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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-24409
INTERNATIONAL INTEGRATION INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 04-3169145
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Main Street 02142
Cambridge, Massachusetts (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (617) 250-2500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 12, 1999, the approximate aggregate market value of the voting
stock held by non-affiliates of the registrant was $120,000,000, based on the
last reported sale price of the registrant's Common Stock on the Nasdaq
National Market as of the close of business on March 12, 1999. There were
16,773,005 shares of Common Stock outstanding as of March 12, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
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Document 10-K Part
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Specifically Identified Portions of the Registrant's Proxy Statement for the III
Annual Meeting of Stockholders to be held on May 20, 1999
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PART I
Item 1. Business
Summary
International Integration Incorporated ("i-Cube" or the "Company") is an
IT solutions provider specializing in consulting, electronic business, and
transformation services for the complex IT environments inherent in the world's
leading organizations. Utilizing a fixed-time/fixed-price model and a unique
client teaming approach, the Company delivers innovative solutions that
leverage the value of its customers' existing business processes and
information systems while creating new capabilities. The Company believes that
through these services, its customers can cost-effectively and rapidly improve
their competitiveness and narrow the gap between their business requirements
and the capabilities of their IT environments.
The Company utilizes a set of tools and methodologies, known as
i-Structure, to build large-scale, complex solutions based on client-server and
Internet architectures. i-Structure provides the Company with a repeatable and
consistent development framework, applicable to electronic business,
application migration and custom development projects. The Company believes
that i-Structure increases the speed and reduces the risk and cost inherent in
the development of complex business applications. The solutions developed using
i-Structure are independent of any single hardware, software or middleware
platform and are highly adaptable to future technology and business change. In
addition, i-Structure enables the Company to migrate legacy software
applications into multi-tier, client-server and Internet-based applications,
allowing customers to preserve the core functionality and other benefits of
their legacy infrastructure while eliminating the constraints of legacy system
architectures. The Company believes that i-Structure enhances the productivity
of IT professionals and the Company's continued investment in i-Structure is an
important component of its growth strategy.
Business Developments
In its third quarter, the Company launched a new initiative to deliver
program management services that helps customers develop best practices for
internal project management efforts, in response to client demand. This new
service leverages the Company's core competence in scoping, managing and
implementing large-scale, complex enterprise-wide projects.
In its fourth quarter, the Company continued strengthening its management
team with the hiring of both a vice president of Marketing and a general
counsel. During 1998, the company grew its personnel significantly, hiring
consultants experienced in all phases of IT transformation, from analysis and
complex system design to full-scale application development and implementation.
In February 1999, the Company announced its electronic business services
to provide business-to-business, business-to-consumer, and corporate intranet
solutions. These services deliver end-to-end integrated solutions that merge
current business processes with Internet technology and allow clients to take
advantage of the global accessibility and open standards provided by the
Internet. The Company also announced details of an electronic business
engagement with the Global Trust Organization, a consortium of leading
financial institutions that is delivering a business-to-business e-commerce
solution for secure global banking.
Industry Background
Businesses today face the constant need to react quickly to changes in
their marketplace. Driven by the economics associated with the Internet and
other factors such as deregulation, industry consolidations and the demand for
improved customer service, businesses are challenged with developing and
implementing new strategies on a rapid basis. To meet the challenge, businesses
require IT infrastructures that can be rapidly and cost-effectively developed,
deployed and enhanced.
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 can limit the ability of an
organization to successfully and
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rapidly modify its IT infrastructure to support electronic business strategies.
Because legacy systems are typically based on proprietary architectures, they
are often incapable of incorporating technological innovations, may be
incompatible with other systems across the enterprise, and can be costly to
maintain.
In order to overcome the restrictive aspects of legacy systems,
organizations continue to invest in multi-tier client-server applications based
on open systems and Internet standard architectures. These client-server
applications are independent of any one vendor's hardware, software or
middleware environments, and their multi-tier structure eases maintenance and
facilitates enhancements. 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 and browser based user
interfaces and seamless integration with other applications and data sources.
Such applications are important for 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 and Internet based
technologies to replace their legacy applications have traditionally had two
choices: install a third-party package or develop a new, custom application.
Third party packages, while generally less expensive and less risky than the
development of a custom application, can be limiting. Often, without extensive
modification, a package solution requires an organization to adapt its business
practices to meet the business rules embedded in the package. As a result,
organizations often choose to custom develop applications which are tailored to
their business practices. To justify the investment in a custom solution, many
organizations seek to leverage prior investments 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 multi-tier
client-server and Internet 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-time/fixed-price electronic business, 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 tools,
which support the development of multi-tier client-server and Internet
architecture solutions which are flexible, scalable and easy to maintain. The
Company's suite of services and i-Structure methodologies and tools 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:
Cost-Effective, Rapid Delivery.
The Company is able to complete projects more cost-effectively and rapidly
due to the methodologies and tools 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.
Ability to Preserve, Leverage, and Extend the Value of Existing Business
Processes and Applications.
Many organizations have made significant investments in their legacy
applications that 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.
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Adaptability and Flexibility.
The Company's electronic business, 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 define the business functionality of the application
independently of the application technology, database or graphical user
interface utilized. i-Structure's ability to support multi-tier client-server
and Internet architectures allows the application logic, database and
presentation technology of applications developed by the Company to be
logically separated from one another, 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.
Risk Reduction.
The Company's ability to migrate legacy applications to client-server and
Internet architectures reduces the risks inherent in creating and implementing
entirely new solutions. The methodologies and tools 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 electronic business and
custom applications. This consistent development approach is designed to ensure
that the developed application will be easily maintainable by the customer and
will reduce the cost of future system enhancements.
Scalability.
The Company's i-Structure methodologies and tools provide the basis for
designing applications that are scalable to meet the customer's organizational
growth as well as improve 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.
Services
The Company's process for delivering its information technology solutions
is based on a suite of services, consisting of information systems consulting,
application implementation services and customer support, as follows:
o 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 consists of the following:
o 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 applications and evaluate
implementation options. These sessions, which typically run from two days
to two weeks, are custom-designed and may result in the delivery of a
proof-of-concept or prototype.
o Application Staging and Planning. 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 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
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applications, including the architecture, coding standards, user interfaces
and batch requirements. In the case of a legacy application, the Company
and the customer jointly determine whether the application is a good
candidate for migration or whether a new application should be custom
developed.
o Application Implementation Services. The Company's implementation services
for an engagement typically include a design phase, a development phase 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 can involve the migration of a customer's legacy
application to a multi-tier client-server or Internet-based 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.
o 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 and Internet-based
environments. Using i-Structure, the Company analyzes the legacy
application and deconstructs it into 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 and Internet
applications in situations where the customer has made significant
investments in a legacy application which satisfies many of the customer's
business requirements.
o Custom Development. The Company provides custom development services in
situations where the customer's business processes and legacy applications
cannot meet its current business objectives or where the customer's
application is too fragmented to allow for effective migration. The
Company's custom development services utilize the methodologies and tools
of i-Structure to build applications. The Company believes that this
consistent, common development framework and the resulting multi-tier
client-server and Internet architectures provides the most cost effective
project delivery and simplifies subsequent application support and
expansion.
o 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 customers' 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
support services are generally offered on a fixed-price basis separately
from the Company's implementation services.
o Project Management Office. The Company provides a comprehensive Project
Management Office ("PMO") service that helps customers develop best
practices for internal project management
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efforts. The Company's PMO services seek to build on its success scoping,
managing and implementing complex enterprise-wide project engagements. The
Company has packaged best practices into a step-by-step process that helps
clients establish a structure to assign and track concurrent activities and
tangible deliverables. The PMO structure centers on a "program office" that
standardizes enterprise-wide resource allocation and tracking to create a
consolidated view of project status and reporting. Resulting benefits to
clients of the Company's PMO service offering include an accelerated
approach to successfully managing large scale development projects and a
reusable methodology that allows customers to successfully manage future
projects regardless of scale or complexity.
o Electronic Business Service. i-Cube's electronic business offering begins
with the assumption that there is value in transforming existing business
processes and the information systems that support them to capitalize on
the opportunities offered by the Internet. Unlike many IT service
organizations that focus primarily on front-end web development, i-Cube
delivers fully integrated solutions that merge current business processes
with Internet technology and allow clients to take advantage of the global
accessibility and open standards provided by the Internet. The Company's
consultants work with customers' key stakeholders to determine the optimal
model for the future. A customer's existing business and IT capabilities
are integral to this vision. Through its unique approach to providing
electronic business solutions, the Company helps customers recognize their
current strengths and rapidly extend them to a new electronic business
model.
Selling 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
seeking to implement an electronic business strategy, are facing competitive
pressures due to deregulation or industry consolidation, or whose existing IT
systems otherwise 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 December
31, 1998, the Company had 22 full-time selling and marketing professionals. In
addition, the Company generates leads through its business development staff
located at the Company's headquarters, its marketing partners, participation in
industry events 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.
The Company has historically derived, and may in the future derive, a
significant amount of its net revenue from major engagements with a relatively
small number of customers. In 1998, the following four customers each accounted
for 10% or more of the Company's net revenues: IBM (17%); Salt River Project
(15%); Daimler-Chrysler (12%); and PEMEX/Integrated Trade Systems (11%).
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, Internet consulting
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firms, 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.
The Company believes that the principal competitive factors in the market
in which it competes include: a willingness to offer fixed-time/fixed-price
projects, expertise in the development of large-scale, multi-tier client-server
and Internet architecture solutions, the ability to preserve a customer's
investment in its current business processes and legacy applications, the speed
with which applications are developed, and the total "cost of ownership" of an
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.
Employees
As of December 31, 1998, the Company had 260 full-time employees. The
Company's employees are not covered by any collective bargaining agreement. The
Company considers relations with its employees to be good.
Trademarks
i-Cube, Transforming the Business World, i-Structure, and the i-Cube logo
are service marks of the Company.
Item 2. Properties
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.
Item 3. Legal Proceedings
The Company is not currently a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
The current executive officers of the Company are as follows:
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Name Age Position held with the Company
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Michael Pehl 37 Chief Executive Officer and Chairman of the Board of Directors
Madhav Anand 32 President, Co-Founder and Director
Lawrence P. Begley 43 Executive Vice President, Chief Financial Officer, Treasurer
and Director
Jane Callanan 42 Vice President, Human Resources
Karl-Heinz Dette 47 Vice President and General Manager, European Operations
James K. McCann 42 Vice President, Client Services
Maria A. Cirino 35 Vice President, Sales and Marketing
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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 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 at 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 Boston
Consulting Group ("BCG"), an international management consulting firm. 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.
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.
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.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock commenced trading on June 23, 1998 on the
Nasdaq National Market under the symbol "ICUB." As of March 12, 1999, there
were approximately 80 holders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.
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1998
Quarter Ended: High Low
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December 31 ............................... $19.500 $13.125
September 30 .............................. 21.625 14.500
June 30 (beginning June 23, 1998) ......... 19.625 16.625
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The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipated paying any cash dividends on its Common Stock in the
foreseeable future.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data of the Company for the
five years ended December 31, 1998 are derived from the Company's consolidated
financial statements and notes thereto. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included as Item 7 and the financial
statements and related footnotes included as Item 8 in this Form 10-K.
<TABLE>
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Years ended December 31,
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1998 1997 1996 1995 1994
(in thousands, except per share data) ------------ ------------ ------------ ----------- -----------
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STATEMENT OF INCOME DATA
Net revenues ................................. $ 41,167 $ 26,859 $ 14,479 $ 9,197 $ 2,893
Project personnel and software costs ......... 16,949 10,385 5,308 2,521 1,372
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Gross profit ............................... 24,218 16,474 9,171 6,676 1,521
Operating expenses:
Selling and marketing ....................... 4,382 3,046 1,580 897 329
General and administrative .................. 9,875 6,734 5,011 2,371 400
-------- -------- -------- -------- --------
Total operating expenses ................... 14,257 9,780 6,591 3,268 729
-------- -------- -------- -------- --------
Operating income ............................. 9,961 6,694 2,580 3,408 792
Other income, net ............................ 1,368 391 85 92 9
-------- -------- -------- -------- --------
Income before income taxes ................. 11,329 7,085 2,665 3,500 801
Provision for income taxes ................... 4,386 2,760 1,050 1,424 316
-------- -------- -------- -------- --------
Net income ................................. $ 6,943 $ 4,325 $ 1,615 $ 2,076 $ 485
Earnings per share:
Basic ....................................... $ 0.47 $ 0.34 $ 0.13 $ 0.17 $ 0.04
======== ======== ======== ======== ========
Diluted ..................................... $ 0.37 $ 0.29 $ 0.12 $ 0.15 $ 0.04
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic ....................................... 14,877 12,627 12,425 12,323 12,114
Diluted ..................................... 18,607 15,163 13,682 13,465 12,114
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December 31,
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1998 1997 1996 1995 1994
(in thousands) ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents, and short term
investments ......................... $44,359 $10,822 $3,889 $3,064 $1,062
Working capital ...................... 42,339 7,853 3,855 2,067 541
Total assets ......................... 54,139 21,112 10,502 7,656 1,537
Long-term obligations, net of current
maturities .......................... 231 672 -- -- --
Total stockholders' equity ........... 45,261 9,616 4,561 2,695 619
</TABLE>
The Company has implemented Statement of Financial Accounting Standards
No. 128, "Earnings Per Share", which requires the presentation of both basic
and diluted earnings per share in the Consolidated Statements of Income. The
per share amounts presented above and in Item 7,
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations", are based on the basic weighted average shares outstanding unless
specifically identified as diluted.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is an IT solutions provider specializing in consulting,
electronic business, and transformation services for the complex IT
environments inherent in the world's leading organizations. Since 1992, the
Company has helped clients leverage their current business processes and
technology infrastructure to create competitive advantage. The Company's
solutions are based on open standards and architectures that are independent of
any single vendor's hardware, software, or middleware. The Company makes use of
i-Structure, a set of methodologies and tools which embody "best" practices in
application development, project management, testing, and deployment. Utilizing
a fixed-time/fixed-price model and a unique client teaming approach, the
Company delivers solutions quickly, with full knowledge transfer to the client.
The Company derives substantially all of its revenues from consulting,
electronic business and transformation services. The Company's services are
principally provided on a fixed-time/fixed-price 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.
For its larger projects, the Company's contracts typically call for an
advance payment from its customers upon signing, with additional payments
required upon the attainment of project milestones. For its smaller projects,
the Company typically receives payment ratably over the duration of the
engagement. Deferred revenues consist principally of amounts billed in advance
for the Company's technology consulting contracts that will be recognized upon
performance and amounts billed to customers in excess of revenues recognized
to-date.
During 1998, the Company expanded its operations by opening its European
headquarters in Mannheim, Germany, bringing to three the number of locations
from which the Company provides its services.
The Company has traditionally depended upon a few major clients for a
majority of its revenues. During the year ended December 31, 1998, revenues
from four clients accounted for 17%, 15%, 12%, and 11% of the Company's net
revenues. During the comparable period in 1997, revenues from five clients
accounted for 29%, 19%, 14%, 11%, and 10% of the Company's net revenues. The
percentage of revenues coming from the top five clients declined to 64% in 1998
from 83% in 1997. The loss of one or more major customers could have a material
adverse effect on the Company's business, financial condition, and results of
operations. 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. See "Certain Factors That May Affect Future
Results".
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. See "Certain Factors That May Affect Future Results".
Recent Developments
The Company completed the initial public offering of 2,605,000 shares of
its Common Stock on June 26, 1998 (including shares purchased by the
underwriters pursuant to their over-allotment option). The net proceeds to the
Company from these shares were approximately $27.9 million.
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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>
Percentage of Total
Revenues Years Ended
December 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues .................................... 100% 100% 100%
Project personnel and software costs ......... 41 39 37
--- --- ---
Gross profit .............................. 59 61 63
Operating expenses:
Selling and marketing ....................... 11 11 11
General and administrative .................. 24 25 35
--- --- ---
Total operating expenses .................. 35 36 46
--- --- ---
Operating income ............................. 24 25 17
Other income, net ............................ 4 1 1
--- --- ---
Income before income taxes ................ 28 26 18
Provision for income taxes ................... 11 10 7
--- --- ---
Net income ................................ 17% 16% 11%
=== === ===
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Revenues
The Company's net revenues increased by $14.3 million, or 53%, to $41.2
million for the year ended December 31, 1998 from $26.9 million for the year
ended December 31, 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 year ended December 31, 1998, the Company's five largest customers
accounted for 64% of net revenues as compared to 83% for the year ended
December 31, 1997. In the years ended December 31, 1998 and 1997, the Company
had four and five customers, respectively, 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 $16.9 million, for the year
ended December 31, 1998 from $10.4 million for the comparable period in 1997.
As a percentage of net revenues, these costs were 41% in 1998 and 39% in 1997.
The absolute dollar and percentage increases in project personnel and software
costs 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, which includes
contractors and employees working over 20 hours per week, increased to 202 at
December 31, 1998 from 135 at December 31, 1997.
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 44%, to $4.4
million, for the year ended December 31, 1998 from $3.0 million for the
comparable period in 1997. As a percentage of net revenues, these costs were
11% in both years. The increase in selling and marketing costs in absolute
dollars was primarily attributable to increased spending on promotional
activities and increases in selling and marketing personnel. Selling and
marketing personnel, which includes contractors and employees working over 20
hours per week, increased to 22 at December 31, 1998 from 17 at December 31,
1997.
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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 47%, to $9.9
million, for the year ended December 31, 1998 from $6.7 million for the
comparable period in 1997. As a percentage of net revenues, these costs were
24% in 1998 and 25% in 1997. The decline in general and administrative costs as
a percentage of net revenues reflects 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 and costs related to the opening of the Company's
European headquarters. General and administrative employees, which include
contractors and employees working over 20 hours per week, increased to 36 at
December 31, 1998 from 24 at December 31, 1997.
Other Income, Net
Other income, net consists primarily of interest income from the Company's
cash, cash equivalents, and short-term investment 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 $1.4
million and $0.4 million for the years ended December 31, 1998 and 1997,
respectively. The increase in other income, net was principally due to the
increase in cash, cash equivalents, and short-term investments which included
net proceeds from the Company's initial public offering in the second quarter
of 1998. The Company invests its cash, cash equivalents, and short-term
investments primarily in overnight repurchase agreements, short-term U.S.
Treasury and Agency bonds, and short-term commercial paper.
Provision for Income Taxes
The Company's combined effective rate for federal and state income taxes
was 39% for 1998 and 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Revenues
The Company's net revenues increased by $12.4 million, or 86%, to $26.9
million for the year ended December 31, 1997 from $14.5 million for the
comparable period in 1996. This increase in net revenues represents an increase
in the number of customer projects from both new and existing customers plus an
increase in the average size of projects. During the year ended December 31,
1997, the Company's five largest customers accounted for 83% of net revenues as
compared to 79% for the comparable period in 1996.
Project Personnel and Software Costs
Project personnel and software costs increased 96%, to $10.4 million, for
the year ended December 31, 1997 from $5.3 million for the comparable period in
1996. As a percentage of net revenues, these costs were 39% in 1997 and 37% in
1996. The increase in project personnel and software costs in absolute dollars
was primarily attributable to an increase in the number of personnel required
to deliver projects and increased 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 compensation on both an absolute and
per employee basis. Project personnel headcount, which includes contractors and
employees working over 20 hours per week, increased to 135 at December 31, 1997
from 87 at December 31, 1996.
Selling and Marketing
Selling and marketing costs increased 93%, to $3.0 million, for the year
ended December 31, 1997 from $1.6 million for the comparable period in 1996. As
a percentage of net revenues, these costs were 11% in both years. The increase
in selling and marketing costs in absolute dollars was primarily attributable
to increased spending on promotional activities and increases in selling and
marketing
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personnel. Selling and marketing personnel, which includes contractors and
employees working over 20 hours per week, increased to 17 at December 31, 1997
from 9 at December 31, 1996.
General and Administrative
General and administrative costs increased 34%, to $6.7 million, for the
year ended December 31, 1997 from $5.0 million for the comparable period in
1996. As a percentage of net revenues, these costs were 25% in 1997 and 35% in
1996. In 1996, the Company paid $1.2 million in bonuses to secure the services
of certain executive officers of the Company. General and administrative
personnel, which includes contractors and employees working over 20 hours per
week, increased to 24 at December 31, 1997 from 15 at December 31, 1996.
Other Income, Net
Other income, net consists primarily of interest income from the Company's
cash, cash equivalents, and short-term investment 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 $0.4
million and $85,000 for the years ended December 31, 1997 and 1996,
respectively.
Provision for Income Taxes
The Company's combined effective rate for federal and state income taxes
was 39% for 1997 and 1996.
Liquidity and Capital Resources
Prior to its initial public offering, the Company met its working capital
requirements through cash generated from operations. In June 1998, the Company
completed its initial public offering of common stock resulting in net proceeds
to the Company of approximately $27.9 million. The Company also maintains a
$5.0 million revolving line of credit (the "Line") with Silicon Valley Bank,
which expires in September 1999. Under the Line, the Company may borrow the
lesser of $5.0 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 December 31, 1998 the Company was in compliance with these requirements and
no borrowings have been made under the Line.
The Company's cash and cash equivalents balances increased to $36.1
million at December 31, 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 cash and cash
equivalents balances increased to $10.8 million at December 31, 1997 from $3.9
million at December 31, 1996. This increase in cash was primarily the result of
cash generated from operations. The Company's working capital was $42.3 million
at December 31, 1998 as compared to $7.9 million at December 31, 1997 and $3.9
million at December 31, 1996.
The Company's operating activities provided cash from operations of $7.3
million for the year ended December 31, 1998 as compared to $8.2 million
provided from operations for the comparable period in 1997 and $0.5 million in
1996. The decrease in cash provided from operations in 1998 as compared to 1997
was due principally to a decrease in deferred revenues which was partially
offset by a decrease in accounts receivable and an increase in accrued
expenses. The decrease in deferred revenues in 1998 was the result of the
timing of milestone billings on some of the Company's fixed-price contracts.
The increase in cash from operations in 1997 was primarily the result of
increases in net income, deferred revenues and accrued expenses.
The Company used cash of $9.8 million for investing activities for the
year ended December 31, 1998 as compared to $1.8 million and $0.4 million used
in the comparable periods of 1997 and 1996, respectively. Cash used for
investing activities consisted primarily of purchases of short-term investments
and purchases of property and equipment used to support the growing base of
employees.
The Company's financing activities provided cash of $27.7 million for the
year ended December 31, 1998 which mainly represents the net proceeds of $27.9
million from its initial public offering of common stock in June 1998.
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New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This Statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement. The components of comprehensive income
for the Company generally include foreign currency translation and unrealized
gains or losses on short-term investments classified as available for sale.
These components are not material for the years presented.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, superseding SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements, and requires those
enterprises to report selected information about operating segments in interim
financial statements. It also requires disclosures about products and services,
geographic areas, and major customers. The Company has determined that it has
one reportable segment.
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 conditions 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 of cash flows for the year ended
December 31, 1998.
Year 2000
In the past, many information technology products were designed with two
digit year codes that did not recognize century and millennium fields. As a
result, these hardware and software products may not function or may give
incorrect results with respect to dates after December 31, 1999. This problem
is generally referred to as the "Year 2000" problem or issue. Substantially
every company in the computer or information technology industries, as well as
every company which relies on computer systems or which utilizes products which
include embedded technology face the Year 2000 issue.
The Company is currently in the process of assessing its exposure to the
Year 2000 problem. Generally, the Company is assessing its Year 2000 exposure
in four major areas: (i) problems arising from systems previously developed for
customers; (ii) delays in existing projects by the Company's customers as they
shift internal resources to complete their Year 2000 mitigation, and delays in
the purchasing patterns of clients and potential clients with respect to new
projects; (iii) Year 2000 problems faced by the Company's material suppliers
which could have an impact on the Company's business, results of operations or
financial condition; and (iv) Year 2000 problems existent in the Company's
internal information technology ("IT") systems and non-IT systems.
The Company is in the process of assessing systems previously developed
for customers and believes that they are Year 2000 compliant. However, there
can be no assurances that the Company's systems do not contain undetected
errors or defects associated with Year 2000 compliance issues, or that third
party software included in the systems developed by the Company do not contain
Year 2000 problems. Certain of the Company's agreements with its customers
contain warranties that the systems developed by the Company will not
experience Year 2000 problems. To the extent that a problem arises, the Company
may be required to expend funds to remedy the problem or, if asserted, to pay
damages incurred by the customer as a result of such failure. In addition, to
the extent that a Year 2000 problem is identified in a system developed under a
contract without a Year 2000 warranty, the Company may nevertheless expend
resources to remedy the problem, in certain circumstances, at its own cost.
Although the Company's contracts with its customers generally contain
provisions which seek to insulate the Company from, or limit the amount of, any
liability arising from claims asserted against the Company,
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there can be no assurance that any such limitations would be upheld in favor of
the Company. The Company is aware of a growing number of lawsuits against other
providers of IT services. Because of the unprecedented nature of such
litigation, it is uncertain to what extent the Company may be affected by such
litigation. Due to the complexity of the Year 2000 issue, upon any failure of
critical client systems or processes that may be directly or indirectly
connected or related to systems or software designed, developed, customized, or
implemented by the Company as described above, the Company may be subjected to
claims regardless of whether the failure is related to the services provided by
the Company. If asserted, such claims (including the associated defense costs)
could have a material adverse effect on the Company's business, operating
results, and financial condition.
The Company is in the process of conducting a survey of its major
customers to determine their Year 2000 readiness and the likelihood that the
customers will delay scheduled or in-process contracts, or defer future
contracts with the Company, in order to allocate more IT resources to solving
their Year 2000 problems. In addition, the Company continually seeks feedback
from its salespersons as to the impact that the Year 2000 readiness of
prospective customers may have on the Company's future revenues. There can be
no assurance that the Company's customers and prospective customers will not
delay scheduled, in-process, or future projects as a result of their own Year
2000 remediation efforts. Any such delays could have a material adverse impact
on the Company's business, operating results, and financial condition.
The Company has completed the process of determining the nature and extent
of the work required, if any, to make its internal IT systems Year 2000
compliant. The Company's internal IT systems consist principally of its
accounting and human resources software. The licensor of the software has
indicated to the Company in writing that the products are Year 2000 compliant.
Based on currently available information, the Company believes the expense
associated with these efforts will be immaterial and has provided for the
enhancement of these systems in its operating and capital budgets for the
current fiscal year. However, if Year 2000 issues of which the Company is not
currently aware arise and are not remediated on time, or if the Company is
required to pay for any required updating, modification or replacement of the
Company's information systems, the Year 2000 issue could have a material
adverse impact on the Company's business, operating results, and financial
condition. The Company is also assessing its utilization of non-IT systems
which contain embedded technology such as microcontrollers. Following its
determination of such utilization, the Company expects to contact the providers
of any material non-IT systems to determine whether the systems are Year 2000
compliant, and if not, whether such systems will be remediated or will need to
be replaced. In addition to the Company's internal systems, the Company relies
on third party vendors in the conduct of its business. The Company is in the
process of seeking assurances from its material vendors and suppliers that
there will be no interruption of service as a result of the Year 2000 issue and
to the extent such assurances are not given, the Company intends to devise
contingency plans to ameliorate the negative effects on the Company in the
event the Year 2000 issue results in the unavailability of services. There can
be no assurance that any contingency plans developed by the Company will
prevent any such service interruption on the part of one or more of the
Company's third party vendors or suppliers from having a material adverse
effect on the Company. In addition, the failure on the part of the accounting
systems of the Company's clients due to the Year 2000 issue could result in a
delay in the payment of invoices issued by the Company for services and
expenses. A failure of the accounting systems of a significant number of the
Company's clients would have a material adverse effect on the Company.
Through December 31, 1998, the Company had not incurred material costs
directly relating to the remediation of Year 2000 problems. Pending further
progress in its assessment of its exposure to the Year 2000 problem, as
described in the preceding paragraphs, the Company is unable to estimate the
costs of remediating the Year 2000 problem that it may incur in the future.
The Securities and Exchange Commission has asked publicly-traded companies
to include a reasonable description of their most reasonably likely worst case
Year 2000 scenario. As of the date of this report, the Company is uncertain as
to such scenario, although the Company believes that it may include a situation
where one of the Company's significant clients asks the Company to delay or
stop work on an ongoing project due to the client's internal Year 2000 issues.
The Company intends to address
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this uncertainty by continuing to assess its exposure to the Year 2000 problem,
as described above. The Company intends to consider this scenario in its
financial and strategic planning for 1999 and 2000, including in its projected
personnel needs and other areas. As of December 31, 1998, the Company is not
able to estimate revenue lost due to Year 2000 issues.
The Company has not yet established a contingency plan for addressing the
most reasonably likely worst case Year 2000 scenario. The Company intends to
establish such a plan to the extent the Company believes it necessary to do so,
based on the impact that such scenario is expected to have on the Company's
business, operating results, and financial condition.
Safe Harbor Provision
This Form 10-K 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,
increases in personnel and related costs, opening additional offices, general
and administrative expenses, sales and marketing expenses, issues arising out
of the Year 2000 problem and other costs, both in absolute terms and 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 for a
variety of reasons, including those set forth in "Certain Factors That May
Affect Future Results". The Company makes no commitments to disclose any
revisions to forward-looking statements, or any facts, events or circumstances
that may occur after the date of this Form 10-K that may have an impact on the
forward-looking statements.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
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. 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. Furthermore, 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.
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.
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The Company generally undertakes projects on a fixed-time/fixed-price
basis, and warrants defined project deliverables as specified in mutually
agreed upon statements of work. In making proposals for fixed-time/fixed-price
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-time/fixed-price 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's business, financial condition, and results of operations may
be adversely affected by the Year 2000 problems described above.
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. 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.
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. 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.
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.
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.
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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. Many of these competitors have significantly
greater financial, technical, sales and marketing resources and greater name
recognition than 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. A liability claim brought against the Company
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
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 is subject to a number of risks that can adversely affect its
international operations, including difficulties administering its business
globally, managing foreign operations, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and supplementary data set forth in
Item 14 are incorporated herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In January 1997, the Company's Board of Directors decided to retain
PricewaterhouseCoopers LLP 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
Form 10-K. 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 PricewaterhouseCoopers LLP, the Company had not
consulted with PricewaterhouseCoopers LLP regarding accounting principles.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is contained in part under the
caption "Executive Officers of the Company" in PART I hereof, and the remainder
is contained in the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on May 20, 1999 (the "Proxy Statement") under the
captions "ELECTION OF DIRECTORS--DIRECTORS OF THE COMPANY" and "OTHER MATTERS--
Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by this reference.
Item 11. Executive Compensation
The information required by this item is contained under the caption
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement and is incorporated
herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the Company's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained in the Company's Proxy
Statement under the caption "Certain Transactions" and is incorporated herein
by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Form 10-K:
1. Financial Statements.
The following documents, which are attached at Annex A hereto, are filed
as part of this Annual Report on Form 10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Income for the years ended December 31,
1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement 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 and are inapplicable, and therefore have been omitted.
3. Exhibits.
The exhibits filed as part of this Annual Report on Form 10-K are listed
in the Exhibit Index immediately preceding the exhibits. The Company has
identified by reference to a footnote in the Exhibit Index each management
contract and compensation plan filed as an exhibit to this Annual Report on
Form 10-K in response to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 30th day
of March, 1999.
INTERNATIONAL INTEGRATION INCORPORATED
By: /s/ Michael Pehl
------------------------------------
Michael Pehl
Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ----------------------------------- ---------------
<S> <C> <C>
/s/ Michael Pehl Chief Executive Officer and March 30, 1999
- ------------------------- Chairman (Principal Executive
Michael Pehl Officer)
/s/ Madhav Anand President and Director March 30, 1999
- -------------------------
Madhav Anand
/s/ Lawrence P. Begley Executive Vice President, Chief March 30, 1999
- ------------------------- Financial Officer, Treasurer and
Lawrence P. Begley Director (Principal Accounting and
Financial Officer)
/s/ Thomas J. Meredith Director March 30, 1999
- -------------------------
Thomas J. Meredith
/s/ Joseph M. Tucci Director March 30, 1999
- -------------------------
Joseph M. Tucci
/s/ Gregory S. Young Director March 30, 1999
- -------------------------
Gregory S. Young
/s/ John A. Young Director March 30, 1999
- -------------------------
John A. Young
/s/ Patrick J. Zilvitis Director March 30, 1999
- -------------------------
Patrick J. Zilvitis
</TABLE>
19
<PAGE>
Annex A
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of International Integration
Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of International
Integration Incorporated at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999
20
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................... $36,057 $10,822
Short-term investments ...................................... 8,302 --
Accounts receivable, net of reserve of $112 and $196,
respectively .............................................. 3,880 5,906
Unbilled revenues ........................................... 1,988 708
Prepaid expenses and other current assets ................... 602 429
Deferred income taxes ....................................... 157 812
------- -------
Total current assets ...................................... 50,986 18,677
Property and equipment:
Computers and equipment ..................................... 3,574 2,527
Furniture and fixtures ...................................... 1,029 602
------- -------
Total property and equipment, at cost ..................... 4,603 3,129
Less-accumulated depreciation ............................... 1,723 838
------- -------
Total property and equipment, net ......................... 2,880 2,291
Other assets ................................................. 273 144
------- -------
Total assets .............................................. $54,139 $21,112
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................ $ 1,366 $ 483
Accrued expenses ............................................ 4,887 2,956
Current portion of long-term obligations .................... 92 268
Accrued income taxes ........................................ 75 1
Deferred revenues ........................................... 2,227 7,116
------- -------
Total current liabilities ................................. 8,647 10,824
Long-term obligations ........................................ 231 672
Commitments
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;
16,316,202 and 12,966,889 shares issued at December 31,
1998 and 1997, respectively; 16,316,202 and 12,963,888
shares outstanding at December 31, 1998 and 1997,
respectively .............................................. 163 129
Additional paid-in capital .................................. 30,164 1,516
Treasury stock, 0 and 3,001 shares at cost at December 31,
1998 and 1997, respectively ............................... -- (8)
Note receivable from stockholder ............................ (533) (533)
Retained earnings ........................................... 15,455 8,512
Accumulated other comprehensive income ...................... 12 --
------- --------
Total stockholders' equity ................................ 45,261 9,616
------- --------
Total liabilities and stockholders' equity ................ $54,139 $21,112
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
21
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Net revenues ................................. $41,167 $26,859 $14,479
Project personnel and software costs ......... 16,949 10,385 5,308
------- ------- -------
Gross profit .............................. 24,218 16,474 9,171
Operating expenses:
Selling and marketing ....................... 4,382 3,046 1,580
General and administrative .................. 9,875 6,734 5,011
------- ------- -------
Total operating expenses .................. 14,257 9,780 6,591
Operating income ............................. 9,961 6,694 2,580
Other income (expense):
Interest income ............................. 1,430 460 85
Interest expense ............................ (62) (69) --
------- ------- -------
Income before income taxes ................ 11,329 7,085 2,665
Provision for income taxes ................... 4,386 2,760 1,050
------- ------- -------
Net income ................................ $ 6,943 $ 4,325 $ 1,615
======= ======= =======
Earnings per share:
Basic ....................................... $ 0.47 $ 0.34 $ 0.13
Diluted ..................................... $ 0.37 $ 0.29 $ 0.12
Weighted average shares outstanding:
Basic ....................................... 14,877 12,627 12,425
Diluted ..................................... 18,607 15,163 13,682
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
22
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A Series B
common stock common stock Common stock
------------------------- ----------------------- ---------------------------------
Number No Number No Number Additional
of par of par of Par paid-in
shares value shares value shares value capital
-------------- ---------- ------------- --------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 ................ -- -- -- -- -- -- --
Tax benefit due to stock option exercise ..... -- -- -- -- -- -- 590
Net income ................................... -- -- -- -- -- -- --
----------- ----- -------- ------ ---------- ---- -------
Balance at December 31, 1997 .................. -- -- -- -- 12,966,889 129 1,516
Exercise of stock options .................... -- -- -- -- 744,313 8 455
Proceeds from initial public offering ........ -- -- -- -- 2,605,000 26 27,851
Tax benefit due to stock option exercise ..... -- -- -- -- -- -- 342
Translation adjustments ...................... -- -- -- -- -- -- --
Net income ................................... -- -- -- -- -- -- --
Comprehensive income ......................... -- -- -- -- -- -- --
----------- ----- -------- ------ ---------- ---- -------
Balance at December 31, 1998 .................. -- -- -- -- 16,316,202 $163 $30,164
=========== ===== ======== ====== ========== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
23
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Treasury stock
-----------------
Note Accumulated
Number receivable other Total Statement of
of from Retained comprehensive stockholders' comprehensive
shares Cost stockholder earnings income equity income
--------- ------ ------------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .................. -- -- -- $ 2,685 -- $ 2,695 --
Conversion ................................... -- -- -- (113) -- -- --
Exercise of stock options .................... -- -- -- -- -- 251 --
Net income ................................... -- -- -- 1,615 -- 1,615 $1,615
------ ----- ------ ------- -- ------- ------
Balance at December 31, 1996 .................. -- -- -- 4,187 -- 4,561 --
Exercise of stock options .................... -- -- $ (533) -- -- 148 --
Acquisition of treasury stock ................ (3,001) $(8) -- -- -- (8) --
Tax benefit due to stock option exercise ..... -- -- -- -- -- 590 --
Net income ................................... -- -- -- 4,325 -- 4,325 4,325
------ ----- ------ ------- -- ------- ------
Balance at December 31, 1997 .................. (3,001) (8) (533) 8,512 -- 9,616 --
Exercise of stock options .................... 3,001 8 -- -- -- 471 --
Proceeds from initial public offering ........ -- -- -- -- -- 27,877 --
Tax benefit due to stock option exercise ..... -- -- -- -- -- 342 --
Translation adjustments ...................... -- -- -- -- $12 12 12
Net income ................................... -- -- -- 6,943 -- 6,943 6,943
Comprehensive income ......................... -- -- -- -- -- -- $6,955
====== ===== ====== ======= === ======= ======
Balance at December 31, 1998 .................. -- -- $ (533) $15,455 $12 $45,261
====== ===== ====== ======= === =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
24
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 6,943 $ 4,325 $ 1,615
Adjustments to reconcile net income to net cash used by
operating activities: ......................................
Depreciation and amortization .............................. 885 531 267
Provision for doubtful accounts ............................ (84) 82 73
Loss on disposal of fixed assets ........................... -- 97 --
Deferred income taxes ...................................... 655 (17) 163
Tax benefit due to stock option exercise ................... 342 590 --
Changes in operating assets and liabilities: ...............
Accounts receivable ....................................... 2,110 (1,290) (2,669)
Unbilled revenues ......................................... (1,280) (486) 191
Prepaid expenses and other current assets ................. (173) (237) (97)
Accounts payable .......................................... 883 101 290
Accrued expenses .......................................... 1,931 1,907 (328)
Accrued income taxes ...................................... 74 (65) (937)
Deferred revenues ......................................... (4,889) 2,672 1,955
Other ..................................................... (129) 23 13
--------- ------- -------
Net cash provided by operating activities ............... 7,268 8,233 536
Cash flows from investing activities:
Purchases of available for sale securities ................... (10,802) -- --
Sale and maturities of available for sale securities ......... 2,500 -- --
Purchases of property and equipment .......................... (1,474) (1,788) (388)
Proceeds from sale of fixed assets ........................... -- 25 --
--------- ------- -------
Net cash used in investing activities ................... (9,776) (1,763) (388)
Cash flows from financing activities:
Repayment of long-term obligations ........................... (617) (177) --
Proceeds from equipment line of credit ....................... -- 500 --
Proceeds from exercise of stock options ...................... 471 148 251
Purchase of treasury stock ................................... -- (8) --
Proceeds from initial public offering ........................ 27,877 -- --
Decrease in due from related parties ......................... -- -- 396
Decrease in due from officer/stockholder ..................... -- -- 30
--------- ------- -------
Net cash provided by financing activities ............... 27,731 463 677
Effect of exchange rates on cash and cash equivalents ......... 12 -- --
Net increase in cash and cash equivalents ..................... 25,235 6,933 825
Cash and cash equivalents, beginning of period ................ 10,822 3,889 3,064
--------- ------- -------
Cash and cash equivalents, end of period ...................... $ 36,057 $10,822 $ 3,889
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
25
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(1) ORGANIZATION AND SIGNIFICANT POLICIES
International Integration Incorporated, commonly known as i-Cube (the
"Company"), is an IT solutions provider specializing in consulting, electronic
business, and transformation services for the complex IT environments inherent
in the world's leading organizations. Since 1992, i-Cube has helped clients
leverage their current business processes and technology infrastructure to
create competitive advantage. Utilizing a fixed-time/fixed-price model and a
unique client teaming approach, i-Cube delivers solutions rapidly and with full
knowledge transfer. i-Cube's innovative solutions are based on open standards
and architectures that are independent of any single vendor's hardware,
software or middleware. i-Cube uses i-Structure, a set of methodologies and
tools which embody best practices in application development, project
management, testing, and deployment. During 1998, the Company expanded its
operations by opening its European headquarters in Mannheim, Germany, bringing
to three the number of locations from which the Company provides its services.
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 are translated into United States dollars at exchange rates
prevailing at the balance sheet date. Revenues and expenses for the year are
translated at the average exchange rates in effect during the year. The
resulting translation adjustments are accumulated as a separate component of
stockholders' equity.
(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
are 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 consist principally of amounts billed in advance for
technology consulting contracts that will be recognized upon performance and
amounts billed to clients in excess of revenues recognized to-date. Unbilled
revenues on contracts represent revenues recognized on contracts in excess of
contractual billings to-date.
(e) Significant Customers and Concentration of Credit Risk During the year
ended December 31, 1998, revenues from four clients accounted for 17%, 15%,
12%, and 11% of the Company's net revenues. During the year ended December 31,
1997, revenues from five clients accounted for 29%, 19%, 14%, 11%, and 10% of
the Company's net revenues. During the year ended December 31, 1996, revenues
from three clients accounted for 24%, 22%, and 16% of the Company's net
revenues.
Financial instruments that subject the company to credit risks consist
primarily of trade accounts receivable. As of December 31, 1998 and 1997,
approximately 49% and 86% of the Company's accounts receivable are due from two
and four customers, respectively.
26
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(1) ORGANIZATION AND SIGNIFICANT POLICIES (Continued)
(f) Cash, Cash Equivalents, and Short-term Investments Cash equivalents
consist of highly liquid investments with a maturity of less than three months
when purchased. At December 31, 1998 and 1997, cash and cash equivalents
include overnight repurchase agreements of $12,525 and $10,800, 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.
The Company invests in only high quality, short-term investments, all of
which are classified as available for sale at December 31, 1998. Short-term
investments are recorded at fair market value, which approximates cost. The
cost of securities sold is based on the specific identification method. Gross
realized and unrealized gains or losses were not significant as of December 31,
1998. All available for sale securities have maturities of less than one year.
(g) Depreciation The Company provides for depreciation of fixed assets
over their estimated useful lives, using the straight-line method, as follows:
<TABLE>
<S> <C>
Asset Classification Estimated Useful Life
- ------------------------------------ ----------------------
Computers and equipment ......... 3-5 years
Furniture and fixtures .......... 5 years
</TABLE>
Depreciation and amortization expense relating to total fixed assets was
$885, $531, and $267 for the years ended December 31, 1998, 1997, and 1996,
respectively. As of December 31, 1998 and 1997, the cost of furniture and
fixtures recorded under capital leases was $473, and the related accumulated
amortization was $150 and $47, respectively. Upon retirement or disposal, the
cost of the disposed asset 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 8).
(i) Earnings Per Share Basic earnings per share ("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 statement and tax bases of assets and
liabilities, as measured by the enacted tax rates assumed to be in effect when
these differences reverse.
(k) Comprehensive Income In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. The components of
comprehensive income for the Company generally include foreign currency
translation and unrealized gains or losses on short-term investments classified
as available for sale. The Company has adopted SFAS No. 130 in the accompanying
financial statements.
(l) Segment Reporting In June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
superseding SFAS No. 14, Financial Reporting for Segments of
27
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(1) ORGANIZATION AND SIGNIFICANT POLICIES (Continued)
a Business Enterprise. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements, and requires those enterprises to report selected
information about operating segments in interim financial statements. It also
requires disclosures about products and services, geographic areas, and major
customers.
The Company is in the business of providing specialized IT solutions in
consulting, electronic business, and transformation services for the complex IT
environments inherent in the world's leading organizations. The Company
evaluated its business activities that are regularly reviewed by the Executive
Management team and Board of Directors for which discrete financial information
is available. As a result of this evaluation, the Company determined that it
has one operating segment. The adoption of SFAS 131 did not affect the results
of operations, financial position, or require the disclosure of segment
information since the Company has one reportable segment.
(m) Computer Software Developed or Obtained for Internal Use 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 conditions 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 of cash flows for the year ended December
31, 1998.
(n) Reclassifications Certain prior year amounts have been reclassified to
conform to current year presentation.
(2) SHORT-TERM INVESTMENTS
The following is a summary of investments classified as current assets at
December 31, 1998:
<TABLE>
<S> <C>
Corporate debt securities .......... $1,236
U.S. Government securities ......... 7,066
------
Total ............................. $8,302
======
</TABLE>
(3) 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 $5,000
or 75% of eligible accounts receivable, as defined in the agreement. The
interest rate on all borrowings under the working capital line is prime (7.75%
at December 31, 1998). The unsecured line of credit expires in September 1999.
The Company is required to comply with certain operational and financial
covenants under the agreement if there are borrowings under the credit line. At
December 31, 1998, the Company is in compliance with all such covenants. The
agreement also provides for a $4,000 sublimit for foreign exchange transactions
and the issuance of letters of credit of up to $4,000. There were no borrowings
under this line of credit at December 31, 1998 or 1997.
In July 1997, the Company obtained an equipment line of credit ("equipment
line") with the same financial institution from which the Company could borrow
up to $500 for qualified capital expenditures, as defined in the agreement. The
interest rate on all borrowings under the equipment line was prime plus 3/4%
(9.25% at December 31, 1997) and was reduced to prime upon the Company's
successful completion of its Initial Public Offering ("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 was required to make 36 equal monthly principal payments
plus interest. The Company was required to comply with certain
28
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(3) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS (Continued)
operational and financial covenants under the agreement if there were
borrowings under the equipment line. The outstanding balance under the
equipment line was paid in full in July 1998.
Long-term obligations consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Capital lease obligations ........ $323 $440
Equipment line ................... -- 500
-- ---
323 940
Less-current maturities .......... 92 268
--- ---
$231 $672
==== ====
</TABLE>
Maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1999 ...................................... $122
2000 ...................................... 122
2001 ...................................... 122
2002 ...................................... 15
----
381
Less-amount representing interest ......... 58
----
$323
====
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Accrued payroll and other payroll expenses ........ $2,747 $1,638
Accrued marketing ................................ 245 206
Accrued other .................................... 1,895 1,112
----- -----
$4,887 $2,956
====== ======
</TABLE>
(5) INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------------ ---------
<S> <C> <C> <C>
Current
Federal ......... $2,900 $2,118 $ 692
State ........... 831 659 196
------ ------ ------
3,731 2,777 888
Deferred
Federal ......... 504 (13) 124
State ........... 151 (4) 38
------ ------ ------
655 (17) 162
------ ------- ------
$4,386 $2,760 $1,050
====== ======= ======
</TABLE>
29
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(5) INCOME TAXES (Continued)
A reconciliation of the Company's income tax provision to the U.S.
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
U.S. federal statutory tax rate ..................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit .......... 5.7 6.3 6.3
Research and development credits .................... (0.8) (1.0) (1.0)
Other, net .......................................... (0.2) (0.3) 0.1
---- ---- ----
Effective tax rate ................................ 38.7% 39.0% 39.4%
==== ==== ====
</TABLE>
Significant components of the deferred tax asset as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Nondeductible accruals and reserves ....... $284 $835
Depreciation .............................. (127) (23)
---- ----
Total net deferred tax asset ............ $157 $812
==== ====
</TABLE>
(6) 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 101,000,000
shares consisting of 100,000,000 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 i-Cube's
stockholders approved, an increase in the authorized shares of Common Stock,
$0.01 par value, to 100,000,000.
The Company completed an IPO of 2,500,000 shares of its common stock on
June 23, 1998. Additionally, the underwriters elected to exercise their option
to purchase 105,000 shares of common stock from the Company to cover
over-allotments. The net proceeds to the Company from the subscribed and
over-allotment shares were $27,877, after deduction of offering expenses of
$3,383.
(7) EARNINGS PER SHARE
The following table reconciles the denominator of the diluted earnings per
share computation as shown on the Consolidated Statements of Income.
<TABLE>
<CAPTION>
Diluted EPS Computation 1998 1997 1996
---------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Basic common shares outstanding .............. 14,876,825 12,627,222 12,424,678
Stock options ................................ 3,729,786 2,536,198 1,257,658
---------- ---------- ----------
Diluted common and common equivalent shares .. 18,606,611 15,163,420 13,682,336
========== ========== ==========
</TABLE>
Options to purchase shares of the Company's common stock of 113,610,
139,847, and 150,000 for the years ended December 31, 1998, 1997, and 1996,
respectively, were outstanding during the respective periods but were not
included in the computation of diluted EPS because the exercise price of the
options was greater than or equal to the average market price of the common
stock for the periods reported.
30
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(8) STOCK PLANS
(a) 1993 Stock Plan
The Company has a 1993 Stock Plan (the "1993 Plan"), pursuant to which the
Company may grant to employees, directors, and consultants of the Company
statutory and nonstatutory stock options to purchase shares of Series B 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. 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. Upon the adoption of the
1998 Plan, shares remaining ungranted under the 1996 Plan were authorized to be
granted under the 1998 Plan, and the 1996 Plan was then terminated.
(c) 1998 Stock Plan
On April 23, 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the "1998 Plan"), pursuant to which the Company may grant to
employees, officers, directors, and advisors of the Company stock options,
restricted stock, or other stock-based awards to purchase up to 3,432,078
shares of common stock plus the number of shares of Common Stock granted under
the 1993 Plan or the 1996 Plan which are not actually issued because the grants
have expired, have resulted in shares not being issued, or have been
repurchased by the Company. Under the 1998 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. However, it is the
Company's intent to grant only Non-statutory Stock Options in the future. Stock
options under the 1998 Plan are non-transferable and generally vest over a
four-year period. The maximum term of any option is ten years. The Company's
intent is to grant all future stock options under the 1998 Plan.
(d) 1998 Employee Stock Purchase Plan
On April 23, 1998, the Company's Board of Directors adopted the 1998
Employee Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees
the right to purchase up to 300,000 shares of Common Stock on an annual basis
at the lower of 85% of the market price at the beginning or end of the 12-month
offering period. The offering period began on January 1, 1999. A liability will
be recorded for ESPP withholdings not yet applied toward the purchase of Common
Stock.
31
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(8) STOCK PLANS (Continued)
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, 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 ............................... 1,140,201 11.66
Exercised ............................. (744,313) 0.63
Forfeited/canceled .................... (250,914) 4.98
--------- ------
Outstanding, December 31, 1998 ......... 5,832,599 $ 4.00 2,839,427 $1.97
========= ====== ========= =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------- ------------------------------
Number Weighted- Weighted- Number Weighted-
Range of outstanding average average Exerciseable average
exercise at December 31, remaining exercise at December 31, exercise
prices 1998 contractual life price 1998 price
- ----------------- ----------------- ------------------ ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.01-0.67 591,124 5.78 years $ 0.14 558,501 $ 0.11
1.33-1.33 13,425 6.33 1.33 10,717 1.33
2.00-2.20 2,668,714 7.48 2.01 1,592,889 2.01
3.00-3.00 1,108,311 8.34 3.00 546,686 3.00
5.00-5.00 680,825 8.86 5.00 126,820 5.00
7.00-12.00 260,000 9.33 9.91 3,814 12.00
14.00-17.00 307,100 9.77 16.16 -- --
17.13-18.50 203,100 9.79 17.71 -- --
------------- --------- ---- ------ --------- ------
$ 0.01-18.50 5,832,599 7.91 years $ 4.00 2,839,427 $ 1.97
============= ========= ==== ====== ========= ======
</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). Prior to the IPO,
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. Subsequent to the IPO, the
exercise prices are equal to the closing prices of the Company's stock as
reported by Nasdaq
32
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(8) STOCK PLANS (Continued)
exchange on the date of grant. Pursuant to the required pro forma disclosure
under the fair value method of 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>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Expected option term (years) ......... 7.0 7.0 7.0
Risk-free interest rate (%) .......... 5.3 6.4 6.6
Expected volatility (%) .............. 43.3 -- --
Dividend yield (%) ................... -- -- --
Weighted average fair value of
options granted ..................... $7.07 $1.20 $0.72
</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 consistent with the method prescribed by SFAS No. 123, the
Company's net income would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
Net income
<S> <C> <C> <C>
As reported .................................... $ 6,943 $ 4,325 $ 1,615
Compensation expense for stock options ......... 1,200 573 272
------- ------- -------
Pro forma net income ........................... $ 5,743 $ 3,752 $ 1,343
======= ======= =======
Basic earnings per share as reported ............ $ 0.47 $ 0.34 $ 0.13
Pro forma basic earnings per share .............. $ 0.39 $ 0.30 $ 0.11
Diluted earnings per share as reported .......... $ 0.37 $ 0.29 $ 0.12
Pro forma diluted earnings per share ............ $ 0.31 $ 0.25 $ 0.10
</TABLE>
(9) 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, 1998:
<TABLE>
<S> <C>
1999 ................................. $1,207
2000 ................................. 1,293
2001 ................................. 1,140
2002 ................................. 45
------
Total minimum lease payments ......... $3,685
======
</TABLE>
Rent expense was approximately $1,197, $1,158, and $544 for the years
ended December 31, 1998, 1997, and 1996, respectively.
(10) RELATED PARTY TRANSACTIONS
During 1995, the Company provided certain management, administrative, and
support services and subleased a portion of its facilities to a 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.
33
<PAGE>
INTERNATIONAL INTEGRATION INCORPORATED ("i-Cube")
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands, except per share data)
(10) RELATED PARTY TRANSACTIONS (Continued)
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.
Interest accrues at 8.5%, is payable at maturity, and the associated interest
receivable is included in other assets in the Consolidated Balance Sheets.
(11) 401(k) PLAN
During April 1995, the Company adopted a defined contribution plan (the
"401k Plan") under Section 401(k) of the Internal Revenue Code. The 401k Plan
allows eligible employees to make contributions up to a specified annual
maximum contribution. Under the 401k 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 401k Plan during 1996 or 1997.
The Company contributed $129 to the 401K Plan during 1998.
(12) SUPPLEMENTARY INFORMATION
During 1998, 1997, and 1996, the Company paid interest of $62, $69, and
$0, respectively.
During 1998, 1997, and 1996, the Company paid $3,587, $2,217, and $1,808,
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 1997 and 1996, the Company paid $249 and $1,150 for executive
signing bonuses, respectively. These amounts are included in general and
administrative expenses.
34
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant(1)
3.2 Amended and Restated By-laws of the Registrant(1)
10.1 1993 Stock Plan(1)(2)
10.2 1996 Stock Plan(1)(2)
10.3 1998 Stock Incentive Plan(1)(2)
10.4 1998 Non-Employee Director Stock Option Plan(1)(2)
10.5 Founding Stockholders' Agreement dated as of May 6, 1997 between the Registrant,
Madhav Anand, Yannis Doganis, Sundar Subramaniam and Edouard Aslanian(1)
10.6 Amendment to Founding Stockholders' Agreement dated as of 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(1)
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(1)
10.8 Letter Agreement dated August 8, 1995 between the Registrant and Silicon Valley Bank(1)
10.9 Promissory Note dated August 8, 1995 between the Registrant and Silicon Valley Bank(1)
10.10 Commercial Security Agreement dated August 8, 1995 between the Registrant
and Silicon Valley Bank(1)
10.11 Negative Pledge Agreement dated August 8, 1995 between the Registrant and
Silicon Valley Bank(1)
10.12 Letter Agreement dated October 7, 1996 between the Registrant and Silicon Valley Bank(1)
10.13 Promissory Note dated July 31, 1997 between the Registrant and Silicon Valley Bank(1)
10.14 Loan Modification Agreements between Registrant and Silicon Valley Bank dated
August 6, 1996, August 7, 1996 and August 28, 1997, respectively(1)
10.15 Lease Agreement dated November 20, 1996 between the Registrant, RR&C
Development Company and Patrician Associates, Inc.(1)
10.16 Lease Agreement dated as of July 14, 1995 between the Registrant and
Riverfront Office Park Joint Venture(1)
10.17 Amendment No. 1 to Lease Agreement dated as of July 14, 1995 between the
Registrant and Riverfront Office Park Joint Venture(1)
10.18 Sublease dated as of June 19, 1995 between the Registrant and MathSoft, Inc.(1)
10.19 Letter Agreement dated June 3, 1996 between the Registrant and Michael Pehl(1)(2)
10.20 Letter Agreement dated August 30, 1996 between the Registrant and Lawrence P.
Begley(1)(2)
10.21 Letter Agreement dated December 19, 1997 between the Registrant and Karl-
Heinz Dette(1)(2)
10.22 Application Transformation Program Agreement dated as of July 23, 1997
between Hewlett-Packard Company and the Registrant(1)
10.23 Cooperation Agreement dated as of July 9, 1997 between the Registrant and
debis Systemhaus MEB Mercedes EDV Beratung GmbH(1)
10.24 Letter between the Company and Madhav Anand, Edouard Aslanian, Yannis
Doganis and Gary C. Mekikian relating to indemnification matters(1)
16.1 Letter from Arthur Andersen LLP re: change in certifying accountants(1)
21.1 Subsidiaries of the Registrant(1)
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
</TABLE>
- ------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-50889) and incorporated herein by reference.
(2) Management contract or compensation plan.
35
Exhibit 23.1
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement
of International Integration Incorporated on Form S-8 (File No. 333-69269) of
our report dated February 2, 1999 on our audits of the consolidated financial
statements of International Integration Incorporated as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31,
1998, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 36,057
<SECURITIES> 8,302
<RECEIVABLES> 3,992
<ALLOWANCES> 112
<INVENTORY> 0
<CURRENT-ASSETS> 50,986
<PP&E> 4,603
<DEPRECIATION> 1,725
<TOTAL-ASSETS> 54,139
<CURRENT-LIABILITIES> 8,647
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 45,098
<TOTAL-LIABILITY-AND-EQUITY> 54,139
<SALES> 0
<TOTAL-REVENUES> 41,167
<CGS> 0
<TOTAL-COSTS> 31,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 11,329
<INCOME-TAX> 4,386
<INCOME-CONTINUING> 6,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,943
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.37
</TABLE>
