<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1998
REGISTRATION NO. 333-50889
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL INTEGRATION INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7371 04-3169145
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
101 MAIN STREET
CAMBRIDGE, MA 02142
(617) 250-2500
(ADDRESS AND TELEPHONE NUMBER
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL PEHL
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
INTERNATIONAL INTEGRATION INCORPORATED
101 MAIN STREET
CAMBRIDGE, MA 02142
(617) 250-2500
(NAME, ADDRESS AND TELEPHONE
NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
PETER B. TARR, ESQ. JOHN A. MELTAUS, ESQ.
JEFFREY A. STEIN, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
HALE AND DORR LLP 125 HIGH STREET
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 248-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 248-7100
TELECOPY: (617) 526-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued June 18, 1998
2,500,000 Shares
(i-Cube Logo)
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $11 AND $13 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
------------------------
APPLICATION HAS BEEN MADE TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ICUB."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 4 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- ------------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total(3)............................. $ $ $
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- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $950,000.
The Company has agreed to pay the expenses of the Selling Stockholders,
other than underwriting discounts and commissions.
(3) The Company and the Selling Stockholders have granted the Underwriters
an option, exercisable within 30 days of the date hereof, to purchase up
to an aggregate of 375,000 additional Shares (105,000 of which will be
provided by the Company and 270,000 of which will be provided by the
Selling Stockholders) at the price to public less underwriting discounts
and commissions for the purpose of covering over-allotments, if any. If
the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions, proceeds to Company and
proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1998 at the
offices of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
UBS SECURITIES
, 1998
<PAGE> 3
[ARTWORK PORTRAYING THE COMPANY'S SERVICES. THE TEXT CONTAINED WITHIN THE
ARTWORK IS AS FOLLOWS:
[Introduction]
Transforming the Business World
As the business world changes, legacy systems have limited the ability of many
enterprises to compete. The gap between where they are -- with their existing
inflexible information technology infrastructure -- and where they want to be --
agile enough to rapidly adopt new competitive strategies -- is quickly growing.
i-Cube helps Fortune 1000 and other large enterprises close that gap.
[Section 1:]
The Business Situation:
Businesses today face the constant need to react quickly to changes in their
marketplace.
Deregulation, industry consolidation, globalization of product and vendor
markets, demand for more responsive customer service -- all create a need to
continually develop and implement new strategies rapidly.
A need to overcome the restrictive aspects of legacy systems.
i-Cube helps companies eliminate these constraints, while preserving the
investment they have made in their existing systems.
So applications can respond to the new demands of business.
Can interface with emerging technologies.
Can be better prepared for a future of changing business requirements.
<PAGE> 4
[Case study:]
For McDonnell Douglas (The Boeing Company), i-Cube migrated four legacy systems
into one common client/server-based system that coordinates all contractual
requirements. While the rearchitected system provides screens and functions
familiar to users -- minimizing training costs -- the application now runs on an
open systems framework that supports swift enhancement.
[Section 2:]
The Business Methods:
i-Cube helps some of the largest organizations in the world meet their business
challenges.
With iMPACT, a suite of services including Information Systems Consulting,
Application Implementation Services and Customer Support.
Services designed to help i-Cube customers improve their competitiveness.
Services that incorporate a proven set of software tools, technologies and
methodologies.
The i-Structure.
A set of methodologies and technologies supporting the development and migration
of scalable, multi-tier, client/server applications.
Applications that are independent of the hardware and operating systems on which
they operate.
That are adaptable to future technology or business changes.
That are easily maintainable.
i-Cube uses the i-Structure for constructing large-scale, complex applications
in a rapid, predictable, low-risk manner.
<PAGE> 5
And for migrating legacy applications by deconstructing them and reconstructing
their components into an enhanced, open systems environment.
Providing an application infrastructure with the flexibility customers need to
adapt their IT environments as their businesses evolve.
[GRAPHIC: A stylized depiction of the main lines of service provided by i-Cube,
with separate sections labeled accordingly. Section #1 reads: Information
Systems Consulting -- Solutions Workshops, Application Staging & Planning
(ASAP); Section #2 reads: Application Implementation Services -- Application
Design (Application Migration, including Rearchitect, Rapid Enhancement
Deployment), Custom Development (Rapid Application Development), and Application
Integration; Section #3 reads: Customer Support -- Skills Enhancement &
Empowerment, Rollout & Transitional Maintenance.]
[CAPTION: i-Cube iMPACT Services]
[Case study:]
For Mercedes-Benz Lease Finanz, i-Cube performed a complete overhaul of the
company's lease finance system to support creative new finance options for
private customers and allow rapid feedback on credit applications to
potential customers. i-Cube helped the company achieve its goal of reducing
finance approval time from one to two days to 15 minutes.
[i-Cube logo]
<PAGE> 6
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 4
The Company................................ 12
Use of Proceeds............................ 12
Dividend Policy............................ 12
Capitalization............................. 13
Dilution................................... 14
Selected Consolidated Financial Data....... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management................................. 34
Certain Transactions....................... 44
Principal Stockholders..................... 45
Description of Capital Stock............... 47
Shares Eligible for Future Sale............ 50
Underwriters............................... 52
Legal Matters.............................. 53
Experts.................................... 53
Change in Accountants...................... 54
Additional Information..................... 54
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and with quarterly reports
for the first three quarters of each year containing unaudited consolidated
interim financial information.
------------------------
i-Cube, Transforming the Business World, i-Structure, iMPACT and the i-Cube
logo are service marks of the Company. This Prospectus also includes other
service marks, trademarks and trade names of the Company and of companies other
than the Company.
------------------------
Except as set forth in the consolidated financial statements or as
otherwise indicated herein, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option; (ii) assumes the filing
prior to the effective date of the Registration Statement of which this
Prospectus is a part of the Amended and Restated Certificate of Incorporation of
the Company (the "Restated Certificate of Incorporation") increasing the
authorized shares of Common Stock, and implementing certain provisions described
below under "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions; Anti-Takeover Effects," and the receipt of stockholder
approval therefor; and (iii) reflects a three-for-two split of the Company's
Common Stock effected in February 1997. See "Description of Capital Stock,"
"Underwriters" and Note 5 of Notes to Consolidated Financial Statements. As used
in this Prospectus, the "Company" and "i-Cube" refer to International
Integration Incorporated and its subsidiaries.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
International Integration Incorporated ("i-Cube" or the "Company") provides
application migration and custom software development services on a fixed-price,
fixed-time basis to Fortune 1000 companies and other large enterprises. The
Company believes that through these services, its customers can cost-effectively
and rapidly improve their competitiveness and narrow the gap between the demands
of their business strategies and the capabilities of their information
technology ("IT") environments. The Company offers a full range of services,
known as iMPACT, including information systems consulting, application
migration, custom software development and customer support.
The Company utilizes its proprietary development methodologies and
technologies, known as i-Structure, to implement large-scale, complex
application migration and custom development projects based on a multi-tier
client/server architecture. i-Structure's proprietary technologies include
transformation tools used to separate legacy applications into their smallest
logical components, methodologies to populate an Application Repository that
contains the components of and critical information about an application, and
runtime tools used to access and integrate application components. i-Structure
provides the Company with a repeatable and consistent development framework,
applicable to both its application migration and custom development projects,
that increases the speed and reduces the risk and cost of the development of
strategic, core business applications. The applications custom developed or
migrated using i-Structure are not dependent on any single hardware provider or
operating system, are adaptable to future technologies and business changes, and
are easily maintainable. In addition, i-Structure enables the Company to migrate
legacy software applications into multi-tier client/server applications,
allowing customers to preserve the core functionality and other benefits of
their legacy applications while eliminating the constraints of legacy system
architectures. The Company believes that i-Structure enhances the productivity
of its IT professionals and the Company's continued investment in i-Structure is
a key component of its growth strategy.
The Company believes that the expertise gained from completing large-scale,
strategic application migration and custom development projects since its
founding in 1992 provides a significant competitive advantage. Recent
engagements include projects for Cooper Cameron Corporation, Daimler-Benz AG,
Hewlett-Packard Company, IBM, McDonnell Douglas Corporation (now part of The
Boeing Company), Rockwell Automation/Reliance Electric, and Wisconsin Power and
Light Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................................ 2,500,000 shares
Common Stock to be outstanding after this offering.......... 15,967,233 shares(1)
Use of proceeds............................................. For general corporate purposes, including working
capital, capital expenditures and potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...................... ICUB
</TABLE>
- ---------------
(1) Based on shares of Common Stock outstanding as of March 31, 1998. Excludes
(i) 5,539,782 shares of Common Stock issuable upon exercise of stock options
outstanding as of March 31, 1998, of which options to purchase 1,657,628
shares were then exercisable, and (ii) 4,064,578 shares of Common Stock
reserved for future issuance under the Company's stock plans. See
"Description of Capital Stock," "Management -- Benefit Plans" and Note 7 of
Notes to Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
----- ------ ------ ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................................................ $ 833 $2,893 $9,197 $14,479 $26,859 $5,598 $8,828
Operating income............................................ 197 792 3,408 2,580 6,694 1,471 2,119
Net income.................................................. 124 485 2,076 1,615 4,325 929 1,372
Earnings per share(1):
Basic..................................................... $ .01 $ .04 $ .17 $ .13 $ .34 $ .07 $ .10
Diluted................................................... $ .01 $ .04 $ .15 $ .12 $ .29 $ .07 $ .09
Weighted average shares outstanding(1):
Basic..................................................... 9,353 12,114 12,323 12,425 12,627 12,519 13,244
Diluted................................................... 9,353 12,114 13,465 13,682 15,163 14,256 16,031
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 9,833 $36,783
Working capital............................................. 9,174 36,124
Total assets................................................ 19,518 46,468
Long-term obligations, net of current maturities............ 623 623
Total stockholders' equity.................................. 11,043 37,993
</TABLE>
- ---------------
(1) For an explanation of the determination of the number of shares used in
computing earnings per share, see Note 6 of Notes to Consolidated Financial
Statements.
(2) Adjusted to give effect to the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share (the midpoint of the range set forth on the cover of this
Prospectus), after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
3
<PAGE> 8
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Prospectus before purchasing the shares of Common Stock
offered hereby. This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
the various factors identified in this Prospectus, including but not limited to
the matters set forth below, which could cause actual results to differ
materially from those indicated by such forward-looking statements.
Fluctuations in Results of Operations. The Company's results of operations
have varied significantly in the past and may vary significantly in the future,
on a quarterly and annual basis, as a result of a variety of factors, many of
which are outside the Company's control. These factors include, without
limitation: (i) the timing and size of new contracts; (ii) the Company's ability
to accurately estimate the time and expense associated with providing services
under its customer contracts; (iii) the Company's ability to attract and retain
employees having qualifications and experience appropriate for the Company's
engagements; (iv) employee utilization, the number and type of engagements
performed by the Company during a particular period and the payment terms, other
contractual terms and degree of completion of such engagements; (v) the
Company's ability to execute the large, complex and lengthy engagements
characteristic of the Company's business, including without limitation its
ability to staff and manage the appropriate level of IT professionals; (vi) any
unexpected cancellation or termination of large engagements; (vii) demand for
the Company's services; (viii) the efforts and performance of the Company's
marketing partners; (ix) the costs associated with the opening of new offices;
(x) changes in customer budgets; (xi) the publication of opinions about the
Company and its services, or its competitors or their services, by industry
analysts; (xii) competitive conditions in the industry; and (xiii) general
domestic and international economic conditions. The Company's expense levels are
based, in significant part, on anticipated contract requirements and on other
expectations of future revenues and are relatively fixed in the short term.
Consequently, if revenue levels are below expectations, including without
limitation as a result of an unanticipated delay in or termination of a customer
engagement, expense levels could be disproportionately high as a percentage of
net revenues, and the Company's business, financial condition and results of
operations would be materially adversely affected. See "-- Project and Customer
Concentration," "-- Fixed-Price, Fixed-Time Contracts" and "Business --
Customers."
The Company also believes that the purchase of its services generally
involves a significant commitment of a customer's capital resources. Therefore,
any downturn in a customer's business could have a material adverse effect on
the Company's business, financial condition and results of operations. To the
extent that projects progress faster than expected, results of operations for
subsequent quarters may be materially adversely affected. Due to these and other
factors, the Company's quarterly revenues, expenses and results of operations
could vary significantly in the future. Accordingly, period-to-period
comparisons of operating results are not necessarily meaningful and operating
results for any period should not be relied upon as indications of future
performance. There can be no assurance that the Company will be able to increase
its net revenues or operating income in future periods or be able to sustain its
level of net revenues or operating income or its rate of growth on a quarterly
or annual basis. See "-- Project Risks," "-- Length of Sales Cycle" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Due to all of the foregoing factors, it is possible that in some future
quarter, the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Project and Customer Concentration. The Company has historically derived,
and may in the future derive, a significant amount of its net revenues from
major engagements with a relatively small number of customers. In each of 1995
and 1996, the Company had three customers which individually accounted for 10%
or more of the Company's net revenues, and in 1997 the following five customers
each accounted for 10% or
4
<PAGE> 9
more of the Company's net revenues: Salt River Project (29%); IBM (19%);
Daimler-Benz AG (14%); PEMEX/Integrated Trade Systems (11%); and Wisconsin Power
and Light Company (10%). For the first three months of 1998, the following five
customers each accounted for 10% or more of the Company's net revenues: IBM
(23%); PEMEX/Integrated Trade Systems (17%); Salt River Project (16%); Rockwell
Automation/Reliance Electric (11%); and Hewlett-Packard Company (10%). Although
the Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon large contracts with a small number of
customers. The Company has a limited history of obtaining additional projects
from certain of its major customers, and there can be no assurance that any
major customer will not decrease or discontinue its level of business with the
Company following completion of existing projects or during the course of an
engagement, or that the Company will be able to replace on a timely basis any
discontinued business with engagements from new customers. The loss of or a
reduction in the level of services provided to one or more major customers would
have a material adverse effect on the Company's business, financial condition
and results of operations. If a major customer were unable or unwilling to
proceed with a project or to pay the Company for its services on a timely basis,
the Company's business, financial condition and results of operations could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Customers" and Note
1 of Notes to Consolidated Financial Statements.
Project Risks. Many of the Company's projects are large, complex
engagements that are performed by the Company over extended periods of time. The
Company is generally paid for these projects in installments, based on the
achievement of certain milestones. The Company's ability to successfully
complete these projects and to earn the milestone payments is based on factors
within and outside the Company's control, including the Company's ability to
hire and retain the requisite IT professionals, the Company's project management
capabilities, the abilities and cooperation of its customers, changes in project
goals and the Company's technical expertise, and accordingly, there can be no
assurance that the Company will successfully achieve milestone payments on the
timetable projected by the Company, if at all. Furthermore, because of the
significant numbers of IT professionals assigned by the Company to these large
projects, unexpected early terminations of any of such engagements could result
in underutilization of project personnel until such persons can be redeployed to
other projects. Conversely, an unexpected delay in the completion of a major
engagement could result in a delay in the redeployment of project personnel to
new assignments for which the Company is contractually committed to achieve
milestones on a timely basis. For these and other reasons, the failure of the
Company to successfully complete its large engagements within the time frame
projected by the Company could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's failure or inability to meet a customer's expectations in the
performance of its services could give rise to claims against the Company or
damage the Company's reputation and adversely affect its ability to attract new
business.
Fixed-Price, Fixed-Time Contracts. The Company generally undertakes
projects on a fixed-price, fixed-time basis, and warrants defined project
deliverables as specified in mutually agreed upon statements of work. In making
proposals for fixed-price, fixed-time contracts, the Company relies on its
estimated costs and timing for completing the project. These estimates reflect,
among other factors, judgments as to the efficiencies of the Company's
methodologies, technologies, and IT professionals as applied to the project. Any
increased or unexpected costs or unanticipated delays in connection with the
performance of fixed-price, fixed-time contracts, including delays caused by
factors outside the Company's control, could affect the profitability of these
contracts and have a material adverse effect on the Company's business,
financial condition and results of operations. In the past, the Company has been
required to commit unanticipated additional resources to complete certain
projects, which may have negatively affected the Company's anticipated
profitability on such projects. The Company recognizes that it may experience
similar situations in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Management of Growth. The Company has experienced growth in net revenues
and expansion of its operations which have placed, and are expected to continue
to place, significant demands on the Company's managerial, operational and
financial resources. The Company must continue to manage its financial,
operational and management controls, reporting systems and procedures, and
expand, train, manage and
5
<PAGE> 10
motivate its work force. Given the scale and complexity of the Company's
technology consulting engagements and the Company's expansion of its operations
to date, the Company must continue to improve its ability to timely and
accurately predict and to staff and manage the IT professional resources
required for those engagements. The Company expects to implement an
enterprise-wide accounting and human resources software application in the
second half of 1998 to support its anticipated growth. There can be no assurance
that the Company will be able to implement this new application without
disruption, or that the Company's systems, procedures or controls will otherwise
be adequate to support the Company's expanding operations. In addition, in the
event the Company is required to expand its office facilities, there can be no
assurance that such facilities will be available on acceptable terms, if at all,
or that any expansion or relocation will not have a disruptive effect on the
Company's operations. If the Company's management is unable to manage growth
effectively, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business -- i-Cube
Culture and Professional Resources" and "Management -- Executive Officers,
Directors and Certain Key Officers."
Competitive Market for IT Professionals. The Company's success depends to
a significant extent on its ability to attract, train, motivate and retain
highly skilled IT professionals, particularly project managers, software
engineers and other senior technical personnel. There is currently a shortage
of, and significant competition for, software development and other IT
professionals with the advanced technological skills necessary to perform the
services offered by the Company. This shortage has caused wages for such
professionals to increase, which increases operating costs to IT service
providers such as the Company. The Company's ability to maintain existing
engagements and obtain new business therefore depends, in large part, on its
ability to hire and retain additional technical personnel with the IT skills
required to keep pace with continuing changes in information processing
technology, evolving industry standards and changing customer preferences. In
addition, the Company generally incurs substantial costs in recruiting, hiring
and training IT professionals before these employees become productive. There
can be no assurance that the Company will be successful in attracting and
retaining future employees or retaining current employees, or that such
employees will continue to achieve high performance levels. An inability to hire
a sufficient number of qualified employees or an inability to retain employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, even if the Company is able to
expand its team of highly skilled IT professionals, the resources required to
attract and retain such employees may adversely affect the Company's operating
margins. See "Business -- i-Cube Culture and Professional Resources."
Length of Sales Cycle. The time between the date of initial contact with a
potential customer and the execution of a contract with that customer is often
lengthy, typically ranging from six weeks for smaller engagements to nine months
or more for the Company's larger engagements, and is subject to delays over
which the Company has little or no control, including customers' budgetary
constraints, customers' internal acceptance reviews, the success and continued
internal support of customers' own development efforts, and the possibility of
cancellation or delay of projects by customers. During such sales cycle, the
Company may expend substantial funds and management resources and yet not obtain
project awards or revenues. See "Business -- Sales and Marketing."
Dependence on Third Party Marketing Relationships. The Company has
developed and may continue to develop marketing relationships with third parties
that offer products or services that are complementary to those offered by the
Company. The Company currently has joint marketing relationships with Hewlett-
Packard Company and debis Systemhaus, the IT services subsidiary of Daimler-Benz
AG. The Company believes that the customer referrals and partner endorsements
provided by these relationships have contributed significantly to the award of
new business to the Company in the past. To date, these relationships have been
mutually non-exclusive and do not require any minimum level of business or
revenue. There can be no assurance that the Company can successfully maintain
these relationships or establish similar relationships with others. If the
Company's marketing partners were to reduce their efforts on behalf of the
Company, the Company's business, financial condition and results of operations
could be materially adversely affected. See "Business -- Marketing
Relationships."
6
<PAGE> 11
Rapid Technological Change; Dependence on Client/Server Architectures. The
market for the Company's services is characterized by innovation and rapid
technological change, evolving industry standards and changing customer
preferences. Both the needs of potential customers and the technologies
available for meeting those needs can change significantly within a short period
of time. The Company has derived a significant portion of its revenues from
projects based primarily on client/server architectures. These technologies are
continuing to develop and are subject to rapid change. Any factors negatively
affecting the acceptance of such technologies could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's future will depend in part on its ability to continually
enhance its services, to develop services that address the needs of its
customers and potential customers, and to continue to improve its i-Structure
methodologies and technologies. There can be no assurance that the Company will
be successful in developing and marketing services that respond to technological
changes, that the Company will enhance its i-Structure methodologies and
technologies on a timely or cost-effective basis, or that the Company's
services, methodologies and technologies will adequately meet the requirements
of the marketplace. The failure of the Company to respond to rapidly changing
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Industry
Background," "Business -- Technology" and "Business -- Research and
Development."
Dependence on Key Personnel. The Company's future success depends to a
significant extent on Michael Pehl, its Chief Executive Officer and Chairman of
the Board of Directors, and its other executive officers and key employees. The
loss of the services of any one or more of these individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. None of these individuals is contractually obligated to
remain in the employ of the Company for any specified period of time. The
Company does not have, and is not considering securing, key-man life insurance
on any of its executive officers or other key employees.
Highly Competitive Market. The Company operates in a highly competitive
and rapidly changing market and competes with a variety of organizations that
offer services similar to those offered by the Company. The market includes
participants from a variety of market segments, including other IT service
providers, large accounting and other professional service firms, packaged
software vendors and services groups of computer equipment companies, as well as
the internal IT staffs of its customers and potential customers. Many of these
competitors have significantly greater financial, technical, sales and marketing
resources and greater name recognition than the Company. In addition, there are
relatively low barriers to entry into the market in which the Company competes
and the Company has faced, and expects to continue to face, additional
competition from new entrants into this market. There can be no assurance that
the Company will be able to continue to compete successfully with its existing
competitors or that it will be able to compete successfully with new
competitors. See "Business -- Competition."
Dependence on Proprietary Rights. The Company's success and its ability to
compete is dependent, in part, upon its proprietary rights, including its rights
in i-Structure methodologies and technologies. The Company relies primarily on a
combination of copyright, trademark and trade secret laws to establish and
protect its proprietary rights. There can be no assurance that such measures
will be adequate to protect the Company's proprietary rights. In addition, the
Company seeks to protect its proprietary rights through the use of
confidentiality agreements with employees, consultants, advisors and others.
There can be no assurance that any such agreements will provide adequate
protection for the Company's proprietary rights in the event of any unauthorized
use or disclosure, that employees of the Company, consultants, advisors or
others will maintain the confidentiality of such proprietary information, or
that such proprietary information will not otherwise become known, or be
independently developed, by competitors.
The Company historically has restricted access to the source codes of its
software tools and other technologies. The Company regards its source codes as
proprietary information, and attempts to protect the confidentiality of these
source codes, some of which are embedded in the developed application and
licensed to the customer for runtime use. In certain cases, the Company has also
licensed the source code version to
7
<PAGE> 12
customers for internal use, to enable them to maintain their transformed
applications, and in other cases, the Company has entered into arrangements to
make its source code available upon the occurrence of certain events, such as
the bankruptcy or insolvency of the Company or certain material breaches of the
Company's application development contract. In the event of any release of the
source code pursuant to such arrangements, the customer's license is generally
limited to use of the source code for specific purposes. Despite the Company's
precautions, it may be possible for unauthorized parties to copy or otherwise
reverse engineer portions of the Company's software or otherwise obtain and use
information that the Company regards as proprietary.
The Company does not possess any patents or copyright registrations in the
United States or any other jurisdiction. Existing copyright and trade secret
laws only offer limited protection, and the laws of certain countries in which
the Company provides services may not protect the Company's intellectual
property rights to the same extent as the laws of the United States. Certain
provisions of the agreements entered into by the Company, including provisions
protecting against unauthorized use, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions, and the Company is
required to negotiate limits on these provisions from time to time.
Although the Company believes that its services and technologies do not
infringe on the intellectual property rights of others, there can be no
assurance that infringement claims will not be asserted against the Company in
the future. Such claims, if resolved against the Company, could adversely affect
the Company's reputation, preclude it from offering certain services, and have a
material adverse effect on the Company's business, financial condition and
results of operations. In its agreements with its customers, the Company agrees
to indemnify its customers for any expenses or liabilities resulting from
claimed infringements of patents, trademarks or copyrights of third parties. In
certain instances, the amount of such indemnities may be greater than the
revenues the Company may have received from the customer. There can be no
assurance that third parties will not assert infringement or misappropriation
claims against the Company in the future with respect to current or future
services. Any claims or litigation, with or without merit, could be
time-consuming, result in costly litigation or delays, or require the Company to
enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
received notice from a company located in the Netherlands that it believes that
its rights to use the i-Cube name in the Netherlands, Belgium and Luxembourg are
superior to those of the Company. In the event that the Company agrees with the
claims of such company, or in the event that the Company elects not to challenge
the assertions of such company, the Company may not be able to market its
services in those countries under the i-Cube name. On June 17, 1998, the Company
received a letter from Sapient Corporation ("Sapient") regarding the dates in
1993 on which Madhav Anand, the President and a Founder of the Company who was
an employee of Sapient, terminated employment with Sapient and commenced
employment with the Company. The letter states that Sapient is investigating any
potential legal claims it may have against the Company relating to this matter
and alleged similarities between Sapient's proprietary methodologies and
business practices and those of the Company. The Company is investigating this
matter. On the basis of its preliminary investigation, the Company is not aware
of any basis for any meritorious material claim by Sapient.
The Company's business includes the development of custom software in
connection with specific customer engagements. The Company frequently assigns to
its customers the copyright and other intellectual property rights in certain
aspects of the software and documentation developed for these customers.
Although the Company's contracts with its customers provide that it retains the
rights to its intellectual property, there can be no assurance that customers
will not assert rights in, and seek to limit the Company's use of, such
intellectual property.
Contract Liability. The Company's agreements with its customers typically
contain provisions designed to limit the Company's exposure to claims relating
to the Company's professional services and the applications developed by it.
However, it is possible that the limitation of liability provisions contained in
the Company's agreements may not adequately protect the Company or be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any such liability claims to date, there can be no assurance that
the Company will not be subject to such claims in the future. A liability claim
brought against the
8
<PAGE> 13
Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risk of Software Defects. Software applications as complex as those
developed by the Company frequently contain errors or defects, especially when
first implemented. Any such defects or errors could result in delayed or lost
revenues, adverse customer reaction, negative publicity regarding the Company
and its services and harm to the Company's reputation, or could require
expensive corrections, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with International Operations. In 1996, 1997 and the
first three months of 1998, net revenues from customers located outside of the
United States accounted for 9%, 14% and 7%, respectively, of the Company's net
revenues in such period. The Company expects that net revenues from
international operations, principally in Europe, may account for an increasingly
significant amount of the Company's net revenues. As a result, the Company is
subject to a number of risks, including, among other things, difficulties
relating to administering its business globally, managing foreign operations
(including the Company's office in Germany), currency fluctuations, restrictions
against the repatriation of earnings, the burdens of complying with a wide
variety of foreign laws, the uncertainty of laws and enforcement in certain
jurisdictions relating to the protection of intellectual property rights and
multiple and possibly overlapping tax structures. Other factors that can
adversely affect international operations are changes in import/export duties
and quotas, introduction of tariff or non-tariff barriers and economic or
political changes in international markets. In addition, a substantial portion
of the Company's operating expenses and capital expenditures relating to the
Company's international operations continue to be denominated in United States
dollars, while the Company anticipates that an increasing amount of its net
revenues will be generated in foreign currencies. As a result, the Company may
be exposed to fluctuations in the foreign exchange rates between the United
States dollar and the currency in which a particular engagement is transacted.
To date, the Company has not sought to hedge the risks associated with
fluctuations in foreign exchange rates. The realization of any of the foregoing
risks could have a material adverse effect on the Company's business, financial
condition and results of operations.
Year 2000 Compliance Issues. The Company believes that the purchasing
patterns of customers and potential customers may be significantly affected by
Year 2000 issues. Many companies are expending significant resources to correct
or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software services
such as those offered by the Company. Conversely, Year 2000 issues may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
services.
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems because its existing systems
correctly define the year 2000. Although the Company believes that the
information systems of its major partners and vendors (insofar as they relate to
the Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major partners and vendors as they relate to the Company's
business, or that any such impact of a major partner's or vendor's information
system would not have a material adverse effect on the Company.
Control by Principal Stockholders. Following this offering, approximately
45% of the outstanding shares of Common Stock of the Company will be held by
Sundar Subramaniam, a founder of the Company, and certain trusts and
partnerships for the benefit of Mr. Subramaniam or members of his family. Prior
to the completion of this offering, all of such shares are held in a voting
trust, for which State Street Bank and Trust Company is acting as trustee. Under
the terms of the voting trust agreement, the trustee has the right to vote the
shares following discussion with certain non-management members of the Board of
Directors, but without consulting the holders of the voting trust certificates,
except with respect to certain specific actions. The voting trust agreement will
terminate upon the closing of this offering. As a result, Mr. Subramaniam and
members of his family will have the ability to substantially influence the
business and affairs of the Company, including the election of the Company's
directors, and to otherwise affect the outcome of certain actions requiring
9
<PAGE> 14
stockholder approval, including the adoption of amendments to the Company's
Restated Certificate of Incorporation and certain mergers, sales of assets, and
other business acquisitions or dispositions. See "Principal Stockholders."
No Prior Trading Market; Potential Volatility of Stock Price. Prior to
this offering, there has been no public market for the Company's Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after this offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price will be determined solely by negotiations between the Company and the
Representatives of the Underwriters and therefore may not be indicative of
prices that will prevail in the trading market after this offering. The market
price of the Company's Common Stock could be subject to wide fluctuations in
response to, and may be adversely affected by, variations in quarterly results
of operations, changes in earnings estimates by analysts, adverse earnings or
other financial or business announcements by the Company and its customers or
competitors and market conditions in the industry, as well as general economic
conditions. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices for many
companies' stocks and that often have been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." See "Underwriters"
for a discussion of the factors to be considered in determining the initial
public offering price.
Shares Eligible for Future Sale. Sales of substantial amounts of shares of
the Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. In addition to the
2,500,000 shares offered hereby (2,875,000 shares if the over-allotment option
is exercised in full), approximately 2,374.5 additional shares of Common Stock
outstanding as of March 31, 1998, which are not subject to 180-day lock-up
agreements (the "Lock-up Agreements") with the Representatives of the
Underwriters, will be eligible for sale in the public market in accordance with
Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act"),
on the date of this Prospectus. Upon expiration of the Lock-up Agreements, 180
days after the date of this Prospectus, approximately 12,932,841.5 additional
shares of Common Stock will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act. At March 31, 1998,
approximately 3,107,837.5 shares of Common Stock were issued or issuable
pursuant to vested options or pursuant to other rights granted under the
Company's stock plans, of which approximately 59,617.5 shares are not subject to
Lock-up Agreements with the Representatives of the Underwriters and will be
eligible for sale in the public market in accordance with Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus. The Company
intends to file one or more registration statements on Form S-8 under the
Securities Act following the date of this Prospectus to register up to 5,539,782
shares of Common Stock subject to outstanding stock options granted pursuant to
the Company's stock option program as of March 31, 1998, including the 1,657,628
shares of Common Stock subject to options vested as of March 31, 1998, and
4,064,578 shares of Common Stock issuable pursuant to the Company's stock plans.
Such registration statements are expected to become effective upon filing. See
"Shares Eligible for Future Sale" and "Underwriters."
Broad Management Discretion as to Use of Proceeds. The anticipated net
proceeds of this offering to the Company have not been designated for specific
uses. Therefore, the Company's management will have broad discretion with
respect to the use of the net proceeds of this offering to the Company. See "Use
of Proceeds."
Immediate and Substantial Dilution. Purchasers of shares of Common Stock
offered hereby will suffer an immediate and substantial dilution in the net
tangible book value per share of the Common Stock from the initial public
offering price. See "Dilution."
Potential Adverse Effects of Anti-Takeover Provisions; Availability of
Preferred Stock for Issuance. Following the closing of this offering, the
Company's Board of Directors will have the authority to issue up to 1,000,000
shares of Preferred Stock without any further vote or action by the
stockholders, and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of such shares. Since the
10
<PAGE> 15
Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any such Preferred Stock. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. Further,
certain provisions of the Company's Restated Certificate of Incorporation,
including provisions that create a classified Board of Directors, and certain
provisions of the Company's Amended and Restated By-laws and of Delaware law
could have the effect of delaying or preventing a change in control of the
Company. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions; Anti-Takeover Effects."
11
<PAGE> 16
THE COMPANY
The Company was incorporated in Massachusetts in 1992 and was
reincorporated in Delaware in 1996. The principal executive offices of the
Company are located at 101 Main Street, Cambridge, Massachusetts 02142. The
Company's telephone number is (617) 250-2500.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$26,950,000 ($28,121,800 if the Underwriters' over-allotment option is exercised
in full), assuming an initial public offering price of $12.00 per share (the
midpoint of the range set forth on the cover of this Prospectus) and after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company.
The principal purposes of this offering are to establish a public market
for the Company's Common Stock, to increase the Company's visibility in the
marketplace, to facilitate future access to public capital markets and to obtain
additional working capital.
The Company expects to use the net proceeds for general corporate purposes,
including working capital and capital expenditures. A portion of the net
proceeds may also be used for the acquisition of other companies, assets,
products and technologies that are complementary to the Company's business,
although the Company has no commitments or agreements with respect to any such
acquisitions, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending such uses, the net proceeds to the Company from
this offering will be invested in investment grade, interest-bearing securities.
As of the date of this Prospectus, none of the proceeds have been designated for
specific uses.
DIVIDEND POLICY
No cash dividends have ever been declared or paid on the Company's capital
stock and the Company does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. The Company currently intends to retain
all of its future earnings, if any, for use in the operation of the business. In
addition, the Company's bank facility contains a covenant prohibiting the
payment of cash dividends without the bank's consent. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
12
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 (i) on an actual basis, and (ii) as adjusted to reflect the issuance
and sale of the 2,500,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $12.00 per share (the midpoint of
the range set forth on the cover of this Prospectus), after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company, and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED
--------- -------------
(UNAUDITED, IN THOUSANDS,
EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C>
Long-term obligations, net of current maturities............ $ 623 $ 623
Stockholders' equity(1):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 13,467,233 shares outstanding, actual;
15,967,233 shares issued and outstanding, as
adjusted(2)............................................ 134 159
Additional paid-in capital................................ 1,566 28,491
Treasury stock............................................ (8) (8)
Note receivable from stockholder.......................... (533) (533)
Retained earnings......................................... 9,884 9,884
------- -------
Total stockholders' equity............................. 11,043 37,993
------- -------
Total capitalization.............................. $11,666 $38,616
======= =======
</TABLE>
- ---------------
(1) Gives effect to the filing of the Restated Certificate of Incorporation of
the Company prior to the effective date of the Registration Statement of
which this Prospectus is a part.
(2) Excludes (i) 5,539,782 shares of Common Stock issuable upon exercise of
stock options outstanding as of March 31, 1998, of which options to purchase
1,657,628 shares were then exercisable, and (ii) 4,064,578 shares of Common
Stock reserved for future issuance under the Company's stock plans. See
"Management -- Benefit Plans" and Note 7 of Notes to Consolidated Financial
Statements.
13
<PAGE> 18
DILUTION
The net tangible book value of the Company as of March 31, 1998 was
approximately $11,043,000, or $0.82 per share of Common Stock. Net tangible book
value per share is determined by dividing the Company's tangible net worth
(tangible assets less liabilities) by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,500,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $12.00 per share (the midpoint of the range set forth on the cover of this
Prospectus) and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company, the net tangible book
value of the Company as of March 31, 1998 would have been $37,993,000, or $2.38
per share of Common Stock. This represents an immediate increase in such net
tangible book value of $1.56 per share to existing stockholders and an immediate
dilution of $9.62 per share to new investors. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Net tangible book value per share before this offering.... $ .82
Increase in net tangible book value per share attributable
to new investors....................................... 1.56
Net tangible book value per share after this offering....... 2.38
------
Dilution per share to new investors......................... $ 9.62
======
</TABLE>
The following table summarizes, as of March 31, 1998, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company, and the average price per share paid by
existing stockholders and by new investors at an assumed initial public offering
price of $12.00 per share (the midpoint of the range set forth on the cover of
this Prospectus) before deduction of estimated underwriting discounts and
commissions and offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 13,467,233 84.3% $ 997,632 3.2% $ .07
New investors................ 2,500,000 15.7 30,000,000 96.8 12.00
---------- ----- ----------- -----
Total................... 15,967,233 100.0% $30,997,632 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Company and the Selling Stockholders upon the exercise in full
of the Underwriters' over-allotment option will reduce the number of shares
of Common Stock held by existing stockholders to 13,197,233 shares, or 82.1%
of the total number of shares of Common Stock to be outstanding after this
offering and will increase the number of shares of Common Stock held by new
investors to 2,875,000 shares, or 17.9% of the total number of shares to be
outstanding after this offering. See "Principal Stockholders."
The foregoing table assumes no exercise of stock options outstanding at
March 31, 1998. As of March 31, 1998, there were options outstanding to purchase
5,539,782 shares of Common Stock at a weighted average exercise price of $2.51
per share and 4,064,578 shares reserved for future issuance under the Company's
stock plans. To the extent all of such outstanding options had been exercised,
net tangible book value per share after this offering would be $2.41 and total
dilution per share to new investors would be $9.59. See "Management -- Benefit
Plans" and Note 7 of Notes to Consolidated Financial Statements.
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, and with Management's Discussion and Analysis of Financial Condition
and Results of Operations, included elsewhere in this Prospectus. The selected
consolidated statement of income data set forth below for the three years in the
period ended December 31, 1997 and the selected consolidated balance sheet data
at December 31, 1996 and December 31, 1997 are derived from consolidated
financial statements of the Company audited by Coopers & Lybrand L.L.P.,
independent public accountants, which are included elsewhere in this Prospectus.
The selected consolidated statement of income data for the year ended December
31, 1994 and the selected consolidated balance sheet data at December 31, 1994
and 1995 are derived from consolidated financial statements of the Company
audited by Coopers & Lybrand L.L.P. which are not included in this Prospectus.
The selected consolidated statement of income data for the year ended December
31, 1993 and the selected consolidated balance sheet data at December 31, 1993
are derived from audited financial statements of the Company which are not
included in this Prospectus. The selected consolidated financial data for the
three months ended March 31, 1997 and March 31, 1998 are derived from the
Company's unaudited Consolidated Financial Statements included elsewhere in this
Prospectus. The unaudited Consolidated Financial Statements have been prepared
by the Company on a basis consistent with the Company's audited financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. Results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998 or any other future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
---- ------ ------ ------- ------- ------ -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.................................... $833 $2,893 $9,197 $14,479 $26,859 $5,598 $ 8,828
Project personnel and software costs............ 288 1,372 2,521 5,308 10,385 2,000 3,612
---- ------ ------ ------- ------- ------ -------
Gross profit.............................. 545 1,521 6,676 9,171 16,474 3,598 5,216
Operating expenses:
Selling and marketing......................... 95 329 897 1,580 3,046 630 850
General and administrative.................... 253 400 2,371 5,011 6,734 1,497 2,247
---- ------ ------ ------- ------- ------ -------
Total operating expenses.................. 348 729 3,268 6,591 9,780 2,127 3,097
---- ------ ------ ------- ------- ------ -------
Operating income................................ 197 792 3,408 2,580 6,694 1,471 2,119
Other income, net............................... -- 9 92 85 391 52 130
---- ------ ------ ------- ------- ------ -------
Income before income taxes................ 197 801 3,500 2,665 7,085 1,523 2,249
Provision for income taxes...................... 73 316 1,424 1,050 2,760 594 877
---- ------ ------ ------- ------- ------ -------
Net income................................ $124 $ 485 $2,076 $ 1,615 $ 4,325 $ 929 $ 1,372
==== ====== ====== ======= ======= ====== =======
Earnings per share(1):
Basic......................................... $.01 $ .04 $ .17 $ .13 $ .34 $ .07 $ .10
==== ====== ====== ======= ======= ====== =======
Diluted....................................... $.01 $ .04 $ .15 $ .12 $ .29 $ .07 $ .09
==== ====== ====== ======= ======= ====== =======
Weighted average shares outstanding(1):
Basic......................................... 9,353 12,114 12,323 12,425 12,627 12,519 13,244
Diluted....................................... 9,353 12,114 13,465 13,682 15,163 14,256 16,031
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
---- ------ ------ ------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 6 $1,062 $3,064 $ 3,889 $10,822 $ 9,833
Working capital....................................... 169 541 2,067 3,855 7,853 9,174
Total assets.......................................... 360 1,537 7,656 10,502 21,112 19,518
Long-term obligations, net of current maturities...... 59 -- -- -- 672 623
Total stockholders' equity............................ 132 619 2,695 4,561 9,616 11,043
</TABLE>
- ---------------
(1) For an explanation of the determination of the number of shares used in
computing earnings per share, see Note 6 of Notes to Consolidated Financial
Statements.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The following discussion contains certain trend
analysis and other statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that actual results
or events may differ materially. In evaluating such statements, prospective
investors should specifically consider the risk factors identified in this
Prospectus, particularly the matters set forth under the caption "Risk Factors,"
which could cause actual results to differ materially from those indicated by
such forward-looking statements.
OVERVIEW
The Company provides application migration and custom software development
services on a fixed-price, fixed-time basis to Fortune 1000 companies and other
large enterprises. The Company was founded in 1992 and has been profitable each
year since it began operations in 1993. The Company has financed its operations
principally through cash generated from operations.
The Company derives substantially all of its revenues from technology
consulting services. The Company's services are principally provided on a
fixed-price basis. See "Risk Factors -- Project Risks" and "Risk
Factors -- Fixed-Price, Fixed-Time Contracts." In 1997, 96% of net revenues of
the Company were derived from fixed-price contracts. In developing the
fixed-price of a project, the Company follows a process that assesses the
technical complexity of the project, the nature of the work, the functions to be
performed, the resources required to complete the engagement, and the extent to
which the Company will deploy its internally-developed software tools to deliver
the solution. Net revenues exclude reimbursable expenses charged to customers.
Revenue from fixed-price projects is recognized using
percentage-of-completion accounting, based on the ratio of labor hours incurred
to date as compared to the estimated total labor hours needed to complete the
project. Because the Company's operating results may be adversely affected by
inaccurate estimates of project completion, the Company has a series of project
review processes to help provide accurate project estimates, including a
detailed review at the end of each reporting period to determine project percent
completion. As a part of determining the estimates of the costs to complete, the
Company conservatively estimates the time to complete and project resources in
the early phases of the contract, considering such factors as project complexity
and technical risks. This estimation process may have the effect of deferring
contract revenue to the later phases of the contract period when the risk
factors are reduced, which results in an appropriate match of revenue to costs.
The cumulative impact of any revision in estimates of the time and resources
required for completion and losses on projects in process are reflected in the
period in which they become known. Revenue from maintenance contracts is
deferred and recognized ratably over the contractual periods during which the
services are performed. Revenue related to time and materials engagements is
recognized when the services are performed.
The Company typically receives a substantial advance payment from its
customers upon contract signing, with additional payments required upon the
attainment of project milestones. Deferred revenues consist principally of
amounts billed in advance for the Company's technology consulting contracts that
will be recognized upon performance and amounts received from customers in
excess of revenues recognized to date.
The Company has traditionally depended upon a few major customers for a
majority of its net revenues. During the three months ended March 31, 1998, net
revenues from its five largest customers accounted for 23%, 17%, 16%, 11% and
10%, respectively, of the Company's net revenues. During 1997, net revenues from
the Company's five largest customers accounted for 29%, 19%, 14%, 11% and 10%,
respectively, of the Company's net revenues. Although the Company's strategy is
to broaden its customer base, there can be no assurance that such customer
concentration will actually diminish, and the Company anticipates that its
results of operations in any given period will continue to depend to a
significant extent upon large contracts with a small number of customers. See
"Risk Factors -- Project and Customer Concentration" and Note 1 of
16
<PAGE> 21
Notes to Consolidated Financial Statements. In 1996, 1997 and the first three
months of 1998, net revenues from customers located outside of the United States
accounted for 9%, 14% and 7%, respectively, of the Company's net revenues in
such period.
The Company's results of operations are influenced to a significant extent
by its ability to attract, train, motivate and retain highly skilled IT
professionals. As a consequence, the Company's most significant expense is the
cost of hiring and training personnel, wages and related employee costs. The
ability of the Company to manage employee utilization and to contain turnover
and payroll costs will have a significant impact on its profitability. See "Risk
Factors -- Competitive Market for IT Professionals."
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
Consolidated Statements of Income as a percentage of net revenues for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Project personnel and software costs............... 27.4 36.7 38.7 35.7 40.9
----- ----- ----- ----- -----
Gross profit............................. 72.6 63.3 61.3 64.3 59.1
Operating expenses:
Selling and marketing............................ 9.7 10.9 11.3 11.3 9.6
General and administrative....................... 25.8 34.6 25.1 26.7 25.5
----- ----- ----- ----- -----
Total operating expenses................. 35.5 45.5 36.4 38.0 35.1
----- ----- ----- ----- -----
Operating income................................... 37.1 17.8 24.9 26.3 24.0
Other income, net.................................. 1.0 0.6 1.5 0.9 1.5
----- ----- ----- ----- -----
Income before income taxes............... 38.1 18.4 26.4 27.2 25.5
Provision for income taxes......................... 15.5 7.2 10.3 10.6 9.9
----- ----- ----- ----- -----
Net income............................... 22.6% 11.2% 16.1% 16.6% 15.6%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Net Revenues. The Company's net revenues increased by $3.2 million, or
57.7%, from $5.6 million in the first three months of 1997 to $8.8 million for
the comparable period in 1998. This increase in net revenues was primarily
attributable to an increased volume of projects from new customers and the
leveraging of existing customer relationships to obtain repeat business.
Project Personnel and Software Costs. Project personnel and software costs
consist primarily of compensation and related costs of personnel dedicated to
customer assignments and personnel assigned to developing and enhancing the
Company's methodologies and technologies deployed during the project delivery
process. Project personnel and software costs also include fees paid to
subcontractors for work performed in connection with projects and non-reimbursed
project travel expenses. Project personnel and software costs increased by
$1.6 million, or 80.6%, from $2.0 million in the first three months of 1997 to
$3.6 million for the comparable period in 1998. As a percentage of net revenues,
these costs were 35.7% and 40.9%, respectively, in such periods. The increase in
project personnel and software costs in absolute dollars was primarily
attributable to the hiring of additional and more experienced personnel required
to deliver the Company's services and increases in per person compensation
costs. The increase in project personnel and software costs as a percentage of
net revenues was primarily attributable to an increase in per person
compensation. Project personnel headcount increased from 103 employees at
March 31, 1997 to 138 employees at March 31, 1998.
17
<PAGE> 22
Selling and Marketing. Selling and marketing costs consist primarily of
compensation and related costs of sales and marketing personnel, travel
expenses, and marketing program and promotion costs. Selling and marketing costs
increased by $220,000, or 35.0%, from $630,000 in the first three months of 1997
to $850,000 for the comparable period in 1998. As a percentage of net revenues,
these costs were 11.3% and 9.6% in the first three months of 1997 and 1998,
respectively. The increase in selling and marketing costs in absolute dollars
was primarily attributable to increased spending on promotional activities and
the hiring of more experienced sales personnel. Sales and marketing personnel
increased from 13 employees at March 31, 1997 to 14 employees at March 31, 1998.
General and Administrative. General and administrative costs consist
primarily of compensation and related costs of the Company's management and
administrative functions, including finance and accounting, human resources,
internal information technology, and the costs of the Company's facilities and
other general corporate expenses. General and administrative costs increased
$750,000, or 50.1%, from $1.5 million in the first three months of 1997 to
$2.2 million for the comparable period in 1998. As a percentage of net revenues,
these costs were 26.7% and 25.5%, respectively, in such periods. The decline in
general and administrative costs as a percentage of net revenues reflected a
decline in administrative staff as a percentage of total staff and more
efficient space utilization of the Company's facilities in the first three
months of 1998. The increase in general and administrative costs in absolute
dollars was primarily attributable to an increase in general and administrative
personnel from 17 at March 31, 1997 to 26 at March 31, 1998. In addition,
expenditures for recruiting and leased equipment contributed to the dollar
increase in general and administrative costs.
Other Income, Net. Other income, net consists primarily of interest income
from the Company's cash balances and interest expense associated with fixed
asset purchases made under the Company's equipment line of credit and
obligations under capital leases. Other income, net was approximately $52,000
and $130,000 for the first three months of 1997 and 1998, respectively.
Provision for Income Taxes. The Company's effective rate for Federal and
state income taxes was 39.0% for the first three months of 1997 and 1998.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Net Revenues. Net revenues increased by $5.3 million, or 57.4%, from
$9.2 million in 1995 to $14.5 million in 1996 and increased by $12.4 million, or
85.5%, to $26.9 million in 1997. The increases each year represent an increase
in the number of customer projects from both new and existing customers plus an
increase in the average size of projects. Net revenues from the Company's five
largest customers represented approximately 83.8%, 78.8% and 83.4% of the
Company's net revenues for 1995, 1996 and 1997, respectively.
Project Personnel and Software Costs. Project personnel and software costs
increased by $2.8 million, or 110.6%, from $2.5 million in 1995 to $5.3 million
in 1996 and by $5.1 million, or 95.6%, to $10.4 million in 1997. As a percentage
of net revenues, project personnel and software costs were 27.4%, 36.7% and
38.7% for 1995, 1996 and 1997, respectively. The increases in project personnel
and software costs in absolute dollars were primarily attributable to an
increase in the number of personnel required to deliver projects and increased
per person compensation costs. The increases in project personnel and software
costs as a percentage of net revenues were primarily attributable to an increase
in compensation on both an absolute and per employee basis. Project personnel
headcount was 65, 87 and 120 at December 31, 1995, 1996 and 1997, respectively.
Selling and Marketing. Selling and marketing costs increased by $683,000,
or 76.1%, from $897,000 in 1995 to $1.6 million in 1996 and by $1.4 million, or
92.8%, to $3.0 million in 1997. As a percentage of net revenues, selling and
marketing costs were 9.7%, 10.9% and 11.3% in 1995, 1996 and 1997, respectively.
The increased selling and marketing costs reflect the expansion of sales and
marketing personnel from five at December 31, 1995 to nine at December 31, 1996
and to 17 at December 31, 1997. In 1996 and 1997, the Company also increased its
promotional and public relations activities.
General and Administrative. General and administrative costs increased by
$2.6 million, or 111.3%, from $2.4 million in 1995 to $5.0 million in 1996 and
by $1.7 million, or 34.4%, to $6.7 million in 1997. As a percentage of net
revenues, general and administrative costs were 25.8%, 34.6% and 25.1% for 1995,
1996 and
18
<PAGE> 23
1997, respectively. The increase in general and administrative costs in absolute
dollars resulted from an increase in general and administrative personnel from
nine employees at December 31, 1995 to 15 employees at December 31, 1996 and to
21 employees at December 31, 1997. In 1996 and 1997, the Company hired several
new officers including the Chief Executive Officer, the Chief Financial Officer
and the Vice President, Human Resources and added resources in finance, human
resources and information technology to support the Company's rapid growth. In
addition, in 1996, the Company paid a $1.0 million bonus to Michael Pehl to
secure his services as Chairman and Chief Executive Officer and a $150,000 bonus
to Lawrence P. Begley to secure his services as Chief Financial Officer and
Treasurer.
Other Income, Net. Other income, net consists primarily of interest income
from the Company's cash balances and interest expense associated with fixed
asset purchases made under the Company's equipment line of credit and
obligations under capital leases. Other income, net in 1995, 1996 and 1997 was
approximately $92,000, $85,000 and $391,000, respectively.
Provision for Income Taxes. The Company's effective rate for Federal and
state income taxes was 40.7%, 39.4% and 39.0% for 1995, 1996 and 1997,
respectively.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information for the five quarters in the period ended March 31, 1998 in dollars
and as a percentage of net revenues. This information is derived from unaudited
consolidated financial statements and has been prepared on the same basis as the
Company's Consolidated Financial Statements which appear elsewhere in this
Prospectus. In the opinion of the Company's management, this information
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information when read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto. The
results for any quarter are not necessarily indicative of future quarterly
results of operations, and the Company believes that period-to-period
comparisons should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................. $5,598 100.0% $6,633 100.0% $7,093 100.0% $7,535 100.0% $8,828 100.0%
Project personnel and
software costs............. 2,000 35.7 2,474 37.3 2,914 41.1 2,998 39.8 3,612 40.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............. 3,598 64.3 4,159 62.7 4,179 58.9 4,537 60.2 5,216 59.1
Operating expenses:
Selling and marketing...... 630 11.3 808 12.2 770 10.9 838 11.1 850 9.6
General and
administrative........... 1,497 26.7 1,672 25.2 1,690 23.8 1,875 24.9 2,247 25.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total operating
expenses............... 2,127 38.0 2,480 37.4 2,460 34.7 2,713 36.0 3,097 35.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income............. 1,471 26.3 1,679 25.3 1,719 24.2 1,824 24.2 2,119 24.0
Other income, net............ 52 0.9 76 1.1 115 1.6 148 2.0 130 1.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income before income
taxes.................. 1,523 27.2 1,755 26.4 1,834 25.8 1,972 26.2 2,249 25.5
Provision for income taxes... 594 10.6 684 10.3 715 10.1 766 10.2 877 9.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net income............... $ 929 16.6% $1,071 16.1% $1,119 15.7% $1,206 16.0% $1,372 15.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The Company's results of operations have varied significantly in the past
and may vary significantly in the future, on a quarterly and annual basis, as a
result of a variety of factors, many of which are outside the Company's control.
See "Risk Factors -- Fluctuations in Results of Operations." The Company
believes that the purchase of its services generally involves a significant
commitment of a customer's capital resources. Therefore, any downturn in a
customer's business could have a material adverse effect on the Company's
19
<PAGE> 24
business, financial condition and results of operations. To the extent that
projects progress faster than expected, results of operations for subsequent
quarters may be materially adversely affected.
Although the Company has achieved significant historical quarter-to-quarter
growth in net revenues and income from operations, the Company has no assurance
that this growth rate is sustainable. In addition, throughout 1996 and 1997, the
Company's total number of employees and average per employee compensation
expense has increased each quarter and is expected to continue to increase. As a
result, the Company's gross profit margin has declined. Additionally, the
Company continues to invest in corporate infrastructure and expects to maintain,
as a percentage of net revenues, its spending on selling and marketing expenses
as well as general and administrative expenses. These costs and investments are
expected to cause the Company's operating income margin to decline.
Due to all the foregoing factors, it is possible that in some future
quarter, the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash provided by operations.
The Company's cash balances were $3.1 million, $3.9 million, $10.8 million
and $9.8 million at December 31, 1995, 1996 and 1997, and at March 31, 1998,
respectively. The Company's working capital was $2.1 million, $3.9 million,
$7.9 million and $9.2 million at December 31, 1995, 1996 and 1997, and at March
31, 1998, respectively.
The Company's operating activities provided cash from operations of
$3.1 million, $523,000 and $8.2 million in the years ended December 31, 1995,
1996 and 1997, respectively, and used $728,000 for the three-month period ended
March 31, 1998. The decrease in cash provided from operations in 1996 as
compared to 1995 was due principally to lower net income, an increase in
accounts receivable and a decrease in accrued expenses and accrued income taxes.
The increase in cash provided from operations in 1997 as compared to 1996 was
due mainly to an increase in net income, decreases in accounts receivable and an
increase in accrued expenses. The cash used for operations for the three month
period ended March 31, 1998 was mainly attributable to a decrease in accrued
expenses due to payment of bonuses and a decrease in deferred revenues resulting
from the timing of milestone billings on certain contracts.
The Company used cash of $672,000, $375,000, $1.7 million and $258,000 for
investing activities in the years ended December 1995, 1996 and 1997 and the
three month period ended March 31, 1998, respectively. Cash used for investing
activities in 1995 and 1996 consisted primarily of purchases of property and
equipment, principally computer equipment and software to support the growing
base of employees and required infrastructure. In 1997, in addition to property
and equipment, the Company purchased approximately $540,000 of furniture as part
of its expansion of office facilities in Cambridge, Massachusetts and in the
City of Industry, California. At March 31, 1998, the Company had no significant
commitments for capital expenditures for 1998 but expects to continue to
purchase property and equipment to enhance its corporate infrastructure.
The Company's financing activities used cash of $392,000 in 1995 and
provided cash of $677,000 and $463,000 in 1996 and 1997, respectively, and was
relatively cash neutral for the three month period ended March 31, 1998. The use
of cash in 1995 was due mainly to an increase in an amount due from a related
party. In 1996, cash was provided by the repayment of the amount due from the
related party and the exercise of stock options. In 1997, the Company's
financing activities reflect proceeds from an equipment line of credit, offset
in part by payment on the Company's capital lease transactions entered into
during the period.
The Company maintains a $2.0 million working capital line of credit (the
"Line") with Silicon Valley Bank, which expires in August 1998. The interest
rate on all borrowings under the Line is prime plus 1/2% and will be reduced to
prime upon the closing of this offering. The Line is collateralized by
substantially all of the Company's assets. Under the Line, the Company may
borrow the lesser of $2.0 million or 75% of eligible accounts receivable, as
defined in the agreement. The Company is required to comply with certain
operational
20
<PAGE> 25
and financial covenants under the Line if there are borrowings under the Line.
At December 31, 1995, 1996 and 1997, and at March 31, 1998, the Company was in
compliance with these requirements and no borrowings have been made under the
Line. The Line contains a covenant prohibiting the payment of cash dividends
without the bank's consent.
The Company expects that cash flows from operations will continue to
provide the main source of liquidity for the Company. The Company expects that
existing cash and investment balances, together with the proceeds of this
offering and anticipated cash flows from operations, will be sufficient to meet
the Company's working capital requirements for at least the next 12 months.
INFLATION
The Company's most significant costs are the salaries and related benefits
for its IT professionals. Competition for IT professionals with the advanced
technological skills necessary to perform the services offered by the Company
has caused wages to increase at a rate greater than the general rate of
inflation. As with other IT service providers, the Company must adequately
anticipate wage increases. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services. See "Risk Factors -- Competitive Market for IT Professionals."
THE YEAR 2000 ISSUE
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems because its existing systems
correctly define the year 2000. Although the Company believes that the
information systems of its major partners and vendors (insofar as they relate to
the Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major partners and vendors as they relate to the Company's
business, or that any such impact of a major partner's or vendor's information
system would not have a material adverse effect on the Company.
21
<PAGE> 26
BUSINESS
International Integration Incorporated ("i-Cube" or the "Company") provides
application migration and custom software development services on a fixed-price,
fixed-time basis to Fortune 1000 companies and other large enterprises. The
Company believes that through these services, its customers can cost-effectively
and rapidly improve their competitiveness and narrow the gap between the demands
of their business strategies and the capabilities of their IT environments. The
Company offers a full range of iMPACT services including information systems
consulting, application migration, custom software development and customer
support.
The Company utilizes its proprietary development methodologies and
technologies, known as i-Structure, to implement large-scale, complex
application migration and custom development projects based on a multi-tier
client/server architecture. i-Structure's proprietary technologies include
transformation tools used to separate legacy applications into their smallest
logical components, methodologies to populate an Application Repository that
contains the components of and critical information about an application, and
runtime tools used to access and integrate application components. i-Structure
provides the Company with a repeatable and consistent development framework,
applicable to both its application migration and custom development projects,
that increases the speed and reduces the risk and cost of the development of
strategic, core business applications. The applications custom developed or
migrated using i-Structure are not dependent on any single hardware provider or
operating system, are adaptable to future technologies and business changes, and
are easily maintainable. In addition, i-Structure enables the Company to migrate
legacy software applications into multi-tier client/server applications,
allowing customers to preserve the core functionality and other benefits of
their legacy applications while eliminating the constraints of legacy system
architectures. The Company believes that i-Structure enhances the productivity
of its IT professionals and the Company's continued investment in i-Structure is
a key component of its growth strategy.
The Company believes that the expertise gained from completing large-scale,
strategic application migration and custom development projects since its
founding in 1992 provides a significant competitive advantage. Recent
engagements include projects for Cooper Cameron Corporation, Daimler-Benz AG,
Hewlett-Packard Company, IBM, McDonnell Douglas Corporation (now part of The
Boeing Company), Rockwell Automation/Reliance Electric, and Wisconsin Power and
Light Company.
INDUSTRY BACKGROUND
Businesses today face the constant need to react quickly to changes in
their marketplace. Factors such as deregulation, industry consolidations, the
globalization of product and vendor markets, the increasing demand for improved
and more responsive customer service and the emergence of the Internet as a
vehicle for commerce have intensified competition and have presented businesses
with the opportunity and the need to continually develop and implement new
strategies on a rapid basis. To meet these challenges, businesses require IT
infrastructures which can be cost-effectively and swiftly developed, deployed
and modified to support their business strategies.
Organizations continue to rely on inflexible legacy software applications
and systems to analyze and process vast amounts of business-critical data and
run core business processes. Furthermore, organizations have invested
significantly in their legacy systems. However, legacy software applications and
systems have significant constraints which limit the ability of organizations to
successfully and rapidly modify their IT infrastructures to support new business
strategies. Because legacy systems are typically based on proprietary
architectures, they are often incapable of incorporating technological
innovations quickly or easily, may be incompatible with other systems across the
enterprise, can be costly, time-consuming and difficult to maintain and modify
and are not easily scalable.
To overcome the restrictive aspects of legacy systems, organizations have
sought to deploy multi-tier client/server applications based on open systems.
These open, client/server applications are not dependent on a particular
vendor's hardware, software or operating system platform, and their multi-tier
structure facilitates modifications and enhances scalability. As a result, such
applications provide organizations with the freedom to choose "best of breed"
technologies without compromising business functionality. In addition, they
provide the organization with the ability to enhance ease-of-use through
graphical user interfaces and seamless
22
<PAGE> 27
integration with other applications and data sources on disparate platforms
within and outside the enterprise. These open, multi-tier client/server
applications can be key to increasing an organization's productivity, improving
access to information and decision-making, enhancing customer service,
shortening product development, delivery, and support times and ultimately
creating and sustaining a competitive advantage.
Organizations seeking to implement client/server technologies to replace
their core business legacy applications have traditionally had only two choices:
install a third-party package or develop a new, custom application. Third party
packages, while sometimes less expensive and less risky than the development of
a custom application, are limited in their utility because often, without
extensive modification, they require the organization to adapt its business
practices to meet the business rules embedded in the package and may be limited
for use in a specific technology environment. As a result, organizations often
choose to custom develop applications which are tailored to their business
practices. In order to justify their investment in these custom solutions,
organizations seek to leverage, where possible, their prior investment in their
legacy systems and to minimize the risk, expense and duration of the custom
development process. Organizations want solutions that (i) capture the benefits
of open, multi-tier client/server architectures, (ii) are integrated with other
systems throughout the enterprise, (iii) permit the application to meet changes
in the organization's business strategies and IT infrastructure and (iv)
continue to meet the needs of the organization as it grows.
THE I-CUBE SOLUTION
i-Cube provides fixed-price, fixed-time application migration and custom
software development services which enable organizations to align the
capabilities of their IT systems with their business strategies. The Company's
services incorporate its i-Structure methodologies and technologies, which
support the development, either through the migration of the customer's legacy
application or through a custom development process, of open, multi-tier
client/server applications which are flexible, scalable and easily maintainable.
The Company's iMPACT suite of services and i-Structure methodologies and
technologies are designed to address the large-scale, strategic application
projects of its customers. The Company's services are designed to offer
customers the following benefits:
Risk Reduction. The Company's ability to migrate legacy applications to
client/server architectures reduces the risks inherent in creating and
implementing entirely new solutions. The methodologies and technologies of
i-Structure provide the Company with a repeatable and consistent framework for
the migration process and automate certain critical transformation and
reconfiguration functions, thereby reducing the risk of the development process.
In addition, the Company uses the framework provided by i-Structure for building
custom applications. This consistent development approach is designed to ensure
that the developed application will be easily maintainable by the Company or by
the customer and to reduce the cost of future system redesign.
Cost-Effective, Rapid Delivery. The Company is able to complete projects
more cost-effectively and rapidly due to the methodologies and technologies of
i-Structure. Through the consistent application of these methodologies and
technologies, the Company's IT professionals increase their efficiency and
leverage knowledge acquired throughout the Company from prior projects. In
addition, the Company offers its services on a fixed-price, fixed-time basis.
The Company believes that fixed-price, fixed-time contracts are favored by
customers because they permit more accurate estimation of development costs and
because customers perceive that such contracts more closely align the Company's
interests with their own, resulting in shorter development cycles.
Preservation and Leverage of Core Functionality. Many organizations have
made significant investments in their legacy applications which are fundamental
to the operation of their business. The Company's ability to offer complex
application migration services enables its customers to preserve and leverage
the core business functionality, user interfaces and other benefits of the
legacy applications while eliminating the "technology lock" and other
constraints of legacy system architectures.
Adaptability and Flexibility. The Company's application migration and
custom development processes are designed to separate the application's business
rules from the technology through which the application is displayed. These
processes are based on the construction of essential "building blocks" which are
configured to
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define the business functionality of the application independently of the
application technology, database or graphical user interface utilized.
i-Structure's ability to support a multi-tier client/server architecture allows
the application logic, database and presentation technology of applications
developed by the Company to be logically separated from one another, thereby
resulting in applications that are flexible and adaptable in response to future
technology and business changes and that can be easily modified for future
maintenance.
Scalability. The Company's i-Structure methodologies and technologies
provide the basis for designing applications that are scalable to meet the
customer's organizational growth as well as increased system deployment
throughout the customer's enterprise. Opportunities for incremental performance
enhancements are incorporated into application design to permit the capabilities
of the system to grow as the customer's business evolves and its IT requirements
change.
GROWTH STRATEGY
The Company's objective is to enhance its position as a preferred provider
of application migration and custom software development services to Fortune
1000 companies and other large enterprises. i-Cube's strategy to achieve this
goal includes the following elements:
Expand Market Share. The Company believes its expertise in providing
large-scale migration and custom client/server development solutions
differentiates it from other IT service providers and is a key competitive
advantage. The Company intends to leverage this competitive advantage to
generate additional business from existing customers, establish new customer
relationships and expand its geographic presence. The Company develops new and
follow-on customer opportunities primarily through its senior executives and
direct sales force, through the efforts of its marketing partners and through
customer referrals. The Company has recently expanded its office in Germany in
order to service existing customers and to further broaden its European sales
opportunities. The Company is accepting smaller engagements which leverage its
application migration and custom development expertise in order to further
expand its base of customer relationships.
Preserve High Performance Culture. The Company believes that its high
performance culture is a major competitive advantage and a critical factor to
its success. The Company's culture emphasizes teamwork, entrepreneurship, a
passion for client satisfaction and individual responsibility and accountability
at all levels of the organization. The Company's investment in its people
includes extensive team-building exercises for employees, initial and on-going
training, mentoring, pay for performance, opportunities for accelerated career
advancement, a flexible work environment and stock ownership opportunities for
all employees. The Company believes that this emphasis on its culture and its
investment in its employees enables the Company to attract, retain and motivate
high caliber employees in a competitive employment environment.
Invest in i-Structure To Maintain Competitive Advantage. The Company's
i-Structure methodologies and technologies provide it with a competitive
differentiator in the planning and execution of its engagements. The Company
believes that i-Structure enables it to deliver its services in a rapid,
predictable and low-risk manner while providing the flexibility for customers to
adapt their IT environments as their businesses evolve. The Company enhances
i-Structure methodologies through a central knowledge database that incorporates
the Company's experience on prior projects. These efforts are designed to ensure
that i-Structure incorporates the latest technical advances as well as the
knowledge gained from the Company's various customer engagements.
Leverage and Expand Marketing Relationships. The Company has established
marketing relationships with Hewlett-Packard Company and debis Systemhaus (the
IT services subsidiary of Daimler-Benz AG). These relationships provide the
Company with access to incremental business development opportunities, an
expanded marketing reach and referenceable customer base, increased brand
recognition, and improved competitive positioning in certain sales situations.
The Company considers joint marketing arrangements to be appropriate in
situations where the joint marketing partner's products and services are
complementary to those of the Company and where the partner is committed to
marketing the Company's services in connection with its own product and service
offerings.
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SERVICES
The Company's process for delivering its information technology solutions
is based on its iMPACT suite of services, consisting of information systems
consulting, application implementation services and customer support, as
follows:
[CHART]
The document here contains a graphic portrayal of the Company's services. The
graphic shows the three categories of the Company's services: information
systems consulting; application implementation services and customer support.
Under the "Information Systems Consulting" heading are two service listings,
entitled "Solutions Workshop" and "Application Staging and Planning (ASAP)",
respectively. An arrow points from the Information Systems Consulting category
to the Application Implementation Services category. Under "Application
Implementation Services" is a box containing the words "Application Design".
Arrows point from the "Application Design" box to boxes entitled "Application
Migration" and "Custom Development", respectively. In the "Application Design"
box are the words: "rearchitect; rapid enhancement deployment", and in the
"Custom Development" box are the words "rapid application development". An arrow
points from each of these two boxes to the box entitled "Application
Integration". An arrow points from the Application Implementation Services"
category to the Customer Support category. Under the Customer Support category
are two boxes entitled "Skills Enhancement and Empowerment" and "Rollout &
Transitional Maintenance", respectively.
Information Systems Consulting
Each of the Company's engagements typically commences with an information
systems consulting phase, which helps the customer and the Company to understand
the customer's business objectives and to determine the technical requirements
of the application development project under consideration. As part of this
process, the Company prepares a detailed analysis of the customer's application
architecture and a fixed-price, fixed-time schedule for either the design alone
or the design and development phases of the project. The extent of the Company's
consulting services generally depends on the complexity of the development
project, and the services offered consist of the following:
Solutions Workshops
The Company's smaller engagements typically commence with brief, structured
scoping sessions that focus on a customer's business needs and the solutions to
address them. The Company and the customer review the functionality of the
customer's legacy applications and weigh the costs and benefits of migrating the
legacy application versus a custom development approach. These sessions, which
typically run from two days to two weeks, are custom-designed and typically
result in the delivery of a proof-of-concept or prototype.
Application Staging and Planning ("ASAP")
The Company's larger engagements typically commence with an intensive
staging and planning session involving the Company and business and technical
representatives of the customer. During the ASAP process, which typically takes
from four to six weeks, the Company assesses the customer's business strategies
and its strategic, core business applications, for purposes of identifying the
areas where the applications fail to match the customer's business objectives.
The Company also reviews important aspects of the applications, including the
architecture, coding standards, interfaces and batch requirements. In situations
where the legacy application generally satisfies the customer's business
requirements, the Company and the customer jointly
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determine whether the application is a good candidate for migration or whether a
new application should be custom developed.
Application Implementation Services
The Company's implementation services for an engagement typically include a
design phase, a development phase (migration or custom development) and an
integration phase. In the design phase, the Company develops a design of the
customer's application, including the definition and quantification of essential
elements. This design plan encompasses user interfaces, business logic, data
management, security considerations and hardware and software configurations.
The Company and the customer develop a detailed statement of work, including, if
not done as a part of the consulting engagement, a final, fixed-price,
fixed-time timetable for an implementation plan. The development phase involves
the migration of the customer's legacy application to a multi-tier client/server
architecture, or the construction of a new application as a custom development
project, depending on the recommendations of the Company developed during the
consulting phase. Application migration projects often also include custom
development components, to enhance the functionality of the new application
beyond that inherent in the legacy application from which it was migrated. The
Company's implementation services also include the integration of the
application with the customer's IT infrastructure, including other software
applications used by the customer. The implementation phase of the Company's
engagements typically ranges from three to six months for smaller projects to
over a year for larger engagements.
Application Migration
The Company's application migration services consist of the migration of
customers' existing legacy applications, each often containing millions of lines
of code, from technology-specific, legacy system architectures to open,
multi-tier client/server environments. Using i-Structure, the Company analyzes
the legacy application and deconstructs it down to its smallest logical
components, consisting of interface components, data components and business
function components which are then used by the Company as generic "building
blocks" to build a platform-independent solution. Following the migration, the
application can be rapidly enhanced by the Company or the customer through
custom development of additional features. The Company believes that the
migration of existing legacy applications is a cost-effective approach for the
development of large, multi-tier client/server applications in situations where
the customer has made significant investments in a legacy application which
satisfies many of the customer's business requirements.
Custom Development
The Company generally provides custom development services in situations
where the customer's legacy application does not meet its business objectives,
where the customer's application is too fragmented to allow for effective
migration, or where the customer has new business objectives that require the
construction of a new application. The Company's custom development services
utilize the methodologies and technologies of i-Structure to build applications
with an architecture similar to that utilized in the application migration
process, based on generic building blocks. The Company believes that this
consistent, common development framework optimizes the capabilities of a
multi-tier client/server architecture and facilitates the development process
and subsequent application support and expansion.
Customer Support
In order to reduce the customer's overall "cost of ownership" of an
application developed by the Company, the Company offers support services that
train the customer's users and IT personnel in the use, maintenance and
enhancement of the developed application. In addition, the Company offers
rollout support, to assist its customers in implementing the application on an
enterprise-wide basis. The Company offers transitional maintenance services,
pursuant to which it offers ongoing support and enhancements for defined periods
of time. From time to time, the Company licenses a portion of its i-Structure
tools to its customers to facilitate their support activities. The Company
believes that its support services are central to its strategy of establishing
and maintaining strong customer relationships and generating repeat business.
The Company's
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support services are generally offered on a fixed-price basis separately from
the Company's implementation services.
TECHNOLOGY
The Company has accumulated a significant repository of methodologies and
technologies included within i-Structure, as a result of the Company's
experience on prior projects. These methodologies and technologies support the
development and migration of scalable, multi-tier client/server applications
that are independent of the hardware and operating system on which they operate,
are adaptable to future technologies or business changes, and are easily
maintainable. For the Company's migration engagements, the Company believes that
i-Structure technologies automate a significant portion of the migration tasks,
thereby resulting in a more rapid, cost-effective and risk-reduced
implementation process.
The Company's proprietary technologies consist primarily of (i) the
transformation tools used to separate legacy applications into their smallest
logical components, (ii) its methodologies in populating the Application
Repository, an SQL database containing the components and critical information
about the application, and (iii) runtime tools, which enable the customer to
access and integrate the stored components. In addition, the Company relies on
its own or commonly available third party configuration, development, testing
and system management and administration tools to complete the migration or
custom development process. Other than the transformation tools, which are
relevant only to the Company's migration projects, the Company's methodologies
and technologies apply both to migration projects and to custom development
projects, resulting in a common system architecture regardless of the
implementation approach followed.
The Company utilizes its transformation tools in connection with migration
engagements to analyze the legacy application for purposes of identifying the
application logic, data types, presentation logic and job control language, and
to divide the application into its smallest logical components. These
components, as well as information about the application, are stored in the
Application Repository. For custom development engagements, the Company has
developed filtering tools that enable it to extract and segment information from
a variety of third party development tools, such as PowerBuilder and Visual
Basic, in order to populate the Application Repository.
The components and other application information are then reassembled by
one of the Company's proprietary runtime tools, called the Transaction Router,
which accesses the elements contained in the Application Repository in order to
integrate and implement the business functionality of the application. The
Transaction Router operates independently of the language or application
methodology utilized by the application, and can therefore access and integrate
a wide variety of graphical user interfaces, applications and databases.
i-Structure supports a variety of technology architectures. Customers can
change the presentation tier or support multiple presentation tiers while
keeping the legacy system as a database or application platform, and can
integrate new technologies, either on the client or the server. The Company
believes that the flexibility of applications developed through i-Structure
reduces the risk of the development process and helps customers narrow the gap
between the demands of their business strategies and the capabilities of their
IT environments as new technologies emerge.
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CUSTOMER ENGAGEMENTS
Examples of the Company's engagements are set forth below:
MCDONNELL DOUGLAS. As a government contractor, McDonnell Douglas
Corporation ("MDC"), an aerospace company (now part of The Boeing Company), has
thousands of active contracts, each with its own progress and performance
reporting requirements. MDC's legacy contract management system consisted of
four different applications residing on mainframes using primarily
non-relational databases, each dealing with an individual part of the contract
management process. Each contract management system performed adequately
separately, but the system was inefficient as a whole: contract data and changes
were entered into each system separately, multiple IT teams maintained the
geographically dispersed and functionally distinct systems, and contract billing
was a cumbersome process. Additionally, MDC's internal planning and reporting
needs required full integration of contract information, regardless of the
contract stage.
i-Cube was retained to consolidate MDC's contract management system by
migrating the four legacy applications into a single client/server system. The
Company rearchitected the baseline contract management application from the
mainframe to an open, three-tier client/server environment, removed duplicate
functionality and added new functionality to improve the government billing
process. The Company initiated the project in June 1995 and completed it in
October 1996 with a team averaging eight to ten IT professionals.
The new architecture provides a presentation tier containing graphical user
interfaces for PC and Macintosh clients using ANSI-standard C++ code, along with
reporting tools and client software for Macintosh, Windows 3.11 and Windows NT.
The functionality tier contains core business rules and transaction processing,
transformed from COBOL to ANSI-standard C code and encapsulated using i-Cube's
proprietary tools. In the data tier, an Oracle relational database holds the
business data transformed from DB2 and IMS (a non-relational database). The
rearchitected contract management system provides screens and functions familiar
to users of the legacy application, minimizing training costs, but with the
added benefit that the application now runs on an open systems framework that
supports swift enhancement.
The new system provides users with a single point of entry into the
contract management system and a streamlined process for contract data input.
The common, enterprise-wide application meets MDC's internal planning and
reporting needs for access to consistent and timely contract information. MDC
has been internally enhancing and maintaining the system since the engagement
completion date in 1996.
In addition to the contracts management system, the Company has completed
follow-on engagements to develop a decision support system for manufacturing and
a financial planning system for MDC.
WISCONSIN POWER AND LIGHT. Wisconsin Power and Light Company ("WPL")
provides natural gas, water and electricity to more than 400,000 customers
spread over 16,000 square miles in central and southern Wisconsin. Due to the
deregulation of the utility industry, WPL anticipated that competition for
customers would force utilities to compete on the basis of service as well as
price. To meet these new strategic challenges, WPL sought to overhaul its
Customer Information and Billing System ("CIS") to make it scalable, as well as
Internet-enabled to support electronic commerce with customers and suppliers.
The legacy CIS had more than 3.5 million lines of code, was increasingly costly
to maintain, and could not be easily enhanced for new services.
WPL selected i-Cube to rearchitect its legacy application. Through the use
of i-Structure, the Company rearchitected the CIS legacy application to a
three-tier client/server architecture in less than six months, with the total
transition project and roll-out into production taking a year and a half from
start to finish. The new architecture provides a presentation tier containing
graphical user interfaces for the PC client, along with reporting tools and
client software for Internet/intranet and Windows NT. The functionality tier
contains core business rules and transaction processing, transformed from COBOL
to ANSI-Standard C code and encapsulated using i-Cube's proprietary tools. In
the data tier, an Oracle relational database holds the business data transformed
from IMS, DB2 and flat files. The rearchitected CIS provides screens and
functions familiar to users of the legacy application, minimizing training
costs, but with the added benefit that the legacy application now runs on an
open-systems framework that supports swift enhancement.
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MERCEDES-BENZ LEASE FINANZ. In conjunction with the release of its new A
Class automobile model in Europe, Mercedes-Benz Lease Finanz (a subsidiary of
Daimler-Benz AG) decided on a complete overhaul of its Lease Finance system to
support creative new finance options and allow near real-time feedback to
potential private customers on finance and lease applications. Faced with credit
approval times of one to two days on the mainframe, the car maker's objective
was to bring the process down to 15 minutes. Most importantly, it was critical
that the application be fully functional before the A Class started shipping to
dealers, less than 12 months later.
Mercedes-Benz tried to deploy a two-tier client/server system to meet the
challenge to develop a product management system. This first attempt failed
because of inadequate system performance, so debis Systemhaus, Daimler-Benz' IT
services subsidiary, turned to i-Cube to assist in custom developing the FAST
System, a fully integrated three-tier finance application designed to be used by
dealers and customer service representatives in Mercedes-Benz' German call
center. The Company committed to and provided the solution in nine months.
Leveraging i-Structure, i-Cube met the requirement for a highly flexible new
application that was compatible with existing systems and adaptable for planned
changes to hardware and software and future changes in architecture. i-Cube
designed and custom developed a fully integrated and scalable credit application
and approval system which incorporates the existing functionality of the legacy
system as well as new functionality related to creative finance options for
retail buyers. The FAST System automates and integrates all aspects of the
finance application, which includes entering customer data, performing credit
checks, incorporating financial terms, creating required documents and
electronic interfaces to credit bureaus. The new system, which operates over a
wide-area network, has complex interfaces with the dealerships, credit approval,
and enterprise resource planning applications.
CUSTOMERS
Organizations to which the Company provided services within the past two
years include the following:
<TABLE>
<S> <C>
City of Columbus (Ohio) McDonnell Douglas Corporation
Cooper Cameron Corporation PEMEX/Integrated Trade Systems
Daimler-Benz AG Rockwell Automation/Reliance
debis Systemhaus Electric
Hewlett-Packard Company Salt River Project
IBM Wisconsin Power and Light Company
</TABLE>
The Company has historically derived, and may in the future derive, a
significant amount of its net revenues from major engagements with a relatively
small number of customers. In each of 1995 and 1996, the Company had three
customers which individually accounted for 10% or more of the Company's net
revenues, and in 1997 the following five customers each accounted for 10% or
more of the Company's net revenues: Salt River Project (29%); IBM (19%);
Daimler-Benz AG (14%); PEMEX/Integrated Trade Systems (11%); and Wisconsin Power
and Light Company (10%). For the first three months of 1998, the following five
customers each accounted for 10% or more of the Company's net revenues: IBM
(23%); PEMEX/Integrated Trade Systems (17%); Salt River Project (16%); Rockwell
Automation/Reliance Electric (11%); and Hewlett-Packard Company (10%).
The Company normally enters into written contracts with its customers prior
to the time it commences work on a project. These written contracts contain
varying terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
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i-CUBE CULTURE AND PROFESSIONAL RESOURCES
The Company believes that its high performance culture is a major
competitive advantage and enables it to attract, retain and motivate high
caliber employees in a competitive employment environment. The Company focuses
on building a culture around a strong values set that governs and guides
relationships with clients, fellow employees, team members, partners, the
community and other stakeholders. The Company's values include trust and
respect, integrity, commitment, teamwork, and the journey. The journey value
recognizes that, while reaching each major milestone in a project is a rewarding
experience for the team, it is equally important that employees feel challenged
and recognized every day. The Company's culture is built on teamwork, an
entrepreneurial spirit and a passion for making clients successful. i-Cube has a
company-wide performance review program, teamwork enhancement programs, and
management and professional development courses. Employees are rewarded for
performing in accordance with Company values. The Company's compensation
packages include a competitive base salary, Company and individual
performance-driven incentive programs, and a comprehensive benefits package.
This package includes a broad-based incentive stock option program that enables
all employees to participate in the future performance of the Company.
The Company has an intensive five-week orientation program designed to
provide new IT employees with the technical, professional and consulting skills
required to be successful with the Company. In addition, employees stay abreast
of technological advances and developments through a combination of on-the-job
exposure to relevant technology, selected training programs, peer review and
mentoring by senior personnel.
The Company's career development programs center on providing initial and
ongoing training and performance feedback on a routine basis, and allocating
assignments in accordance with employees' skills and career objectives. In
addition, the Company devotes substantial resources to developing and
continuously improving the project management abilities of its senior IT
professionals. The Company believes that its emphasis on skilled project
management strengthens its competitive position and enhances its ability to
complete fixed-price, fixed-time projects successfully and profitably. See "Risk
Factors -- Management of Growth."
The Company's recruiting methods include advertising in newspapers and
trade magazines, on the Company's web site and through participation in career
fairs and college recruiting events. The Company has established an employee
referral plan which rewards employees with cash or other incentives for
referring applicants who are hired by the Company, and actively involves
employees in screening candidates for new positions. As of March 31, 1998, the
Company employed seven full-time employees and two full-time contract recruiters
dedicated to recruiting IT professionals and managing its human resources.
As of March 31, 1998, the Company had 178 full-time employees, comprising
138 IT professionals, 14 sales and marketing personnel and 26 general and
administrative personnel. The Company's employees are not represented by any
labor union.
The Company believes that there is a shortage of, and significant
competition for, IT professionals and that its future success is highly
dependent upon its ability to attract, train, motivate and retain skilled IT
personnel with the advanced technical skills necessary to perform the services
offered by the Company. See "Risk Factors -- Competitive Market For IT
Professionals."
SALES AND MARKETING
The Company's target market is companies within the Fortune 1000 and other
large enterprises. Within this market, the Company targets companies that are
facing competitive pressures as a result of deregulation, industry
consolidations or other reasons, and whose existing IT systems lag their
business requirements.
The Company sells its services through its direct sales force located at
the Company's offices in Cambridge, Massachusetts, City of Industry, California,
and Mannheim, Germany, and through its marketing partners. The Company sells to
customers utilizing a team approach, consisting of members of the Company's
sales function (typically a senior sales executive supported by account
executives) and members of the Company's technical staff. At March 31, 1998, the
Company had eight full-time sales professionals. In
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addition, the Company generates leads through its telemarketing staff located at
the Company's headquarters, its marketing partners and through customer
referrals.
The Company's business development and marketing activities focus on
generating leads and building market awareness and name recognition for the
Company. The Company has an active public relations program and participates in
industry conferences and trade shows. In addition, the Company seeks to leverage
the sales and marketing activities of its marketing partners.
The Company's Solutions Workshops and Application Staging and Planning
sessions are an integral part of the Company's sales process. These sessions
enable the customer to identify its strategic and information technology goals
and to understand the Company's approach and technical capabilities in helping
the customer to meet them. In addition, these sessions enable the Company to
develop the specifications and prepare a detailed analysis of the customer's
application architecture, and a fixed-price schedule and plan for the
development project.
MARKETING RELATIONSHIPS
The Company is party to joint marketing agreements with Hewlett-Packard
Company and with debis Systemhaus MEB, the IT services subsidiary of
Daimler-Benz AG. Under its agreement with the Company, Hewlett-Packard has
agreed to provide a sales and delivery organization focused on identifying,
selling and delivering migration projects during the term of the agreement. The
Company has agreed to assist Hewlett-Packard in selling these migration
projects, and to staff an "application transformation center" where the
migration projects are to be performed. Migration engagements awarded to the
Company under the agreement will generally be provided by the Company under a
subcontractor agreement with Hewlett-Packard. Pursuant to the terms of its
agreement with Hewlett-Packard, the Company is required to deposit its software
tools into escrow in certain circumstances. In the event of certain defaults by
the Company, the tools in escrow are to be released from escrow to enable
Hewlett-Packard to fulfill the Company's obligations under ongoing statements of
work. See "Risk Factors -- Dependence on Proprietary Rights." The agreement
between the Company and Hewlett-Packard commenced in July 1997 and expires in
July 1999, subject to automatic renewal for additional one year terms until
terminated by either party.
The Company's agreement with debis Systemhaus MEB provides for joint
marketing of the Company's services, both within the debis Systemhaus entities
and among entities of the Daimler-Benz AG group of companies. Marketing efforts
are initially focused in Germany in the first stage but are expected to be
directed more broadly throughout Europe in a second stage. The agreement
provides for debis Systemhaus to establish a division, to be known as the
"Center of Competence", for purposes of managing sales and project handling-
related activities related to the agreement. The agreement expires in July 2002,
subject to extension for up to an additional three years; provided, however,
that the agreement may be terminated without cause by either party at the end of
any calendar year upon 12 months written notice, and may be terminated for cause
without notice.
The Company considers joint marketing arrangements to be appropriate in
situations where the joint marketing partner's products or services are
complementary to those of the Company and where the partner is committed to
marketing the Company's services. From time to time, the Company may consider
additional joint marketing relationships, although the Company is not engaged in
any material discussions with respect to any such relationships as of the date
of this Prospectus. See "Risk Factors -- Dependence on Third Party Marketing
Relationships."
COMPETITION
The Company operates in a highly competitive and rapidly changing market
and competes with a variety of organizations that offer services similar to
those offered by the Company. The market includes participants from a variety of
market segments, including other IT service providers, large accounting and
other professional service firms, packaged software vendors and services groups
of computer equipment companies, as well as the internal IT staffs of its
customers and potential customers. Many of these competitors have significantly
greater financial, technical, sales and marketing resources and greater name
recognition than the
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Company. In addition, there are relatively low barriers to entry into the market
in which the Company competes and the Company has faced, and expects to continue
to face, additional competition from new entrants into this market. There can be
no assurance that the Company will be able to continue to compete successfully
with its existing competitors or that it will be able to compete successfully
with new competitors.
The Company believes that the principal competitive factors in the market
in which it competes include: a willingness to offer fixed-price, fixed-time
projects, expertise in the development of large-scale, multi-tier client/server
applications, the ability to preserve the customer's investment in its legacy
application, the speed with which the application is developed, and the total
"cost of ownership" of the application, including the initial development and
implementation costs as well as ongoing maintenance costs. The Company believes
that it competes effectively in each of these areas. Nevertheless, there can be
no assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
The Company's success and its ability to compete is dependent, in part,
upon its proprietary rights, including its rights in i-Structure methodologies
and technologies. The Company relies primarily on a combination of copyright,
trademark and trade secret laws to establish and protect its proprietary rights.
There can be no assurance that such measures will be adequate to protect the
Company's proprietary rights. In addition, the Company seeks to protect its
proprietary rights through the use of confidentiality agreements with employees,
consultants, advisors and others. There can be no assurance that any such
agreements will provide adequate protection for the Company's proprietary rights
in the event of any unauthorized use or disclosure, that employees of the
Company, consultants, advisors or others will maintain the confidentiality of
such proprietary information, or that such proprietary information will not
otherwise become known, or be independently developed, by competitors.
The Company historically has restricted access to the source codes of its
software tools and other technologies. The Company regards its source codes as
proprietary information, and attempts to protect the confidentiality of these
source codes, some of which are embedded in the developed application and
licensed to the customer for runtime use. In certain cases, the Company has also
licensed the source code version to customers for internal use, to enable them
to maintain their transformed applications, and in other cases, the Company has
entered into arrangements to make its source code available upon the occurrence
of certain events, such as the bankruptcy or insolvency of the Company or
certain material breaches of the Company's application development contract. In
the event of any release of the source code pursuant to such arrangements, the
customer's license is generally limited to use of the source code for specific
purposes. Despite the Company's precautions, it may be possible for unauthorized
parties to copy or otherwise reverse engineer portions of the Company's software
or otherwise obtain and use information that the Company regards as proprietary.
The Company does not possess any patents or copyright registrations in the
United States or any other jurisdiction. Existing copyright and trade secret
laws only offer limited protection, and the laws of certain countries in which
the Company provides services may not protect the Company's intellectual
property rights to the same extent as the laws of the United States. Certain
provisions of the agreements entered into by the Company, including provisions
protecting against unauthorized use, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions, and the Company is
required to negotiate limits on these provisions from time to time.
The Company's competitive position may be affected by its ability to
protect its proprietary information. However, because the IT industry is
characterized by rapid technological change, the Company believes that patent,
trademark, copyright and other legal protections are less significant to the
Company's success than other factors such as the knowledge, ability and
experience of the Company's personnel, the development of new services, customer
service and ongoing support.
The Company's business includes the development of custom software in
connection with specific customer engagements. The Company frequently assigns to
its customers the copyright and other intellectual
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<PAGE> 37
property rights in certain aspects of the software and documentation developed
for these customers. Although the Company's contracts with its customers provide
that the Company retains the rights to its intellectual property, there can be
no assurance that customers will not assert rights in, and seek to limit the
Company's use of, such intellectual property.
The Company has received notice from a company located in the Netherlands
that it believes that its rights to use the i-Cube name in the Netherlands,
Belgium and Luxembourg are superior to those of the Company. See "Risk
Factors -- Dependence on Proprietary Rights."
On June 17, 1998, the Company received a letter from Sapient Corporation
("Sapient") regarding the dates in 1993 on which Madhav Anand, the President and
a Founder of the Company who was an employee of Sapient, terminated employment
with Sapient and commenced employment with the Company. The letter states that
Sapient is investigating any potential legal claims it may have against the
Company relating to this matter and alleged similarities between Sapient's
proprietary methodologies and business practices and those of the Company. The
Company is investigating this matter. On the basis of its preliminary
investigation, the Company is not aware of any basis for any meritorious
material claim by Sapient.
MANAGEMENT INFORMATION SYSTEMS
The Company has invested significantly in its information technology and
management information systems in order to build a scalable environment. The
Company has an enterprise-wide groupware application that is utilized for global
e-mail and calendaring, knowledge management discussion databases, and forms
databases. The Company's United States offices are linked via a high-speed
network, and the Company expects to establish a similar connection with its
German office prior to the end of 1998. Many of the Company's human resource
administrative functions are managed on-line, including job requisitions and
approvals, performance reviews, training course registration, employee handbook
distribution and tuition reimbursement approvals. The Company expects to
implement an enterprise-wide accounting and human resources software application
in the second half of 1998 to support its anticipated growth. See "Risk
Factors -- Management of Growth."
FACILITIES
The Company's headquarters are located in approximately 46,700 square feet
of leased office space in Cambridge, Massachusetts. This facility is used by the
Company's senior management and its administrative, human resources and sales
and marketing personnel and serves as the Company's principal transformation and
development facility. The lease term extends to November 2001 with a five-year
renewal at the option of the Company. In addition, the Company leases
approximately 5,800 square feet of office space in City of Industry, California,
and approximately 4,000 square feet in Mannheim, Germany, in which it houses the
Company's European operations. The Company believes that its facilities will be
adequate to meet its needs for approximately the next 12 months.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
33
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN KEY OFFICERS
The executive officers, directors and certain key officers of the Company
and their ages as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Michael Pehl.............................. 36 Chief Executive Officer and Chairman of the Board
of Directors
Madhav Anand.............................. 31 President, Co-Founder and Director
Lawrence P. Begley........................ 42 Executive Vice President, Chief Financial Officer,
Treasurer and Director
Jane Callanan............................. 42 Vice President, Human Resources
Karl-Heinz Dette.......................... 46 Vice President and General Manager, European
Operations
Timothy D. Eager.......................... 39 Chief Technology Officer
James K. McCann........................... 41 Vice President, Operations
Thomas J. Meredith(1)..................... 47 Director
Joseph M. Tucci(2)........................ 50 Director
Gregory S. Young(1)....................... 41 Director
John A. Young(2).......................... 65 Director
Patrick J. Zilvitis(2).................... 55 Director
OTHER KEY OFFICERS
Maria A. Cirino........................... 34 Vice President, Sales and Marketing
Yannis Doganis............................ 33 Vice President and Co-Founder
Patricia M. Gilligan...................... 46 Vice President, Eastern Region Operations
Robert M. Lapides......................... 41 Vice President, Global Business Development
Gary C. Mekikian.......................... 34 Vice President
Michael A. Morin.......................... 44 Vice President
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Michael Pehl has served as Chief Executive Officer since June 1996. He was
elected Chairman of the Board of Directors of the Company in July 1996. From
March 1994 to May 1996, Mr. Pehl was Chief Executive Officer of Deloitte &
Touche Consulting Group/ICS, the global SAP and Baan package implementation
group of Deloitte Touche Tohmatsu International, a global accounting and
consulting firm. From January 1991 until March 1994, Mr. Pehl was Chief
Executive Officer of ICS, a systems implementation firm that he founded and sold
to Deloitte & Touche in 1994. Prior to founding ICS, Mr. Pehl was employed by
SAP AG and SAP America from July 1986 to December 1990 where he held various
positions in the consulting and development organizations. Mr. Pehl was a member
of the SAP AG team that relocated to the United States in 1987 and established
SAP America.
Madhav Anand co-founded the Company and has served as a Director since June
1993. Since November 1994, Mr. Anand has served as President of the Company.
From April 1992 to February 1993, Mr. Anand was a project manager at Sapient
Corporation, an IT consulting firm. From May 1989 to April 1992, Mr. Anand was
an associate director for Cambridge Technology Partners, an IT consulting firm.
Lawrence P. Begley joined the Company in October 1996 as Chief Financial
Officer, Treasurer and a Director and became Executive Vice President in April
1998. From August 1988 to October 1996, Mr. Begley was employed by The Boston
Consulting Group ("BCG"), an international management consulting firm.
34
<PAGE> 39
From August 1988 until December 1990, Mr. Begley was Director of Finance and
Corporate Controller of BCG. From December 1990 to October 1996, he was Chief
Financial Officer and Treasurer of BCG.
Jane Callanan joined the Company in March 1997 as Vice President, Human
Resources. From May 1993 to January 1997, Ms. Callanan was Vice President of
Human Resources at Shiva Corporation, a provider of remote access and
internetworking technology to Fortune 1000 companies. From July 1990 to March
1993, Ms. Callanan was Vice President of Human Resources at Cambridge Technology
Partners, an IT consulting firm.
Karl-Heinz Dette joined the Company in April 1998 as Vice President and
General Manager, European Operations. From July 1987 to March 1998, Mr. Dette
was employed by SAP AG where he held a variety of senior management positions
including Global Alliance Manager for Oracle and Siemens Nixdorf.
Timothy D. Eager joined the Company in September 1994 as Chief Technology
Officer. From November 1983 to August 1994, Mr. Eager was employed by
Hewlett-Packard Company. Mr. Eager held several positions at Hewlett-Packard
including Senior Consultant, Project Manager and Senior Systems Engineer.
James K. McCann joined the Company in June 1997 as Vice President,
Operations. From September 1974 until May 1997, Mr. McCann was employed by
Northrop Grumman, an international aerospace and defense electronics firm. From
June 1993 to May 1997, Mr. McCann was Vice President, Information Services at
Northrop Grumman. Prior to June 1993, Mr. McCann held several positions at
Northrop Grumman including Director, Information Technology Management,
Director, Information Technology Aircraft Division, and Program Director, B-2
Program Office.
Thomas J. Meredith has served as a Director of the Company since March
1998. Since November 1992, Mr. Meredith has been the Chief Financial Officer of
Dell Computer. In September 1995, Mr. Meredith was named Senior Vice President,
Finance and Information Systems of Dell Computer and retained the position of
Chief Financial Officer of Dell Computer. In July 1996, Mr. Meredith's title was
changed to Senior Vice President and Chief Financial Officer of Dell Computer.
Mr. Meredith is a director of i2 Technologies Inc.
Joseph M. Tucci has served as a Director of the Company since May 1995.
Since January 1993, he has been the President and Chief Executive Officer of
Wang Global (formerly Wang Laboratories, Inc.), and has been its Chairman of the
Board of Directors since October 1993.
Gregory S. Young has served as a Director of the Company since August 1995.
Since 1990, Mr. Young has been President of Teton Capital Management, a private
capital investment firm. Mr. Young is the son of John A. Young.
John A. Young has served as a Director of the Company since August 1995.
Mr. Young was the Chief Executive Officer and President of Hewlett-Packard
Company from 1978 to 1992. Mr. Young is a director of SmithKline Beecham p.l.c.,
Lucent Technologies, Chevron Corp., Novell, Inc., Wells Fargo Bank & Co. and
Affymetrix, Inc. Mr. Young is the father of Gregory S. Young.
Patrick J. Zilvitis has served as a Director of the Company since December
1997. Since November 1992, Mr. Zilvitis has been the Vice President, Corporate
Information Technology and Chief Information Officer of The Gillette Company.
Other key officers of the Company include:
Maria A. Cirino joined the Company in July 1997 as a Vice President in the
sales organization. In February 1998, she also assumed responsibility for
marketing. From January 1993 to June 1997, Ms. Cirino was employed by Shiva
Corporation, a provider of remote access and internetworking technology to
Fortune 1000 companies. Ms. Cirino held several positions at Shiva including
Vice President, Internet Business Group and Vice President of Sales, Americas.
From January 1991 to January 1993, Ms. Cirino was employed by Lotus Development
Corporation as Group Manager, Word Processing Division and Channel Marketing
Manager.
Yannis Doganis joined the Company as a co-founder in March 1993. Since June
1997, he has served as Vice President, Client Solutions Group. From March 1993
to June 1997, Mr. Doganis was Vice President,
35
<PAGE> 40
Operations. From October 1991 to March 1993, Mr. Doganis was a project manager
and technical team leader at Cambridge Technology Partners, an IT consulting
firm.
Patricia M. Gilligan joined the Company in June 1997. From June 1997 to
February 1998, Ms. Gilligan was Senior Director, Eastern Region Operations. In
February 1998, Ms. Gilligan became Vice President, Eastern Region Operations.
From December 1992 to June 1997, Ms. Gilligan was employed by Cahners
Publishing, a publishing company. Ms. Gilligan served as Director of
Applications for Cahners from December 1992 until December 1994, when she was
elected Chief Information Officer of Cahners.
Robert M. Lapides joined the Company in May 1997 as Vice President, Global
Business Development. From May 1984 to November 1996, Mr. Lapides was employed
by Liant Software Corporation, a provider of application development and data
access software tools. At Liant Software, Mr. Lapides held a variety of
positions including Senior Vice President, Worldwide Sales, Marketing and
Customer Service, and Vice President and General Manager, Language Products
Business Unit.
Gary C. Mekikian joined the Company in September 1994. From September 1994
to December 1996, Mr. Mekikian served as Vice President, Sales. From December
1996 to February 1998, Mr. Mekikian was Vice President, Western Region
Operations. In March 1998, Mr. Mekikian became a Vice President in the sales
organization. From January 1990 to September 1994, Mr. Mekikian was employed as
Manager, Major Accounts at Hewlett-Packard Company.
Michael A. Morin joined the Company in April 1996 as Northeast Area Sales
Manager. In October 1996, Mr. Morin was promoted to Vice President in the sales
organization. From February 1994 to April 1996, Mr. Morin was employed by i2
Technologies Inc., a provider of intelligent planning and scheduling software
for global supply chain management, as Northeast Regional Manager and Regional
Vice President of Sales. From March 1989 to January 1994, Mr. Morin was employed
by Consilium Incorporated, a supplier of integrated manufacturing execution
software and systems, where Mr. Morin was a regional and district manager.
See "Certain Transactions" and "Principal Stockholders" for certain
information concerning the Company's directors and executive officers.
ELECTION OF DIRECTORS
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Begley and G. Young will serve in the class whose term expires in 1999;
Messrs. Anand, J. Young and Zilvitis will serve in the class whose term expires
in 2000; and Messrs. Meredith, Pehl and Tucci will serve in the class whose term
expires in 2001. Upon the expiration of the term of a class of directors,
directors in such class will be elected for three-year terms at the annual
meeting of stockholders in the year in which such term expires.
COMPENSATION OF DIRECTORS
The Company reimburses non-employee directors for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors. Non-employee
directors of the Company will receive stock options under the Company's 1998
Non-Employee Director Stock Option Plan (the "Director Plan"). Under the
Director Plan, each director of the Company who is not also an employee or
officer of the Company is granted a nonqualified stock option to purchase 30,000
shares of Common Stock on the date such person is first elected to the Board of
Directors and each such director is granted a nonqualified stock option to
purchase 7,500 shares of Common Stock on the date of each Annual Meeting of
Stockholders of the Company commencing with the 1999 Annual Meeting of
Stockholders. The exercise price per share for all options granted under the
Director Plan will be equal to the fair market value of the Common Stock on the
date of grant. See "-- Benefit Plans." Since their election to the Board of
Directors, the Company has granted non-qualified options and issued restricted
stock to certain of its non-employee directors in the following aggregate
amounts: Mr. Joseph Tucci, 45,000 options and 37,500 shares of Common Stock; Mr.
Gregory S. Young, 82,500 options and 37,500 shares of Common Stock; Mr. John
Young, 45,000 options and 37,500 shares of
36
<PAGE> 41
Common Stock; Mr. Thomas Meredith, 30,000 options; and Mr. Patrick Zilvitis,
30,000 options. No director who is an employee of the Company will receive
separate compensation for services rendered as a director.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. Tucci, J.
Young and Zilvitis, reviews executive salaries, administers any bonus, incentive
compensation and stock plans of the Company, and approves the salaries and other
benefits of the executive officers of the Company. In addition, the Compensation
Committee consults with the Company's management regarding pension and other
benefit plans and compensation policies and practices of the Company.
The Audit Committee, which consists of Messrs. Meredith and G. Young,
reviews the professional services provided by the Company's independent
auditors, the independence of such auditors from management of the Company, the
annual financial statements of the Company and the Company's system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to the accounting, auditing and financial reporting practices and
procedures of the Company as it may find appropriate or may be brought to its
attention.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1997, the
cash compensation paid and shares underlying options granted to (i) the
Company's Chief Executive Officer and (ii) each of the four other most highly
compensated executive officers who received annual compensation in excess of
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(2)
---------------
AWARDS
---------------
ANNUAL COMPENSATION(1) SECURITIES
---------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS(#) COMPENSATION
--------- --------- --------------- ------------
<S> <C> <C> <C> <C>
Michael Pehl............................. $260,000 $130,000 200,000 $ 8,771(3)
Chief Executive Officer and Chairman of
the Board of Directors
Madhav Anand............................. 150,000 51,060 -- --
President
Lawrence P. Begley....................... 250,000 96,600 -- 10,910(4)
Executive Vice President, Chief
Financial Officer, Treasurer and
Director
Jane Callanan............................ 114,818 80,690 225,000 --
Vice President, Human Resources(5)
James K. McCann.......................... 116,667 128,175 225,000 --
Vice President, Operations(6)
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life or
other benefits which are available to all salaried employees of the Company,
and certain perquisites and other benefits, securities or property which do
not exceed the lesser of $50,000 or 10% of the person's salary and bonus
shown in the table.
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<PAGE> 42
(2) Represents stock options granted during the fiscal year ended December 31,
1997. The Company did not grant any restricted or stock appreciation rights
or make any long term incentive plan payouts during 1997 to its Named
Executive Officers.
(3) Represents life insurance premiums paid on behalf of Mr. Pehl.
(4) Represents life and health insurance premiums paid on behalf of Mr. Begley.
(5) Ms. Callanan joined the Company in March 1997. Ms. Callanan would have
earned a total annual salary of $180,000 had she been employed as an
executive officer of the Company for the entire year ended December 31,
1997. Ms. Callanan received a sign-on bonus of $49,000 when she joined the
Company in March 1997, which is included in the amount listed in the table
above after her name in the "Bonus" column.
(6) Mr. McCann joined the Company in June 1997. Mr. McCann would have earned a
total annual salary of $200,000 had he been employed as an executive officer
of the Company for the entire year ended December 31, 1997. Mr. McCann
received a sign-on and relocation bonus of $100,000 when he joined the
Company in June 1997, which is included in the amount listed in the table
above after his name in the "Bonus" column.
In the table above, columns required by the Regulations of the Securities
and Exchange Commission (the "Commission") have been omitted where no
information was required to be disclosed under those columns.
STOCK OPTIONS
The following table contains information concerning the grant of options to
purchase shares of the Company's Common Stock to each of the Named Executive
Officers of the Company during the fiscal year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------------- ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK APPRECIATION
SECURITIES OPTIONS GRANTED FOR OPTION TERM(3)
UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION -----------------------
OPTIONS GRANTED IN FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
--------------- ----------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Pehl............. 200,000(4) 10.4% $3.00 06/24/07 $3,309,347 $5,624,982
Madhav Anand............. -- -- -- -- -- --
Lawrence P. Begley....... -- -- -- -- -- --
Jane Callanan............ 225,000(5) 11.6 3.00 03/05/07 3,723,015 6,328,105
James K. McCann.......... 225,000(6) 11.6 3.00 06/02/07 3,723,015 6,328,105
</TABLE>
- ---------------
(1) Based on an aggregate of 1,931,700 shares subject to options granted to
employees of the Company in 1997.
(2) All options were granted at or above fair market value as determined by the
Board of Directors on the date of grant. In determining fair market value of
the Company's Common Stock, the Board of Directors considered various
factors, including the value of contracts signed by the Company, the
expected value of contracts "in-process", the revenue-generating potential
of the Company's workforce and other relevant factors, including new
marketing partnerships signed and significant management hires.
(3) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming that the stock price on the date of grant appreciates
at the specified annual rates of appreciation, compounded annually over the
term of the option. These numbers are calculated using a base price of
$12.00 per share (the midpoint of the range set forth on the cover of this
Prospectus).
38
<PAGE> 43
(4) By their terms, such options will become immediately exercisable upon the
closing of this offering.
(5) Such options become exercisable as follows: 37,496 shares on March 5, 1998;
18,751 shares on September 5, 1998; 18,750 shares on March 5, 1999; 18,751
shares on September 5, 1999; 18,751 shares on March 5, 2000; 18,750 shares
on September 5, 2000; 18,751 shares on March 5, 2001; and 75,000 shares on
March 5, 2004; provided that the options that become exercisable on March 5,
2004 are subject to immediate vesting if the Company attains certain market
capitalization thresholds.
(6) Such options become exercisable as follows: 37,496 shares on June 2, 1998;
18,751 shares on December 2, 1998; 18,750 shares on June 2, 1999; 18,751
shares on December 2, 1999; 18,751 shares on June 2, 2000; 18,750 shares on
December 2, 2000; 18,751 shares on June 2, 2001; and 75,000 shares on June
2, 2004; provided that the options that become exercisable on June 2, 2004
are subject to immediate vesting if the Company attains certain market
capitalization thresholds.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1997.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael Pehl......... -- -- 359,689 1,056,811 $3,571,890 $10,393,110
Madhav Anand......... -- -- 75,000 75,000 735,000 735,000
Lawrence P. Begley... -- -- 93,750 431,250 937,500 4,312,500
Jane Callanan........ -- -- -- 225,000 -- 2,025,000
James K. McCann...... -- -- -- 225,000 -- 2,025,000
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, as permitted by the rules of the Commission, these values
have been calculated using a price of $12.00 per share (the midpoint of the
range set forth on the cover of this Prospectus), less the aggregate
exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, the members of the Compensation
Committee of the Company's Board of Directors were Messrs. Pehl, J. Young and
Tucci. Mr. Pehl has served as Chief Executive Officer of the Company since June
1996. No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" and "Principal Stockholders."
EMPLOYMENT AGREEMENTS
The Company is party to a letter agreement with Michael Pehl, pursuant to
which Mr. Pehl received a $1,000,000 cash signing bonus, $50,000 to pay for
negotiation and relocation expenses and a $4,000,000 life insurance policy
(which will be terminated 91 days after the closing of this offering) as
inducements to join the Company. Under the agreement, Mr. Pehl is entitled to an
annual base salary of not less than $200,000. In addition, the agreement
provides that effective upon his employment, Mr. Pehl was entitled to receive
stock options to purchase 892,500 shares of the Company's Common Stock at an
exercise price of $2.00 per share. The agreement provides for vesting of the
options over a four-year period, subject to acceleration in full upon a change
of control and subject to an acceleration provision that is effective upon the
completion of an initial public offering, as follows: if, at the time of the
Company's initial public offering, less than 50% of Mr. Pehl's
39
<PAGE> 44
options have vested, then 50% shall immediately vest, with the remaining 50% to
vest in four equal semi-annual installments starting six months after the
initial public offering. More than 50% of Mr. Pehl's options will have vested
prior to this offering. If Mr. Pehl's employment is terminated by the Company
for cause, or if he voluntarily leaves the Company or dies, the options will
terminate (provided that he or his estate may exercise any vested options). If
Mr. Pehl's employment is terminated without cause, the options that have vested
as of the date of termination will remain exercisable until the later of June
30, 1998 or ninety days after the date of termination, whereupon they will
expire. The agreement also provides that effective upon his employment, Mr. Pehl
was entitled to receive two stock options, each to purchase 162,000 shares of
the Company's Common Stock at an exercise price of $2.00 per share. The
agreement provides for vesting of these options at the end of seven years from
the date of the agreement, subject to the following acceleration provisions. The
first of the options will completely vest if the Company achieves a total market
capitalization of $400 million while Mr. Pehl is employed by the Company or
within six months of the termination of Mr. Pehl's employment without cause. The
second of the options will completely vest if the Company achieves a total
market capitalization of $600 million while Mr. Pehl is employed by the Company
or within six months of the termination of Mr. Pehl's employment without cause.
The agreement provides that Mr. Pehl may provide advisory services to his former
employer, Deloitte & Touche Consulting Group/ICS, for a maximum of twelve days
per year.
The Company is party to a letter agreement with Lawrence P. Begley, dated
August 30, 1996. Pursuant to the agreement, Mr. Begley received a $150,000 cash
signing bonus and a $1,000,000 term life insurance policy as inducements to join
the Company. Under the agreement, Mr. Begley is entitled to an annual base
salary of not less than $250,000. In addition, the agreement provides that
effective upon his employment, Mr. Begley was entitled to receive stock options
to purchase 375,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. The agreement provides for vesting of the options over a
four-year period, subject to acceleration in full upon a change of control and
subject to an acceleration provision that is effective upon the completion of an
initial public offering, as follows: if, at the time of the Company's initial
public offering, less than 50% of Mr. Begley's options have vested, then 50%
shall immediately vest, with the remaining 50% to vest in four equal semi-annual
installments starting six months after the initial public offering. Less than
50% of Mr. Begley's options will have vested prior to this offering. The
agreement also provides that effective upon his employment, Mr. Begley was
entitled to receive two stock options, each to purchase 75,000 shares of the
Company's Common Stock at an exercise price of $2.00 per share. The agreement
provides for vesting of the options at the end of seven years from the date of
the agreement, subject to the following acceleration provisions. The first of
the options will completely vest if the Company achieves a total market
capitalization of $400 million while Mr. Begley is employed by the Company or
within six months of the termination of Mr. Begley's employment without cause.
The second of the options will completely vest if the Company achieves a total
market capitalization of $600 million while Mr. Begley is employed by the
Company or within six months of the termination of Mr. Begley's employment
without cause. If the Company terminates Mr. Begley's employment without cause
or if Mr. Begley resigns as a result of (i) any reduction in compensation below
$250,000 per year or (ii) a material diminution of his job responsibilities or
position within the Company without his consent within the first thirty-six
months after he commenced employment with the Company, then Mr. Begley will
continue to receive his annual base salary and benefits for the twelve-month
period following the effective date of termination.
The Company is party to a letter agreement with Karl-Heinz Dette dated
December 19, 1997. Pursuant to the agreement, Mr. Dette received a $100,000 cash
signing bonus as an inducement to join the Company. Under the agreement, Mr.
Dette is entitled to an annual base salary of $175,000, an annual bonus of up to
20% of his annual base salary and an additional annual bonus of up to $100,000,
each bonus to be based upon the attainment of certain performance criteria set
by the Board of Directors, which include revenue, profitability and client
satisfaction. The agreement provides that for the first twelve-month period of
Mr. Dette's employment, the Company will guarantee a minimum performance bonus
of $50,000. The agreement also provides that effective upon his employment, Mr.
Dette was entitled to receive stock options to purchase 100,000 shares of the
Company's common stock. The agreement provides for vesting of the options over a
four-year period. In the event that the Company ceases to perform computer and
consulting services and
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<PAGE> 45
Mr. Dette elects to terminate his employment with the Company, the Company will
pay him a lump sum equal to twice his annual base salary.
BENEFIT PLANS
1993 Stock Plan
In March 1993, the Company's Board of Directors approved the 1993 Stock
Plan (the "1993 Stock Plan"), which provided for the grant of options to
purchase, awards of and authorizations to purchase (collectively, "1993 Plan
Stock Rights") Common Stock of the Company to employees, officers and directors
of, and consultants or advisors to, the Company and its parent and subsidiary
corporations who are expected to contribute to the Company's future growth and
success. No grants have been made under this plan since December 1995 and the
plan was terminated by the Company's Board of Directors in April 1996. 1993 Plan
Stock Rights are not transferable by the grantee except by will or the laws of
descent and distribution. Generally, incentive stock options granted under the
1993 Stock Plan may not be exercised by an optionee more than two months
following the termination of employment, and such options expire not more than
ten years after the date of grant. As of March 31, 1998, options to purchase
915,175 shares had been granted and were outstanding and unexercised under the
1993 Stock Plan.
1996 Stock Plan
In January 1996, the Company's Board of Directors approved the 1996 Stock
Plan (the "1996 Stock Plan"), which provides for the grant of options to
purchase, awards of and rights to purchase (collectively, "1996 Plan Stock
Rights") shares of Common Stock of the Company to employees, officers and
directors of, and consultants or advisors to, the Company and its parent and
subsidiary corporations who are expected to contribute to the Company's future
growth and success. Upon the adoption of the 1998 Stock Incentive Plan in April
1998, the 1996 Stock Plan was terminated and no further grants will be made
under the 1996 Stock Plan. 1996 Plan Stock Rights are not transferable by the
grantee except by will or the laws of descent and distribution. Generally,
incentive stock options granted under the 1996 Stock Plan may not be exercised
by an optionee more than three months following the termination of employment,
and such options expire not more than ten years after the date of grant. As of
March 31, 1998, options to purchase 4,624,607 shares had been granted and were
outstanding and unexercised under the 1996 Stock Plan.
1998 Stock Incentive Plan
In April 1998, the Company's Board of Directors approved the 1998 Stock
Incentive Plan (the "1998 Stock Incentive Plan"), which provides for the grant
of incentive stock options, non-statutory stock options, stock appreciation
rights, performance shares and awards of restricted stock and unrestricted stock
("Awards"). The aggregate number of shares of Common Stock that may be issued
pursuant to the 1998 Stock Incentive Plan equals 3,432,078 shares plus such
additional number of shares subject to awards granted under the 1996 Stock Plan
or the 1993 Stock Plan that are not actually issued because such options expire
or otherwise result in shares not being issued, or in the case of restricted
stock, are repurchased by the Company pursuant to the terms of the applicable
stock restriction agreement.
The 1998 Stock Incentive Plan is administered by the Board of Directors and
the Compensation Committee. The Board has the authority to grant Awards under
the 1998 Stock Incentive Plan and to accelerate, waive or amend certain
provisions of outstanding Awards. The Board has authorized the Compensation
Committee to administer certain aspects of the 1998 Stock Incentive Plan and has
authorized the Chief Executive Officer of the Company to grant Awards to
non-executive officer employees.
Incentive Stock Options and Nonstatutory Options. Optionees receive the
right to purchase a specified number of shares of Common Stock at some time in
the future at an exercise price and subject to such terms and conditions as are
specified at the time of the grant. Incentive stock options and options that the
Board or Compensation Committee intends to qualify as performance-based
compensation under Section 162(m) of the Code may not be granted at an exercise
price less than the fair market value of the Common Stock on the date of grant
(or less than 110% of the fair market value in the case of incentive stock
options granted to optionees holding 10% or more of the voting stock of the
Company). All other options may be granted at an
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<PAGE> 46
exercise price that may be less than, equal to or greater than the fair market
value of the Common Stock on the date of grant.
Stock Appreciation Rights and Performance Shares. A stock appreciation
right ("SAR") is based on the value of Common Stock and entitles the SAR holder
to receive consideration to the extent that the fair market value on the date of
exercise of the shares of Common Stock underlying the SAR exceeds the fair
market value of the underlying shares on the date the SAR was granted. A
performance share award entitles the recipient to acquire shares of Common Stock
upon the attainment of specified performance goals.
Restricted and Unrestricted Stock. Restricted stock awards entitle
recipients to acquire shares of Common Stock, subject to the right of the
Company to repurchase all or part of such shares at their purchase price from
the recipient in the event that the conditions specified in the applicable stock
award are not satisfied prior to the end of the applicable restriction period
established for such award. The Company may also grant to participants shares of
Common Stock free of any restrictions under the 1998 Stock Incentive Plan.
All of the employees, officers, directors, consultants and advisors of the
Company who are expected to contribute to the Company's future growth and
success are eligible to participate in the 1998 Stock Incentive Plan.
Section 162(m) of the Code disallows a tax deduction to public companies
for certain compensation in excess of $1 million paid to a company's chief
executive officer or to any of the four other most highly compensated executive
officers. Certain compensation, including "performance-based compensation," is
not included in compensation subject to the $1 million limitation. The 1998
Stock Incentive Plan limits to 1,000,000 the maximum number of shares of Common
Stock with respect to which Awards may be granted to any employee in any
calendar year. This limitation is intended to preserve the tax deductions to the
Company that might otherwise be unavailable under Section 162(m) with respect to
certain Awards.
1998 Non-Employee Directors' Stock Option Plan
In April 1998, the Company's Board of Directors adopted the 1998
Non-Employee Director Stock Option Plan (the "Director Plan"), which provides
for the grant of options to purchase a maximum of 250,000 shares of Common Stock
of the Company to non-employee directors of the Company. The Director Plan is
administered by the Board of Directors.
Under the Director Plan, each director of the Company who is not also an
employee or officer of the Company is granted a nonqualified stock option to
purchase 30,000 shares of Common Stock on the date such person is first elected
to the Board of Directors and each such director is granted a nonqualified stock
option to purchase 7,500 shares of Common Stock on the date of each Annual
Meeting of the Stockholders of the Company commencing with the 1999 Annual
Meeting of Stockholders. The exercise price per share for all options granted
under the Director Plan will be equal to the fair market value of the Common
Stock on the date of grant. The options granted to a director are exercisable in
eight equal semi-annual installments, commencing six months following the date
of grant, provided that the optionee remains a director at such time. The term
of each option is ten years from the date of grant. In addition, the Director
Plan authorizes the Board of Directors to grant additional options to
non-employee directors and to determine the terms applicable to such options.
Notwithstanding the terms of the option grants set forth in the Director Plan,
the Board of Directors has the authority to grant options that are immediately
exercisable subject to the Company's right to repurchase any unvested shares of
stock acquired by the optionee on exercise of an option in the event such
optionee's service as a director terminates for any reason. Except as otherwise
set forth in the option agreement or as determined by the Board of Directors,
options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable to the extent vested only while the
optionee is serving as a director of the Company and within one year after the
optionee ceases to serve as a director of the Company. No options to purchase
shares have been granted to date under the Director Plan. Upon a change in
control of the Company, as defined in the Director Plan, all outstanding options
under the Director Plan will immediately vest.
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<PAGE> 47
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in April 1998. The Purchase Plan authorizes
the issuance of up to a total of 300,000 shares of Common Stock to participating
employees.
All employees of the Company who meet certain conditions, other than
officers of the Company, are eligible to participate in the Purchase Plan.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of the stock of the Company or any subsidiary are
not eligible to participate.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount to be deducted by the Company from
such pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the Purchase
Plan, the option price is an amount equal to 85% of the fair market value per
share of the Common Stock on either the first day or the last day of the
Offering Period, whichever is lower. An employee may purchase, in any one
Offering Period, a number of shares the aggregate purchase price of which is up
to 10% of the employee's compensation for the immediately preceding twelve-month
period divided by 85% of the market value of a share of Common Stock on the
commencement date of the Offering Period, subject to a limit of $25,000 in fair
market value of stock purchased in any year. The Compensation Committee may, in
its discretion, choose an Offering Period of 12 months or less for each of the
offerings under the Purchase Plan and choose a different Offering Period for
each offering under the Purchase Plan.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan, or when such employee ceases employment for any reason, except that upon
termination of employment because of death, the employee's beneficiary has
certain rights to elect to exercise the option to purchase the shares which the
accumulated payroll deductions in the participant's account would purchase at
the date of death.
401(k) Plan
The Company has a Section 401(k) Retirement Savings Plan (the "401(k)
Plan"). The 401(k) Plan is a tax-qualified plan covering all full-time employees
of the Company. Under the 401(k) Plan, participants may elect to defer a portion
of their eligible compensation, subject to certain limitations. In addition, at
the discretion of the Board of Directors, the Company may make matching
contributions to the 401(k) Plan for all eligible employees. The Company
currently matches 50% of each employee's pre-tax contribution to the plan, with
such matching subject to a limit of 3% of such employee's eligible compensation.
Matching contributions currently vest in increments over a two-year period,
beginning on an employee's date of employment. The Company did not contribute to
the 401(k) Plan during 1995, 1996 or 1997. The Company contributed $32,000 to
the 401(k) Plan during the three months ended March 31, 1998.
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<PAGE> 48
CERTAIN TRANSACTIONS
In 1995, the Company recognized net revenues of $366,000 for services
provided to a company of which Sundar Subramaniam was a director and significant
shareholder. Mr. Subramaniam is a founder of the Company, and immediately
following this offering will, together with certain trusts and partnerships for
his benefit and the benefit of his family, own approximately 45% of the
outstanding shares of the Common Stock of the Company.
In 1994 and 1995, the Company provided administrative and support services
and subleased a portion of its Cambridge, Massachusetts headquarters to a
company of which Mr. Subramaniam is a director and significant shareholder. The
Company received approximately $31,000 and $102,000 in 1994 and 1995,
respectively, for these services.
In 1996, the Company loaned $60,000 to Timothy D. Eager, the Company's
Chief Technology Officer. Such loan bears interest at 7% per annum, and is
payable on demand. The loan is secured by Mr. Eager's shares of common stock. At
March 31, 1998, the outstanding amount of this loan, including accrued interest,
was $65,249.
In 1996, the Company was paid $317,000 for IT services provided to a
company of which Mr. Subramaniam was a significant shareholder.
In October, 1997, the Company loaned Sundar Subramaniam $533,333, which Mr.
Subramaniam used to exercise options to purchase 400,000 shares of the Common
Stock of the Company. This loan bears interest at 8.5% per annum, and is payable
in full on October 13, 2000. The loan is secured by the shares of Common Stock
acquired upon such exercise. At March 31, 1998, the outstanding amount of this
loan, including accrued interest, was approximately $554,416.
The Company and Sundar Subramaniam, a principal stockholder of the Company,
are parties to a Voting Trust Agreement dated October 13, 1997. The Voting Trust
Agreement will terminate upon the closing of this offering. See "Risk
Factors -- Control by Principal Stockholders" and "Principal Stockholders."
The Company believes the transactions set forth above were made on terms no
less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors and affiliates will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of the
Company's Board of Directors.
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998 and as adjusted to
reflect the sale of the shares offered hereby by (i) each person who is known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director and Named Executive Officer of the Company, and (iii)
all directors and executive officers of the Company as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below have
sole voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law. The
address of each person below owning beneficially more than 5% of the outstanding
shares of Common Stock is c/o International Integration Incorporated, 101 Main
Street, Cambridge, MA 02142.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)(2)
-------------------------- --------------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Sundar Subramaniam(3)............................. 7,155,025 53.1% 7,155,025 44.8%
Madhav Anand(4)................................... 1,848,750 13.6 1,848,750 11.5
Edouard Aslanian(5)............................... 1,755,000 13.0 1,755,000 11.0
Yannis Doganis.................................... 1,755,000 13.0 1,755,000 11.0
Gary C. Mekikian(6)............................... 750,000 5.4 750,000 4.6
Michael Pehl(7)................................... 658,705.5 4.7 658,705.5 4.0
Lawrence P. Begley(8)............................. 187,500.5 1.4 187,500.5 1.2
Jane Callanan(9).................................. 37,496 * 37,496 *
James K. McCann................................... -- -- -- --
Thomas J. Meredith(10)............................ 30,000 * 30,000 *
Gregory S. Young(11).............................. 104,691.5 * 104,691.5 *
John A. Young..................................... -- -- -- --
Joseph M. Tucci (12).............................. 65,626 * 65,626 *
Patrick J. Zilvitis(13)........................... 30,000 * 30,000 *
All executive officers and directors as a group
(12 persons)(14)................................ 3,142,814.5 21.4% 3,142,814.5 18.3%
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes: (i) 13,467,233 shares of Common Stock outstanding as of
March 31, 1998; and (ii) shares issuable pursuant to options held by the
respective person or group which may be exercised within 60 days after
March 31, 1998, as set forth below. The number of shares of Common Stock
deemed outstanding after this offering includes an additional 2,500,000
shares that are being offered for sale by the Company in this offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to the shares.
(2) The above table assumes no exercise of the over-allotment option to
purchase up to an aggregate of 375,000 shares of Common Stock from the
Company and the Selling Stockholders. If the Underwriters exercise their
over-allotment option in full, the number of shares sold, the number of
shares beneficially owned and the percentage of ownership after this
offering for the Selling Stockholders and for all executive officers and
directors as a group would be as follows: Madhav Anand, 75,000 shares sold,
1,773,750 shares beneficially owned (11.0%) after this offering; Edouard
Aslanian, 55,000 shares sold, 1,700,000 shares beneficially owned (10.6%)
after this offering; Yannis Doganis, 75,000 shares sold, 1,680,000 shares
beneficially owned (10.5%) after this offering; Gary C. Mekikian, 65,000
shares sold, 685,000 shares beneficially owned (4.2%) after this offering;
and all executive officers and directors as a group, 75,000 shares sold,
3,067,814.5 shares beneficially owned (17.7%) after this offering. Mr.
Aslanian has been an employee of the Company since January 1993.
45
<PAGE> 50
(3) Consists of 5,355,025 shares owned by Mr. Subramaniam and 1,800,000 shares
owned by the Geneva Trust, of which Mr. Subramaniam and his family are the
sole beneficiaries, all of which are held in trust by State Street Bank and
Trust Company, 225 Franklin Street, 3rd Floor, Boston, MA 02110, as
trustee, under a certain Voting Trust Agreement dated as of October 13,
1997 among Mr. Subramaniam, State Street Bank and Trust Company, the
Company, Subramaniam Limited Partnership, a Massachusetts limited
partnership and Harrington Trust Limited, as trustee of the Geneva Trust.
The Voting Trust Agreement terminates upon the closing of this offering.
(4) Includes 93,750 shares issuable pursuant to options held by Mr. Anand that
may be exercised within 60 days after March 31, 1998.
(5) Includes certain shares held by a family limited partnership controlled by
Mr. Aslanian.
(6) Includes 325,000 shares issuable pursuant to options held by Mr. Mekikian
that may be exercised within 60 days after March 31, 1998.
(7) Consists of 658,705.5 shares issuable pursuant to options held by Mr. Pehl
that may be exercised within 60 days after March 31, 1998.
(8) Consists of 187,500.5 shares issuable pursuant to options held by Mr.
Begley that may be exercised within 60 days after March 31, 1998.
(9) Includes 22,496 shares issuable pursuant to options held by Ms. Callanan
that may be exercised within 60 days after March 31, 1998.
(10) Consists of 30,000 shares acquired after March 31, 1998 on exercise of
options and held subject to the Company's right to repurchase in the event
Mr. Meredith's service as a director terminates before vesting dates
applicable to such options.
(11) Includes 42,191 shares issuable pursuant to options held by Mr. Young that
may be exercised within 60 days after March 31, 1998.
(12) Includes 28,126 shares issuable pursuant to options held by Mr. Tucci that
may be exercised within 60 days after March 31, 1998.
(13) Consists of 30,000 shares issuable pursuant to options held by Mr. Zilvitis
that may be exercised within 60 days after March 31, 1998, subject to the
Company's right to repurchase in the event Mr. Zilvitis' service as a
director terminates before vesting dates applicable to such options.
(14) Includes 1,212,814 shares issuable pursuant to options that may be
exercised within 60 days after March 31, 1998.
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, $.01 par value per
share, and 1,000,000 shares of Preferred Stock, $.01 par value per share.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") and Amended and
Restated By-laws (the "Restated By-laws"), filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
As of March 31, 1998, there were 13,467,233 shares of Common Stock
outstanding held by 30 stockholders of record. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of the 2,500,000
shares of Common Stock offered by the Company hereby, there will be 15,967,233
shares of Common Stock outstanding upon the closing of this offering. In
addition, as of March 31, 1998, there were outstanding stock options for the
purchase of a total of 5,539,782 shares of Common Stock.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities of the
Company, subject to the prior rights of any outstanding Preferred Stock. Holders
of the Common Stock have no preemptive, subscription, redemption or conversion
rights, nor are they entitled to the benefit of any sinking fund. The
outstanding shares of Common Stock are, and the shares offered by the Company in
this offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, powers, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of Preferred Stock, in one or more
series. Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights. There are no shares of Preferred Stock currently outstanding.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any Preferred Stock issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could adversely affect the
voting power or other rights of the holders of Common Stock, and could make it
more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. The Company has not, to date, issued any shares of such Preferred Stock
and has no present plans to issue any shares of Preferred Stock.
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<PAGE> 52
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management -- Election of Directors." In
addition, the Restated Certificate of Incorporation provides that directors may
be removed only for cause by the affirmative vote of the holders of 75% of the
shares of capital stock of the Company entitled to vote. Under the Restated
Certificate of Incorporation, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company.
The Restated Certificate of Incorporation also provides that after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors. Under
the Restated By-laws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
the Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal any of the foregoing provisions of the Restated Certificate of
Incorporation. The Restated By-laws also may be amended or repealed by a
majority vote of the Board of Directors subject to any limitations set forth in
the Restated By-laws and amendment by stockholders of provisions described above
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company issued and outstanding and entitled to vote. The
75% stockholder vote would be in addition to any separate class vote that might
in the future be required pursuant to the terms of any series Preferred Stock
that might be outstanding at the time any such amendments are submitted to
stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Restated Certificate of Incorporation provides that the directors and
officers of the Company shall be indemnified by the Company to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with their service for or on behalf of the Company. In addition, the Restated
Certificate of Incorporation provides that the directors of the Company will not
be personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted
48
<PAGE> 53
in bad faith, knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit from their
action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe
Limited Partnership.
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<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 15,967,233 shares
of Common Stock outstanding (assuming no exercise of outstanding options). Of
these shares, the 2,500,000 shares (2,875,000 shares if the over-allotment
option is exercised in full) to be sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that any shares purchased by affiliates
of the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 13,467,233 shares of Common Stock outstanding upon completion
of this offering are deemed "Restricted Shares" under Rule 144 or Rule 701 under
the Securities Act. Approximately 2,374.5 of such Restricted Shares will be
eligible for sale in the public market pursuant to Rule 144(k) on the date of
this Prospectus. Upon expiration of the Lock-up Agreements, 180 days after the
date of this Prospectus, an additional 12,932,841.5 shares of Common Stock will
be eligible for sale in the public market pursuant to Rule 144 under the
Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an Affiliate, who has beneficially owned Restricted
Shares for at least one year is entitled to sell, within any three-month period,
a number of such shares that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 159,672 shares
immediately after this offering) or (ii) the average weekly trading volume in
the Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, Affiliates must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock which are not
restricted securities. Under Rule 144(k), a person who is not an Affiliate and
has not been an Affiliate for at least three months prior to the sale and who
has beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one-
and two-year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate. The one-
and two-year holding periods described above do not begin to run until the full
purchase price or other consideration is paid by the person acquiring the
Restricted Shares from the issuer or an Affiliate. Rule 701 provides that
currently outstanding shares of Common Stock acquired under the Company's
employee compensation plans may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, subject only to the manner
of sale provisions of Rule 144, and by Affiliates after the date of this
Prospectus, subject only to the manner of sale provisions of Rule 144, and by
Affiliates under Rule 144 without compliance with its one-year minimum holder
period, subject to certain limitations.
OPTIONS
Rule 701 also provides that the shares of Common Stock acquired upon the
exercise of currently outstanding options or pursuant to other rights granted
under the Company's stock plans may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, subject only to the manner
of sale provisions of Rule 144, and by Affiliates under Rule 144, without
compliance with its one-year minimum holding period, subject to certain
limitations. At March 31, 1998, approximately 3,107,837.5 shares of Common Stock
were issued or issuable pursuant to vested options or pursuant to other rights
granted under the Company's stock program, of which approximately 59,617.5
shares are not subject to Lock-up Agreements with the Underwriters and will be
eligible for sale in the public market in accordance with Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act following the date of this Prospectus, to register up
to 5,539,782 shares of Common Stock subject to outstanding stock options or
other rights granted pursuant to the Company's stock option program as of
50
<PAGE> 55
March 31, 1998, including the 1,657,628 shares of Common Stock subject to
options vested as of March 31, 1998, and 4,064,578 shares of Common Stock
issuable pursuant to the Company's stock plans. Such registration statements are
expected to become effective upon filing.
LOCK-UP AGREEMENTS
Except for sales of Common Stock to the Underwriters pursuant to the
Underwriting Agreement and transactions relating to Common Stock or other
securities acquired in open market transactions after the completion of this
offering, the Company, the executive officers and directors, the Selling
Stockholders and certain other securityholders have agreed not to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock (or any
security convertible into or exchangeable or exercisable for Common Stock)
without the prior written consent of Morgan Stanley & Co. Incorporated ("Morgan
Stanley") for a period of 180 days from the date of this Prospectus. In
addition, for a period of 180 days from the date of this Prospectus, except as
required by law, the Company has agreed that its Board of Directors will not
consent to any offer for sale, sale or other disposition, or any transaction
which is designed or could be expected to result in the disposition by any
person, directly or indirectly, of any shares of Common Stock without the prior
written consent of Morgan Stanley. See "Underwriters." Morgan Stanley in its
sole discretion at any time or from time to time and without notice may release
for sale in the public market all or any portion of the shares subject to the
lock-up agreements.
REGISTRATION RIGHTS
No securityholders of the Company are entitled to require the Company to
register any securities of the Company under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no predictions can be made as to the effect, if any,
that market sales of shares of Common Stock prevailing from time to time, or the
availability of shares for future sale, may have on the market price for the
Common Stock. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely effect prevailing market prices for
the Common Stock and could impair the Company's future ability to obtain capital
through an offering of equity securities.
51
<PAGE> 56
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus, the Underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and UBS
Securities LLC are acting as Representatives (the "Underwriters"), have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
UBS Securities LLC..........................................
---------
Total............................................. 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, this offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company and certain stockholders of the Company, consisting of Messrs.
Anand, Aslanian, Doganis and Mekikian (collectively, the "Selling
Stockholders"), have granted the Underwriters an option, exercisable for 30 days
from the date of the Prospectus, to purchase up to an additional 375,000 shares
of Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with this offering. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered by the
Underwriters hereby.
At the request of the Company, the Underwriters have reserved up to 125,000
shares of the Common Stock offered hereby for sale at the initial public
offering price to the Company's customers and other persons with whom the
Company has business relationships, including potential marketing partners and
other persons who have been supportive of the Company's efforts. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
Except for sales of Common Stock to the Underwriters pursuant to the
Underwriting Agreement and transactions relating to Common Stock or other
securities acquired in open market transactions after the completion of this
offering, the Company and the executive officers and directors of the Company,
the Selling
52
<PAGE> 57
Stockholders and certain other securityholders have agreed that, without the
prior written consent of Morgan Stanley, they will not, during the period ending
180 days after the date of this Prospectus, (a) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
(regardless of whether such shares or any such securities are then owned by such
person or are thereafter acquired), or (b) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, regardless of whether any such
transactions described in clauses (a) or (b) of this paragraph are to be settled
by delivery of such Common Stock or such other securities, in cash or otherwise.
Morgan Stanley in its sole discretion at any time or from time to time and
without notice may release for sale in the public market all or any portion of
the shares subject to the lock-up agreements.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price are the future prospects of the Company and its industry in general, net
revenues, earnings and certain other financial and operating information of the
Company in recent periods, and the price-earnings ratios, certain other ratios,
and market prices of securities and certain financial operating information of
companies engaged in activities similar to those of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Peter B.
Tarr, a partner of Hale and Dorr LLP, is Secretary of the Company.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and December 31, 1997 and for the three years in the period ended December
31, 1997 included in this Prospectus have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
53
<PAGE> 58
CHANGE IN ACCOUNTANTS
In January 1997, the Company's Board of Directors decided to retain Coopers
& Lybrand L.L.P. as its independent public accountants and dismissed the
Company's former auditors. The former auditors' report on the Company's
financial statements for the years ended December 31, 1995 and 1994 does not
cover the consolidated financial statements of the Company included in this
Prospectus. Such report did not contain an adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with the former auditors on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure at the time of the change or with respect to the
Company's financial statements for fiscal years 1995 and 1994, which, if not
resolved to the former auditors' satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report. Prior to retaining Coopers & Lybrand L.L.P., the Company had not
consulted with Coopers & Lybrand L.L.P. regarding accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement, each such statement being qualified by such reference.
The Registration Statement may be inspected without charge at the principal
office of the Commission in Washington, D.C. and copies of all or any part of
which may be inspected and copied at the public reference facilities maintained
by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
54
<PAGE> 59
INTERNATIONAL INTEGRATION INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997, and March 31, 1998 (unaudited)...................... F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1998 (unaudited)................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
International Integration Incorporated:
We have audited the accompanying consolidated balance sheets of International
Integration Incorporated as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 consolidated financial position of International
Integration Incorporated as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 16, 1998
F-2
<PAGE> 61
INTERNATIONAL INTEGRATION INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ -----------
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,889 $10,822 $ 9,833
Accounts receivable, net of reserve of $114, $196 and
$112, respectively..................................... 4,698 5,906 5,349
Unbilled revenues......................................... 222 708 476
Prepaid expenses and other current assets................. 192 429 490
Deferred income taxes..................................... 795 812 878
------- ------- -------
Total current assets.............................. 9,796 18,677 17,026
------- ------- -------
Property and equipment, at cost:
Computers and equipment................................... 679 2,527 2,460
Furniture and fixtures.................................... 244 602 881
------- ------- -------
923 3,129 3,341
Less-accumulated depreciation............................. 384 838 1,039
------- ------- -------
539 2,291 2,302
Other assets................................................ 167 144 190
------- ------- -------
Total assets...................................... $10,502 $21,112 $19,518
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 382 $ 483 $ 727
Accrued expenses.......................................... 1,049 2,956 2,362
Current portion of long-term obligations.................. -- 268 258
Accrued income taxes...................................... 66 1 938
Deferred revenues......................................... 4,444 7,116 3,567
------- ------- -------
Total current liabilities......................... 5,941 10,824 7,852
------- ------- -------
Long-term obligations....................................... -- 672 623
Commitments (Note 8)
Stockholders' equity:
Preferred stock $0.01 par value; 1,000,000 shares
authorized, no shares issued or outstanding............ -- -- --
Common stock $0.01 par value; 100,000,000 shares
authorized; 12,493,212, 12,966,889 and 13,470,234
shares issued at December 31, 1996 and 1997 and March
31, 1998, respectively; 12,493,212, 12,963,888 and
13,467,233 shares outstanding at December 31, 1996 and
1997 and March 31, 1998, respectively.................. 124 129 134
Additional paid-in capital................................ 250 1,516 1,566
Treasury stock, 3,001 shares at cost...................... -- (8) (8)
Note receivable from stockholder.......................... -- (533) (533)
Retained earnings......................................... 4,187 8,512 9,884
------- ------- -------
Total stockholders' equity........................ 4,561 9,616 11,043
------- ------- -------
Total liabilities and stockholders' equity........ $10,502 $21,112 $19,518
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE> 62
INTERNATIONAL INTEGRATION INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1995 1996 1997 1997 1998
------ ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $9,197 $14,479 $26,859 $5,598 $8,828
Project personnel and software costs........ 2,521 5,308 10,385 2,000 3,612
------ ------- ------- ------ ------
Gross profit...................... 6,676 9,171 16,474 3,598 5,216
Operating expenses:
Selling and marketing..................... 897 1,580 3,046 630 850
General and administrative................ 2,371 5,011 6,734 1,497 2,247
------ ------- ------- ------ ------
Total operating expenses.......... 3,268 6,591 9,780 2,127 3,097
------ ------- ------- ------ ------
Operating income............................ 3,408 2,580 6,694 1,471 2,119
Other income (expense):
Interest income........................... 92 85 460 52 156
Interest expense.......................... -- -- (69) -- (26)
------ ------- ------- ------ ------
Income before income taxes........ 3,500 2,665 7,085 1,523 2,249
Provision for income taxes.................. 1,424 1,050 2,760 594 877
------ ------- ------- ------ ------
Net income........................ $2,076 $ 1,615 $ 4,325 $ 929 $1,372
====== ======= ======= ====== ======
Earnings per share:
Basic..................................... $ 0.17 $ 0.13 $ 0.34 $ 0.07 $ 0.10
====== ======= ======= ====== ======
Diluted................................... $ 0.15 $ 0.12 $ 0.29 $ 0.07 $ 0.09
====== ======= ======= ====== ======
Weighted average shares outstanding:
Basic..................................... 12,323 12,425 12,627 12,519 13,244
Diluted................................... 13,465 13,682 15,163 14,256 16,031
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE> 63
INTERNATIONAL INTEGRATION INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK COMMON STOCK COMMON STOCK TREASURY STOCK
------------------- ---------------- ------------------ --------------
NUMBER NUMBER NUMBER ADDITIONAL NUMBER
OF PAR OF PAR OF PAR PAID-IN OF
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL SHARES COST
----------- ----- -------- ----- ---------- ----- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 12,020,025 $8 300,499 $ 2 -- -- -- -- --
Exercise of stock options........... -- -- 27,000 -- -- -- -- -- --
Net income.......................... -- -- -- -- -- -- -- -- --
----------- -- -------- --- ---------- ---- ------ ------ ---
Balance at December 31, 1995.......... 12,020,025 8 327,499 2 -- -- -- -- --
Conversion.......................... (12,020,025) (8) (327,499) (2) 12,347,524 $123 -- -- --
Exercise of stock options........... -- -- -- -- 145,688 1 $ 250 -- --
Net income.......................... -- -- -- -- -- -- -- -- --
----------- -- -------- --- ---------- ---- ------ ------ ---
Balance at December 31, 1996.......... -- -- -- -- 12,493,212 124 250 -- --
Exercise of stock options........... -- -- -- -- 473,677 5 676 -- --
Acquisition of treasury stock....... -- -- -- -- -- -- -- (3,001) $(8)
Tax benefit due to stock option
exercise.......................... -- -- -- -- -- -- 590 -- --
Net income.......................... -- -- -- -- -- -- -- -- --
----------- -- -------- --- ---------- ---- ------ ------ ---
Balance at December 31, 1997.......... -- -- -- -- 12,966,889 129 1,516 (3,001) (8)
Exercise of stock options........... -- -- -- -- 503,345 5 50 -- --
Net income.......................... -- -- -- -- -- -- -- -- --
----------- -- -------- --- ---------- ---- ------ ------ ---
Balance at March 31, 1998
(unaudited)......................... -- -- -- -- 13,470,234 $134 $1,566 (3,001) $(8)
=========== == ======== === ========== ==== ====== ====== ===
<CAPTION>
NOTE TOTAL
RECEIVABLE STOCK-
FROM RETAINED HOLDERS'
STOCKHOLDER EARNINGS EQUITY
----------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1994.......... -- $ 609 $ 619
Exercise of stock options........... -- -- --
Net income.......................... -- 2,076 2,076
----- ------ -------
Balance at December 31, 1995.......... -- 2,685 2,695
Conversion.......................... -- (113) --
Exercise of stock options........... -- -- 251
Net income.......................... -- 1,615 1,615
----- ------ -------
Balance at December 31, 1996.......... -- 4,187 4,561
Exercise of stock options........... $(533) -- 148
Acquisition of treasury stock....... -- -- (8)
Tax benefit due to stock option
exercise.......................... -- -- 590
Net income.......................... -- 4,325 4,325
----- ------ -------
Balance at December 31, 1997.......... (533) 8,512 9,616
Exercise of stock options........... -- -- 55
Net income.......................... -- 1,372 1,372
----- ------ -------
Balance at March 31, 1998
(unaudited)......................... $(533) $9,884 $11,043
===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE> 64
INTERNATIONAL INTEGRATION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 2,076 $ 1,615 $ 4,325 $ 929 $ 1,372
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 150 267 531 103 200
Provision for doubtful accounts...... -- 73 82 20 --
Loss on disposal of fixed assets..... -- -- 97 -- --
Deferred income taxes................ (910) 163 (17) 3 (66)
Tax benefit due to stock option
exercise........................... -- -- 590 -- --
Changes in operating assets and
liabilities:
Accounts receivable................ (1,814) (2,669) (1,290) 1,848 557
Unbilled revenues.................. (413) 191 (486) (338) 232
Prepaid expenses and other current
assets.......................... (66) (97) (237) (109) (61)
Accounts payable................... 73 290 101 338 244
Accrued expenses................... 1,847 (328) 1,907 154 (594)
Accrued income taxes............... 572 (937) (65) 546 937
Deferred revenues.................. 1,551 1,955 2,672 3,021 (3,549)
------- ------- ------- ------ -------
Net cash provided by (used in)
operating activities.......... 3,066 523 8,210 6,515 (728)
------- ------- ------- ------ -------
Cash flows from investing activities:
Purchases of property and equipment..... (497) (388) (1,788) (564) (212)
Proceeds from sale of fixed assets...... -- -- 25 -- --
Other..................................... (175) 13 23 (2) (46)
------- ------- ------- ------ -------
Net cash used in investing
activities.................... (672) (375) (1,740) (566) (258)
------- ------- ------- ------ -------
Cash flows from financing activities:
Repayment of long-term obligations...... -- -- (177) -- (58)
Proceeds from equipment line of
credit............................... -- -- 500 -- --
Proceeds from exercise of stock
options.............................. -- 251 148 75 55
Purchase of treasury stock.............. -- -- (8) -- --
(Increase) decrease in due from related
parties.............................. (362) 396 -- -- --
(Increase) decrease in due from
officer/stockholder.................. (30) 30 -- -- --
------- ------- ------- ------ -------
Net cash provided by (used in)
financing activities.......... (392) 677 463 75 (3)
------- ------- ------- ------ -------
Net increase (decrease) in cash and cash
equivalents............................. 2,002 825 6,933 6,024 (989)
Cash and cash equivalents, beginning of
period.................................. 1,062 3,064 3,889 3,889 10,822
------- ------- ------- ------ -------
Cash and cash equivalents, end of
period.................................. $ 3,064 $ 3,889 $10,822 $9,913 $ 9,833
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 65
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
International Integration Incorporated ("i-Cube" or the "Company") provides
application migration and custom software development services on a fixed-price,
fixed-time basis to Fortune 1000 companies and other large enterprises.
A summary of the Company's significant accounting policies follows:
(a) 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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Principles of Consolidation
The consolidated financial statements reflect the operations of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
(c) Foreign Currency Translation
Assets and liabilities of the Company's foreign operations denominated in
foreign currencies are translated into United States dollars at exchange rates
prevailing at the balance sheet date. Revenues and expenses for the period are
translated at the average exchange rates in effect during the period. Foreign
currency effects were not material during the periods presented.
(d) Revenue Recognition
The Company derives substantially all of its revenues from technology
consulting services. Revenues from contracts are recognized on the
percentage-of-completion basis. The cumulative impact of any revision in
estimates of the cost to complete and losses on projects in process are
reflected in the period in which they become known. Net revenues exclude
reimbursable expenses charged to customers. Revenues from maintenance contracts
is deferred and recognized ratably over the contractual periods during which
services are performed. Revenues related to time and materials engagements are
recognized when the services are performed.
Deferred revenues include amounts billed in advance for technology
consulting contracts that will be recognized upon performance and amounts
received from customers in excess of revenues recognized to date. Unbilled
revenues represent revenues recognized on contracts in excess of contractual
billings to date and are expected to be collected within one year.
(e) Significant Customers and Concentration of Credit Risk
For the years ended December 31, 1995, 1996 and 1997 and the three months
ended March 31, 1997 and 1998, three, three, five, three and five customers each
accounted for 10% or more of net revenues for the respective period and an
aggregate of 75%, 62%, 83%, 72% and 77% of net revenues, respectively.
Financial instruments that subject the Company to credit risks consist
primarily of trade accounts receivable. As of December 31, 1996 and 1997 and
March 31, 1998, approximately 85%, 86% and 75% of the Company's accounts
receivable were due from three, four and three customers, respectively.
F-7
<PAGE> 66
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
(f) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased. At December 31, 1997 and March 31, 1998,
cash and cash equivalents include overnight repurchase agreements with a bank of
$10,800 and $9,600, respectively. Due to the short-term nature of these
agreements, the Company does not take possession of the underlying collateral,
U.S. Government Agency notes, which are held by the bank.
(g) Depreciation
The Company provides for depreciation of the assets over their estimated
useful lives, using the straight-line method, as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Computers and equipment........................... 3-5 years
Furniture and fixtures............................ 5 years
</TABLE>
As of December 31, 1997 and March 31, 1998, the cost of furniture and
fixtures recorded under capital leases was $473, and the related accumulated
amortization was $47 and $71, respectively. Upon retirement or disposal, the
cost of the asset disposed of and the related accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
(h) Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations and has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," through disclosure only (Note 7).
(i) Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings per Share," in the year
ended December 31, 1997. All historical earnings per share ("EPS") data have
been presented to conform to the provisions of this statement (Note 6). SFAS No.
128 requires the presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents
(using the treasury stock method).
(j) Income Taxes
Deferred income taxes are determined based on the difference between the
financial statements and the tax bases of assets and liabilities, as measured by
the enacted tax rates assumed to be in effect when these differences reverse.
(k) Impairment of Long-Lived Assets
The Company periodically reviews the values assigned to long-lived assets,
including property and equipment and other assets, to determine whether any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
F-8
<PAGE> 67
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
(l) Unaudited First Quarter Information
The unaudited financial statements as of and for the three-month periods
ended March 31, 1997 and 1998 reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations and changes in cash
flows as of and for the periods presented. These unaudited financial statements
should be read in conjunction with the audited financial statements and related
notes thereto. The results for the interim periods presented are not necessarily
indicative of results to be expected for the full year.
(2) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
The Company has a working capital line of credit ("working capital line")
with a financial institution under which the Company may borrow the lesser of
$2,000 or 75% of eligible accounts receivable, as defined in the agreement. The
interest rate on all borrowings under the working capital line is prime plus
1/2% (9.0% at December 31, 1997) and will be reduced to prime upon the
Company's completion of an Initial Public Offering ("IPO"). The working capital
line expires in August 1998 and is collateralized by substantially all assets of
the Company. The Company is required to comply with certain operational and
financial covenants under the agreement if there are borrowings under the
working capital line. At December 31, 1997, the Company was in compliance with
all such covenants. The agreement also provides a $1,000 sublimit for foreign
exchange transactions and the issuance of letters of credit. There were no
borrowings under the working capital line for all periods presented.
In July 1997, the Company obtained an equipment line of credit ("equipment
line") with the same financial institution from which the Company may borrow up
to $500 for qualified capital expenditures, as defined in the agreement. The
interest rate on all borrowings under the equipment line is prime plus 3/4%
(9.25% at December 31, 1997) and will be reduced to prime upon the Company's
completion of an IPO. The Company was able to borrow against this equipment line
until January 31, 1998 (the "draw period"). During the draw period, the Company
was required to make payments of interest only on all outstanding borrowings. At
the conclusion of the draw period, the Company is required to make 36 equal
monthly principal payments plus interest. The Company is required to comply with
certain operational and financial covenants under the agreement if there are
borrowings outstanding under the equipment line. At December 31, 1997, the
Company was in compliance with all such covenants.
Long-term obligations consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Capital lease obligations................................... $440
Equipment line.............................................. 500
----
940
Less-current maturities..................................... 268
----
$672
====
</TABLE>
F-9
<PAGE> 68
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
Maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 348
1999........................................................ 313
2000........................................................ 313
2001........................................................ 122
2002........................................................ 16
------
1,112
Less-amount representing interest........................... 172
------
$ 940
======
</TABLE>
(3) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996, 1997 and
March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- ---------
1996 1997 1998
------ ------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and other payroll expenses............ $ 474 $1,638 $ 921
Accrued other......................................... 575 1,318 1,441
------ ------ ------
$1,049 $2,956 $2,362
====== ====== ======
</TABLE>
(4) INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current
Federal................................................ $1,768 $ 692 $2,118
State.................................................. 566 196 659
------ ------ ------
2,334 888 2,777
Deferred
Federal................................................ (695) 124 (13)
State.................................................. (215) 38 (4)
------ ------ ------
(910) 162 (17)
------ ------ ------
$1,424 $1,050 $2,760
====== ====== ======
</TABLE>
F-10
<PAGE> 69
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
A reconciliation of the Company's income tax provision to the U.S.
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate............................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.................. 6.3 6.3 6.3
Research and development credits............................ (0.7) (1.0) (1.0)
Other, net.................................................. 1.1 .1 (0.3)
---- ---- ----
Effective tax rate................................ 40.7% 39.4% 39.0%
==== ==== ====
</TABLE>
Significant components of the net deferred tax asset as of December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accruals and reserves....................................... $784 $835
Depreciation................................................ 11 (23)
---- ----
Total net deferred tax asset...................... $795 $812
==== ====
</TABLE>
(5) STOCKHOLDERS' EQUITY
Until February 1996, the Company had authorized 12,020,025 and 2,979,975 of
Series A and Series B common shares, respectively, at no par value.
In February 1996, each share of Series A common stock and Series B common
stock, without par value, was converted into one share of common stock, $0.01
par value, with the same voting rights. The Company has authorized 22,000,000
shares consisting of 21,000,000 shares of common stock, $0.01 par value, and
1,000,000 shares of preferred stock, $0.01 par value.
In February 1997, i-Cube's Board of Directors voted a three-for-two stock
split of the Company's common stock, payable as a stock dividend, which became
effective the same day. All share and per share data, except common stock par
value, have been retroactively adjusted to reflect these changes.
In April 1998, i-Cube's Board of Directors voted, and recommended to
i-Cube's stockholders for approval, an increase in the authorized shares of
Common Stock, $0.01 par value, to 100,000,000.
(6) EARNINGS PER SHARE
The following table reconciles the denominator of the basic and diluted
earnings per share computation as shown on the Consolidated Statements of
Income:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic common shares
outstanding................ 12,322,743 12,424,678 12,627,222 12,519,461 13,243,701
Stock options................ 1,141,930 1,257,658 2,536,198 1,736,146 2,787,440
---------- ---------- ---------- ---------- ----------
Diluted common and common
equivalent shares.......... 13,464,673 13,682,336 15,163,420 14,255,607 16,031,141
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 70
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
Options to purchase shares of the Company's common stock of 440,574,
150,000, 139,847, 204,100 and 22,856 for the years ended December 31, 1995,
1996, 1997 and three months ended March 31, 1997 and 1998, respectively, were
outstanding during the respective periods but were not included in the
computation of diluted EPS because the exercise price of the options, which
ranges from $1.33 to $2.20 in 1995, $2.20 in 1996, $5.00 in 1997, $3.00 in the
three months ended March 31, 1997 and $7.00 in the three months ended March 31,
1998, were greater than the average market price of the common stock for the
periods reported. The outstanding options not included in the calculation for
the year ended December 31, 1995 will expire between May 2005 and December 2005.
The outstanding options not included in the calculation for the year ended
December 31, 1996 will expire in September 2005. The outstanding options not
included in the calculation for the year ended December 31, 1997 will expire in
November 2007. The outstanding options not included in the calculation for the
three months ended March 31, 1997 will expire between February 2007 and March
2007. The outstanding options not included in the calculation for the three
months ended March 31, 1998 will expire in March 2008.
(7) STOCK PLANS
(a) 1993 Stock Plan
The Company has a 1993 Stock Plan (the "1993 Plan"), pursuant to which the
Company was authorized to grant to employees, directors and consultants of the
Company statutory and nonstatutory stock options to purchase shares of Series B
common stock (now common stock). Under the 1993 Plan, incentive stock options
may be granted at an exercise price not less than the fair market value of the
Company's common stock on the date of the grant, as determined by the Board of
Directors. Nonqualified options may be granted on terms determined by the Board
of Directors, but at a price of no less than the book value per share or 50% of
the fair market value on the date of grant, whichever is lower. The maximum term
of the options is ten years from date of grant. Upon the adoption of the 1996
Plan, shares remaining ungranted under the 1993 Plan were authorized to be
granted under the 1996 Plan, and the 1993 Plan was then terminated.
(b) 1996 Stock Plan
On January 15, 1996, the Company's Board of Directors adopted the 1996
Stock Plan (the "1996 Plan"), pursuant to which the Company may grant to
employees, directors and consultants of the Company stock options, rights or
awards to purchase shares of common stock. The total number of shares available
for grant under the 1996 Plan was 989,984 at March 31, 1998. Under the 1996
Plan, incentive stock options ("ISOs") may be granted at an exercise price not
less than the fair market value of the Company's common stock on the date of the
grant (110% of fair market value for ISOs granted to holders of more than 10% of
the voting stock of the Company), as determined by the Board of Directors. Stock
options under the 1996 Plan are non-transferable and generally vest over a
four-year period. The maximum term of any option is ten years.
F-12
<PAGE> 71
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
Information related to all stock options granted by the Company is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EXERCISE PRICE
NUMBER OF EXERCISE OPTIONS OF OPTIONS
SHARES PRICE EXERCISABLE EXERCISABLE
--------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994....... 1,099,988 $0.01 354,487 $0.01
Granted............................ 1,259,175 1.59
Exercised.......................... (27,000) 0.01
--------- ----- --------- -----
Outstanding, December 31, 1995....... 2,332,163 0.85 1,166,952 $0.54
Granted............................ 2,952,000 2.00
Exercised.......................... (145,688) 1.72
Forfeited/canceled................. (479,550) 1.99
--------- ----- --------- -----
Outstanding, December 31, 1996....... 4,658,925 1.43 1,728,001 $0.72
Granted............................ 1,931,700 3.43
Exercised.......................... (473,677) 1.44
Forfeited/canceled................. (429,323) 2.17
--------- ----- --------- -----
Outstanding, December 31, 1997....... 5,687,625 2.06 1,997,804 $0.92
Granted............................ 451,500 5.74
Exercised.......................... (503,345) 0.11
Forfeited/canceled................. (95,998) 3.59
--------- ----- --------- -----
Outstanding March 31,
1998(unaudited).................... 5,539,782 $2.51 1,657,628 $1.32
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, REMAINING EXERCISE AT MARCH 31, EXERCISE
PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
---------- ------------ ---------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
$0.01-0.67 728,500 6.53 $0.13 668,880 $0.10
1.33-1.33 21,675 7.08 1.33 13,551 1.33
2.00-2.20 2,721,594 8.23 2.01 840,167 2.02
3.00-3.00 1,180,563 9.08 3.00 133,905 3.00
5.00-5.00 720,450 9.61 5.00 1,125 5.00
7.00-7.00 167,000 9.97 7.00 -- --
---------- --------- ---- ----- --------- -----
$0.01-7.00 5,539,782 8.41 $2.51 1,657,628 $1.32
========== ========= ==== ===== ========= =====
</TABLE>
The exercise price for each of the above grants was determined by the Board
of Directors of the Company to be equal to the fair market value of the common
stock on the day of grant (110% of the fair market value for grants to holders
of more than 10% of the voting stock of the Company). In reaching this
determination at the time of each such grant, the Board considered a broad range
of factors including the illiquid nature of an investment in the Company's
common stock, the Company's historical financial performance, and the Company's
future prospects. Pursuant to the required pro forma disclosure under the fair
value method of
F-13
<PAGE> 72
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
estimating compensation cost, the Company has estimated the fair value of its
stock option grants by using the Black-Scholes option pricing method with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Expected option term (years)................................ 5.0 7.0 7.0
Risk-free interest rate (%)................................. 6.3 6.6 6.4
Dividend yield (%).......................................... 0.0 0.0 0.0
Weighted-average fair value of options granted.............. $0.40 $0.72 $1.20
</TABLE>
The Company applies APB Opinion No. 25 and the related Interpretations.
Accordingly, no compensation cost has been recognized for option grants. Had
compensation cost for these awards been determined based on the fair value at
the grant dates using the minimum value method, consistent with SFAS No. 123,
the Company's net income would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net income
As reported............................................ $2,076 $1,615 $4,325
Compensation expense for stock options................. 56 272 573
------ ------ ------
Pro forma net income................................... $2,020 $1,343 $3,752
====== ====== ======
Basic earnings per share as reported..................... $ 0.17 $ 0.13 $ 0.34
Pro forma basic earnings per share....................... $ 0.16 $ 0.11 $ 0.30
Diluted earnings per share as reported................... $ 0.15 $ 0.12 $ 0.29
Pro forma diluted earnings per share..................... $ 0.15 $ 0.10 $ 0.25
</TABLE>
(8) COMMITMENTS
The Company leases its facilities under operating lease agreements that
expire through October 2002. The following are the future minimum lease payments
under operating leases as of December 31, 1997:
<TABLE>
<S> <C>
1998................................................ $1,108
1999................................................ 1,144
2000................................................ 1,228
2001................................................ 1,140
2002................................................ 45
------
Total minimum lease payments.............. $4,665
======
</TABLE>
Rent expense was $237, $544 and $1,158 for the years ended December 31,
1995, 1996 and 1997, respectively.
(9) RELATED PARTY TRANSACTIONS
In 1995, the Company had net revenues of $36 from an entity whose principal
stockholder is a principal stockholder and a former director of the Company.
In 1995, the Company had net revenues of $366 from an entity of which a
principal stockholder and former director of the Company was a stockholder and
director.
F-14
<PAGE> 73
INTERNATIONAL INTEGRATION INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
During 1995, the Company provided certain management, administrative and
support services and subleased a portion of its facilities to another related
entity. The Company charged the entity $102 during 1995, which was offset
against operating expenses of the Company. The amount charged was included in
due from related party in the Company's balance sheets. During 1996, all amounts
were paid in full.
In 1996, the Company was paid $317 for IT services provided to a company of
which a principal stockholder and a former director of the Company was a
significant shareholder.
During 1997, the Company received a note for $533 from a stockholder for
the exercise of 400,000 stock options. The note is due in October 2000 and
accrues interest at 8.5%, payable at maturity.
(10) 401(k) PLAN
During April 1995, the Company adopted a defined contribution plan (the
"401(k) Plan") under Section 401(k) of the Internal Revenue Code. The 401(k)
Plan allows eligible employees to make contributions up to a specified annual
maximum contribution, as defined. Under the 401(k) Plan, the Company may, but is
not obligated to, match a portion of the employees contributions up to a defined
maximum. The Company did not contribute to the 401(k) Plan during 1995, 1996, or
1997. The Company's contribution to the plan was $32 during the three months
ended March 31, 1998.
(11) SUPPLEMENTARY INFORMATION
During 1997 and the three months ended March 31, 1998, the Company paid
interest of $69 and $22 respectively. No interest was paid in 1995, 1996, or the
three months ended March 31, 1998.
During 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998,
the Company paid $1,762, $1,808, $2,217, $127, and $7, respectively for income
taxes.
The Company entered into obligations under capital leases of $617 during
the period ended December 31, 1997.
During 1997, the Company disposed of various fixed assets with an original
cost of $199.
During 1996 and 1997 the Company paid $1,150 and $249 for executive signing
bonuses, respectively. These amounts are included in general and administrative
expenses.
F-15
<PAGE> 74
[Callout:]
The i-Cube Mission
To help clients create business advantage by rapidly revitalizing and
implementing strategic information solutions
i-Culture Values
These values are deeply held principles that govern and guide i-Cube in its
relationships with clients, team members, partners, communities and other
stakeholders.
- - Trust and respect
- - Integrity
- - Commitment
- - Teamwork
- - A belief that the journey is as important as the destination
i-Culture Vision
Where technical barriers end and business solutions begin. Together, as a team,
we consistently strive to:
- - Deploy brilliant technology
- - Thrill our clients
- - Do the right things right
We are passionate people having fun!
The i-Culture.
Helping the company foster teamwork, entrepreneurial values, leadership and a
commitment to client success.
[GRAPHIC: A stylized depiction of the i-Culture as a cube with sides
representing the people, the technology and the methods i-Cube employs to
deliver value to clients.]
[CAPTION: The i-Culture: i-Cube understands the important role its people play
in delivering solutions to clients.]
[photograph of company employees participating in a team building exercise]
[Section 3:]
The People:
i-Cube believes that the quality of its people will determine the quality of
services it delivers to its clients.
Placing as great a focus on its people as on its technology, i-Cube is committed
to attracting and retaining a team of high-caliber professionals with deep
business and technology experience.
So people, technology and methods work together to deliver results to clients.
It's a culture built on teamwork. The company's investment in its people
includes extensive team-building experiences for all employees. Initial and
ongoing training.
Mentoring. Pay-for-performance. Opportunities for accelerated career
advancement. A flexible work environment. Stock ownership opportunities for all
employees.
<PAGE> 75
I-Cube Logo
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 12,197
NASD filing fee............................................. 4,525
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 120,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 50,000
Miscellaneous............................................... 58,278
--------
Total............................................. $950,000
========
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Registrant's Certificate of
Incorporation, as amended, provides for indemnification of the Registrant's
directors and officers for liabilities and expenses that they may incur in such
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the Registrant, and with respect to any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. Reference is made to the Registrant's Form of
Amended and Restated Certificate of Incorporation filed as Exhibit 3.2 hereto.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
The Company intends to obtain directors and officers liability insurance
for the benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock.
On February 28, 1996, the Company issued an aggregate of 8,231,683
(pre-split) shares of its Common Stock to seven stockholders upon the
conversion of an aggregate of 8,231,683 shares of the common stock of
International Integration Incorporated, a Massachusetts corporation, in
connection with the Company's reincorporation in Delaware. Of these, 18,000
shares were issued to one stockholder upon the conversion of shares issued
(pursuant to an exercise of options under the Company's 1993 Stock Plan) in
the three years preceding the filing of this registration statement; the
balance of these shares were issued to six stockholders upon the conversion
of shares issued more than three years prior to the filing of this
registration statement.
II-1
<PAGE> 77
Between February 28, 1996 and February 4, 1997, the Company issued an
aggregate of 122,625 (pre-split) shares of its Common Stock to eight
stockholders for an aggregate purchase price of $327,975. All of such
issuances were pursuant to option exercises or restricted stock purchases
under the Company's stock plans.
The Company declared a three-for-two stock split, by means of a stock
dividend, effective February 5, 1997. As a result, the holders of 8,354,308
shares received an additional 4,177,154 shares of Common Stock.
Since its reincorporation in Delaware, the Company has repurchased
from stockholders an aggregate of 3,001 (post-split) shares of Common
Stock, which are currently held in treasury by the Company.
Subsequent to the stock split described above, the Company issued an
aggregate of 938,772 (post-split) shares of its Common Stock to 16
stockholders for an aggregate purchase price of $659,547.51. All of such
issuances were pursuant to option exercises or restricted stock purchases
under the Company's stock plans.
(b) Certain Grants and Exercises of Stock Options and Restricted
Stock.
Prior to January 1, 1996, the Company (i) issued options under its
1993 Stock Plan to purchase an aggregate of 1,866,363.5 (post-split) shares
of Common Stock, exercisable at a weighted average exercise price of $.57
per share and (ii) issued an aggregate of 951,188.5 (post-split) shares of
Common Stock at a weighted average purchase price of $.60 per share upon
exercise of certain of such options. Also, during this period, the Company
issued 300,500 (post-split) shares of restricted stock under its 1993 Stock
Plan for a weighted average purchase price of $.01 per share.
From February 29, 1996 through March 31, 1998, the Company (i) issued
options under its 1996 Stock Plan to purchase an aggregate of 4,710,628
(post-split) shares of Common Stock, exercisable at a weighted average
purchase price of $2.84 per share and (ii) issued an aggregate of 86,021
(post-split) shares of Common Stock at a weighted average purchase price of
$2.18 per share upon exercise of certain of such options. Also, during this
period, the Company issued 112,500 (post-split) shares of restricted stock
under its 1996 Stock Plan for a weighted average purchase price of $2.00
per share.
The foregoing exercises of stock options and grants of restricted
stock are also included in the totals in paragraph (a) above.
No underwriters were involved in the foregoing sales of securities.
Such sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative
to sales by an issuer not involving any public offering or the rules and
regulations thereunder, or, in the case of options to purchase Common
Stock, Rule 701 of the Securities Act. All of the foregoing securities are
deemed restricted securities for the purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1* -- Certificate of Incorporation of the Registrant, as amended
3.2* -- Amended and Restated Certificate of Incorporation of the
Registrant, to be filed prior to the closing of this
offering
3.3* -- By-laws of the Registrant, as amended
3.4* -- Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering
4.1* -- Specimen Certificate for Common Stock
5.1* -- Opinion of Hale and Dorr LLP
10.1* -- 1993 Stock Plan
</TABLE>
II-2
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
10.2* -- 1996 Stock Plan
10.3* -- 1998 Stock Incentive Plan
10.4* -- 1998 Non-Employee Director Stock Option Plan
10.5* -- Founding Stockholders' Agreement dated as of May 6, 1997
between the Registrant, Madhav Anand, Yannis Doganis, Sundar
Subramaniam and Edouard Aslanian
10.6* -- Amendment to Founding Stockholders' Agreement dated as May
6, 1997, between the Registrant, Madhav Anand, Yannis
Doganis, Sundar Subramaniam, Edouard Aslanian, Harrington
Trust Limited, as Trustee of The Geneva Trust, and
Subramaniam Limited Partnership
10.7* -- Voting Trust Agreement dated as of October 13, 1997 between
the Registrant, State Street Bank and Trust Company, Sundar
Subramaniam, Subramaniam Limited Partnership and Harrington
Trust Limited, as Trustee of the Geneva Trust
10.8* -- Letter Agreement dated August 8, 1995 between the Registrant
and Silicon Valley Bank
10.9* -- Promissory Note dated August 8, 1995 between the Registrant
and Silicon Valley Bank
10.10* -- Commercial Security Agreement dated August 8, 1995 between
the Registrant and Silicon Valley Bank
10.11* -- Negative Pledge Agreement dated August 8, 1995 between the
Registrant and Silicon Valley Bank
10.12* -- Letter Agreement dated October 7, 1996 between the
Registrant and Silicon Valley Bank
10.13* -- Promissory Note dated July 31, 1997 between the Registrant
and Silicon Valley Bank
10.14* -- Loan Modification Agreements between Registrant and Silicon
Valley Bank dated August 6, August 7, 1996 and August 28,
1997, respectively
10.15* -- Lease Agreement dated November 20, 1996 between the
Registrant, RR&C Development Company and Patrician
Associates, Inc.
10.16* -- Lease Agreement dated as of July 14, 1995 between the
Registrant and Riverfront Office Park Joint Venture
10.17* -- Amendment No. 1 to Lease Agreement dated as of July 14, 1995
between the Registrant and Riverfront Office Park Joint
Venture
10.18* -- Sublease dated as of June 19, 1995 between the Registrant
and MathSoft, Inc.
10.19* -- Letter Agreement dated June 3, 1996 between the Registrant
and Michael Pehl
10.20* -- Letter Agreement dated August 30, 1996 between the
Registrant and Lawrence P. Begley
10.21* -- Letter Agreement dated December 19, 1997 between the
Registrant and Karl-Heinz Dette
10.22* -- Application Transformation Program Agreement dated as of
July 23, 1997 between Hewlett-Packard Company and the
Registrant
10.23* -- Cooperation Agreement dated as of July 9, 1997 between the
Registrant and debis Systemhaus MEB Mercedes EDV Beratung
GmbH
10.24 -- Letter between the Company and the Selling Stockholders
relating to indemnification matters
16.1* -- Letter from Arthur Andersen LLP re: change in certifying
accountants
21.1* -- Subsidiaries of the Registrant
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1* -- Power of Attorney (see page II-5)
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statements Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
II-3
<PAGE> 79
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(2) or (3) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Cambridge, Massachusetts, on this
18th day of June, 1998.
INTERNATIONAL INTEGRATION INCORPORATED
By: /s/ LAWRENCE P. BEGLEY
------------------------------------
Lawrence P. Begley
Executive Vice President, Chief
Financial Officer, Treasurer and
Director (Principal Accounting and
Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
MICHAEL PEHL* Chief Executive Officer and June 18, 1998
- --------------------------------------------------- Chairman (Principal Executive
Michael Pehl Officer)
MADHAV ANAND* President and Director June 18, 1998
- ---------------------------------------------------
Madhav Anand
LAWRENCE P. BEGLEY Executive Vice President, Chief June 18, 1998
- --------------------------------------------------- Financial Officer, Treasurer
Lawrence P. Begley and Director (Principal
Accounting and Financial
Officer)
THOMAS J. MEREDITH* Director June 18, 1998
- ---------------------------------------------------
Thomas J. Meredith
JOSEPH M. TUCCI* Director June 18, 1998
- ---------------------------------------------------
Joseph M. Tucci
GREGORY S. YOUNG* Director June 18, 1998
- ---------------------------------------------------
Gregory S. Young
JOHN A. YOUNG* Director June 18, 1998
- ---------------------------------------------------
John A. Young
PATRICK J. ZILVITIS* Director June 18, 1998
- ---------------------------------------------------
Patrick J. Zilvitis
* /s/ LAWRENCE P. BEGLEY
- ---------------------------------------------------
Lawrence P. Begley
Attorney-in-fact
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1* -- Certificate of Incorporation of the Registrant, as amended
3.2* -- Amended and Restated Certificate of Incorporation of the
Registrant, to be filed prior to the closing of this
offering
3.3* -- By-laws of the Registrant, as amended
3.4* -- Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering
4.1* -- Specimen Certificate for Common Stock
5.1* -- Opinion of Hale and Dorr LLP
10.1* -- 1993 Stock Plan
10.2* -- 1996 Stock Plan
10.3* -- 1998 Stock Incentive Plan
10.4* -- 1998 Non-Employee Director Stock Option Plan
10.5* -- Founding Stockholders' Agreement dated as of May 6, 1997
between the Registrant, Madhav Anand, Yannis Doganis, Sundar
Subramaniam and Edouard Aslanian
10.6* -- Amendment to Founding Stockholders' Agreement dated as May
6, 1997, between the Registrant, Madhav Anand, Yannis
Doganis, Sundar Subramaniam, Edouard Aslanian, Harrington
Trust Limited, as Trustee of The Geneva Trust, and
Subramaniam Limited Partnership
10.7* -- Voting Trust Agreement dated as of October 13, 1997 between
the Registrant, State Street Bank and Trust Company, Sundar
Subramaniam, Subramaniam Limited Partnership and Harrington
Trust Limited, as Trustee of the Geneva Trust
10.8* -- Letter Agreement dated August 8, 1995 between the Registrant
and Silicon Valley Bank
10.9* -- Promissory Note dated August 8, 1995 between the Registrant
and Silicon Valley Bank
10.10* -- Commercial Security Agreement dated August 8, 1995 between
the Registrant and Silicon Valley Bank
10.11* -- Negative Pledge Agreement dated August 8, 1995 between the
Registrant and Silicon Valley Bank
10.12* -- Letter Agreement dated October 7, 1996 between the
Registrant and Silicon Valley Bank
10.13* -- Promissory Note dated July 31, 1997 between the Registrant
and Silicon Valley Bank
10.14* -- Loan Modification Agreements between Registrant and Silicon
Valley Bank dated August 6, August 7, 1996 and August 28,
1997, respectively
10.15* -- Lease Agreement dated November 20, 1996 between the
Registrant, RR&C Development Company and Patrician
Associates, Inc.
10.16* -- Lease Agreement dated as of July 14, 1995 between the
Registrant and Riverfront Office Park Joint Venture
10.17* -- Amendment No. 1 to Lease Agreement dated as of July 14, 1995
between the Registrant and Riverfront Office Park Joint
Venture
10.18* -- Sublease dated as of June 19, 1995 between the Registrant
and MathSoft, Inc.
10.19* -- Letter Agreement dated June 3, 1996 between the Registrant
and Michael Pehl
10.20* -- Letter Agreement dated August 30, 1996 between the
Registrant and Lawrence P. Begley
10.21* -- Letter Agreement dated December 19, 1997 between the
Registrant and Karl-Heinz Dette
10.22* -- Application Transformation Program Agreement dated as of
July 23, 1997 between Hewlett-Packard Company and the
Registrant
10.23* -- Cooperation Agreement dated as of July 9, 1997 between the
Registrant and debis Systemhaus MEB Mercedes EDV Beratung
GmbH
10.24 -- Letter between the Company and the Selling Stockholders
relating to indemnification matters
16.1* -- Letter from Arthur Andersen LLP re: change in certifying
accountants
21.1* -- Subsidiaries of the Registrant
23.1 -- Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
23.2* -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1* -- Power of Attorney (see page II-5)
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
2,500,000 SHARES
INTERNATIONAL INTEGRATION INCORPORATED
COMMON STOCK ($.01 PAR VALUE PER SHARE)
UNDERWRITING AGREEMENT
__________, 1998
<PAGE> 2
_____________, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
UBS Securities LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
International Integration Incorporated, a Delaware corporation
(the "Company"), proposes to issue and sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") an aggregate of 2,500,000 shares of the
common stock, $.01 par value per share, of the Company (the "Firm Shares").
The Company also proposes to issue and sell to the several
Underwriters and certain shareholders of the Company (the "Selling
Shareholders") named in Schedule I hereto severally propose to sell to the
several Underwriters not more than an additional 375,000 shares of common stock,
$.01 par value per share, of the Company (the "Additional Shares"), of which
105,000 shares are to be issued and sold by the Company and 270,000 shares are
to be sold by the Selling Shareholders, each Selling Shareholder selling the
amount set forth opposite such Selling Shareholder's name in Schedule I hereto,
if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 3 hereof. The
Firm Shares and the Additional Shares are hereinafter collectively referred to
as the "Shares." The shares of common stock, $.01 par value per share, of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "Common Stock." The Company and the Selling
Shareholders are hereinafter sometimes collectively referred to as the
"Sellers."
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated
<PAGE> 3
registration statement to register additional shares of Common Stock pursuant to
Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"),
then any reference herein to the term "Registration Statement" shall be deemed
to include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan
Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the
Shares set forth opposite its name on Schedule II to this Agreement, up to
125,000 shares, for sale to the Company's employees, officers, and directors and
other parties associated with the Company (collectively, "Participants"), as set
forth in the Prospectus under the heading "Underwriters" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the business day on
which this Agreement is executed will be offered to the public by Morgan Stanley
as set forth in the Prospectus.
1. Representations and Warranties of the Company. The
Company represents and warrants to and agrees with each of the Underwriters
that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in
-2-
<PAGE> 4
good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold
by the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
-3-
<PAGE> 5
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company
or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole. The Company, in its reasonable judgment, has concluded that any
costs or liabilities associated with Environmental Laws (including,
without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws or
any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) would not,
singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company
and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction, not in the ordinary course of business; (ii) the Company
has not purchased any of its outstanding capital stock, other than
repurchases of shares of common stock of the Company at their original
purchase price made pursuant to
-4-
<PAGE> 6
contractual rights of the Company under stock option or stock
restriction agreements of which the Underwriters or their counsel have
been advised in writing, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock, short-term debt or long-term debt
of the Company and its subsidiaries, except in each case as described in
the Prospectus.
(p) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings
by the Company and its subsidiaries, in each case except as described in
the Prospectus.
(q) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names currently employed by them in connection with the business now
operated by them, and, except as described in the Prospectus, neither
the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect
to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse affect on the Company and its subsidiaries, taken as a
whole.
(r) No material labor dispute with the employees of the Company
or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(s) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent in the Company's reasonable judgment in the
businesses in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied
for; and neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect
-5-
<PAGE> 7
on the Company and its subsidiaries, taken as a whole, except as
described in the Prospectus.
(t) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, other than those which, if not so possessed, would not have
a material adverse effect on the Company and its subsidiaries taken as a
whole, and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described the Prospectus.
(u) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(v) The accountants who have certified or shall certify the
financial statements filed or to be filed with the Commission as part of
the Registration Statement and the Prospectus are independent
accountants as required by the Securities Act. The consolidated
financial statements of the Company and its subsidiaries (together with
the related notes thereto) included in the Registration Statement
present fairly the financial position and results of operations of the
Company and its subsidiaries at the respective dates and for the
respective periods to which they apply, subject to normal year-end
adjustments. Such financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved except as otherwise stated therein.
(w) The Shares have been approved for listing on the Nasdaq
National Market, subject to official notice of issuance.
(x) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement.
-6-
<PAGE> 8
(y) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(z) (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection
with the Directed Share Program, and that (ii) no authorization,
approval, consent, license, order, registration or qualification of or
with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
(aa) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its
products.
2. Representations and Warranties of the Selling
Shareholders. Each of the Selling Shareholders represents and warrants to and
agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Shareholder and the Company, as Custodian, relating to the deposit of
the Shares to be sold by such Selling Shareholder (the "Custody
Agreement") and the Power of Attorney appointing certain individuals as
such Selling Shareholder's attorneys-in-fact to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement (the "Power of Attorney"), will not contravene
any provision of applicable law, or the certificate of incorporation or
by-laws of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon such
Selling Shareholder or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Shareholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Shareholder,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Shareholder
and the legal right and power, and all
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<PAGE> 9
authorization and approval required by law, to enter into this
Agreement, the Custody Agreement and the Power of Attorney and to sell,
transfer and deliver the Shares to be sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to
this Agreement have been duly authorized and are validly issued, fully
paid and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Shareholder and
are valid and binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other
encumbrances.
(g) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 2(g) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
3. Agreements to Sell and Purchase. The Company hereby
agrees to sell to the several Underwriters, and each Underwriter, upon the basis
of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees, severally and not jointly, to purchase
from the Company at $______ a share (the "Purchase Price") the number of Firm
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the number of Firm Shares to be
sold by the Company set forth in Schedule II hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
issue and sell, and each Selling Shareholder, severally and not jointly, agrees
to sell to the Underwriters the Additional Shares in the respective amounts set
forth on Schedule I hereto, and the Underwriters shall have a one-time right to
purchase, severally and not jointly, up to 375,000 Additional Shares at the
Purchase Price. If you, on behalf of the Underwriters, elect to exercise such
option, you shall so notify the
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<PAGE> 10
Company in writing not later than 30 days after the date of this Agreement,
which notice shall specify the number of Additional Shares to be purchased by
the Underwriters and the date on which such shares are to be purchased. Such
date may be the same as the Closing Date (as defined below) but not earlier than
the Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase from each of the Company and the
Selling Shareholders that number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased from
such party as the number of Firm Shares set forth in Schedule II hereto opposite
the name of such Underwriter bears to the total number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, (C) transactions by any person other
than the Company relating to shares of Common Stock or other securities acquired
in open market transactions after the completion of the offering of the Shares
or (D) the issuance by the Company of shares of Common Stock or options to
purchase shares of Common Stock issued pursuant to the Company's existing stock
plans as described in the Prospectus, PROVIDED that any such shares of Common
Stock described in this clause (D), whether to be issued directly or upon
exercise of any option, shall not be issued prior to the 181st day after the
date of the Prospectus unless the recipient of such shares executes and delivers
to you on or before the date of such issuance a "lock-up" agreement
substantially in the form of Exhibit A hereto. The Company agrees that, without
the prior written consent of Morgan Stanley & Co. Incorporated, it will not,
during the period ending 180 days after the date of the Prospectus, file or
cause to become effective any registration statement relating to any securities
of the Company, including a registration statement registering shares under any
of the Company's stock option plans or other employee benefit plans. In
addition, each Selling Shareholder, agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 180 days after the date of the Prospectus,
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
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<PAGE> 11
4. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold
by the Company shall be made to the Company in Federal or other funds
immediately available in New York City against delivery of such Firm Shares for
the respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1998, or at such other time on the same or such other
date, not later than _________, 1998, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "Closing
Date." The closing of the offering and sale of the Firm Shares will be held at
the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts.
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than _______, 1998, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "Option Closing Date." The closing of the offering and sale of the
Additional Shares will be held at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts.
Certificates for the Firm Shares and Additional Shares shall be
in definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The
obligations of the Sellers to sell the Shares to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Shares on
the Closing Date are subject to the condition that the Registration Statement
shall have become effective not later than __________ (New York City time) on
the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
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<PAGE> 12
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) if any of the Company's securities are rated by any
"nationally recognized statistical rating organization," as such
term is defined for purposes of Rule 436(g)(2) under the
Securities Act, there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any such securities; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 6(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Hale and Dorr LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in the Commonwealth of
Massachusetts and the State of California, which are the only
jurisdictions in the United States in which the Company, to such
counsel's knowledge, maintains an office or owns or leases
property;
(ii) to such counsel's knowledge, the Company has no
subsidiaries except as set forth on Exhibit 21.1 of the
Registration Statement or as set forth on a
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<PAGE> 13
schedule to be provided by or on behalf of the Underwriters, and
each such subsidiary of the Company (other than International
Integration GmbH, as to which such counsel need not express any
opinion) has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction
of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing in the Commonwealth of Massachusetts;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof contained
in the Prospectus and the Shares have been duly authorized for
quotation on the Nasdaq National Market;
(iv) the shares of Common Stock (including the Shares to
be sold by the Selling Shareholders) outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
domestic subsidiary of the Company listed on Exhibit 21.1 of the
Registration Statement or that is listed on a schedule to be
provided by or on behalf of the Underwriters have been duly and
validly authorized and issued, are fully paid and non-assessable
and are owned of record directly by the Company, and none of the
documents filed as an exhibit to the Registration Statement or
that are listed on a schedule to be provided by or on behalf of
the Underwriters create any liens, encumbrances, equities or
claims on any such shares;
(vi) the Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for by the
Underwriters in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive
rights under the Delaware General Corporation Law or, to such
counsel's knowledge, similar rights granted by contract;
(vii) this Agreement has been duly authorized, executed
and delivered by the Company;
(viii) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or
the certificate of incorporation or by-laws of the Company or, to
the best of such counsel's knowledge, any agreement or other
instrument binding upon the Company or any of its subsidiaries
that has been filed as an exhibit to the Registration Statement
or that is listed on a schedule to be provided by or on behalf of
the Underwriters, or, to the best of such counsel's knowledge,
any judgment, order or decree of any governmental body, agency or
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<PAGE> 14
court having jurisdiction over the Company or any subsidiary, and
no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by the Company of its obligations under this
Agreement, except such as have been obtained or made under the
Securities Act and such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer
and sale of the Shares;
(ix) to such counsel's knowledge, (i) no shares of Common
Stock are required pursuant to any agreement or other right to be
registered under the Registration Statement, and (ii) no person
has the right to require such registration, except such rights
that have either been satisfied or validly waived;
(x) the statements (A) in the Prospectus under the
captions "Risk Factors - Shares Eligible for Future Sale," "Risk
Factors - Potential Adverse Effects of Anti-Takeover Provisions;
Availability of Preferred Stock for Issuance," "Management -
Benefit Plans," "Description of Capital Stock," "Shares Eligible
for Future Sale" and the first, second, fourth and sixth
paragraphs under "Underwriters" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the
information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(xi) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
the Company or any of its subsidiaries is a party or to which any
of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended; and
(xiii) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical data
included therein as to which such counsel need not express any
opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Registration Statement and the prospectus included
therein at the time the
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<PAGE> 15
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (C) has no reason to believe that
(except for financial statements and schedules and other
financial and statistical data as to which such counsel need not
express any belief) the Prospectus contains any untrue statement
of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Coopers & Lybrand Gesellschaft mit beschrankter Haftung,
German counsel for the Company, dated the Closing Date, to the effect
that:
(i) International Integration GmbH (the "German
Subsidiary") has been duly incorporated, is validly existing as a
corporation under the laws of Germany, has the corporate power
and authority to own its property and to conduct its business as
now conducted and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(ii) all of the issued shares of capital stock of the
German Subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances,
equities or claims, and there are no options, warrants or rights
to purchase, or other agreements or obligations to issue, or
rights to convert any obligation into any shares of capital stock
or ownership interest in the German Subsidiary; and
(iii) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened to
which the German Subsidiary is a party or to which any of the
properties of the Germany Subsidiary is subject.
(e) The Underwriters shall have received on the Closing Date an
opinion of Morse, Barnes-Brown & Pendleton, P.C., counsel for the
Selling Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;
(ii) the execution and delivery by each Selling
Shareholder of, and the performance by such Selling Shareholder
of its obligations under, this Agreement and the Custody
Agreement and Powers of Attorney of such Selling Shareholder will
not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling
Shareholder (if such Selling Shareholder
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<PAGE> 16
is a corporation), or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon such Selling
Shareholder or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Shareholder, and no
consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by such Selling Shareholder of its obligations under
this Agreement or the Custody Agreement or Power of Attorney of
such Selling Shareholder, except such as have been obtained or
made under the Securities Act and such as may be required by the
securities or Blue Sky laws of the various states in connection
with offer and sale of the Shares;
(iii) each of the Selling Shareholders has sole and
exclusive rights and interests in and to the Shares to be sold by
such Selling Shareholder and the legal right and power, and all
authorization and approval required by law, to enter into this
Agreement and the Custody Agreement and Power of Attorney of such
Selling Shareholder and to sell, transfer and deliver the Shares
to be sold by such Selling Shareholder;
(iv) the Custody Agreement and the Power of Attorney of
each Selling Shareholder have been duly authorized, executed and
delivered by such Selling Shareholder and are valid and binding
agreements of such Selling Shareholder; and
(v) upon the Underwriters obtaining control of the Shares
to be sold by the Selling Shareholders, and assuming the
Underwriters acquired such Shares for value and without notice of
any adverse claim to such Shares within the meaning of Section
8-102 of the Uniform Commercial Code as in effect in The
Commonwealth of Massachusetts, the Underwriters will have
acquired all rights the Selling Shareholders in such Shares free
of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
(f) The Underwriters shall have received on the Closing Date an
opinion of Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to
in Sections 6(c)(vi), 6(c)(vii), 6(c)(x) (but only as to the statements
in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 6(c)(xiii) above.
With respect to the first two clauses of Section 6(c)(v) above,
Hale and Dorr LLP may rely on an opinion of local counsel to any
subsidiary of the Company in giving such opinion, provided that (A)
counsel for the subsidiary is satisfactory to your counsel, (B) a copy
of each opinion so relied upon is delivered to you and is in form and
substance satisfactory to your counsel, and (C) Hale and Dorr LLP shall
state in their opinion that
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<PAGE> 17
they are justified in relying on each such other opinion. With respect
to Section 6(c)(xiii) above, Hale and Dorr LLP and Testa, Hurwitz &
Thibeault, LLP may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified. With respect to Section 6(e) above,
Morse, Barnes-Brown & Pendleton, P.C. may rely upon an opinion or
opinions of counsel for any Selling Shareholders and, with respect to
factual matters and to the extent such counsel deems appropriate, upon
the representations of each Selling Shareholder contained herein and in
the Custody Agreement and Power of Attorney of such Selling Shareholder
and in other documents and instruments; provided that (A) each such
counsel for the Selling Shareholders is satisfactory to your counsel,
(B) a copy of each opinion so relied upon is delivered to you and is in
form and substance satisfactory to your counsel, (C) copies of such
Custody Agreements and Powers of Attorney and of any such other
documents and instruments shall be delivered to you and shall be in form
and substance satisfactory to your counsel and (D) Morse, Barnes-Brown &
Pendleton, P.C. shall state in their opinion that they are justified in
relying on each such other opinion.
The opinion of Hale and Dorr LLP, Coopers & Lybrand Gesellschaft
mit beschrankter Haftung and Morse, Barnes-Brown & Pendleton, P.C.
described in Sections 6(c), 6(d) and 6(e) above (and any opinions of
counsel for any Selling Shareholder referred to in the immediately
preceding paragraph) shall be rendered to the Underwriters at the
request of the Company or one or more of the Selling Shareholders, as
the case may be, and shall so state therein.
(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Coopers & Lybrand L.L.P., independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents and opinions of counsel as you may reasonably
request with respect to the good standing of the Company, the due authorization
and issuance of the Additional Shares and other matters related to the issuance
of the Additional Shares.
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<PAGE> 18
7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 7(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending June 30, 1999 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of
the Commission thereunder.
(f) That in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale,
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<PAGE> 19
transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which
Participants will need to be so restricted. The Company will direct the
transfer agent to place stop transfer restrictions upon such securities
for such period of time.
(g) To comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share
Program.
8. Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Sellers
agree to pay or cause to be paid all expenses incident to the performance of
their obligations under this Agreement, and that (a) the Company shall pay: (i)
the fees, disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the Shares under
the Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to listing the Shares on the
Nasdaq National Market, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, (ix) all fees
and disbursements of counsel incurred by the Underwriters in connection with the
Directed Share Program and stamp duties, similar taxes or duties or other taxes,
if any, incurred by the Underwriters in connection with the Directed Share
Program, and (x) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section; and (b) each Selling Shareholder will pay or cause to be paid
all costs and expenses incident to the performance of such Selling Shareholder's
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<PAGE> 20
obligations under this Agreement which are not otherwise specifically provided
for in this Section 8, including (i) any fees and expenses of counsel for such
Selling Shareholder, (ii) such Selling Shareholder's pro rata share of the fees
and expenses of the Attorney-in-Fact and the Custodian; and (iii) all costs and
expenses related to the transfer, sale and delivery of the Shares to be sold by
such Selling Shareholder to the Underwriters, including any transfer or other
taxes payable thereon. It is understood, however, that except as provided in
this Section, Section 9 entitled "Indemnity and Contribution," and the last
paragraph of Section 11 below, the Underwriters will pay all of their costs and
expenses, including fees and disbursements of their counsel, stock transfer
taxes payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise
affect any agreement that the Sellers may otherwise have for the allocation of
such expenses among themselves.
9. Indemnity and Contribution.
(a) The Sellers, jointly and severally, agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(b) The Company agrees to indemnify and hold harmless Morgan
Stanley and each person, if any, who controls Morgan Stanley within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("Morgan Stanley Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any
untrue statement or alleged untrue statement of a material fact
contained in the prospectus wrapper material prepared by or with the
consent of the Company for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus or
any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary
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<PAGE> 21
prospectus, not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii)
related to, arising out of, or in connection with the Directed Share
Program, provided that, the Company shall not be responsible under this
subparagraph (iii) for any losses, claim, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to
have resulted from the bad faith or gross negligence of Morgan Stanley
Entities.
(c) Each Selling Shareholder agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers
who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented
if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to
information relating to such Selling Shareholder furnished in writing by
or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company
or any Selling Shareholder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented
if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to
information relating to such Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(e) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 9(a), 9(b), 9(c) or
9(d), such person (the "indemnified party") shall promptly
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<PAGE> 22
notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, (ii) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of
either such Section and (iii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Selling
Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriters and such control persons
of any Underwriters, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In the case of any such separate firm for
the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Shareholders and such
control persons of any Selling Shareholders, such firm shall be
designated in writing by the Selling Shareholders. The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested in writing an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel as contemplated by the second and
third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request
and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of
such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such
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<PAGE> 23
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such proceeding. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to
Section 9(b) hereof in respect of such action or proceeding, then in
addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses
of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons,
if any, who control Morgan Stanley within the meaning of either Section
15 of the Act or Section 20 of the Exchange Act.
(f) To the extent the indemnification provided for in Section
9(a), 9(b), 9(c) or 9(d) is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified
party or parties on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause 9(f)(i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 9(f)(i) above but also
the relative fault of the indemnifying party or parties on the one hand
and of the indemnified party or parties on the other hand in connection
with the statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Sellers on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 9 are several in proportion to the
respective number of Shares they have purchased hereunder, and not
joint.
(g) The Sellers and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to
in Section 9(f). The amount paid or payable by an indemnified party as a
result of the losses,
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<PAGE> 24
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section
9 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(h) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of
the Company and the Selling Shareholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, any
Selling Shareholder or any person controlling any Selling Shareholder,
or the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
(i) Notwithstanding anything to the contrary set forth in this
Agreement, the aggregate liability of each Selling Shareholder under the
representations and warranties contained in Section 2(g) of this
Agreement and for indemnification and contribution under Section 9 of
this Agreement shall in no event exceed the net proceeds received by
such Selling Shareholder from the Underwriters in the offering of Shares
under this Agreement.
10. Termination. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
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<PAGE> 25
11. Effectiveness; Defaulting Underwriters. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you, the
Company and the Selling Shareholders for the purchase of such Firm Shares are
not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders. In any such case either you or the relevant Sellers
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of any Seller to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
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<PAGE> 26
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 27
Very truly yours,
INTERNATIONAL INTEGRATION INCORPORATED
By: ______________________________________
Name:
Title:
The Selling Shareholders
named in Schedule I hereto,
acting severally
By: ______________________________________
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
UBS Securities LLC
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By: ______________________________
Name:
Title:
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<PAGE> 28
SCHEDULE I
NUMBER OF ADDITIONAL
SHARES TO BE SOLD
--------------------
Company ............................................... 105,000
SELLING SHAREHOLDER:
Madhav Anand .......................................... 75,000
Edouard Aslanian ...................................... 55,000
Yannis Doganis ........................................ 75,000
Gary C. Mekikian ...................................... 65,000
-------
Total ............................................ 375,000
=======
<PAGE> 29
SCHEDULE II
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------------
Morgan Stanley & Co. Incorporated .....................
BT Alex. Brown Incorporated ...........................
UBS Securities LLC ....................................
Total ......................................... 2,500,000
=========
<PAGE> 30
EXHIBIT A
[FORM OF LOCK-UP LETTER]
____________, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
UBS Securities LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement
(the "Underwriting Agreement") with International Integration Incorporated, a
Delaware corporation (the "Company"), providing for the public offering (the
"Public Offering") by the several Underwriters, including Morgan Stanley (the
"Underwriters"), of ________ shares (the "Shares") of the common stock, $.01 par
value per share, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written
<PAGE> 31
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-----------------------------
(Name)
-----------------------------
(Address)
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<PAGE> 1
June ___, 1998
Mr. Madhav Anand
812 Memorial Drive, #1308
Cambridge, MA 02139
Mr. Edouard Aslanian
345 Manhattan Avenue
Hermosa Beach, CA 90254
Mr. Yannis Doganis
238-244 Columbia Street
Cambridge, MA 02139
Mr. Gary Mekikian
115 Skyline Drive
Burbank, CA 91501
Dear Sirs:
As you know, International Integration Incorporated (the "Company") has
filed a Registration Statement on Form S-1, File No. 333-50889 (the
"Registration Statement") with the Securities and Exchange Commission in order
to effect a public offering of the common stock, $.01 par value per share, of
the Company. You will participate in the public offering by selling shares in
the over-allotment option if it is exercised by the underwriters. In connection
therewith, each of you (the "Selling Stockholders") will become party to an
Underwriting Agreement among the Company, Morgan Stanley & Co. Incorporated, BT
Alex. Brown Incorporated and UBS Securities LLC, as representatives of the
underwriters (the "Underwriters") and you (the "Underwriting Agreement").
Pursuant to the Underwriting Agreement, you have agreed to indemnify the
Underwriters against liabilities arising from certain untrue statements or
alleged untrue statements of a material fact contained in the Registration
Statement or certain omissions or alleged omissions to state a material fact,
whether or not such information was provided by you. Accordingly, and in
consideration of our mutual agreements set forth in this letter agreement, you
and the Company hereby agree as follows:
(a) The Company hereby agrees that it shall indemnify and hold harmless
each Selling Stockholder and each other person, if any, who controls such
Selling Stockholder within the meaning of the Securities Act of 1933, as amended
(the "Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") against any losses, claims, damages or liabilities, joint or
several (including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim), to which such Selling
<PAGE> 2
Mr. Madhav Anand
Mr. Edouard Aslanian
Mr. Yannis Doganis
Mr. Gary Mekikian
June ___, 1998
Page 2
Stockholder or controlling person may become subject under the Securities Act,
the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any preliminary
prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to the Registration Statement, or arise out of or are
based upon the omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made in the Registration Statement,
preliminary prospectus or final prospectus, or any such amendment or supplement,
in reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of such Selling Stockholder or controlling person
specifically for use in the preparation thereof.
(b) Each Selling Stockholder, severally and not jointly, hereby agrees
to indemnify and hold harmless the Company, each of its directors and officers
and each person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim), to which the Company, such directors and officers or
controlling person may become subject under the Securities Act, Exchange Act,
state securities or Blue Sky laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any amendment or
supplement to the Registration Statement, or arise out of or are based upon any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, if the
statement or omission was made in reliance upon and in conformity with
information relating to such Selling Stockholder furnished in writing to the
Company by or on behalf of such Selling Stockholder specifically for use in
connection with the preparation of the Registration Statement, prospectus,
amendment or supplement.
(c) Each party entitled to indemnification under this Agreement (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has
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Mr. Madhav Anand
Mr. Edouard Aslanian
Mr. Yannis Doganis
Mr. Gary Mekikian
June ___, 1998
Page 3
actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; PROVIDED, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, PROVIDED, FURTHER, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Agreement except to the extent that the Indemnifying
Party is prejudiced thereby. The Indemnified Party may participate in such
defense at such party's expense; PROVIDED, HOWEVER, that the Indemnifying Party
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation without the
prior written consent of the Indemnifying Party.
(d) If the indemnification provided for herein is unavailable to or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions in
respect thereof) referred to therein for any reason, then each Selling
Stockholder shall be liable for the portion of the losses, claims, damages or
liabilities as is equal to the portion represented by the percentage that the
public offering price of the shares sold by such Selling Stockholder bears to
the public offering price of all securities offered by the Registration
Statement, and the Company shall be responsible for the remaining portion;
provided, however, that in any such case, no Selling Stockholder shall be
required to contribute any amount in excess of the proceeds to it of all shares
sold by it pursuant to the Registration Statement. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
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Mr. Madhav Anand
Mr. Edouard Aslanian
Mr. Yannis Doganis
Mr. Gary Mekikian
June ___, 1998
Page 4
EXECUTED under seal as of the date set forth above.
Very truly yours,
INTERNATIONAL INTEGRATION
INCORPORATED
By:________________________________
Name:______________________________
Title:_____________________________
ACCEPTED AND AGREED:
- ------------------------------
Madhav Anand
- ------------------------------
Edouard Aslanian
- ------------------------------
Yannis Doganis
- ------------------------------
Gary Mekikian
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated March 16, 1998, on our audits of the consolidated financial
statements of International Integration Incorporated. We also consent to the
references to our firm under the captions "Experts" and "Selected Financial
Data."
/s/ Coopers & Lybrand L.L.P.
------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 18, 1998
