<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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) 914-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of October 31, 1999 there were 60,407,583 shares of common stock
outstanding.
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION:
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II - OTHER INFORMATION:
ITEM 1: LEGAL PROCEEDINGS 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
2
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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>
September 30, December 31,
1999 1998
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 72,438 $ 80,051
Investments held to maturity 28,492 24,918
Accounts receivable, less allowance of $6,165 and $4,550
at September 30, 1999 and December 31, 1998, respectively 151,373 133,583
Unbilled revenue on contracts 18,331 10,964
Deferred income taxes 2,179 2,179
Prepaid expenses and other current assets 43,272 33,284
-------- --------
Total current assets 316,085 284,979
Property and equipment, net 53,390 48,255
Other assets 23,566 17,972
-------- --------
Total assets $393,041 $351,206
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,333 $ 15,804
Accrued expenses 58,631 49,603
Deferred revenue 13,971 10,861
Income taxes payable 25,951 30,635
Obligations under capital leases, current 94 147
-------- --------
Total current liabilities 111,980 107,050
Other long term liabilities 402 197
Deferred income taxes 997 1,809
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 250,000,000
shares; issued and outstanding 60,395,026 and 58,856,401 shares
at September 30, 1999 and December 31, 1998, respectively 604 589
Additional paid-in capital 138,693 115,662
Accumulated other comprehensive loss (6,570) (1,652)
Retained earnings 146,935 127,551
-------- --------
Total stockholders' equity 279,662 242,150
-------- --------
Total liabilities and stockholders' equity $393,041 $351,206
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Net revenues $168,235 $153,074 $483,104 $451,875
Costs and expenses:
Project personnel 76,824 68,272 230,059 205,659
General and administration 17,440 16,806 55,407 50,358
Sales and marketing 15,902 13,794 46,192 42,824
Other costs 46,619 31,971 130,396 88,608
Business combination costs - 8,400 - 8,400
-------- -------- -------- --------
Total operating expenses 156,785 139,243 462,054 395,849
-------- -------- -------- --------
Income from operations 11,450 13,831 21,050 56,026
Other income (expense):
Interest income, net 867 608 2,030 1,757
Gain on equity investment 4,396 514 5,817 434
Gain on sale of marketable
equity securities - - 2,228 -
Foreign exchange gain/(loss) 604 (132) 140 (290)
-------- -------- -------- --------
Income before income taxes 17,317 14,821 31,265 57,927
Provision for income taxes 6,581 5,146 11,881 22,238
-------- -------- -------- --------
Net income $ 10,736 $ 9,675 $ 19,384 $ 35,689
======== ======== ======== ========
Basic net income per share $ .18 $ .17 $ .33 $ .62
======== ======== ======== ========
Diluted net income per share $ .18 $ .16 $ .32 $ .57
======== ======== ======== ========
Weighted average number of
common shares outstanding 60,209 58,410 59,738 57,846
======== ======== ======== ========
Weighted average number of
common and common
equivalent shares outstanding 61,205 61,895 62,229 62,348
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,384 $ 35,689
Amounts that reconcile net income to net cash (used in)/provided by
operating activities:
Depreciation and amortization 12,945 10,040
Gain on investment in Cambridge Technology Capital Fund (5,817) -
Gain on sale of marketable equity securities (2,228) (433)
Tax benefit from exercise of stock options 1,689 11,265
Benefit for deferred income taxes (814) (27)
Changes in assets and liabilities:
Increase in accounts receivable (19,674) (32,845)
Increase in unbilled revenue on contracts (7,741) (6,547)
Increase in prepaid expenses and other current assets (10,476) (3,862)
(Decrease)/increase in accounts payable (2,330) 936
Increase in accrued expenses 8,247 8,273
Increase in deferred revenue 3,133 4,488
(Decrease)/increase in income taxes payable (5,760) 5,266
Decrease in other assets 2,267 200
-------- --------
Net cash (used in)/provided by operating activities (7,175) 32,443
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (18,053) (19,809)
Investment in Cambridge Technology Capital Fund (2,212) (1,289)
Purchase of investments held to maturity (28,530) (23,733)
Maturity of investments 24,956 15,445
Proceeds from sale of marketable equity securities 2,324 -
-------- --------
Net cash used in investing activities (21,515) (29,386)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Obligations under capital leases and loan repayments (145) (981)
Dividend distribution - (1,186)
Proceeds from employee stock purchase plan 8,284 7,222
Proceeds from exercise of stock options 12,982 16,047
-------- --------
Net cash provided by financing activities 21,121 21,102
-------- --------
Effect of foreign exchange rate changes on cash (44) 531
Net (decrease)/increase in cash and cash equivalents (7,613) 24,690
Cash and cash equivalents at beginning of period 80,051 39,649
-------- --------
Cash and cash equivalents at end of period $ 72,438 $ 64,339
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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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 or 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 the year ended December 31, 1998 for additional disclosures, including a
summary of the Company's accounting policies. The consolidated results of
operations for the three and nine months ended September 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 were paid and the remaining
balance of $616,000 was paid during the third quarter of 1999.
6
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C. NET INCOME PER SHARE
--------------------
The following table presents the calculation of earnings per share for the three
and nine months ended September 30, 1999 and 1998 (in thousands except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $10,736 $ 9,675 $19,384 $35,689
============ ============ ============ ============
Basic:
Weighted average number of common shares outstanding 60,209 58,410 59,738 57,846
============ ============ ============ ============
Net income per share $ .18 $ .17 $ .33 $ .62
============ ============ ============ ============
Diluted:
Weighted average number of common shares outstanding 60,209 58,410 59,738 57,846
Dilutive effects of stock options 996 3,485 2,491 4,502
------------ ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding 61,205 61,895 62,229 62,348
============ ============ ============ ============
Net income per share $ .18 $ .16 $ .32 $ .57
============ ============ ============ ============
</TABLE>
For the three and nine month periods ended September 30, 1999, outstanding
options to purchase approximately 7.0 million and 3.8 million shares,
respectively, were excluded from the computation of diluted EPS because the
effects of these option shares were anti-dilutive. For the three and nine month
periods ended September 30, 1998, outstanding options to purchase approximately
2.9 million and 2.8 million shares, respectively, were excluded from the
computation of diluted EPS because the effects of these option shares were anti-
dilutive.
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 September 30, 1999, the Company held foreign exchange forward contracts of
approximately $5.8 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. The following table presents the
calculation of comprehensive income and its components for the three and nine
months ended September 30, 1999 and 1998 (in thousands):
7
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive income/(loss):
Net income $10,736 $ 9,675 $19,384 $35,689
Other comprehensive income/(loss):
Unrealized loss on marketable equity
security,
net of taxes of $59 for the three and nine
month periods ended September 30, 1999 (97) - (97) -
Reclassification adjustment for gain on
marketable equity securities included in
net income, net of taxes of $753 - - (1,255) -
Foreign currency translation adjustment 2,102 1,491 (3,566) 55
------------- ------------ ------------ ------------
Other comprehensive income/(loss) 2,005 1,491 (4,918) 55
------------- ------------ ------------ ------------
Comprehensive income $12,741 $11,166 $14,466 $35,744
============= ============ ============ ============
</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. In February 1999, the
Company filed a counterclaim against such former stockholders of Excell which
alleges breach of contract. The Company believes that the plaintiffs' claims are
without merit and intends to vigorously defend the lawsuit.
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 such existing matter will have a material
adverse effect on its financial condition, results of operations, or cash flows.
8
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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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
North America $110,933 $104,778 $318,091 $316,083
International 57,302 48,296 165,013 135,792
----------- ---------- ---------- ---------
Consolidated $168,235 $153,074 $483,104 $451,875
=========== ========== ========== =========
Income from operations:
North America $ 6,493 $ 10,823 $ 11,610 $ 43,877
International 4,957 3,008 9,440 12,149
----------- ---------- ---------- ---------
Consolidated $ 11,450 $ 13,831 $ 21,050 $ 56,026
=========== ========== ========== =========
Total assets:
North America $289,506 $242,146 $289,506 $242,146
International 103,535 88,816 103,535 88,816
----------- ---------- ---------- ---------
Consolidated $393,041 $330,962 $393,041 $330,962
=========== ========== ========== =========
</TABLE>
9
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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 provides management consulting and systems
integration services to transform its clients into e-businesses. Working in
collaboration with "Global 1000", high-velocity middle market companies, and
dot-com companies, the Company combines a deep understanding of New Economy
issues with integrated, end-to-end services and a proven track record of rapid,
guaranteed delivery. 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.
Starting with the third quarter of 1999, the Company will report on the
performance of its business along four principal service offerings: e-Business
Solutions; Traditional IT Solutions; Network Solutions; and Change Management
Solutions. E-Business Solutions consist of Cambridge's Interactive Solutions,
Custom e-Business Solutions, E-Procurement and Supply Chain Solutions, and e-
Customer Relationship Management ("e-CRM"). This information should enable the
marketplace to more accurately understand the scope of the Company's e-business
capabilities.
Within e-Business Solutions, Interactive Solutions services address marketing
strategy, user experience, creative design, and technical infrastructure
integration. Interactive Solutions include electronic commerce, extranet,
intranet, online communities, interactive marketing, interactive service web
sites, and knowledge management systems, and permit clients to build cyber-
relationships with their customers, consumers, and distribution channels. The
Company's Custom Software Solutions (CSS) offering implement and integrate
custom software solutions for clients looking to integrate their systems or
achieve a competitive strategic advantage by automating their proprietary and
unique business processes. Custom e-Business Solutions integrates electronic
commerce infrastructures with existing enterprise systems.
E-Procurement and Supply Chain Solutions services enable a client to
electronically leverage its vendor relationships to efficiently purchase goods
and services, as well as Web-enable key processes of an organization such as
order fulfillment and expense management to improve the quality of information
and decrease transaction costs. E-CRM provides innovative, customer-focused
internet-based solutions that enable clients to attract and retain profitable
customers and cultivate customer loyalty.
Traditional IT Solutions consist of that portion of Cambridge's Custom Solutions
practice that does not qualify as Custom e-Business Solutions and would include
the implementation of client-server applications. Traditional IT Solutions also
include the implementation and customization of package software delivered by
Cambridge's ERS service line outside of E-Procurement and Supply Chain
Solutions, as well as those Customer Management Solutions (CMS) implementations
outside of E-CRM.
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These CMS services are typically delivered using packages from leading front
office vendors, including Siebel, Clarify, and Vantive.
Network Services consists of the Cambridge Network Services offerings. Network
Services offers a combination of network assessment, design and deployment
services with a comprehensive set of integration skills to support a client's
distributed computing environments. These solutions focus on providing clients
the networking expertise needed to integrate all parts of an enterprise and
address enterprise infrastructure, enterprise messaging, network operating
systems, and enterprise strategy planning.
Change Management Solutions are delivered by Cambridge Management Consulting
(CMC). CMC helps its clients achieve rapid, tangible, high-payback operational
improvements through the implementation of major change programs. These
programs impact key business processes, management and decision-making systems,
and roles and responsibilities and deliver financial and operational
improvements identified at the commencement of an engagement. Most importantly,
the programs help clients sustain those improvements delivered by focusing on
behavioral change in the clients' management and staff, at all levels of their
business.
Net revenues for the third quarter of 1999 increased 10% to $168.2 million
compared to $153.1 million for the same period in 1998. Net income for the
quarter ended September 30, 1999 increased 11% to $10.7 million, or $.18 per
share (diluted). Included in net income for the third quarter of 1999 is a $4.4
million, or a $.05 per share (diluted) gain on equity investment related to the
Company's investment in the Cambridge Technology Capital Fund I, L.P. (the
"Fund"). This compares to net income of $9.7 million, or $.16 per share
(diluted), for the quarter ended September 30, 1998, including business
combination costs of $8.4 million, or $.09 per share (diluted), for the
acquisition of Excell.
North American net revenues increased 6% to $110.9 million for the quarter ended
September 30, 1999 compared to $104.8 million for the same period in 1998, while
International net revenues grew 19% to $57.3 million in the third quarter of
1999 compared to $48.3 million in the third quarter of 1998. The increase in
North American net revenues for the quarter ended September 30, 1999 compared to
the same period in 1998 was due primarily to 41% growth in e-Business Solutions
and was partially offset by a 21% decrease in Traditional IT Solutions. North
American net revenues for the quarter ended September 30, 1999 represented 66%
of total net revenues while International net revenues represented 34% of total
net revenues for the same period. North American net revenues for the quarter
ended September 30, 1998 represented 68% of total net revenues while
International net revenues represented 32% of total net revenues for the same
period in 1998. The International net revenue growth in the third quarter of
1999 compared to the third quarter of 1998 resulted from continued demand for
the Company's services, primarily in Europe and Asia Pacific. Net revenues from
the Company's European and Asia Pacific operations accounted for 31% of total
net revenues in the quarter ended September 30, 1999, compared to 29% for the
same period in 1998. Globally, net revenue growth for the third quarter of 1999
compared to the third quarter of 1998 was primarily driven by a 41% increase in
the net revenues from e-Business Solutions, partially offset by a 14% decrease
in Traditional IT Solutions. Traditional IT Solutions remains an integral part
of the Company's service offerings as it strategically supports e-Business
Solutions.
Total net revenues grew 3% to $168.2 million in the third quarter of 1999
compared to $163.5 million for the second quarter of 1999. In the third quarter
of 1999, North American net revenues were $110.9 million, or 66% of total net
revenues, compared to $109.7 million, or 67% of total net revenues for the
second quarter of 1999. In the third quarter of 1999, International net revenues
were $57.3 million, or 34% of total net revenues, compared to $53.8 million, or
33% of total net revenues, for the second quarter
11
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of 1999. The sequential growth in net revenues for the third quarter of 1999
compared to the second quarter of 1999 was primarily due to an 18% increase in
e-Business Solutions and was partially offset by a 13% decrease in traditional
IT Solutions.
Employee turnover was approximately 31%, excluding forced turnover, for the
third quarter of 1999 compared to approximately 22%, excluding forced turnover,
for the same period in 1998. The Company, along with the rest of the technology
industry, continue to be challenged by employee turnover as companies compete
for employees with the skill sets required to fulfill client demand. Company
headcount totaled approximately 4,400 for both September 30, 1999 and December
31, 1998, as the Company continued to assess the skill sets necessary to address
the changing market dynamics and focused on training, hiring, and assimilating
appropriate personnel to service its clients.
On October 25, 1999, the Company announced that as it continues its transition
to delivering a higher level of e-Business services, the skill sets required to
deliver those solutions are in high demand. Issues surrounding turnover, project
delays related to Year 2000, and the associated slowdown in ERP implementation
services remain unclear for the remainder of 1999 and into the early part of
2000. As a result of these factors, the Company expects net revenues for the
fourth quarter of 1999 to be in the range of $150.0 million to $155.0 million
and expects a per share loss of approximately $.26 (diluted) to $.29 (diluted),
reflecting a $12.0 million to $17.0 million pre-tax charge to operations related
to an additional employee retention bonus program and the impact of decreased
revenue. As the Company completes its fiscal year 2000 budget process, there may
be additional initiatives undertaken that further decrease earnings for the
fourth quarter of 1999. These expectations are subject to risks, which are
discussed herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Total net revenues increased 10% to $168.2 million for the quarter ended
September 30, 1999 compared to $153.1 million for the quarter ended September
30, 1998. North American net revenues increased by 6% to $110.9 million for the
third quarter of 1999 compared to $104.8 million for the third quarter of 1998.
International net revenues grew 19% to $57.3 million for the third quarter of
1999 from $48.3 million for the same period in 1998. The increase in total net
revenues for the third quarter of 1999 compared to the third quarter of 1998 was
principally due to a 41% increase in the net revenues from e-Business Solutions
to $68.1 million from $48.2 million and net revenue increases from Network
Solutions of 12% to $14.0 million from $12.4 million and Change Management
Solutions of 7% to $32.1 million from $29.9 million. These increases were
partially offset by decreases in the net revenues from Traditional IT Solutions
of 14% to $54.0 million for the third quarter of 1999 from $62.6 million for the
third quarter of 1998. The decrease in Traditional IT Solutions was partially
due to the impact of clients' completing Year 2000 remediation work in lieu of
software package implementations and custom client-server applications.
Traditional IT Solutions remain an integral part of the Company's service
offerings as it strategically supports e-Business Solutions.
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
$76.8 million, or 46% of net revenues, for the third quarter of 1999 compared to
$68.3 million or 45% of net revenues, for the third quarter of 1998. The dollar
and percentage increase
12
<PAGE>
resulted primarily from a 1999 retention bonus 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. Worldwide project personnel
headcount increased 4% to 3,594 employees at September 30, 1999 from 3,463
employees at September 30, 1998. Competition for personnel with IT skills is
intense and the Company expects salaries and wages to continue to increase. The
Company periodically reviews and updates its billing rates in an attempt to
cover the expected increase in project personnel costs.
General and administration expenses were $17.4 million or 10% of net revenues
for the third quarter of 1999 compared to $16.8 million or 11% of net revenues
for the third quarter of 1998. The dollar increase resulted primarily from a
1999 retention bonus program, and an increase in payroll and payroll-related
expenses associated with increased wages and the hiring of additional personnel
to support the Company's business. The dollar increase was also caused by
increased recruiting cost associated with adding senior leadership positions as
well as maintaining current staff levels. The percentage decrease was caused by
higher net revenue growth for the quarter ended September 30, 1999 versus the
same period in 1998 compared to the growth in general and administration
expenses. Worldwide general and administrative personnel headcount increased 3%
to 522 employees at September 30, 1999 from 509 employees at September 30, 1998.
Sales and marketing expenses were $15.9 million for the third quarter of 1999
compared to $13.8 million for the third quarter of 1998, reflecting 9% of net
revenues for both periods. The dollar increase resulted primarily from a 1999
retention bonus program and an increase in payroll and payroll-related expenses
associated with increased wages and the hiring of additional sales and marketing
personnel to enable the Company to maximize potential client lead generation.
The increase was also caused by an increase in travel, marketing and public
relations costs. Worldwide sales and marketing personnel headcount increased 11%
to 311 employees at September 30, 1999 from 279 employees at September 30, 1998.
The Company continued its investment in marketing initiatives and educational
and training programs through those conducted by its Management Lab. The
Management Lab enables clients to participate in both physical and virtual
interactive forums to discuss issues associated with adopting IT, 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 $46.6 million or 28% of net
revenues for the third quarter of 1999 compared to $32.0 million or 21% of net
revenues for the third quarter of 1998. The dollar and percentage increase from
1998 resulted principally from a decrease in project personnel utilization and
billability, which increased non-billable project personnel costs. Also,
increased travel, employee training, and facilities costs contributed to the
dollar and percentage increase in other costs. The utilization and billability
decreases, and corresponding increase in non-billable resources, were primarily
caused by (i) costs associated with project overruns, (ii) higher than expected
turnover, (iii) additional training requirements and delays in hiring employees
with the skill sets required to support the changes in market demand for the
Company's ERP services to the demand for e-business and other solutions, and
(iv) changes in the Company's project management. The Company continues to
assess its hiring plans based upon a review of the skill sets required to
reflect the change in market dynamics described above.
Included in other income for the third quarter of 1999 is a gain on equity
investment of $4.4 million related to the Company's investment in the Fund
compared to a gain of $514,000 for the third quarter of
13
<PAGE>
1998. Also included in other income for the third quarter of 1999 is a foreign
exchange gain of $604,000 compared to a foreign exchange loss of $132,000 for
the third quarter of 1998.
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 September 30, 1999, the Company held foreign exchange contracts of
approximately $5.8 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 third quarter of 1999 was 38.0%
compared to 34.7% for the same period a year ago. The lower effective tax rate
in the third quarter of 1998 was caused by an adjustment required to reduce the
effective tax rate of 40% recorded during the first half of 1998 to an effective
rate of 38% for the nine months of ended September 30, 1998. The reduction in
the 1998 effective tax rate from 40% to 38% was 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, its geographic mix of revenue and
income, and the effects of varying compensation arrangements.
Net income increased 11% to $10.7 million or $.18 per share (diluted) in the
third quarter of 1999 from $9.7 million or $.16 per share (diluted) for the same
period in 1998. Net income for the third quarter of 1998 included business
combination costs of $8.4 million, or $.09 per share (diluted), for the
acquisition of Excell.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues increased 7% to $483.1 million for the first nine months of 1999
compared to $451.9 million for the first nine months of 1998 due principally to
a 22% increase in e-Business Solutions from $143.0 million in 1998 to $174.0
million in 1999 and a 21% increase in Network Solutions from $33.6 million in
1998 to $40.5 million in 1999, partially offset by a 4% decrease in Traditional
IT Solutions from $183.9 million in 1998 to $177.3 million in 1999. Change
Management Solutions remained at $91.3 million for both periods. North American
net revenues increased 1% to $318.1 million for the first nine months of 1999
from $316.1 million for the first nine months of 1998. International net
revenues grew 21% to $165.0 million for the first nine months of 1999 from
$135.8 million for the same period in 1998.
Project personnel costs were $230.1 million, or 48% of net revenues for the
first nine months of 1999, compared to $205.7 million, or 46% of net revenues,
for the first nine months of 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, bonus and related costs
recorded in during the third quarter of 1999 associated with the 1999 retention
bonus program, 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.
14
<PAGE>
General and administration expenses were $55.4 million for the first nine months
of 1999 compared to $50.4 million for the first nine months of 1998 million,
reflecting 11% of net revenues for both periods. The increase primarily
reflects a charge recorded 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, the costs related to the 1999 retention bonus program recorded
during the third quarter of 1999 and increases in payroll and payroll-related
expenses and recruiting costs.
Sales and marketing expenses were $46.2 million, or 10% of net revenues, for the
first nine months of 1999 compared to $42.8 million, or 9% of net revenues, for
the first nine months of 1998. The dollar and percentage increase was primarily
due to an increase in payroll and payroll-related expenses associated with
increased wages and the hiring of additional sales and marketing personnel over
1998 staff levels to maximize potential client lead generation through its field
marketing staff with subsequent services coordinated by its sales personnel, the
retention bonus and related costs recorded in the third quarter of 1999,
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 $130.4 million, or 27% of net revenues, for the first nine
months of 1999 compared to $88.6 million, or 20% of net revenues, for the first
nine months of 1998. The dollar and percentage increase from 1998 resulted
principally from a decrease in project personnel utilization and billability, a
provision for uncollectable project expenses due from clients recorded 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, costs associated
with higher than expected turnover, delays in hiring employees with the skill
sets required to support the changes in demand for the Company's ERP services to
the demand for interactive and e-Business solutions, 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 nine months of 1999 is a gain on equity
investment of $5.8 million related to the Company's investment in the Fund. Also
included in other income for the first nine months of 1999 is the gain on sale
of marketable equity securities of $2.2 million.
The Company's effective income tax rate for the first nine months of 1999 and
1998 was 38%. 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. 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, its geographic mix of revenue and income, and the
effects of varying compensation arrangements.
Net income decreased 46% to $19.4 million or $.32 per share (diluted) for the
nine months ended September 30, 1999 from $35.7 million or $.57 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 $26.2 million, or $.43 per share (diluted), for the nine months
ended September 30, 1999. Net income in 1998 includes $8.4 million of business
combination costs or $.09 per share (diluted), for the acquisition of Excell.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to operate virtually debt-free and to enhance its working
capital position during the quarter ended September 30, 1999. Working capital
increased to $204.1 million at September 30, 1999, from $177.9 million at
December 31, 1998. This increase was primarily due to increases in accounts
receivable, unbilled revenue on contracts, and prepaid expenses and other
current assets, and a decrease in income taxes payable, partially offset by a
decrease in cash and cash equivalents and an increase in accrued expenses. The
increase in unbilled revenue on contracts was caused by timing differences,
including timing differences between contractual billing terms and percentage of
completion revenue recognition requirements. As of October 31, 1999, a
substantial portion of the unbilled revenue on contracts at September 30, 1999
had been billed. The Company's days sales outstanding in accounts receivable
was 81 days for the third quarter of 1999 compared to 76 days for the quarter
ended June 30, 1999, 78 days for the quarters ended March 31, 1999 and December
31, 1998 and 83 days for the quarter ended September 30, 1998. This increase
was impacted by an invoicing system conversion and software issue that delayed
the invoicing of fees for the first two months of the third quarter. The vendor
has since resolved the problem, and the Company is billing on a normal basis.
The Company continues to work toward a goal of 70 days sales outstanding in
accounts receivable.
Net cash used in operating activities was $7.2 million in the first nine months
of 1999, compared to net cash provided by operating activities of $32.4 million
for the same period in 1998. The difference in net cash used in operating
activities in 1999 compared to net cash provided by operating activities in 1998
was primarily caused by lower net income in 1999, a decrease in tax benefits
from the exercise of stock options, an increase in prepaid expenses and other
current assets, a decrease in accounts payable, and a decrease in income taxes
payable, partially offset by a reduced increase in accounts receivable for the
first nine months of 1999.
Capital expenditures of $18.1 million in 1999 were used principally for computer
equipment to support the Company's 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") 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
September 30, 1999, the Company was in compliance with these
16
<PAGE>
financial ratio requirements. As of September 30, 1999 and December 31, 1998,
the Company had no balance outstanding under the Facility.
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. The
balance of the Fund's capital has been provided by institutional investors and
directors and employees of the Company. During the first nine months of 1999
the Company contributed $2.2 million to the Fund to bring its cumulative
investment in the Fund to approximately $4.1 million. The Company's investment
in the Fund resulted in a net gain of approximately $5.8 million for the nine
months ended September 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 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 continue 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.
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 will be completed during the fourth
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. Each of these third party applications
were upgraded, as well as tested by the Company for Year 2000 compliance during
the third quarter of 1999. The Company believes that its internally
17
<PAGE>
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 continues to
obtain 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.
The Company has in place 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. There can be no
assurances that any contingency plan will be adequate to address a service
failure.
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.
18
<PAGE>
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.
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).
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; e-business initiatives undertaken
is response to customer demand; statements about the Company's charge for its
human resources repositioning and retention program; estimated costs for
additional retention programs; 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; the impact of
varying compensation arrangements; geographic expansion and opening additional
offices; the Company's goal for days sales outstanding 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; future initiatives in an attempt to adapt to
changing market dynamics; the success of the Company's human resources
repositioning and retention program; estimated costs for additional retention
programs; 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
19
<PAGE>
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.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. In February 1999, the
Company filed a counterclaim against the former stockholders of Excell which
alleges breach of contract. The Company believes that the plaintiffs' claims are
without merit and intends to vigorously defend the lawsuit.
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.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
3(i)(1) Amended and Restated Certificate of Incorporation of the Company,
as amended.
3(ii)(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.
10.1 Amended and Restated Service Agreement between the Company and
Gerard Van Kemmel, dated July 12, 1999.
10.2 Agreement between the Company and James K. Sims, dated as of
September 1, 1999.
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 8-A/A filed on September 30, 1998.
(4) Incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A/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 September 30, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
Date: November 15, 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
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3(i)(1) Amended and Restated Certificate of Incorporation of the
Company, as amended.
3(ii)(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.
10.1 Amended and Restated Service Agreement between the Company and
Gerard Van Kemmel, dated July 12, 1999.
10.2 Agreement between the Company and James K. Sims, dated as of
September 1, 1999.
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 8-A/A filed on September 30, 1998.
(4) Incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A/A filed on September 30, 1998.
<PAGE>
EXHIBIT 11
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income $10,736 $ 9,675 $19,384 $35,689
======= ======= ======= =======
Basic:
Weighted average common
shares outstanding 60,209 58,410 59,738 57,846
======= ======= ======= =======
Net income per share $ .18 $ .17 $ .33 $ .62
======= ======= ======= =======
Diluted:
Weighted average common
shares outstanding 60,209 58,410 59,738 57,846
Dilutive effects of stock options 996 3,485 2,491 4,502
------- ------- ------- -------
Weighted average common and
common equivalent shares
outstanding 61,205 61,895 62,229 62,348
======= ======= ======= =======
Net income per share $ .18 $ .16 $ .32 $ .57
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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