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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-21040
CAMBRIDGE TECHNOLOGY PARTNERS
(MASSACHUSETTS), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1320610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8 CAMBRIDGE CENTER
Cambridge, Massachusetts 02142
(Address of principal executive offices) (Zip Code)
(617) 374-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of July 31, 1999, there were 60,204,769 shares of common stock
outstanding.
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION:
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 22
PART II - OTHER INFORMATION:
ITEM 1: LEGAL PROCEEDING 22
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,446 $ 80,051
Investments held to maturity 27,334 24,918
Accounts receivable, less allowance of
$7,465 and $4,550 at June 30, 1999
and December 31, 1998, respectively 145,293 133,583
Unbilled revenue on contracts 19,900 10,964
Deferred income taxes 2,179 2,179
Prepaid expenses and other current assets 36,935 33,284
-------- --------
Total current assets 292,087 284,979
Property and equipment, net 53,308 48,255
Other assets 18,730 17,972
-------- --------
Total assets $364,125 $351,206
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,283 $ 15,804
Accrued expenses 52,212 49,603
Deferred revenue 14,906 10,861
Income taxes payable 24,190 30,635
Obligations under capital leases, current 112 147
-------- --------
Total current liabilities 103,703 107,050
Other long term liabilities 135 197
Deferred income taxes 1,056 1,809
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
authorized 250,000,000 shares;
issued and outstanding 59,779,195 and
58,856,401 shares at June 30, 1999 and
December 31, 1998, respectively 598 589
Additional paid-in capital 131,009 115,662
Accumulated other comprehensive loss (8,575) (1,652)
Retained earnings 136,199 127,551
-------- --------
Total stockholders' equity 259,231 242,150
-------- --------
Total liabilities and stockholders' equity $364,125 $351,206
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $163,496 $156,578 $314,869 $298,801
Costs and expenses:
Project personnel 81,667 71,852 153,235 137,387
General and administration 21,525 17,664 37,967 33,552
Sales and marketing 16,025 15,722 30,290 29,030
Other costs 45,817 29,262 83,777 56,637
-------- -------- -------- --------
Total operating expenses 165,034 134,500 305,269 256,606
-------- -------- -------- --------
Income/(loss) from operations (1,538) 22,078 9,600 42,195
Other income (expense):
Interest income, net 478 523 1,163 1,068
Gain on equity investment 1,139 - 1,421 -
Gain on sale of marketable
equity securities 2,228 - 2,228 -
Foreign exchange loss (390) (24) (464) (157)
-------- -------- -------- --------
Income before income taxes 1,917 22,577 13,948 43,106
Provision for income taxes 728 9,043 5,300 17,092
-------- -------- -------- --------
Net income $ 1,189 $ 13,534 $ 8,648 $ 26,014
======== ======== ======== ========
Basic net income per share $.02 $.23 $.15 $.45
======== ======== ======== ========
Diluted net income per share $.02 $.21 $.14 $.41
======== ======== ======== ========
Weighted average number of
common shares outstanding 59,654 57,986 59,480 57,581
======== ======== ======== ========
Weighted average number of
common and common
equivalent shares outstanding 60,813 63,403 62,588 63,014
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,648 $ 26,014
Amounts that reconcile net income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 7,775 6,474
Gain on investment in Cambridge Technology
Capital Fund (1,421) -
Gain on sale of marketable equity securities (2,228) -
Tax benefit from exercise of stock options 1,589 10,189
Changes in assets and liabilities:
Increase in accounts receivable (14,623) (31,571)
Increase in unbilled revenue on contracts (9,475) (2,040)
Increase in prepaid expenses and other
current assets (4,416) (9,006)
Decrease in accounts payable (3,293) (156)
Increase in accrued expenses 2,420 9,484
Increase in deferred revenue 4,132 4,846
(Decrease)/increase in income taxes payable (8,487) 2,588
Decrease in other assets 1,769 31
-------- --------
Net cash (used in)/provided by operating
activities (17,610) 16,853
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (13,263) (12,865)
Investment in Cambridge Technology Capital Fund (1,409) (955)
Purchase of investments held to maturity (7,231) (13,557)
Maturity of investments 4,815 7,669
Proceeds from sale of marketable equity securities 2,324 -
-------- --------
Net cash used in investing activities (14,764) (19,708)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Obligations under capital leases and loan
repayments (110) (987)
Dividend distribution - (1,129)
Proceeds from employee stock purchase plan 4,768 3,390
Proceeds from exercise of stock options 8,998 13,975
-------- --------
Net cash provided by financing activities 13,656 15,249
-------- --------
Effect of foreign exchange rate changes on cash (887) 336
Net (decrease)/increase in cash and cash equivalent (19,605) 12,730
Cash and cash equivalents at beginning of period 80,051 39,648
-------- --------
Cash and cash equivalents at end of period $ 60,446 $ 52,378
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. BASIS OF REPORTING
------------------
The accompanying consolidated financial statements of Cambridge Technology
Partners (Massachusetts), Inc., a Delaware corporation (the "Company"), include
the accounts of the Company and all of its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
In August 1998, the Company acquired all of the outstanding capital stock of
Excell Data Corporation ("Excell"). The Excell acquisition was accounted for
using the pooling of interests method of accounting. All prior period
historical consolidated financial statements presented herein have been restated
to include the financial position, results of operations, and cash flows of
Excell. Certain prior period amounts have been reclassified to conform to
current period presentation. In the opinion of management, the consolidated
financial statements reflect all normal and recurring adjustments, which are
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows as of the dates and for the periods presented.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all the disclosures normally
required by generally accepted accounting principles for annual financial
statements nor those normally made in the Company's Annual Report on Form 10-K.
Accordingly, reference should be made to the Company's Annual Report on
Form 10-K for additional disclosures, including a summary of the Company's
accounting policies. The consolidated results of operations for the three and
six months ended June 30, 1999 are not necessarily indicative of results for the
full year.
B. REPOSITIONING COSTS
-------------------
In the second quarter of 1999, the Company announced a human resources
repositioning and retention program which was undertaken to enable the Company
to retain, retrain, relocate and strategically redeploy employees into its e-
business service offerings. The program includes employee retention bonuses,
staff reductions, and the retraining, relocation and redeployment of certain
employees. In the second quarter of 1999 the Company recorded expenses
associated with these activities of $8.9 million. The $8.9 million of
repositioning costs include $5.9 million of employee retention bonuses,
$1.3 million of severance costs, and $1.7 million of costs to retrain, relocate
and redeploy certain employees. Costs related to retention bonuses, retraining,
relocation and redeployment were incurred and substantially paid prior to the
end of the second quarter of 1999. Staff reductions included approximately
55 professional staff and 17 administrative personnel. The plan to reduce these
positions was approved by management prior to June 30, 1999 and each of the
related individuals was aware of their severance benefits. At June 30, 1999
approximately $764,000 of the severance costs have been paid and the remaining
balance of $616,000 in accrued expenses is expected to be paid in the quarter
ending September 30, 1999.
6
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C. NET INCOME PER SHARE
--------------------
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
requires the presentation of basic and diluted earnings per share ("EPS"). Basic
EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed using the weighted average number of common shares outstanding
plus the dilutive effect of common stock equivalents (using the treasury stock
method). For the three and six month periods ended June 30, 1999, outstanding
options to purchase approximately 5.4 million and 4.2 million shares,
respectively, were excluded from the computation of diluted EPS because the
effects of these option shares were anti-dilutive. The number of common stock
equivalents excluded from the computation of diluted EPS was immaterial for the
three and six months ended June 30, 1998.
The following table presents the calculation of earnings per share for the three
and six months ended June 30, 1999 and 1998 (in thousands except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,189 $13,534 $ 8,648 $26,014
======= ======= ======= =======
Basic:
Weighted average number of common
shares outstanding 59,654 57,986 59,480 57,581
======= ======= ======= =======
Net income per share $ .02 $ .23 $ .15 $ .45
======= ======= ======= =======
Diluted:
Weighted average number of common
shares outstanding 59,654 57,986 59,480 57,581
Dilutive effects of stock options 1,159 5,417 3,108 5,433
------- ------- ------- -------
Weighted average number of common
and common equivalent shares
outstanding 60,813 63,403 62,588 63,014
======= ======= ======= =======
Net income per share $ .02 $ .21 $ .14 $ .41
======= ======= ======= =======
</TABLE>
D. FOREIGN EXCHANGE CONTRACTS
--------------------------
The Company maintains foreign exchange contracts in an attempt to mitigate the
risk of changes in foreign exchange rates associated with intercompany balances.
The contracts generally have maturities of one month. The impact of exchange
rate movements on contracts is recorded in other income in the period in which
the exchange rates change, generally consistent with the term of the contract.
As of June 30, 1999, the Company held foreign exchange forward contracts of
approximately $6.0 million and there were no related deferred gains and losses.
The Company does not hold foreign exchange contracts for trading purposes.
E. COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" requires the presentation of comprehensive income and its components.
Comprehensive income presents a measure of all changes in equity that result
from recognized transactions and other economic events during the period other
than transactions with stockholders.
7
<PAGE>
The following table presents the calculation of comprehensive income and its
components for the three and six months ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive income/(loss):
Net income $ 1,189 $13,534 $ 8,648 $26,014
Other comprehensive income:
Reclassification adjustment for gain on
marketable equity securities included in
net income, net of taxes of $920 and
$753 for the three and six month
periods ended June 30, 1999,
respectively (1,521) - (1,255) -
Foreign currency translation adjustment (2,472) 237 (5,668) (1,436)
------- ------- ------- -------
Other comprehensive income/(loss) (3,993) 237 (6,923) (1,436)
------- ------- ------- -------
Comprehensive income/(loss) $(2,804) $13,771 $ 1,725 $24,578
======= ======= ======= =======
</TABLE>
F. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
will be recorded for each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company is
currently determining the impact of the adoption of SFAS 133 on the Company's
results of operations and financial position.
G. LEGAL PROCEEDINGS
-----------------
On November 18, 1998, certain of the former stockholders of Excell filed a
lawsuit against the Company in the United States District Court for the District
of Massachusetts. The complaint alleges breach of contract, violation of federal
securities laws, common law fraud, and negligent misrepresentation in connection
with the Excell acquisition and seeks unspecified damages. The Company believes
that the plaintiffs' claims are without merit and intends to vigorously defend
the lawsuit. In February 1999, the Company filed a counterclaim against such
former stockholders of Excell which alleges breach of contract.
In March and April 1999, certain stockholders of the Company filed ten separate
class action lawsuits against the Company and certain of the Company's officers
in the United States District Court for the District of Massachusetts. These
suits have since been consolidated by the court. The suits allege
misrepresentations and omissions regarding the Company's future growth prospects
and progress of the Company's reorganization in violation of federal securities
laws. The suits seek unspecified damages. The Company believes that the
plaintiffs' claims are without merit and intends to vigorously defend the
lawsuits.
8
<PAGE>
The Company is involved in litigation and various other legal matters, which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter will have a material adverse
effect on its financial condition, results of operations, or cash flows.
H. OPERATING SEGMENT INFORMATION
-----------------------------
The Company is managed in two operating segments: North America and
International. The North American operating segment consists of systems
integration and consulting services in the United States and Canada while the
International operating segment consists of systems integration and consulting
services outside of North America.
The Company evaluates each segment's performance based on net revenues and
income from operations. Corporate costs have been allocated to each segment
based on the proportionate operating income of each segment. Total corporate
assets have been included in North America.
Information about the Company's operating segments is presented as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
North America $109,743 $109,782 $207,158 $211,306
International 53,753 46,796 107,711 87,495
-------- -------- -------- --------
Consolidated $163,496 $156,578 $314,869 $298,801
======== ======== ======== ========
Income/(loss) from operations:
North America $ (740) $ 16,678 $ 5,117 $ 33,054
International (798) 5,400 4,483 9,141
-------- -------- -------- --------
Consolidated $ (1,538) $ 22,078 $ 9,600 $ 42,195
======== ======== ======== ========
Total assets:
North America $273,239 $236,774 $273,239 $236,774
International 90,886 73,608 90,886 73,608
-------- -------- -------- --------
Consolidated $364,125 $310,382 $364,125 $310,382
======== ======== ======== ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
Cambridge Technology Partners (Massachusetts), Inc., a Delaware corporation (the
"Company"), is an international management consulting and systems integration
firm. Founded in 1991, the Company combines management consulting, internet
solutions, custom and package software deployment, network services, and
training to rapidly deliver end-to-end business solutions for "Global 2000"
organizations worldwide. The Company provides the majority of its services on a
fixed-time, fixed-price model with client involvement at all stages of the
process. In performing its services, the Company brings together key client
users, executives, and IT professionals in interactive sessions to achieve
consensus on the business case, strategic objectives, and functionality of a
business solution. In many cases, the Company employs a rapid deployment
methodology that features an iterative approach. The Company believes that these
techniques permit the delivery of results in rapid time frames -- typically
within three to twelve months. Net revenues for the second quarter of 1999
increased 4% to $163.5 million compared to $156.6 million for the same period in
1998. Net income for the quarter ended June 30, 1999 decreased 91% to
$1.2 million, or $.02 per share (diluted), compared to $13.5 million, or
$.21 per share (diluted), for the quarter ended June 30, 1998. Adjusted to
exclude repositioning costs of $8.9 million, charges for client receivables of
$4.2 million, and a gain of $2.2 million from the sale of marketable equity
securities, net income would have been $7.9 million, or $.13 per share
(diluted), for the quarter ended June 30, 1999.
The table below presents net income and diluted net income per share for the
three and six-month periods ended June 30, 1999 and 1998, respectively, after
adjusting for the repositioning costs, client receivable provision, and gain on
the sale of marketable equity securities described above:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Reported income/(loss) from
operations $(1,538) $22,078 $ 9,600 $42,195
Repositioning costs 8,926 - 8,926 -
Client receivable provision 4,200 - 4,200 -
------- ------- ------- -------
Adjusted income from operations 11,588 22,078 22,726 42,195
Reported other income, net 3,455 499 4,348 911
Less gain on sale of
marketable equity securities (2,228) - (2,228) -
------- ------- ------- -------
Adjusted income before income taxes
12,815 22,577 24,846 43,106
Adjusted provision for income taxes
4,870 9,043 9,442 17,092
------- ------- ------- -------
Adjusted net income $ 7,945 $13,534 $15,404 $26,014
======= ======= ======= =======
Adjusted diluted net income per share
$ .13 $ .21 $ .25 $ .41
======= ======= ======= =======
</TABLE>
10
<PAGE>
Repositioning costs of $8.9 million resulted from a human resources
repositioning and retention program to enable the Company to retain, retrain,
relocate and strategically redeploy employees into its e-business service
offerings due to changing market dynamics which resulted in decreased demand for
Enterprise Resource Planning (ERP) services and increased demand for interactive
and WEB-based services. The program includes employee retention bonuses, staff
reductions, and the retraining, relocation and redeployment of certain
employees. The $8.9 million of repositioning costs include $5.9
million of employee retention bonuses, $1.3 million of severance costs, and $1.7
million of costs to retrain, relocate and redeploy certain employees. Of the
$8.9 million of repositioning and retention costs, $6.6 million was charged to
project personnel costs, $1.9 million to general and administrative expenses,
$235,000 to sales and marketing expenses, and $172,000 to other costs. Costs
related to retention bonuses, retraining, relocation and redeployment were
incurred and substantially paid prior to the end of the second quarter of 1999.
Staff reductions included approximately 55 professional staff and 17
administrative personnel (see Note B of Notes to the Consolidated Financial
Statements).
During the second quarter of 1999, the Company provided for $4.2 million of
potentially uncollectable accounts related to disputed fees and out-of pocket
expenses charged to clients. Of this $4.2 million client receivable provision,
$2.0 million was charged to general and administrative costs and $2.2 million
was charged to other costs.
Other income is comprised of interest income and expense, investment activity
related to the Cambridge Technology Capital Fund and the impact of foreign
currency fluctuations on the operation of the Company. For the three and six
month periods ended June 30, 1999, reported other income also includes a $2.2
million gain on the sale of marketable equity securities.
North American net revenues were $109.7 million for the quarter ended June 30,
1999 compared to $109.8 million for the same period in 1998, while International
net revenues grew 15% to $53.8 million in the second quarter of 1999 compared to
$46.8 million in the second quarter of 1998. Net revenues in North America
remained the same for the quarter ended June 30, 1999 compared to the same
period in 1998 principally because the benefits of the realignment of the
Company's North American operations did not materialize as quickly as
anticipated resulting in expanded responsibilities for members of project
management and the need for additional sales force training. North American net
revenues for the quarter ended June 30, 1999 represented 67% of
11
<PAGE>
total net revenues while International net revenues represented 33% of total net
revenues for the same period. North American net revenues for the quarter ended
June 30, 1998 represented 70% of total net revenues while International net
revenues represented 30% of total net revenues for the same period in 1998. The
International net revenue growth in the second quarter of 1999 compared to the
second quarter of 1998 resulted from continued demand for the Company's
services, primarily in Europe. Net revenues from the Company's European
operations accounted for 29% of total net revenues in the quarter ended June 30,
1999, compared to 27% for the same period in 1998. The increase in International
net revenues as a percentage of total net revenues also resulted, in part, from
North American net revenues remaining essentially the same for the second
quarter of 1999 compared to the same quarter in 1998. Globally, revenue growth
for the second quarter of 1999 compared to the second quarter of 1998 was driven
by a 48% increase in the net revenues from Customer Management Solutions
services and a 41% increase in the net revenues from Interactive Solutions
services, partially offset by a 20% decrease in net revenues from Custom
Software Solutions services. Custom Software Solutions remains an integral part
of the Company's service offerings as it strategically supports Interactive
Solutions and Customer Management Solutions. Net revenues from Custom Software
Solutions services increased 4% in the second quarter of 1999 compared to the
first quarter of 1999.
Sequentially, total net revenues grew 8% to $163.5 million in the second quarter
of 1999 compared to $151.4 million for the first quarter of 1999. In the second
quarter of 1999, North American net revenues were $109.7 million, or 67% of
total net revenues, compared to $97.4 million, or 64% of total net revenues, for
the first quarter of 1999. In the second quarter of 1999, International net
revenues were $53.8 million, or 33% of total net revenues, compared to
$54.0 million, or 36% of total net revenues, for the first of 1999. The increase
in North American net revenues, is principally due to increased demand for the
Company's services in North America.
Total Company headcount remained at approximately 4,400 at June 30, 1999 and
December 31, 1998 as the Company assessed the skill sets necessary to address
the changing market dynamics and focused on training, hiring, and assimilating
appropriate personnel to service its clients.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Total net revenues increased 4% to $163.5 million for the quarter ended June 30,
1999 compared to $156.6 million for the quarter ended June 30, 1998. North
American net revenues were approximately $110.0 million for both the second
quarter of 1999 and the second quarter of 1998. International net revenues grew
15% to $53.8 million for the second quarter of 1999 from $46.8 million for the
same period in 1998. The increase in total net revenues was principally due to
48% and 41% increases in the net revenues from Customer Management Solutions and
Interactive Solutions services, respectively, and net revenue increases from
Network Services and Enterprise Resource Solutions services of 25% and 6%,
respectively. These increases were partially offset by decreases in the net
revenues from Custom Software Solutions and Management Consulting services of
20% and 7%, respectively. Custom Software Solutions remains an integral part of
the Company's service offerings as it strategically supports Interactive
Solutions and Customer Management Solutions. Net revenues from Custom Software
Solutions services increased 4% in the second quarter of 1999 compared to the
first quarter of 1999.
12
<PAGE>
Project personnel costs consist principally of payroll and payroll-related
expenses for personnel dedicated to client assignments and are directly related
to the level of client services being delivered. Project personnel costs were
$81.7 million, or 50% of net revenues, in 1999 compared to $71.9 million or 46%
of net revenues, in 1998. The dollar and percentage increase resulted primarily
from $5.3 million of retention bonus costs and $1.3 million of repositioning
costs associated with the Company's repositioning and retention program, and an
increase in payroll and payroll-related expenses associated with increased wages
and the hiring of additional project personnel over 1998 staff levels to support
the increased volume of services delivered to clients, and an increase in
subcontractor costs to supplement critical skills. The Company continues to
maintain its staffing process to monitor its subcontractor costs. Worldwide
project personnel headcount increased 5% to 3,441 employees at June 30, 1999
from 3,292 employees at June 30, 1998. While the Company anticipates meeting its
retention and hiring goals for the remainder of fiscal 1999, competition for
personnel with information technology skills is intense and the Company expects
salaries and wages to continue to increase. The Company periodically reviews and
updates its billing rates to cover the expected increase in costs.
General and administration expenses were $21.5 million or 13% of net revenues in
1999 compared to $17.7 million or 11% of net revenues in 1998. The dollar and
percentage increases primarily reflect the $2.0 million charge provided for
during the second quarter of 1999 for potentially uncollectable client
receivables, and $1.5 million of repositioning costs and $352,000 of retention
costs associated with the Company's repositioning and retention program.
Sales and marketing expenses were $16.0 million in 1999 compared to
$15.7 million in 1998, reflecting 10% of net revenues for both periods.
Retention bonus costs off $235,000 associated with the Company's repositioning
and retention program and an increase in travel and training costs were offset
by a decrease in payroll and payroll-related expenses as sales and marketing
personnel decreased 7% from 293 at June 30, 1998 to 272 at June 30, 1999. The
Company continued its investment in marketing initiatives and educational and
training programs through those conducted by its Management Lab and the
Cambridge Information Network (CIN). The Management Lab and CIN enable clients
to participate in both physical and virtual interactive forums to discuss issues
associated with adopting advanced information technology, as well as key
business, technology, and career management issues.
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, non-billable project personnel
costs, and training costs. Other costs were $45.8 million or 28% of net
revenues in 1999 compared to $29.3 million or 19% of net revenues in 1998.
The dollar and percentage increase from 1998 resulted principally from a
decrease in project personnel utilization and billability which resulted in
increased non-billable project personnel costs, and a charge of $2.2 million
taken during the second quarter of 1999 to provide for client reimbursable
expenses due from clients which were determined to be uncollectable. Also,
increased facility, travel, and employee training costs contributed to the
dollar and percentage increase in other costs. The decrease in project personnel
utilization and billability was primarily caused by costs associated with
project overruns, delays in hiring employees with the skill set required to
support the change in demand for the Company's ERP services to the demand for
interactive and WEB-based services, and changes in the Company's project
management model that resulted in an increase in non-billable resources.
The Company
13
<PAGE>
has adjusted its hiring plans based upon a review of the skill sets required to
reflect the change in market dynamics described above, and has instituted a
human resource repositioning and retention program in order to retain, retrain,
relocate and strategically redeploy employees resulting in the elimination of 72
positions worldwide.
During the second quarter of 1999 the Company recorded repositioning costs of
$8.9 million that resulted from a human resources repositioning and retention
program to enable the Company to retain, retrain, relocate and strategically
redeploy employees into its e-business service offerings. The $8.9 million of
repositioning and retention costs include $5.9 million of employee retention
bonuses, $1.3 million of severance costs, and $1.7 million of costs to retrain,
relocate and redeploy certain employees. Staff reductions included approximately
55 professional staff and 17 administrative personnel (see Note B of Notes to
the Consolidated Financial Statements).
Included in other income for the second quarter of 1999 is a gain on equity
investment of $1.1 million related to the Company's investment in the Cambridge
Technology Capital Fund. Also, included in other income for the second quarter
of 1999 is the gain on sale of marketable equity securities of $2.2 million
resulting from a gain on the sale of securities classified as available for
sale.
The Company maintains monthly foreign exchange forward contracts in an attempt
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. The exchange rate gains
and losses are directly related to the accuracy of such forecasted amounts.
As of June 30, 1999, the Company held foreign exchange contracts of
approximately $6.0 million. As the Company grows its international business, it
becomes increasingly subject to the risks associated with international
operations, including fluctuations in foreign currency exchange rates. The
Company continues to monitor the impact of foreign currency exchange rates on
revenues.
The Company's effective income tax rate for the second quarter of 1999 was 38%
compared to 40% for the same period a year ago. The lower effective tax rate in
1999 is primarily due to the favorable effects of continuing state tax rate
minimization initiatives and global tax planning strategies. 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 and its geographic mix of revenue and income.
Net income decreased 91% to $1.2 million or $.02 per share (diluted) in the
second quarter of 1999 from $13.5 million or $.21 per share (diluted) for the
same period in 1998. Adjusted to exclude a repositioning charge of $8.9 million,
charges for client receivables of $4.2 million and a gain of $2.2 million on the
sale of marketable equity securities, net income would have been $7.9 million,
or $.13 per share (diluted), for the quarter ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
Net revenues increased 5% to $314.9 million in 1999 compared to $298.8 million
in 1998 due principally to 36% and 33% increases in the net revenues from
Interactive Solutions and Customer Management Solutions services, respectively,
and net revenue increases from Network Services and Enterprise Resource
Solutions services of 25% and 18%, respectively. These increases were
14
<PAGE>
partially offset by decreases in the net revenues from Custom Software Solutions
and Management Consulting services of 19% and 5%, respectively. Custom Software
Solutions remains an integral part of the Company's service offerings as it
strategically supports Interactive Solutions and Customer Management Solutions.
North American net revenues decreased 2% to $207.2 million for the first six
months of 1999 from $211.3 million for the first six months of 1998.
International net revenues grew 23% to $107.7 million for the first six months
of 1999 from $87.5 million for the same period in 1998.
Project personnel costs were $153.2 million, or 49% of net revenues in 1999,
compared to $137.4 million, or 46% of net revenues, in 1998. The dollar and
percentage increase resulted primarily from costs associated with the Company's
repositioning and retention program recorded during the second quarter of 1999,
an increase in payroll and payroll-related expenses associated with increased
wages and the hiring of additional project personnel over 1998 staff levels to
support the increased volume of services delivered to clients, and an increase
in subcontractor costs to supplement critical skills.
General and administration expenses were $38.0 million, or 12% of net revenues,
in 1999 compared to $33.6 million, or 11% of net revenues, in 1998. The dollar
and percentage increase primarily reflects the $2.0 million charge provided for
during the second quarter of 1999 for client receivables determined to be
potentially uncollectable, costs associated with the Company's repositioning and
retention program recorded during the second quarter of 1999, and an increase in
payroll and payroll-related expenses.
Sales and marketing expenses were $30.2 million in 1999 compared to
$29.0 million in 1998, reflecting 10% of net revenues for both periods.
The dollar increase was primarily due to an increase in travel and public
relations costs, and costs associated with the Company's repositioning and
retention program recorded during the second quarter of 1999.
Other costs were $83.8 million or 27% of net revenues in 1999 compared to
$56.6 million or 19% of net revenues in 1998. The dollar and percentage increase
from 1998 resulted principally from a decrease in project personnel utilization
and billability, the provision for uncollectable reimbursable expenses due from
clients taken in the second quarter of 1999, and increased facility, travel, and
employee training costs. The decrease in project personnel utilization and
billability were primarily caused by costs associated with project overruns,
delays in hiring employees with the skill set required to support the change in
demand for the Company's ERP services to the demand for interactive and WEB-
based services, and changes in the Company's project management model that
resulted in an increase in non-billable resources.
Included in other income for the first six months of 1999 is a gain on equity
investment of $1.4 million related to the Company's investment in the Cambridge
Technology Capital Fund. Also, included in other income for the first six months
of 1999 is the gain on sale of marketable equity securities of $2.2 million
resulting from a gain on the sale of securities classified as available for
sale.
The Company's effective income tax rate for the first six months of 1999 was 38%
compared to 40% for the same period a year ago. The lower effective tax rate in
1999 is primarily due to the favorable effects of continuing state tax rate
minimization initiatives and global tax planning strategies. The Company's
effective tax rate may vary from period to period based on the
15
<PAGE>
Company's future expansion into areas of varying country, state, and local
statutory income tax rates and its geographic mix of revenue and income.
Net income decreased 67% to $8.6 million or $.14 per share (diluted) for the six
months ended June 30, 1999 from $26.0 million or $.41 per share (diluted) for
the same period in 1998. Adjusted to exclude a repositioning charge of
$8.9 million, charges for client receivables of $4.2 million and a gain of
$2.2 million on the sale of marketable equity securities, net income would have
been $15.4 million, or $.25 per share (diluted), for the six months ended
June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to operate debt-free and to enhance its working capital
position. Working capital increased to $188.4 million at June 30, 1999, from
$177.9 million at December 31, 1998. This increase was primarily due to
increases in investments held to maturity, accounts receivable, unbilled revenue
on contracts, and prepaid expenses and other current assets, and decreases in
accounts payable and income taxes payable, partially offset by decreases in cash
and cash equivalents and increases in accrued expenses and deferred revenue. The
increase in unbilled revenue on contracts and deferred revenue was caused by
timing differences, including timing differences between contractual billing
terms and percentage of completion revenue recognition requirements. As of July
31, 1999, a substantial portion of the unbilled revenue on contracts at June 30,
1999 had been billed. The Company's days sales in accounts receivable was 76
days for the second quarter of 1999 compared to 78 days for the quarters ended
March 31, 1999 and December 31, 1998, respectively. The Company continues to
work toward a short term goal of 70 days sales in accounts receivable.
Net cash used in operating activities was $17.6 million in the first six months
of 1999, compared to net cash provided by operating activities of $16.9 million
for the same period in 1998. Net cash used in operating activities in 1999
compared to net cash provided by operating activities in 1998 was caused by
lower net income in 1999, a decrease in tax benefits from the exercise of stock
options, an increase in unbilled revenue on contracts, a decrease in accounts
payable, and a decrease in income taxes payable, partially offset by a reduced
increase in accounts receivable and prepaid expenses and other current assets
for the first six months of 1999.
Capital expenditures of $13.3 million in 1999 were used principally for computer
equipment to support the Company's expanding operations, the consolidation of
its Northeast operations and corporate functions into a new facility, and
employee workstations, telecommunications equipment, and leasehold improvements.
Capital expenditures for the full year of 1999 are expected to approximate
$26 million, principally for the consolidation of the Company's Northeast
operations and corporate functions, and for leasehold improvements, personal
computers, employee workstations, telecommunications and video conferencing
equipment, and other equipment to support both current and anticipated levels of
customer activities worldwide. The actual amount of capital expenditures may
vary from management's estimates as capital needs arise and actual expenditures
are made. The Company evaluates, on an ongoing basis, potential acquisitions of
companies or technologies that may complement or enhance the Company's global
growth initiatives. The Company cannot be certain that it will be able to
identify suitable acquisition opportunities at an acceptable cost, if at all.
The Company maintains a $50.0 million unsecured senior revolving credit facility
(the "Facility") through a syndication arrangement committed equally by The
Chase Manhattan Bank ("Chase")
16
<PAGE>
and Fleet National Bank. The Facility, which expires on September 10, 2001, is
administered by Chase and carries a commitment fee, payable quarterly in
arrears, calculated based on the unused portion of the Facility and a price grid
as set forth in the credit agreement. The Facility permits the Company to elect
any one of three possible interest rate formulas as defined in the credit
agreement. Interest is payable in arrears based on an interest period determined
by the interest rate elected by the Company. The Facility requires, among other
things, the Company to maintain certain financial ratios, including debt service
coverage, debt to capital, and net worth. At June 30, 1999, the Company was in
compliance with these financial ratio requirements. As of June 30, 1999 and
December 31, 1998, the Company had no balance outstanding under the Facility.
Cambridge Technology Capital Fund I L.P. (the "Fund") was formed in October 1997
as a limited partnership with committed capital of approximately $25.3 million.
The Fund is intended to invest in expansion-stage, private companies providing
products and services within areas of the Company's strategic expertise. A
wholly owned subsidiary of the Company acts as the sole general partner of the
Fund's general partner and the Company's investment is accounted for using the
equity method of accounting. The Company's capital commitment to the Fund is
approximately $6.0 million. No more than two-thirds of the Fund's committed
capital may be called before October 1999 without approval of the Fund's
partners. The balance of the Fund's capital has been provided by institutional
investors and directors and employees of the Company. During the first half of
1999 the Company contributed $1.4 million to the Fund to bring its cumulative
investment in the Fund to approximately $3.3 million. The Company's investment
in the Fund resulted in a net gain of approximately $1.4 million for the
six months ended June 30, 1999.
In January 1998, the Company entered into an agreement with Boston Properties
Limited Partnership ("Boston Properties") to lease an approximately 177,000
square foot building, located in Cambridge, Massachusetts. The lease agreement
commenced in May 1999 and is for a ten-year period. This new facility houses the
Company's Northeast operations, new employee training center, and corporate
departments. The Company's previous facility in Cambridge, Massachusetts, which
housed part of the Company's Northeast operations and corporate functions, is
being subleased to a third party through its remaining lease term. The
Company's lease at its Allston, Massachusetts facility, which housed the
remainder of the Company's Northeast operations, was terminated effective June
30, 1999.
The Company expects that cash flows from operations will provide the principal
source of future liquidity for the Company. However, continued growth 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 its $50.0 million
unsecured senior revolving credit facility will be sufficient, at least through
2000, to meet the Company's working capital requirements and to fund the
Company's operations. In order to meet client demand for the Company's
services, the Company expects to continue to maintain its professional staff and
to open additional sales and operations offices, as needed, in North America and
internationally. The Company plans to open offices and reposition personnel in
response to anticipated demand for the Company's services. Operating results and
liquidity may be adversely affected if market demand and revenues are different
than 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,
political, and regulatory conditions, could also adversely affect future results
and liquidity.
17
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's internal
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has conducted an assessment of its information technology ("IT")
systems and non-IT systems (such as building security, voice mail, telephone and
other systems containing embedded microprocessors) and is in the process of
upgrading and enhancing material internal systems to bring them into material
Year 2000 compliance. These activities are expected to be completed during the
third quarter of 1999. The Company's material internal IT systems consist
principally of accounting, human resources and sales force automation
application software created by third parties, plus internally developed time
and expense reporting and project accounting software applications. For the
third-party software applications, the Company has obtained written confirmation
that the software applications are Year 2000 compliant. The Company also expects
that each of these third party applications will be upgraded, as well as tested
by the Company for Year 2000 compliance during the third quarter of 1999. The
Company believes that its internally developed applications are now materially
Year 2000 compliant. The Company's computer hardware platforms, principally
servers, have been confirmed as Year 2000 compliant by the server manufacturers,
and this has been supported by the Company's internal testing.
Based on currently available information, the Company believes expenses
associated with these efforts have been and will continue to be immaterial and
has provided for the enhancement of these systems in its operating and capital
budgets for the current fiscal year. However, if compliance efforts of which
the Company is not currently aware are required and are not completed on time,
or if the cost of any required updating, modification or replacement of the
Company's IT systems exceeds the Company's estimates, the Year 2000 issue could
have a material adverse effect on the Company.
In addition to the Company's internal systems, the Company relies on third party
relationships in the conduct of its business. For example, third party vendors
handle the payroll function for the Company, and the Company also relies on the
services of landlords of its facilities, telecommunication companies, banks,
utilities, and commercial airlines, among others. The Company is currently
obtaining assurances from its landlords and material vendors and suppliers that
there will be no interruption of service as a result of the Year 2000 issue, and
to the extent such assurances are not given, the Company intends to devise
contingency plans to ameliorate the negative effects on the Company in the event
the Year 2000 issue results in the unavailability of services. However,
contingency plans developed by the Company may not prevent a service
interruption on the part of one or more of the Company's third party vendors or
suppliers from having a material adverse effect on the Company. In addition,
the failure on the part of the accounting systems of the Company's clients due
to the Year 2000 issue could result in a delay in the payment of invoices issued
by the Company for services and expenses. A failure of the accounting systems
of a significant number of the Company's clients would have a material adverse
effect on the Company.
18
<PAGE>
The Company is preparing written contingency plans to address failures in its
major IT and non-IT systems. These plans will include identification of major
systems, dependencies on third parties, and resources and strategies necessary
to restore operations or work around failures. The failure of the Company's
accounting systems resulting from a Year 2000 related power system outage at the
Company's central data center, particularly at the end of a fiscal period, could
represent a reasonably likely worst case scenario. The Company's contingency
plan provides for back-up power systems that could support the data center, as
well as the operation of a parallel disaster recovery site.
Although the Company's principal service offerings do not include Year 2000
remediation services, former, present and future clients could assert that
certain services performed by the Company involved or are related to the Year
2000 issue. The Company has recommended, implemented, and customized various
third-party software packages for its clients, certain of which may not be
Year 2000 compliant. Because the Company has designed, developed and implemented
software and systems for a large number of clients since 1991, there can be no
way of assuring that all such software programs and systems will be Year 2000
compliant. In particular, the Company's solution delivery methodology, in many
cases, empowers clients to maintain, alter and upgrade systems after the
completion of an engagement. Due to the potential significance of the Year 2000
issue upon client operations, upon any failure of critical client systems or
processes that may be directly or indirectly connected or related to systems or
software analyzed, designed, developed, or implemented by the Company, the
Company may be subjected to claims regardless of whether the failure is related
to the services provided by the Company. If asserted, the resolution of such
claims (and the associated defense costs) could have a material adverse effect
on the Company.
The Company's policy has been to attempt to include provisions in client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties, limit the Company's liability to the amount of
fees paid by the client to the Company in connection with the project, and
disclaim any liability arising from third-party software that is implemented,
customized or installed by the Company. The Company may not be able to obtain
these contractual protections in agreements concerning future projects, and
contractual provisions governing current and completed projects may not prevent
clients from asserting claims against the Company with respect to the Year 2000
issue. The contractual protections, if any, obtained by the Company may not
effectively operate to protect the Company from, or limit the amount of, any
liability arising from claims asserted against the Company.
SENIOR MANAGEMENT CHANGES
On June 23, 1999, the Company announced the promotion of Gerard Van Kemmel to
the position of Chief Operating Officer. Mr. Van Kemmel is now responsible for
the Company's worldwide operations. Mr. Van Kemmel joined the Company in
November 1997 and until April 1999 served as Senior Vice President of Cambridge
Management Consulting. In April 1999, Mr. Van Kemmel was named Executive Vice
President of the Company's North American Operations. Prior to joining the
Company, Mr. Van Kemmel was Chairman of Continental Europe for Peter Chadwick
Holdings Limited from July 1997 to November 1997. From 1966 until July 1997,
Mr. Van Kemmel was employed by Andersen Consulting, holding many positions
including President of Andersen Consulting France, Chairman of Andersen
Worldwide Board and member of the Andersen Worldwide Executive Committee.
19
<PAGE>
On July 19, 1999, the Company announced the appointment of Jack L. Messman, a
director of the Company, as the Company's President and Chief Executive Officer.
Mr. Messman replaces James K. Sims who held the positions since the Company's
founding in 1991. Mr. Messman previously served as President, Chief Executive
Officer and Chairman of the Board of Union Pacific Resources Group Inc. (UPRG).
He joined UPRG in 1991 as President and Chief Executive Officer. UPRG is a
North American independent oil and gas exploration and production company with
assets totaling over $7.5 billion.
Prior to joining UPRG in 1991, Mr. Messman held a number of senior-level
positions in various industries: Chairman and Chief Executive Officer of U.S.
Pollution Control, Inc., Union Pacific's environmental services company from
1988 to 1991; Managing Director of Mason Best Company of Houston, an investment
banking firm, from 1986 to 1988, while simultaneously serving as Chairman and
Chief Executive Officer of Somerset House Corporation, a publishing company
owned by Mason Best; Executive Vice President/Chief Financial Officer and a
member of the Board of Directors of Warner Amex Cable Communications, Inc., Blue
Bell, Pennsylvania from 1983 to 1986; Executive Vice President and Member of the
Board of Directors of Safeguard Scientifics, Inc., Wayne, Pennsylvania, from
1981 to 1983 and 1994 to present; and President and Chief Executive Officer of
Novell, Inc., from 1982 to 1983 and a member of the Board of Directors since
1982.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company) (see Note F of Notes to Consolidated Financial Statements).
20
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements (statements that are not
historical facts), including, without limitation: statements about future net
revenues and profits; capital expenditures; liquidity sources and needs; working
capital needs; the Year 2000 issue; the impact of the realignment of the
Company's North American operations in 1999; statements about the Company's
charge for its human resources repositioning and retention program; the
Company's efforts to retain, retrain, relocate, and strategically redeploy
employees; the Company's hiring efforts; increases in personnel and wages for
the Company's personnel; geographic expansion and opening additional offices;
the Company's goal for days sales in accounts receivable; and litigation
involving the Company. These forward-looking statements are subject to several
risks and uncertainties. While it is impossible to identify each factor and
event that could affect the Company's results, there are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by the forward-looking statements and that could have an impact
on the Company's operating results. These factors include, without limitation,
the number and significance of client engagements commenced and completed during
a period; the number of working days in a period; employee hiring, retention,
billability and utilization; the Company's ability to manage its growth; the
Company's ability to manage the cost of its engagements and operating costs;
changes in demand for the Company's services; changes in demand for third party
products or solutions for which the Company performs integration services; risks
associated with the Company's realignment of its North American operations from
a geographic-based to a service line model, including the orientation of new
management teams within the service line structure and the need to develop
reliable forecasting tools for each service line within the organization; the
success of the Company's human resources repositioning and retention program;
changes in market conditions that could impact the value of securities owned by
the Company or the Company's investment in the Cambridge Technology Capital
Fund; turnover in senior management; the Year 2000 issue, including the effect
of the Year 2000 issue on client purchasing patterns; competition; risks
associated with international operations; the acceptance and profitability of
the Company's services in new locations; the integration of acquired businesses;
unanticipated negative outcomes of litigation involving the Company; and
misappropriation of, or lack or loss of protection of, the Company's
intellectual property. 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 client assignments and general
economic conditions. Because a high percentage of the Company's expenses are
relatively fixed, a variation in the timing of the initiation or the completion
of client assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from period to period.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------- ---------------------------------------------------------
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates due to investments in instruments made for non-trading
purposes. The interest rate risk relates primarily to the Company's portfolio of
short-term investment grade municipal securities. The Company is also subject to
risk relating to fluctuating interest rates to the extent that it incurs any
borrowings under its credit facility. The foreign exchange rate risk relates to
the Company's investment in foreign exchange contracts which are entered into in
an attempt to mitigate the risk of changes in foreign exchange rates associated
with intercompany balances. The Company believes that interest rate risk and
foreign currency exchange rate risk are both immaterial to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
On November 18, 1998, certain of the former stockholders of Excell filed a
lawsuit against the Company in the United States District Court for the District
of Massachusetts. The complaint alleges breach of contract, violation of federal
securities laws, common law fraud, and negligent misrepresentation in connection
with the Excell acquisition and seeks unspecified damages. The Company believes
that the plaintiffs' claims are without merit and intends to vigorously defend
the lawsuit. In February 1999, the Company filed a counterclaim against the
former stockholders of Excell which alleges breach of contract.
In March and April 1999, certain stockholders of the Company filed ten separate
class action lawsuits against the Company and certain of the Company's officers
in the United States District Court for the District of Massachusetts. These
suits have since been consolidated by the court. The suits allege
misrepresentations and omissions regarding the Company's future growth prospects
and progress of the Company's reorganization in violation of federal securities
laws. The suits seek unspecified damages. The Company believes that the
plaintiffs' claims are without merit and intends to vigorously defend the
lawsuits.
The Company is involved in litigation and various other legal matters, which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter will have a material adverse
effect on its financial condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
(a) The annual meeting of stockholders was held on May 26, 1999.
(b) Not applicable.
(c) A vote was proposed to: (1) elect a Board of Directors to serve for the
ensuing year and (2) ratify the selection of the firm of PricewaterhouseCoopers
LLP as independent accountants for the fiscal year ending December 31, 1999.
22
<PAGE>
The voting results were as follows:
<TABLE>
<CAPTION>
Withheld Votes Broker
Votes For Votes Against Authority Abstained Non-Votes
--------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(1) James K. Sims 44,407,476 N/A 1,106,251 N/A -
Warren V. Musser 44,853,156 N/A 660,571 N/A -
Robert E. Keith, Jr. 44,864,528 N/A 649,199 N/A -
Jack L. Messman 44,846,123 N/A 667,604 N/A -
John W. Poduska, Sr. Ph.D 44,426,627 N/A 1,087,100 N/A -
James I. Cash, Jr. Ph.D. 44,572,550 N/A 941,177 N/A -
James D. Robinson III 44,856,840 N/A 656,887 N/A -
(2) PricewaterhouseCoopers LLP 45,239,966 108,245 N/A 165,516 -
</TABLE>
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
3.1(1) Amended and Restated Certificate of Incorporation of the Company,
as amended.
3.2(2) Amended and Restated By-laws of the Company.
4.1(3) Rights Agreement dated June 23, 1997 by and between the Company and
ChaseMellon Shareholder Services, LLC ( the "Rights Agreement").
4.2(4) Amendment No. 1 to the Rights Agreement dated September 30, 1998 by
and between the Company and ChaseMellon Shareholder Services, LLC.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
- --------------------------------------------------------------------------------
(1) Incorporated herein by reference to Exhibit 3.1 to the
Company's Report on Form 10-Q for the period ended June 30,
1998.
(2) Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1
(File No. 33-56338).
(3) Incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8A/A filed on
September 30, 1998.
(4) Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form 8A/A filed on
September 30, 1998.
(b) Reports on Form 8-K:
The Company did not file any current reports on Form 8-K during the three
months ended June 30, 1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
Date: August 13, 1999 By: /s/ Arthur M. Toscanini
---------------------------
Arthur M. Toscanini
Executive Vice President and
Chief Financial Officer
By: /s/ Louis P. Persico
---------------------------
Louis P. Persico
Vice President, Controller and
Chief Accounting Officer
24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of the Company,
as amended.
3.2(2) Amended and Restated By-laws of the Company.
4.1(3) Rights Agreement dated June 23, 1997 by and between the Company and
ChaseMellon Shareholder Services, LLC ( the "Rights Agreement").
4.2(4) Amendment No. 1 to the Rights Agreement dated September 30, 1998 by
and between the Company and ChaseMellon Shareholder Services, LLC.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
- --------------------------------------------------------------------------------
(1) Incorporated herein by reference to Exhibit 3.1 to the
Company's Report on Form 10-Q for the period ended June 30,
1998.
(2) Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1
(File No. 33-56338).
(3) Incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8A/A filed on
September 30, 1998.
(4) Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form 8A/A filed on
September 30, 1998.
25
<PAGE>
EXHIBIT 11
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,189 $13,534 $ 8,648 $26,014
======= ======= ======= =======
Basic:
Weighted average common
shares outstanding 59,654 57,986 59,480 57,581
======= ======= ======= =======
Net income per share $ .02 $ .23 $ .15 $ .45
======= ======= ======= =======
Diluted:
Weighted average common
shares outstanding 59,654 57,986 59,480 57,581
Dilutive effects of stock
options 1,159 5,417 3,108 5,433
------- ------- ------- -------
Weighted average common and
common equivalent shares
outstanding 60,813 63,403 62,588 63,014
======= ======= ====== ======
Net income per share $ .02 $ .21 $ .14 $ .41
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 60,446
<SECURITIES> 27,334
<RECEIVABLES> 152,758
<ALLOWANCES> 7,465
<INVENTORY> 0
<CURRENT-ASSETS> 292,087
<PP&E> 93,139
<DEPRECIATION> 39,831
<TOTAL-ASSETS> 364,125
<CURRENT-LIABILITIES> 103,703
<BONDS> 0
598
0
<COMMON> 0
<OTHER-SE> 258,633
<TOTAL-LIABILITY-AND-EQUITY> 259,231
<SALES> 0
<TOTAL-REVENUES> 314,869
<CGS> 0
<TOTAL-COSTS> 305,269
<OTHER-EXPENSES> (4,446)
<LOSS-PROVISION> 4,302
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 13,948
<INCOME-TAX> 5,300
<INCOME-CONTINUING> 8,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,648
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14
</TABLE>
