 1994. This
increase is principally due to increased cash balances generated from increased
cash flows provided by operations and higher average interest rates obtained in
1995 compared to 1994.
Interest expense was $365,000 in 1995 compared to $154,000 in 1994. This
increase was due to increased interest expense of SCG, Axiom, and Ramos related
to the outstanding balances under their revolving credit facilities (see Note G
of Notes to Consolidated Financial Statements).
Foreign exchange gain amounted to $106,000 in 1995 compared to $42,000 in 1994.
This increase is primarily due to weakening of the U.S. dollar against European
foreign currencies and the related increase in intercompany balances. As of
December 31, 1995, the Company held foreign exchange forward contracts of
approximately $3.9 million to hedge against the risk of changes in foreign
exchange rates related to intercompany balances.
The Company's effective income tax rate in 1995 increased to 39.0% from 36.8% in
1994. This increase is primarily due to SCG's non-taxable S-Corporation income,
prior to the acquisition, of $1.2 million in 1994 versus $569,000 in 1995 (see
Note K of Notes to Consolidated Financial
26
<PAGE>
Statements). 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. The pro forma increase to historical
income taxes represents the pro forma provision for income taxes for SCG's S-
Corporation net income prior to the date of acquisition (see Note K of Notes to
Consolidated Financial Statements). The pro forma income tax rate in 1995 and
1994 was 40% and 41%, respectively.
Net income was $13.3 million or $.25 per share for the 1995 period as compared
to $7.9 million or $.16 per share for the same period in 1994. Net income for
1995 includes business combination costs of $1.3 million or $.02 per share
related to the acquisitions of SCG and Axiom partially offset by a gain of
$909,000 or $.01 per share related to the sale of the Company's interest in
AdValue. The Company increased its net income per share by 56% despite an 8%
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to generate cash flow from operations to fund its business
growth and strategic acquisitions. In addition, the Company continued to operate
primarily debt-free and enhanced its working capital position. Working capital
increased to $68.5 million at December 31, 1996, from $34.8 million at December
31, 1995. This increase was primarily due to positive cash flows from
operations, increased in accounts receivable, proceeds from exercise of stock
options partially offset by cash used for capital expenditures related to office
expansions and computer equipment for new employees. The Company's days sales in
accounts receivable was 75 days during 1996 compared to 65 days for the same
period in 1995. This increase is primarily due to the Company performing larger
projects for major corporations in the 1996 period. The outstanding receivable
balances from these clients are greater as a result of the higher billing
amounts per project compared to smaller projects in 1995, coupled with the more
time consuming payment processes of these major corporations. The Company
continues to focus on its outstanding receivables by involving its project
management staff in the collection process. In 1996, the Company established a
treasury function primarily responsible for worldwide collection and cash
management efforts. Despite the increased days in sales outstanding, the
Company's cash equivalent and investment balances increased 103% to $32.5
million at December 31, 1996, from $16.0 million at December 31, 1995.
Net cash provided by operating activities increased by $9.5 million to $19.7
million in 1996 from $10.2 million for the comparable period in 1995. This
increase is primarily the result of increases in net income, tax benefit from
exercise of stock options, deferred revenue which was partially offset by the
increase in accounts receivable, unbilled revenue on contracts, and prepaid
expenses and other current assets.
Capital expenditures which totaled $12.2 million in 1996 were used principally
for computer equipment to support the Company's expanding operations and
employee workstations and leasehold improvements for the Company's expanding and
new offices in North America, Latin America, and Europe. Capital expenditures
for 1997 are expected to approximate $26.7 million,
27
<PAGE>
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, Latin America, Europe, and the Pacific Rim. In accordance with
the Company's strategic acquisition plans, the Company evaluates, on an ongoing
basis, potential acquisitions of companies or technologies that may complement
its business.
The Company maintains an uncollateralized revolving credit facility (the
"Facility") with Fleet National Bank ("Fleet Bank"), which was amended on June
26, 1996. Among other things, the amendments increased the amount available
under the Facility from $10.0 million to $20.0 million, extended the expiration
date to June 30, 1998, from June 30, 1996, and decreased the facility cost to
.15% from .25%. 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 increase in the amount under the Facility establishes
sufficient support for the Company's growth strategy beyond the Company's cash
flows from operations. The Facility requires, among other things, the Company
to maintain certain financial ratios including tangible net worth, debt to
equity, and operating profitability. At December 31, 1996 and 1995, the Company
was in compliance with these financial ratio requirements and no borrowings have
been made under the Facility.
In December 1996, the Company terminated Ramos' $600,000 revolving credit
facility with Westamerica Bank and repaid all of the outstanding balance under
this revolving credit facility (see Note G of Notes to Consolidated Financial
Statements).
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. 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 1998, to meet
the Company's short-term and long-term working capital requirements and to fund
the expansion of the Company's business. In order to meet client demand for the
Company's services in 1997, the Company expects to continue to increase its
professional staff and to open additional sales and operations offices in North
America, Latin America, Europe, and the Pacific Rim. Although the Company's
plans to open offices and hire personnel are driven in response to increased
demand for the Company's information technology consulting and management
consulting, and software deployment 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.
This Form 10-K includes forward-looking statements which involve risks and
uncertainties, particularly as to net revenues and profits, capital
expenditures, future liquidity needs, working capital needs and project
personnel costs, general and administrative expenses, sales and
28
<PAGE>
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 year, the number of working days in a year, employee hiring
and utilization rates, acceptance and profitability of the Company's services in
new territories, and integration of companies acquired. 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 year, can cause significant variations in operating results from year
to year.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial
statements and schedules set forth in Item 14(a) under the captions
"Consolidated Financial Statements" and "Financial Statement Schedules" as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this item may be found under the sections
captioned "Election of Directors," "Directors and Executive Officers," and
"Section 16 Reporting" in the Company's definitive proxy statement pursuant to
Regulation 14A (the "1997 Proxy Statement"), which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the Company's fiscal year ended December 31, 1996 and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item may be found under the section
captioned "Compensation and Other Information Concerning Executive Officers" in
the 1997 Proxy Statement, and is incorporated herein by reference.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item may be found under the section
captioned "Stock Ownership of Directors and Executive Officers" in the 1997
Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item may be found under the section
captioned "Certain Relationships and Related Transactions" in the 1997 Proxy
Statement, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements.
For the following consolidated financial information included herein,
see Index on Page F-1:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the three years ended
December 31, 1996.
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
The following consolidated financial statements are included in Item 8:
II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they
are either not required or the information is otherwise included.
30
<PAGE>
<TABLE>
<CAPTION>
3. List of Exhibits.
<C> <S>
Exhibit No. Description
2.1(6) - Agreement and Plan of Reorganization by and among the Company,
The Systems Consulting Group, Inc. and the other parties named
therein dated as of August 11, 1995.
2.1(7) - Agreement and Plan of Reorganization by and among the Company,
Axiom Management Consulting, Inc. and the other parties named
therein dated as of October 16, 1995.
3.1(9) - Amended and Restated Certificate of Incorporation of the
Company, as amended May 15, 1996.
3.2(1) - Amended and Restated By-laws of the Company.
10.1(1) - Lease dated June 4, 1992, as amended, between 304 Vassar Street
Realty Trust and the Company, for 304 Vassar Street, Cambridge,
Massachusetts.
10.2(1)* - Form of Non-Qualified Stock Option Agreement of the Company for
Executive Officers.
10.3(1)* - Form of Non-Qualified Stock Option Agreement of the Company for
Non Executive Officers.
10.4(1)* - Form of Incentive Stock Option Agreement of the Company for
Executive Officers.
10.5(1)* - Payment Agreement dated October 23, 1992 between the Company and
James K. Sims.
10.6(1)* - $104,150 principal amount Promissory Note of James K. Sims to
the Company.
10.7(1)* - $49,000 principal amount Promissory Note of James K. Sims to the
Company.
10.8(1) - Form of Warrant issued by the Company to Safeguard Scientifics
(Delaware), Inc.
10.9(1)* - Agreement dated December 1992 between the Company and James K.
Sims.
10.10(1)* - Agreement dated December 1992 between the Company and Robert L.
Gett.
10.11(1)* - Agreement dated December 1992 between the Company and Arthur M.
Toscanini.
10.12(1)* - Loan and Stock Pledge and Restriction Agreement dated December
31, 1992 between the Company and Robert L. Gett.
10.13(1) - Amendment No. 2 to Capital Contribution Agreement dated March
14, 1991.
10.14(1) - Loan and Security Agreement dated February 1, 1993 by and
between the Company and Fleet Bank of Massachusetts, N.A.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.15(1)* - Form of Incentive Stock Option Agreement of the Company for Non-
Executive Employees.
10.16(2) - First Amendment to Loan and Security Agreement by and between the
Company and Fleet Bank of Massachusetts, N.A. dated September
1993.
10.17(3) - Stock Purchase Agreement dated January 17, 1994 among the
Company, IOS Group AB and the other parties named therein.
10.18(4) - Guaranty of the Company dated February 22, 1994 on behalf of T.
Karls Investments Limited.
10.19(4) - Guaranty of the Company dated February 22, 1994 on behalf of
Arnes Investments Limited.
10.20(5) - Second Amendment to Loan and Security Agreement by and between
the Company and Fleet Bank of Massachusetts, N.A. dated July 11,
1994.
10.21(8)* - Amendment to Agreement between the Company and James K. Sims
dated December 15, 1994.
10.22* - Description of 1996 Executive Bonus Plan.
10.23* - Description of 1996 Employee Bonus Plan.
10.24(9)* - Amended and Restated 1991 Stock Option Plan, as amended.
10.25(9)* - Third Amendment to Loan and Security Agreement by and between
the Company and Fleet Bank N.A. dated June 26, 1996.
11.1 - Statement Regarding Computation of Per Share Earnings.
21.1 - Subsidiaries of the Company.
23.1 - Consent of Coopers & Lybrand L.L.P.
24.1 - Power of Attorney (see Page 34 of this Report).
- ----------
</TABLE>
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-56338).
(2) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the three-month period ended September 30, 1993.
(3) Incorporated herein by reference to the exhibits to the Company's Report on
Form 8-K dated March 4, 1994.
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 filed on March 4, 1994 (File No. 33-
76142).
(5) Incorporated herein by reference to the exhibits to the Company's Report on
Form 10-Q for the three-month period ended June 30, 1994.
(6) Incorporated herein by reference to the exhibits to the Company's Report on
Form 8-K dated August 11, 1995.
(7) Incorporated herein by reference to the exhibits to the Company's Report on
Form 8-K dated October 16, 1995.
(8) Incorporated herein by reference to the exhibits to the Company's Report on
Form 10-K for the twelve-month period ended December 31, 1994.
(9) Incorporated herein by reference to the exhibits to the Company's
Report on Form 10-Q for the three-month period ended June 30, 1996.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
32
<PAGE>
(b) Reports on Form 8-K.
A Report on Form 8-K was filed by the Company on November 18, 1996 to
disclose the acquisition of all of the outstanding shares of capital stock of
Ramos & Associates, Inc. ("Ramos") pursuant to an Agreement and Plan of
Reorganization among the Company, the Stockholders of Ramos and the other
parties named therein.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above. Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference facilities maintained by the
Commission, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the
Commission's regional offices located at Seven World Trade Center, 13/th/ Floor,
New York, New York 10048, and at the Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition the Company is
required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of the Company is traded on the Nasdaq National
Market. Reports and other information concerning the Company may be inspected at
the National Association of Securities Dealers, Inc. 1735 K Street, N.W.,
Washington, D.C. 20006.
(d) Financial Statement Schedules.
The Company hereby files as part of this Form 10-K the consolidated financial
statement schedules listed in Item 14(a)(2) above, which are attached hereto.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Cambridge, Commonwealth of Massachusetts, on the 28th day of March, 1997.
Cambridge Technology Partners
(Massachusetts), Inc.
By: /s/ James K. Sims
------------------
James K. Sims
President
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Cambridge Technology's
Partners (Massachusetts), Inc., hereby severally constitute and appoint James K.
Sims and Arthur M. Toscanini, and each of them singly, our true and lawful
attorneys, with full power to them and each of them singly, to sign for us in
our names in the capacities indicated below, amendments to this report, and
generally to do all things in our names and on our behalf in such capacities to
enable Cambridge Technology Partners (Massachusetts), Inc. to comply with the
provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James K. Sims President (Chief Executive March 28, 1997
- ------------------------- Officer) and Director
James K. Sims
/s/ Arthur M. Toscanini Executive Vice President - March 28, 1997
- ------------------------- Finance and Treasurer (Chief
Arthur M. Toscanini Financial Officer and Chief
Accounting Officer)
/s/ Warren V. Musser Director March 28, 1997
- -------------------------
Warren V. Musser
/s/ Jean C. Tempel Director March 28, 1997
- -------------------------
Jean C. Tempel
/s/ Jack L. Messman Director March 28, 1997
- -------------------------
Jack L. Messman
/s/ John W. Poduska, Sr. Director March 28, 1997
- -------------------------
John W. Poduska, Sr.
/s/ Robert E. Keith, Jr. Director March 28, 1997
- -------------------------
Robert E. Keith, Jr.
/s/ James I. Cash, Jr. Director March 28, 1997
- -------------------------
James I. Cash, Jr.
/s/ James D. Robinson III Director March 28, 1997
- -------------------------
James D. Robinson III
</TABLE>
34
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995, and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Cambridge Technology Partners (Massachusetts), Inc.:
We have audited the accompanying consolidated balance sheets of Cambridge
Technology Partners (Massachusetts), Inc. as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cambridge
Technology Partners (Massachusetts), Inc., as of December 31, 1996 and 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 3, 1997
F-2
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,817 $ 7,490
Investments held to maturity 12,727 8,544
Accounts receivable, less allowance of $1,085 and $787
at December 31, 1996 and 1995, respectively 55,540 35,509
Unbilled revenue on contracts 2,959 2,045
Deferred income taxes 161 -
Prepaid expenses and other current assets 14,195 6,889
-------- -------
Total current assets 105,399 60,477
Property and equipment, net 19,027 12,042
Other assets 3,462 1,716
Goodwill, net 2,512 3,311
-------- -------
Total assets $130,400 $77,546
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,052 $ 6,693
Accrued expenses 17,410 12,488
Deferred revenue 5,203 2,993
Deferred income taxes - 786
Borrowings under revolving credit facility - 325
Income taxes payable 3,178 2,176
Obligations under capital leases, current 74 181
-------- -------
Total current liabilities 36,917 25,642
Obligations under capital leases 162 221
Deferred income taxes 471 89
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000 shares;
issued and outstanding 48,431,489 and 45,595,451 shares
at December 31, 1996 and 1995, respectively 484 456
Additional paid-in capital 44,652 23,734
Retained earnings 47,970 26,885
Foreign currency translation adjustment (256) 519
-------- -------
Total stockholders' equity 92,850 51,594
-------- -------
Total liabilities and stockholders' equity $130,400 $77,546
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Net revenues $ 236,554 $156,266 $94,287
Costs and expenses:
Project personnel 109,207 73,386 44,331
General and administration 27,859 20,078 11,949
Sales and marketing 18,150 15,610 10,908
Other costs 45,530 25,338 14,829
Business combination costs 1,195 1,333 -
--------- -------- --------
Total operating expenses 201,941 135,745 82,017
--------- -------- --------
Income from operations 34,613 20,521 12,270
Other income (expense):
Interest income 874 712 368
Interest expense (46) (365) (154)
Gain on sale of AdValue - 909 -
Foreign exchange (loss)
gain (226) 106 42
--------- -------- --------
Income before income taxes 35,215 21,883 12,526
Provision for income taxes 14,115 8,535 4,604
--------- -------- --------
Net income $ 21,100 $ 13,348 $ 7,922
========= ======== ========
Net income per share $ .39 $ .25 $ .16
========= ======== ========
Pro forma data (unaudited) (Note K):
Historical income before
income taxes $ 35,215 $ 21,883 $ 12,526
Provision for income taxes:
Historical income taxes 14,115 8,535 4,604
Pro forma increase to
historical income taxes - 215 517
--------- -------- --------
Pro forma net income $ 21,100 $ 13,133 $ 7,405
========= ======== ========
Pro forma net income per share $ .39 $ .25 $ .15
========= ======== ========
Weighted average number of
common and common equivalent
shares outstanding 54,637 51,862 48,127
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Number of Par Paid-In Unearned
Shares Value Capital Compensation
---------- ----- ---------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 14,768,228 $ 148 $ 4,482 $ (66)
Issuance of common stock in
public offering, net of issuance cost 500,000 5 6,895 -
Issuance of common stock for acquisition of
IOS Group AB, net of issuance cost 425,000 4 4,217 -
Exercise of stock options 98,110 1 304 -
Income tax benefit related to stock option exercises - - 537 -
Repayment of notes receivable from employees for stock
purchased under employee stock purchase plan - - 14 -
Amortization of unearned compensation associated
with stock options - - - 57
Amortization of note receivable from officer - - - -
Foreign currency translation adjustment - - - -
Issuance of Axiom stock under restricted stock plan - - 25 -
Issuance of Axiom stock under stock agreement - - 297 -
Issuance of Ramos stock under restricted stock plan - - 1 -
Repurchase of Axiom common stock - - (725) -
Dividend distribution (SCG) - - - -
Net income - - - -
---------- ----- ---------- ------------
Balance, December 31, 1994 15,791,338 158 16,047 (9)
Exercise of stock options 342,051 4 1,788 -
Income tax benefit related to stock option exercises - - 3,753 -
Shares issued under employee stock purchase plan 29,650 - 579 -
Repurchase of Axiom common stock - - (53) -
Repayment of note payable related to
repurchase of Axiom common stock - - (284) -
Issuance of Axiom stock under stock agreement - - 66 -
Issuance of Ramos stock under restricted stock plan - - 17 -
Payment on note receivable from employees for stock
purchased under employee stock purchase plan - - 36 -
Amortization of unearned compensation associated
with stock options - - - 9
Amortization of note receivable from officer - - - -
SCG conversion to C Corporation - - 2,079 -
Foreign currency translation adjustment - - - -
Dividend distribution (SCG) - - - -
Net income - - - -
---------- ----- ---------- ------------
Balance, December 31, 1995 16,163,039 162 24,028 -
Exercise of stock options 1,776,193 18 8,297 -
Income tax benefit related to stock option exercises - - 10,555 -
Shares issued under employee stock purchase plan 124,123 1 2,070 -
Issuance of Ramos stock under restricted stock plan - - 5 -
Shares to effect stock split 30,368,134 303 (303) -
Foreign currency translation adjustment - - - -
Dividend distribution (NatSoft) - - - -
Net income - - - -
---------- ----- ---------- ------------
Balance, December 31, 1996 48,431,489 $ 484 $ 44,652 $ -
========== ===== ========== ============
<CAPTION>
Foreign
Receivable Currency
from Translation Retained
Officer Adjustment Earnings
---------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1993 $ (62) $ (32) $ 8,373
Issuance of common stock in
public offering, net of issuance cost - - -
Issuance of common stock for acquisition of
IOS Group AB, net of issuance cost - - -
Exercise of stock options - - -
Income tax benefit related to stock option exercises - - -
Repayment of notes receivable from employees for stock
purchased under employee stock purchase plan - - -
Amortization of unearned compensation associated
with stock options - - -
Amortization of note receivable from officer 54 - -
Foreign currency translation adjustment - 82 -
Issuance of Axiom stock under restricted stock plan - - -
Issuance of Axiom stock under stock agreement - - -
Issuance of Ramos stock under restricted stock plan - - -
Repurchase of Axiom common stock - - -
Dividend distribution (SCG) - - (80)
Net income - - 7,922
---------- ----------- --------
Balance, December 31, 1994 (8) 50 16,215
Exercise of stock options - - -
Income tax benefit related to stock option exercises - - -
Shares issued under employee stock purchase plan - - -
Repurchase of Axiom common stock - - -
Repayment of note payable related to
repurchase of Axiom common stock - - -
Issuance of Axiom stock under stock agreement - - -
Issuance of Ramos stock under restricted stock plan - - -
Payment on note receivable from employees for stock
purchased under employee stock purchase plan - - -
Amortization of unearned compensation associated
with stock options - - -
Amortization of note receivable from officer 8 - -
SCG conversion to C Corporation - - (2,079)
Foreign currency translation adjustment - 469 -
Dividend distribution (SCG) - - (599)
Net income - - 13,348
---------- ----------- --------
Balance, December 31, 1995 - 519 26,885
Exercise of stock options - - -
Income tax benefit related to stock option exercises - - -
Shares issued under employee stock purchase plan - - -
Issuance of Ramos stock under restricted stock plan - - -
Shares to effect stock split - - -
Foreign currency translation adjustment - (775) -
Dividend distribution (NatSoft) - - (15)
Net income - - 21,100
---------- ----------- --------
Balance, December 31, 1996 $ - $ (256) $ 47,970
========== =========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,100 $ 13,348 $ 7,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,948 3,812 1,833
Tax benefit from exercise of stock options 10,555 3,753 537
Provision (benefit) for deferred income taxes (566) 425 134
Gain on sale of AdValue - (909) -
Changes in assets and liabilities:
Increase in accounts receivable (19,924) (12,986) (6,866)
Increase in unbilled revenue on contracts (927) (232) (1,636)
Increase in prepaid expenses and other current
assets (7,499) (4,756) (1,639)
Increase in other assets (1,826) (240) (661)
Increase in accounts payable 4,373 2,659 2,066
Increase in accrued expenses 5,122 3,145 4,452
Increase in deferred revenue 2,236 1,161 1,278
Increase (decrease) in income taxes payable 960 1,317 (993)
Other, net 124 (309) 724
-------- -------- --------
Net cash provided by operating activities 19,676 10,188 7,151
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,193) (8,767) (4,233)
Purchase of investments held to maturity (18,467) (22,140) (23,136)
Maturity of investments held to maturity 14,284 24,075 13,376
Proceeds from sale of AdValue - 909 -
Cash used in acquisition of business, net of
cash acquired - - (251)
-------- -------- --------
Net cash used in investing activities (16,376) (5,923) (14,244)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under credit arrangements,
net (325) (1,256) 181
Issuance of common stock, net of issuance costs 5 17 6,901
Proceeds from long-term debt - - 183
Repayment of long-term debt and capital leases (183) (1,160) (137)
Dividend distributions (15) (599) (80)
Proceeds from employee stock purchase plan 2,071 579 -
Proceeds from exercise of stock options 8,315 1,792 305
Other, net - (235) (50)
-------- -------- --------
Net cash provided by (used in) financing
activities 9,868 (862) 7,303
-------- -------- --------
Effect of foreign exchange rate changes on cash (841) 66 39
Net increase in cash and cash equivalents 12,327 3,469 249
Cash and cash equivalents at beginning of period 7,490 4,021 3,772
-------- -------- --------
Cash and cash equivalents at end of period $ 19,817 $ 7,490 $ 4,021
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
------------------------------------------
Basis of Reporting
Cambridge Technology Partners (Massachusetts), Inc. (the "Company") is an
international professional services firm that works with clients to design,
develop, and deploy client/server and Internet applications. The Company's
information technology development offerings also include third-party software
implementation and management consulting services. The Company provides the
majority of its services on a fixed-price, fixed-timetable model with client
involvement at all stages of the process. The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts and balances have been eliminated in
consolidation. In October and November of 1996, respectively, the Company
acquired all of the outstanding capital stock of NatSoft S.A. ("NatSoft") and
Ramos & Associates, Inc. ("Ramos"). The acquisitions of NatSoft and Ramos were
accounted for using the pooling of interests method of accounting (see Note B).
All prior period historical consolidated financial statements presented herein
have been restated to include the financial position, results of operations, and
cash flows of these acquired companies. Certain prior period amounts have also
been reclassified to conform with current period presentation.
Stock Split
In June 1996, the Company completed a three-for-one stock split in the form of 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 effect 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. All references in the
accompanying Notes to Consolidated Financial Statements to applicable share and
per share data, stock option data, and market prices of the Company's common
stock, for all periods presented, have been retroactively restated to reflect
the stock split (see Note H).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose carrying
amount approximates market value due to the short maturity of the investments.
During 1996, in accordance with the terms of a client contract, the Company
received a prepayment for services being performed in the amount of $900,000,
which is included in cash and cash equivalents at December 31, 1996. The use of
this cash is restricted pending completion of the project, which is expected in
the second half of 1997.
F-7
<PAGE>
Investments
The Company accounts for its investments under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments are classified as
investments held to maturity and mature within one year from the date of
purchase. At December 31, 1996 and 1995, the Company held investment grade
municipal bonds of $12.7 million and $8.5 million, respectively, which are
carried at amortized cost and approximates market value.
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance costs are
charged to operations when incurred, while betterments are capitalized.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the various assets which range from four to fifteen years. Upon
retirement or disposal, the cost of the asset disposed of and the related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income.
Intangible Assets
Goodwill, related to the acquisition of CTP Scandinavia in February 1994, is
being amortized over six years on a straight-line basis. The Company recorded
amortization expense of $798,000 for each of the years ended December 31, 1996
and 1995, and $682,000 for the year ended December 31, 1994. As of December 31,
1996 and 1995, accumulated amortization was $2.3 million and $1.5 million,
respectively. The carrying value of goodwill is subject to periodic review of
realizability.
Revenue Recognition
The Company derives substantially all of its revenues from information
technology and management consulting, software development and implementation,
and package software evaluation and implementation services. The Company
operates in one industry segment, software development and implementation
services. Revenues derived from any maintenance and support services are
immaterial to the consolidated financial statements of the Company. Revenues
from software development and implementation contracts are recognized primarily
on the percentage of completion method. The cumulative impact of any revision in
estimates of the percent complete is reflected in the period in which the
changes become known. Losses on projects in progress are recognized when known.
Revenues from management consulting and package software evaluation and
implementation services are recognized as the service is provided, principally
on a time and material basis. Net revenues exclude reimbursable expenses charged
to clients.
F-8
<PAGE>
Deferred revenue consists of amounts received or billed in advance of services
provided. Unbilled revenue represents amounts recognized based on services
performed in excess of billings in accordance with terms of client contracts.
Translation of Foreign Currencies and Foreign Exchange Transactions
For non-U.S. operations, the functional currency is the applicable local
currency. The translation of the functional currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using average rates
of exchange prevailing during the reporting period. Adjustments resulting from
the translation of foreign currency financial statements are accumulated in a
separate component of stockholders' equity until the entity is sold or
substantially liquidated. Gains or losses resulting from foreign currency
transactions are included in the results of operations.
Foreign Exchange Contracts
The Company maintains monthly foreign exchange contracts to mitigate the risk of
changes in foreign exchange rates associated with intercompany balances. The
contracts relate primarily to European currencies and generally have maturaties
of one month. The impact of exchange rate movements on contracts are recorded in
income in the period in which the exchange rates change, generally consistent
with the term of the contract. As of December 31, 1996, the Company held foreign
exchange forward contracts of approximately $7.9 million and there were no
related deferred gains or losses. The Company does not hold foreign exchange
contracts for trading purposes.
Concentration of Credit Risk
The Company provides its services primarily to Fortune 1000 companies. The
Company performs ongoing credit evaluations of its major customers and maintains
reserves for potential credit losses. Such losses have been immaterial and are
within management's expectation. No single customer accounted for 5% or more of
total net revenues for the years ended 1996, 1995, and 1994.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to hedging instruments. The counterparties to these contracts
are major financial institutions. The Company continually monitors its positions
and credit ratings of its counterparties and limits the amount of contracts it
enters into with any one party.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to provide 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
F-9
<PAGE>
period. Actual results could differ from those estimates and would impact future
results of operations and cash flows.
B. Acquisitions
------------
On November 18, 1996, the Company acquired all the outstanding capital stock of
Ramos. This acquisition was accomplished through a merger of the Company's
acquisition subsidiary and Ramos in an exchange of 1,175,119 shares of the
Company's common stock for all outstanding shares of capital stock of Ramos.
Ramos, founded in 1991 and based in San Ramon, California, specializes in the
Enterprise Resource Planning service market. With offices in San Ramon, Chicago,
Dallas, and Islin, New Jersey, Ramos had approximately 215 employees at the time
of the acquisition. This acquisition has been accounted for using the pooling of
interests method of accounting. Ramos currently operates as a business unit of
the Company.
On October 15, 1996, the Company acquired all the outstanding capital stock of
NatSoft, a Switzerland-based information technology consulting and software
implementation firm. This acquisition was accomplished through an exchange of
271,714 shares of the Company's common stock for all outstanding shares of
capital stock of NatSoft. With approximately 105 employees at the time of
acquisition, NatSoft established the Company's entry into the Swiss market and
provided the Company with a pool of multi-lingual professionals who can support
projects in Southern Europe. This acquisition has been accounted for using the
pooling of interests method of accounting. The Company's services in Southern
Europe are operated through NatSoft.
On October 17, 1995, the Company acquired Axiom Management Consulting, Inc.
("Axiom"). This acquisition was accomplished through an exchange of 1,007,898
shares (consisting of 978,360 shares of the Company's common stock and options
to purchase 29,538 shares of the Company's common stock) of the Company's common
stock for all of the outstanding shares of capital stock of Axiom and the
assumption of all outstanding options to acquire shares of capital stock of
Axiom. This transaction has been accounted for using the pooling of interests
method of accounting. Axiom currently operates as a business unit of the
Company.
On August 14, 1995, the Company acquired The Systems Consulting Group, Inc.
("SCG"). The acquisition was accomplished through an exchange of 2,273,994
shares (consisting of 2,168,292 shares of the Company's common stock and an
option to purchase 105,702 shares of the Company's common stock) of the
Company's common stock for all of the outstanding capital stock of SCG and the
assumption of all outstanding options to acquire shares of capital stock of SCG.
This transaction has been accounted for using the pooling of interests method of
accounting. In 1996, the Company integrated SCG into its operational structure
and service offerings.
The accompanying consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisitions of Ramos, NatSoft,
Axiom, and SCG in accordance with the pooling of interests requirements. All
prior period historical consolidated financial statements presented herein have
been restated to include the financial position, results of operations, and
F-10
<PAGE>
cash flows of these acquisitions. Costs related to these acquisitions have been
charged to business combination costs in the consolidated statements of
operations.
The following information presents certain statement of operations data of the
Company, SCG, Axiom, NatSoft, and Ramos for the periods prior to the
acquisitions. SCG and Axiom information is presented through September 30, 1995,
which represents the interim period end nearest to the date of the acquisitions.
In addition, NatSoft and Ramos information is presented through September 30,
1996, which represents the interim period end nearest to the date of these
acquisitions.
<TABLE>
<CAPTION>
Cambridge
Technology Combined
Partners SCG Axiom NatSoft Ramos Total
---------- -------- --------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues for the:
Year ended
December 31, 1994 $ 59,679 $ 10,315 $ 13,483 $ 7,825 $ 2,985 $ 94,287
Nine months ended
September 30, 1995 $ 70,052 $ 13,484 $ 10,723 $ 9,211 $ 7,651 $ 111,121
Year ended
December 31, 1995 $ 132,416 $ 12,254 $ 11,596 $ 156,266
Nine months ended
September 30, 1996 $ 141,862 $ 8,046 $ 17,497 $ 167,405
Net income (loss) for the:
Year ended
December 31, 1994 $ 6,611 $ 1,261 $ (315) $ 336 $ 29 $ 7,922
Nine months ended
September 30, 1995 $ 7,632 $ 1,381 $ 57 $ 141 $ 203 $ 9,414
Year ended
December 31, 1995 $ 12,683 $ 205 $ 460 $ 13,348
Nine months ended
September 30, 1996 $ 14,042 $ 163 $ 853 $ 15,058
</TABLE>
In February 1994, the Company acquired all of the outstanding capital stock of
IOS Group AB (now CTP Scandinavia) for 1,275,000 shares of the Company's common
stock, valued on the date of acquisition at $4.2 million and $1,000 in cash.
CTP Scandinavia is a Sweden-based corporation which provides open systems
information technology and software development services in an enterprise-wide,
client/server environment.
The 1,275,000 shares of common stock issued were restricted, as to sale or
transfer, for eighteen months from the date of acquisition. The acquisition has
been accounted for as a purchase and, accordingly, the results of CTP
Scandinavia have been included in the Company's consolidated statements of
operations from the date of acquisition.
The Company has allocated the purchase price of $4.6 million, which includes
associated costs of $370,000, to the underlying assets and liabilities of CTP
Scandinavia based upon their respective fair values at the time of the
acquisition. The excess (approximately $4.8 million) of
F-11
<PAGE>
the purchase price over the fair value of net assets acquired is being amortized
on a straight-line basis over six years.
Pro forma net revenues, net income, and net income per share combining the
consolidated results of operations of the Company and CTP Scandinavia as if the
acquisition had occurred at the beginning of the period were approximately,
$95.1 million, $7.7 million, and $.16, respectively, at December 31, 1994. The
pro forma results do not purport to be indicative of what would have occurred
had the acquisition been consummated as of the beginning of the period or of
future operations of the combined company.
C. Accounts Receivable
-------------------
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Contracts in process $44,246 $28,334
Completed contracts 12,379 7,962
------- -------
56,625 36,296
Less: Allowance for doubtful accounts 1,085 787
------- -------
$55,540 $35,509
======= =======
</TABLE>
In accordance with state government practices, a governmental client withholds a
percentage of invoiced receivables as retention. At December 31, 1996 and 1995,
retention receivable totaled $1.8 million and $1.4 million, respectively, and
was included in other assets. Due to the contractual time period given to the
governmental client for final review of completed projects, the Company expects
to receive payments in the summer of 1997 on approximately 75% of the retention
receivable outstanding as of December 31, 1996, with the remaining balance to be
received in 1998. Beginning in 1996, reimbursable expenses and other non-trade
receivables totaling approximately $5.9 million and $4.4 million at December 31,
1996 and 1995, respectively, which were included in accounts receivable in prior
periods, have been reclassified to prepaid expenses and other current assets for
all periods presented.
D. Investment in Affiliates
------------------------
The Company had a 6.3% investment interest in AdValue Media Technologies, Inc.
("AdValue") (formerly AdValue Network ("AVN"), a partnership which was formed in
1991 to develop, test, and market a centralized spot advertising computer
software package). AdValue was incorporated in December 1993 to serve as the
successor entity to AVN. The investment was accounted for using the equity
method. On May 19, 1995, the Company sold its interest in AdValue for $909,000
in cash. The investment balance in AdValue at the time of the sale was zero, and
accordingly, the Company recognized a gain of $909,000 for the period ended
December 31, 1995.
F-12
<PAGE>
E. Property and Equipment
----------------------
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Equipment $21,735 $12,945
Furniture and fixtures 5,272 3,895
Leasehold improvements 3,317 1,382
Motor vehicles 366 366
------- -------
Total cost 30,690 18,588
Less accumulated depreciation 11,663 6,546
------- -------
$19,027 $12,042
======= =======
</TABLE>
Depreciation expense for 1996, 1995, and 1994 was $5.1 million, $3.0 million,
and $1.1 million, respectively.
Equipment under capital leases, included in property and equipment, amounted to
$756,000 and $763,000 at December 31, 1996 and 1995, respectively, and the
related accumulated depreciation was $440,000 and $310,000 at December 31, 1996
and 1995, respectively.
F. Accrued Expenses
----------------
Accrued expenses consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Accrued payroll and payroll-related expenses $ 9,010 $ 7,691
Other accrued expenses 6,559 3,251
Accrued value added tax 1,386 1,034
Deferred rent 455 512
------- -------
$17,410 $12,488
======= =======
</TABLE>
G. Revolving Credit Facility
-------------------------
The Company maintains an uncollateralized revolving credit facility (the
"Facility") with Fleet National Bank ("Fleet Bank"), which was amended on June
26, 1996, 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%. 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 including tangible net worth, debt to equity,
and operating profitability. At December 31, 1996 and 1995, the Company was in
F-13
<PAGE>
compliance with these financial ratio requirements and no borrowings have been
made under the Facility.
SCG maintained a $1.0 million revolving credit facility with Barnett Bank of
South Florida, N.A. ("Barnett Bank"). This revolving credit facility bore
interest at a rate per annum equal to Barnett Bank's prime rate in effect from
time to time plus 1.50%, payable monthly. On June 13, 1995, the term under this
revolving credit facility was extended to June 30, 1996, with maximum allowable
borrowings increased to $2.5 million. In September 1995, the Company terminated
this revolving credit facility and repaid the outstanding amount of $1.0
million.
Axiom maintained a $1.25 million revolving credit facility with Wells Fargo
Bank, N.A. This revolving credit facility bore interest at a rate per annum
equal to the prime rate in effect from time to time plus .25%, payable monthly.
In December 1995, the Company repaid the outstanding amount of $501,000 and
terminated this revolving credit facility.
Ramos maintained a $600,000 revolving credit facility with Westamerica Bank.
This credit facility bore interest at a rate per annum equal to Westamerica
Bank's index rate plus 2.25% (10.75% at December 31, 1995), payable monthly. The
credit facility was collateralized by Ramos' accounts receivable and personally
guaranteed by two Ramos executives. The credit facility subjected Ramos to
certain restrictions and covenants related to, among other things, tangible net
worth and working capital. At December 31, 1995, amounts outstanding under this
credit facility were $325,000. In December 1996, the Company repaid all
outstanding amounts and terminated this revolving credit facility.
H. Stockholders' Equity and Other Stock Related Information
--------------------------------------------------------
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.
Following stockholder approval in May 1996, the stock split was completed on
June 19, 1996, in the form of 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. All references
in the accompanying Notes to Consolidated Financial Statements to applicable
share and per share data, stock option data, and market prices of the Company's
common stock, for all periods presented, have been retroactively restated to
reflect the stock split.
Common Stock Offering
On April 6, 1994, the Company and certain stockholders of the Company completed
a public offering of common stock involving the sale of 1,500,000 shares of the
Company's common stock issued by the Company and six million shares of the
Company's common stock held by the
F-14
<PAGE>
existing stockholders. The net proceeds to the Company from the sale of the
1,500,000 shares of common stock sold by the Company was $6.9 million. The
Company invested the proceeds from the offering primarily in investment grade
municipal bonds and these funds are used for general corporate purposes,
including working capital to support planned expansion of its operations and to
fund capital expenditures and future acquisitions.
Stock Option Plans
Under the Company's 1991 Stock Option Plan (the "Option Plan"), the Company may
grant incentive stock options to employees and nonqualified stock options to
employees, directors, officers, and other key individuals. The Management
Resource Committee of the Board of Directors administers the Option Plan.
Options generally vest ratably over a four year period and expire ten years from
the date of grant.
Stock option activity, both incentive and nonqualified, under the Option Plan is
presented as follows:
<TABLE>
<CAPTION>
Weighted Average
Option Option Exercise Price
Shares Price Per Share
---------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1993 5,788,848 $ .03-$ 5.92 $ 1.93
Granted 3,301,713 $ 4.92-$ 6.31 $ 5.94
Exercised 294,330 $ .33-$ 5.17 $ 1.04
Canceled 247,251 $ .33-$ 5.50 $ 3.93
---------- -------------- -------
Outstanding at December 31,
1994 8,548,980 $ .03-$ 6.31 $ 3.45
Granted 3,860,175 $10.00-$ 17.25 $ 14.64
Exercised 1,025,820 $ .33-$ 6.31 $ 1.75
Canceled 283,215 $ .33-$ 17.25 $ 5.98
---------- -------------- -------
Outstanding at December 31,
1995 11,100,120 $ .03-$17.25 $ 7.48
Granted 2,922,675 $ 15.67-$35.25 $ 25.71
Exercised 2,603,934 $ .03-$17.25 $ 3.18
Canceled 901,850 $ .33-$34.00 $ 10.97
---------- -------------- -------
Outstanding at December 31,
1996 10,517,011 $ .33-$35.25 $ 13.27
========== ============== ========
</TABLE>
At December 31, 1996, 1995, and 1994, 4,014,783, 4,288,638, and 3,116,247
options were exercisable, respectively, under the Option Plan. In December 1994
and 1995, the Company's Board of Directors amended the Option Plan, with
subsequent stockholder approval, to increase the number of shares of common
stock authorized for issuance under the Option Plan from nine million to twelve
million shares in 1994 and twelve million to fifteen million in 1995. In
December 1996, the Company's Board of Directors further amended the Option Plan,
subject to
F-15
<PAGE>
stockholder approval, to increase the number of shares of common stock
authorized for issuance under the Option Plan from fifteen million to nineteen
million shares.
The following table summarizes information about stock options under the Option
Plan outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Options Exercisable
Outstanding ---------------------
------------------------------
Weighted Average Weighted Weighted
Options Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/96 Life Price at 12/31/96 Price
- -------------- ----------- -------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.33 520,023 5 Years $ .33 520,023 $ .33
$.67 to $1.34 813,881 6 Years $ 1.00 813,881 $ 1.00
$1.67 to $5.71 1,152,762 7 Years $ 4.44 833,052 $ 4.36
$5.59 to $6.32 1,960,985 8 Years $ 6.04 960,277 $ 6.00
$10.00 to $17.30 3,180,847 9 Years $ 14.81 887,550 $ 14.30
$15.67 to $28.13 2,888,513 10 Years $ 25.80 - -
---------- ---------
$.33 to $28.13 10,517,011 4,014,783
========== =========
</TABLE>
During 1991, the Company granted, under the Option Plan, 750,000 nonqualified
stock options to a key employee at an exercise price of $.03 per share, which
vested over a four-year period. Upon grant, unearned compensation equivalent to
the market value of these options at the date of grant was charged to
stockholders' equity and subsequently amortized over the vesting period.
Amortization expense of $9,000 and $57,000 was recorded for the years ended
December, 1995 and 1994, respectively. At December 31, 1996, there were no
options outstanding or exercisable under this grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
option plans. Accordingly, no compensation expense has been recognized. Had
compensation expense for the Company's stock option plans and employee stock
purchase plan been determined based on the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share would have been
reduced by $5.3 million, or $.10 per share in 1996 and $1.1 million, or $.03 per
share in 1995. The weighted average fair value of the options granted under the
stock options plans and the shares issued under employee stock purchase plan in
1996 and 1995, calculated using the Black-Scholes pricing model, was $11.40 and
$6.64 per share, respectively. The following assumptions were used in the Black-
Scholes pricing model for options granted in 1996 and 1995: risk-free interest
rate ranging from 5.49% to 6.9%, estimated volatility of 45%, assumed forfeiture
rate of 16%, and an expected life of 5 years for stock options and 6 months for
shares purchased under the employee stock purchase plan.
F-16
<PAGE>
In connection with the Company's acquisition of SCG, the Company assumed all
outstanding options to purchase shares of capital stock of SCG and such options
were converted into options to purchase 105,702 shares of the Company's common
stock at an exercise price of $.02 per share. As of December 31, 1996 and 1995,
options to purchase 52,802 and 105,702 shares, respectively, of the Company's
common stock were outstanding and exercisable.
In connection with the Company's acquisition of Axiom, the Company assumed all
outstanding options to purchase shares of capital stock of Axiom and converted
them into options to purchase 29,538 shares of the Company's common stock, as of
October 17, 1995, at an exercise price of $.16 per share. As of December 31,
1996 and 1995, options to purchase 22,503 and 24,684 shares of the Company's
common stock were exercisable respectively.
During 1995, the Company established the 1995 Non-employee Director Stock Option
Plan ("Non-employee Director Option Plan"). The Non-employee Director Option
Plan authorizes the grant of options for up to 150,000 shares of the Company's
common stock. Each member of the Company's Board of Directors who is neither (i)
an employee nor an officer of the Company or Safeguard Scientific, Inc.
("Safeguard"), nor (ii) an affiliate of Technology Leaders II L.P. or any
related entity serving on the Board of Directors on March 21, 1995, was granted
an option to purchase 30,000 shares of the Company's common stock. Each person
who is neither (I) an employee nor an officer of the Company or Safeguard nor
(II) an affiliate of Technology Leaders II L.P. or any related entity who is
first elected to the Board of Director after March 21, 1995, shall be
automatically granted, on the date of such election without further action by
the Board of Directors, an option to purchase 30,000 shares of the Company's
common stock. The options were granted with an exercise price equal to the fair
value on the date of grant, ranging from $10.00 to $17.25. Options generally
vest ratably over a four-year period and expire ten years from the date of
grant. Options to purchase 120,000 shares of common stock were granted in 1995.
At December 31, 1996, 120,000 options were outstanding and 43,122 shares were
exercisable. Weighted average exercise price for the exercisable shares was
$12.55. At December 31, 1996, the options outstanding had an average remaining
contractual life of 9 years and a weighted average exercise price of $13.29.
Employee Stock Purchase Plan
On December 14, 1994, the Board of Directors adopted the Company's 1994 Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which was subsequently approved
by stockholders in the annual meeting of stockholders in May 1995. The Company
has authorized 1,500,000 shares of the Company's common stock for purchases
under the Stock Purchase Plan. The Stock Purchase Plan permits eligible
employees to purchase up to 1,500 shares of common stock per payment period,
subject to limitations provided by Section 423(b) of the Internal Revenue Code,
through accumulated payroll deductions. The purchases are made twice per year at
a price equal to the lesser of (i) 85% of the average market price of the
Company's common stock on the first business day of the payment period and (ii)
85% of the average market price of the Company's common stock on the last day of
the payment period. Annual payment periods consist of two six-month periods,
January 15 through July 14 and July 15 through January 14.
F-17
<PAGE>
Preferred Stock
The certificate of incorporation was amended and restated, in December 1992, to
increase the number of authorized shares of capital stock to include two million
shares of preferred stock, par value $.01 per share, in one or more series.
The Board of Directors is authorized, subject to certain limitations prescribed
by law to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series.
The Company has not issued and has no present plans to issue any shares of
preferred stock.
Warrants
In December 1992, the Company issued warrants to Safeguard for the purchase of
900,000 shares of the Company's common stock at a price of $2.00 per share. The
warrants are exercisable for a five-year period from the date of issuance. As
of December 31, 1996, no warrants were exercised. The warrants were issued in
consideration of Safeguard's commitment to guarantee a credit facility and a
term note totaling $3.5 million for the Company. Under the Company's Facility,
Safeguard's guarantee was subsequently released.
Dividends
The Facility with Fleet Bank prohibits the Company from paying any dividends or
making any distributions either in cash or in kind on any class of its capital
stock without Fleet Bank's prior consent. The Company currently intends to
retain future earnings for use in its business and, therefore, does not expect
to pay dividends in the foreseeable future.
Dividend distributions made by SCG, prior to the acquisition, were principally
for reimbursement of income tax liabilities of its former stockholders due to
SCG's S-Corporation tax status.
I. Lease Commitments
-----------------
On June 4, 1992, the Company entered into, among other building and equipment
leases, a lease for a building in Cambridge, Massachusetts, that is used as its
corporate headquarters. The building is owned by a trust, the sole beneficiary
of which is the Chairman of the Company. The initial lease expires in August
2007, and is renewable for two additional five year terms. The lease provides
for increases, which began in September 1995, based upon increases in the
Consumer Price Index-Urban Wage Earners and Clerical Workers, U.S. City Average,
All Items ("CPI").
F-18
<PAGE>
Minimum future lease commitments under noncancelable operating leases for
buildings and equipment in effect at December 31, 1996, are presented as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 6,467
1998 5,272
1999 4,742
2000 3,694
2001 3,248
Thereafter 8,331
-------
Total minimum lease payments $31,754
=======
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, rental expense under all
leases was approximately $5.7 million, $4.6 million, and $2.9 million,
respectively, of which approximately $785,000, $765,000, and $775,000,
respectively, related to the trust described above.
Minimum future lease commitments under noncancelable capital leases for
equipment at December 31, 1996, are presented as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 94
1998 80
1999 77
2000 18
2001 -
-------
Total minimum payments 269
Less amounts representing interest 33
-------
Present value of minimum lease payments 236
Current portion 74
-------
Long-term obligation $ 162
=======
</TABLE>
J. Other Costs
-----------
Other costs consist of the following (in thousands):
<TABLE>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Facility costs and related expenses $27,896 $12,481 $ 6,153
Non-billable project expenses 7,507 5,892 4,338
Non-billable staff travel 7,473 5,696 3,758
Education and training 2,654 1,269 580
------- ------- -------
$45,530 $25,338 $14,829
======= ======= =======
</TABLE>
F-19
<PAGE>
K. Income Taxes
------------
The components of income before income taxes and the related provision for
income taxes for the years ended December 31, 1996, 1995, and 1994, are
presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Income before income taxes:
Domestic $32,675 $19,800 $12,049
Foreign 2,540 2,083 477
------- ------- -------
$35,215 $21,883 $12,526
======= ======= =======
Provision (benefit) for income taxes:
Current:
Federal $10,351 $ 5,860 $ 3,499
Foreign 1,307 655 61
State 3,023 1,595 910
------- ------- -------
14,681 8,110 4,470
Deferred:
Federal (311) 363 57
Foreign (207) 28 70
State (48) 34 7
------- ------- -------
(566) 425 134
------- ------- -------
Total $14,115 $ 8,535 $ 4,604
======= ======= =======
</TABLE>
The Company's deferred tax assets and (liabilities) are comprised of the
following as of December 31, 1996 and 1995, respectively (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Tax basis of software technology $ - $ 50
Bad debt reserves 339 72
Vacation accrual 262 40
Fixed asset depreciation (471) (388)
Cash to accrual adjustments (829) (848)
Other 389 199
----- -----
$(310) $(875)
===== =====
</TABLE>
F-20
<PAGE>
The table below reconciles the expected U.S. federal income tax provision to the
recorded income tax provision (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax provision $12,326 35.0% $7,659 35.0% $4,259 34.0%
State income taxes, net of
federal income tax benefit 1,934 5.5 1,185 5.4 548 4.4
Goodwill amortization 240 .7 240 1.1 191 1.5
Non-taxable S-Corporation income - - (215) (1.0) (517) (4.1)
Other, net (385) (1.1) (334) (1.5) 123 1.0
------- ---- ------- ---- ------ ----
$14,115 40.1% $8,535 39.0% $4,604 36.8%
======= ==== ====== ==== ====== ====
</TABLE>
Prior to the acquisition on August 14, 1995, SCG had elected to be treated as an
S-Corporation for income tax reporting purposes. Under this election, the
individual stockholders are deemed to have received a pro rata distribution of
taxable income of SCG (whether or not an actual distribution was made), which is
included in their taxable income. Accordingly, SCG did not provide for income
taxes. Pro forma net income per share, which reflects the provision for pro
forma income taxes to the net income of SCG, is presented in the pro forma data
section of the accompanying consolidated statements of operations. In addition,
SCG's S-Corporation tax reporting status was terminated on the date of the
acquisition and therefore, the undistributed earnings of $2.1 million as of the
date of acquisition has been reclassified to additional paid-in-capital.
L. 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 (see Note H). Net income
per share data also reflects, when applicable, the assumed issuance, at the
beginning of the period, common stock of the Company and options to purchase
common stock of the Company relating to the acquisitions of SCG, Axiom, NatSoft,
and Ramos, which were accounted for using the pooling of interests method of
accounting (see Note B). Primary and fully diluted income per share are the same
for each period presented.
M. Employee Benefit Plans
----------------------
In 1992, the Company established a savings and profit-sharing plan (the "401(k)
Plan") covering substantially all of the Company's employees. The 401(k) Plan is
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.
The Company may elect to make contributions under the 401(k) Plan. Starting in
1994, the Company elected to make matching contributions based on a percentage
of employees' contributions, subject to limitations as defined in the 401(k)
Plan. In 1996, the Company completed the rollover of assets held under the SCG
Profit-sharing Plan and the Axiom Profit-sharing Plan to the 401(k) Plan.
Company matching contributions amounted to $845,000, $499,000, and $329,000 in
1996, 1995, and 1994, respectively.
F-21
<PAGE>
NatSoft sponsors a defined contribution retirement plan (the "NatSoft Plan") for
its employees. Under the NatSoft Plan, employees can contribute between 5% to
11% of insured salary depending on age and other factors. All employee
contributions are matched by NatSoft. Employer matching contribution amounted to
$202,000, $181,000, and $99,000 for the years ended December 31, 1996, 1995, and
1994, respectively. NatSoft also sponsors a defined contribution retirement plan
for three executives who are also stockholders. NatSoft's contribution to this
plan amounted to $150,000, and $296,000 for the years ended December 31, 1995,
and 1994, respectively. In June 1996, the defined contribution retirement plan
was terminated.
In 1992, Ramos established a savings and profit-sharing plan (the "Ramos Profit-
sharing Plan") covering substantially all of Ramos' employees. The Ramos Profit-
sharing Plan is qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended. Ramos may elect to make contributions under the Ramos Profit-
sharing Plan. Ramos elected to make matching contributions based on a percentage
of employees' contributions. Ramos' matching contributions amounted to $455,000,
$227,000, and $82,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. The Company expects to rollover assets held under the Ramos
Profit-sharing Plan to the 401(k) Plan during the second quarter of 1997.
N. Commitments and Contingencies
-----------------------------
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 $1.7
million 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 is vigorously defending 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 is vigorously
defending itself in this arbitration.
O. Supplemental Cash Flow Information
----------------------------------
Supplemental disclosures of cash flow information are presented as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 46 $ 343 $ 189
Income taxes 3,523 3,146 4,897
</TABLE>
F-22
<PAGE>
During 1995, capital lease obligations of $357,000 were incurred by SCG, Axiom,
and Ramos for the acquisition of certain equipment. During 1994, capital lease
obligations of $50,000 were incurred by Ramos for the acquisition of certain
equipment. In addition, the Company exchanged 1,275,000 shares of its common
stock for 100% of the outstanding shares of CTP Scandinavia.
P. Geographic Information
----------------------
Information about the Company's operations and total assets in North America and
Europe is presented as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net revenues:
North America $178,000 $115,430 $74,649
Europe 58,554 40,836 19,638
-------- -------- -------
Consolidated $236,554 $156,266 $94,287
======== ======== =======
Income from operations:
North America $ 28,820 $ 18,429 $11,753
Europe 5,793 2,092 517
-------- -------- -------
Consolidated $ 34,613 $ 20,521 $12,270
======== ======== =======
Total assets at December 31:
North America $105,766 $ 60,135 $38,515
Europe 24,634 17,411 13,536
-------- -------- -------
Consolidated $130,400 $ 77,546 $52,051
======== ======== =======
</TABLE>
North American operations consist primarily of information technology consulting
and software development and implementation services in the United States.
European operations consist of information technology consulting and software
development services principally in the United Kingdom, the Netherlands,
Switzerland, Sweden, Norway, Ireland, and Germany, which have similar business
environments. There are no intercompany sales for the periods presented.
F-23
<PAGE>
Q. Quarterly Financial Information (unaudited)
-------------------------------------------
The following table presents the unaudited quarterly financial information for
the years ended 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- ---------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
------- ------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $47,279 $31,681 $56,257 $38,172 $63,869 $41,268 $69,149 $45,145
Income from operations 7,497 4,063 7,906 4,915 9,213 5,146 9,997 6,397
Income before income taxes 7,603 4,367 8,150 5,847 9,392 5,225 10,070 6,444
Net income 4,587 2,573 4,865 3,605 5,606 3,236 6,042 3,934
Net income per share .09 .05 .09 .07 .10 .06 .11 .07
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Cambridge Technology Partners (Massachusetts), Inc.
Our report on the consolidated financial statements of Cambridge Technology
Partners (Massachusetts), Inc. is included on page F-2 of this Form 10-K. In
connection of our audits of such financial statements, we have also audited the
related financial statements schedule for each of the three years in the period
ended December 31, 1996, listed in Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 3, 1997
<PAGE>
SCHEDULE II
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1994, 1995, and 1996
(in thousands)
<TABLE>
<CAPTION>
Column C
------------------------------------
(2)
Column B Charged to Column E
Column A Balance at (1) other Balance at
Allowances for Beginning Charged to accounts - Column D End of
Doubtful Accounts of Period cost and expenses describe Deductions Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 $ 503 $ 49 $ - $ - $ 552
Year ended December 31, 1995 552 304 - 69 787
Year ended December 31, 1996 787 298 - - 1,085
</TABLE>
S-2
<PAGE>
Exhibit 10.22
YOUR 1996 EXECUTIVE BONUS PLAN
PLAN PURPOSE
At Cambridge Technology Partners, we work hard to satisfy our clients each
and every day. As a growing company, we can see the tangible results of
this dedication and loyalty. We know these results depend on you. We are
committed to sharing the company's financial success with our employees.
Our 1996 Executive Bonus Plan is designed to reward our success and your
contributions. This year's plan has been revised to take into account our
business goals for 1996.
It is our hope that the 1996 Executive Bonus Plan will continue to motivate
all employees to strive for company prosperity. By working together, we can
all share financially in the company's growth.
OUR 1996 GOAL
Our investors consider growth in our pre-tax income to be a key measure of
our performance. Therefore, the bonus pool is driven by the annual increase
in the measure. Our 1995 pre-tax income will be the trigger point for 1996
bonuses. If our 1996 pre-tax income does not exceed 1995 pre-tax income, no
bonuses will be paid. Pre-tax income will be determined after giving effect
to payments under Cambridge Technology Partners' compensation plans.
We have set a target for this year's pre-tax income. If our 1996 pre-tax
income equals this target, 100% of the bonus pool will be available for
bonuses. This is an aggressive but reachable objective.
ELIGIBILITY
You are eligible for the Executive Bonus Plan if (i) you hold the position
of Chief Executive Officer, President, Executive Vice President, Senior
Vice President or Vice President, (ii) you are a full-time Cambridge
Technology Partners employee and, (iii) you are hired before July 1, 1996.
If you join the Company after January 1, 1996, but before July 1, 1996,
your bonus will be pro-rated on your full months consecutive employment
through the year end. Employees who have salary and/or level changes in
1996 will receive a pro-rated bonus based on the number of months at each
salary level.
YOUR BONUS OPPORTUNITY
Your bonus will be based on a fixed percentage of your base salary. This
percentage is determined by your salary level. The total amount available
for your bonus is based on pre-tax income. There are two parts to your
bonus. Seventy-five percent of your potential bonus is based on our
achievement of the pre-tax income goal. The remaining 25% of your bonus is
based on your individual performance as determined
<PAGE>
-2-
at year end. This award will be made at management's discretion and is
intended to recognize and reward employees for their overall contribution
to the company throughout the year.
THE BONUS POOL
The percentage of the bonus pool paid will depend on our pre-tax income.
Bonuses will be paid according to the attached schedule.
The actual amount you receive will be based on the bonus potential for your
position.
BONUS PAYMENTS
We will make every reasonable effort to ensure that bonuses are distributed
within 60 days after the completion of the fiscal year. Bonuses will be
paid by check and applicable taxes will be deducted from your payment.
IF YOU LEAVE CAMBRIDGE TECHNOLOGY PARTNERS
You must be on the payroll the day that bonuses are distributed to be
eligible for a bonus. If you are on an approved leave, your bonus will be
pro-rated, based on your continuous full months of employment during the
year.
NO GUARANTEES
The Executive Bonus Plan will be updated each year. The plan does not
guarantee that you will be offered a bonus and does not guarantee your
continued employment with the company. The program is based on company and
individual performance and management reserves the exclusive right to
modify or terminate the plan at its discretion at any time.
IN SUMMARY
At Cambridge Technology Partners, we want to recognize everyone's
contributions in helping to make the company successful. We believe that
the Executive Bonus Plan will assist us in ensuring that individual
employees can be recognized for their achievements. We look forward to us
all sharing in our company's success.
<PAGE>
Exhibit 10.23
YOUR 1996 EMPLOYEE BONUS PLAN
PLAN PURPOSE
At Cambridge Technology Partners, we work hard to satisfy our clients each
and every day. As a growing company, we can see the tangible results of this
dedication and loyalty. We know these results depend on you. We are committed to
sharing the company's financial success with our employees. Our 1996 Employee
Bonus Plan is designed to reward our success and your contributions. This year's
plan has been revised to take into account our business goals for 1996.
It is our hope that the 1996 Employee Bonus Plan will continue to motivate
all employees to strive for company prosperity. By working together, we can all
share financially in the company's growth.
OUR 1996 GOAL
Our investors consider growth in our pre-tax income to be a key measure of
our performance. Therefore, the bonus pool is driven by the annual increase in
the measure. Our 1995 pre-tax income will be the trigger point for 1996 bonuses.
If our 1996 pre-tax income does not exceed actual 1995 pre-tax income, no
bonuses will be paid. Pre-tax income will be determined after giving effect to
payments under Cambridge Technology Partners' compensation plans.
We have set a target for this year's pre-tax income. If our 1996 pre-tax
income equals this target, 100% of the bonus pool will be available for bonuses.
This is an aggressive but reachable objective.
If we exceed this target, an additional pool will be made available for
bonuses. The executive bonus amounts will be paid out according to the attached
schedule.
ELIGIBILITY
You are eligible for the Employee Bonus Plan if you are a full-time
Cambridge Technology Partners employee and were hired before July 1, 1996. If
you join the Company before July 1, 1996, your bonus will be pro-rated on your
full months consecutive employment through the year end. Employees who have
salary and/or level changes in 1996 will receive a pro-rated bonus based on the
number of months at each salary level.
<PAGE>
YOUR BONUS OPPORTUNITY
Your bonus will be based on a fixed percentage of your base salary. The
total amount available for your bonus is based on pre-tax income. There are two
parts to your bonus. One-half of your potential bonus is based on our
achievement of the pre-tax income goal. The remaining 50% of your bonus is based
on your individual performance as determined at year end. This award will be
made at management's discretion and is intended to recognize and reward
employees for their overall contribution to the company throughout the year.
THE BONUS POOL
The percentage of the bonus pool paid will depend on our pre-tax income.
Bonuses will be paid according to the attached schedule. The actual amount you
receive will be based on the bonus potential for your position. So, for example,
if the company's pre-tax income is equal to the target pre-tax income amount and
your performance meets your manager's expectations, you could receive 100% of
your bonus potential (75% of this would be based on the performance of the
company and 25% would be based on your performance). If your performance was not
up to expectations, you would still be eligible to receive 75% of your bonus
potential because the company has met its performance goals.
BONUS PAYMENTS
We will make every reasonable effort to ensure that bonuses are distributed
within 60 days after the completion of the fiscal year. Bonuses will be paid by
check and applicable taxes will be deducted from your payment.
IF YOU LEAVE CAMBRIDGE TECHNOLOGY PARTNERS
You must be on the payroll the day that bonuses are distributed to be
eligible for a bonus. If you are on an approved leave, your bonus will be pro-
rated, based on your continuous full months of employment during the year.
NO GUARANTEES
The Employee Bonus Plan will be updated each year. The plan does not
guarantee that you will be offered a bonus and does not guarantee your continued
employment with the company. The program is based on company and individual
performance and management reserves the exclusive right to modify or terminate
the plan at its discretion at any time.
<PAGE>
IN SUMMARY
At Cambridge Technology Partners, we want to recognize everyone's
contributions in helping to make the company successful. We believe that the
Employee Bonus Plan will assist us in ensuring that individual employees can be
recognized for their achievements. We look forward to us all sharing in our
company's success.
<PAGE>
Exhibit 11.1
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Net income $ 21,100 $ 13,348 $ 7,922
========== ========== ==========
Weighted average number of common shares outstanding 47,118 45,055 43,879
Dilutive effect of common equivalent shares of stock options
and warrants 7,519 6,807 4,248
---------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding 54,637 51,862 48,127
========== ========== ==========
Net income per share (1) $ .39 $ .25 $ .16
========== ========== ==========
</TABLE>
- -----------------------
(1) Primary and Fully-diluted income per share are the same for all periods
presented.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
<S> <C>
Cambridge Technology Partners Scandinavia AB Sweden
Cambridge Technology Partners (United Kingdom), Inc. Delaware
Cambridge Technology Partners (Benelux), Inc. Delaware
Cambridge Technology Partners Securities Corporation Massachusetts
Cambridge Technology Partners International, Inc. Delaware
Cambridge Technology Partners (Benelux), B.V. The Netherlands
Cambridge Technology Partners Cambridge Management Consulting, Inc. California
The Systems Consulting Group, Inc. Florida
Cambridge Technology Partners (Latin America) Delaware
NatSoft S.A. Switzerland
Cambridge Technology Partners - Enterprise Resource Solutions, Inc. California
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cambridge Technology Partners (Massachusetts), Inc. on Form S-8 (File Nos. 33-
70114, 33-87710, 33-93054, 33-93056, 333-09709 and 33-99672) and on Form S-3
(File Nos. 33-96838, 333-16165 and 333-17347) of our reports dated February 3,
1997, on our audits of the consolidated financial statements and financial
statement schedule of Cambridge Technology Partners (Massachusetts), Inc. as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, which reports are included in this Annual Report on
Form 10-K.
Boston, Massachusetts
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 19,817 7,490 4,021
<SECURITIES> 12,727 8,544 10,311
<RECEIVABLES> 55,540 33,509 21,087
<ALLOWANCES> 1,085 787 552
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 105,399 60,477 40,269
<PP&E> 30,690 18,588 9,659
<DEPRECIATION> 11,663 6,546 3,633
<TOTAL-ASSETS> 130,400 77,546 52,051
<CURRENT-LIABILITIES> 36,917 25,642 18,473
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 484 456 445
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 130,400 77,546 52,051
<SALES> 0 0 0
<TOTAL-REVENUES> 236,554 156,266 94,287
<CGS> 0 0 0
<TOTAL-COSTS> 201,941 135,745 82,017
<OTHER-EXPENSES> (648) (1,727) (326)
<LOSS-PROVISION> 298 235 91
<INTEREST-EXPENSE> 46 365 154
<INCOME-PRETAX> 35,215 21,883 12,526
<INCOME-TAX> 14,115 8,535 4,604
<INCOME-CONTINUING> 21,100 13,348 7,922
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 21,100 13,348 7,922
<EPS-PRIMARY> 0.39 0.25 0.16
<EPS-DILUTED> 0.39 0.25 0.16
</TABLE>
