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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 25, 1999
Commission file number 0-28192
Renaissance Worldwide, Inc.
(Exact Name of Registrant as Specified in its Charter)
Massachusetts
(State or other jurisdiction
of incorporation or organization)
04-2920563
(I.R.S. Employer
Identification No.)
52 Second Avenue
Waltham, Massachusetts 02451
(781) 290-3000
(Address, including ZIP Code, and Telephone Number, including Area Code,
of Registrant's Principal Executive Offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of each class)
NASDAQ NATIONAL MARKET
(Name of each exchange on which registered)
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. [X] YES [_] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
Based on the closing sales price of the registrant's Common Stock on the
NASDAQ National Market on March 17, 2000, the aggregate market value of the
Common Stock held by non-affiliates of the registrant was approximately
$232,542,000.
The number of shares of the registrant's Common Stock outstanding on March
17, 2000 was 56,789,488.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR USE IN
CONNECTION WITH ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 25,
2000 ARE INCORPORATED BY REFERENCE INTO PART III.
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PART I
ITEM 1: BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. The
important factors discussed in Item 7--"Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption "Factors
That May Affect Future Results" among others, could cause actual results to
differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time.
Overview
Renaissance Worldwide, Inc. ("Renaissance" or the "Company") is a global
provider of business and technology consulting services. The four business
units in operation during 1999 were the Information Technology Consulting
Services Group, the Enterprise Solutions Group, the Government Solutions Group
and the Business Strategy Group. In February, 2000, the Company announced its
intention to realign its existing business units and transform the
organization to focus more directly on emerging eBusiness opportunities and
increasing client interest and investment in web-based technologies. This
transformation includes the incubation and development of two new business
units--GovConnect.com(TM) and the eSystems Development Group, as well as the
development and implementation of an Internet based recruiting platform.
As part of this refinement of the Company's strategic focus, the Business
Strategy Group was sold on March 10, 2000 for $65.0 million. Proceeds from the
sale were used to pay-down the Company's debt which will provide additional
liquidity to develop further emerging opportunities (see Note 17 of Notes to
Consolidated Financial Statements).
The Company's Business
The Company provides business and technology consulting services primarily
to Global 2000 companies, and to a lesser extent, to other businesses around
the world. The Company maintains offices in North America, Europe, and the
Asia-Pacific region.
Information Technology Consulting Services Group
The Information Technology Consulting Services Group ("ITCS Group") provides
services designed to assist clients in design, implementation and/or support
of IT applications. The ITCS Group focuses principally on 4 service areas: IT
Strategy and eBalanced Scorecard; eTransformation; Custom Application
Development including project management; and IT Staffing services built
around five technology sectors: workgroup/desktop; legacy systems; network and
communications; database design and development; and Internet/www.
Enterprise Solutions Group
The Enterprise Solutions Group provides business and technology solutions
designed to integrate leading edge processes and technologies. In 1999 the
Enterprise Solutions Group divested two non-core entities--the operations of
Neoglyphics Media Corporation as well as the Customer Management Solutions
Vantive Practice ("CMS"). (See Note 4 of Notes to Consolidated Financial
Statements). The Enterprise Solutions Group's principal offerings fall into
three categories: enterprise applications; eWorkplace(TM); and
eValueChain(TM).
1
Government Solutions Group
The Government Solutions Group provides technology solutions to the public
sector, primarily in the areas of strategy, systems integration and electronic
solutions. Technology solution competencies are focused around Public
Assistance, Child Support Enforcement, Child Welfare, Managed Care, Employment
and Training, Administration, Tax and Revenue Processing, and Courts and
Judicial Systems Automation.
Business Strategy Group
The Business Strategy Group provided strategy development and implementation
consulting services to large organizations primarily in the global
telecommunications, computing, and energy industries. The group offered
services in three principal categories: strategic destination, strategic
navigation and strategic mobilization consulting. As noted above, this group
was sold in a cash transaction on March 10, 2000. For the year ended December
25, 1999, the Business Strategy Group accounted for approximately 4% of the
Company's total revenue.
ITCS Group
The ITCS Group provides consulting services to assist clients in the design,
implementation, and support of information technology ("IT") applications.
During the fiscal year ended December 25, 1999, the ITCS Group accounted for
approximately 69% of the Company's total revenue.
Service Offerings
. IT Strategy and eBalanced Scorecards. The ITCS Group provides business
management consulting for organizations which need to develop a
competitive business roadmap in the emerging Internet economy. The
Company uses a variety of business management consulting methodologies to
focus, shape, map and transform the organization. The goal is to develop
and validate an eStrategy, which supports both business and IT
initiatives to create profitable and competitive Internet-based products,
services and relationships.
. eTransformation. The ITCS Group provides life-cycle transformation of
legacy platforms, systems integration, and application development
services. These engagements typically require redevelopment of the
(front-end) user interface, adding new middleware, and usually retaining
the existing (back-end) data interface for transaction processing needs,
data warehousing repositories, data mining processes, etc. These services
allow clients to integrate existing business functions and processes
across disparate systems, applications and platforms. This integration is
designed to allow clients enterprise-wide collaboration with customers,
suppliers and service providers, particularly where Internet, intranet
and extranet now provide database transactions, interactive
collaboration, and transactional interfaces to end users. These advanced
applications require expertise in database management systems,
client/server architectures, object-oriented programming languages and
custom software development.
. Custom Application Development. The ITCS Group provides full life-cycle
(Concept-To-Completion(R)) application development services, including
project management. These engagements consist of requirements definition,
analysis, applications and systems architecture, design, prototyping and
programming, implementation and project management of web-based and
client-server application software.
. IT Staffing and Project Management. The ITCS Group provides IT
supplemental staffing and project management services on a contract basis
for application development and software engineering. The ITCS Group's
technology professionals are billed primarily on an hourly basis and
typically work on implementation, integration and development engagements
lasting from six to twelve months under the direction of the client.
2
Enterprise Solutions Group
The Enterprise Solutions Group provides management consulting and technology
integration solutions to improve client business performance through strategic
alignment, process innovation technology deployment and organizational
mobilization. The Enterprise Solutions Group's principal offerings fall into
three categories: 1) enterprise application strategic consulting and
deployment, 2) eWorkplace(TM) strategic consulting and application deployment,
3) eValueChain strategic consulting and application deployment. For the year
ended December 25, 1999, the Enterprise Solutions Group accounted for
approximately 22% of the Company"s total revenue.
Service Offerings
. Enterprise Applications. These services include planning, selecting,
implementing, supporting and managing clients' application and process
improvement environments. The Enterprise Solutions Group provides
comprehensive implementation services for complex software packages,
including back office systems for human resources, benefits,
compensation, career development, recruiting, payroll and financial
applications; and student administration systems for higher education
institutions.
. eWorkplace. The Enterprise Solutions Group provides strategic consulting,
planning and application deployment services for employee and manager
self-service applications, service center/call center support
applications, knowledge-base deployments, and enterprise information
portal applications.
. eValueChain. The Enterprise Solutions Group provides strategic
consulting, planning and application deployment services for supply
chain, distribution, logistics, procurement, and order processing to
support the supplier side, and front-office strategic consulting,
planning and application deployment services for customer relationship
management and sales force automation applications.
Government Solutions Group
The Government Solutions Group provides specialized management and IT
consulting services to federal, state and municipal government clients. For
the year ended December 25, 1999, the Government Solutions Group accounted for
approximately 5% of the Company's total revenue.
Service Offerings
The Government Solutions Group's professionals address the requirements
particular to the public sector with management and technology consulting and
systems integration and electronic solutions in the following areas:
. Public Assistance (TANF, Welfare Reform, Medicaid, Child Care)
. Child Support Enforcement
. Child Welfare
. Managed Care (Health Care)
. Employment and Training (Labor)
. Administration (Payroll, Human Resources, Retirement)
. Tax and Revenue Processing
. Courts and Judicial Systems Automation
See Note 12 to the Company's Consolidated Financial Statements for
additional financial information about these business units and geographic
regions.
3
Competition
The market for the Company's consulting services is intensely competitive on
local, national, and international levels. The market is fragmented and
subject to rapid change. The market is served by numerous management
consulting companies, technology consultants, temporary personnel agencies and
outsourcing companies, solutions providers, implementers, systems integrators,
diversified technology companies (including hardware and software companies),
and other service companies, some of which have greater financial, technical,
marketing, and other resources and have greater name recognition than the
Company. Some of these competitors have a nationwide and/or worldwide presence
equivalent to, or greater than, that of the Company. Within any given market,
the Company and its competitors frequently compete for the same highly skilled
consultants.
The Enterprise Solutions, Government Solutions and ITCS Groups compete with
many other companies for IT professionals. Primary competitive factors for
recruiting and retaining such professionals include: compensation; quality of
benefits; consistent flow of high quality, varied assignments; schedule
flexibility; and an understanding of consultant skills and work preferences.
These groups also compete for management consultants. Management consultants
often hold advanced degrees and are in high demand across many business
sectors. Primary competitive factors for recruiting and retaining such
professionals include: compensation; quality of benefits; quality, variety and
complexity of assignments; opportunity for advancement; and opportunity for
professional development.
The Company competes for clients with a wide array of service providers. The
Company considers large organizations with complex business and technology
needs to be among its prime clients. Within a given market, there are a
limited number of such potential clients, some of which have designated only
certain companies as approved providers of the type of services provided by
the Company. Primary competitive factors for obtaining and retaining clients
include: comprehensive service offerings; careful matching of consultant
skills with the client's requirements; nationwide and worldwide presence;
organizational expertise and expertise of individual consultants; price of
services; monitoring of client satisfaction during and after an engagement;
and general responsiveness to client needs.
Although the Company believes that it competes favorably in recruiting IT
professionals and management consultants as well as in obtaining clients,
there is no assurance that it will continue to be successful in doing so.
Growth Strategy
The Company believes that it needs to focus on the emerging opportunities of
the Internet economy to achieve internal growth. The Company believes that
many of its current service offerings (including eTransformation, custom
application development, eStrategy, eGovernment, eWorkplace, eValueChain and
IT staffing) are well positioned to benefit from the large client interest and
investment in Internet, intranet and extranet technologies. In addition, the
Company believes that there are significant additional opportunities available
to it through the incubation of strategic new offerings. The Company's growth
strategy consists of the following primary components:
. Focus on Key Service Offerings. In 1999 the Company narrowed its formerly
wide spectrum of services offerings to effectively focus on a few, key
service areas. These include IT strategy and eBalanced Scorecard, IT
transformation, primarily from legacy to Internet or web-based systems,
electronic government and public access, and IT staffing. The Company has
a significant track record in each of these areas, and feels that it has
the capability to successfully grow revenue and margin without the
distraction of service areas that are considered non-core, less
significant or those that have historically performed poorly over time.
. Sales and Management Training. Management believes that it has assembled
a world-class professional staff. A strategic part of growing the
organization is the retention of best-in-class individuals and the
advancement of leadership at all levels through a clearly defined and
executed training program. Ongoing training offers a means of sharing
knowledge, fostering company culture, participating in best practices and
enhancing critical job skills. The expanded organization and history of
continued rapid growth have
4
provided professional staff with an array of opportunities and challenges,
and management believes that the continuing development of the
professional staff is central to the Company's successful growth and
expansion.
. Leverage Opportunities of the Emerging Digital Economy. Management
believes that the Company is well positioned to benefit from the growing
client interest and investment in Internet and other web-based
technologies. Under its emerging business model, The Company will both
nurture certain existing e-solutions capabilities and incubate new
offerings within its organization to create new independent units focused
on delivering web-based business-to-business e-solutions. In early 2000
the Company announced the launch of two new service units:
GovConnect.com(TM), electronic government and public access; and the
eSystems Development Group, focusing on end-to-end (strategy,
transformation, implementation) eBusiness solutions. The Company plans to
hold a variable ownership position in its new e-businesses, some of which
may be publicly held.
. Leverage Key Strategic Partnerships. The Company understands that
strategic partnerships are key to successful service development and
delivery in the current highly complex and rapidly changing technological
environment. Therefore, it has formed several key partnerships with
industry leading software, systems, communications, computing and
platform companies. The partners often benefit from this relationship
with the Company as well, not only from the perspective of added
opportunities, but for purposes of beta testing and ongoing design of
tools and methodologies. The Company believes it must develop and
maintain successful key partnerships to better serve its clients. The
Company is not a reseller of any major product or service of any of its
partners, and takes pride in its position as an unbiased consultancy.
. Large Account Penetration. The Company seeks to develop long-term
strategic partnerships with industry leading Global 2000 clients. The
Company offers services across the IT spectrum, particularly involving
enterprise applications and Internet or other web-based strategy,
transformation or implementation services. The Company believes that
leveraging additional Company services to its top 100 clients as well as
ongoing client satisfaction will result in a strong recurring revenue
base. In addition, the Company's Government Solutions Group currently
provides services to a majority of state governments. The Company plans
to leverage its track record with that base of government agencies by
offering additional service offerings within each given state to other
agencies or municipalities, particularly in the area of electronic
government and public access.
. Focus on Accountability. Management understands that growth is not enough
to enhance shareholder value. To increase shareholder value, growth must
be managed and controlled to ensure that the growth is responsible
growth. The Company made a significant investment in 1999 to create the
systems and metrics to measure revenue growth and monitor spending. The
Company has also successfully recruited a new Chief Operating Officer,
Chief Financial Officer and Chief Information Officer to help drive
growth while maintaining fiscal responsibility.
Client Base
The Company focuses its sales efforts primarily on large organizations with
complex business and technology needs. In the year ended December 25, 1999,
approximately 20% of the Company's revenue was derived from its top 10
customers, none of which accounted for more than 10% of revenue. The primary
industries served by the Company are communications and computing, financial
services, manufacturing and the public sector.
Employees
As of December 25, 1999, the Company had approximately 4,900 employees,
consisting of 2,200 salaried consultants, 1,800 hourly consultants and 900
branch, corporate and administrative staff. In addition, the Company had
approximately 700 consultants working on an independent contractor basis as of
such date. The
5
Company is not a party to any collective bargaining agreements and considers
its relationships with its employees to be satisfactory.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
G. Drew Conway.......... 42 Chairman, Chief Executive Officer and Director
Edward H. Longo, Jr..... 56 President and Chief Operating Officer
Joseph F. Pesce......... 51 Executive Vice President, Chief Financial Officer and Treasurer
Christopher D. T.
Guiffre................ 31 Vice President, General Counsel and Clerk
Mr. Conway founded the Company (formerly The Registry, Inc.) in 1986, and
currently serves as Chairman and Chief Executive Officer.
Mr. Longo has served as President and Chief Operating Officer since July,
1999. From 1980 until 1999, Mr. Longo served in various executive roles
including Senior Vice President of Information Services Division at Keane,
Inc., an IT services company. From 1970 until 1980, he served in various
management and technical positions at Honeywell, Inc., a diversified
technology and manufacturing company.
Mr. Pesce has served as Executive Vice President, Chief Financial Officer
and Treasurer since July, 1999. From 1994 until 1999, Mr. Pesce was Vice
President, Chief Financial Officer and Treasurer of Concentra Managed Care
Inc., a provider of field care management and specialized cost containment
services. From 1981 until 1994, he held various financial positions of
increasing responsibility with Computervision Corporation and its predecessor,
Prime Computer, Inc., including Controller, Vice President of Finance,
Treasurer and Chief Financial Officer. Mr. Pesce is a certified public
accountant.
Mr. Guiffre has served as Vice President, General Counsel and Clerk since
March, 2000. From 1998 to 2000, Mr. Guiffre served as Corporate Counsel and
Director of Legal Affairs, and from 1997 to 1998, he served as Counsel to the
Company. Prior to joining Renaissance, he was an Associate at Bingham Dana
LLP, a major Boston law firm. Mr. Guiffre is also a Director of Progressive
Solutions Corporation, a privately-held technology training company. Mr.
Guiffre has been a member of the Massachusetts Bar since 1995.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of
the Company.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Waltham,
Massachusetts, in approximately 200,000 square feet under a ten-year lease
which will expire in January 2010, unless renewed for one five-year term. The
Company is currently negotiating to sublease approximately 50,000 square feet
and 25,000 square feet of this facility, each for a three-year term. In
November of 1999 the Company moved from its prior Newton, Massachusetts
location in a leased space owned by the 189 Wells Avenue Realty Trust (the
"Trust"), of which G. Drew Conway, Chief Executive Officer, Chairman of the
Board and significant stockholder is sole beneficiary. That building was sold
in March, 2000 and the Company was released from its lease obligation
effective with the sale. The Company's new Waltham headquarters consolidates
the staff of 6 former area locations, all of which have been closed.
6
The Company also maintains offices and leases office space in the various
locations throughout the world in which it maintains branch offices. The
Company believes that its facilities are adequate for its current operations,
but there can be no assurance that the Company will be able to lease space on
acceptable terms to accommodate future growth.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not currently involved in any legal proceedings the resolution of which, in
management's opinion, would have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "REGI". The following table sets forth the high and low sales prices of
the Company's common stock for the periods indicated:
Quarter High Low
------- ------ ------
Fiscal 1999
First Quarter.................................................. $ 8.38 $ 4.00
Second Quarter................................................. 8.19 4.75
Third Quarter.................................................. 8.06 3.69
Fourth Quarter................................................. 7.75 2.69
Fiscal 1998
First Quarter.................................................. 31.75 20.75
Second Quarter................................................. 28.94 16.75
Third Quarter.................................................. 23.06 8.56
Fourth Quarter................................................. 15.06 5.38
The stock prices shown above have been adjusted to reflect the two-for-one
stock split effected as a stock dividend that was paid on March 24, 1998.
Holders of Record
On March 17, 2000, there were approximately 154 holders of record of the
Company's common stock.
Dividends
The Company currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. In addition, the
Company's revolving line of credit agreements prohibit the payment of cash
dividends without consent of the lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
7
Common Stock Buy Back
On March 14, 2000, the Company announced that its Board of Directors
authorized the Company to repurchase up to 2 million shares of its common
stock. The stock may be bought from time to time in the open market or through
private transactions. The repurchased shares would be used for employee stock
benefit and stock option plans.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
During the Company's fiscal year ended June 28, 1997 and the six-month
transition period (which resulted from a change to the Company's year-end)
ended December 27, 1997, the Company acquired Application Resources, Inc.
("ARI"), Shamrock Computer Resources, Ltd. ("SCR"), Renaissance Solutions,
Inc. ("RSI") and The Hunter Group, Inc. ("The Hunter Group") in transactions
accounted for as pooling of interests. In the second quarter of fiscal 1998,
the Company acquired Triad Data, Inc. ("Triad") and Neoglyphics Media
Corporation ("Neoglyphics") in transactions also accounted for as pooling of
interests. Each of the acquired companies had a fiscal year that ended in
December. The Statement of Operations Data and Balance Sheet Data for the
Company's fiscal years presented below give effect to these acquisitions by
combining their financial position as of the date shown and their results of
operations for the twelve months ended on that date with those of the Company,
as shown in the following table. For the transition period, the Statement of
Operations Data and Balance Sheet Data reflect the results of operations for
the six months ended December 27, 1997 and the financial position on that date
for all the companies.
Renaissance
(The
Registry) ARI SCR RSI Hunter Triad Neoglyphics
------------- ------------- ------------- ------------- ------------- ------------- -------------
Fiscal 1995.......... June 24, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1995(1)
Fiscal 1996.......... June 29, 1996 June 30, 1996 June 30, 1996 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1996
Fiscal 1997.......... June 28, 1997 June 30, 1997 June 30, 1997 June 30, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1997
(1) Neoglyphics commenced operations as a separate entity in February 1995.
The results of operations for 1995 include the 11 months ended December
31, 1995.
8
The following table sets forth, on the basis described above, certain
selected consolidated financial data of the Company. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto.
Year Ended Transition Year Ended
-------------------------- Period Ended -------------------------
June 24, June 29, June 28, December 27, December 26, December 25,
1995 1996(4) 1997(3) 1997 1998 1999
-------- -------- -------- ------------ ------------ ------------
(In thousands except per share data)
Statement of Operations
Data(1):
Revenue................. $199,356 $298,278 $444,504 $283,076 $710,156 $742,584
Cost of revenue......... 144,171 212,756 314,074 196,100 482,733 522,462
-------- -------- -------- -------- -------- --------
Gross profit............ 55,185 85,522 130,430 86,976 227,423 220,122
Selling, general and
administrative
expenses............... 45,642 69,186 97,809 71,134 193,355 208,856
Acquisition-related
expenses(2)............ -- 3,524 8,268 6,761 6,904 --
Restructuring charges
and other asset
writedowns(5).......... -- -- -- -- 5,691 6,910
-------- -------- -------- -------- -------- --------
Income from operations.. 9,543 12,812 24,353 9,081 21,473 4,356
-------- -------- -------- -------- -------- --------
Interest and other
(income) expense, net.. 804 773 (3,267) 1,162 5,503 9,336
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before taxes........... 8,739 12,039 27,620 7,919 15,970 (4,980)
Income tax provision.... 1,544 3,886 14,074 5,009 12,992 362
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations.. 7,195 8,153 13,546 2,910 2,978 (5,342)
Income (loss) from
discontinued
operations(6).......... 3,094 3,867 3,628 (7,141) (34,324) 3,419
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items.... 10,289 12,020 17,174 (4,231) (31,346) (1,923)
Extraordinary gain, net
of taxes of $579....... -- -- -- -- -- 833
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ 10,289 $ 12,020 $ 17,174 $ (4,231) $(31,346) $ (1,090)
======== ======== ======== ======== ======== ========
Basic earnings per
share:
Income (loss) from
continuing
operations............ $ 0.18 $ 0.19 $ 0.27 $ 0.05 $ 0.05 $ (0.09)
Discontinued
operations............ 0.07 0.09 0.07 (0.13) (0.62) 0.06
Extraordinary gain..... -- -- -- -- -- 0.01
-------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.25 $ 0.28 $ 0.34 $ (0.08) $ (0.57) $ (0.02)
======== ======== ======== ======== ======== ========
Diluted earnings per
share:
Income (loss) from
continuing
operations............ $ 0.17 $ 0.18 $ 0.25 $ 0.05 $ 0.05 $ (0.09)
Discontinued
operations............ 0.07 $ 0.08 $ 0.06 (0.12) (0.59) 0.06
Extraordinary gain..... -- -- -- -- -- 0.01
-------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.24 $ 0.26 $ 0.31 $ (0.07) $ (0.54) $ (0.02)
======== ======== ======== ======== ======== ========
Weighted average common
shares:
Basic.................. 40,776 42,885 50,495 54,537 55,418 56,338
Diluted................ 43,013 46,862 54,607 58,159 57,830 56,338
Distributions........... $ 4,372 $ 2,958 $ 3,465 $ 925 $ -- $ --
Balance Sheet Data:
Cash and cash
equivalents............ $ 8,067 $ 64,507 $ 30,013 $ 19,956 $ 10,957 $ 10,605
Working capital......... 26,958 113,147 134,023 75,411 58,530 95,919
Total assets............ 75,835 168,024 256,921 316,177 372,065 338,644
Total debt, including
current portion........ 25,016 11,198 12,021 49,928 96,899 73,509
Stockholders' equity.... 33,346 123,743 197,092 193,895 179,785 181,357
- --------
(1) Statement of Operations Data for the years ended June 24, 1995, June 29,
1996, June 28, 1997, December 26, 1998 and December 25, 1999 are for 52,
53, 52, 52 and 52 weeks, respectively.
(2) Represents transaction and other related costs associated with
acquisitions accounted for as pooling of interests.
9
(3) In August 1996, ARI received a settlement of $1.6 million from its
insurance company for payment of defense costs and related expenses
associated with certain litigation. This amount, less related expenses,
has been included in interest and other income (expense), net, in the
Statement of Operations Data above.
(4) In conjunction with the renegotiation of the Company's lease with a real
estate trust of which Mr. Conway is the sole beneficiary, the accounts of
the Trust have been consolidated with those of the Company, commencing
September 19, 1995 (see Note 14 of Notes to Consolidated Financial
Statements).
(5) The charge of $5.7 million in 1998 consists primarily of reserves for
redundant facilities and personnel pursuant to a restructuring plan which
the company adopted in the third quarter. The asset writedowns of $6.9
million in 1999 consist of $2.9 million related to the sale of Neoglyphics
and CMS in the second quarter and a $4.0 million goodwill writedown
related to the proposed disposition of Renaissance Worldwide
Professionals, Ltd. (formerly known as James Duncan Associates, Ltd.)
which is expected to close in March of 2000.
(6) In the fourth quarter of fiscal 1999, the Company decided to sell its
management consulting practice, the Business Strategy Group in an
initiative to support the Company's new strategic direction. The cash
transaction of $65.0 million closed on March 10, 2000 and will result in a
gain for the Company estimated at $10 million which will be recorded in
the first quarter of 2000. Accordingly, the Company reported the results
of the Business Strategy Group as discontinued operations in the
accompanying financial statements and related notes for all periods shown.
Income (loss) from discontinued operations for the six months ended
December 27, 1997 include acquisition-related expenses of $11.2 million
associated with the acquisition of RSI, which was accounted for as a
pooling of interests. Income (loss) from discontinued operations for the
year ended December 26, 1998 includes charges of $27.1 million associated
with the writeoff of goodwill associated with the Technomics and COBA-UK
businesses and other restructuring costs of $3.3 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Since its initial public offering in June 1996 and through the end of 1998,
the Company executed an aggressive acquisition strategy acquiring twenty-three
companies, significantly expanding the Company's national and international
presence and increasing the number of management consulting and IT service
offerings provided by the Company. With the growth came a reorganization of
the Company's structure into four business segments: Enterprise Solutions
Group, Government Solutions Group (together as the "Solutions Groups") and
Information Technology Consulting Services ("ITCS") Group and the Business
Strategy Group. The Business Strategy Group was sold on March 10, 2000 for
$65.0 million and is now shown as discontinued operations on the Company's
Statement of Operations for all periods presented (see Note 17 of Notes to
Consolidated Financial Statements).
Consulting services performed are billed either on a time and materials
basis, as is the case with the ITCS Group and certain sectors of the Solutions
Groups, or on a fixed price basis for the remainder of the Solutions Groups
and the Business Strategy Group. Revenue for fixed price contracts is
recognized using the percentage of completion method based upon the number of
labor hours incurred compared to the total estimated labor hours at estimated
realizable rates. Under the percentage of completion method, the Company must
estimate the percentage of completion of each project at the end of each
financial reporting period. Estimates are subject to adjustment as a project
progresses to reflect changes in projected completion costs or dates. The
cumulative effect of any revision in estimates of the percentage of
completion, or the effect of identifiable losses on cost over-runs, is
reflected in the financial reporting period in which the change in the
estimate or the loss becomes known. The Company mitigates the risk of losses
for cost over-runs by subdividing its projects into smaller phases. In these
cases, the Company and its clients agree on a fixed price and fixed time frame
before beginning each phase of the project. These agreements may be revised,
by mutual agreement, when a significant change in the scope or cost of a phase
arises that neither the Company nor the client had anticipated. Because the
Company bears the
10
risk of cost over-runs and inflation associated with fixed-price, fixed-time
frame projects, the Company's operating results may be adversely affected by
inaccurate estimates of contract completion costs and dates.
The Company experiences certain fluctuations in its revenues and operating
results as revenue is recognized only when consultants are working. As such,
quarterly results are adversely affected when client facilities are closed due
to holidays or inclement weather, when there are a number of Company scheduled
holidays falling within the quarter, or when consultants are on vacation
during certain peak vacation periods.
Revenue growth is achieved by increasing the number of projects or
consultants on engagements and, to a lesser extent, by increasing average bill
rates. Gross margin increases are achieved primarily by increasing the
utilization of the salaried consultants, and to a lesser extent, by increasing
the bill rates of hourly consultants and increasing the amount of revenue
generated by the Solutions Groups. The Solutions Groups generally obtain
higher gross margin percentages than the ITCS Group.
As a result of the number of acquisitions and expansion since June 1996, the
Company has increased its IT, human resources, legal, marketing and finance
infrastructure and expanded the number and size of branch facilities to
accommodate growth. These measures have resulted in increased selling, general
and administrative expenses. Delays in integrating the back office operations
of certain acquisitions have resulted in some redundant expenditures,
increasing selling, general and administrative expenses.
The Company continues to convert its enterprise-wide financial and human
resource systems to the PeopleSoft system. The Company expects a significant
benefit by conforming all accounting and human resource systems to PeopleSoft,
allowing for additional capacity without additional headcount, a reduction of
manual input, as well as expanded and more timely reporting of financial
information. The Company is staffing the PeopleSoft project internally. While
using internal resources reduces the overall costs of this project, the
Company will experience some decrease in the billable utilization of its
consultants as a result of using these resources on internal projects.
Acquisitions and Dispositions
In January 1999, the Company acquired substantially all of the assets of
InfoSolutions.edu, L.L.C. ("InfoSolutions") for approximately $5.2 million
including a $2.5 million note payable. InfoSolutions provides software
consulting and implementation to universities and non-profit organizations.
In fiscal 1998, the Company acquired three companies, Exad Galons,
Hackenberg and Partners (Hackenberg) and International Public Access
Technologies ("IPAT") for an aggregate of $12.5 million in cash.
InfoSolutions, Exad Galons, Hackenberg and IPAT were accounted for as
purchases. The purchase price has been allocated to the assets acquired and
liabilities assumed based upon their fair values as of the respective dates of
acquisition. The excess of the consideration paid over the estimated fair
value of net assets acquired has been recorded as goodwill. The results of
operations for these acquisitions have been included in the Company's results
of operations from the respective dates of acquisition. InfoSolutions, Exad
Galons and Hackenberg were added to the Company's Enterprise Solutions Group
whereas IPAT became part of the Company's Government Solutions Group.
In fiscal 1998, the Company also acquired Neoglyphics and Triad for a total
of 4,554,760 shares of the Company's common stock. Neoglyphics was added to
the Company's Enterprise Solutions Group while Triad became part of the
Company's ITCS Group. These transactions have been accounted for as pooling of
interests and, therefore, the financial statements of the Company have been
restated to include the financial condition, results of operations and cash
flows of these two companies for all periods presented. The Company incurred
$6.9 million in acquisition-related expenses in the second quarter of 1998
related to these transactions.
11
The Company made several dispositions of non-strategic assets in 1999. In
February 1999, the Company sold substantially all of the assets of Renaissance
Technomic, Inc. and Renaissance Technomic Limited (collectively, "Technomic"),
and COBA Consulting Limited ("COBA"). The Company recorded asset impairment
charges of approximately $27.1 million in 1998 associated with these
businesses which were part of the Business Strategy Group and are reported as
discontinued operations. No gain or loss was recognized in connection with the
sale of these businesses. Technomic was a provider of strategic market
research and consulting services. COBA was a provider of management consulting
services.
In May 1999, the Company sold substantially all of the assets of Neoglyphics
and its Customer Management Solutions Vantive practice ("CMS") for $10.0
million in cash, a $2.0 million convertible note receivable and 400,000 shares
of the purchaser's common stock. The note is convertible into common stock at
the time of a qualifying initial public offering by the purchaser at a 20%
discount from the offering price. The purchaser filed a preliminary
registration statement with the Securities and Exchange Commission ("SEC") in
early 2000. In connection with this sale, the Company recognized a net after-
tax gain of $833,000. The gain on the sale has been classified as an
extraordinary item because the pooling of interests method of accounting was
applied to the original acquisition of these assets within the last two years.
In the fourth quarter of fiscal 1999, the Company made a decision to sell
its Business Strategy Group for $65.0 million in cash. Accordingly, the
results of operations of the Business Strategy Group have been classified as
discontinued operations in the accompanying financial statements (see Note 17
of Notes to Consolidated Financial Statements). The transaction closed on
March 10, 2000 and will result in a gain for the Company of approximately $10
million which will be recorded in the first quarter of fiscal 2000. In
February 2000, the Company signed a letter of intent to sell Renaissance
Worldwide Professionals Ltd., formerly known as James Duncan Associates, back
to its management for approximately $1.2 million. This transaction is expected
to close by the end of March 2000 and will not have a material effect upon the
Company's results of operations. The Company recorded a goodwill writedown of
$4.0 million in connection with this business in the fourth quarter of 1999
(see Note 6 of Notes to Consolidated Financial Statements).
Twelve months ended December 25, 1999 and December 26, 1998
Revenue: Total revenue increased by $32.4 million or 4.6% to $742.6 million
in 1999 from $710.2 million in 1998. The Government Solutions Group led the
Company's revenue growth with an 83% increase to $36.4 million in 1999 from
$19.9 million in 1998. The Enterprise Solutions Group's revenue grew 5.1% to
$171.0 million in 1999 from $162.7 million in 1998 and the ITCS Group's
revenue grew 1.4% to $535.2 million in 1999 from $527.6 million in 1998. These
increases are attributable to the full year impact of the IPAT acquisition in
July 1998 for Government Solutions and new service offerings in all business
segments. The Company experienced a slowdown in revenue over the last half of
the year as demand for enterprise resource planning ("ERP") and IT consulting
and staffing services softened significantly. The Company believes that this
softening resulted from its customers and potential customers curtailing
current projects or deferring new project development and spending until 2000
because of concerns about the impact of the Year 2000 (Y2K) issue. The Company
believes that the Y2K issue created a significant slowdown in the industry and
a hesitation in the marketplace as clients shifted their staffing and spending
priorities away from initiating new IT projects.
Gross Profit: Total gross profit decreased by $7.3 million or 3.2% to $220.1
million in 1999 from $227.4 million in 1998. As a percentage of revenue, gross
profit decreased to 29.6% in 1999 from 32.0% in 1998. This decrease in gross
profit percentage was attributable to a reduction in the ITCS Group and
Enterprise Solutions Groups' margins, especially over the last half of the
year due to the reduction in revenue mentioned above.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $15.5 million or 8% to $208.9 million in
1999 from $193.4 in 1998. As a percentage of revenue, selling, general and
administrative expenses increased to 28.1% of revenue for fiscal 1999 from
27.2% for fiscal 1998. This
12
increase was attributable primarily to investments in the Company's
information technology, corporate finance and administrative functions and
telecommunications and facilities infrastructure to accommodate the growth of
the past year.
Restructuring Charges and Other Asset Writedowns: The Company recorded asset
writedowns of $6.9 million in fiscal 1999. The Company recorded asset
writedowns of $2.9 million in connection with the sale of Neoglyphics and CMS
in the second quarter of 1999 and a $4.0 million goodwill writeoff in
connection with the proposed disposition of Renaissance Worldwide
Professionals, Ltd. which is expected to close at the end of March 2000. The
restructuring and other asset write-downs of $5.7 million in 1998 related to a
restructuring plan designed to focus the Company on the new corporate strategy
and eliminate redundant facilities, equipment, software and personnel recorded
in the third quarter of 1998. A balance of $2.9 million accrual remained from
this charge at December 26, 1998 and was fully utilized in fiscal 1999. The
Company believes that it fully realized the annual savings that were expected
from actions implemented.
Interest and Other Expense: Interest and other expense increased by $3.8
million to $9.3 million in 1999 from $5.5 million in 1998. This increase is
due to increased borrowings under the Company's line of credit during fiscal
1999.
Income Tax Provision: The Company recorded income tax provisions of $13.0
million and $0.4 million for the twelve months ended December 26, 1998 and
December 25, 1999, respectively. The resulting effective tax rate for these
periods is not meaningful due to the impact of non-deductible expenses for tax
purposes in addition to other book and tax differences (see Note 8 of Notes to
Consolidated Financial Statements).
Income (Loss) from Discontinued Operations: Income (loss) from discontinued
operations includes the operating activities of the Business Strategy Group.
Net income from discontinued operations was $3.4 million in 1999 compared to a
loss of $34.3 million in 1998. Income (loss) from discontinued operations for
the twelve months ended December 26, 1998 includes charges of $27.1 million
associated with the writeoff of goodwill associated with the Technomics and
COBA-UK businesses and other restructuring costs of $3.3 million (see Note 17
of Notes to Consolidated Financial Statements).
Extraordinary Gain, Net of Tax: In connection with the sale of substantially
all of the assets of Neoglyphics and CMS, the Company recognized a net after-
tax gain of $833,000. The gain on the sale has been classified as an
extraordinary item because the pooling of interests method of accounting was
applied to the original acquisition of these assets within the last two years.
Twelve months ended December 26, 1998 and December 27, 1997
In 1997, the Company changed its fiscal year from the last Saturday in June
to the last Saturday in December. The following table sets forth certain
consolidated financial data of the Company for the twelve months ended
December 27, 1997 and December 26, 1998. This data is presented to reflect the
comparative periods discussed in the following analysis.
13
Additional Selected Consolidated Financial Data
Year ended
-------------------------
December 27, December 26,
1997 1998
------------ ------------
(Unaudited)
Revenue............................................. $531,247 $710,156
Cost of revenue..................................... 370,141 482,733
-------- --------
Gross profit........................................ 161,106 227,423
Selling, general and administrative expenses........ 124,043 193,355
Acquisition-related expenses........................ 6,361 6,904
Restructuring charges and asset writedown........... -- 5,691
-------- --------
Income from continuing operations................... 30,702 21,473
Interest and other (income) expense, net............ 1,583 5,503
-------- --------
Income from continuing operations before taxes...... 29,119 15,970
Income tax provision................................ 13,167 12,992
-------- --------
Net income from continuing operations............... 15,952 2,978
Loss from discontinued operations, net of income
taxes.............................................. (4,664) (34,324)
-------- --------
Net income.......................................... $ 11,288 $(31,346)
======== ========
Revenue: Total revenue increased by $179.0 million or 33.7% to $710.2
million in 1998 from $531.2 million in the twelve months ended December 27,
1997. The increase is attributable primarily to increases in the revenues of
the ITCS Group; whose revenues comprised 74% of the total revenues for the
twelve months ended December 26, 1998. The ITCS Group's revenues increased by
$108.2 million or 25.1% to $527.6 million in the period due to growth within
existing branch offices. Revenues from the Enterprise Solutions Group
increased $65.3 million or 67.0% to $162.7 million in the period due to an
increase in the overall number of engagements, the acquisition of Exad Galons
and Hackenberg and the creation of additional service offerings during the
year. Revenues from the Company's Government Solutions Group increased 461% to
$19.9 million from $3.5 million in the comparable prior period. These
increases are attributable primarily to the addition of the IPAT acquisition
in July of 1998 and the full year impact of the EMS acquisition acquired in
August of 1997.
Gross Profit: Gross profit increased 41.2% to $227.4 million for fiscal 1998
from $161.1 million in the twelve months ended December 27, 1997. As a
percentage of revenue, gross profit increased to 32.0% in fiscal 1998 from
30.3% in the twelve months ended December 27, 1997. This increase is
attributable to the number of higher margin solutions projects and the
increased utilization and number of salaried consultants as compared with the
prior period.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by 55.9% to $193.4 million in fiscal 1998
from $124.0 million in the twelve months ended December 27, 1997. As a
percentage of revenue, selling, general and administrative expenses increased
to 27.2% of revenue for fiscal 1998 from 23.4% for the comparable prior
period. The increase was attributable to the additional costs necessary to
support the growth in the Company's business and professional staff, increases
in the size and number of facilities, investments in upgrading the Company's
telecommunications networks and systems and additional provisions to the
allowance for doubtful accounts. In addition, the Company experienced
increases in amortization of goodwill due to the acquisitions made during
fiscal 1997 and 1998.
Acquisition-related Expenses: The Company incurred acquisition-related
expenses in fiscal 1998 of $6.9 million as a result of the acquisitions of
Neoglyphics and Triad in the second quarter. Acquisition-related expenses of
$6.4 million in the twelve months ended December 27, 1997 resulted from the
acquisition of the Hunter Group in the fourth quarter. These costs represent
investment banking, accounting, printing, and legal costs.
14
Restructuring Charges and Other Asset Writedowns: The restructuring and
other asset write-downs of $5.7 million in 1998 related to a restructuring
plan designed to focus the Company on the new corporate strategy and eliminate
redundant facilities, equipment, software and personnel recorded in the third
quarter of 1998. A balance of $2.9 million remained from this accrual as of
December 26, 1998.
Interest and Other Expense: Interest and other expense increased by $3.9
million to $5.5 million in fiscal 1998 from $1.4 million for the twelve months
ended December 27, 1997. This increase is due to increased borrowings under
the Company's line of credit during fiscal 1998 to fund acquisitions, earnout
payments and working capital expenditures. The Company had lower borrowings
under its line of credit in 1997 as a result of cash received in a public
offering of the Company's common stock in February 1997.
Income Tax Provision: The Company recorded income tax provisions of $13.0
million and $13.2 million for the twelve months ended December 27, 1997 and
December 26, 1998, respectively. The resulting effective tax rate for these
periods is not meaningful due to the impact of non-deductible expenses for tax
purposes in addition to other book and tax differences (see Note 8 of Notes to
Consolidated Financial Statements).
Income (Loss) from Discontinued Operations: Income (loss) from discontinued
operations for the twelve months ended December 26, 1998 includes charges of
$27.1 million associated with the writeoff of goodwill associated with the
Technomics and COBA-UK businesses and other restructuring costs of $3.3
million (see Note 17 to Notes to Consolidated Financial Statements).
Quarterly Results
The following tables summarize unaudited quarterly financial data for the
years ended December 25, 1999 and December 26, 1998. This financial data has
been prepared on the same basis as the audited financial statements and, in
the opinion of management, includes all adjustments necessary for the fair
presentation of the information for the periods presented, when read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter.
Three months ended
---------------------------------------
March June September December
1999 1999(2)(3) 1999 1999(4)
-------- ---------- --------- --------
(In thousands, except per share data)
Revenue...................... $198,171 $202,025 $180,899 $161,489
Gross profit................. 59,405 62,254 54,293 44,170
Income (loss) from continuing
operations before
extraordinary items(1)...... 1,421 2,845 (850) (8,758)
Earnings (loss) per share
from continuing operations
before extraordinary items:
Basic...................... $ 0.03 $ 0.05 $ (0.02) $ (0.15)
Diluted.................... $ 0.03 $ 0.05 $ (0.02) $ (0.15)
Net income (loss) before
extraordinary items(1)...... $ 1,701 $ 3,760 $ 1,142 $ (8,526)
Net earnings (loss) before
extraordinary items per
share:
Basic...................... $ 0.03 $ 0.08 $ 0.02 $ (0.15)
Diluted.................... $ 0.03 $ 0.08 $ 0.02 $ (0.15)
15
Three months ended
-------------------------------------
March June September December
1998 1998(5) 1998(6) 1998(7)
-------- -------- --------- --------
(In thousands except per share data)
Revenue........................ $157,539 $176,837 $188,998 $186,782
Gross profit................... 50,514 58,853 63,299 54,757
Income (loss) from continuing
operations.................... 4,148 (2,453) 5,885 (4,602)
Earnings (loss) per share from
continuing operations(1):
Basic........................ $ 0.08 $ (0.04) $ 0.11 $ (0.08)
Diluted...................... $ 0.07 $ (0.04) $ 0.10 $ (0.08)
Net income (loss) before
extraordinary items (1)....... $ 5,463 $ (439) $ 5,601 $(41,971)
Net earnings (loss) before
extraordinary items per share:
Basic........................ $ 0.10 $ (0.01) $ 0.10 $ (0.75)
Diluted...................... $ 0.09 $ (0.01) $ 0.10 $ (0.75)
- --------
(1) In 1999, the Company decided to sell its management consulting practice,
the Business Strategy Group in an initiative to support the Company's new
strategic direction. The cash transaction of $65.0 million closed on March
10, 2000 and will result in a gain for the Company estimated at $10
million which will be recorded in the first quarter of 2000. Accordingly,
the Company reported the results of the Business Strategy Group as
discontinued operations in the accompanying financial statements and
related notes for all periods shown. Therefore, the difference between
"Income (loss) from continuing operations before extraordinary items" for
each quarter as shown above and quarterly results previously shown is due
to discontinued operations, net of taxes.
(2) Includes an asset writedown of $2.9 million related to the sale of
Neoglyphics and CMS in May 1999.
(3) Excludes the extraordinary net after-tax gain of $833,000 in connection
with the sale of Neoglyphics and CMS.
(4) Includes a goodwill writedown of $4.0 million associated with the proposed
disposition of Renaissance Worldwide Professionals, Ltd., formerly known
as James Duncan Associates, which is expected to close at the end of March
2000.
(5) Includes transaction costs of $6.9 million associated with the
acquisitions of Neoglyphics and Triad, which have been accounted for as
pooling of interests and a $2.9 million charge associated with Triad's
conversion from an S corporation to a C corporation.
(6) Includes charges for restructuring and other asset writedowns of $5.7
million, which includes costs for severance, lease closures, and other
write-offs of non-performing assets.
(7) Includes charges of $27.1 million associated with the writeoff of goodwill
associated with the Technomics and COBA-UK businesses and other
restructuring costs of $3.3 million which are included in income (loss)
from discontinued operations as they were associated with the Business
Strategy Group.
During the October to December quarter, the number of holidays and vacation
days marginally reduces revenue. Some clients also close operations completely
during the last week of the year. In 1999, the Company experienced a slowdown
in revenue over the last half of the year as demand for enterprise resource
planning ("ERP") and IT consulting and staffing services softened
significantly. The Company believes that this softening resulted from its
customers and potential customers curtailing current projects or deferring new
project development and spending until 2000 because of concerns about the
impact of the Year 2000 (Y2K) issue. The Company believes that the Y2K issue
created a significant slowdown in the industry and a hesitation in the
marketplace as clients shifted their staffing and spending priorities away
from initiating new IT projects. The Company has historically experienced
lower operating profit margin in the January to March quarter, in part as a
result of higher unemployment tax accruals and, to a lesser extent, FICA taxes
which are expensed as incurred. During this quarter, the unemployment tax,
which is based on the first $7,000-$24,500 of wages for each employee,
depending on the state, is significantly higher than other quarters.
16
Liquidity and Capital Resources
During 1998, the Company had a line of credit facility which provided a
borrowing base of 85% of eligible accounts receivable as defined, up to a
maximum borrowing of $85 million, payable on demand. Interest was payable
monthly in arrears at the bank's prime rate plus 0.50% (8.25% at December 26,
1998) or the LIBOR rate plus 2.50% (7.71% at December 26, 1998), at the option
of the Company. The line of credit was collateralized by the majority of the
assets of the Company, excluding the assets of the Trust, contained certain
restrictions, and required the maintenance of certain financial covenants.
This line of credit was terminated on March 24, 1999.
In February of 1999, the Company entered into a new line of credit ("Interim
Facility") with a different bank to provide a borrowing base of 85% of
eligible accounts receivable as defined, up to a maximum borrowing of $110
million. Interest was payable monthly in arrears at the LIBOR rate plus 2.00%
or the higher of the bank's prime rate or the Fed Funds rate plus 0.50%, plus
0.75%, at the Company's option. The Interim Facility was collateralized by the
majority of the assets of the Company, contained certain restrictions, and
required maintenance of certain financial covenants. The Interim Facility was
a short-term facility to be used until syndication of a senior term loan
facility committed to by the bank. The Interim Facility was used to repay the
outstanding borrowings on the existing line of credit that was terminated on
March 24, 1999.
On July 15, 1999 the Company entered into a three-year, $150 million
revolving credit and term loan agreement (the "Credit Facility") with a bank
syndicate. The Credit Facility consists of a revolving line of credit of $100
million ("Revolving Credit Facility") and a term loan of $50 million ("Term
Loan"). The Credit Facility bears interest at the higher of the Federal Funds
Rate plus 0.50% or the prime rate plus up to 1.75% or LIBOR plus up to 3.00%,
depending on the Company's level of compliance with certain financial ratios.
The Credit Facility requires the Company to make quarterly principal payments
of $250,000 on the Term Loan beginning September 15, 2000 and each quarter
thereafter until June 15, 2002. The remaining obligations under the Term loan
would be repaid on July 15, 2002 along with any outstanding borrowings under
the Revolving Credit Facility. The Credit Facility is secured by the majority
of the assets of the Company and contains certain restrictions and various
covenants, including the maintenance of defined financial ratios.
On September 15, 1999, the Company announced that it was revising its
revenue and earnings estimates for the third and fourth quarters of 1999 due
to a softening in the demand for services in two of its core business--the
Enterprise Solutions and ITCS Groups. Based upon this revised outlook, the
Company informed the bank syndicate that it would not be in compliance with
certain of its financial covenants for the third quarter of 1999. On November
4, 1999, the Company and the banks signed an amendment to the Credit Facility
amending certain financial covenants for the third quarter of 1999 through the
third quarter of 2000, reverting back to the original financial covenants
established in the Credit Facility thereafter. The Credit Facility, as
amended, now bears interest at the higher of the Federal Funds Rate plus 0.50%
or the prime rate, plus up to 2.25% or LIBOR plus up to 3.50%, depending on
the Company's level of compliance with certain financial ratios. In connection
with this amendment, the Company was required to pay amendment fees to the
banks and related expenses of approximately $500,000, which were recorded in
the third quarter of 1999 as interest, and other expense, net.
As of December 25, 1999, the availability under the Credit Facility was
approximately $19.6 million. The weighted average interest rate on the Credit
Facility at December 25, 1999 was 9.97%.
On February 25, 2000, the Company and the banks signed a second amendment to
the Credit Facility which permitted the Company to complete its sale of the
Business Strategy Group (see Note 17 of Notes to Consolidated Financial
Statements) and amended certain financial covenants to reflect the
dispositions of the Business Strategy Group and Renaissance Worldwide
Professionals, Ltd.
On March 14, 2000, the Company used $60.0 million of the proceeds that it
received from the sale of its Business Strategy Group to repay the $50.0
million Term Loan and $10.0 million of borrowings under the Revolving Credit
Facility.
17
The Company had cash flows from operations of $48.5 million for the fiscal
year ended December 25, 1999. The operating cash flows were attributable
primarily to a $4.4 million decrease in gross accounts receivable and a $22.7
million decrease in other current assets and other assets primarily attributed
to a reduction of prepaid expenses, security deposits on facilities and a
refund on income taxes.
The Company used $24.6 million of cash flows for investing activities for
the fiscal year ended December 25, 1999. The primary uses of cash for
investing activities for the period were $23.3 million for current year
acquisitions and certain contingent payments related to prior acquisitions and
$16.8 million for fixed asset purchases. This was mitigated by net proceeds
from the sale of Neoglyphics and CMS of $10.0 million.
The Company used $24.0 million of cash flows for financing activities in the
fiscal year ended December 25, 1999, primarily for the repayment of borrowings
on the Company's lines of credit.
The Company anticipates that its primary uses of working capital in future
periods will be for funding growth, either through acquisitions, the internal
development of existing branch offices or the development of new branch
offices and service offerings. The Company also anticipates capital
expenditures of approximately $15 to $20 million over the next twelve months,
primarily related to information systems. In connection with certain of its
acquisitions, the Company is obligated to make certain contingent payments
over the next several years, including approximately $9 million which the
Company currently is required to pay over the next 12 months. The Company does
not believe that such payments would have a material impact on the Company's
liquidity, results of operations or capital requirements. The Company's
principal capital requirement is working capital to support the accounts
receivable associated with its revenue growth. The Company believes that its
financing under the Credit Facility, together with cash flows from operations,
will be sufficient to meet the Company's presently anticipated working capital
needs for at least the next 12 months.
Foreign currency fluctuations and inflation did not have a significant
impact on the Company for any of the periods presented.
Recent Accounting Developments
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company is required to be in conformity with the
provisions of SAB 101 in fiscal 2000 and is currently evaluating the impact
SAB 101 will have on its financial condition or results of operations.
Factors That May Affect Future Results
The following discussion of factors that may affect the future results of
the Company's business are divided between those that relate specifically to
the Company and those that relate to companies in the IT consulting industry
in general.
Risks Specific To The Company
The Company's inability to effectively execute its growth strategy could
adversely affect operating results.
The Company's transformation into an eSolutions provider could adversely
effect the business and financial results. The Company is currently
attempting to transform itself into an eSolutions provider. The majority of
the Company's revenues have historically been derived from its IT staffing
business. In 1999, approximately 69% of total revenue was derived from the
ITCS Group, most of which was from IT staffing engagements. Part of the
transformation effort involves the transition to web-based IT recruiting,
with which the Company has little experience. In addition, changes in the
marketplace may cause revenue growth rates from IT staffing to decrease.
There is no guarantee that the Company will be successful in effectively
executing its transformation either rapidly enough, or in a way that
enhances operating results.
18
The success of the Company's current business strategy is highly dependent
on the growth of the Internet. The Company's success will be more clearly
linked to increased use of the Internet by businesses. Commercial use of
the Internet is currently at an early stage of development and the future
of the Internet is not clear. Because a significant portion of the
Company's business is derived from providing consulting services to
businesses relating to e-commerce, the Company's business will suffer if
commercial use of the Internet fails to continue to grow rapidly in the
future.
There is an inherent risk of selling assets of, or investments in, the
Company's business units. A portion of the Company's new business strategy
involves developing subsidiaries and potentially selling, in public or
private offerings, such companies, or portions of the companies, that it
has acquired or developed. The Company has no experience in executing this
new strategy and there can be no assurance that it will be able to do so
effectively. In addition, market and other conditions largely beyond the
Company's control affect: the Company's ability to engage in such sales;
the timing of such sales; and the amount of proceeds from such sales.
There is no guarantee that the Company will be able to obtain the funds
necessary to grow the business. The Company generally has financed its
operations from sales of its common stock, its revolving credit line, and
reinvested profits. These sources of funding may not be sufficient in the
future, and the Company may need to obtain funding from other sources.
However, the Company may not be able to obtain funding from other sources.
In addition, even if the Company finds outside funding sources, it may be
required to issue to such outside sources securities with greater rights
than those currently possessed by holders of shares of its common stock.
The Company may also be required to take other actions which may lessen the
value of its common stock, including borrowing money on terms that are not
favorable to the Company.
The Company's inability to manage growth could adversely effect operating
results. The growth of the Company's business in recent years has placed
significant demands on the Company's managerial and other resources. The
Company's ability to manage this growth effectively will require it to
continue to improve the Company's operating, financial and other internal
systems. The Company will also have to improve business development
capabilities and train, motivate and manage an increasing number of
employees. The Company currently relies on several different financial
reporting systems to monitor and manage the Company's financial
performance. The Company has nearly completed the implementation of a new
single financial reporting system, but that system is not yet fully
operational. The failure to successfully implement or transition to this
new system effectively may result in difficulty managing the business,
which could adversely affect the Company's operating results and stock
price.
The Company depends on certain key employees, and the loss of any of those
employees could potentially harm the Company's business.
The Company's performance is substantially dependent on the performance of
its executive officers and other key employees, in particular, G. Drew Conway,
its chairman and chief executive officer, Edward H. Longo, Jr., its president
and chief operating officer, and Joseph F. Pesce, its executive vice
president, chief financial officer and treasurer. In addition, the Company's
success is dependent on its ability to attract, train, retain, and motivate
high quality personnel, especially for its management team. The loss of the
services of any of the Company's executive officers or key employees could
potentially harm its business or financial results.
The Company depends on several key software vendor relationships.
The Hunter Group, the principal business in the Enterprise Solutions
business unit, derives a substantial proportion of its revenue from its
relationships with software providers, particularly PeopleSoft and SAP.
Because the Hunter Group contributes a significant proportion of the Company's
operating profits, it is in part dependent on the continued success of those
software vendors. An adverse change in The Hunter Group's relationship with
these software companies could adversely affect the Company's operating
results. Any changes in sponsored programs or the loss of certifications would
adversely affect the Company's business by reducing the number of client
referrals and engagements.
19
Doing business internationally involves additional risks unique to foreign
operations.
The Company recruits consultants and generates a portion of the Company's
revenues from outside the United States. Foreign operations are subject,
however, to special risks that can adversely affect revenues and profits.
These risks include:
. currency exchange rate fluctuations . tariff and trade barriers
. labor strikes . immigration laws and regulations
. political and economic disruptions . potentially adverse tax
. changes in government policies and consequences
regulatory requirements . exchange controls
The Company's operating results fluctuate and the Company's business is
slightly seasonal.
The Company's operating results have fluctuated from quarter to quarter as a
result of many different factors, including the number, significance, mix and
timing of client projects, the number of business days in a particular period,
and general economic conditions. As the Company's Enterprise and Government
Solutions Groups, which provide services principally on a project-by-project
basis, grow and contribute a greater percentage of the Company's revenues,
greater variability in quarterly operating results may occur. The Company's
business is also somewhat seasonal. We experience this seasonality in the
Company's fourth quarter because of an increased number of holidays in that
quarter. Investors should not rely on operating results in any one quarter as
an indicator of the Company's future results.
The Company must develop and maintain positive brand name awareness.
The Company believes that establishing and maintaining its brand name is
essential to expanding business and attracting new customers. The Company also
believes that the importance of brand name recognition will increase in the
future because of the growing number of consulting companies that will need to
differentiate themselves. Promotion and enhancement of the Company's brand
name will depend largely on the Company's ability to provide consistently
high-quality services. If the Company is unable to provide high-quality
services, the value of its brand name may suffer.
The value of the Company's business may fluctuate because the value of some
of its assets fluctuates.
In the future, a portion of the Company assets may include the equity
securities of both publicly traded and non-publicly traded companies. The
market price and valuations of the securities that the Company holds in such
companies may fluctuate due to market conditions and other conditions over
which the Company has no control. Fluctuations in the market price and
valuations of the securities that the Company holds in other companies may
result in fluctuations of the market price of the Company's common stock and
may reduce the amount of working capital available to the Company.
The price of the Company's common stock has been volatile.
Recently, the stock market has experienced significant price and volume
fluctuations that have particularly impacted the market prices of equity
securities of many companies providing Internet-related services. Some of
these fluctuations appear to be unrelated or disproportionate to the operating
performance of such companies. Such future market movements could adversely
affect the market price of the Company's common stock, especially if the
Company is successful in implementing its Internet-based strategy.
Two directors control a substantial amount of the Company's common stock.
Approximately 33% of the Company's common stock is held by Mr. Conway
(24.6%) the Company's chairman and chief executive officer, and Mr. Terry
Hunter (8.4%), a former officer and director. As a result, Messrs. Conway and
Hunter would be able to significantly influence any matter requiring
stockholder approval.
20
This concentration of ownership could also have the effect of making it
difficult for a third party to acquire control of the company and may deter
third parties from attempting to do so. Future sales of substantial amounts of
their common stock, or the potential for such sales, may adversely affect the
prevailing market price of the common stock.
Risks Relating To The Information Technology Consulting Industry
All providers of IT consulting services face similar risks. The following is
a list of the significant risks and how they may affect the Company's
business.
The Company's business depends on attracting and retaining qualified
professionals who are in high demand.
The Company's business and future growth depend upon the Company's ability
to attract and retain experienced and skilled professionals, particularly
management consultants, IT professionals, IT project managers, business
development managers, account managers, and technology recruiters. Competition
for these professionals is intense because the demand for them is greater than
their current availability. Despite the Company's best efforts, not all of the
Company's professionals will always be satisfied with the Company's culture,
compensation and benefits. This problem can be particularly troublesome with
professionals of an acquired business who may have come from a corporate
culture that is different than the Company's. There is great mobility among
the employees that we need to attract. Many of the Company's competitors have
substantially greater financial and other resources. They may offer these
individuals more attractive compensation and benefits packages. If the Company
does not recruit, train and maintain a sufficient number of professional
personnel, it will not be able to satisfy client demands for IT consulting
services and the Company's business will be adversely affected.
IT projects are complex and subject the Company to non-payment and other
financial risks.
Many of the Company's IT projects subject it to financial risks. These
engagements often involve critical business processes and leading-edge
software applications. Despite the Company's best efforts, it may not always
be able to satisfy a customer's expectations because software applications do
not always work as expected. A customer's dissatisfaction could affect its
willingness to pay us for these services, which would result in a financial
loss on that project. Customer dissatisfaction can also damage the Company's
reputation and negatively affect the Company's ability to attract new
business. Even in situations where the scope of a project changes, as a result
of customer demands or otherwise, we may not always be successful in obtaining
a price adjustment as large as the one we seek. To the extent that projects
are extended or enlarged without corresponding changes in fee schedules, the
Company's business would be adversely affected.
Failure to remediate Year 2000 problems could lead to liability claims.
Some clients engaged the Company to evaluate and remedy their Year 2000
problem. Many of these engagements involved projects critical to the client's
operations and business. Despite the Company's best efforts, because the Year
2000 problem was complex and because it was often associated with critical
client systems or processes, the Company may be subject to claims from clients
for failure to properly evaluate or remedy the client's Year 2000 problem. In
addition, the Company has written software code and performed services for the
Company's clients in the past that may still be in use but are not year 2000
compliant. Such past efforts may subject us to claims similar to those
mentioned above despite the fact that we were not engaged to evaluate or
remedy the clients year 2000 problems. Although the Company has not been
notified of any Y2K related problems, any claims with respect to year 2000
problems, whether meritorious or not, may adversely affect the Company's
business.
21
The Company's business is subject to fluctuations in the general health of
the economy.
Demand for IT consulting services will be affected by the general health of
the domestic and international economies. Some clients may reduce expenditures
for information technology if they suffer slowdowns in their businesses due to
a general slowing of the economy. This reduction in spending may require some
clients to delay or cancel IT projects that it had been engaged to manage or
on which the Company's consultants may have been staffed. Fluctuations in the
general economy that adversely affect the amount of money the Company's
clients are willing to spend on IT consulting or related services may
adversely affect the Company's business.
U.S. government limits on immigration restrict the Company's ability to hire
foreign nationals.
Each year the Company hires IT professionals who are foreign nationals
working in the United Stated under H-1B permits. Under current law, there is a
fixed annual number of H-1B visas available for issuance. Once this limit has
been reached, the Company is unable to hire additional foreign nationals until
additional H-1B visas are made available in the following fiscal year. These
limitations on the Company's ability to hire foreign nationals under H-1B
visas may adversely affect the Company's business.
The market for IT services is competitive.
The market for IT services and management consulting services includes a
large number of competitors and is highly competitive. The Company's
competitors include "Big Five" accounting firms, systems consulting and
integration firms, application software development firms, services divisions
of computer equipment companies and general management consulting companies.
Moreover, the Company often competes with the internal resources of the
Company's clients. The competitive nature of the marketplace creates pricing
pressures that may adversely affect the Company's business.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates on its borrowings. In the normal
course of its business, the Company manages its exposure to these risks as
described below. The Company does not engage in trading market risk sensitive
instruments for speculative purposes.
Foreign Exchange
During 1999, less than 10% of the Company's business was transacted in
currencies other than the U.S. dollar. The Company does not enter into forward
exchange contracts as a hedge against foreign currency exchange risk on
transactions denominated in foreign currencies or for speculative or trading
purposes. The Company has performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in foreign exchange rates. As of December
25, 1999 the analysis demonstrated that such market movements would not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. Actual gains and losses in the future may
differ materially from this analysis based on changes in the timing and amount
of foreign currency rate movements and the Company's actual exposures. The
Company believes that its exposure to foreign currency exchange rate risk at
December 25, 1999 was not material.
Interest Rates
As of December 25, 1999, the Company's exposure to market risk associated
with changes in interest rates relates primarily to its debt obligations. At
December 25, 1999 the terms of the Company's long-term fixed-rate debt
approximated fair value using quoted market prices where available. Market
risk associated with the Company's long-term debt is the potential increase in
fair value resulting from a decrease in interest rates. As of December 25,
1999, approximately $68.9 million (primarily borrowings under the Company's
Credit Facility) of the Company's total debt of $73.5 million was variable at
an average rate of 9.97%.
22
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of PricewaterhouseCoopers LLP...................................... 24
Report of Katch Tyson & Company........................................... 25
Report of Goldstein Golub Kessler LLP..................................... 26
Consolidated Balance Sheet as of December 26, 1998 and December 25, 1999.. 27
Consolidated Statement of Operations for the Year Ended June 28, 1997, the
Six Months Ended December 27, 1997 and the Years Ended December 26, 1998
and December 25, 1999.................................................... 28
Consolidated Statement of Changes in Stockholders' Equity for the Year
Ended June 28, 1997,
the Six Months Ended December 27, 1997 and the Years Ended December 26,
1998 and
December 25, 1999........................................................ 29
Consolidated Statement of Cash Flows for the Year Ended June 28, 1997, the
Six Months Ended December 27, 1997 and the Years Ended December 26, 1998
and December 25, 1999.................................................... 32
Notes to Consolidated Financial Statements................................ 33
Financial Statement Schedule:
II--Valuation and Qualifying Accounts.................................... S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
See selected unaudited quarterly financial data in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Renaissance Worldwide, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements listed in the index appearing under Item 8
of this Form 10-K present fairly, in all material respects, the financial
position of Renaissance Worldwide, Inc. and its subsidiaries (the "Company")
at December 26, 1998 and December 25, 1999, and the results of their
operations and their cash flows for the year ended June 28, 1997, for the six
months ended December 27, 1997, and for each of the two years in the period
ended December 25, 1999 in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing in Item 8 of this Form 10-K
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits. We did not audit the results of operations of Neoglyphics
Media Corporation, a wholly-owned subsidiary, for the year ended December 31,
1997, which are included in the accompanying consolidated statement of
operations for the year ended June 28, 1997. We also did not audit the results
of operations of Triad Data, Inc., a wholly-owned subsidiary, for the year
ended December 31, 1997, which are included in the accompanying consolidated
statement of operations for the year ended June 28, 1997. In the aggregate,
these statements reflect total revenues of $61,575,000 in the accompanying
consolidated statement of operations for the year ended June 28, 1997. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Neoglyphics Media Corporation and Triad Data, Inc.
for this period is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
_____________________________________
Boston, Massachusetts
March 14, 2000
24
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Neoglyphics Media Corporation
We have audited the accompanying statement of financial position of
Neoglyphics Media Corporation as of December 31, 1997, and the related
statements of income and cash flows for the year then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neoglyphics Media
Corporation at December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Katch, Tyson & Company
_____________________________________
Northfield, IL
March 12, 1998
25
INDEPENDENT AUDITOR'S REPORT
To the Stockholder
Triad Data, Inc.
We have audited the accompanying balance sheets of Triad Data, Inc. as of
December 31, 1997 and 1996 and the related statements of income and retained
earnings, and cash flows for the years then ended (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Triad Data, Inc. as of
December 31, 1997 and 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Goldstein Golub Kessler LLP
New York, New York
February 27, 1998
26
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
December 26, December 25,
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 10,957 $ 10,605
Accounts receivable, net of allowance for doubtful
accounts of $9,616 and $10,344, respectively...... 196,190 155,784
Deferred income taxes.............................. 10,335 12,136
Other current assets............................... 23,918 6,882
Net current assets of discontinued operations...... -- 7,765
-------- --------
Total current assets............................. 241,400 193,172
Fixed Assets:
Land............................................... 360 360
Buildings.......................................... 1,439 1,439
Leasehold and building improvements................ 5,702 9,144
Computer equipment and software.................... 27,789 21,224
Furniture and equipment............................ 10,777 12,136
-------- --------
Total fixed assets............................... 46,067 44,303
Less: Accumulated depreciation and amortization..... (14,910) (14,629)
-------- --------
Fixed assets, net................................... 31,157 29,674
Goodwill and other intangible assets, net of
accumulated amortization of $6,630 and $8,694,
respectively....................................... 84,869 70,868
Other assets........................................ 12,560 9,450
Deferred income taxes............................... 2,079 3,336
Net non-current assets of discontinued operations... -- 32,144
-------- --------
Total assets..................................... $372,065 $338,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................... $ 92,476 $ 18,914
Current portion of long-term debt.................. 2,070 1,544
Accounts payable................................... 33,294 28,546
Accrued salaries, wages and related benefit
costs............................................. 34,355 31,754
Other accrued expenses............................. 16,494 13,156
Deferred income taxes.............................. 4,181 3,339
-------- --------
Total current liabilities........................ 182,870 97,253
Deferred income taxes............................... 5,928 6,983
Term loan........................................... -- 50,000
Other long-term debt................................ 2,353 3,051
Other liabilities................................... 1,129 --
-------- --------
Total liabilities................................ 192,280 157,287
-------- --------
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred Stock, $0.10 par value, 1,000,000
authorized:
None issued and outstanding........................ -- --
Common stock, no par value: 99,000,000 authorized:
56,225,943 issued and 56,025,943 outstanding and
56,765,438 issued and 56,565,438 outstanding,
respectively....................................... 4,725 4,725
Additional paid-in-capital.......................... 181,520 184,183
Notes receivable from stockholders.................. (1,476) (722)
Retained deficit.................................... (2,642) (3,732)
Accumulated other comprehensive income (loss)....... 204 (551)
Treasury stock, at cost: 200,000 shares............. (2,546) (2,546)
-------- --------
Total stockholders' equity....................... 179,785 181,357
-------- --------
Total liabilities and stockholders' equity....... $372,065 $338,644
======== ========
The accompanying notes are an integral part of these financial statements.
27
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share data)
Six Months
Year Ended Ended Year Ended Year Ended
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
---------- ------------ ------------ ------------
Revenue..................... $444,504 $283,076 $710,156 $742,584
Cost of revenue............. 314,074 196,100 482,733 522,462
-------- -------- -------- --------
Gross profit................ 130,430 86,976 227,423 220,122
Selling, general and
administrative expenses.... 97,809 71,134 193,355 208,856
Acquisition-related
expenses................... 8,268 6,761 6,904 --
Restructuring charges and
asset writedowns........... -- -- 5,691 6,910
-------- -------- -------- --------
Income from operations...... 24,353 9,081 21,473 4,356
Interest expense............ 1,446 1,495 6,342 9,498
Interest income and other
(income) expense, net...... (4,713) (333) (839) (162)
-------- -------- -------- --------
Income (loss) before taxes.. 27,620 7,919 15,970 (4,980)
Income tax provision........ 14,074 5,009 12,992 362
-------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary
items...................... 13,546 2,910 2,978 (5,342)
Income (loss) from
discontinued operations,
net of income taxes........ 3,628 (7,141) (34,324) 3,419
-------- -------- -------- --------
Income (loss) before
extraordinary items........ 17,174 (4,231) (31,346) (1,923)
Extraordinary gain, net of
taxes of $579.............. -- -- -- 833
-------- -------- -------- --------
Net income (loss)........... $ 17,174 $ (4,231) $(31,346) $ (1,090)
======== ======== ======== ========
Basic earnings per share:
Income (loss) from
continuing operations.... $ 0.27 $ 0.05 $ 0.05 $ (0.09)
Discontinued operations... 0.07 (0.13) (0.62) 0.06
Extraordinary gain........ -- -- -- 0.01
-------- -------- -------- --------
Net income (loss)......... $ 0.34 $ (0.08) $ (0.57) $ (0.02)
======== ======== ======== ========
Diluted earnings per share:
Income (loss) from
continuing operations.... $ 0.25 $ 0.05 $ 0.05 $ (0.09)
Discontinued operations... 0.06 (0.12) (0.59) 0.06
Extraordinary gain........ -- -- -- 0.01
-------- -------- -------- --------
Net income (loss)......... $ 0.31 $ (0.07) $ (0.54) $ (0.02)
======== ======== ======== ========
Weighted average common
shares:
Basic..................... 50,495 54,537 55,418 56,338
======== ======== ======== ========
Diluted................... 54,607 58,159 57,830 56,338
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
28
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share data)
Preferred Stock Common Stock
No Par Value No Par Value Treasury Stock
------------------ ----------------- Warrant ---------------- Notes Deferred
Additional to acquire Receivable Stock
Paid-in Common from Share- Compen- Retained
Shares Value Shares Value Capital Stock Shares Value holders sation Earnings
---------- ------ ---------- ----- ---------- ---------- ------- ------- ----------- -------- --------
Balance at June
29, 1996........ 2,448,000 $1,916 48,898,148 $ 202 $100,331 $ -- -- $ -- $(476) $(179) $21,702
Repurchase of
stock........... -- -- -- -- -- -- 96,286 (2,000) -- -- --
Proceeds from
issuance of
stock, net of
issuance costs.. 165,000 1,564 2,776,660 1,043 52,916 -- (96,286) 2,000 -- -- (80)
Stock issued
upon sale of
warrants........ -- -- 1,013,760 -- 11,917 (1,600) -- -- -- -- --
Compensation in
connection with
grant of stock
options......... -- -- -- -- 528 -- -- -- -- -- --
Stock issued
upon exercise of
options......... -- -- 1,210,537 -- 3,497 -- -- -- -- -- --
Stock issued for
acquisition..... -- -- 266,528 -- 3,979 -- -- -- -- -- --
Tax benefit
associated with
option
exercises....... -- -- -- -- 3,557 -- -- -- -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- 179 --
Conversion of
preferred
stock........... (2,613,000) (3,480) 1,434,160 3,480 -- -- -- -- -- -- --
Stock issued
through stock
purchase plan... -- -- 111,474 -- 1,126 -- -- -- -- -- --
Buy back of
Treasury Stock.. -- -- (15,005) -- -- -- -- -- -- -- --
Distributions... -- -- -- -- -- -- -- -- -- -- (3,465)
Unrealized loss
on marketable
securities...... -- -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- --
Net income for
the year........ -- -- -- -- -- -- -- -- -- -- 17,174
Comprehensive
income for the
year............ -- -- -- -- -- -- -- -- -- -- --
Elimination of
duplicate
activity for the
six month period
ended December
31, 1996
resulting from
the change in
fiscal year of
entity acquired
in pooling-of-
interests....... -- -- (1,538,184) -- (20,650) 1,600 -- -- -- -- 169
---------- ------ ---------- ----- -------- ------ ------- ------- ----- ----- -------
Accumulated
Other Comprehensive
Income (loss)
------------------------
Unrealized Cumulative Total
Gain/loss on Translation Stockholders'
Investments Adjustment Equity
------------ ----------- -------------
Balance at June
29, 1996........ $(18) $265 $123,743
Repurchase of
stock........... -- -- (2,000)
Proceeds from
issuance of
stock, net of
issuance costs.. -- -- 57,443
Stock issued
upon sale of
warrants........ -- -- 10,317
Compensation in
connection with
grant of stock
options......... -- -- 528
Stock issued
upon exercise of
options......... -- -- 3,497
Stock issued for
acquisition..... -- -- 3,979
Tax benefit
associated with
option
exercises....... -- -- 3,557
Amortization of
deferred stock
compensation.... -- -- 179
Conversion of
preferred
stock........... -- -- --
Stock issued
through stock
purchase plan... -- -- 1,126
Buy back of
Treasury Stock.. -- -- --
Distributions... -- -- (3,465)
Unrealized loss
on marketable
securities...... (15) --
Cumulative
translation
adjustment...... -- 200
Net income for
the year........ -- --
Comprehensive
income for the
year............ -- -- 17,359
Elimination of
duplicate
activity for the
six month period
ended December
31, 1996
resulting from
the change in
fiscal year of
entity acquired
in pooling-of-
interests....... 12 (302) (19,171)
------------ ----------- -------------
The accompanying notes are an integral part of these financial statements.
29
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share data)
Preferred Stock Common Stock
No Par Value No Par Value Treasury Stock
----------------- ----------------- Warrant ----------------- Notes Deferred
Additional to acquire Receivable Stock
Paid-in Common from Share- Compen- Retained
Shares Value Shares Value Capital Stock Shares Value holders sation Earnings
-------- ------- ---------- ----- ---------- ---------- ------- ------- ----------- -------- --------
Balance at June
28, 1997........ -- -- 54,158,078 4,725 157,201 -- -- -- (476) -- 35,500
Compensation
expense in
connection with
grant of stock
options......... -- -- -- -- 750 -- -- -- -- -- --
Stock issued
upon exercise of
options......... -- -- 191,726 -- 1,057 -- -- -- -- -- --
Stock issued for
acquisition..... -- -- 328,578 -- -- -- -- -- -- -- --
Tax benefit
associated with
option
exercises....... -- -- -- -- 302 -- -- -- -- -- --
Stock issued
through stock
purchase plan... -- -- 73,670 -- 1,475 -- -- -- -- -- --
Unrealized gain
on marketable
securities...... -- -- -- -- -- -- -- -- -- -- --
Net loss for the
period.......... -- -- -- -- -- -- -- -- -- -- (4,231)
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income for the
period.......... -- -- -- -- -- -- -- -- -- -- --
Adjustment to
add back
elimination of
the six month
period ended
June 30, 1997
resulting from
the change in
fiscal year of
entity acquired
in pooling-of
interests....... -- -- -- -- -- -- -- -- -- -- (827)
Elimination of
duplicate
activity for the
six month period
ended December
27, 1997
resulting from
the change in
fiscal year of
entities
acquired in
pooling-of-
interests....... -- -- (86,637) -- (42) -- -- -- -- -- (1,738)
------- ------- ---------- ----- ------- --- ------- ------- ---- --- ------
Accumulated
Other Comprehensive
Income (loss)
------------------------
Unrealized Cumulative Total
Gain/loss on Translation Stockholders'
Investments Adjustment Equity
------------ ----------- -------------
Balance at June
28, 1997........ (21) 163 197,092
Compensation
expense in
connection with
grant of stock
options......... -- -- 750
Stock issued
upon exercise of
options......... -- -- 1,057
Stock issued for
acquisition..... -- -- -
Tax benefit
associated with
option
exercises....... -- -- 302
Stock issued
through stock
purchase plan... -- -- 1,475
Unrealized gain
on marketable
securities...... 43 --
Net loss for the
period.......... -- --
Cumulative
translation
adjustment...... -- 160
Comprehensive
income for the
period.......... -- -- (4,028)
Adjustment to
add back
elimination of
the six month
period ended
June 30, 1997
resulting from
the change in
fiscal year of
entity acquired
in pooling-of
interests....... -- (146) (973)
Elimination of
duplicate
activity for the
six month period
ended December
27, 1997
resulting from
the change in
fiscal year of
entities
acquired in
pooling-of-
interests....... -- -- (1,780)
------------ ----------- -------------
The accompanying notes are an integral part of these financial statements.
30
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share data)
Preferred Stock Common Stock
No Par Value No Par Value Treasury Stock
--------------- ----------------- Warrant --------------- Notes Deferred
Additional to acquire Receivable Stock
Paid-in Common from Share- Compen- Retained
Shares Value Shares Value Capital Stock Shares Value holders sation Earnings
--------- -------- ---------- ------ ---------- ---------- ------- ------- ----------- -------- --------
Balance at
December 27,
1997............ -- -- 54,665,415 4,725 160,743 -- -- -- (476) -- 28,704
Stock issued
upon exercise of
options......... -- -- 1,301,014 -- 5,861 -- -- -- -- -- --
Repurchase of
stock........... -- -- -- -- -- -- 200,000 (2,546) -- -- --
Stock issued for
acquisition..... -- -- -- -- 129 -- -- -- -- -- --
Tax benefit
associated with
option
exercises....... -- -- -- -- 9,914 -- -- -- -- -- --
Stock issued
through stock
purchase plan... -- -- 259,514 -- 4,873 -- -- -- -- -- --
Issuance of
notes to
stockholders.... -- -- -- -- -- -- -- -- (1,000) -- --
Unrealized gain
on marketable
securities...... -- -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- -- (31,346)
Comprehensive
income for the
year............ -- -- -- -- -- -- -- -- -- -- --
------- -------- ---------- ------ -------- ---- ------- ------- ------ ---- -------
Balance at
December 26,
1998............ -- -- 56,225,943 4,725 181,520 -- 200,000 (2,546) (1,476) -- (2,642)
Stock issued
upon exercise of
options......... -- -- 160,688 -- 450 -- -- -- -- -- --
Tax benefit
associated with
option
exercises....... -- -- -- -- 249 -- -- -- -- -- --
Stock issued
through stock
purchase plan... -- -- 378,807 -- 1,964 -- -- -- -- -- --
Repayment of
notes from
stockholders.... -- -- -- -- -- -- -- -- 754 -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- -- -- -- -- -- (1,090)
Comprehensive
income for the
year............ -- -- -- -- -- -- -- -- -- -- --
------- -------- ---------- ------ -------- ---- ------- ------- ------ ---- -------
Balance at
December 25,
1999............ -- $ -- 56,765,438 $4,725 $184,183 $-- 200,000 $(2,546) $ (722) $-- $(3,732)
======= ======== ========== ====== ======== ==== ======= ======= ====== ==== =======
Accumulated
Other Comprehensive
Income (loss)
------------------------
Unrealized Cumulative Total
Gain/loss on Translation Stockholders'
Investments Adjustment Equity
------------ ----------- -------------
Balance at
December 27,
1997............ 22 177 193,895
Stock issued
upon exercise of
options......... -- -- 5,861
Repurchase of
stock........... -- -- (2,546)
Stock issued for
acquisition..... -- -- 129
Tax benefit
associated with
option
exercises....... -- -- 9,914
Stock issued
through stock
purchase plan... -- -- 4,873
Issuance of
notes to
stockholders.... -- -- (1,000)
Unrealized gain
on marketable
securities...... (22) --
Cumulative
translation
adjustment...... -- 27
Net loss for the
year............ -- --
Comprehensive
income for the
year............ -- -- (31,341)
------------ ----------- -------------
Balance at
December 26,
1998............ -- 204 179,785
Stock issued
upon exercise of
options......... -- -- 450
Tax benefit
associated with
option
exercises....... -- -- 249
Stock issued
through stock
purchase plan... -- -- 1,964
Repayment of
notes from
stockholders.... -- -- 754
Cumulative
translation
adjustment...... -- (755)
Net loss for the
year............ --
Comprehensive
income for the
year............ -- -- (1,845)
------------ ----------- -------------
Balance at
December 25,
1999............ $-- $(551) $181,357
============ =========== =============
The accompanying notes are an integral part of these financial statements.
31
RENAISSANCE WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six Months Year Ended
Year Ended Ended -------------------------
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
---------- ------------ ------------ ------------
Cash flows from operating
activities:
Net income (loss)........... $17,174 $(4,231) $(31,346) $(1,090)
Adjustments to reconcile net
income (loss) to net cash
provided by (used for)
operating activities:
Depreciation and
amortization............... 3,947 5,099 10,748 16,328
Writedown of goodwill....... -- -- 26,409 3,960
Loss on writedown of fixed
assets..................... -- -- 4,159 2,950
Compensation expense on
stock options.............. 494 750 -- --
Provision for losses on
accounts receivable........ 902 1,274 12,703 11,659
Deferred income taxes....... 4,129 (97) (3,624) (2,654)
Extraordinary gain on sale
of assets.................. -- -- -- (833)
Changes in operating assets
and liabilities:
Accounts receivable......... (39,041) (26,677) (50,263) 4,355
Other current assets........ (2,478) (2,708) (6,063) 17,252
Other assets................ (1,093) (3,446) (8,757) 5,464
Accounts payable, accrued
expenses and other
liabilities................ 2,483 11,471 17,989 (8,913)
------- ------- -------- -------
Net cash provided by (used
for) operating
activities............... (13,483) (18,565) (28,045) 48,478
Cash flows from investing
activities:
Cash disbursed for
acquisitions, net of cash
acquired.................... (41,543) (36,987) (24,331) (23,322)
Cash proceeds from the sale
of business................. -- -- -- 10,000
Purchases of fixed assets.... (8,216) (11,841) (14,436) (16,824)
Proceeds from sale of
assets...................... -- -- -- 4,351
Net decrease (increase) in
notes receivable............ (721) 1,271 (1,698) 1,216
Net purchases (sales) of
marketable securities....... (15,100) 22,808 5,845 --
------- ------- -------- -------
Net cash used for
investing activities..... (65,580) (24,749) (34,620) (24,579)
Cash flows from financing
activities:
Net borrowings (repayments)
on revolving credit
facilities................. 3,507 31,234 47,382 (73,562)
Principal payments on long-
term debt.................. (2,564) (3,292) (2,242) 53
Proceeds from issuance of
long-term debt............. 384 4,047 311 50,000
Debt issue costs on new
credit facility............ -- -- -- (3,130)
Net proceeds from the
issuance of common stock... 67,127 -- -- --
Purchase of treasury stock.. (2,000) -- (2,546) --
Proceeds from the issuance
of treasury stock.......... 1,920 -- -- --
Proceeds from exercise of
stock options and purchase
plans...................... 4,633 2,530 10,734 2,663
Distributions............... (3,465) (925) -- --
------- ------- -------- -------
Net cash provided by (used
for) financing
activities............... 69,542 33,594 53,639 (23,976)
Effect of exchange rate
changes on cash and cash
equivalents................ 84 169 27 (275)
Addition of activity for
Hunter for January to June
1997 (Note 3)............... -- 200 -- --
Elimination of duplicate
activity from July to
December (Note 3)........... (25,057) (706) -- --
------- ------- -------- -------
Net decrease in cash and cash
equivalents................. (34,494) (10,057) (8,999) (352)
Cash and cash equivalents,
beginning of period......... 64,507 30,013 19,956 10,957
------- ------- -------- -------
Cash and cash equivalents,
end of period............... $30,013 $19,956 $ 10,957 $10,605
======= ======= ======== =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest...... $ 1,311 $ 1,324 $ 5,945 $ 8,662
Cash paid for income taxes.. $10,269 $10,589 $ 12,394 $ 7,291
The accompanying notes are an integral part of these financial statements.
32
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Renaissance Worldwide, Inc. ("Renaissance" or the "Company") is a global
provider of business and technology consulting services to organizations with
complex information technology ("IT") operations in a broad range of
industries. The Company's offerings are categorized into three business units:
the Enterprise Solutions Group, Government Solutions Group, and Information
Technology Consulting Services Group ("ITCS Group"). The Enterprise Solutions
Group provides IT solutions design and implementation services. The Government
Solutions Group provides specialized management and technology consulting
services to the public sector. The ITCS Group provides consulting services
centered around application design, implementation and support. A fourth
segment, the Business Strategy Group, which provided management consulting and
technology integration services in connection with performance support
systems, was sold for $65.0 million on March 10, 2000, and is reported as
discontinued operations (see Note 17). The Company's primary locations are in
North America with subsidiaries in Europe and Asia/Pacific (see Note 12).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying financial statements include the accounts of Renaissance
Worldwide, Inc. and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated.
Fiscal Year
Effective with the period ended December 27, 1997, the Company changed its
fiscal year from the last Saturday in June to the last Saturday in December.
The six month period ended December 27, 1997 (the "Transition Period")
reflects the results of operations and cash flows for the six months then
ended for the Company and all of its subsidiaries. The results of operations
and of cash flows for the years ended June 28, 1997, December 26, 1998 and
December 25, 1999 are for 52 weeks.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company's cash equivalents consist primarily of short term federal notes and
money market securities bearing interest at a rate of approximately 4.0% at
December 25, 1999. The investments are carried at cost plus accrued interest,
which approximates market value. The Company considers such securities to be
classified as "available-for-sale" under Statements of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Revenue Recognition
The Company's revenue is primarily comprised of fees for consulting
services. The majority of the Company's revenue is from contracts on a time
and materials basis and is recognized as the services are performed. The
remainder of the Company's contracts are on a fixed-price basis, and revenue
from those contracts is recognized using the percentage of completion method
based upon the number of labor hours incurred compared to the total estimated
hours at estimated realizable rates. Under the percentage of completion
method, the Company must estimate the percentage of completion of each project
at the end of each financial reporting period. Estimates are subject to
adjustment as a project progresses to reflect changes in projected completion
costs or dates. Revenues are reported net of reimbursable expenses which are
typically billed and collected from clients. Losses, if any, are provided for
in the period in which the loss is determined. Amounts received in excess of
revenue recognized are recorded as deferred revenue.
33
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Receivable, Concentration of Credit Risk and Uncertainties
The Company is subject to credit risk through trade receivables. Credit risk
with respect to trade receivables is mitigated by the diversification of the
Company's operations, as well as its large client base and its geographical
dispersion. The Company performs ongoing evaluations of its receivables and
may obtain retainers at the onset of significant fixed price client
engagements. Collateral is not required for time and material contracts. In
management's opinion, the Company has provided sufficient provisions to
prevent a significant impact of credit losses to the financial statements. The
failure of the Company to complete a fixed price project to the client's
satisfaction within the fixed price exposes the Company to potentially
unrecoverable cost overruns.
Fees on fixed-price contracts are generally billable to clients upon the
achievement of specified milestones. Unbilled revenue was $23.1 million and
$14.9 million at December 26, 1998, and December 25, 1999, respectively.
No single customer accounted for more than 10% of revenues or more than 10%
of accounts receivable for any period presented.
Fixed Assets
Fixed assets are stated at cost. Additions, renewals and betterments of
fixed assets are capitalized. Repair and maintenance expenditures for minor
items are generally expensed as incurred. Depreciation of fixed assets is
provided using the straight-line method over the following estimated useful
lives:
Buildings and improvements.................. 31.5 years
Computer equipment.......................... 5 years
Furniture and equipment..................... 5 to 7 years
Motor vehicles.............................. 5 years
Leasehold improvements...................... Lesser of lease term or 20 years
In March 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 was effective
for fiscal years beginning after December 15, 1998. The Company's existing
accounting policies conform to the requirements of this statement. The Company
has capitalized $3.6 million and $4.1 million in 1998 and 1999 respectively in
relation to its PeopleSoft implementation. These costs primarily include
licensing fees and internal labor costs of employees directly associated with
the implementation project.
Advertising Costs
Advertising costs are recorded as expense when incurred.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities, utilizing currently enacted tax rates. The
effect of any future change in tax rates is recognized in the period in which
the change occurs.
Certain of the Company's subsidiaries had previously elected to be treated
as small business corporations for income tax purposes with income or loss and
credits passed through to the stockholders. These elections were
34
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsequently terminated prior to or upon acquisition by the Company and the
net deferred tax asset or liability as of the date of acquisition has been
included in the provision for income taxes in the period of termination.
Certain of the Company's subsidiaries had previously utilized the cash
method of accounting for income taxes. Upon acquisition by the Company, these
subsidiaries converted to the accrual method of accounting for income taxes.
Stock-Based Compensation
The Company accounts for employee awards under its stock plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. The Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" for disclosure purposes only.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at December 26, 1998 and December 25, 1999, and
the reported amounts of revenue and expenses for the year ended June 28, 1997,
the six month period ended December 27, 1997 and the years ended December 26,
1998 and December 25, 1999. Actual results could differ from those estimates.
Goodwill and Other Intangible Assets
The Company amortizes goodwill and intangible assets arising from purchase
acquisitions on a straight-line basis over a period of 10 to 30 years.
Goodwill is evaluated for consideration of potential impairment based on the
operating results and forecasted cash flows of the acquired entity. Based on
these evaluations, the Company has written off goodwill of $4.0 million
associated with Renaissance Worldwide Professionals, Ltd. (formerly James
Duncan Associates, based in the United Kingdom) in 1999. The Company also
wrote off goodwill of $21.4 million associated with COBA Consulting Limited
("COBA UK") and $5.7 million associated with of Renaissance Technomic, Inc.
and Renaissance Technomic Limited (collectively, "Technomic"), businesses in
1998 which were part of the Business Strategy Group and are reported in
discontinued operations (See Note 17).
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the current period presentation.
Other Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" which
requires disclosure of comprehensive income and its components in interim and
annual reports. Comprehensive income includes all changes in stockholders'
equity during a period except those resulting from investments by stockholders
and distributions to stockholders. Accordingly, the components of
comprehensive income include net income, cumulative translation adjustments
and unrealized gains and losses on available-for-sale securities. Deferred
taxes have not been provided on cumulative translation adjustments because
deferred taxes have not been provided on unremitted earnings (see Note 8).
Deferred taxes and any reclassification adjustments related to unrealized
gains/losses on investments are insignificant.
35
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Translation of Foreign Currencies
The functional currency of the Company's subsidiaries is the local currency.
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at the balance sheet date; income and
expense items and cash flows are translated at average exchange rates for the
period. Cumulative net translation adjustments are included in stockholders'
equity. Gains and losses resulting from foreign currency transactions, not
significant in amount, are included in the results of operations as other
(income) expense.
Earnings (Loss) Per Share
Earnings (loss) per share--basic is calculated based upon the weighted
average number of common shares actually outstanding, and earnings (loss) per
share--diluted is calculated based upon the weighted average number of common
shares and dilutive potential common stock outstanding. Potential common stock
includes stock options and warrants, calculated using the treasury stock
method, and the assumed conversion of preferred stock (see Note 9). However,
potential common stock has been excluded from the calculation of diluted
earnings per share for the year ended December 25, 1999, as its effect would
be anti-dilutive.
A reconciliation of the weighted average number of common shares outstanding
is as follows:
Year Ended
Year Ended Six Months Ended -------------------------
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
---------- ---------------- ------------ ------------
(In thousands)
Weighted average number
of common shares
outstanding-basic...... 50,495 54,537 55,418 56,338
Assumed exercise of
stock options, using
the treasury stock
method................. 3,553 3,622 2,412 --
Assumed conversion of
preferred stock........ 559 -- -- --
------ ------ ------ ------
Weighted average number
of common and potential
common shares
outstanding--diluted... 54,607 58,159 57,830 56,338
====== ====== ====== ======
Recent Accounting Developments
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company is required to be in conformity with the
provisions of SAB 101 in fiscal 2000 and is currently evaluating the impact
SAB 101 will have on its financial condition or results of operations.
3. POOLING OF INTERESTS ACQUISITIONS
Fiscal 1998 Pooling of Interests
In fiscal 1998, the Company acquired Neoglyphics Media Corporation
("Neoglyphics") and Triad Data, Inc. ("Triad") for a total of 4,554,760 shares
of the Company's common stock. Neoglyphics was an Internet development and
applications services provider which was added to the Company's Enterprise
Solutions Group. In addition, outstanding stock options to purchase
Neoglyphics common stock were converted into options to purchase 119,940
shares of the Company's common stock. Triad was an information technology
consulting firm which became part of the Company's Services Group. The Company
incurred $6.9 million in acquisition-related expenses in the second quarter of
1998 related to these transactions.
36
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Neoglyphics and Triad each had a calendar year end and the results of
operations for the year ended December 31, 1997 were combined with the results
of operations for the Company's fiscal year ended June 28, 1997. Additionally,
the financial position of Neoglyphics and Triad as of December 31, 1996 has
been combined with the Company's financial position as of June 28, 1997. In
order to conform Neoglyphics' and Triad's year end to the Company's fiscal
year end, the consolidated statement of income for the six months ended
December 27, 1997 includes six months (July to December 1997) for Neoglyphics
and Triad which has also been included in the consolidated statement of income
for the fiscal year ended June 28, 1997. An adjustment has been made to
retained earnings in the transition period ended December 28, 1997 to
eliminate the duplication of net income of Neoglyphics and Triad for such six
month period.
Transition Period Pooling of Interests
In 1997, the Company acquired all of the outstanding stock of Renaissance
Solutions, Inc. ("RSI") and the Hunter Group Inc. ("Hunter Group"). In total,
21,647,012 shares of the Company's common stock were exchanged for all of the
outstanding common stock of RSI and the Hunter Group. In addition, outstanding
stock options to purchase RSI and the Hunter Group common stock were converted
into options to purchase 3,361,088 shares of the Company's common stock.
Fiscal 1997 Pooling of Interests
In 1996, the Company acquired Applications Resources, Inc. ("ARI"), Shamrock
Computer Resources, Ltd. ("SCR") and International Systems Services
Corporation ("ISS") for a total of 6,797,548 shares of the Company's common
stock. ARI and SCR are information technology consulting firms performing
services similar to those of the ITCS Group. ISS is a consulting firm
providing business and management consulting services. In addition,
outstanding stock options to purchase ARI common stock were converted into
options to purchase 435,810 shares of the Company's common stock.
These transactions have been accounted for as pooling of interests and,
therefore, the financial statements of the Company have been restated to
include the financial condition, results of operations and cash flows of these
two companies for all periods presented.
There were no material transactions between the Company, ARI, SCR, ISS, RSI,
the Hunter Group, Neoglyphics or Triad during any of the periods presented. No
material adjustments to net assets or results of operations were necessary to
conform the accounting practices of ARI, SCR, ISS, RSI, the Hunter Group,
Neoglyphics or Triad to that of the Company. Certain reclassifications were
made to the financial statements of ARI, SCR, ISS, RSI, the Hunter Group,
Neoglyphics and Triad to conform with the Company's classifications. All costs
associated with the acquisitions have been expensed as incurred.
4. PURCHASES AND DISPOSITIONS
Fiscal 1999 Purchases
In January 1999, the Company acquired InfoSolutions.edu, L.L.C.
("InfoSolutions") for approximately $5.2 million including a $2.5 million note
payable. InfoSolutions provides software consulting and implementation to
universities and non-profit organizations. In connection with this
acquisition, the Company may be required to pay additional consideration of up
to $500,000 based on personnel retention.
Fiscal 1999 Dispositions
The Company made several dispositions of non-strategic assets in 1999. In
February 1999, the Company sold substantially all of the assets of Renaissance
Technomic, Inc. and Renaissance Technomic Limited
37
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(collectively, "Technomic") and COBA Consulting Limited ("COBA"). The Company
recorded asset impairment charges of approximately $27.1 million in 1998
associated with these businesses which were part of the Business Strategy
Group and are reported in discontinued operations. No gain or loss was
recognized in connection with the sale of these businesses. Technomic was a
provider of strategic market research and consulting services. COBA was a
provider of management consulting services.
In May 1999, the Company sold substantially all of the assets of Neoglyphics
and its Customer Management Solutions Vantive practice ("CMS") for $10.0
million in cash, a $2.0 million convertible note receivable and 400,000 shares
of the purchaser's common stock. The note is convertible into common stock at
the time of a qualifying initial public offering by the purchaser at a 20%
discount from the offering price. The purchaser filed a preliminary
registration statement with the SEC in early 2000. In connection with this
sale, the Company recognized an after tax gain of $833,000. The gain on the
sale has been classified as an extraordinary item because the pooling of
interests method of accounting was applied to the original acquisition of
these assets within the last two years.
In the fourth quarter of fiscal 1999, the Company made a decision to sell
its Business Strategy Group for $65.0 million in cash. Accordingly, the
results of operations of the Business Strategy Group have been classified as
discontinued operations in the accompanying financial statements (see Note
17). The transaction closed on March 10, 2000 and will result in a gain for
the Company of approximately $10 million which will be recorded in the first
quarter of fiscal 2000. In February 2000, the Company signed a letter of
intent to sell Renaissance Worldwide Professionals Ltd., formerly known as
James Duncan Associates, back to its management for approximately $1.2
million. This transaction is expected to close by the end of March 2000 and
will not have a material effect upon the Company's results of operations. The
Company recorded a goodwill writedown of $4.0 million in connection with this
business in the fourth quarter of 1999 (see Note 6).
Fiscal 1998 Purchases
In fiscal 1998, the Company acquired Exad Galons, Hackenberg and Partners
("Hackenberg") and International Public Access Technologies "IPAT" for an
aggregate of $12.5 million in cash. Exad Galons and Hackenberg were added to
the Company's Enterprise Solutions Group whereas IPAT became part of the
Company's Government Solutions Group.
In connection with these acquisitions, the Company may pay or has paid
contingent consideration of $8.3 million based upon certain earnout
arrangements. Such amounts are recorded as additional purchase price when
paid.
Transition Period Purchases
During the transition period ended December 27, 1997, the Company acquired
four companies: McClain Group, Inc., Technomics Consultants International,
Inc., Eligibility Management Systems, Inc., and Cambridge Software Group. The
aggregate purchase price and related costs associated with these acquisitions
was $37.5 million which has been allocated to the assets and liabilities
assumed based upon their fair value on the date of acquisition. The excess of
the purchase price over this fair value of acquired assets and liabilities has
been allocated to goodwill.
In connection with the Transition Period Acquisitions, the Company may pay
or has paid contingent consideration of up to $12.6 million based upon certain
earnout arrangements. Such amounts are recorded as additional purchase price
when paid.
38
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 1997 Purchases
During the fiscal year ended June 28, 1997, the Company acquired five
companies: Morris Information Systems, Sun-Tek Consultants, Inc., Sterling
Information Group, James Duncan & Associates ("JDA"), and Connexus Consulting
Group, Inc. In addition, during fiscal 1997, prior to the merger with the
Company, RSI acquired two companies: COBA Consulting Limited ("COBA UK") and
C.M. Management Systems Ltd., Inc. ("COBA-Boston"). These acquisitions are
collectively referred to as the "Fiscal 1997 Acquisitions". The aggregate
purchase price and related costs associated with the Fiscal 1997 Acquisitions
were $38.0 million plus 266,528 shares of the Company's common stock.
In connection with the Fiscal 1997 Acquisitions, the Company was required to
pay contingent consideration of up to $32.3 million based on certain earn-out
arrangements. Such amounts, when paid, were recorded as additional purchase
price. As of December 25, 1999, the Company had accrued contingent
consideration of approximately $4.1 million associated with COBA-Boston which
was paid in the first quarter of 2000.
These transactions were accounted for as purchases. The purchase price has
been allocated to the assets acquired and liabilities assumed based upon their
fair values as of the respective dates of acquisition. The excess of the
consideration paid over the estimated fair value of net assets acquired has
been recorded as goodwill and amortized. The results of operations for these
acquisitions have been included in the Company's results of operations from
their respective dates of acquisition. At December 26, 1998 and December 25,
1999, $7.1 million and $9.0 million, respectively, were accrued for contingent
consideration related to the above acquisitions. These amounts are included in
other accrued expenses.
Assuming the 1999, 1998, Transition Period, and 1997 Acquisitions occurred
at the beginning of each respective period, the pro forma results of
operations would not materially differ from the Company's reported results of
operations.
5. RELATED PARTY NOTES AND ADVANCES
Notes receivable from stockholders of $1,476,000 and $722,000 at December
26, 1998 and at December 25, 1999, respectively, which are included as a
reduction of stockholders' equity in the accompanying balance sheet, include
promissory notes from two of ARI's officers totaling $226,000 for the exercise
of stock options bearing interest at a variable rate based upon federal income
tax requirements (approximately 6% at December 26, 1998 and December 25,
1999), two demand notes from an individual who was the sole stockholder of the
Hunter Group totaling $250,000, which accrue interest at 5%, and notes issued
to various employees to purchase the Company's common stock totaling $246,000
which accrue interest at 7.0%. In addition, the Company has notes receivable
and advances from officers totaling approximately $2.0 million due from
various senior officers of the Company of which approximately $1.0 million is
included in other assets and approximately $1.0 million is included in other
current assets. Notes bear interest at the prime rate.
6. RESTRUCTURING AND OTHER ASSET WRITE-DOWNS
In February 2000, the Company signed a letter of intent to sell Renaissance
Worldwide Professionals, Ltd. (formerly James Duncan & Associates) back to its
management for approximately $1.2 million. In connection with this transaction
which is expected to close in March 2000, the Company recorded a charge in the
fourth quarter of 1999 to write-down goodwill in the amount of $4.0 million.
In the second quarter of 1999, the Company recorded an asset writedown of
$2.9 million in connection with the sale of Neoglyphics and CMS (Note 4).
39
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the Company recorded a charge of $5.7 million related to a
restructuring plan designed to focus the Company on the new corporate strategy
and eliminate redundant facilities, equipment, software, and personnel
recorded in the third quarter of 1998. A balance of $2.9 million accrual
remained from this charge at December 26, 1998 which included $1.7 million of
costs to terminate lease obligations and other activities and $1.2 million
related to severance and other costs. These charges were utilized as planned
in 1999.
7. FINANCING ARRANGEMENTS
During 1998, the Company had a line of credit facility which provided a
borrowing base of 85% of eligible accounts receivable as defined, up to a
maximum borrowing of $85 million, payable on demand. Interest was payable
monthly in arrears at the bank's prime rate plus 0.50% (8.25% at December 26,
1998) or the LIBOR rate plus 2.50% (7.71% at December 26, 1998), at the option
of the Company. The line of credit was collateralized by the majority of the
assets of the Company, excluding the assets of the Wells Avenue Realty Trust
(Note 14), contained certain restrictions, and required the maintenance of
certain financial covenants. This line of credit was terminated on March 24,
1999.
In February of 1999, the Company entered into a new line of credit ("Interim
Facility") with a different bank to provide a borrowing base of 85% of
eligible accounts receivable as defined, up to a maximum borrowing of $110
million. Interest was payable monthly in arrears at the LIBOR rate plus 2.00%
or the higher of the bank's prime rate or the Fed Funds rate plus 0.50%, plus
0.75%, at the Company's option. The Interim Facility was collateralized by the
majority of the assets of the Company, contained certain restrictions, and
required maintenance of certain financial covenants. The Interim Facility was
a short-term facility to be used until syndication of a senior term loan
facility committed to by the bank. The Interim Facility was used to repay the
outstanding borrowings on the existing line of credit that was terminated on
March 24, 1999.
On July 15, 1999 the Company entered into a three-year, $150 million
revolving credit and term loan agreement (the "Credit Facility") with a bank
syndicate. The Credit Facility consists of a revolving line of credit of $100
million ("Revolving Credit Facility") and a term loan of $50 million ("Term
Loan"). The Credit Facility bears interest at the higher of the Federal Funds
Rate plus 0.50% or the prime rate, plus up to 1.75% or LIBOR plus up to 3.0%,
depending on the Company's level of compliance with certain financial ratios.
The Credit Facility requires the Company to pay a commitment fee of 0.375% to
0.50% per annum, depending on certain financial criteria, on the unused
portion of the Credit Facility. The Credit Facility requires the Company to
make quarterly principal payments of $250,000 on the Term Loan beginning
September 15, 2000 and each quarter thereafter until June 15, 2002. The
remaining obligations under the Term Loan would be repaid on July 15, 2002
along with any outstanding borrowings under the Revolving Credit Facility. The
Credit Facility is collateralized by the majority of the assets of the Company
and contains certain restrictions and various covenants, including the
maintenance of defined financial ratios.
On September 15, 1999, the Company announced that it was revising its
revenue and earnings estimates for the third and fourth quarters of 1999 due
to a softening in the demand for services in two of its core businesses--
Enterprise Solutions and ITCS. Based upon this revised outlook, the Company
informed the bank syndicate that it would not be in compliance with certain of
its financial covenants for the third quarter of 1999. On November 4, 1999,
the Company and the banks signed an amendment to the Credit Facility amending
certain financial covenants for the third quarter of 1999 through the third
quarter of 2000, reverting back to the original financial covenants
established in the Credit Facility thereafter. The Credit Facility, as
amended, now bears interest at the higher of the Federal Funds Rate plus 0.50%
or the prime rate, plus up to 2.25% or LIBOR plus up to 3.5%, depending on the
Company's level of compliance with certain financial ratios. In connection
with this amendment, the Company was required to pay amendment fees to the
banks and related expenses of approximately $500,000 which were recorded in
the third quarter of 1999 as interest and other expense, net.
40
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 25, 1999, the total amount outstanding under the Credit
Facility, including the Term Loan, was $68.0 million at a weighted average
interest rate of 9.97% with a remaining borrowing availability under the
Credit Facility approximately $19.6 million. The Company had additional
outstanding debt, including current portions, of approximately $5.5 million
which was comprised of other local lines of credit and various notes payable
with interest rates ranging from 6.75% to 9.375% and maturities between May
2000 and April 2013.
On February 25, 2000, the Company and the banks signed a second amendment to
the Credit Facility which permitted the Company to complete its sale of the
Business Strategy Group (see Note 17) and Renaissance Worldwide Professionals
Ltd., formerly James Duncan Associates, and amended certain financial
covenants to reflect the sale of these businesses.
On March 14, 2000 the Company used $60.0 million of the proceeds that it
received from the sale of its Business Strategy Group to repay the $50.0
million Term Loan and $10.0 million of borrowings under the Revolving Credit
Facility (see Note 17).
8. INCOME TAXES
Prior to November 27, 1996, January 1, 1997, December 31, 1996 and April 2,
1998, SCR, Neoglyphics, ISS and Triad, respectively, had each elected to be an
S Corporation for federal income tax purposes as provided in Section 1362(a)
of the Internal Revenue Code. As such, the corporate income or loss and
credits were passed through to the stockholders and reported on their personal
tax returns.
Neoglyphics elected to terminate its S Corporation status on January 1,
1997. At the time of this conversion, a net deferred tax liability of $302,000
was recorded through the income tax provision on January 1, 1997. This
deferred tax liability was comprised principally of the effects of Neoglyphics
being a cash basis tax payer.
SCR's, ISS's and Triad's elections to be treated as S Corporations
terminated in conjunction with the acquisition of all of the common stock of
SCR, ISS and Triad by the Company. As a result, the income or loss of SCR
commencing on November 27, 1996, the income or loss of ISS commencing on
December 31, 1996 and the income or loss of Triad commencing on April 2, 1998
is subject to corporate income tax, and is included in the income tax
provision (benefit) described below.
At the time of the conversion of SCR from an S Corporation to a C
Corporation, a net deferred tax asset of $403,000 was recorded through the
income tax provision on November 27, 1996. This deferred tax asset was
comprised principally of certain accrued expenses and allowances which are
recognized in different periods for financial and tax reporting.
At the time of conversion of ISS from an S Corporation to a C Corporation, a
net deferred tax liability of $1,002,000 was recorded through the income tax
provision on December 31, 1996. This deferred tax liability was comprised
principally of the effect of converting from the cash basis to the accrual
basis for tax reporting purposes.
At the time of conversion of Triad from an S Corporation to a C Corporation,
a net deferred tax liability of $2,878,000 was recorded through the income tax
provision on April 2, 1998. This deferred tax liability was comprised
principally of the effect of converting from the cash basis to the accrual
basis for tax reporting purposes.
41
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
From its inception, the Hunter Group reported its financial results for
income tax purposes using the cash method of accounting. Upon acquisition by
the Company, the Hunter Group changed its method of accounting for income tax
reporting purposes from the cash method to the accrual method. As a result,
substantially all of the deferred tax liability related to the Hunter Group
accumulated on the balance sheet will become due and payable over a four-year
period.
The components of the income tax provision (benefit) from continuing
operations are as follows:
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
(In thousands)
Current:
Federal............... $ 9,798 $4,527 $ 9,275 $3,428
State................. 2,436 1,162 1,969 167
Foreign............... 51 384 2,013 318
------- ------ ------- ------
12,285 6,073 13,257 3,913
Deferred:
Federal............... 682 (872) (2,531) (3,172)
State................. 171 (192) (612) (379)
------- ------ ------- ------
853 (1,064) (3,143) (3,551)
Change in tax status of
SCR, ISS, Neoglyphics
and Triad.............. 936 -- 2,878 --
------- ------ ------- ------
$14,074 $5,009 $12,992 $ 362
======= ====== ======= ======
Pretax income (loss) from continuing operations is summarized as follows:
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
(In thousands)
Domestic... $27,943 $8,277 $11,787 $(2,724)
Foreign.... (323) (358) 4,183 (2,256)
------- ------ ------- -------
Total.... $27,620 $7,919 $15,970 $(4,980)
======= ====== ======= =======
42
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that
a benefit will be realized. Deferred tax expense (benefit) represents the
change in the net deferred tax asset or liability balance. Deferred tax assets
and liabilities are comprised of the following at December 26, 1998, and
December 25, 1999:
December 26, December 25,
1998 1999
------------ ------------
(In thousands)
Deferred tax assets:
Net operating loss carryforward.................... $1,282 $1,120
Allowance for doubtful accounts.................... 3,749 1,306
Accounts payable and accrued expenses.............. 4,787 6,126
Other.............................................. 739 2,874
------ ------
Total gross deferred tax assets.................. 10,557 11,426
------ ------
Deferred tax liabilities:
Differences arising due to tax accounting method
changes........................................... 5,676 3,003
Fixed assets....................................... 855 2,420
Other.............................................. 1,721 853
------ ------
Total gross deferred tax liabilities............. 8,252 6,276
------ ------
Net deferred tax asset........................... $2,305 $5,150
====== ======
As of December 25, 1999, the Company has $0.6 million (federal) and $17.7
million (state) of net operating loss carryforwards which may be used to
offset future federal and state taxable income, respectively. The
carryforwards expire on various dates from 2009 to 2018. An ownership change,
as defined in the Internal Revenue Code, may limit the amount of net operating
loss that can be utilized annually to offset future taxable income.
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate for continuing operations due to the
following:
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
Statutory U.S. federal
tax rate............... 35.0% 35.0% 35.0% (35.0%)
State taxes, net of
federal tax benefit.... 6.2 7.7 6.0 (2.7)
Income (loss) from SCR,
ISS, Triad and
Neoglyphics not taxable
for corporate income
tax purposes........... (4.0) -- 3.7 --
Non-deductible
expenses............... 9.5 15.5 18.4 8.7
Goodwill not deductible
for corporate income
tax purposes........... 0.3 0.6 3.5 36.4
Foreign income (loss)
taxed at different
rates.................. 0.5 6.3 (1.3) --
Change in tax status of
SCR, ISS, Neoglyphics
and Triad.............. 3.4 -- 18.0 --
Other................... 0.1 (1.8) (1.9) (0.1)
---- ---- ---- -----
Effective tax rate...... 51.0% 63.3% 81.4% 7.3%
==== ==== ==== =====
43
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-deductible expenses during the year ended June 28, 1997 and six months
ended December 27, 1997 and the year ended December 26, 1998 primarily relate
to certain costs incurred in connection with the acquisitions of SCR, ISS,
RSI, the Hunter Group, Neoglyphics and Triad.
Undistributed earnings of certain foreign subsidiaries aggregated
approximately $3.0 million on December 25, 1999, which under existing law,
will not be subject to U.S. tax until distributed as dividends. Since the
earnings have been or are intended to be indefinitely reinvested in foreign
operations, no provision has been made for any U.S. taxes that may be
applicable thereto. Furthermore, any taxes paid to foreign governments on
those earnings may be used in whole or in part as credits against the U.S. tax
on any dividends distributed from such earnings. It is not practicable to
estimate the amount of unrecognized deferred U.S. taxes on these undistributed
earnings.
9. STOCKHOLDERS' EQUITY
Preferred Stock, $0.10 par value
On April 10, 1996, Renaissance's then sole stockholder authorized 1,000,000
shares of preferred stock, $0.10 par value. Preferred stock may be issued in
one or more series at the discretion of the Board of Directors of Renaissance
(without shareholder approval) with such designations, rights and preferences
as the Board of Directors may determine. The preferred stock may have
dividend, liquidation, redemption, conversion, voting or other rights which
may be more expansive than the rights of the holders of Renaissance's common
stock.
Preferred Stock, no par value
Renaissance's wholly-owned subsidiary, ARI, was authorized to issue
5,000,000 shares of preferred stock, of which 3,000,000 shares were designated
as Series A Preferred Stock (the "Series A Preferred Stock"). The remaining
preferred stock may have been issued from time to time in one or more
additional series at the discretion of the Board of Directors. Shares of
Series A Preferred Stock were non-redeemable and had a liquidation preference
of $0.79 per share plus any declared but unpaid dividends.
Each share of Series A Preferred Stock was convertible into the number of
shares of common stock that results from dividing the conversion price in
effect at the time of conversion into $0.79 for each share of Series A
Preferred Stock being converted. The conversion price of the Series A
Preferred Stock was initially $.1084 per share, subject to adjustment for
stock splits, dividends, distributions, and combinations. At June 29, 1996,
all shares of Series A Preferred Stock were convertible into .548856 shares of
Renaissance's common stock based on a conversion price of $0.1084 per share.
On November 26, 1996, in conjunction with the acquisition of ARI by
Renaissance (see Note 3), all of the outstanding shares of Series A Preferred
Stock were converted into 1,434,160 shares of common stock.
Stock Split and Authorized Shares
On July 30, 1997, Renaissance's stockholders approved an increase to
99,000,000 in the number of authorized shares of common stock of the Company.
On February 12, 1998, the Company announced a 2-for-1 stock split. All shares
and per share amounts included in the consolidated financial statements have
been adjusted to give retroactive effect to the stock split for all periods
presented.
44
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sale of Common and Preferred Stock
On November 19, 1996, ARI sold 55,000 units to an unrelated investor for net
proceeds of $2.6 million. Each unit consisted of shares of ARI's series A
Preferred Stock and 1.0978 shares of common stock, for a total of 165,000
shares of Series A Preferred Stock and 60,374 shares of common stock.
Public Offerings of Common Stock
On February 26, 1997, Renaissance completed a secondary public offering for
the sale of 2,468,332 shares of common stock, including the reissuance of the
treasury shares acquired in conjunction with the acquisition of SCR (see Note
3). Renaissance received approximately $48.3 million from the sale of the
shares, net of the underwriting discounts and expenses associated with the
offering. The excess of the cost of the treasury stock over the net reissuance
price has been charged to retained earnings. Net proceeds were used to repay
all outstanding indebtedness under Renaissance's credit facility.
On November 18, 1996, RSI completed an additional offering. The transaction
included 344,240 shares sold by RSI and 1,679,760 shares sold by existing
shareholders, including shares acquired by Gemini upon exercise of the Gemini
Warrants (below). The net proceeds of the offering were $6.5 million, after
deducting offering expenses of $353,000.
Treasury Stock
In September 1998, the Board of Directors authorized the Company to
repurchase up to 200,000 shares of its common stock through the open market.
The Company repurchased 200,000 shares through December 26, 1998 for a total
of $2.5 million.
Gemini Warrants
RSI sold two warrants (together, the "Gemini Warrants") to Gemini upon the
closing of RSI's initial public offering for an aggregate purchase price of
$1.6 million. One warrant was exercisable through April 11, 1998 for up to
501,760 shares of common stock at an exercise price equal to $8.125 per share.
The second warrant was exercisable through November 1, 1999 for up to 512,000
shares of common stock at an exercise price equal to $12.1875 per share. In
November 1996, Gemini exercised the warrants and RSI received proceeds from
the exercise of $10.3 million.
10. STOCK PLANS
Employee Stock Option Plans
1996 Stock Plan
This plan, adopted in March 1996, authorizes the grant of incentive stock
options, non-qualified stock options, stock purchase authorizations or stock
bonus awards to key employees, including officers, employee directors and
consultants.
As of December 27, 1997, the total number of shares of Common Stock
authorized under the 1996 Stock Plan was 7,200,000. In May of 1998, the
shareholders approved an amendment to the 1996 Stock Plan, increasing the
original number of shares of common stock available for awards under the Plan.
The amendment
45
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provided that for a three-year period, the shares available under the Plan
will be increased each year by a number of shares equal to 4% of the total
outstanding shares at the beginning of each year. For 1998 and 1999, that
increase was 2,233,885 and 2,241,038 respectively.
Incentive stock options cannot be granted to consultants. For incentive
options, the purchase price is equal to the fair market value on the date of
grant (110% of fair market value for stockholders who hold greater than 10% of
the Company's stock at the time of grant). For non-qualified options and stock
purchase authorizations, the purchase price is determined by the Board of
Directors within limits as set forth in the plan, but shall not be less than
85% of the fair market value of common stock on the date of grant. The periods
over which options are exercisable are determined by the Board of Directors.
These options generally vest over one to five years and may expire up to ten
years after the date of grant (five years for incentive options granted to 10%
stockholders). If permitted by the Board of Directors, employees may use
previously acquired shares of the Company's common stock (provided that such
shares tendered have been held for at least six months) or may borrow money
from the Company on a recourse basis (for a period of time not to exceed five
years) to pay the exercise price of shares purchased. The Board of Directors
has the discretion to designate non-qualified options as transferable. The
plan will terminate in March 2006.
1998 Acquisition Plan
In April 1998, the Board of Directors approved the 1998 Acquisition Plan for
use exclusively for non-qualified options to be awarded to employees of
acquired businesses. This plan has the same term and vesting provisions of the
1996 Stock Plan. A total of 1,000,000 shares of common stock were authorized
for issuance under the Plan.
1998 International Plan
In April 1998, the Board of Directors approved the 1998 International Plan
for use exclusively for non-qualified options to be awarded to employees in
foreign jurisdictions. This plan has the same term and vesting provisions of
the 1996 Stock Plan. A total of 1,000,000 shares of Common Stock were
authorized for issuance under the Plan.
1998 Directors Stock Plan
In May of 1998, the stockholders of the Company approved the 1998 Directors
Stock Option Plan (the "1998 Directors Plan") which replaced the existing 1996
Eligible Directors' Stock Plan. Under the 1998 Directors Plan, outside
directors of the Company will receive equity compensation in three ways. Upon
joining the Board, an outside director will receive an option covering 20,000
shares of Common Stock. This option will become exercisable in four annual
installments beginning one year after grant. Outside directors will also
receive an option covering 2,500 shares of common stock after each year of
service. This award, which represents compensation for service during the
previous year, will be immediately exercisable. Each director will be required
to take one-half on the annual retainer (currently $12,000) in options having
an equivalent value and may elect to take all or a portion of the balance in
options as well. Options are granted at fair market value on the date of grant
and expire ten years from the date of grant. A total of 120,000 shares of
Common Stock were authorized for issuance under the Plan.
Other Stock Option Plans
As of December 25, 1999, 147,206 options were outstanding under the 1996
Eligible Director's Stock Plan and the RSI Director Plan which the Company
assumed when it acquired RSI in 1997. The Company also assumed other stock
option plans from RSI, the Hunter Group and Neoglyphics. The Neoglyphics Stock
Option Plan was closed and all outstanding options were canceled in May of
1999, when the assets of this business
46
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were sold (see Note 4). As of December 25, 1999, 827,980 options were
outstanding under these RSI and the Hunter Group plans. These options
generally vest over one to five years and expire 10 years from the date of
grant.
Option Repricing
In December 1998, the Company offered employees the opportunity to reprice
their stock options at the fair market value of the Company's common stock on
December 15, 1998. Employees electing to take advantage of this repricing
program agreed to a two for one exchange of their options and to a one year
holding period. In connection with this program, the Company repriced
6,159,730 of existing options with a weighted average exercise price of
$21.55.
Transactions under all of the stock plans are summarized as follows:
June 28, 1997 December 27, 1997 December 26, 1998 Decemer 25, 1999
-------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
Of Exercise Of Exercise Of Exercise Of Exercise
Options Price Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of period.............. 5,640,109 $ 7.13 8,347,962 $14.85 12,221,607 $16.12 9,925,362 $11.28
Elimination of
duplicate activity
from July to
December.............. (376,368) -- -- -- -- -- -- --
Addition of activity
from January to June.. -- -- 248,559 $11.00 -- -- -- --
Granted................ 5,141,809 18.70 4,421,009 22.43 7,546,143 13.44 5,984,504 5.61
Exercised.............. (1,217,193) 3.19 (91,902) 7.99 (1,301,014) 4.44 (160,688) 2.80
Canceled............... (855,213) 9.967 (704,021) 20.26 (8,541,374) 21.15 (4,036,337) 11.99
Conversion of Series A
Preferred Stock
Options to Common
Stock Options......... 14,818 0.66 -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------ ---------- ------
Outstanding at end of
period................. 8,347,962 $14.85 12,221,607 $16.12 9,925,362 $11.28 11,712,841 $ 8.19
========== ====== ========== ====== ========== ====== ========== ======
Exercisable at end of
year................... 1,185,229 $ 3.14 1,686,430 $ 4.01 1,681,809 $ 9.55 2,945,507 $ 9.12
Weighted average fair
value of options
granted during the
period................. $10.98 $13.42 $ 9.34 $ 5.61
Options available for
future grant........... 6,543,988 4,667,335 8,894,430 8,136,230
The following table summarizes information about stock options outstanding
at December 25, 1999 under the stock plans:
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
As Of Remaining Average As Of Average
December 25, Contractual Exercise December 25, Exercise
1999 Life Price 1999 Price
Range Of Exercise Prices ------------ ----------- -------- ------------ --------
$ 0.39 - $ 5.00....... 1,740,607 9.10 $ 3.88 212,830 $ 1.95
$ 5.50 - $10.16....... 7,956,503 8.28 6.24 1,988,575 6.06
$11.00 - $19.19....... 977,623 7.76 16.30 365,010 15.89
$21.00 - $29.56....... 1,038,108 7.76 22.78 379,492 22.65
---------- ---- ------ --------- ------
$ 0.39 - $29.56....... 11,712,841 8.31 $ 8.19 2,945,907 $ 9.12
========== ==== ====== ========= ======
47
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 Employee Stock Purchase Plan
This plan permits eligible employees to purchase a limited number of shares
on a semi-annual basis. The purchase price is 85% of the lower of the fair
market value at the beginning or end of each six month period. Under this
plan, the Company issued 259,514 and 378,807 shares of common stock during
fiscal years 1998 and 1999 at an average price per share of $18.78 and $5.18,
respectively. At December 25, 1999, the Company has 360,406 shares of common
stock available for issuance pursuant to the employee stock purchase plan.
Accounting Treatment
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Compensation is
recognized for the difference between the exercise price of options granted
and the estimated fair value of the related shares on the date of grant, and
is recorded over the vesting period. Amortization of compensation expense was
$494,000 for the fiscal year ended June 28, 1997, $750,000 for the six month
period ended December 27, 1997 and $0 for the fiscal years ended December 26,
1998 and December 25, 1999. The benefit of tax deductions associated with the
exercise of non-qualified stock options in excess of the amount of
compensation recorded for financial reporting purposes is recorded as a credit
to additional paid-in capital.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS No. 123 is effective for periods beginning
after December 15, 1995. SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock options and other equity instruments
based on fair value, or provide pro forma disclosure of net income and
earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions only of SFAS No. 123. Had compensation cost
of the Company's stock-based compensation plans been determined based on the
fair value at the grant dates as calculated in accordance with SFAS No. 123,
the Company's net income and earnings per share for the year ended June 28,
1997, the six months ended December 27, 1997 and the years ended December 26,
1998 and December 25, 1999 would have been reduced to the pro forma amounts
indicated below:
As Reported
-------------------------------------------------------------------
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
(Dollars in thousands except per share amounts)
Net income (loss)....... $17,174 $ (4,231) $(31,346) $ (1,090)
Net income (loss) per
share--basic........... $ 0.34 $ (0.08) $ (0.57) $ (0.02)
Net income (loss) per
share--diluted......... $ 0.31 $ (0.07) $ (0.54) $ (0.02)
Pro Forma
-------------------------------------------------------------------
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
Net income (loss)....... $10,737 $(13,970) $(65,595) $(11,508)
Net income (loss) per
share--basic........... $ 0.21 $ (0.26) $ (1.18) $ (0.20)
Net income (loss) per
share--diluted......... $ 0.20 $ (0.24) $ (1.13) $ (0.20)
Because options vest over several years and this pro forma disclosure only
reflects grants made in the last three fiscal periods, the effects of applying
SFAS No. 123 in this pro forma disclosure are not likely to be representative
of the effects on reported net income for future years.
48
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used:
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
Risk-free interest
rates.................. 6.3% 6.2% 6.0% 4.62%
Expected volatility..... 43.3% to 62.0% 45.0% 79.0% 80.0%
Expected dividend
yield.................. -- -- -- --
Expected life in years.. 3 to 5 5.25 5.5 3
The fair value of the employee's purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following
assumptions used:
Year Ended Six Months Ended Year Ended Year Ended
June 28, 1997 December 27, 1997 December 26, 1998 December 25, 1999
------------- ----------------- ----------------- -----------------
Risk-free interest
rates.................. 5.27% to 6.0% 6.0% 6.0% 4.75%
Expected volatility..... 43.5% to 62.0% 43.5% to 62.0% 79.0% 80.0%
Expected dividend
yield.................. -- -- -- --
Expected life in years.. .5 .5 .5 .5
11. EMPLOYEE BENEFIT PLANS
The Company provides various employee retirement savings plans under Section
401(k) of the Internal Revenue Code which cover substantially all employees.
Under the terms of the plans, employees may contribute a percentage of their
salary up to a maximum of 10%-20% which is then invested in one or more of
several mutual funds selected by the employee. The Company may make
contributions to the plans at its discretion; such contributions totaled
$605,000, $472,000, $3.0 million and $3.2 million for the year ended June 28,
1997, the six months ended December 27, 1997 and the years ended December 26,
1998 and December 25, 1999, respectively.
12. SEGMENT INFORMATION
The Company adopted SFAS 131 in fiscal 1998. The prior years' segment
information has been restated for discontinued operations to represent the
Company's three primary business segments; Enterprise Solutions, Government
Solutions and ITCS. The accounting policies of the segments are the same as
those described in the Summary of Significant Accounting Policies in Note 1 to
these financial statements.
49
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents information about reported segments for the
year ended June 28, 1997, the six months ended December 27, 1997 and the years
ended December 26, 1998 and December 25, 1999:
For the year For the six For the year ended
ended months ended -------------------------
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
------------ ------------ ------------ ------------
Revenue:
Enterprise Solutions..... $ 83,087 $ 51,870 $162,722 $171,053
Government Solutions..... -- 3,541 19,876 36,366
IT Consulting Services... 361,417 227,665 527,558 535,165
-------- -------- -------- --------
Total(1)............... $444,504 $283,076 $710,156 $742,584
======== ======== ======== ========
Income from continuing
operations:
Enterprise Solutions..... $ 8,866 $ (561) $ 9,631 $ 8,351
Government Solutions..... -- 643 3,297 4,905
IT Consulting Services... 23,755 20,369 36,883 40,920
-------- -------- -------- --------
Total(1)............... $ 32,621 $ 20,451 $ 49,811 $ 54,176
======== ======== ======== ========
Corporate expenses(2)...... $ -- $ 4,609 $ 15,743 $ 42,910
Acquisition-related
expenses.................. 8,268 6,761 6,904 --
Restructuring charges and
asset writedowns.......... -- -- 5,691 6,910
Interest and other
(income)/expense, net..... (3,267) 1,162 5,503 9,336
-------- -------- -------- --------
Total income from
continuing operations
before taxes.......... $ 27,620 $ 7,919 $ 15,970 $ (4,980)
======== ======== ======== ========
Total assets:
Enterprise Solutions..... $ 35,416 $ 33,022 $ 55,023 $ 68,745
Government Solutions..... -- 20,484 32,998 41,175
IT Consulting Services... 115,348 157,443 232,650 188,815
Assets of discontinued
operations.............. 77,482 99,361 51,394 39,909
Reconciling items(3)..... 28,675 5,867 -- --
-------- -------- -------- --------
Total.................. $256,921 $316,177 $372,065 $338,644
======== ======== ======== ========
- --------
(1) Intersegment revenues were not material and have been eliminated in the
above presentation.
(2) Beginning in 1998, certain back office operations, functions and expenses
were centralized into corporate office control thereby increasing the
expenses in the corporate area. Historically, the majority of these
expenses could have been included in the IT Consulting Services Group as
these corporate functions did not exist. The Company is not able to
restate its historical results on a comparable basis.
(3) Represents unallocated corporate assets.
50
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
GEOGRAPHIC INFORMATION
The following table presents the revenue and income from continuing
operations by geographic area for the year ended June 28, 1997, the six months
ended December 27, 1997, and the years ended December 26, 1998 and December
25, 1999 and the identifiable assets by geographic area as of these dates:
Six Months Year Ended
Year Ended Ended -------------------------
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
---------- ------------ ------------ ------------
(In thousands)
Revenue:
North America............. $430,108 $267,364 $665,244 $687,701
Europe.................... 13,716 14,011 42,249 50,424
Other..................... 680 1,701 2,663 4,459
-------- -------- -------- --------
Total................... $444,504 $283,076 $710,156 $742,584
======== ======== ======== ========
Income from continuing
operations:
North America............. $ 32,208 $ 17,159 $ 30,105 $ 10,394
Europe.................... 220 (606) 3,481 819
Other..................... 193 (711) 482 53
-------- -------- -------- --------
Total................... $ 32,621 $ 15,842 $ 34,068 $ 11,266
======== ======== ======== ========
Acquisition-related
expenses................. 8,268 6,761 6,904 --
Restructuring and other
asset writedown.......... -- -- 5,691 6,910
Interest and other
(income) expense, net.... (3,267) 1,162 5,503 9,336
-------- -------- -------- --------
Income from continuing
operations before taxes.... $ 27,620 $ 7,919 $ 15,970 $ (4,980)
======== ======== ======== ========
Identifiable assets:
North America............. $209,891 $290,853 $359,146 $284,734
Europe.................... 18,288 20,176 11,269 13,792
Other..................... 67 (719) 1,650 209
Corporate................. 28,675 5,867 -- --
Discontinued operations... -- -- -- 39,909
-------- -------- -------- --------
Total................... $256,921 $316,177 $372,065 $338,644
======== ======== ======== ========
Corporate assets represent marketable securities invested for all segments
and regions. All other assets are used in the operations of individual
entities in the different segments and geographical areas.
13. OTHER RELATED PARTY TRANSACTIONS
During the year ended June 28, 1997, the Company entered into a contract
with an entity controlled by the Chief Executive Officer, Chairman of the
Board and significant stockholder of the Company to utilize an airplane for
corporate travel purposes. The Company pays for such usage on a per-flight
basis at a rate which management believes approximates market prices. Total
amounts incurred to this entity during the year ended June 28, 1997, the six
months ended December 27, 1997, and the years ended December 26, 1998 and
December 25, 1999 were $100,000, $267,000, $291,000 and $264,000,
respectively.
51
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. CONSOLIDATION OF REAL ESTATE TRUST
As described in Note 15, the Company leases office space from the Wells
Avenue Realty Trust ("Trust"), of which the Chief Executive Officer, Chairman
of the Board, and significant stockholder of the Company is the sole
beneficiary. Effective September 19, 1995, the Company renegotiated its lease
with the Trust in conjunction with a refinancing of the Trust's mortgage. The
modified lease terms expanded the amount of space which the Company occupies,
committed the Company to rent the facility through the maturity date of the
mortgage loan, and granted the Company a right of first refusal to lease any
space in the facility currently occupied by other tenants when the tenants'
leases expire.
Accordingly, as of this date, the Company obtained significant control over
the operations of the Trust and assumed a significant portion of the Trust's
obligations. As a result, the Company has consolidated the accounts of the
Trust as of September 19, 1995 on a prospective basis. This office building
was sold in March, 2000 and the Company will cease to consolidate the accounts
of the Trust effective with the date of sale.
As of December 25, 1999, the Trust reported the following assets and
liabilities (in thousands):
Fixed assets, net.................................................. $ 1,566
Other assets....................................................... 337
Mortgage loans payable............................................. (1,939)
-------
$ (36)
=======
15. COMMITMENTS AND CONTINGENCIES
The Company occupies premises under various non-cancelable operating leases
which include terms requiring it to pay a pro-rata portion of increased
operating expenses and real estate taxes. The leases expire on various dates
through April 2018, and certain of the leases contain options for renewal or
purchase of related equipment.
In January 1993, the Company entered into a three year lease with the Trust,
which required annual rental payments of $120,000, payable in equal monthly
installments of $10,000. This lease continued to be amended upon subsequent
expansions of the leased area and currently requires annual payments of
$531,000 payable in equal monthly installments of $44,000. The amended lease
term expires September 2010. In conjunction with the amendment of the lease in
September 1995, the Company began to consolidate the accounts of the Trust on
a prospective basis (see Note 14). This building was sold in March, 2000 and
the Company was released from its lease obligation effective with the sale.
In June 1998, the Company entered into a ten year agreement to lease 200,000
square feet in Waltham, Massachusetts which is the site of the Company's new
headquarters. In connection with its move in November, 1999, the Company
consolidated six other offices located around Massachusetts. The Company is
currently negotiating to sublease 50,000 square feet and 25,000 square feet of
this facility, each for a three-year term.
In August 1998, the Company entered into a twenty year agreement to lease
30,000 square feet in London, England to consolidate several branch locations
in the city. In September 1999, the Company moved its operations from this
location to another facility of equal size for a term of 15 years at a
substantially lower rent. The vacated facility was assigned to a major
european bank, without cost to the Company, for the entire remaining term. The
rental commitments on this assigned facility have not been included in the
minimum payments under non-cancelable leases below.
52
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the year ended June 28, 1997, the six months ended December
27, 1997 and the years ended December 26, 1998 and December 25, 1999 was $6.8
million, $5.1 million, $10.2 and $14.3 million, respectively. Future minimum
payments under non-cancelable leases at December 25, 1999 are as follows,
excluding amounts payable to the Trust and the assigned London, England lease
mentioned above (in thousands):
Operating
Leases
---------
2000............................................................... $ 22,781
2001............................................................... 21,766
2002............................................................... 16,383
2003............................................................... 13,965
2004............................................................... 12,878
Thereafter......................................................... 55,225
--------
$142,998
========
16. FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the normal
course of business. Fair values are estimated based on assumptions concerning
the amount and timing of estimated future cash flows and assumed discount
rates reflecting varying degrees of perceived risk. Accordingly, the fair
values may not represent actual values of the financial instruments that could
have been realized as of year end or that will be realized in the future.
The carrying amounts of the Company's financial instruments, which include
accounts receivable, notes receivable, line of credit, accounts payable,
accrued salaries and wages, other accrued expenses, income taxes payable and
long-term debt approximate their fair values at December 26, 1998 and December
25, 1999.
17. DISCONTINUED OPERATIONS
In the fourth quarter of 1999, the Company decided to sell its management
consulting practice, the Business Strategy Group in an initiative to support
the Company's new strategic direction. The cash transaction of $65.0 million
closed on March 10, 2000 and will result in a gain for the Company estimated
at $10 million which will be recorded in the first quarter of 2000.
Accordingly, the Company reported the results of operations of the Business
Strategy Group as discontinued operations in the accompanying financial
statements and related notes for all periods shown.
53
RENAISSANCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 25, 1999, assets of the Business Strategy Group consisted
primarily of accounts receivable, goodwill and deferred income taxes amounting
to $47.7 million; and liabilities of $7.8 million consisted primarily of
accrued expenses and deferred income taxes.
Six Months
Year Ended Ended Year Ended Year Ended
June 28, December 27, December 26, December 25,
1997 1997 1998 1999
---------- ------------ ------------ ------------
(In thousands)
Revenue..................... $45,329 $37,043 $ 66,158 $36,096
Cost of revenue............. 28,348 19,595 45,326 21,380
Selling, general and
administrative expenses.... 10,833 10,552 29,643 9,022
Acquisition-related expenses
(1)........................ -- 11,200 -- --
Restructuring charges and
asset writedowns (2)....... -- -- 30,398 --
Interest and other (income)
expense, net............... -- (484) (318) 314
------- ------- -------- -------
Income (loss) from
discontinued operations.... 6,148 (3,820) (38,891) 5,380
Income tax provision
(benefit).................. 2,520 3,321 (4,567) 1,961
------- ------- -------- -------
Net income (loss) from
discontinued operations.... $ 3,628 $(7,141) $(34,324) $ 3,419
======= ======= ======== =======
- --------
(1) Represents transaction costs associated with the acquisition of RSI, which
was accounted for as a pooling of interests.
(2) Includes charges of $27.1 million associated with the write off of
goodwill and other costs associated with the Technomics and COBA-UK
subsidiaries and $3.3 million in restructuring charges.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The information required by this Item is included in Item 1 of this report
or will be included under the captions "Election of Class II Director--
Nominee," "Election of Class II Director--Other Directors," "Election of Class
II Director--Board of Directors and Committees," and "Election of Class II
Director--Director Compensation" and "Section 16(a) Beneficial ownership
Reporting Compliance" in the Proxy Statement, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included under the captions
"Executive Compensation--Summary Compensation Table," "Executive
Compensation--Option Grants in Last Fiscal Year," "Executive Compensation--
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values" and "Executive Compensation--Employment Agreements" in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
55
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The financial statements and financial statement schedules filed under
Item 8 as part of this report.
Listed below are all Exhibits filed as part of this Report. Certain Exhibits
are incorporated herein by reference to The Registry's Registration Statement
on Form S-1 (File No. 333-03366), Renaissance's Report on Form 10-K for the
transition period from June 28, 1997 to December 27, 1997 (File No. 0-28192),
and Renaissance's Report on Form 10-K for the fiscal year ended December 26,
1998 (File No. 0-28192).
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
2.1 Stock Purchase Agreement among Renaissance Worldwide Strategy
Inc., Registrant, Rome Acquisition Corp., and solely for the
purposes of Section 10.13 of the agreement, Behrman Capital II,
L.P., dated as of February 29, 2000.
3.1(1) Restated Articles of Organization of Registrant, as filed in
Massachusetts on May 13, 1996.
3.2(2) Articles of Amendment to Restated Articles of Organization, as
filed in Massachusetts on July 30, 1997.
3.3(2) Articles of Amendment to Restated Articles of Organization, as
filed in Massachusetts on January 7, 1998.
3.4(2) By-Laws of Registrant, as amended and restated on November 20,
1997.
4.1(1) Articles 3, 4, 5, and 6 of the Articles of Organization of
Registrant (included in Exhibit 3.1).
4.2(3) Specimen Stock Certificate.
10.1 Registrant's 1996 Stock Plan. *
10.2 Registrant's 1996 Employee Stock Purchase Plan. *
10.3(3) 1998 Directors Retainer Plan.*
10.4 Registrant's 1998 Acquisition Stock Plan. *
10.5 Registrant's 1998 International Stock Plan. *
10.6(1) Employment Agreement, dated May 1996 between Registrant and G.
Drew Conway.*
10.7(2) Registration Rights Agreement, dated as of November 26, 1997, by
and among, Registrant, Terry L. Hunter, and William M. Mercer
Incorporated.
10.8(3) Lease Agreement by and between Waltham 60/10 LLC and Registrant,
dated as of June 30, 1998.
10.9 Amended and Restated Credit Agreement among Registrant, Bank of
America, N.A., BNY Factoring LLC and the Lenders which are a
party to the agreement, dated as of July 15, 1999.
10.10 Pledge and Security Agreement, between Registrant, and Bank of
America, N.A., dated as of July 15, 1999.
10.11 First Amendment to Amended and Restated Credit Agreement among
Registrant, each of the Lenders which is a party to the
agreement, and Bank of America, N.A., dated as of September 25,
1999.
56
Exhibit
Number Description of Document
------- ----------------------- ---
10.12 Second Amendment to Amended and Restated Credit Agreement among
Registrant, each of the Lenders which is a party to the
agreement, and Bank of America, N.A., dated as of February 25,
2000.
21 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Katch Tyson & Company.
23.3 Consent of Goldstein Golub Kessler LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
- --------
* Denotes management contract or compensation arrangements.
(1) Filed as an Exhibit to The Registry's Registration Statement on Form S-1
(File No. 333-03366) and incorporated by reference herein.
(2) Filed as an Exhibit to Renaissance Worldwide Inc.'s Report on Form 10-K for
the transition period from June 28, 1997 to December 27, 1997 (File No. 0-
28192).
(3) Filed as an Exhibit to Renaissance Worldwide, Inc.'s Report on Form 10-K
for the fiscal year ended December 26, 1998 (File No. 0-28192).
(b) No reports on Form 8-K were filed during the last quarter of 1999.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Worldwide, Inc.
Date: March 23, 2000
/s/ G. Drew Conway
By: _________________________________
G. Drew Conway
President, Chief Executive
Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ G. Drew Conway Chief Executive Officer March 24, 2000
______________________________________ and Chairman of the Board
G. Drew Conway of Directors (Principal
Executive Officer)
/s/ Joseph F. Pesce Executive Vice President, March 24, 2000
______________________________________ Chief Financial Officer,
Joseph F. Pesce and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Robert P. Badavas Director March 24, 2000
______________________________________
Robert P. Badavas
/s/ Paul C. O'Brien Director March 24, 2000
______________________________________
Paul C. O'Brien
58
SCHEDULE II
RENAISSANCE WORLDWIDE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Deductions
Balance at Charged Write-off of Balance
Beginning to Costs and Uncollectible at End of
of Period Expenses Accounts Period
---------- ------------ ------------- ---------
Allowance for doubtful
accounts:
Year ended June 28, 1997(1).. $ 938 $ 1,336 $ 434 $ 1,840
Six months ended December 27,
1997(2)..................... 2,174 3,090 1,820 3,444
Year ended December 26,
1998........................ 3,444 12,703 6,531 9,616
Year ended December 25,
1999(3)..................... 9,616 11,659 10,002 11,273
- --------
(1) Beginning balance adjusted to reflect change in fiscal year end of RSI.
(2) Beginning balance adjusted to reflect change in fiscal year end of the
Hunter Group.
(3) The December 25, 1999 allowance for doubtful accounts balance includes
$929,000 related to discontinued operations (see Note 17 of Notes to
Consolidated Financial Statements).
S-1