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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-24409
INTERNATIONAL INTEGRATION INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction
Incorporation or Organization)
101 MAIN STREET, CAMBRIDGE, MA
(Address of Principal Executive Offices)
04-3169145
(I.R.S. Employer
Identification No.)
02142
(Zip Code)
617-250-2500
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 11, 1998 there were 16,175,432 shares of Common Stock, $.01 par
value, outstanding.
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 2
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-12
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
Exhibit 27.1 Financial Data Schedule
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $41,559 $10,822
Accounts receivable, net of reserve of $112 and $196, respectively 6,870 5,906
Unbilled revenues 2,134 708
Prepaid expenses and other current assets 127 429
Deferred income taxes 1,126 812
------- -------
Total current assets 51,816 18,677
Property and equipment, at cost:
Computers and equipment 2,623 2,527
Furniture and fixtures 1,014 602
------- -------
Total property and equipment, at cost 3,637 3,129
Less- accumulated depreciation 1,257 838
------- -------
Total property and equipment, net 2,380 2,291
Other assets 582 144
------- -------
Total assets $54,778 $21,112
======= =======
Current liabilities:
Accounts payable $ 1,027 $ 483
Accrued expenses 4,313 2,956
Current portion of long-term obligations 254 268
Accrued income taxes 126 1
Deferred revenues 6,879 7,116
------- -------
Total current liabilities 12,599 10,824
Long-term obligations 556 672
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; 161 129
16,146,741 and 12,537,467 shares issued at June 30,
1998 and 1997, respectively; 16,143,740 and 12,534,466
shares outstanding at June 30, 1998 and 1997, respectively
Additional paid-in capital 30,537 1,516
Treasury stock, 3,001 shares at cost (8) (8)
Note receivable from stockholder (533) (533)
Retained earnings 11,464 8,512
Cumulative translation adjustment 2 -
------- -------
Total stockholders' equity 41,623 9,616
------- -------
Total liabilities and stockholders' equity $54,778 $21,112
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 9,901 $ 6,633 $18,729 $12,231
Project personnel and software costs 4,034 2,474 7,646 4,474
------- ------- ------- -------
Gross profit 5,867 4,159 11,083 7,757
Operating expenses
Selling and marketing 1,076 808 1,926 1,438
General and administrative 2,410 1,672 4,657 3,169
------- ------- ------- -------
Total operating expenses 3,486 2,480 6,583 4,607
------- ------- ------- -------
Operating income 2,381 1,679 4,500 3,150
Other income, net 166 76 296 128
------- ------- ------- -------
Income before income taxes 2,547 1,755 4,796 3,278
Provision for income taxes 966 684 1,843 1,278
======= ======= ======= =======
Net income $ 1,581 $ 1,071 $ 2,953 $ 2,000
======= ======= ======= =======
Earnings per share
Basic $ 0.12 $ 0.09 $ 0.22 $ 0.16
======= ======= ======= =======
Diluted $ 0.09 $ 0.07 $ 0.18 $ 0.14
======= ======= ======= =======
Weighted average shares outstanding
Basic 13,729 12,535 13,473 12,527
Diluted 17,384 14,646 16,874 14,459
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,953 $ 2,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 419 208
Loss on disposal of fixed assets - 97
Deferred income taxes (314) (585)
Changes in operating assets and liabilities:
Accounts receivable (964) (519)
Unbilled revenues (1,426) 5
Prepaid expenses and other current assets 302 50
Accounts payable 544 14
Accrued expenses 1,357 950
Accrued income taxes 125 (66)
Deferred revenues (238) 2,641
------- -------
Net cash provided by operating activities 2,758 4,795
Cash flows from investing activities:
Purchases of property and equipment (508) (1,099)
Other (438) (50)
------- -------
Net cash used in investing activities (946) (1,149)
Cash flows from financing activities:
Repayment of long-term obligations (129) (112)
Proceeds from exercise of stock options 335 88
Proceeds from initial public offering 28,719 -
Purchase of treasury stock - (7)
------- -------
Net cash provided by (used in) financing activities 28,925 (31)
------- -------
Net increase in cash and cash equivalents 30,737 3,615
Cash and cash equivalents, beginning of period 10,822 3,889
------- -------
Cash and cash equivalents, end of period $41,559 $ 7,504
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by International Integration Incorporated ("i-Cube" or the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read
in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 1997 included in the Company's Registration
Statement on Form S-1 (File No. 333-50889). The accompanying consolidated
financial statements reflect all normal and recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of
results for these interim periods presented. The results of operations for
the three and six month periods ended June 30, 1998, are not necessarily
indicative of results to be expected for the full year.
2. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("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. 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).
The following table reconciles the denominator of the basic and
diluted earnings per share computation as shown on the Consolidated
Statements of Income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic common shares outstanding 13,729 12,535 13,473 12,527
Stock options 3,655 2,111 3,401 1,932
------ ------ ------ ------
Diluted common and common
equivalent shares 17,384 14,646 16,874 14,459
</TABLE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position ("SOP") 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use", was
issued which provides guidance in addressing whether and under what
condition the costs of internal-use software should be capitalized. SOP
98-1 is effective for transactions entered into in fiscal years beginning
after December 15, 1998, however earlier adoption is encouraged. The
Company adopted the guidelines of SOP 98-1 as of January 1, 1998, and the
impact of such adoption was not material to results of operations or cash
flows for the six month period or the three month period ended June 30,
1998.
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INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
International Integration Incorporated ("i-Cube") provides application
migration and custom software development services on a fixed-price, fixed-time
basis to Fortune 1000 companies and other large enterprises. i-Cube 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. The Company offers a
full range of iMPACT services including information systems consulting,
application migration, custom software development and customer support.
The Company derives substantially all of its revenues from technology
consulting services. The Company's services are principally provided on a
fixed-price, fixed-time basis. 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.
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 clients for a
majority of its revenues. During the six months ended June 30, 1998 revenues
from four clients accounted for 24%, 15%, 12% and 12%, respectively, of the
Company's net revenues. During 1997, revenues from five clients 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 contracts with a small number of
customers.
The Company's revenues and earnings may fluctuate from quarter to
quarter based on the number, size and scope of projects in which the Company is
engaged, the contractual terms and degree of completion of such projects, any
delays incurred in connection with a project, the accuracy of estimates of
resources required to complete ongoing projects, general economic conditions and
other factors.
6
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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 Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Project personnel and software costs 41 37 41 37
--- --- --- ---
Gross profit 59 63 59 63
Operating expenses:
Selling and marketing 11 12 10 12
General and administrative 24 26 25 26
--- --- --- ---
Total operating expenses 35 38 35 38
--- --- --- ---
Operating income 24 25 24 25
Other income, net 2 1 2 1
--- --- --- ---
Income before income taxes 26 26 26 26
Provision for income taxes 10 10 10 10
--- --- --- ---
Net income 16% 16% 16% 16%
=== === === ===
</TABLE>
NET REVENUES
The Company's net revenues increased by $3.3 million, or 49%, to $9.9
million in the three months ended June 30, 1998 from $6.6 million for the
comparable period in 1997. Net revenues increased by $6.5 million, or 53% to
$18.7 million in the first six months of 1998 from $12.2 million for the
comparable period in 1997. This increase in net revenues was primarily
attributable to an increased volume of projects from new customers and the
leveraging of existing client relationships to obtain repeat business. During
the three months ended June 30, 1998, the Company's five largest customers
accounted for 72% of net revenues as compared to 81% for the comparable period
in 1997. During the three months ended June 30, 1998, the Company had four
customers that each accounted for 10% or more of net revenues.
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 63%, to $4.0 million in the three months
ended June 30, 1998 from $2.5 million for the comparable period in 1997. As a
percentage of net revenues, these costs were 41% and 37%, respectively, in the
1998 and 1997 periods. Project personnel and software costs increased 71%, to
$7.6 million in the six months ended June 30, 1998 from $4.5 million for the
comparable period in 1997. As a percentage of net revenues, these costs were 41%
and 37%, respectively, in the 1998 and 1997 periods. The dollar and percentage
increase in project personnel and software costs in both the three month and six
month periods in 1998 were 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. Project personnel
headcount increased to 172 at June 30, 1998 from 121 at June 30, 1997.
7
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SELLING AND MARKETING
Selling and marketing costs consist primarily of compensation and
related costs of sales and marketing personnel, travel expenses and marketing
programs and promotion costs. Selling and marketing costs increased 33%, to $1.1
million in the three months ended June 30, 1998 from $0.8 million for the
comparable period in 1997. As a percentage of net revenues, these costs were 11%
and 12% in the three months ended June 30, 1998 and 1997, respectively. Selling
and marketing costs increased 34% to $1.9 million in the six months ended June
30, 1998 from $1.4 million for the comparable period in 1997. As a percentage of
net revenues, these costs were 10% and 12%, respectively, in the six months
ended June 30, 1998 and 1997. The increase in selling and marketing costs in
absolute dollars was primarily attributable to increased spending on promotional
activities. Sales and marketing personnel remained constant at 17 employees at
June 30, 1998 and 1997.
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 44% to $2.4
million in the three months ended June 30, 1998 from $1.7 million for the
comparable period in 1997. As a percentage of net revenues, these costs were 24%
and 26%, respectively, in the three months ended June 30, 1998 and 1997.
General and administrative costs increased 47% to $4.7 million in the six months
ended June 30, 1998 from $3.2 million for the comparable period in 1997. As a
percentage of net revenues, these costs were 25% and 26%, respectively, in
the six months ended June 30, 1998 and 1997. The decline in general and
administrative costs as a percentage of revenues reflects a decline in
administrative staff as a percentage of total staff and more efficient space
utilization of the Company's facilities in 1998. The increase in general and
administrative costs in absolute dollars was primarily attributable to an
increase in general and administrative personnel to 33 at June 30, 1998 from 20
at June 30, 1997.
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 $166,000 and $76,000
for the three months ended June 30, 1998 and 1997, respectively. Other income,
net was approximately $296,000 and $128,000 for the six months ended June 30,
1998 and 1997, respectively. The increase in other income, net was principally
due to the year over year increase in cash and cash equivalents.
PROVISION FOR INCOME TAXES
The Company's effective rate for federal and state income taxes was 39%
for 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
In June, 1998 the Company completed an initial public offering of
common stock resulting in net proceeds to the Company of approximately $28.7
million.
The Company's cash balances increased to $41.6 million at June 30, 1998
from $10.8 million at December 31, 1997. The increase in cash was primarily due
to proceeds from the Company's initial public offering and cash generated from
operations. The Company's working capital was $39.2 million at June 30, 1998 as
compared to $7.9 million at December 31, 1997.
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The Company's operating activities provided cash from operations of
$2.8 million for the six months ended June 30, 1998 as compared to $4.8 million
provided from operations for the comparable period in 1997. The decrease in cash
provided from operations in 1998 as compared to 1997 was due principally to an
increase in unbilled revenues in 1998 as compared to a decrease in 1997 and to a
decrease in deferred revenues in 1998 as compared to an increase in 1997. The
increase in unbilled revenues and lower deferred revenues in 1998 were the
result of the timing of milestone billings on some of the Company's fixed price
contracts.
The Company used cash of $0.9 million for investing activities for the
six months ended June 30, 1998 as compared to $1.1 million used in the
comparable period of 1997. Cash used for investing activities consisted
primarily of purchases of property and equipment, principally computer equipment
and software, to support the growing base of employees and costs associated with
the implementation of the Company's internal financial system.
The Company maintains a $2.0 million working capital line of credit
(the "Line") with Silicon Valley Bank, which expires in August 1998. Under the
Line, the Company may borrow the lesser of $2.0 million or 75% of eligible
accounts receivable, as defined in the loan agreement. The Company is required
to comply with certain operational and financial covenants under the Line if
there are borrowings under the Line. At June 30, 1998 the Company was in
compliance with these requirements and no borrowings have been made under the
Line.
The Company expects that cash flows from operations and the net
proceeds from its initial public offering will be sufficient to meet the working
capital requirements of the Company for at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position ("SOP") 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use", was issued
which provides guidance in addressing whether and under what condition the costs
of internal-use software should be capitalized. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998,
however earlier adoption is encouraged. The Company adopted the guidelines of
SOP 98-1 as of January 1, 1998, and the impact of such adoption was not material
to results of operations or cash flows for the six months or three months ended
June 30, 1998.
SAFE HARBOR PROVISION
This Form 10-Q includes forward-looking statements (statements that are
not historical facts) such as statements about future net revenues and profits,
capital expenditures, liquidity sources and needs, working capital needs,
increase in personnel and related costs, opening additional offices, general and
administrative expenses, sales and marketing expenses, and other costs as a
percentage of net revenues. These forward-looking statements are subject to
several risks and uncertainties and the Company's actual future results may
differ significantly from those stated in any forward looking statements. While
it is impossible to identify each factor and event that could affect the
Company's results, variations in the Company's revenues and operating results
occur from time to time as a result of a number of factors, such as the
significance of client engagements commenced and completed during the period,
the number of working days in a period, employee hiring, retention, and
acceptance and profitability of the Company's services in new territories.
The timing of revenues is difficult to forecast because the Company's sales
cycle is relatively long in the case of new clients and may depend on factors
such as the size and scope of the assignments and general economic conditions.
Because a high percentage of the Company's expenses are relatively fixed, a
variation in the timing of the initiation or the completion of client
assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from period to period.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
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.
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.
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. 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.
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. 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. 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.
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. 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.
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'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 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
10
<PAGE> 12
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.
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. There can be no assurance that
the Company can successfully maintain these relationships or establish similar
relationships with others.
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 Company's future success depends to a significant extent on its
executive officers. 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.
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. 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'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. 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.
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.
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.
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
that can adversely affect international operations.
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The Company's assessment of its exposure to Year 2000 problems is not
complete. Although the Company believes that it has no material exposure to Year
2000 problems with respect to its own information technology systems, the
Company is taking steps to verify whether third parties with whom it has
material relationships, including customers and vendors, are Year 2000
compliant, and whether the failure of any third party to be Year 2000 compliant
could have a material impact on the Company. 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 is also assessing its non-information technology systems,
including equipment and machinery utilized by or otherwise affecting the
Company.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May, 1998, the Company submitted certain matters to the Company's
stockholders for approval by written consent in lieu of a meeting.
The following sets forth a description of each matter voted on and the
votes cast:
(1) An amendment and restatement of the Company's Certificate of Incorporation
to provide for 100,000,000 authorized shares of Common Stock;
(2) The ratification of the Company's Amended and Restated By-laws.
(3) The adoption, ratification and approval of the Company's 1998 Stock
Incentive Plan.
(4) The adoption, ratification and approval of the Company's 1998 Employee
Stock Purchase Plan.
(5) The adoption, ratification and approval of the Company's !998 Director
Stock Option Plan.
(6) The ratification of the designation of the directors of the Company into
classes as follows:
Class I Directors (initial term expires at the 1999 Annual Meeting of
Stockholders): Lawrence P. Begley and Gregory S. Young;
Class II Directors (initial term expires at the 2000 Annual Meeting of
Stockholders): Madhav Anand, John A. Young and Patrick J. Zilvitis;
Class III Directors (initial term expires at the 2001 Annual Meeting of
Stockholders): Thomas J. Meredith, Michael Pehl and Joseph M. Tucci.
(7) The ratification of the selection of Coopers & Lybrand L.L.P. as the
Company's auditors for the fiscal year ending December 31, 1998.
(8) The ratification of all prior actions of the Company's officers and
directors taken on behalf of the Company since the Company's inception in
1992.
For each of the above-referenced matters (1) through (8), consents were
returned by the holders of 13,475,984.5 shares out of the 13,484,922 shares of
the Company's Common Stock then outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Documents listed below, except for documents identified by footnotes, are
being filed as exhibits herewith. Documents identified by footnotes, if
any, are not being filed herewith and, pursuant to Rule 12b-32 of the
General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Exchange Act") reference is made to
such documents as previously filed as exhibits with the Commission. The
Company's file number under the Exchange Act is 000-24409.
Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form S-K:
None.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 1998
INTERNATIONAL INTEGRATION INCORPORATED
By: /s/ Lawrence P. Begley
-------------------------------
Lawrence P. Begley
Executive Vice President
& Chief Financial Officer
14
<PAGE> 16
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Statement Regarding Computation of Earnings Per Share
27.1 Financial Data Schedule
15
<PAGE> 1
Exhibit 11.1
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,581 $ 1,071 $ 2,953 $ 2,000
======= ======= ======= =======
Basic:
Weighted average common shares outstanding 13,729 12,535 13,473 12,527
======= ======= ======= =======
Net income per share $ 0.12 $ 0.09 $ 0.22 $ 0.16
======= ======= ======= =======
Diluted:
Weighted average common shares outstanding 13,729 12,535 13,473 12,527
Stock options 3,655 2,111 3,401 1,932
------- ------- ------- -------
Weighted average common and common equivalent
shares outstanding 17,384 14,646 16,874 14,459
======= ======= ======= =======
Net income per share $ 0.09 $ 0.07 $ 0.18 $ 0.14
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 41,559
<SECURITIES> 0
<RECEIVABLES> 6,982
<ALLOWANCES> 112
<INVENTORY> 0
<CURRENT-ASSETS> 51,816
<PP&E> 3,637
<DEPRECIATION> 1,257
<TOTAL-ASSETS> 54,778
<CURRENT-LIABILITIES> 12,599
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 41,462
<TOTAL-LIABILITY-AND-EQUITY> 54,778
<SALES> 0
<TOTAL-REVENUES> 18,729
<CGS> 0
<TOTAL-COSTS> 14,229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296
<INCOME-PRETAX> 4,796
<INCOME-TAX> 1,843
<INCOME-CONTINUING> 2,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,953
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.18
</TABLE>
