10-Q 1 d10q.txt FORM 10-Q 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 March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ COMMISSION FILE NUMBER 0-21040 CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. (Exact name of registrant as specified in its charter) DELAWARE 06-1320610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8 CAMBRIDGE CENTER Cambridge, Massachusetts 02142 (Address of principal executive offices) (Zip Code) (617) 374-9800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of April 30, 2001, there were 63,532,772 shares of common stock outstanding. CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. TABLE OF CONTENTS ----------------- PART I - FINANCIAL INFORMATION: ITEM 1: FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 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 23 PART II - OTHER INFORMATION: Item 1: Legal Proceedings 24 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 24 Item 6: Exhibits and Reports on Form 8-K 25 SIGNATURES 26 EXHIBIT INDEX 27 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ------- -------------------- CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
March 31, December 31, 2001 2000 ------------------------------------------------------------- ---------- ------------ ASSETS Current assets: Cash and cash equivalents $ 47,056 $ 66,723 Investments 17,257 29,987 Accounts receivable, less allowance of $14,416 and $17,964 at March 31, 2001 and December 31, 2000, respectively 85,177 96,537 Unbilled revenue on contracts 13,557 8,813 Deferred income taxes 25,518 14,083 Prepaid expenses and other current assets 31,958 31,936 -------- -------- Total current assets 220,523 248,079 Property and equipment, net 38,978 44,310 Deferred income taxes 33,938 33,938 Long-term investments 7,098 8,094 Other assets 10,886 8,123 -------- -------- Total assets $311,423 $342,544 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,147 $ 13,879 Accrued expenses 47,499 60,150 Accrued restructuring costs 14,411 11,933 Deferred revenue 3,731 6,091 Income taxes payable 21,955 24,822 -------- -------- Total current liabilities 105,743 116,875 Other long-term liabilities 1,250 1,250 Commitments and contingencies (see Note G) Stockholders' equity: Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none issued and outstanding at March 31, 2001 and December 31, 2000, respectively - - Common stock, $.01 par value, 250,000,000 shares authorized; 63,532,271 and 63,492,236 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 635 635 Additional paid-in capital 171,852 171,782 Retained earnings 45,887 67,123 Accumulated other comprehensive loss (12,510) (13,458) Deferred compensation (1,434) (1,663) -------- -------- Total stockholders' equity 204,430 224,419 -------- -------- Total liabilities and stockholders' equity $311,423 $342,544 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended March 31, ---------------------------- 2001 2000 -------- -------- Revenues $116,485 $147,592 Costs and expenses: Project costs 70,307 89,925 General and administration 49,632 59,067 Sales and marketing 17,137 19,295 Restructuring and other costs 11,000 - -------- -------- Total operating expenses 148,076 168,287 -------- -------- Loss from operations (31,591) (20,695) Other income (expense): Interest income, net 850 706 Gain (loss) on investment (1,096) 5,113 Gain on sale of assets - 7,661 Foreign exchange gain (loss) (834) 90 -------- -------- Total other income (expense) (1,080) 13,570 -------- -------- Loss before income taxes (32,671) (7,125) Benefit for income taxes (11,435) (2,850) -------- -------- Net loss $(21,236) $ (4,275) ======== ======== Basic net loss per share $(.34) $(.07) ======== ======== Diluted net loss per share $(.34) $(.07) ======== ======== Weighted average number of common shares outstanding - Basic 63,312 62,270 ======== ======== Weighted average number of common and common equivalent shares outstanding - Diluted 63,312 62,270 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 4 CAMBRIDGE TECHNOLOGY PARTNERS (MASSACHUSETTS), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, ---------------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(21,236) $ (4,275) Amounts that reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,575 4,238 Stock based compensation 229 500 Non-cash restructuring costs 11,000 - (Gain) loss on investment 1,096 (5,113) Gain on sale of assets - (7,661) Change in deferred income taxes (11,435) (2,524) Changes in assets and liabilities: Decrease (increase) in accounts receivable 10,216 (6,248) Increase in unbilled revenue on contracts (5,079) (3,401) Increase in prepaid expenses and other current assets (510) (4,911) (Increase) decrease in other assets (2,959) 1,182 Increase (decrease) in accounts payable 4,494 (3,566) Decrease in accrued restructuring costs (7,085) - (Decrease) increase in accrued expenses (11,675) 9,536 (Decrease) increase in deferred revenue (2,340) 1,724 Decrease in income taxes payable (3,136) (314) Increase in other long-term liabilities - 2,000 -------- -------- Net cash used in operating activities (33,845) (18,833) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (2,589) (2,790) Proceeds from the disposal of property and equipment 1,206 - Purchase of investments - (1,944) Proceeeds from investments 12,730 7,746 Proceeds from sale of assets - 3,001 -------- -------- Net cash provided by investing activities 11,347 6,013 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt and capital leases - (37) Proceeds from employee stock purchase plan - 2,826 Proceeds from exercise of stock options 70 5,789 -------- -------- Net cash provided by financing activities 70 8,578 -------- -------- Effect of foreign exchange rate changes on cash 2,761 (96) Net decrease in cash and cash equivalents (19,667) (4,338) Cash and cash equivalents at beginning of period 66,723 62,288 -------- -------- Cash and cash equivalents at end of period $ 47,056 $ 57,950 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 5 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 ("Cambridge"), include the accounts of Cambridge and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation. In the opinion of management, the consolidated financial statements reflect all normal and recurring adjustments, which are necessary for a fair presentation of Cambridge'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, 2000 for additional disclosures, including a summary of the Company's accounting policies. The consolidated results of operations for the three months ended March 31, 2001 are not necessarily indicative of results for the full year. B. ACQUISITION -- ----------- On March 12, 2001, Novell, Inc. ("Novell) announced it had entered into a definitive agreement to acquire Cambridge. Under terms of the agreement, Novell will exchange 0.668 of a share of Novell common stock for every outstanding share of Cambridge's common stock. The acquisition has been approved by the board of directors of each company and is subject to customary closing conditions, including approval by the shareholders of Cambridge. If completed, Cambridge will become a wholly owned subsidiary of Novell. C. RESTRUCTURING AND OTHER COSTS -- ------------------------------ During the first quarter of 2001, Cambridge approved and implemented a restructuring program that resulted in a charge of $11.0 million for restructuring and other costs. This restructuring plan was designed to remove costs from the organization by eliminating 213 billable and 43 non-billable employees, and reducing space requirements in both United States and European field locations. The $11.0 million charge consists of $8.2 million of severance costs, $1.3 million to close or sublease existing offices, $1.4 million to write-down leasehold improvements and office equipment, and $0.1 million of other associated costs. All severance and other costs associated with the restructuring plan will be paid in 2001. Costs to close offices will be paid in 2001 while costs to sublet offices will be paid according to the lease terms. All leasehold improvements and office equipment will be written-off in 2001. During 2000, Cambridge approved and implemented restructuring programs that resulted in a charge of $27.0 million for restructuring and other costs. In the fourth quarter of 2000, Cambridge recorded $5.0 million of severance costs as part of a restructuring plan to balance delivery capacity and infrastructure with demand by eliminating 240 billable and 40 non-billable positions. Through March 31, 2001, 250 employees have been eliminated under this plan. In the third quarter of 2000, Cambridge recorded $22.0 million of restructuring costs as part of a plan to eliminate 423 positions and reduce 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 6 leasehold improvements and office equipment, $4.1 million to close or sublease existing offices and $2.5 million of other associated costs. Through March 31, 2001, 360 employees have been eliminated under this plan. All severance and other costs associated with the restructuring plan will be paid by September 30, 2001. Costs to close offices will be paid by September 30, 2001 while costs to sublet offices will be paid according to the lease terms. All leasehold improvements and office equipment will be written-off in by September 30, 2001. Restructuring plan activities since December 31, 2000 were as follows (in thousands, except employee amounts):
Employee Asset Other Total Total Termination Lease Write- Exit Employees Amount Costs Abandonements downs Costs ---------- -------- ----------- ------------- ------- ----- First quarter 2001 provision 256 $11,000 $ 8,185 $1,253 $1,437 $125 Less: Cash payments and asset write-downs - - - - - - ------ -------- --------- ------- ------- ----- Balance of first quarter 2001 provision at March 31, 2001 256 11,000 8,185 1,253 1,437 125 ------ -------- --------- ---------- ------- ------ Balance of fourth quarter 2000 provision at December 31, 2000 280 5,000 5,000 - - - Less: Cash payments and asset write-downs (250) (4,937) (4,937) - - - ------ -------- --------- ---------- ------- ------ Balance of fourth quarter 2000 provision at March 31, 2001 30 63 63 - - - ------ -------- --------- ---------- ------- ------ Balance of third quarter 2000 provision at December 31, 2000 125 11,319 3,417 3,029 4,386 487 Less: Cash payments and asset write-downs (62) (3,020) (1,156) (967) (872) (25) ------ -------- --------- ---------- ------- ------ Balance of third quarter 2000 provision at March 31, 2001 63 8,299 2,261 2,062 3,514 462 ------ -------- --------- ---------- ------- ------ Total accrued balance at March 31, 2001 349 $19,362 $10,509 $3,315 $4,951 $587 ====== ======== ========= ========== ======= ======
The total reserve for asset write-downs of $4.9 million is reported in property and equipment, net in the consolidated balance sheets. The remaining $14.4 million of accrued restructuring costs is reported on its own line in the consolidated balance sheets. 7 D. NET INCOME PER SHARE -- -------------------- The following table presents the calculation of earnings per share ("EPS") for the three months ended March 31, 2001 and 2000 (in thousands except per share data): Three Months Ended March 31, ---------------------- 2001 2000 ---------- ----------- Net loss $(21,236) $(4,275) ========== =========== Basic: Weighted average number of common shares outstanding 63,312 62,270 ========== =========== Net loss per share $ (.34) $ (.07) ========== =========== Diluted: Weighted average number of common shares outstanding 63,312 62,270 Dilutive effects of stock options - - ---------- ---------- Weighted average number of common and common equivalent shares outstanding 63,312 62,270 ========== ========== Net loss per share $ (.34) $ (.07) ========== ========== For the three month periods ended March 31, 2001 and 2000, basic and diluted EPS were calculated based solely on weighted average number of common shares outstanding. For the three months ended March 31, 2001 and 2000, 17.0 million and 15.3 million shares respectively, were excluded from the computation of diluted EPS because the effects of these shares were anti-dilutive. E. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- ------------------------------------------------------------ Effective January 1, 2001, Cambridge adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which requires that Cambridge record all derivatives on its balance sheet at fair value. Cambridge purchases foreign exchange forward contracts in an attempt to mitigate the risk of changes in foreign exchange rates associated with intercompany balances. As of March 31, 2001, Cambridge held foreign exchange forward contracts of approximately $10.4 million and there were no related deferred gains or losses. As of March 31, 2001, Cambridge maintained foreign exchange contracts to mitigate the risk of changes in British pounds, Swiss francs, European euros, Swedish kronas, and Australian dollars. Cambridge does not hold foreign exchange contracts for trading purposes. The contracts generally have maturities of one month. The impact of exchange rate movements on the fair value of the contracts has in the past and continues to be recorded in other income in the period in which the exchange rates change. Due to the fact that the change in fair value of these forward contracts is naturally offset, to a significant extent, in the income statement by changes in the fair value of the foreign currency denominated intercompany balances, Cambridge has elected not to designate these contracts as derivatives in a hedge relationship as defined by FAS 133. Accordingly, the adoption of SFAS 133 had no impact on the results of operations of Cambridge. 8 F. COMPREHENSIVE INCOME -- -------------------- 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 months ended March 31, 2001 and 2000 (in thousands): Three Months Ended March 31, -------------------- 2001 2000 --------- ------- Comprehensive loss: Net loss $(21,236) $(4,275) Other comprehensive income (loss): Unrealized loss on marketable equity securities, net of taxes of ($5) and $(2,525) for the three month periods ended March 31, 2001 and 2000, respectively (9) (3,788) Foreign currency translation adjustment 957 (1,325) ---------- --------- Other comprehensive income (loss) 948 (5,113) ---------- --------- Comprehensive loss $(20,288) $(9,388) ========== ========= G. COMMITMENTS AND CONTINGENCIES -- ----------------------------- In March and April 1999, certain stockholders of Cambridge filed ten separate class action lawsuits against Cambridge and certain of the Cambridge's officers in the United States District Court for the District of Massachusetts ("District Court"). These were consolidated by the District Court. The suits alleged misrepresentations and omissions regarding Cambridge's future growth prospects and progress of Cambridge's reorganization in violation of federal securities laws. On March 30, 2001, the District Court dismissed the case in its entirety, with prejudice. Cambridge is involved in litigation and various other legal matters, which have arisen in the ordinary course of business, some of which relates to the collection of client receivables. Cambridge 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. On March 12, 2001, Novell announced it had entered into a definitive agreement to acquire Cambridge. Pursuant to change in control agreements, which Cambridge entered into with certain executive officers in October 2000, Cambridge may be required to make severance payments, which could have a material effect on Cambridge's results of operations in the period in which the covered executives are terminated. Under the terms of the agreements, certain executive officers would be entitled to severance benefits if, within 24 months following a change in control, they were involuntarily terminated without cause or voluntarily terminated for good reason. Cambridge is not presently able to reasonably estimate the amounts, if any, which might become payable under the terms of these agreements. 9 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. Cambridge's ownership interest in the Fund, of approximately 24%, is accounted for using the equity method of accounting. Cambridge's total capital commitment to the Fund is approximately $6.0 million, of which $5.7 million has been contributed through March 31, 2001. The carrying value of Cambridge's investment in the Fund was approximately $5.1 million and $18.2 million at March 31, 2001 and 2000 respectively, and is included in long-term investments in the consolidated balance sheet. For the quarter ended March 31, 2001, Cambridge did not receive any distributions from the Fund. For the quarter ended March 31, 2000, Cambridge received approximately $5.9 million of cash distributions and $14.2 million of distributions in-kind in the form of marketable equity securities. For the first quarter of 2001, Cambridge recorded a loss of $1.1 million from its equity investment in the Fund which was primarily due to impairment charges on portfolio companies yet to go public. The amount of gain or loss allocated to Cambridge each period is based on the allocation of the Fund's income as determined by the Fund's partnership agreement. Summarized financial information of the Fund is presented as follows (in thousands): Three Months Ended --------------------------- March 31, 2001 2000 ------------ ---------- Net realized gains $ - $ 69,967 Net decrease in unrealized appreciation of investments (3,601) (51,989) Net loss from operations (166) (156) ----------- ----------- Net increase (decrease) in partners' capital $(3,767) $ 17,822 =========== =========== The net decrease in unrealized appreciation of investments for the three months ended March 31, 2001 and 2000 included zero and $50.0 million respectively, of reversals of unrealized gains from prior periods in order to record realized gains for securities sold or distributed during the current period. I. OPERATING SEGMENT INFORMATION -- ----------------------------- . The chief operating decision maker of Cambridge receives reports on three operating segments: North America, International and Change Management Consulting ("CMC"). The North American operating segment consists of e-business, systems integration, and IT consulting services in the United States and Canada, while the International operating segment consists of e-business, systems integration, and IT consulting services outside of North America. CMC consists of operations management consulting in the United States, Canada, and Europe. Cambridge evaluates each segment's performance based on revenues and income from operations. Total corporate revenues, loss from operations and total assets have been included in North America. The carrying value of the investment in the Fund of $5.1 million 10 and $18.2 million is included in total assets for North America at March 31, 2001 and 2000, respectively. Prior period amounts have been reclassified to conform with current period presentation. Information about the Company's operating segments is presented as follows (in thousands): Three Months Ended March 31, -------------------------- 2001 2000 ---------- ---------- Revenues: North America $ 56,886 $ 80,542 International 35,228 35,256 Change Management Consulting 24,371 31,794 ---------- ---------- Consolidated $116,485 $147,592 ========== ========== Loss from operations: North America $(19,765) $(23,885) International (6,526) (758) Change Management Consulting (5,300) 3,948 ----------- --------- Consolidated loss from operations (31,591) (20,695) Other income (expense) (1,080) 13,570 ----------- --------- Consolidated loss before incomes taxes $(32,671) $ (7,125) =========== ========= Total assets: North America $230,517 $268,586 International 48,259 56,857 Change Management Consulting 32,647 50,735 ---------- --------- Consolidated $311,423 $376,178 ========== ========= 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Overview On March 12, 2001, Novell, Inc. ("Novell") announced it had entered into a definitive agreement to acquire Cambridge Technology Partners (Massachusetts), Inc. ("Cambridge"). Under terms of the agreement, Novell will exchange 0.668 of a share of Novell common stock for every outstanding share of Cambridge's common stock. The acquisition has been approved by the board of directors of each company and is subject to customary closing conditions, including approval by the shareholders of Cambridge. If completed, Cambridge will become a wholly owned subsidiary of Novell. Cambridge 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, Cambridge provides strategic and management consulting as well as systems integration services to transform its clients into e-Businesses. Working in collaboration with large corporations and high-velocity middle market companies, Cambridge combines a deep understanding of New Economy issues with integrated, end-to-end services, and a proven track record of shared risk and rapid delivery. Electronic commerce business solutions delivered to clients have become and will likely continue to become more integrated with clients' value chains and legacy systems. Cambridge's service offering generally include Digital Business Strategy, eCommerce, eCustomer Relationship Management, eSupply Chain Management, eEnterprise Resource Management, User Experience Design, and Technology. In addition, the Cambridge service offering includes Change Management Consulting ("CMC"), an operations management leader specializing in the design of operational strategy and, equally important, the execution of that strategy. Cambridge provides a significant portion of its services on a fixed-time, fixed- price model, with client involvement at all stages of the process. Cambridge and its clients generally agree on a contractually fixed price for each phase of a project. In performing its services, Cambridge 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, Cambridge employs a rapid deployment methodology that features an iterative approach. Cambridge believes that these techniques permit the delivery of results in rapid time frames--typically within three to twelve months. Cambridge continues to be adversely impacted by a slowing economy, particularly in the United States. During 2001, Cambridge recorded $11.0 million of restructuring and other costs in a restructuring plan designed to continue to remove costs from the business by balancing current delivery capacity and infrastructure with demand. As a result, 213 billable and 43 non-billable positions will be eliminated, and office space requirements will be reduced in field locations. Voluntary employee turnover, on an annualized basis, was approximately 26% for the first quarter of 2001 compared to approximately 23% for the fourth quarter of 2000. Cambridge's headcount was approximately 3,500 at March 31, 2001 compared to approximately 3,800 at December 31, 2000. Cambridge continues to assess the skill sets necessary to address the changing market dynamics and focuses on training, hiring, and assimilating appropriate personnel to service its clients. On July 27, 2000, Cambridge announced that it is exploring strategic options to allow CMC, its operations management consulting unit, to operate as a more independent but majority-owned business of Cambridge. Options being considered include investment by a strategic partner or listing on a European stock exchange. The changes Cambridge is considering are designed to enable CMC to grow faster and to recruit and retain the best personnel with share option and incentive programs directly aligned with the unit's performance. Cambridge has 12 completed much of the work required to restructure CMC in order to facilitate the options under consideration. Due to the slowdown of the global economy Cambridge does not expect to carry out one of these options until the second half of 2001. The closing of any of these options may be delayed and may be contingent upon the condition of the global economy and CMC's industry. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenues decreased 21% to $116.5 million in 2001 compared to $147.6 million in 2000. The decrease in revenues in 2001 compared to 1999 was primarily due to a 29% decrease in revenues from its North America operating unit to $56.9 million from $80.5 million and a 23% decrease in revenues from its CMC unit to $24.4 million from $31.8 million. Revenues from Cambridge's International operating unit were essentially unchanged at $35.2 million for the quarter ended March 31, 2001 compared to $35.3 million for the quarter ended March 31, 2000. The decrease in North America operating unit revenues, which consists of e-business, systems integration, and IT consulting services in the United States and Canada, was primarily due to the ongoing weakness in the North American economy which has caused clients to reduce spending, resulting in a slower sales cycle, contract cancellations or the deferral of additional phases of e-business initiatives. The decrease in CMC revenues, which consists of operations management consulting in the United States, Canada and Europe, was primarily due to weakness in the North American and Western Europe economies that resulted in reduced spending on such projects. Geographically, North American revenues decreased 29% to $64.9 million, or 56% of revenue, in 2001 from $91.2 million, or 62% of revenues, in 2000. Revenues from International operations decreased by 9% to $51.6 million, or 44% of revenues, in 2001 from $56.4 million, or 38% of revenues, in 2000. The decrease in North American revenues is primarily due to the ongoing weakness in the North American economy which has slowed demand for Cambridge's services. The decrease in International revenues was primarily due to unfavorable foreign 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 $70.3 million, or 60% of revenues in 2001, compared to $89.9 million, or 61% of revenues, in 2000. The dollar and percentage decrease was due primarily to an $18.6 million decrease in payroll and payroll related costs. The decrease in payroll and payroll related costs was primarily due to the 16% decrease in worldwide project personnel headcount to 2,664 employees at March 31, 2001, from 3,174 employees at March 31, 2000, and the impact of accruing lower bonuses in 2001 due to the financial performance of Cambridge. General and administration expenses include salaries and benefits associated with management and support personnel including, all corporate functions, facilities costs, training, non-project travel, professional fees, and recruiting costs. General and administration expenses were $49.6 million, or 43% of revenues in 2001, compared to $59.1 million, or 40% of revenues in 2000. The 13 dollar decrease was primarily due to a $4.0 million decrease in non-project travel costs caused by lower project personnel headcount and enhanced spending controls. The dollar decrease is also due to a $3.2 million reduction in facilities and telecommunication costs and a $2.0 million reduction in payroll and recruiting costs. The percentage increase is primarily due to the decrease in revenues. General and administration headcount increased 3% to 542 employees at March 31, 2001, from 525 employees at March 31, 2000. Sales and marketing expenses include salaries and benefits associated with sales and marketing personnel, as well as commissions, travel and entertainment costs, advertising and branding costs. Sales and marketing expenses were $17.1 million, or 15% of revenues in 2001, compared to $19.3 million, or 13% of revenues in 2000. The dollar decrease resulted primarily from lower advertising costs. Sales and marketing headcount increased 2% to 247 employees at March 31, 2001, from 243 employees at March 31, 2000. During the first quarter of 2001, Cambridge recorded $11.0 million of restructuring and other costs in conjunction with a restructuring plan designed to remove costs from the organization by eliminating 213 billable and 43 non- billable employees, and reducing space requirements in both United States and European field locations. The $11.0 million charge consists of $8.2 million of severance costs, $1.3 million to close or sublease existing offices, $1.4 million to write-down leasehold improvements and office equipment, and $0.1 million of other associated costs. All severance and other costs associated with the restructuring plan will be paid in 2001. Costs to close offices will be paid in 2001 while costs to sublet offices will be paid according to the lease terms. All leasehold improvements and office equipment will be written-off in 2001. The 2001 restructuring plan is expected to result in total annual cash and cost savings of approximately $28.5 million, consisting of $20.8 million of project costs, $4.8 million of general and administrative costs, and $2.9 million of sales and marketing costs. During the year ended December 31, 2000, Cambridge recorded $27.0 million of restructuring and other costs. In the fourth quarter of 2000, Cambridge recorded $5.0 million of severance costs as part of a restructuring plan to balance delivery capacity and infrastructure with demand by eliminating 280 positions. In the third quarter of 2000, Cambridge recorded $22.0 million of restructuring costs as part of a plan to eliminate 423 positions and reduce 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. All severance and other costs associated with the restructuring plan will be paid by September 30, 2001. Costs to close offices will be paid by September 30, 2001 while costs to sublet offices will be paid according to lease terms. All leasehold improvements and office equipment will be written-off by September 30, 2001. The 2000 restructuring plan is expected to result in total annual cash and cost savings of approximately $80.0 million, consisting of $60.0 million of project costs, $17.0 million of general and administrative costs, and $3.0 million of sales and marketing costs. 14 Restructuring plan activities since December 31, 2000 were as follows (in thousands, except employee amounts):
Employee Asset Other Total Total Termination Lease Write- Exit Employees Amount Costs Abandonements downs Costs --------- ------- ----------- ------------- ------- -------- First quarter 2001 provision 256 $11,000 $ 8,185 $1,253 $1,437 $125 Less: Cash payments and asset write-downs - - - - - - -------- ------- -------- -------- ------- ----- Balance of first quarter 2001 provision at March 31, 2001 256 11,000 8,185 1,253 1,437 125 -------- -------- -------- -------- ------- ----- Balance of fourth quarter 2000 provision at December 31, 2000 280 5,000 5,000 - - - Less: Cash payments and asset write-downs (250) (4,937) (4,937) - - - ------- --------- -------- -------- ------- ----- Balance of fourth quarter 2000 provision at March 31, 2001 30 63 63 - - - ------- --------- -------- -------- ------- ----- Balance of third quarter 2000 provision at December 31, 2000 125 11,319 3,417 3,029 4,386 487 Less: Cash payments and asset write-downs (62) (3,020) (1,156) (967) (872) (25) ------- --------- -------- -------- ------- ----- Balance of third 2000 provision at March 31, 2001 63 8,299 2,261 2,062 3,514 462 ------- --------- -------- ----------- ------- ----- Total accrued balance at March 31, 2001 349 $19,362 $10,509 $3,315 $4,951 $587 ======= ========= ======== =========== ======= ======
Included in other expense for the first quarter of 2001 is a $1.1 million loss on Cambridge's equity investment in the Cambridge Technology Capital Fund I L.P. (the "Fund") compared to a gain of $5.1 million for the same period in 2000. The $1.1 million loss in 2001 is primarily due to impairment charges on portfolio companies yet to go public, while the $5.1 million gain in 2000 is primarily due the increase in market value of public portfolio companies. During 2000, Cambridge also recorded a $7.7 million gain from the sale of its Cambridge Information Network ("CIN") business Cambridge 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 March 31, 2001, Cambridge held foreign exchange contracts of approximately $10.4 million. The Company continues to monitor the impact of foreign currency exchange rates on revenues. Cambridge's effective income tax rate was 35.0% in 2001 compared to 40.0% in 2000. Cambridge reduced its tax rate from period to period as it does not expect to realize the full benefit of it net operating loss carryforwards. Cambridge's 15 effective tax rate may vary from period to period based on Cambridge's profitability, future expansion into areas with varying country, state, and local statutory income tax rates as well as the impact of any valuation allowances recorded against its deferred tax assets. Net loss for the first quarter of 2001 was $21.2 million or $0.34 per share (basic and diluted) compared to a net loss of $4.3 million or $.07 per share (basic and diluted) for the same period in 2000. The net loss for 2001 includes $7.2 million, after taxes, of restructuring and other costs or $0.11 per share (basic and diluted). LIQUIDITY AND CAPITAL RESOURCES -------------------------------- Cambridge continued to operate debt-free in 2001 and working capital was $114.8 million at March 31, 2001, compared to $131.2 million at December 31, 2000. The decrease was primarily due to a decrease in cash and cash equivalents, investments and accounts receivable, partially offset by an increase in deferred income taxes and a decrease in accrued expenses. Cambridge's days sales outstanding was 66 days at March 31, 2001 compared to 70 days at December 31, 2000. This decrease in days sales outstanding was primarily due to a decrease in accounts receivable from 2000 to 2001 related to enhancements to Cambridge's credit and collection process and a decrease in revenue. Cambridge actively assesses and monitors the collectability of its accounts receivable. Net cash used in operating activities was $33.8 million for the first quarter of 2001 compared to $18.8 million for the same period in 2000. Net cash used in operating activities of $33.8 million for the first quarter of 2001 was primarily due to a net loss of $21.2 million, a $11.4 million increase in deferred income taxes and $11.7 million decrease in accrued expenses partially offset by a $10.2 decrease in accounts receivable. Net cash used in operating activities of $18.8 million for the first quarter of 2000 was primarily due to a net loss of $4.3 million, adjusted for non-operating gains from investments and the sale of assets of $12.8 million and was partially offset by a $9.5 million increase in accrued expenses. Cash provided by investing activities increased to $11.3 million for the first quarter of 2001 from $6.0 million for the same period in 2000. The increase was primarily due to the maturity of investments held to maturity that were not reinvested. Cash provided by financing activities the first quarter of 2001 decreased to essentially zero from $8.6 million for the same period in 2000. The decrease was caused by the termination of the employee stock purchase plan in the second half of 2000 and a decrease in the market value of Cambridge's common stock price which significantly reduced the exercise of options to purchase common stock. Capital expenditures of $2.6 million in 2001 were used principally for leasehold improvements in order to prepare offices to be subleased in conjunction with Cambridge's restructuring plans. Capital expenditures for 2001 are expected to approximate $10.0 million, principally for leasehold improvements, personal computers, telecommunication 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. Cambridge evaluates, on an ongoing basis, potential acquisitions of companies or technologies that may complement or enhance Cambridge's global growth initiatives. Cambridge cannot be certain that it will be able to identify suitable acquisition opportunities at an acceptable cost, if at all. Liquidity may also be affected by acquisitions of companies or technology. 16 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. A wholly-owned subsidiary of Cambridge acts as the general partner of the Fund's general partner and Cambridge's investment is accounted for using the equity method of accounting. Cambridge's capital commitment to the Fund is approximately $6.0 million. At March 31, 2001, Cambridge's cumulative capital contribution to the Fund amounted to $5.7 million. Cambridge's investment in the Fund resulted in a net loss of approximately $1.1 million for the quarter ended March 31, 2001. Cambridge has recorded a deferred tax asset of $59.5 million reflecting the reflecting the benefit of $28.3 million in net operating loss carryforwards, which expire in varying amounts between 2004 and 2020. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that most of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. During 2000, Cambridge recorded a valuation allowance of $4.9 million related to state net operating loss carryforwards that generally have a shorter life than the federal net operating loss carryforwards 20 years. Cambridge expects that cash flows from operations will provide the principal source of future liquidity for Cambridge. However, Cambridge's strategy to reduce cost in order to match Cambridge's capacity and infrastructure with demand may not achieve the costs savings anticipated. Cambridge anticipates that existing cash and investment balances combined with cash generated from operations will be sufficient to meet Cambridge's working capital requirements for at least the next twelve months. Operating results and liquidity may be adversely affected if market demand and revenues do not meet management's expectations. A number of factors, including market acceptance of Cambridge's services, significant fluctuations in currency exchange rates, and changes in general economic, political, or regulatory conditions could adversely affect future results and liquidity. 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 Cambridge's future net revenues and profits; Cambridge's planned transition to e-Business; Cambridge's reliance on key personnel to guide these efforts and its ability to attract and retain qualified employees; capital expenditures; liquidity sources and needs; working capital needs; effectiveness of Cambridge's cost cutting initiatives; e-Business initiatives undertaken in response to customer demand and anticipated market growth opportunities; Cambridge'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, without limitation, the risks described in "Factors that May Affect Future Results" and elsewhere in this Quarterly Report on Form 10-Q, as well as the risk factors relating to Cambridge and the proposed transaction with Novell set forth in the Registration Statement on Form S-4 of Novell, as filed with the Securities and Exchange Commission on April 20, 2001 (the "Proxy Statement-Prospectus"). We do not assume any obligation to update any of the forward-looking statements we make. 17 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. IF THE MERGER WITH NOVELL IS NOT COMPLETED, OUR FUTURE BUSINESS AND OPERATIONS COULD BE HARMED If the merger is not completed, we may be subject to the following material risks: . we maybe required to pay Novell a termination fee of $7.3 million, plus any expenses incurred in collecting such fee; . the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed; and . we will incur significant costs related to the merger, such as legal, accounting and some of the fees and expenses of our financial advisors, which costs must be paid even if the merger is not completed. Further, if the merger is terminated and Cambridge's board of directors determines to pursue another merger or business combination, it is not certain that we will be able to find a partner willing to pay an equivalent or more attractive price than that which would be paid in the merger. In addition, while the merger agreement is in effect and subject to limited exceptions described in the Proxy Statement-Prospectus, Cambridge and its officers, board of directors and advisors are generally prohibited from soliciting, initiating or knowingly encouraging or entering into extraordinary transactions, such as merger, sale of assets or other business combination, with any party other than Novell. WE HAVE A RECENT HISTORY OF OPERATING LOSSES INFLUENCED IN PART BY GENERAL ECONOMIC CONDITIONS, AND MAY NOT BE ABLE TO REVERSE THIS TREND IN THE NEAR FUTURE Primarily as a result of a slowdown in growth in demand for our services, a slowing global economy and increased cost of recruiting and retaining project personnel, we have incurred losses. As a result, we will need to generate additional revenues to achieve profitability. Cambridge's revenues and results of operations will be influenced by general economic conditions in the United States and internationally. In the event of a general economic downturn, or an industry-wide downturn, Cambridge's clients and potential clients may substantially reduce their information technology and related budgets. Additionally, potential clients may decide to implement the information technology projects they do embark upon using international resources, potentially further affecting the strength of our industry. In the event of an economic downturn, Cambridge may not be able to achieve or sustain profitability. 18 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: . actual or perceived lack of security of information; . lack of access and ease of use; . inconsistent quality of service; . increases in access costs to the Internet; . actual or threatened computer "viruses" or other malicious code; . excessive governmental regulation or the imposition of taxation on Internet transactions; . uncertainty regarding intellectual property ownership; . reluctance to adopt new business methods; and . costs associated with the obsolescence of existing infrastructure. 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. 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 19 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: . the number and significance of client engagements commenced and completed during a period; . changes in demand for our consulting and implementation services and third party products or solutions for which we perform integration services; . our ability to obtain new and follow-on client engagements; . the number of working days in a period; . 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; . the introduction of new services or business models by us or our competitors; . 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; . unanticipated negative outcomes of litigation involving us; . our ability to attract, train and retain skilled personnel in all areas of our business; and . 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 20 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. 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 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: . delayed or lost revenues due to adverse client reaction; . requirements to provide additional services to a client at no charge; . negative publicity about us and our services, which could adversely affect our ability to attract or retain clients; and . 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 21 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: . the diversion of the attention of management and other key personnel; . inability to effectively integrate the acquired business into our culture, client delivery methodology and other standards, controls, procedures and policies; . inability to retain the management, key personnel and other employees of the acquired business; . inability to retain the acquired customers; . client satisfaction problems with the acquired business that could affect our reputation; and . 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: . costs and difficulties in staffing and managing international operations; . unexpected changes in and complexity of regulatory requirements; . increased tariffs and other trade barriers; . difficulties in enforcing contractual and intellectual property rights; . longer payment cycles; 22 . local political and economic conditions; . potentially adverse tax consequences, including restrictions on repatriating earnings and the threat of "double taxation;" and . 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------- ----------------------------------------------------------- Cambridge maintains investment portfolio holdings of various issuers, types and maturities. Cambridge's cash and equivalents include cash equivalents that Cambridge considers to be investments purchased with original maturities of three months or less. In addition, Cambridge holds investments in governmental securities with original maturities of one year or less that are stated at amortized cost, which approximates fair value, and are classified as investments held to maturity. Given the short-term nature and investment grade quality of these investments at March 31, 2001, a sharp rise in interest rates should not have a material adverse impact on the fair value of these securities. As a result, Cambridge does not currently hedge these interest rate exposures. Cambridge faces exposure to financial market risks, including adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on Cambridge's financial results. Cambridge's primary exposure has been related to local currency revenue and operating expenses in Europe, Japan, and Latin America. Historically, Cambridge has utilized foreign exchange forward contracts to hedge currency exposures associated with certain intercompany payables denominated in local currencies. At March 31, 2001, Cambridge held foreign exchange contracts with a contract value of $10.4 million that have maturities of one month. The goal of Cambridge's hedging activity is to offset the impact of currency fluctuations on certain local currency intercompany payables. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, Cambridge could experience unanticipated currency gains or losses. Due to the short-term maturities of its foreign exchange forward contracts, Cambridge does not expect foreign currency exchange rate fluctuations to have a material impact on its operating results. 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ------- ----------------- In March and April 1999, certain stockholders of Cambridge filed ten separate class action lawsuits against Cambridge and certain of Cambridge's officers in the United States District Court for the District of Massachusetts ("District Court"). These were consolidated by the District Court. The suits alleged misrepresentations and omissions regarding Cambridge's future growth prospects and progress of Cambridge's reorganization in violation of federal securities laws. On March 30, 2001, the District Court dismissed the case in its entirety, with prejudice. Cambridge is involved in litigation and various other legal matters, which have arisen in the ordinary course of business, some of which relates to the collection of client receivables. Cambridge 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ------- ----------------------------------------- On June 23, 1997, the Board of Directors of Cambridge approved and adopted a Rights Plan pursuant to a Rights Agreement which was amended on September 30, 1998, and in connection therewith, declared a dividend of one preferred stock purchase right for each outstanding share of Cambridge's common stock, which dividend was paid on July 3, 1997 to holders of record of Cambridge at the close of business on July 3, 1997. One preferred stock purchase right is also attached to each share of Cambridge's common stock issued after July 3, 1997. The rights are not presently transferable separate from the share of common stock with respect to which they were issued. The rights are subject to adjustment and become exercisable upon the occurrence of certain events described in the Rights Agreement. In general, Cambridge is entitled to redeem the rights at $.01 per right. The rights will expire on June 23, 2007, unless earlier redeemed or exchanged. As part of the Rights Plan, Cambridge designated 100,000 shares of its preferred stock as Series A Junior Participating Preferred Stock and reserved such shares for issuance upon exercise of the rights. On March 12, 2001, Novell, Inc. ("Novell") announced it had entered into a definitive agreement to acquire Cambridge. On March 12, 2001, the Board of Directors of Cambridge approved an amendment to the Rights Agreement that rendered the Rights Plan inapplicable to the contemplated Novell transaction. 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------- -------------------------------- (a) Exhibits: 2.1(1) Agreement and Plan of Reorganization by and among the Company, Novell, Inc. and Ceres Neptune Acquisition Corp. dated March 12, 2001. 3(i)(2) Amended and Restated Certificate of Incorporation of the Company, as amended. 3(ii)(3) Amended and Restated By-laws of the Company. 4.1(4) Rights Agreement dated June 23, 1997 by and between the Company and ChaseMellon Shareholder Services, LLC ( the "Rights Agreement"). 4.2(5) Amendment No. 1 to the Rights Agreement dated September 30, 1998 by and between the Company and ChaseMellon Shareholder Services, LLC. 4.3(1) Amendment No. 2 to the Rights Agreement dated March 12, 2001, by and between the Company and ChaseMellon Shareholder Services, LLC. 11 Statement Regarding Computation of Per Share Earnings. ------------------------------------------------------------------------------- (1) Incorporated herein by reference to the Company's current report on Form 8-K dated March 13, 2001. (2) Incorporated herein by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended June 30, 1998. (3) Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-56338). (4) Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A/A filed on September 30, 1998. (5) 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 filed one current report on Form 8-K during the three months ended March 31, 2001 on March 13, 2001 to announce the entry into an Agreement and Plan of Reorganization by and among the Company, Novell Inc., and Ceres Neptune Acquisition Corp. 25 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: May 15, 2001 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 26 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 2.1(i) Agreement and Plan of Reorganization by and among the Company, Novell, Inc. and Ceres Neptune Acquisition Corp. dated March 12, 2001. 3(i)(2) Amended and Restated Certificate of Incorporation of the Company, as amended. 3(ii)(3) Amended and Restated By-laws of the Company. 4.1(4) Rights Agreement dated June 23, 1997 by and between the Company and ChaseMellon Shareholder Services, LLC (the "Rights Agreement"). 4.2(5) Amendment No. 1 to the Rights Agreement dated September 30, 1998 by and between the Company and ChaseMellon Shareholder Services, LLC. 4.3(1) Amendment No. 2 to the Rights Agreement dated March 12, 2001, by and between the Company and ChaseMellon Shareholder Services, LLC. 11 Statement Regarding Computation of Per Share Earnings. ------------------------------------------------------------------------------- (1) Incorporated herein by reference to the Company's current report on Form 8-K dated March 13, 2001. (2) Incorporated herein by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended June 30, 1998. (3) Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-56338). (4) Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A/A filed on September 30, 1998. (5) 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 filed one current report on Form 8-K during the three months ended March 31, 2001 on March 13, 2001 to announce the entry into an Agreement and Plan of Reorganization by and among the Company, Novell Inc., and Ceres Neptune Acquisition Corp. 27