<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 MARCH 28, 1997
OR
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-25746
RENAISSANCE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3150009
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lincoln North
55 Old Bedford Road
Lincoln, MA 01773
(Address of principal executive offices)
Telephone Number (617) 259-8833
(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 April 30, 1997 there were 9,467,045 shares of the Registrant's Common
Stock, $.0001 par value per share, outstanding.
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<PAGE>
RENAISSANCE SOLUTIONS, INC.
Form 10-Q For The Fiscal Quarter Ended March 28, 1997
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
ITEM 1. Financial Statements:
Consolidated Statements of Income for the three
months ended March 28, 1997 and March 29, 1996 . . . . . . . . 3
Consolidated Balance Sheets as of
March 28, 1997 and December 31, 1996 . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
three months ended March 28, 1997 and March 29, 1996 . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 8
<CAPTION>
PART II. OTHER INFORMATION PAGE NO.
--------
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 10
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE>
RENAISSANCE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 28, 1997 March 29, 1996
--------------- ---------------
<S> <C> <C>
Revenues $17,475 $11,468
----------- -----------
Cost and expenses:
Professional personnel............................ 9,621 7,071
Professional development and recruiting........... 723 570
Marketing and sales............................... 508 324
General and administrative........................ 3,398 2,298
----------- -----------
Total costs and expenses............................ 14,250 10,263
----------- -----------
Income from operations................................ 3,225 1,205
Interest expense...................................... (30) (47)
Interest income....................................... 633 142
----------- -----------
Income before income taxes............................ 3,828 1,300
Income taxes.......................................... 1,611 579
----------- -----------
Net income............................................ $ 2,217 $ 721
=========== ===========
Pro forma data:
Historical income before pro forma adjustments........ $ 1,300
Pro forma adjustment to officer's salary.............. 68
-----------
Pro forma income before income taxes.................. 1,368
-----------
Historical provision for income taxes................. 579
-----------
Additional pro forma provision for income taxes....... 0
Pro forma income taxes................................ 579
-----------
Pro forma net income.................................. $ 789
===========
Net income per share.................................. $ 0.23 $ 0.10
=========== ===========
Weighted average number of common and common
equivalent shares outstanding......................... 9,711 7,884
=========== ===========
</TABLE>
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RENAISSANCE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited-amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 28, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................. $13,404 $49,415
Marketable securities................................................. 23,142 17,910
Accounts receivable, net.............................................. 18,488 7,765
Unbilled services, net................................................ 3,206 2,057
Deferred tax asset.................................................... 244 560
Prepaid expenses and other current asset.............................. 1,800 826
----------- ----------
Total current assets................................................ 60,284 78,533
----------- ----------
Property and equipment, net.............................................. 4,825 3,977
Goodwill, net............................................................ 27,900 ---
Other assets............................................................. 105 72
----------- ----------
Total assets........................................................ $93,114 $82,582
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings................................................. $ 500 $ 500
Current portion of note payable....................................... --- 782
Note payable to officers/shareholders................................. --- 500
Accounts payable and accrued liabilities.............................. 5,779 2,642
Accrued payroll and related costs..................................... 3,708 1,775
Advanced payments..................................................... 302 879
Income taxes payable.................................................. 318 120
Accrued acquisition costs............................................. 3,585 3,131
----------- ----------
Total current liabilities........................................... 14,192 10,329
Deferred tax liability................................................... 481 431
Other liabilities........................................................ 195 181
----------- ----------
Total liabilities................................................... 14,868 10,941
----------- -----------
Stockholders' equity.....................................................
Preferred stock, $.01 par value, authorized --- ---
2,000,000 shares, none issued.......................................
Common stock, $.0001 par value, authorized 20,000,000
shares, issued and outstanding 9,710,669 and 9,243,594
shares at 1997 and 1996, respectively............................... 1 1
Additional paid in capital............................................ 69,612 64,897
Cumulative translation adjustments.................................... 59 264
Unrealized gain (loss) on marketable securities....................... (140) (18)
Retained earnings..................................................... 8,714 6,497
----------- -----------
Stockholders' equity................................................ 78,246 71,641
----------- -----------
Total............................................................... $93,114 $82,582
=========== =============
</TABLE>
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RENAISSANCE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 28, 1997 March 29, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 2,217 $ 721
Adjustments to reconcile net income to net cash:
Depreciation and amortization............................................ 496 218
Deferred income taxes.................................................... (102) ---
Change in:
Accounts receivable, net.............................................. (6,409) (4,705)
Unbilled services, net................................................ (950) (25)
Receivable from officers/shareholders................................. --- 278
Prepaid expenses and other current assets............................. (817) (465)
Other assets.......................................................... (33) ---
Accounts payable and accrued liabilities.............................. 277 952
Accrued payroll and related costs..................................... (310) (320)
Advanced payments..................................................... (577) (340)
Accrued income taxes.................................................. 195 325
Accrued acquisition costs............................................. 454 ---
Increase in other liabilities......................................... 14 14
----------- -----------
Net cash used for operating activities................................... (5,545) (3,347)
----------- -----------
Cash flows from investing activities:
Sales (purchases) of marketable securities............................ (5,354) 3,554
Expenditures for property and equipment............................... (131) (770)
Cash paid for the acquisition of COBA Consulting Limited.............. (13,424)
Cash paid for the acquisition of C.M. Management Systems
Ltd., Inc............................................................. (10,943)
----------- -----------
Net cash flows (used for) provided by investing activities............ (29,852) 2,784
----------- -----------
Cash flows from financing activities:
Issuance of common stock, net......................................... 873 377
Repayment of note payable to officer/shareholder...................... (500) 5
Payment on note payable............................................... (782) ---
Increase in deferred offering costs................................... --- (85)
----------- -----------
Net cash (used for) provided by financing activities.................. (409) 297
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents.............................................................. (205) (48)
----------- -----------
Decrease in cash and cash equivalents.................................... (36,011) (314)
Cash and cash equivalents, beginning of period........................... 49,415 6,159
----------- -----------
Cash and cash equivalents, end of period................................. $ 13,404 $ 5,845
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid......................................................... $ 30 $ 47
=========== ===========
Income taxes paid..................................................... $ 1,008 $ 282
=========== ===========
</TABLE>
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<PAGE>
RENAISSANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements at March 28, 1997 and for the three
months ended March 28, 1997 and March 29, 1996 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, included in the Company's 1996 Annual Report on Form 10-K/A.
The results of operations for the three months ended March 28, 1997 are not
necessarily indicative of the results for the entire fiscal year ending
December 31, 1997 or for any subsequent period.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements of the Company for the three months ended March 29,
1996 have been restated to give retroactive effect to the acquisition of
International Systems Services Corporation (ISS) on December 31, 1996 as a
pooling-of-interests.
INCOME TAXES
Prior to its acquisition by the Company, ISS was an S corporation for
income tax purposes. Accordingly, no federal or state income tax provision
was required for ISS for the three months ended March 29, 1996.
PRO FORMA DATA
The pro forma data is presented to show the effects on 1996 of the
contractual reduction of the compensation of an officer of ISS following
the acquisition of ISS and the income taxes that would have been provided
for in 1996 on pro forma income before taxes if ISS had been a C
corporation. Net income per share for the three months ended March 29, 1996
is based on pro forma net income. The pro forma data is presented for
informational purposes only and is not necessarily indicative of future net
income or net income per share.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company is required to adopt SFAS 128 in the fourth quarter of fiscal
1997 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier adoption is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock.
If SFAS 128 had been in effect during the current and the prior period,
basic EPS would have been $0.24 and $0.11 for the three months ended March
28, 1997 and March 29, 1996, respectively. Diluted EPS under SFAS 128 would
not have been significantly different than primary EPS currently reported
for the periods presented.
-6-
<PAGE>
2. ACQUISITIONS
On February 3, 1997, the Company acquired all of the outstanding voting
capital stock of COBA Consulting Limited ("COBA-U.K.") for $11,900,000 in
cash, plus 163,160 shares of Common Stock valued at $3,842,000 as of the
date of acquisition. The 163,160 shares of Common Stock are restricted as
to their disposition by the stockholders for a period of two years
following the date of closing. The Company will also acquire certain non-
voting, convertible shares of COBA-U.K. in 1998 and 1999 for a purchase
price, as defined by the Stock Purchase Agreement dated January 27, 1997,
based on COBA-U.K.'s actual financial performance for the years ending
December 31, 1997 and 1998. The maximum additional purchase price, which
may include shares of Common Stock of the Company at the Company's option,
is $12,600,000. This acquisition was accounted for as a purchase and the
total purchase price of $17,266,000, including expenses of $1,524,000, was
allocated to the assets acquired and the liabilities assumed based upon
their estimated fair values. This allocation resulted in goodwill of
$17,150,000 (which will increase for any future cash payments or issuance
of shares) which is being amortized over 25 years. COBA-U.K.'s results of
operations have been included in the consolidated results since the date of
acquisition.
On February 13, 1997, the Company acquired all of the outstanding capital
stock of C.M. Management Systems Ltd., Inc. ("COBA-Boston") for $9,250,000
in cash. The Company may be required to pay an additional amount of up to a
maximum of $18,500,000 in cash and/or shares of Common Stock, at the
Company's option, determined based on COBA-Boston's actual financial
performance for the years ending December 31, 1997 and 1998. This
acquisition was accounted for as a purchase and the total purchase price of
$10,943,000, including expenses of $1,693,000, was allocated to the assets
acquired and the liabilities assumed based upon their estimated fair
values. This allocation resulted in goodwill of $10,940,000 (which will
increase for any future cash payments or issuance of shares) which is being
amortized over 25 years. COBA-Boston's results of operations have been
included in the consolidated results since the date of acquisition.
Prior to their acquisition by Renaissance, both COBA-U.K. and COBA-Boston
were parties to a joint marketing arrangement with a network of consulting
firms in Europe and Asia (the "COBA Network"). No stockholder, director or
officer of COBA-U.K. was also a stockholder, director or officer of COBA-
Boston. Renaissance anticipates that both COBA-U.K. and COBA-Boston will
continue to participate in the COBA Network as subsidiaries of the Company.
The consolidated results of operations on a pro forma basis as though COBA-
U.K. and COBA-Boston had been acquired as of the beginning of the periods
presented and the contractual reduction of the compensation of an officer
of ISS and income taxes that would have been provided if ISS had been a
C corporation for the 1996 period presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 28, 1997 March 29, 1996
-------------- --------------
<S> <C> <C>
Revenue 19,763 18,051
Net income 2,121 789
Net income per share 0.22 0.10
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not indicative of the operating results that would have
occurred had the COBA-U.K. and COBA-Boston acquisitions been consummated as
of the above dates, nor are they necessarily indicative of future operating
results.
-7-
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
The Company derives substantially all of its revenues from management consulting
and client/server systems integration services. The Company markets its services
directly and under a Teaming Agreement with Gemini Consulting, Inc. ("Gemini").
During the three months ended March 28, 1997, the Company effected two
acquisitions. The Company acquired COBA-U.K. on February 3, 1997 and acquired
COBA-Boston on February 13, 1997. These two acquisitions were accounted for as
purchases and COBA-U.K.'s and COBA-Boston's results of operations have been
included in the consolidated results since the dates of acquisition. The
consolidated financial statements of the Company for the three months ended
March 29, 1996 have been restated to give retroactive effect to the acquisition
of International Systems Services Corporation (ISS) on December 31, 1996 as a
pooling-of-interests.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are the factors set forth in the Company's Annual
Report on Form 10-K under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results," which are incorporated by reference herein.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to revenues of certain items in the Company's consolidated
statements of income.
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 28, 1997 March 29, 1996
--------------- ---------------
<S> <C> <C>
Statement of Income Data:
Revenues.......................................................... 100.0% 100.0%
--------------- ---------------
Cost and expenses:
Professional personnel............................................ 55.1% 61.7%
Professional development and recruiting........................... 4.1% 5.0%
Marketing and sales............................................... 2.9% 2.8%
General and administration........................................ 19.4% 20.0%
--------------- ---------------
Total cost and expenses........................................... 81.5% 89.5%
--------------- ---------------
Income from operations............................................ 18.5% 10.5%
Interest expense.................................................. -0.2% -0.4%
Interest income................................................... 3.6% 1.2%
--------------- ---------------
Income before income taxes........................................ 21.9% 11.3%
Income taxes...................................................... 9.2% 5.0%
--------------- ---------------
Net income........................................................ 12.7% 6.3%
=============== ===============
Pro forma data:
Historical income before pro forma adjustments.................... 11.3%
Pro forma adjustment to officer's salary.......................... 0.6%
---------------
Pro forma income before income taxes.............................. 11.9%
Historical provision for income taxes............................. 5.0%
Additional pro forma provision for income taxes................... ---
---------------
Pro forma income taxes............................................ 5.0%
---------------
Pro forma net income.............................................. 6.9%
===============
</TABLE>
Revenues increased 52% to $17.5 million for the three months ended March 28,
1997 from $11.5 million for the three months ended March 29, 1996. This
increase was primarily attributable to the inclusion of COBA-U.K. and
-8-
<PAGE>
COBA-Boston revenues in the 1997 period from the respective acquisition closing
dates. Increased revenues from the Company's pre-existing client base and the
addition of new clients also contributed to the revenue increase. Revenues
attributable to the Company's relationship with Gemini represented 25% and 36%
of revenues in the 1997 and 1996 periods, respectively. For the six month period
ended April 30, 1997, bookings attributable to Gemini under the Teaming
Agreement were estimated at approximately $5.7 million, which represented a
deficiency of approximately $300,000 from Gemini's bookings commitment (as
defined in the Teaming Agreement) to be confirmed for such period.
Professional personnel costs increased 36% in the first quarter of 1997 to $9.6
million, or 55% of revenues, from $7.1 million, or 62% of revenues, in the first
quarter of 1996. The number of full-time equivalent professional employees
increased to 326 at March 28, 1997 from 190 at March 29, 1996. The increase in
personnel costs primarily resulted from the addition of personnel in connection
with the COBA-U.K. and COBA-Boston acquisitions and, to a lesser extent, salary
increases. The Company's first quarter personnel costs historically are higher
than such costs in other quarters due to the impact of FICA taxes resulting from
the payment of prior year bonuses in the first quarter.
Professional development and recruiting costs increased 27% in the first quarter
of 1997 to $723,000, or 4% of revenues, from $570,000, or 5% of revenues, in the
first quarter of 1996. This increase reflected substantially higher spending
for training and staff development, particularly in connection with the
integration of ISS, COBA-U.K. and COBA-Boston personnel, offset in part by lower
expenditures on employee recruiting and relocation.
Marketing and sales expenses increased 57% in the first quarter of 1997 to
$508,000, or 3% of revenues, from $324,000, also 3% of revenues, in the first
quarter of 1996. This increase reflected inclusion in the 1997 period of COBA-
U.K. and COBA-Boston marketing and sales expenses from the respective
acquisition closing dates. The Company expects marketing and sales expenses to
increase in the future as the Company heightens its efforts to promote its
existing brand names and the COBA name and expands its independent marketing
initiatives.
General and administrative expenses increased 48% in the first quarter of 1997
to $3.4 million, or 19% of revenues, from $2.3 million, or 20% of revenues, in
the first quarter of 1996. This increase resulted primarily from the inclusion
of general and administrative expenses of COBA-U.K. and COBA-Boston from the
respective acquisition closing dates.
Income from operations as a percentage of revenues increased to 18.5% in the
1997 period from 10.5% in the 1996 period primarily as a result of lower
combined costs following the COBA-U.K. and COBA-Boston acquisitions.
Interest expense declined 36% in the first quarter of 1997 to $30,000, or 0.2%
of revenues, from $47,000, or 0.4% of revenues, for the first quarter of 1996.
Interest income increased 346% in the first quarter of 1997 to $633,000, or 4%
of revenues, from $140,000, or 1% of revenues, for the first quarter of 1996.
The increase in interest income was primarily the result of higher cash balances
from cash generated by operations and the net proceeds of the Company's follow-
on public offerings of Common Stock in May and November of 1996. Interest
income consists of interest earned on the Company's cash, cash equivalents and
marketable securities.
The provisions for income taxes in the first quarter of 1997 was $1.6 million,
or 42%, compared with a tax provision of $579,000, or 44%, in the first quarter
of 1996. The Company expects that its effective tax rate will remain constant
in future periods as a result of the incurrence of non-deductible costs in
connection with the COBA-U.K. and COBA- Boston acquisitions.
The pro forma data presented show the effect on the 1996 period of the
contractual reduction in the compensation of an ISS officer, following the ISS
acquisition, of $68,000 (which was included in professional personnel costs
in 1996).
Liquidity and Capital Resources
The Company used net cash of $5,545,000 for operating activities in the first
quarter of 1997. Factors affecting the net cash used for operating activities
in this period included an increase in depreciation and amortization (primarily
as a result of the amortization of goodwill recorded in connection with the
COBA-U.K. and COBA-Boston acquisitions), increases in accounts receivable and
unbilled services (reflecting both the COBA-U.K. and COBA-Boston acquisitions
and longer days outstanding and slower billing as part of the changeover of ISS,
COBA-U.K. and COBA-Boston to the Company's revenue management system), an
increase in prepaid expenses and other current assets (primarily as a result of
the COBA-U.K. and COBA-Boston acquisitions), a decrease in accounts payable
and other accrued liabilities (reflecting the timing of payments by the
Company), and an increase in
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<PAGE>
accrued acquisition costs in anticipation of certain expenses to be incurred in
connection with the COBA-U.K. and COBA-Boston acquisitions in the future.
The Company used a total $24,367,000 in cash as a portion of the purchase prices
of the COBA-U.K. and COBA-Boston acquisitions. The Company also issued 163,160
shares of Common Stock in connection with the COBA-U.K. acquisition. The
Company used cash of $1,280,000 in the 1997 period to repay loans relating to
ISS.
Management believes that funds generated by operations, existing cash balances
(including proceeds from the Company's initial and follow-on public offerings)
and borrowings under the bank lines, will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next
twelve months. Thereafter, the Company's liquidity will be materially dependent
upon its internally generated funds and its ability to obtain funds from
financings from external sources, in the form of either additional equity or
indebtedness. The Company's ability to borrow will be a function of the level
of its internally generated funds and the assets of its business that are
available to serve as collateral, which will consist primarily of accounts
receivable.
Item 3 Not applicable
PART II. OTHER INFORMATION
Item 1 None
Item 2 Changes in Securities
On February 3, 1997, the Company issued 163,160 shares of Common
Stock to certain shareholders of COBA-U.K. in connection with its
acquisition of COBA-U.K. (the "COBA-U.K. Acquisition"). The value of
such shares as of the close of business on February 3, 1997 (after
giving effect to disposition restrictions) was $3,842,000. These
securities were issued by the Company in reliance on Section 4(2) of
the Securities Act of 1933, as amended, as the COBA-U.K. Acquisition
did not involve a public offering.
Items 3-5 None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 2 to Employment Agreement, dated January 31,
1997, by and among the Company and Harry M. Lasker.
10.2 Amendment No. 2 to Employment Agreement, dated January 31,
1997, by and among the Company and David A. Lubin.
10.3 Amendment No. 2 to Employment Agreement, dated January 31,
1997, by and among the Company and David P. Norton.
11. Statement Regarding Computation of Earnings per Share.
27. Financial Data Schedule.
99. Pages 30 through 36 of the Company's Annual Report on Form
10-K for the period ended December 31, 1996 (which is not
deemed to be filed except to the extent that portions
thereof are expressly incorporated by reference herein).
(b) Reports on Form 8-K
On January 15, 1997, the Company filed a Current Report on Form
8-K, dated December 31, 1996 (the "Effective Date") (the "ISS
Form 8-K"), announcing under Item 2 (Acquisition or Disposition
of Assets) that the Company had acquired ISS pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") among the
Company, ISS, Artist Acquisition Corp., a wholly-owned
subsidiary of the Company (the "Merger Subsidiary")and O. Bruce
Gupton. Pursuant to the Merger Agreement, the Merger Subsidiary
was merged with and into ISS on the Effective Date, whereupon
ISS became a wholly-owned subsidiary of the Company. No
financial statements were required or filed in connection with
the ISS Form 8-K.
On February 18, 1997, the Company filed a Current Report on Form
8-K, dated February 3, 1997 (the "COBA-U.K. Form 8-K"),
announcing under Item 2 (Acquisition
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<PAGE>
or Disposition of Assets) that the Company had acquired all of
the voting shares of COBA-U.K. pursuant to a Stock Purchase
Agreement dated as of January 27, 1997 between the Company and
certain holders of COBA-U.K. common stock. No financial
statements were required or filed in connection with the COBA-
U.K. Form 8-K.
On February 21, 1997, the Company filed an Amendment No. 1 on
Form 8-K/A to the COBA-U.K. Form 8-K for the purpose of filing an
additional exhibit to such Form 8-K which was erroneously
omitted.
On February 28, 1997, the Company filed a Current Report on Form
8-K, dated February 13, 1997 (the "COBA - Boston Form 8-K),
announcing under Item 2 (Acquisition or Disposition of Assets)
that the Company had acquired all of the capital stock of C.M.
Management Consulting Ltd. Inc. ("COBA - Boston") pursuant to a
Stock Purchase Agreement among the Company and the stockholders
of COBA - Boston. No financial statements were required or filed
in connection with the COBA - Boston Form 8-K.
On February 28, 1997, the Company filed a Current Report on Form
8-K, dated February 28, 1997, announcing under Item 5 (Other
Events) the Company's revenues and net income for the 31-day
period ended January 31, 1997. No financial statements were
required or filed in connection with this Current Report on Form
8-K.
-11-
<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.
RENAISSANCE SOLUTIONS, INC.
(Registrant)
DATED: May 9, 1997
/S/David P. Norton
------------------------------------------
David P. Norton
President and Chief Executive Officer
(Principal Executive Officer)
DATED: May 9, 1997
/S/William T. Jenkins
------------------------------------------
William T. Jenkins
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-12-
<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.
RENAISSANCE SOLUTIONS, INC.
(Registrant)
DATED: May 12, 1997
/S/David P. Norton
------------------------------------------
David P. Norton
President and Chief Executive Officer
(Principal Executive Officer)
DATED: May 12, 1997
/S/William T. Jenkins
------------------------------------------
William T. Jenkins
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-12-
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into as of the 31st day of January, 1997, by and between Renaissance Solutions,
Inc. (the "Corporation") and Harry M. Lasker (the "Employee").
Whereas, the Corporation and the Employee are parties to an Employment
Agreement dated as of January 31, 1995, as amended by Amendment No. 1 to
Employment Agreement, dated as of July 1, 1996; and
Whereas, pursuant to Section 1 of the Employment Agreement, the term of the
Employment Agreement is two years; and
Whereas, the Corporation and the Employee desire to extend the term of the
Employment Agreement by an additional year;
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 1 of the Employment Agreement is hereby amended and restated
in its entirety to read as follows:
"1. Term of Employment. The Corporation hereby agrees to employ the
------------------
Employee, and the Employee hereby accepts employment with the
Corporation, upon the terms set forth in this Agreement, for the
period commencing on the date hereof (the "Commencement Date") and
ending on the third anniversary of the date hereof, unless earlier
terminated in accordance with the provisions of Section 4 hereof (such
period being hereinafter referred to as the "Employment Period").
Each of the one-year periods commencing on the Commencement Date and
on each of the first and second anniversaries thereof is referred to
herein as an "Employment Year.""
2. The second sentence of Section 3.1 of the Employment Agreement is
hereby amended and restated in its entirety to read as follows:
"The Board of Directors may increase, but not decrease the annual base
salary for the second or third Employment Year."
3. In all other respects, the Employment Agreement are hereby ratified
and shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year set forth above.
RENAISSANCE SOLUTIONS, INC.
By: /s/ William T. Jenkins
-------------------------------------
Title: Vice President Finance and
Administration
EMPLOYEE:
/s/ Harry M. Lasker
----------------------------------------
Harry M. Lasker
-2-
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into as of the 31st day of January, 1997, by and between Renaissance Solutions,
Inc. (the "Corporation") and David A. Lubin (the "Employee").
Whereas, the Corporation and the Employee are parties to an Employment
Agreement dated as of January 31, 1995, as amended by Amendment No. 1 to
Employment Agreement, dated as of July 1, 1996; and
Whereas, pursuant to Section 1 of the Employment Agreement, the term of the
Employment Agreement is two years; and
Whereas, the Corporation and the Employee desire to extend the term of the
Employment Agreement by an additional year;
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 1 of the Employment Agreement is hereby amended and restated
in its entirety to read as follows:
"1. Term of Employment. The Corporation hereby agrees to employ the
------------------
Employee, and the Employee hereby accepts employment with the
Corporation, upon the terms set forth in this Agreement, for the
period commencing on the date hereof (the "Commencement Date") and
ending on the third anniversary of the date hereof, unless earlier
terminated in accordance with the provisions of Section 4 hereof (such
period being hereinafter referred to as the "Employment Period").
Each of the one-year periods commencing on the Commencement Date and
on each of the first and second anniversaries thereof is referred to
herein as an "Employment Year.""
2. The second sentence of Section 3.1 of the Employment Agreement is
hereby amended and restated in its entirety to read as follows:
"The Board of Directors may increase, but not decrease the annual base
salary for the second or third Employment Year."
3. In all other respects, the Employment Agreement are hereby ratified
and shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year set forth above.
RENAISSANCE SOLUTIONS, INC.
By: /s/ William T. Jenkins
-------------------------------------
Title: Vice President Finance and
Administration
EMPLOYEE:
/s/ David A. Lubin
----------------------------------------
David A. Lubin
-2-
<PAGE>
EXHIBIT 10.3
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (the "Amendment") is entered
into as of the 31st day of January, 1997, by and between Renaissance Solutions,
Inc. (the "Corporation") and David P. Norton (the "Employee").
Whereas, the Corporation and the Employee are parties to an Employment
Agreement dated as of January 31, 1995, as amended by Amendment No. 1 to
Employment Agreement, dated as of July 1, 1996; and
Whereas, pursuant to Section 1 of the Employment Agreement, the term of the
Employment Agreement is two years; and
Whereas, the Corporation and the Employee desire to extend the term of the
Employment Agreement by an additional year;
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 1 of the Employment Agreement is hereby amended and restated
in its entirety to read as follows:
"1. Term of Employment. The Corporation hereby agrees to employ the
------------------
Employee, and the Employee hereby accepts employment with the
Corporation, upon the terms set forth in this Agreement, for the
period commencing on the date hereof (the "Commencement Date") and
ending on the third anniversary of the date hereof, unless earlier
terminated in accordance with the provisions of Section 4 hereof (such
period being hereinafter referred to as the "Employment Period").
Each of the one-year periods commencing on the Commencement Date and
on each of the first and second anniversaries thereof is referred to
herein as an "Employment Year.""
2. The second sentence of Section 3.1 of the Employment Agreement is
hereby amended and restated in its entirety to read as follows:
"The Board of Directors may increase, but not decrease the annual base
salary for the second or third Employment Year."
3. In all other respects, the Employment Agreement are hereby ratified
and shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year set forth above.
RENAISSANCE SOLUTIONS, INC.
By: /s/ William T. Jenkins
-------------------------------------
Title: Vice President Finance and
Administration
EMPLOYEE:
/s/ David P. Norton
----------------------------------------
David P. Norton
-2-
<PAGE>
EXHIBIT 11
RENAISSANCE SOLUTIONS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited - Amount in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 28, 1997 March 29, 1996
-------------- --------------
<S> <C> <C>
Weighted average number of common and common
equivalent shares outstanding:
Common stock................................ 9,366 7,299
Stock Options (treasury stock method)....... 345 600
-------------- --------------
Total..................................... 9,711 7,899
============== ==============
Net income per common share.................... $ .23 $ .10
============== ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENT OF RENAISSANCE SOLUTIONS, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-28-1997 MAR-29-1996
<CASH> 13,404 49,415
<SECURITIES> 23,142 17,910
<RECEIVABLES> 21,939 10,285
<ALLOWANCES> 245 463
<INVENTORY> 0 0
<CURRENT-ASSETS> 60,284 78,533
<PP&E> 6,186 6,186
<DEPRECIATION> 1,361 2,136
<TOTAL-ASSETS> 93,114 82,582
<CURRENT-LIABILITIES> 14,192 10,329
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 78,245 71,641
<TOTAL-LIABILITY-AND-EQUITY> 93,114 82,582
<SALES> 0 0
<TOTAL-REVENUES> 17,475 11,468
<CGS> 0 0
<TOTAL-COSTS> 14,250 10,263
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30 47
<INCOME-PRETAX> 3,828 1,300
<INCOME-TAX> 1,611 579
<INCOME-CONTINUING> 2,217 721
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,217 721
<EPS-PRIMARY> 0.23 0.10
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99 Pages 30 through 36 of the Company's Annual Report on Form 10-K
for the period ended December 31, 1996.
<PAGE>
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
Risks Associated with Acquisitions. The Company's strategy includes the
acquisition of businesses, products and technologies that are complementary to
those of the Company. Promising acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective
buyers. In furtherance of this strategy, in late 1996 and early 1997 the Company
acquired three businesses, ISS, COBA-UK and COBA-Boston. There can be no
assurance that the Company will be able to complete future acquisitions or that
the Company will be able to successfully integrate these and any future acquired
businesses, and the failure of the Company to integrate any acquired businesses
could have a material adverse effect on the Company's business and results of
operations. In order to finance any such future acquisitions, it may be
necessary for the Company to raise additional funds through public or private
financings. Any equity or debt financing, if available at all, may be on terms
which are not favorable to the Company and, in the case of equity financing, may
result in dilution to the Company's stockholders.
Management of Growth. The Company is currently experiencing a period of
rapid growth which has placed and could continue to place a strain on the
Company's financial, management and other resources. From January 1, 1993
through December 31, 1996, the size of the Company's professional staff
increased from 17 to 208 full-time equivalent employees, and further increases
are anticipated. Since January 1, 1993, the Company has expanded geographically
by adding employees based in Atlanta, Georgia; Boston, Massachusetts; Chicago,
Illinois; San Francisco, California; Stamford, Connecticut; Washington D.C.; and
London, England. The Company intends to open additional domestic and
international offices as needed. The Company's ability to manage its staff and
facilities growth effectively will require it to continue to improve its
operational, financial and other internal systems and to train, motivate and
manage its employees. If the Company's management is unable to manage growth
effectively and new employees are unable to achieve anticipated performance
levels, the Company's business and results of operations could be adversely
affected.
Dependence on Gemini. Since 1993 the Company has been a party to the
Teaming Agreement with Gemini pursuant to which the Company and Gemini have
agreed to market and perform certain service offerings on a collaborative basis.
Approximately 44%, 34% and 31% of the Company's revenues in 1994, 1995 and 1996,
respectively, resulted from its relationship with Gemini; approximately 36%, 15%
and 21%, respectively, of revenues were from services and other amounts billable
to Gemini and approximately 8%, 19% and 10%, respectively, of revenues were from
services billable directly to third parties. As a result, the Company's success
is currently dependent in part on the success of Gemini's marketing efforts.
In November 1996, the Company and Gemini entered into the Restated
Teaming Agreement. Gemini has committed to provide the Company with certain
minimum bookings during the term of the Restated Teaming Agreement, subject to
the satisfaction of certain conditions. In the event that during any of the six
month periods during the term of the Restated Teaming Agreement bookings
obtained by Renaissance from Gemini customers or customers of joint service
offerings by Renaissance and Gemini are less than specified minimum commitment
levels, Gemini may retain the services of Renaissance for a fee equal to the
amount of the deficiency. If at the end of twelve months a bookings deficiency
still remains, Gemini is required to make a compensating payment to Renaissance
of 25% of the remaining deficiency in full satisfaction of the bookings
deficiency. Gemini's obligation to provide these bookings to the Company will
terminate in the event that any of Harry M. Lasker, David A. Lubin or David P.
Norton, the founders of the Company, ceases to be employed by the Company on a
full time basis during the term of the Restated Teaming Agreement. In such
event, the parties have agreed to negotiate in good faith to establish new
commitments for the remainder of the term of the Restated Teaming Agreement. In
addition, the amount of Gemini's bookings commitment is subject to adjustment as
a result of, among other things, any failure by Renaissance to make available to
Gemini such quantities of marketing and sales resources and such number of staff
for joint service offerings as may from time to time be mutually agreed upon by
the parties.
The Company monitors Gemini's progress in meeting its bookings
commitments through regular conference calls and meetings with Gemini
representatives. "Bookings" are generally defined for purposes of the Restated
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<PAGE>
Teaming Agreement as gross fees (excluding expense reimbursements) committed to
Renaissance as a result of the relationship with Gemini during the applicable
period, as evidenced by a written agreement between the Company and the customer
for the delivery of goods or services within twelve months, plus any such fees
actually collected by the Company during such period which are not evidenced by
a written agreement. Gemini generally is treated as having satisfied its
bookings commitment regardless of whether revenues are recognized by Renaissance
with respect to a particular engagement. For example, under the Restated Teaming
Agreement, 50% of the fees attributable to a cancelled contract count towards
Gemini's bookings commitment if such cancellation is not primarily attributable
to the actions or omissions of Gemini. In accordance with industry practice,
nearly all of the Company's contracts are terminable by either the customer or
the Company on short or no notice and without penalty. In addition, Gemini does
not guarantee the collectibility of any receivables resulting from customer
engagements under the Restated Teaming Agreement.
The Restated Teaming Agreement has a term ending on November 1, 1999.
The Restated Teaming Agreement is subject to earlier termination upon the
occurrence of certain events, including a change in control of the Company (as
defined in the Restated Teaming Agreement). In the event that the Restated
Teaming Agreement is validly terminated by either party prior to its expiration,
Renaissance is required to pay a termination fee to Gemini in an amount
declining from a maximum of $1.6 million in the event of a termination prior to
November 1, 1996 to a minimum of $250,000 in the event of a termination prior to
November 1, 1999. In addition, in such event, various payment obligations
contained in the Restated Teaming Agreement will terminate on the termination
date. While the Company is continuing to build its internal marketing force and
seeking additional strategic alliances, the termination of the Restated Teaming
Agreement could have a material adverse effect on the Company's business and
results of operations.
Under the Restated Teaming Agreement, the Company has agreed to train
Gemini in the use of the Company's Balanced Scorecard, desktop application and
certain other methodologies during the period ending October 31, 1998 and to
perpetually license these methodologies, to the extent developed prior to
November 1, 1998, to Gemini on a non-exclusive basis. As a result, during the
term of the Restated Teaming Agreement Gemini personnel may perform services in
connection with joint service offerings which might otherwise be performed by
Company personnel. In addition, following the termination of the Restated
Teaming Agreement, Gemini will be in a position to compete with the Company
using know-how and methodologies which might otherwise be proprietary to the
Company.
The Company's ability to obtain the benefit of the bookings commitments
under the Restated Teaming Agreement may be affected by Gemini's
creditworthiness. Under the terms of the Restated Teaming Agreement, Gemini is
not
-31-
<PAGE>
required to provide the Company with information regarding Gemini's financial
condition. Based on information made publicly available by an affiliate of
Gemini, the Company believes that Gemini experienced a significant decline in
sales and profits as well as capacity problems in 1995, and that Gemini's
results for the first quarter of 1996 were below its budget for such quarter.
In each of the four six month periods ended October 31, 1996, Gemini's
actual bookings were lower than the minimum bookings provided for under the
Teaming Agreement. During the six month period commenced on May 1, 1995 and
ended October 31, 1995, Gemini's bookings commitment (as defined in the Teaming
Agreement) to the Company was $8.25 million. The actual bookings for such
period, net of bookings applied to the prior period deficiency, totalled
approximately $1.9 million. Gemini satisfied the resulting $6.3 million
deficiency in the subsequent six month period through a combination of revenues
generated from client work referred to Renaissance by Gemini, work performed by
Renaissance as a subcontractor for Gemini, work performed by Renaissance
directly for Gemini and the acquisition by Gemini from the Company of certain
Company program designs and related materials. During the six month period
commenced on November 1, 1995 and ended April 30, 1996, Gemini's bookings
commitment to the Company was $7.0 million. The actual bookings for the period,
net of bookings applied to the prior period deficiency, totalled approximately
$1.2 million. Gemini issued to Renaissance a purchase order for the deficiency
of approximately $5.8 million. This purchase order was satisfied by Gemini in
the subsequent six month period through a combination of revenues generated from
client work referred to Renaissance by Gemini of approximately $4.0 million and
a cash payment by Gemini to Renaissance of $750,000 in the third fiscal quarter
of 1996 in satisfaction of the remaining $1.8 million purchase order obligation.
The Company's net income for the third fiscal quarter of 1996 was favorably
affected by this cash payment which was included in revenues and had no
incremental cost associated with it. During the six month period commenced on
May 1, 1996 and ended on October 31, 1996, Gemini's bookings commitment to the
Company was $8.0 million. Approximately $4.1 million in revenues generated from
the $5.2 million in bookings in this six month period were applied to satisfy
the prior period deficiency. Pursuant to the terms of the Restated Teaming
Agreement, Gemini satisfied the resulting bookings deficiency for the period
ending October 31, 1996 with a one-time payment by Gemini to Renaissance of
approximately $1.5 million.
Concentration of Revenues. The Company has in the past derived, and may
in the future derive, a significant portion of its revenues from a relatively
limited number of major projects. In 1994, 1995 and 1996, revenues from services
and other amounts billable to Gemini accounted for approximately 36%, 15% and
21%, respectively, of the Company's total revenues. Revenues from services
billable to Gemini in 1994 include revenues from services
-32-
<PAGE>
provided to CIGNA Corporation ("CIGNA") by the Company as a subcontractor on
behalf of Gemini pursuant to the Teaming Agreement. These revenues from services
provided to CIGNA accounted for approximately 25% of the Company's total
revenues in 1994. In addition, revenues from services billable to divisions of
AT&T and to Mobil Corporation accounted for approximately 8% and 7%,
respectively, of the Company's total revenues in 1994 and revenues from services
billable to divisions of AT&T and to CIGNA accounted for approximately 23% and
8%, respectively, of the Company's total revenues in 1995. In 1996, revenues
from services billable to operating companies of AT&T accounted for
approximately 26% of the Company's total revenues. The Company anticipates that
revenues from operating companies of AT&T will decrease in the future because
several engagements for this group of clients have been completed. The Company's
revenues and earnings can fluctuate from quarter to quarter based on the number
of customer engagements and the requirements of these engagements. In accordance
with industry practice, nearly all of the Company's contracts are terminable by
either the customer or the Company on short or no notice and without penalty. An
unanticipated termination of a major project could have a material adverse
effect on the Company's business and results of operations.
Variability of Quarterly Operating Results. Variations in the Company's
revenues and operating results occur from quarter to quarter as a result of a
number of factors. Quarterly revenues and operating results can depend on the
size of customer engagements during a quarter, the number of working days in a
quarter and employee utilization rates. The timing of revenues is difficult to
forecast because the Company's sales cycle is relatively long in the case of new
customers and may depend on factors such as the size and scope of assignments
and general economic conditions. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the level of customer assignments
can cause significant variations in
-33-
<PAGE>
operating results from quarter to quarter and could result in losses. The
Company attempts to manage its personnel utilization rates by closely monitoring
project timetables and staffing requirements for new projects. While the number
of professional staff may be adjusted to some degree to reflect active projects,
the Company must maintain a sufficient number of senior professionals to oversee
existing customer projects and participate in securing new customer engagements.
In addition, most of the Company's engagements are terminable without customer
penalty. An unanticipated termination of a major project could result in an
increase in underutilized employees and a decrease in revenues and profits or
the incurrence of losses.
Need to Develop New Offerings. The Company's future success will depend
in significant part on its ability to successfully develop and introduce new
service offerings and improved versions of existing service offerings. There can
be no assurance that the Company will be successful in developing, introducing
on a timely basis and marketing such service offerings or that any service
offerings will be accepted in the market. Moreover, services offered by others
may render the Company's services non-competitive or obsolete.
Project Risks. Many of the Company's engagements involve projects which
are critical to the operations of its customers' businesses and which provide
benefits that may be difficult to quantify. The Company's failure or inability
to meet a customer's expectations in the performance of its services could
result in the incurrence by the Company of a financial loss and could damage the
Company's reputation and adversely affect its ability to attract new business.
In addition, an unanticipated difficulty in completing a project could have an
adverse effect on the Company's business and results of operations. Fees for the
Company's engagements typically are based on the project schedule, Renaissance
staffing requirements, the level of customer involvement and the scope of the
project as agreed upon with the customer at the project's inception. The Company
generally seeks to obtain an adjustment in its fees in the event of any
significant change in any of the assumptions upon which the
-34-
<PAGE>
original estimate was based. However, there can be no assurance that the Company
will be successful in obtaining any such adjustment in the future.
Attraction and Retention of Key Personnel; Dependence on Founders. The
Company's business involves the delivery of professional services and is labor
intensive. The Company's success will depend in large part upon its ability to
attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company. Although the Company expects to continue to attract and
retain sufficient numbers of highly skilled employees for the foreseeable
future, there can be no assurance that the Company will be able to do so. The
loss of any of the Company's three founders or other key personnel could have a
material adverse effect on the Company's business and results of operations,
including its ability to attract employees and secure and complete engagements.
Competition. The management consulting and client/server systems
integration markets are subject to rapid change and are highly competitive. The
Company competes with and faces potential competition for customer assignments
and experienced personnel from a number of companies that have significantly
greater financial, technical and marketing resources, generate greater revenues
and have greater name recognition than does the Company. In addition, the
management consulting and client/server systems integration markets are highly
fragmented and served by numerous firms, many of which serve only their
respective local markets. The Company's customers primarily consist of major
corporations, and there are an increasing number of professional services firms
seeking management consulting and client/server systems integration engagements
from that customer base. The Company believes that the principal competitive
factors in the management consulting and client/server systems integration
industries include the nature of the services offered, quality of service,
responsiveness to customer needs, experience,
-35-
<PAGE>
technical expertise and price. There can be no assurance that the Company will
continue to compete successfully with its existing competitors or will be able
to compete successfully with any new competitors.
International Operations. Sales outside North America accounted for
approximately 10% of the Company's revenues in 1996. The Company intends to
expand its presence in European markets and anticipates that international sales
will account for an increasing portion of revenues in the future. International
revenues are subject to a number of risks, including the following: agreements
may be difficult to enforce and receivables difficult to collect through a
foreign country's legal system; foreign customers may have longer payment
cycles; foreign countries could impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs or adopt other restrictions on
foreign trade; fluctuations in exchange rates could affect product demand and
adversely affect the profitability in U.S. dollars of services provided by the
Company in foreign markets where payment for the Company's services is made in
the local currency; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business and results of operations.
Intellectual Property Rights. The Company's success is dependent in part
upon its management consulting and client/server systems integration
methodologies and other intellectual property, some of which is proprietary to
the Company. A significant portion of the Company's management consulting
services are based on the Balanced Scorecard concept described in three Harvard
Business Review articles and in The Balanced Scorecard, a recently published
book, all of which were co-authored by one of the Company's founders. The
Company believes that the Balanced Scorecard name is in the public domain. As a
result, third parties may provide services using the Balanced Scorecard name
which are competitive with the services offered by the Company.
The Company relies upon a combination of trade secret, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect its
proprietary rights. The Company presently holds no patents or registered
copyrights or trademarks. The Company generally enters into confidentiality
agreements with its employees, consultants, customers and potential customers
and limits distribution of its proprietary information. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
deter misappropriation of its proprietary information or that the Company will
be able to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights. Although the Company believes that its services
and products do not infringe on the intellectual property rights of others,
there can be no assurance that such a claim will not be asserted against the
Company in the future.
-36-
