<PAGE>
================================================================================
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, 2000
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 ___
---
As of October 31, 2000, there were 63,096,690 shares of common stock
outstanding.
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<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION:
Item 1: Legal Proceedings 23
Item 6: Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
</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>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,807 $ 62,288
Investments held to maturity 30,355 28,659
Accounts receivable, less allowance of $25,410 and $10,287
at September 30, 2000 and December 31, 1999, respectively 126,900 126,842
Unbilled revenue on contracts 11,970 13,181
Deferred income taxes 4,481 247
Prepaid expenses and other current assets 38,500 38,465
-------- --------
Total current assets 297,013 269,682
Property and equipment, net 44,675 53,127
Deferred income taxes 3,877 3,619
Other assets 17,346 41,246
-------- --------
Total assets $362,911 $367,674
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,140 $ 13,845
Accrued payroll 49,671 21,562
Accrued expenses 50,377 33,409
Deferred revenue 9,051 9,594
Income taxes payable - 12,054
Obligations under capital leases, current - 71
-------- --------
Total current liabilities 123,239 90,535
Obligations under capital lease - 103
Other long term liabilities 1,500 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares
authorized and none issued and outstanding
at September 30, 2000 and December 31,1999, respectively - -
Common stock, $.01 par value, authorized 250,000,000
shares; issued and outstanding 63,066,690 and 62,065,028 shares
at September 30, 2000 and December 31, 1999, respectively 631 621
Additional paid-in capital 170,784 159,738
Retained earnings 86,556 129,670
Accumulated other comprehensive loss (17,636) (9,331)
Deferred compensation (2,163) (3,662)
-------- --------
Total stockholders' equity 238,172 277,036
-------- --------
Total liabilities and stockholders' equity $362,911 $367,674
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $154,070 $168,235 $461,512 $483,104
Costs and expenses:
Project costs 88,529 90,399 265,926 268,620
General and administration 70,727 49,545 196,446 144,784
Sales and marketing 21,303 16,841 61,750 48,650
Restructuring and other costs 22,000 - 22,000 -
-------- -------- -------- --------
Total operating expenses 202,559 156,785 546,122 462,054
-------- -------- -------- --------
Income/(loss) from operations (48,489) 11,450 (84,610) 21,050
Other income (expense):
Interest income, net 1,162 867 2,574 2,030
Gain on investments 6,432 4,396 7,620 8,045
Gain on sale of asset - - 7,661 -
Foreign exchange gain 22 604 425 140
-------- -------- -------- --------
Total other income 7,616 5,867 18,280 10,215
-------- -------- -------- --------
Income (loss) before income taxes (40,873) 17,317 (66,330) 31,265
Provision (benefit) for income taxes (13,033) 6,581 (23,216) 11,881
-------- -------- -------- --------
Net income (loss) $(27,840) $ 10,736 $(43,114) $ 19,384
======== ======== ======== ========
Basic net income (loss) per share $ (0.44) $ 0.18 $ (0.69) $ .33
======== ======== ======== ========
Diluted net income (loss) per share $ (0.44) $ 0.18 $ (0.69) $ .32
======== ======== ======== ========
Weighted average number of common
shares outstanding 62,721 60,209 62,473 59,738
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 62,721 61,205 62,473 62,229
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(43,114) $ 19,384
Amounts that reconcile net income/(loss) to net cash
used in operating activities:
Provision for losses on accounts receivable 18,527 5,217
Depreciation and amortization 13,928 12,945
Stock based compensation 1,499 -
Accrued restructuring and other costs 19,298 -
Tax benefit from exercise of stock options - 1,689
Gain on equity investment in Cambridge Technology Capital Fund (8,777) (5,817)
Gain on sale of marketable equity securities - (2,228)
Gain on sale of assets (7,661) -
Loss on sale of Cambridge Technology Capital Fund
distribution in kind 1,157 -
Change in deferred income taxes (4,492) (814)
Changes in assets and liabilities:
Increase in accounts receivable (22,407) (24,891)
Decrease/(increase) in unbilled revenue on contracts 745 (7,741)
Decrease/(increase) in prepaid expenses and other current assets 1,582 (10,476)
Decrease in other assets 165 2,267
Increase/(decrease) in accounts payable 650 (2,330)
Increase in accrued expenses 33,963 8,247
(Decrease)/increase in deferred revenue (445) 3,133
Decrease in income taxes payable (12,475) (5,760)
Increase in other long-term liabilities 1,500 -
-------- --------
Net cash used in operating activities (6,357) (7,175)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,491) (18,053)
Purchase of investments held to maturity (35,313) (28,530)
Maturity of investments held to maturity 33,617 24,956
Investment in equity securities (3,250) -
Proceeds from Cambridge Technology Capital
Fund cash distribution 5,928 -
Proceeds from sale of Cambridge Technology Capital
Fund distributions in kind 29,041 -
Investment in Cambridge Technology Capital Fund (630) (2,212)
Proceeds from sale of marketable equity securities - 2,324
Proceeds from sale of assets 4,656 -
-------- --------
Net cash provided by/(used in) investing activities 21,558 (21,515)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital leases (142) (145)
Proceeds from employee stock purchase plan 4,920 8,284
Proceeds from exercise of stock options 6,135 12,982
-------- --------
Net cash provided by financing activities 10,913 21,121
-------- --------
Effect of foreign exchange rate changes on cash (3,595) (44)
Net increase/(decrease) in cash and cash equivalents 22,519 (7,613)
Cash and cash equivalents at beginning of period 62,288 80,051
-------- --------
Cash and cash equivalents at end of period $ 84,807 $ 72,438
======== ========
</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 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, 1999
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, 2000 are not necessarily indicative of results for the full
year.
Effective September 30, 2000, the Company reclassified the costs and expenses
components of its consolidated statements of operations in order to conform to
other entities within the Company's industry. The Company had historically
reported an "other costs" line item in its consolidated statements of operations
which included the costs of idle time for project personnel, facility and
telecommunications costs, and non-project related travel costs. Idle time costs
are now included in project costs while facility, telecommunications, and non-
project related travel costs are included in general and administrative costs.
This reclassification of certain financial statement line items did not have an
effect on the overall statements of operations.
B. Restructuring and Other Costs
-----------------------------
In the third quarter of 2000, the Company recorded a charge for restructuring
and other costs of $22.0 million, primarily in connection with the elimination
of approximately 400 positions and to reduce space requirements in both the
corporate headquarters and North American field locations. The $22.0 million of
costs include $9.2 million of severance costs, $6.2 million to write-down
leasehold improvements and office equipment, $4.1 million to close or sublease
existing offices and $2.5 million of other associated costs. Staff reductions
included approximately 200 billable staff and 200 non-billable staff. At
September 30, 2000, approximately $1.3 million of the severance costs, due to
the termination of 74 employees, and $1.4 million of other restructuring costs
have been paid, respectively. The remaining balance of $13.1 million of accrued
restructuring costs, included in accrued expenses in the consolidated balance
sheet, are expected to be paid through the quarter ending March 31, 2001. The
$6.2 million write down of leasehold improvements and office equipment was
effective as of September 30, 2000.
6
<PAGE>
C. Net Income Per Share
--------------------
The following table presents the calculation of earnings per share for the three
and nine months ended September 30, 2000 and 1999 (in thousands except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income/(loss) $(27,840) $10,736 $(43,114) $19,384
======== ======= ======== =======
Basic:
Weighted average number of common shares outstanding 62,721 60,209 62,473 59,738
======== ======= ======== =======
Net income/(loss) per share $ (0.44) $ .18 $ (0.69) $ .33
======== ======= ======== =======
Diluted:
Weighted average number of common shares outstanding 62,721 60,209 62,473 59,738
Dilutive effects of stock options - 996 - 2,491
-------- ------- -------- -------
Weighted average number of common and common
equivalent shares outstanding 62,721 61,205 62,473 62,229
======== ======= ======== =======
Net income/(loss) per share $ (0.44) $ .18 $ (0.69) $ .32
======== ======= ======== =======
</TABLE>
For the three and nine month periods ended September 30, 2000, basic and diluted
EPS were calculated based solely on weighted average number of common shares
outstanding. For the three month and nine month periods ended September 30,
2000, common stock equivalents of 16.3 million and 12.5 million shares,
respectively, were excluded from the computation of diluted EPS because the
effects of these shares were anti-dilutive. The number of common stock
equivalents excluded from the computation of diluted EPS for the three and nine
months ended September 30, 1999 was 7.0 million and 3.8 million shares,
respectively.
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, 2000, the Company held foreign exchange forward contracts of
approximately $7.8 million and there were no related deferred gains or losses.
As of September 30, 2000, the Company maintained foreign exchange contracts to
mitigate the risk of changes in Swiss francs, British pounds, Japanese yen,
European Euro, Swedish krona and Australian dollars. The Company does not hold
foreign exchange contracts for trading purposes.
7
<PAGE>
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, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Comprehensive income/(loss):
Net income/(loss) $(27,840) $10,736 $(43,114) $19,384
Other comprehensive income/(loss):
Unrealized loss on marketable equity
securities, net of taxes of
$(11) and $(1,045) for
the three and nine month periods ended
September 30, 2000, respectively and
net of taxes of $(59) for the three and
nine months periods ended September 30, 1999 (16) (97) (1,567) (97)
Reclassification adjustment for (gain)/loss
on marketable equity securities included in
net income/(loss), net of taxes of $(1,556)
and $784 for the three and nine month
periods ended September 30, 2000,
respectively, and net of taxes of
$ (753) for the nine September 30, 1999 (2,342) - 1,167 (1,255)
Foreign currency translation adjustment (4,774) 2,102 (7,905) (3,566)
-------- ------- -------- -------
Other comprehensive income/(loss) (7,132) 2,005 (8,305) (4,918)
-------- ------- -------- -------
Comprehensive income/(loss) $(34,972) $12,741 $(51,419) $14,466
======== ======= ======== =======
</TABLE>
F. New Accounting Pronouncements
-----------------------------
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 138, ("FAS 138"), "Accounting for Certain Derivative
Instruments - an amendment of FAS 133." This statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives). FAS 138 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not expect FAS 138 to
have a material impact on its financial position and results of operations.
G. Commitments and Contingencies
------------------------------
On November 18, 1998, certain of the former stockholders of Excell Data
Corporation ("Excell") filed a lawsuit against the Company in the United States
District Court for the District of Massachusetts ("District Court"). The
complaint alleged breach of contract, violation of federal securities laws,
common law fraud, and negligent misrepresentation in connection with the Excell
acquisition and sought unspecified damages.
8
<PAGE>
In February 1999, the Company filed a counterclaim against the former
stockholders of Excell which alleges breach of contract. On March 1, 2000, the
District Court granted the Company's motion for summary judgement, dismissing
the complaints of the former shareholders of Excell in their entirety. On
October 18, 2000, the parties entered into a settlement agreement waiving the
plaintiff's right to appeal, dismissing the Company's counterclaim, and
concluding the litigation in its entirety.
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 United States District Court for the District of Massachusetts ("District
Court"). These suits have since been consolidated by the District 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 has moved to dismiss the plaintiffs'
consolidated complaint. The motion is currently pending, with oral argument
before the District Court scheduled for December 4, 2000.
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.
H. Cambridge Technology Capital Fund I L.P. (the "Fund")
------------------------------------------------------
The Fund was formed in October 1997 as a limited partnership with committed
capital of approximately $25.3 million. The Fund's goal is capital appreciation
and is intended to invest in expansion-stage, private companies providing
products and services within the technology industry. The Company's ownership
interest in the Fund, of approximately 24%, is accounted for using the equity
method of accounting. The Company's total capital commitment to the Fund is
approximately $6.0 million, of which $5.6 million has been contributed through
September 30, 2000. The carrying value of the Company's investment in the Fund
was approximately $7.4 million and $33.2 million at September 30, 2000 and
December 31, 1999 respectively, and is included in other assets in the
consolidated balance sheet. The decrease in the carrying value of the Company's
investment in the Fund in 2000 is primarily a result of the distribution of
assets from the Fund's investment portfolio.
9
<PAGE>
The Company received the following distributions from the Fund (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
Cash distributions $ - $ - $ 5,928 $ -
Distributions in-kind, marketable
equity securities 8,710 593 29,583 1,606
------- ------ ------- -------
Total distributions received $ 8,710 $ 593 $35,511 $ 1,606
======= ====== ======= =======
</TABLE>
The gain on the Company's equity investment in the Fund totaled $1.5 million and
$4.4 million for the three months ended September 30, 2000 and 1999,
respectively. The gain on the Company's equity investment in the Fund totaled
$8.8 million and $5.8 million for the nine months ended September 30, 2000 and
1999, respectively. The gain on the Company's equity investment in the Fund for
2000 primarily resulted from realized gains due to the Fund's distributions of
equity securities while the gain on the Company's equity investment in the Fund
for 1999 primarily resulted from unrealized changes in the fair value of the
Fund's investment portfolio. The amount of gain allocated each period is based
on the allocation of the Fund's income as determined by the Fund's partnership
agreement. The allocation methodology may vary at times and may not be solely
based on contribution percentage.
Summarized financial information of the Fund is presented as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Net realized gains $ 30,024 $ 1,994 $ 122,230 $ 5,808
Net reversal of unrealized (increase)/decrease
for securities distributed or sold (26,878) (1,132) (116,613) (3,348)
Net (decrease)/increase in unrealized
appreciation of investments 2,398 17,674 8,036 23,185
Net loss from operations (173) (201) (514) (638)
-------- ------- --------- -------
Net increase in partners' capital $ 5,371 $18,335 $ 13,139 $25,007
======== ======= ========= =======
</TABLE>
I. Operating Segment Information
-----------------------------
The Company is managed in two operating segments: North America and
International. The North American operating segment consists of e-business,
systems integration, and consulting services in the United States and Canada,
while the International operating segment consists of e-business, systems
integration, and consulting services outside of North America.
The Company evaluates each segment's performance based on revenues and income
from operations. For segment reporting purposes, total corporate revenues,
income from operations, and assets have been included
10
<PAGE>
in North America. The carrying value of the investment in the Fund of $7.4
million and $33.2 million is included in total assets for North America at
September 30, 2000 and December 31, 1999, respectively.
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,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
North America $ 94,167 $111,071 $285,322 $317,726
International 59,903 57,164 176,190 165,378
-------- -------- -------- --------
Consolidated $154,070 $168,235 $461,512 $483,104
======== ======== ======== ========
Income/(loss) from operations:
North America $(51,201) $ 4,368 $(89,869) $ 1,652
International 2,712 7,082 5,259 19,398
-------- -------- -------- --------
Consolidated income/(loss)
from operations (48,489) 11,450 (84,610) 21,050
Other income/(loss) 7,616 5,867 18,280 10,215
-------- -------- -------- --------
Consolidated income/(loss)
before income taxes $(40,873) $ 17,317 $(66,330) $ 31,265
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Total assets:
North America $232,584 $270,749
International 130,327 96,925
-------- --------
Consolidated $362,911 $367,674
======== ========
</TABLE>
J. Gain on Sale of Assets
----------------------
On February 10, 2000, the Company announced that it had sold its Cambridge
Information Network ("CIN") to EarthWeb Inc. ("EarthWeb") for $8.0 million in a
combination of cash and EarthWeb common stock, as determined by EarthWeb. During
the first quarter of 2000, the Company recorded a gain on the sale of assets,
net of transaction costs related to this transaction, of approximately $7.7
million. In conjunction with the sale of CIN to EarthWeb, the Company entered
into a service agreement with EarthWeb to purchase a combination of web site
sponsorships and service from EarthWeb's sites for $1.0 million per year for
three years.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Overview
Cambridge Technology Partners (Massachusetts), Inc. ("Cambridge" or the
"Company") performs technology and consulting services to help its clients
develop and accelerate their transition to Internet-based e-business solutions
and processes - the information technology that defines the "New Economy."
Founded in 1991, the Company combines electronic business and digital (Internet)
strategy consulting and cross-enterprise, software integration services to
"Global 1000" organizations worldwide, delivering rapid end-to-end business
solutions.
Electronic commerce business solutions delivered to clients have become and will
likely continue to become more integrated with clients' value chains and legacy
systems. This market trend represents a growth opportunity for Cambridge.
Starting in 2000, Cambridge groups its services into three lines of business,
"e-Solutions," "Traditional" and "Change Management Consulting." The Company's
e-Solutions service offering is comprised of e-Business and e-Integration, and
generally includes digital business strategies, e-commerce technical solutions
consulting, Internet user experience design and advanced software application
integration. Traditional services generally include custom client/server
application solutions and implementations of software such as call centers and
enterprise resource planning (ERP) applications. The Company's Change
Management Consulting practice includes integrated management consulting across
various industrial sectors and the entire scope of the value chain of the
Company's clients.
The Company provides the majority of its services on a fixed-time, fixed-price
model, with client involvement at all stages of the process. For software
development services, the Company and its clients generally agree on a
contractually fixed price for each phase of a project. 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.
Revenues for the third quarter of 2000 decreased 8% to $154.1 million compared
to $168.2 million for the same period in 1999. Net loss for the quarter ended
September 30, 2000 was $27.8 million, or $.44 per share (basic and diluted). The
net loss for the third quarter of 2000 includes restructuring and other costs of
$22.0 million, or $.24 per share (basic and diluted), net of taxes, and $10.0
million, or $.11 per share (basic and diluted), net of taxes, of bad debt
expense for uncollectable accounts receivable related to dot-com clients. Also
included in net loss for the third quarter of 2000 is a $6.4 million gain, or
$.07 per share (basic and diluted), net of taxes, related to the Company's
equity investment in the Cambridge Technology Capital Fund I L.P. (the "Fund").
This compares to net income of $10.7 million, or $.18 per share (basic and
diluted), net of taxes, for the third quarter of 1999. Included in net income
for the third quarter of 1999 is a $4.4 million gain, or $.05 per share
(diluted), net of taxes, on equity investment related to the Company's
investment in the Fund.
For the third quarter of 2000, e-Solutions revenues increased 43% to $97.1
million compared to $68.1 million for the same period in 1999. Sequentially,
e-Solutions revenues increased 5% compared to $92.3
12
<PAGE>
million for the quarter ended June 30, 2000. Growth in e-Solutions revenues for
the third quarter of 2000 compared to the same period in 1999 is primarily due
to increased demand for the Company's e-Integration services worldwide. Revenues
for Traditional services decreased 56% to $30.2 million for the third quarter of
2000 compared to $68.0 million for the same period in 1999. The decrease in
revenues from Traditional services was primarily due to the elevated levels at
which clients invested in such projects in the third quarter of 1999 in
conjunction with Year 2000 prevention plans and the transition of the Company's
focus to providing e-Solutions services. Traditional services remain a part of
the Company's service offerings in support of e-Solutions. Change Management
Consulting revenues for the third quarter of 2000 decreased 17% to $26.8 million
from $32.1 million for the same period in 1999, due primarily to employee
turnover and unfavorable foreign currency exchange rates.
On October 25, 2000, the Company announced that sequential revenues for the
fourth quarter of 2000 are expected to decline, partially due to the reduction
in dot-com business and partially due to an accelerated decline in revenues from
Traditional services as the Company completes its transition to a provider of
e-Solutions services. In the third quarter of 2000 the Company recorded a $22.0
million restructuring charge in order to reduce costs in response to the
changing business environment.
North American revenues decreased 15% to $94.2 million for the quarter ended
September 30, 2000 compared to $111.1 million for the same period in 1999, while
International revenues increased 5% to $59.9 million in the third quarter of
2000 compared to $57.1 million in the third quarter of 1999. North American
revenues for the third quarter of 2000 represented 61% of total revenues while
International revenues represented 39% of total revenues for the same period.
North American revenues for the third quarter of 1999 represented 66% of total
revenues while International revenues represented 34% of total revenues for the
same period. The decrease in North American revenues for the quarter ended
September 30, 2000 compared to the same period in 1999 was due primarily to a
decrease in revenues from Traditional services, which are concentrated more
heavily in North America than International. The increase in International
revenues for the quarter ended September 30, 2000 compared to the same period in
1999 was due primarily to increased revenues from e-Solutions.
Annualized employee turnover was approximately 26.0%, excluding forced turnover,
for the third quarter of 2000 compared to approximately 38.7%, excluding forced
turnover, for the second quarter of 2000. The Company, along with the rest of
the technology industry, continues to be challenged by employee turnover as
companies compete for employees with the skill sets required to fulfill client
demand. Company headcount totaled 4,035 at September 30, 2000, including the
decrease of 74 employees related to the Company's restructuring initiative,
compared to 3,905 at June 30, 2000.
On July 27, 2000, the Company announced that it is exploring strategic options
to allow Cambridge Management Consulting, its change management consulting unit,
to operate as a more independent but majority-owned business of the Company.
Options being considered include finding a strategic partner and listing on a
European stock exchange. The changes the Company is considering are designed to
enable Cambridge Management Consulting to grow faster and to recruit and retain
the best personnel with share option and incentive programs directly aligned
with the unit's performance. During the third quarter of 2000, the Company
completed much of the work required to restructure Cambridge Management
Consulting in order to facilitate the options under consideration.
Effective September 30, 2000, the Company reclassified the costs and expenses
components of its consolidated statements of operations in order to conform to
other entities within the Company's industry. The Company had historically
reported an "other costs" line item in its consolidated statements of operations
which included the costs of idle time for project personnel, facility and
telecommunications costs, and non-project related travel costs. Idle time costs
are now included in project costs while facility, telecommunications, and non-
project related travel costs are included in general and administrative costs.
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Results of Operations
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Total revenues for the third quarter of 2000 decreased 8% to $154.1 million
compared to $168.2 million for the same period in 1999. North American revenues
decreased 15% to $94.2 million for the quarter ended September 30, 2000 compared
to $111.1 million for the same period in 1999. International revenues increased
5% to $59.9 million in the third quarter of 2000 compared to $57.1 million in
the third quarter of 1999. The decrease in worldwide total revenues for the
third quarter of 2000 compared to the third quarter of 1999 was principally due
to a 56% decrease in the revenues from Traditional services to $30.2 million
from $68.0 million, and a decrease of 17% in revenues from Change Management
Consulting to $26.8 million from $32.1 million. These decreases were partially
offset by an increase in the revenues from e-Solutions of 43% to $97.1 million
for the third quarter of 2000 from $68.1 million for the same period in 1999.
The decrease in revenues from Traditional services was primarily due to the
elevated levels at which the clients invested in such projects in the third
quarter of 1999 in conjunction with Year 2000 prevention plans and the
transition of the Company's focus to providing e-Solutions services. Traditional
services remain a part of the Company's service offerings in support of
e-Solutions. Growth in e-Solutions revenues for the third quarter of 2000 is
primarily attributable to increased demand for the Company's e-Integration
services worldwide. The decrease in Change Management Consulting revenues was
primarily due to employee turnover and unfavorable foreign currency exchange
rates.
Project costs consist principally of salaries and benefits for personnel
dedicated to client projects and other non-reimbursable project costs. Project
costs were $88.5 million, or 58% of revenues, for the third quarter of 2000
compared to $90.4 million, or 54% of revenues, for the third quarter of 1999.
The dollar decrease resulted primarily from a decrease in payroll and payroll-
related expenses due to lower headcount and was partially offset by wage
increases in an initiative to transition the Company's salary scale to the top
end of the market. Worldwide project personnel headcount decreased 13% to 3,163
full-time employees at September 30, 2000 from 3,637 full-time employees at
September 30, 1999. The percentage increase was due to a decrease in total
revenues from 1999 to 2000. 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
increases in costs.
General and administration expenses include salaries and benefits of management
and support personnel, facilities costs, training, non-project travel,
professional fees, recruiting costs, all other branch costs and an allocation
of corporate costs. General and administration expenses were $70.7 million, or
46% of revenues, for the third quarter of 2000 compared to $49.5 million, or 29%
of revenues, for the third quarter of 1999. The dollar and percentage increase
resulted primarily from the $10.0 million of bad debt expense for uncollectable
accounts receivable related to dot-com clients, an increase in payroll and
payroll-related expenses associated with increased wages and recruiting of
additional personnel, including senior executives, to support the Company's
business, and higher levels of expenses related to travel, recruiting and
training. Worldwide general and administrative personnel headcount increased 7%
to 639 full-time employees at September 30, 2000 from 598 full-time employees at
September 30, 1999.
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Sales and marketing expenses include salaries, benefits, commissions, travel,
entertainment, and all other direct costs associated with the direct sales
force, as well as, advertising, branding, other marketing costs and an
allocation of corporate costs. Sales and marketing expenses were $21.3 million,
or 14% of revenues, for the third quarter of 2000 compared to $16.8 million, or
10% of revenues, for the third quarter of 1999. The dollar and percentage
increase resulted primarily from costs associated with enhancing the Company's
brand recognition through advertising and the sponsorship of major forums and an
increase in payroll and payroll-related expenses associated with increased wages
and headcount. Worldwide sales and marketing personnel headcount increased 24%
to 233 employees at September 30, 2000 from 188 employees at September 30, 1999.
During the third quarter of 2000, the Company recorded $22.0 million of
restructuring and other costs. This charge was designed primarily to remove non-
billable costs from the organization by eliminating approximately 400 positions,
including 200 under utilized project personnel, and reducing space requirements
in both corporate headquarters and North America field locations. The $22.0
million charge consists of $9.2 million of severance costs, $6.2 million to
write-down leasehold improvements and office equipment, $4.1 million to close or
sublease existing offices and $2.5 million of other associated costs. This
restructuring charge is expected to result in total annual cash and cost savings
of approximately $50.0 million, including $34.0 million of project costs, $13.0
million of general and administrative costs, and $3.0 million of sales and
marketing costs.
Included in other income/(loss) for the third quarter of 2000 is a gain on
investments of $6.4 million, which is comprised of a $4.9 million gain on the
sale of securities distributed from the Fund and a $1.5 million gain related to
the Company's equity investment in the Fund compared to a $4.4 million equity
investment gain for the third quarter of 1999. The gain on the Company's equity
investment in the Fund for the third quarter of 2000 primarily resulted from
realized gains due the Fund's distribution of equity securities and unrealized
appreciation of the Fund's portfolio of securities. The gain on the Company's
equity investment in the Fund for the third quarter of 1999 primarily resulted
from unrealized appreciation of the Fund's portfolio of securities.
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, 2000, the Company held foreign exchange contracts of
approximately $7.8 million. As the Company grows, 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 2000 was 31.9%
compared to 38.0% for the same period a year ago. The Company's effective tax
rate may vary from period to period based on the Company's profitability, 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 loss for the quarter ended September 30, 2000 was $27.8 million, or $.44 per
share (basic and diluted). The net loss for the third quarter of 2000 includes
restructuring costs of $22.0 million, or $.24 per share (basic and diluted), net
of taxes, and $10.0 million, or $.11 per share (basic and diluted), net of
taxes, of bad debt expense for uncollectable accounts receivable related to dot-
com clients. Also included in net loss for the third quarter of 2000 is a $6.4
million gain, or $.07 per share (basic and diluted), net of taxes, related to
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the Company's equity investment in the Fund. This compares to net income of
$10.7 million, or $.18 per share (basic and diluted), net of taxes, for the
third quarter of 1999. Included in net income for the third quarter of 1999 is a
$4.4 million gain, or $.05 per share (diluted), net of taxes, related to the
Company's equity investment in the Fund.
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Total revenues in 2000 decreased 5% to $461.5 million compared to $483.1 million
for the same period in 1999. North American revenues decreased 10% to $285.3
million in 2000 compared to $317.7 million for the same period in 1999.
International revenues increased 7% to $176.2 million in 2000 compared to $165.4
million in 1999. The decrease in worldwide total revenues in 2000 compared to
1999 was principally due to a 53% decrease in the revenues from Traditional
services to $103.0 million from $217.8 million. This decrease was partially
offset by an increase in the revenues from e-Solutions of 53% to $266.4 million
in 2000 from $174.0 million in 1999 and an increase of 1% in revenues from
Change Management Consulting to $92.1 million in 2000 from $91.3 million in
1999. The decrease in revenues from Traditional services was primarily due the
elevated levels at which the clients invested in such projects in 1999 in
conjunction with Year 2000 prevention plans and the transition of the Company's
focus to providing e-Solutions services. Growth in e-Solutions revenues for 2000
is primarily attributable to increased demand for the Company's e-Business and
e-Integration services worldwide. The increase in Change Management Consulting
revenues was primarily due to increased demand in North America within the
energy and chemical sectors and the development of the financial sector in
Europe and was partially offset by employee turnover and unfavorable foreign
currency exchange rates.
Project costs were $265.9 million, or 58% of revenues, in 2000 compared to
$268.6 million, or 56% of revenues, in 1999. The dollar decrease resulted
primarily from a decrease in payroll and payroll-related expenses due to lower
headcount and was partially offset by wage increases in an initiative to
transition the Company's salary scale to the top end of the market place and
bonus costs associated with the Company's incentive bonus program. The
percentage decrease was due to a decrease in total revenues from 1999 to 2000.
General and administration expenses were $196.4 million, or 43% of revenues in
2000 compared to $144.8 million, or 30% of revenues, in 1999. The dollar and
percentage increase resulted primarily from an incentive bonus program, an
increase in payroll and payroll-related expenses associated with increased wages
and recruiting of additional personnel, including senior executives, to support
the Company's business, higher levels of expenses related to the use of outside
professional services, increased facilities and telecommunications costs, and in
increase in bad debt expense.
Sales and marketing expenses were $61.8 million, or 13% of revenues, in 2000
compared to $48.7 million, or 10% of revenues, in 1999. The dollar and
percentage increase resulted primarily from costs associated with enhancing the
Company's brand recognition through advertising, the sponsorship of major
forums, and an increase in payroll and payroll-related expenses associated with
increased wages and headcount.
During the third quarter of 2000, the Company recorded $22.0 million of
restructuring and other costs. This charge was designed to remove non-billable
costs from the organization by eliminating approximately 400 positions and
reducing space requirements in both corporate headquarters and North America
field locations.
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Included in other income in 2000 is a gain on investments of $7.6 million
related to the Company's equity investment in the Fund compared to a gain of
$8.0 million in 1999. The gain on the Company's equity investment in the Fund
for 2000 primarily resulted from realized and unrealized appreciation of the
Fund's portfolio of securities partially offset by a net loss on the sale of
equity securities distributed from the Fund. The gain on the Company's equity
investment in the Fund for 1999 primarily resulted from unrealized appreciation
of the Fund's portfolio of securities. Also included in other income in 2000 is
a gain on the sale the Company's Cambridge Information Network of $7.7 million.
The Company's effective income tax rate for 2000 was 35% compared to 38% for the
same period a year ago. The Company's effective tax rate may vary from period to
period based on the Company's profitability, 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 loss for 2000 was $43.1 million, or $.69 per share (basic and diluted). The
net loss for the 2000 includes restructuring costs of $22.0 million, or $.23 per
share (basic and diluted), net of taxes, and $10.0 million, or $.10 per share
(basic and diluted), net of taxes, of bad debt expense for uncollectable
accounts receivable related to dot-com clients. Also included in net loss in
2000 is a $7.6 million gain, or a $.08 per share (basic and diluted), net of
taxes, on investments related to the Company's equity investment in the Fund,
and a $7.7 million gain, or $.08 per share (basic and diluted), net of taxes, on
the sale of assets. This compares to net income of $19.4 million, or $.32 per
share (diluted), in 1999, including a $8.0 million gain, or $.08 (diluted), net
of taxes, on investments related to the Company's equity investment in the Fund.
Liquidity and Capital Resources
The Company continued to operate essentially debt-free and working capital was
$173.8 million at September 30, 2000 compared to $179.1 million at December 31,
1999. The decrease in working capital was primarily due to an increase in
accrued payroll and other expenses, partially offset by increases in cash,
investments held to maturity, and deferred income taxes, and a decrease in
income taxes payable. The Company's days sales outstanding in accounts
receivable was 74 days for the quarter ended September 30, 2000 compared to 86
days for the quarter ended June 30, 2000 and 79 days for the quarter ended
December 31, 1999. The decrease in days sales outstanding in accounts
receivable for the third quarter of 2000 was primarily due to the $10 million
reserve established for uncollectable accounts receivable from dot-com clients
and an increased focus on improving credit and collection efforts. The Company
actively assesses and monitors the collectability of its accounts receivable and
has included days sales outstanding as a measurement criteria to calculate
certain employees incentive bonuses for 2000.
Net cash used in operating activities was $6.4 million in the first nine months
of 2000, compared to net cash used in operating activities of $7.2 million for
the same period in 1999. A net loss in for the first nine months of 2000 of
$43.1 million was partially offset by non-cash expenses including, the non-cash
portion of restructuring charge, an increase in the provision for losses on
accounts receivable, and stock based compensation. In addition, the net loss in
2000 was partially offset by an increase in accrued expenses while prepaid
expenses and other current assets decreased. Net income of $19.4 million for the
first nine months of 1999 was offset primarily by increases in accounts
receivable and prepaids and other assets.
Capital expenditures of $12.5 million for the first nine months of 2000 were
used principally for computer equipment to support the Company's operations,
employee workstations, telecommunications equipment, and leasehold improvements.
Capital expenditures for the full year of 2000 are expected to approximate $18.0
million, consisting principally of leasehold improvements, personal computers,
employee workstations,
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telecommunications 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. Liquidity
may also be effected by acquisitions of companies or technology.
In December 1999, the Company announced a new investment strategy that is
intended to create and build New Economy companies (NEWCOs) using the knowledge
and skills of its consultants, funding from internal sources and venture capital
firms, and distributions from the Fund. The Company has invested $3.3 million
for the nine months ended September 30, 2000 and expects to invest approximately
$5.0 million in NEWCOs during the three months ended December 31, 2000, subject
to market conditions and the availability of investment opportunities.
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. For
the quarter ended September 30, 2000 the Company was not in compliance with
certain ratio requirements. The Company is in the process of renegotiating the
terms of the Facility. As of September 30, 2000 and December 31, 1999, 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's goal is capital appreciation
and is intended to invest in expansion-stage, private companies providing
products and services within the technology industry. A wholly owned subsidiary
of the Company acts as the 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. At
September 30, 2000, the Company's cumulative capital contribution to the Fund
amounted to approximately $5.6 million. The Company's investment in the Fund
resulted in a net gain of approximately $7.6 million for the nine months ended
September 30, 2000.
The Company anticipates that existing cash and investment balances combined with
cash generated from operations will be sufficient to meet the Company's working
capital requirements for at least the next 12 months and to fund the transition
of the Company's business to one more focused on Internet oriented solutions.
However, the Company's strategy to transition its business to Internet oriented
solutions could place a strain on the Company's financial resources. Operating
results and liquidity may be adversely affected if market demand and revenues do
not increase as anticipated. As the Company expands its international
operations, a number of factors, including market acceptance of the Company's
services, significant fluctuations in currency exchange rates, and changes in
general economic, political, or regulatory conditions could also adversely
affect future results and liquidity.
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New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 138, ("FAS 138"), "Accounting for Certain Derivative
Instruments - an amendment of FAS 133." This statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives). FAS 138 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not expect FAS 138 to
have a material impact on its financial position and results of operations.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
(statements that are not historical fact) including, without limitation,
statements regarding our future net revenues and profits; the Company's planned
transition to e-Business; the Company's reliance on key personnel to guide these
efforts and its ability to attract and retain qualified employees; capital
expenditures; liquidity sources and needs; effectiveness of the Company's cost
cutting initiatives; working capital needs; e-Business initiatives undertaken in
response to customer demand and anticipated market growth opportunities; the
transition of personnel to e-Solutions from traditional services; the Company's
announced strategy for CMC and CMC's future financial performance; increases in
personnel and wages for our personnel; the impact of varying compensation
arrangements; and litigation.
These forward-looking statements are not guarantees and are subject to several
risks and uncertainties. While it is impossible to identify each factor and
event that could affect our results, there are a number of important factors
that could cause our actual results to differ materially from those indicated by
the forward-looking statements and that could have an impact on our operating
results, including the risks described in "Factors that May Affect Future
Results" and elsewhere in this Quarterly Report on Form 10-Q. We do not assume
any obligation to update any of the forward-looking statements we make.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We caution you that the following important factors, among others, could cause
our actual results to differ materially from those expressed in forward-looking
statements made by or on behalf of Cambridge in this Quarterly Report on Form
10-Q or other filings with the Securities and Exchange Commission, press
releases, communications with investors, and oral statements.
OUR BUSINESS WILL BE NEGATIVELY AFFECTED IF WE DO NOT KEEP UP WITH THE
INTERNET'S RAPID TECHNOLOGICAL CHANGE, EVOLVING BUSINESS PRACTICES AND CHANGING
CLIENT REQUIREMENTS
We are in the process of transitioning our primary focus from the provision of
Traditional services to the provision of e-Solutions. The Internet professional
services market is characterized by rapidly changing technology, evolving
business practices and changing client needs. Accordingly, our future success
will depend, in part, on our ability to adapt and meet these challenges. Among
the most important challenges facing us are the need to:
o effectively use leading technologies;
o continue to develop our strategic and technical expertise;
o influence and respond to emerging industry standards and other
technological changes;
o orient management teams to capitalize on these changes;
o recruit and retain qualified project personnel;
o enhance our current services;
o develop new services that meet changing customer needs; and
o market our services.
WE HAVE A RECENT HISTORY OF OPERATING LOSSES AND MAY NOT BE ABLE TO REVERSE THIS
TREND IN THE NEAR FUTURE
Primarily as a result of the decline in revenues from our Traditional services,
a slowdown in growth in demand for the e-Solutions business, increased cost of
recruiting and retaining project personnel, and costs of implementing
restructuring initiatives, we have incurred losses. As a result, we will need to
generate additional revenues to achieve profitability. Our ability to achieve
profitability will also depend upon our success at transitioning to an
e-Solutions company, as well as the strength of our industry. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE USE OF THE INTERNET DECLINES
Our business is dependent upon continued growth in the use of the Internet by
our clients, prospective clients and their customers and suppliers. If the
number of users on the Internet does not increase and commerce over the Internet
does not become more accepted and widespread, demand for our services may
decrease and, as a result, our revenues would decline. Factors that may affect
Internet usage or electronic commerce adoption include:
o actual or perceived lack of security of information;
o lack of access and ease of use;
o inconsistent quality of service;
o increases in access costs to the Internet;
o actual or threatened computer "viruses" or other malicious code;
o excessive governmental regulation or the imposition of taxation on
Internet transactions;
o uncertainty regarding intellectual property ownership;
o reluctance to adopt new business methods; and
o costs associated with the obsolescence of existing infrastructure.
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TO SUCCEED IN OUR LABOR INTENSIVE BUSINESS, WE MUST RECRUIT AND RETAIN QUALIFIED
PROFESSIONALS, WHO ARE CURRENTLY IN HIGH DEMAND
We believe that our success depends in part on our ability to attract and retain
highly skilled technical, consulting, managerial, sales and marketing personnel.
The labor-intensive Internet professional services industry currently faces a
shortage of qualified personnel, which is expected to continue. Not only do we
compete with other companies to recruit and hire from this limited pool, our
industry has traditionally experienced high turnover rates. If we cannot hire
and retain qualified personnel or if a significant number of our current
employees leave, we may be unable to complete or retain existing projects or bid
for new projects of similar scope and revenue. The inability to hire and retain
qualified employees could cause our business results to suffer.
WE DEPEND ON A NUMBER OF KEY PERSONNEL WHO HAVE RECENTLY JOINED US AND WHOM WE
MAY NOT BE ABLE TO RETAIN
Most members of our senior management joined us in 1999 and 2000. Many of these
individuals have not previously worked with one another, and it will take time
for the management team to become integrated and work effectively together. It
may also take time for these individuals to effect change within the
organizations that lie within their respective areas of responsibility. Due to
the competitive nature of our industry, we may not be able to retain all of our
senior managers.
OUR QUARTERLY REVENUES AND OPERATING RESULTS COULD FLUCTUATE, WHICH MAY CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE
Our quarterly revenues and operating results are volatile and difficult to
predict. Our quarterly operating results have varied in the past and could vary
significantly from quarter to quarter in the future. Additionally, if our
operating results in some future period are below the expectations of public
market analysts or investors, the market price of our common stock may decline
significantly. Factors that may cause our results and stock price to fluctuate
include:
o the number and significance of client engagements commenced and completed
during a period;
o changes in demand for our consulting and implementation services and
third party products or solutions for which we perform integration
services;
o our ability to obtain new and follow-on client engagements;
o the number of working days in a period;
o our ability to collect accounts receivable from some of our clients who
may not pay us, may pay us only a portion of what we are owed, or may
delay paying us for an extended period;
o the introduction of new services or business models by us or our
competitors;
o changes in market conditions that could impact the value of securities
owned by us or the value of our investment in Cambridge Technology
Capital Fund I;
o unanticipated negative outcomes of litigation involving us;
o our ability to attract, train and retain skilled personnel in all areas
of our business; and
o our ability in a consistent and accurate manner to manage costs,
including personnel costs and support services costs.
Also, the timing of revenues is difficult to forecast because our 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. We
generally recognize revenues as we provide services.
AN INABILITY TO MAINTAIN A HIGH LEVEL OF UTILIZATION OF OUR BILLABLE CONSULTANTS
MAY ADVERSELY AFFECT OUR OPERATING RESULTS
Our clients can cancel or reduce the scope of their engagements with us on short
notice. If they do so, we may be unable to reassign our professionals to new
engagements without delay. Personnel and related costs constitute a substantial
portion of our operating expenses. Because these expenses are relatively fixed,
and because we establish the levels of these expenses well in advance of any
particular quarter, underutilization of our professional services employees
could occur, causing significant reductions in our operating results for a
particular quarter.
A PORTION OF OUR REVENUES IS DERIVED FROM DOT-COM COMPANIES, MANY OF WHICH HAVE
LIMITED OPERATING HISTORIES AND SIGNIFICANT NET LOSSES
We derive a portion of our revenues from services performed for dot-com
companies. Many dot-com companies are recently organized, have limited operating
histories, have significant net losses and have limited corporate sponsorship or
financial resources. The volatility of the stock market in recent months has
made it difficult for many dot-com companies to raise funds, and a number of
companies have gone bankrupt. As a result, we may experience greater than
expected customer loss or an inability to collect fees from our customers in a
timely manner if at all. Our ability to achieve revenue and earnings targets or
maintain an adequate cash position could be adversely affected.
OUR BUSINESS MAY BE NEGATIVELY IMPACTED IF WE FAIL TO ACCURATELY ESTIMATE THE
TIME AND RESOURCES NECESSARY FOR THE PERFORMANCE OF OUR SERVICES
We derive a significant portion of our revenues from fixed-price, fixed-time
contracts, rather than contracts in which the client pays us on a time and
materials basis. Because of the complex nature of the services we provide, it is
sometimes difficult to accurately estimate the cost, scope and duration of
particular client engagements. If we fail to accurately estimate the resources
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required for a project or fail to satisfy our contractual obligations in a
manner consistent with the project plan, then our costs to complete the project
could increase substantially. We have occasionally had to commit unanticipated
additional resources to complete projects, and we may have to take similar
action in the future. We may not be compensated for these additional costs or
the commitment of these additional resources, which would negatively impact our
operating results.
OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD
RESULT IN LOSSES AND NEGATIVE PUBLICITY
Many of our engagements involve information technology solutions that are
critical to our clients' businesses. Any defects or errors in these solutions or
failure to meet clients' specifications or expectations could result in:
o delayed or lost revenues due to adverse client reaction;
o requirements to provide additional services to a client at no charge;
o negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients; and
o claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by the contractual terms
of our engagement.
THE INTERNET PROFESSIONAL SERVICES MARKET IS HIGHLY COMPETITIVE AND HAS LOW
BARRIERS TO ENTRY. IF WE CANNOT EFFECTIVELY COMPETE, OUR REVENUES MAY DECLINE
The Internet professional services market is relatively new and highly
competitive. Our competitors include a wide variety of Internet-focused
professional service firms, management consulting companies, traditional
information technology service firms, systems integration firms and internal IT
departments of our prospective clients. Additionally, there are relatively low
barriers to entry into the Internet professional services market. Current or
future competitors may develop or offer services that are comparable or superior
to ours at a lower price, which could significantly decrease our revenues.
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH MAY AFFECT OUR ABILITY TO MANAGE
AND MAINTAIN OUR BUSINESS AND MAY BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS
Since our inception, we have acquired a number of businesses. In the future, we
may undertake additional acquisitions of professional service firms that provide
Internet consulting or Internet software application design and implementation
services or other businesses that complement our existing operations. Such
acquisitions could involve a number of risks, including:
o the diversion of the attention of management and other key personnel;
o inability to effectively integrate the acquired business into our
culture, client delivery methodology and other standards, controls,
procedures and policies;
o inability to retain the management, key personnel and other employees of
the acquired business;
o inability to retain the acquired company's customers;
o client satisfaction problems with the acquired business that could affect
our reputation; and
o the amortization of goodwill, which may adversely affect our reported
results of operations.
In addition, any acquired business could significantly underperform relative to
our expectations.
WE FACE INCREASED RISKS IN CONDUCTING BUSINESS ABROAD WHICH MAY DAMAGE OUR
BUSINESS RESULTS
We are a multi-national corporation with offices and subsidiaries around the
world. We face certain risks in doing business abroad that we do not face
domestically. Among the international risks we believe are most likely to affect
us are:
o costs and difficulties in staffing and managing international operations;
o unexpected changes in and complexity of regulatory requirements;
o increased tariffs and other trade barriers;
o difficulties in enforcing contractual and intellectual property rights;
o longer payment cycles;
o local political and economic conditions;
o potentially adverse tax consequences, including restrictions on
repatriating earnings and the threat of "double taxation"; and
o currency issues, including fluctuations in current exchange rates and the
adoption of the Euro by many countries of the European Union.
WE MAY NOT BE ABLE TO PROTECT OUR CONTRACTUAL RIGHTS, WHICH MAY ADVERSELY AFFECT
OUR BUSINESS
We generally enter into contractual relationships with our employees that
protect our confidential information, and impose non-solicitation obligations on
those employees. In the event that our trade secrets or other proprietary
information are misappropriated, our business could be seriously harmed. In
addition, we may not be able to detect unauthorized use of our intellectual
property and take appropriate steps to enforce our rights. In the event we are
unable to enforce these contractual obligations, our business could be adversely
affected.
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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 not material to the Company.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
------- -----------------
On November 18, 1998, certain of the former stockholders of Excell Data
Corporation ("Excell") filed a lawsuit against the Company in the United States
District Court for the District of Massachusetts ("District Court"). The
complaint alleged breach of contract, violation of federal securities laws,
common law fraud, and negligent misrepresentation in connection with the Excell
acquisition and sought unspecified damages. In February 1999, the Company filed
a counterclaim against the former stockholders of Excell which alleges breach of
contract. On March 1, 2000, the District Court granted the Company's motion for
summary judgement, dismissing the complaints of the former shareholders of
Excell in their entirety. On October 18, 2000, the parties entered into a
settlement agreement waiving the plaintiff's right to appeal, dismissing the
Company's counterclaim, and concluding the litigation in its entirety.
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 United States District Court for the District of Massachusetts ("District
Court"). These suits have since been consolidated by the District 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 has moved to dismiss the plaintiffs' complaint.
The motion is currently pending, with oral argument before the District Court
scheduled for December 4, 2000.
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.
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<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
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(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.
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, 2000.
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<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 14, 2000 By: /s/ John J. Gavin, Jr.
-------------------------------
John J. Gavin, Jr.
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas G. Mackiewicz
-------------------------------
Thomas G. Mackiewicz
Vice President, Controller and
Chief Accounting Officer
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<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.
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.
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