<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number: 0-21131
------------------
INTERNATIONAL NETWORK SERVICES
(Exact name of registrant as specified in its charter)
California 77-0289509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1213 Innsbruck Drive, Sunnyvale, CA 94089
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 542-0100
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 [_]
The number of shares outstanding of the registrant's Common Stock as of April
30, 1997 was 31,899,380 .
<PAGE>
INTERNATIONAL NETWORK SERVICES
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of March 31, 1997 (unaudited) and June 30, 1996 ........................... 3
Condensed Statements of Operations (unaudited) for the three and nine month periods ended
March 31, 1997 and 1996............................................................................. 4
Condensed Statements of Cash Flows (unaudited) for the nine month periods ended
March 31, 1997 and 1996............................................................................. 5
Notes to Condensed Financial Statements ................................................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................... 8
PART II -- OTHER INFORMATION
Items 1-5. Not applicable
Item 6. Exhibits and Reports on Form 8-K ....................................................................... 13
Signature.......................................................................................................... 14
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNATIONAL NETWORK SERVICES
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 15,977 $ 869
Short-term investments............................................................. 18,256 ---
Accounts receivable ............................................................... 22,744 11,821
Deferred income taxes.............................................................. 857 857
Prepaid expenses and other assets.................................................. 995 386
--------- ---------
Total current assets........................................................... 58,829 13,933
Property and equipment, net............................................................. 7,881 4,139
--------- ---------
Total assets................................................................... $ 66,710 $ 18,072
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................... $ 1,997 $ 1,908
Accrued expenses................................................................... 6,983 3,704
Income taxes payable............................................................... 242 250
Deferred revenue................................................................... 551 612
Borrowings under line of credit.................................................... -- 1,000
Current portion of notes payable................................................... -- 399
--------- ---------
Total current liabilities...................................................... 9,773 7,873
--------- ---------
Notes payable, less current portion..................................................... -- 316
--------- ---------
Mandatorily Redeemable Convertible Preferred Stock...................................... -- 12,427
--------- ---------
Commitments
Shareholders' equity (deficit):
Preferred Stock, no par value, 5,000,000 shares authorized; no
shares issued and outstanding.................................................. -- --
Common Stock, no par value,75,000,000 shares authorized;
31,656,303 and 11,426,875 shares issued and outstanding
at March 31, 1997 and June 30, 1996, respectively............................. 54,322 2,394
Accretion of Mandatorily Redeemable Convertible Preferred Stock.................... -- (2,454)
Notes receivable from shareholders................................................. (1,924) (1,880)
Retained earnings (deficit)........................................................ 4,539 (604)
--------- ---------
Total shareholders' equity (deficit)........................................... 56,937 (2,544)
--------- ---------
Total liabilities and shareholders' equity (deficit)........................... $ 66,710 $ 18,072
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
INTERNATIONAL NETWORK SERVICES
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue................................................................ $26,539 $12,170 $68,764 $29,286
Operating expenses:
Professional personnel.......................................... 12,366 5,435 31,257 13,230
Sales and marketing............................................. 3,950 2,193 10,197 5,343
General and administrative...................................... 3,520 1,573 9,712 3,088
Other costs..................................................... 3,568 1,834 9,870 4,335
------ ------ ------ ------
Total operating expenses................................ 23,404 11,035 61,036 25,996
------ ------ ------ ------
Income from operations................................................. 3,135 1,135 7,728 3,290
Interest and other, net................................................ 350 (2) 704 21
------ ------ ------ ------
Income before income taxes............................................. 3,485 1,133 8,432 3,311
Provision for income taxes............................................. 1,359 442 3,289 1,291
------ ------ ------ ------
Net income............................................................. $ 2,126 $ 691 $ 5,143 $ 2,020
====== ======= ====== ======
Net income per share................................................... $ 0.06 $ 0.02 $ 0.16 $ 0.07
====== ======= ====== ======
Shares used to compute net income per share............................ 33,687 30,671 32,851 30,546
====== ======= ====== ======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
INTERNATIONAL NETWORK SERVICES
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
--------------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 5,143 $ 2,020
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization.................................................. 2,379 1,205
Changes in operating assets and liabilities:
Accounts receivable....................................................... (10,923) (5,383)
Prepaid expenses and other assets......................................... (609) (695)
Accounts payable.......................................................... 89 1,175
Accrued expenses.......................................................... 3,279 915
Income taxes payable...................................................... (8) (58)
Deferred revenue.......................................................... (61) 336
---------- ---------
Net cash used for operating activities................................ (711) (485)
---------- ---------
Cash flows from investing activities:
Purchases of short-term investments................................................ (18,256) -
Purchases of property and equipment................................................ (6,121) (2,556)
---------- ---------
Net cash used for investing activities................................ (24,377) (2,556)
---------- ---------
Cash flows from financing activities:
Repayments of notes payable........................................................ (715) (249)
Repayment of borrowings under line of credit....................................... (1,000) -
Proceeds from issuance of Common Stock, net........................................ 41,911 67
---------- ---------
Net cash provided by (used for) financing activities.................. 40,196 (182)
---------- ---------
Increase (decrease) in cash and cash equivalents........................................ 15,108 (3,223)
Cash and cash equivalents at beginning of period........................................ 869 4,161
---------- ---------
Cash and cash equivalents at end of period.............................................. $ 15,977 $ 938
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................. $ 97 $ 79
Cash paid for income taxes......................................................... $ 3,297 $ 1,099
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Common Stock in exchange for notes receivable from shareholders........ $ - $ 625
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
International Network Services (the "Company") in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company, and its results of
operations and cash flows. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
fiscal years ended June 30, 1996, 1995 and 1994 included in the Company's
Registration Statement on Form S-1 (File No. 333-9287), which was declared
effective by the Securities and Exchange Commission on September 18, 1996.
For purposes of presentation, the Company has indicated the third quarter
and the first nine months of fiscal 1997 and 1996 as ending on March 31,
respectively; whereas, in fact the Company's fiscal quarters end on the Sunday
nearest the end of the calendar quarter.
The results of operations for the three and nine months ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1997 or any other future interim period, and the Company
makes no representations related thereto.
NOTE 2--BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1997 1996
------- -------
<S> <C> <C>
Accounts receivable:
Trade....................................... $23,387 $12,375
Less: allowance for doubtful accounts....... (643) (554)
------- -------
$22,744 $11,821
======= =======
Property and equipment:
Computer equipment.......................... $11,247 $ 6,511
Furniture and fixtures...................... 1,997 612
------- -------
13,244 7,123
Less: accumulated depreciation.............. (5,363) (2,984)
------- -------
$ 7,881 $ 4,139
======= =======
Accrued expenses:
Accrued compensation and employee
benefits................................. $6,383 $ 3,356
Other liabilities........................... 600 348
------- -------
$ 6,983 $ 3,704
======= =======
</TABLE>
6
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
NOTE 3--CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly-liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents
include commercial paper, U.S. Treasury Bills, demand notes and government
agency bonds. Short-term investments, all of which are classified as
"available for sale", consist of high quality debt securities with original
maturity dates greater than 90 days. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," investments in securities classified as available for sale
are reported at fair value with unrealized gains and losses, net of related
taxes, reported as a separate component of shareholders' equity. At March 31,
1997, the estimated fair value approximated cost.
NOTE 4--INITIAL PUBLIC OFFERING
In September 1996, the Company completed an initial public offering ("IPO")
of 2,875,000 shares of Common Stock for $16 per share, which resulted in
proceeds to the Company of approximately $41.9 million, net of issuance costs of
approximately $924,000. All shares of Mandatorily Redeemable Convertible
Preferred Stock outstanding at June 30, 1996 were automatically converted into
16,734,889 shares of Common Stock on a one for one basis upon the closing of the
IPO.
NOTE 5--NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares ("weighted average shares") outstanding
during the period. Pursuant to the requirements of the Securities and Exchange
Commission, common and common equivalent shares issued within one year prior to
the Company's initial public offering date have been included in the computation
as if they were outstanding for all periods presented prior to the effective
date of the Company's initial public offering, even if anti-dilutive (using the
treasury stock method and the assumed initial public offering price). Common
equivalent shares consist of Mandatorily Redeemable Convertible Preferred Stock
(using the if converted method) and stock options and warrants (using the
treasury stock method).
NOTE 6--RECENT ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings Per Share." It replaces the presentation of primary
earnings per share (EPS) with a presentation of basics EPS. It also requires
dual presentation of basic and diluted EPS on the face of the financial
statements. Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed similarly to fully diluted EPS under APB Opinion
No. 15. FAS 128 must be adopted for the second quarter of fiscal 1998. The
following table represents unaudited, pro forma disclosures of basic and diluted
earnings per share in accordance with FAS 128 assuming the standard was applied
during all periods presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income per common share--as reported $0.06 $0.02 $0.16 $0.07
Basic net income per common share--pro forma $0.07 $0.08 $0.20 $0.24
Diluted net income per common share--pro forma $0.06 $0.02 $0.16 $0.07
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
International Network Services ("INS" or "the Company") is a provider of
services for complex enterprise networks. The Company provides services for the
full life cycle of a network, including planning, design, implementation,
operations and optimization, and maintains expertise in the most complex
technologies and multi-vendor environments. Areas of expertise include WANs,
network management, network and host security and high performance LANs and
VLANs. Substantially all of the Company's revenue is derived from professional
services, which are generally provided to clients on a "time and expenses"
basis. Professional services revenue is recognized as services are performed.
Any payments received in advance of services performed are recorded as deferred
revenue. The Company also performs a limited number of fixed-price projects
under which revenue is recognized using the percentage-of-completion method. In
addition, the Company is leveraging its expertise in complex networks to develop
electronic services for certain repetitive network management tasks, such as
network monitoring and network performance reporting. Revenue derived from
electronic services has not been significant to date. Electronic services
revenue is recognized ratably over the term of the contract. As of March 31,
1997, the Company had 579 network systems engineers.
The following discussion contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Predictions of future
events are inherently uncertain. Actual events could differ materially from
those predicted in the forward looking statements as a result of the risks set
forth in the following discussion, and in particular, the risks discussed below
under the caption "Risk Factors that May Affect Operating Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percent of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- -------------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue ................................................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional personnel.............................................. 46.6 44.7 45.5 45.2
Sales and marketing................................................. 14.9 18.0 14.8 18.3
General and administrative.......................................... 13.3 12.9 14.1 10.5
Other costs......................................................... 13.4 15.1 14.4 14.8
------ ------ ------ ------
Total operating expenses........................................ 88.2 90.7 88.8 88.8
------ ------ ------ ------
Income from operations................................................... 11.8 9.3 11.2 11.2
Interest and other, net ................................................. 1.3 - 1.0 0.1
------- ------ ------ ------
Income before income taxes............................................... 13.1 9.3 12.2 11.3
Provision for income taxes............................................... 5.1 3.6 4.8 4.4
------- ------ ------ ------
Net income............................................................... 8.0 5.7 7.4 6.9
======= ====== ====== ======
</TABLE>
REVENUE
Substantially all of the Company's revenue is derived from fees for
professional services. The Company also derives revenue from electronic
services; however, such revenue has not been significant to date. Revenue
increased 118% to $26.5 million for the three months ended March 31, 1997 from
$12.2 million in the same period of the prior year. Revenue increased 135% to
$68.8 million in the nine months ended March 31, 1997 from $29.3 million in the
same period in the prior year. Revenue increased primarily due to an increase in
the number of professional service projects and to the increase in the size of
projects. The Company does not believe that these rates of growth are
sustainable in future periods. The Company's revenue is dependent in large part
on its ability to attract, retain and utilize qualified network systems
engineers.
8
<PAGE>
OPERATING EXPENSES
Professional personnel. Professional personnel expenses consist primarily
-----------------------
of compensation and benefits of the Company's employees engaged in the delivery
of professional services and electronic services. Professional personnel
expenses were $12.4 million and $31.3 million for the three-month and nine-month
periods ended March 31, 1997, respectively, compared to $5.4 million and $13.2
million, respectively, for the same periods in fiscal 1996. The increase in
absolute dollars is attributable primarily to an increase in the number of
network system engineers. As a percent of revenue, professional personnel
expenses increased to 46.6% and 45.5% for the three-month and nine-month periods
ended March 31, 1997, respectively, compared to 44.7% and 45.2% for the same
respective periods in the prior year. Professional personnel expenses increased
as a percent of revenue in the three month and nine month periods ended March
31, 1997 due to lower utilization of professional personnel.
Sales and marketing. Sales and marketing expenses consist primarily of
--------------------
compensation (including commissions) and benefits of sales and marketing
personnel and outside marketing expenses. Sales and marketing expenses were $4.0
million and $10.2 million for the three-month and nine-month periods ended March
31, 1997, respectively, compared to $2.2 million and $5.3 million, respectively,
for the same periods in fiscal 1996. The increase in absolute dollars was due
primarily to the growth in the number of sales and marketing employees and to
commissions resulting from increased revenue. As a percent of revenue, sales and
marketing expenses decreased to 14.9% and 14.8% for the three-month and
nine-month periods ended March 31, 1997, respectively, from 18.0% and 18.3%,
respectively, in the same periods of fiscal 1996. The decrease, on a percentage
basis, was due primarily to a decrease in commission rates and increased
revenue.
General and administrative. General and administrative expenses consist of
--------------------------
expenses associated with executive staff, finance and administration, corporate
facilities, information systems and human resources. General and administrative
expenses were $3.5 million and $9.7 million for the three-month and nine-month
periods ended March 31, 1997, respectively, compared to $1.6 and $3.1 million,
respectively, for the same periods in fiscal 1996. General and administrative
expenses have increased in absolute dollars as the Company has continued to add
personnel to support the Company's growth in operations. As a percent of
revenue, general and administrative expenses increased to 13.3% and 14.1% for
the three-month and nine-month periods ended March 31, 1997, respectively, from
12.9 % and 10.5%, respectively, in the same periods of fiscal 1996. General and
administrative expenses increased as a percent of revenue in the three-month and
nine-month periods ended March 31, 1997 as a result of the Company's investment
in its infrastructure to support the growth in operations.
Other costs. Other costs consist of expenses related to professional
------------
personnel (other than compensation and benefits), including travel and
entertainment, certain recruiting and professional development expenses, field
facilities, depreciation, expensed equipment and supplies, and research and
development expenses related to electronic services. Other costs were $3.6
million and $9.9 million for the three-month and nine-month periods ended March
31, 1997, respectively, compared to $1.8 million and $4.3 million, respectively,
for the same periods in fiscal 1996. Other costs increased primarily as a result
of increases in the number of professional personnel employed, and to a lesser
extent, the costs of field offices established since the first quarter of fiscal
1996. Other costs decreased as a percent of revenue to 13.4% and 14.4% for the
three-month and nine-month periods ended March 31, 1997, respectively, as
compared to 15.1% and 14.8%, respectively, for the same periods in fiscal 1996.
Other costs, as a percent of revenue, fluctuate primarily due to the timing of
training and recruiting expenses.
Interest and Other, Net. Interest and other, net, consists of interest
-------------------------
income and expense. Interest income consists primarily of interest on cash, cash
equivalents and short term investments and notes receivable from shareholders.
Interest expense consists of interest associated with bank borrowings. Net
interest income was $350,000 for the three-month period ended March 31, 1997 as
compared to net interest expense of $2,000 for the three-month period ended
March 31, 1996. Net interest income was $704,000 and $21,000 for the nine-month
periods ended March 31, 1997 and 1996, respectively. The increase in net
interest income reflects increased cash available for investment and a decrease
in bank borrowings during the first quarter of fiscal 1997. All outstanding debt
was repaid upon completion of the initial public offering in September 1996.
Provision for Income Taxes. Income tax expense represents combined federal
--------------------------
and state taxes at an effective rate of 39% for fiscal 1997 and fiscal 1996.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company financed its operations
and investments in property and equipment primarily through a combination of
cash generated from operations, the private sale of equity securities, private
debt and bank borrowings. In September 1996, the Company completed an initial
public offering of common stock resulting in net proceeds to the Company of
approximately $41.9 million. The Company has a bank credit facility which
includes a revolving line of credit that provides for borrowings equal to the
lesser of $6.0 million or 80% of eligible accounts receivable and a term
facility that provides for borrowings up to $3.0 million for capital equipment
purchases. Advances under the revolving line and term facility bear interest at
the bank's prime rate plus 1.00% and 1.25%, respectively. As of March 31, 1997,
there were no borrowings under these credit facilities. The credit facility
expires in June 1997, is secured by substantially all of the assets of the
Company, and contains customary covenants and restrictions. As of March 31,
1997, the Company was in compliance with all such covenants and restrictions.
At March 31, 1997, the Company had $34.2 million in cash, cash equivalents
and short-term investments, representing an increase of $33.4 million from June
30, 1996. The increase was primarily due to cash provided as a result of the
completion of the Company's initial public offering.
Net cash used in operations for the first nine months of fiscal 1997 was
$711,000. Cash used in operations primarily reflects increases in accounts
receivable. Although the Company believes its collections experience is within
industry standards, the Company's inability to collect for its services on a
timely basis in the future could have a material adverse effect on the Company's
business, operating results and financial condition. Capital expenditures were
$6.1 million during the nine months ended March 31, 1997. The capital
expenditures were primarily attributable to additional equipment requirements
associated with increases in the number of employees and expenditures for
equipment and office furniture associated with the Company's new corporate
headquarters and other field facilities. The Company currently has no material
capital commitments.
The Company believes that the cash, cash equivalents and short-term
investments, together with available credit facilities, will be sufficient to
meet its working capital and capital expenditure requirements for at least the
next twelve months. The Company may also utilize cash to acquire or invest in
complementary businesses or to obtain the right to use complementary
technologies.
RISK FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors could materially and adversely affect the
Company's future operating results and could cause actual events to differ
materially from those predicted in the Company's forward-looking statements
related to its business.
Variability of Quarterly Operating Results. Substantially all of the
----------------------------------------------
Company's revenue is derived from professional services, which are generally
provided on a "time and expenses" basis. Professional services revenue is
recognized only when network systems engineers are engaged on client projects.
In addition, a substantial majority of the Company's operating expenses,
particularly personnel and related costs, depreciation and rent, are relatively
fixed in advance of any particular quarter. As a result, any underutilization of
network systems engineers may cause significant variations in operating results
in any particular quarter and could result in losses for such quarter. Factors
which could cause such underutilization include: the reduction in size, delay in
commencement, interruption or termination of one or more significant projects;
the completion during a quarter of one or more significant projects; the
overestimation of resources required to complete new or ongoing projects; and
the timing and extent of training, weather related shut-downs, vacation days and
holidays. The Company's revenue and earnings may also fluctuate from quarter to
quarter based on a variety of factors including the loss of key employees,
reductions in billing rates, write-offs of billings, or services performed at no
charge as a result of the Company's failure to meet its clients' expectations,
claims by the Company's clients for the actions of the Company's employees
arising from damages to clients' business or otherwise, competition, timing of
employment taxes, the initial or ongoing market acceptance of EnterprisePRO (see
"Uncertainty of Market Acceptance of Electronic Services"), the development and
introduction of new services and general economic conditions. In addition, the
Company plans to continue to expand its operations by hiring additional network
systems engineers and other employees, and adding new offices, systems and other
infrastructure. The resulting increase in operating expenses would have a
material adverse effect on the Company's operating results if revenue were not
to increase to support such expenses. Based upon all of the foregoing, the
Company believes that quarterly revenue and operating results are likely to vary
significantly in the future and that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied on as
indications of future performance. Furthermore, it is likely that in some future
quarter the Company's revenue or operating results will be below the
10
<PAGE>
expectations of public market analysts or investors. In such event, the price of
the Company's Common Stock would likely be materially adversely affected.
Risks Associated with Client Concentration. The Company has derived a
----------------------------------------------
significant portion of its revenue from a limited number of large clients and
expects this concentration to continue. The Company's largest client, MCI Corp.
("MCI"), accounted for approximately $7.5 million, or 17.0%, of the Company's
revenue in fiscal 1996. No one customer accounted for more than 10% of the
Company's revenues for the three or nine month periods ended March 31, 1997.
There can be no assurance that revenue from MCI or other clients that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued will reach or exceed historical levels in any
future period. The Company does not have a long-term services contract with MCI
or any of its other clients. Any significant reduction in the scope of the work
performed for MCI, any other significant client or a number of smaller clients,
the failure of anticipated projects to materialize, or deferrals, modifications
or cancellations of ongoing projects by any of these clients could have a
material adverse effect on the Company's business, operating results and
financial condition.
Need to Attract and Retain Qualified Network Systems Engineers. The
---------------------------------------------------------------------
Company's future success will depend in large part on its ability to hire, train
and retain network systems engineers who together have expertise in a wide array
of network and computer systems and a broad understanding of the industries the
Company serves. Competition for network systems engineers is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. In particular, competition is intense for the limited
number of qualified managers and senior network systems engineers. The Company
has experienced, and may in the future experience, high rates of turnover among
its network systems engineers. Any inability of the Company to hire, train and
retain a sufficient number of qualified network systems engineers could impair
the Company's ability to adequately manage and complete its existing projects or
to obtain new projects, which, in turn, could have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
any inability of the Company to attract and retain a sufficient number of
qualified network systems engineers in the future could impair the Company's
planned expansion of its business.
Management of Growth. The Company has recently experienced a period of
---------------------
rapid revenue and client growth and an increase in the number of its employees
and offices and the scope of its supporting infrastructure. The Company does not
believe these rates of growth are sustainable. This growth has resulted in new
and increased responsibilities for management personnel and has placed and
continues to place a significant strain on the Company's management and
operating and financial systems. The Company will be required to continue to
implement and improve its systems on a timely basis and in such a manner as is
necessary to accommodate the increased number of transactions and clients and
the increased size of the Company's operations. There can be no assurance that
the Company's management or systems will be adequate to support the Company's
existing or future operations. Any failure to implement and improve the
Company's systems or to hire and retain the appropriate personnel to manage its
operations would have a material adverse effect on the Company's business,
operating results and financial condition.
Absence of Long-Term Agreements. The Company's clients are generally able
--------------------------------
to reduce or cancel their use of the Company's professional services without
penalty and with little or no notice. As a result, the Company believes that the
number and size of its existing projects are not reliable indicators or measures
of future revenue. The Company has in the past provided, and is likely in the
future to provide, services to clients without a long-term agreement. When a
client defers, modifies or cancels a project, the Company must be able to
rapidly redeploy network systems engineers to other projects in order to
minimize the underutilization of employees and the resulting adverse impact on
operating results. In addition, the Company's operating expenses are relatively
fixed and cannot be reduced on short notice to compensate for unanticipated
variations in the number or size of projects in progress. As a result, any
termination, significant reduction or modification of its business relationships
with any of its significant clients or with a number of smaller clients could
have a material adverse effect on the Company's business, operating results and
financial condition.
Intense Competition. The network services industry is comprised of a large
-------------------
number of participants and is subject to rapid change and intense competition.
The Company faces competition from system integrators, value added resellers
("VARs"), local and regional network services firms, telecommunications
providers, network equipment vendors, software vendors and computer systems
vendors, many of which have significantly greater financial, technical and
marketing resources and greater name recognition, and generate greater service
revenue than does the Company. The Company has faced, and expects to continue to
face, additional competition from new entrants into its markets. Increased
competition could result in price reductions, fewer client projects,
underutilization of employees, reduced operating margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors. The failure of the
11
<PAGE>
Company to compete successfully would have a material adverse effect on the
Company's business, operating results and financial condition.
Uncertainty of Market Acceptance of Electronic Services. The Company's
-----------------------------------------------------------
long-term strategy is to derive a portion of its revenue from electronic
services, although such revenue has not been significant to date. The Company
has in the past offered, on a limited basis, an electronic service that has not
achieved significant market acceptance or generated significant revenue. The
Company has expended, and expects to continue to expend, substantial amounts in
the development and marketing of its electronic services. The Company has
recently introduced EnterprisePRO, an enhanced version of the prior electronic
service. The introduction of EnterprisePRO and any other electronic services
that the Company may develop in the future will be subject to risks generally
associated with new service introductions, including delays in development,
testing or introduction, or the failure to satisfy clients' requirements. There
can be no assurance that EnterprisePRO will gain market acceptance on a timely
basis or at all. The failure of EnterprisePRO, or any other new electronic
services that the Company may develop, to gain market acceptance on a timely
basis could have a material adverse effect on the Company's business, operating
results and financial condition.
Relationship with Cisco Systems. Although the Company is a
-------------------------------------
vendor-independent provider of network services, the Company has a significant
relationship with Cisco Systems, Inc. ("Cisco") and believes that maintaining
and enhancing this relationship is important to the Company's business due to
Cisco's leading position in the large scale, enterprise internetworking market.
Cisco develops, manufactures, markets and supports high-performance,
multiprotocol internetworking systems that link geographically dispersed LANs
and WANs. The Company has entered into direct relationships with clients as a
result of referrals from Cisco and has from time to time performed pre-sales and
post-sales support services for Cisco. In addition, Cisco is a shareholder of
the Company and an employee of Cisco is a member of the Company's Board of
Directors. Although the Company believes that its relationship with Cisco is
good, there can be no assurance that the Company will be able to maintain or
enhance its relationship with Cisco. Any deterioration in the Company's
relationship with Cisco could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, should the
Company's relationship with Cisco be perceived as compromising the Company's
ability to provide unbiased solutions, the Company's relationship with existing
or potential clients could be materially adversely affected.
Risks Associated With Potential Acquisitions. As part of its business
------------------------------------------------
strategy, the Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies. Any such future transactions
would be accompanied by the risks commonly encountered in making acquisitions of
companies, products and technologies. Such risks include, among others, the
difficulty associated with assimilating the personnel and operations of acquired
companies, the potential disruption of the Company's ongoing business, the
distraction of management and other resources, the inability of management to
maximize the financial and strategic position of the Company through the
successful integration of acquired personnel, technology and rights, the
maintenance of uniform standards, controls, procedures and policies, and the
impairment of relationships with employees and clients as a result of the
integration of new management personnel. There can be no assurance that the
Company will be successful in overcoming these risks or any other problems
encountered in connection with any such acquisitions.
Risks Associated With Potential International Expansion. A component of the
-------------------------------------------------------
Company's long-term strategy is to expand into international markets. If the
Company opens any international offices and the revenue generated by these
offices are not adequate to offset the expense of establishing and maintaining
these foreign operations, the Company's business, operating results and
financial condition could be materially adversely affected. The Company intends
to open its first international office in fiscal 1998, however, there can be no
assurance that the Company will be able to do so on a timely basis, or at all.
To date, the Company has provided limited professional services to certain of
its United States based clients in foreign locations. There can be no assurance
that the Company will be able to successfully market, sell and deliver its
services in these markets. In addition to the uncertainty as to the Company's
ability to expand into international markets, there are certain risks inherent
in conducting business on an international level, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, employment laws and
practices in foreign countries, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, imposition of currency exchange controls, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, and potentially adverse tax consequences, any of which could adversely
impact the success of the Company's international operations. There can be no
assurance that one or more of these factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete effectively in these
markets.
12
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
11.1 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
27 FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 1997.
13
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INTERNATIONAL NETWORK SERVICES
By: /s/ Kevin J. Laughlin
----------------------------------------
Kevin J. Laughlin
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Date: May 14 , 1997
14
<PAGE>
EXHIBIT INDEX
EXHIBIT 11.1 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE
15
<PAGE>
EXHIBIT 11.1
INTERNATIONAL NETWORK SERVICES
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
EXHIBIT 11.1
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding................................... 31,547 8,394 25,339 8,394
Weighted average common equivalent shares from Mandatorily Redeemable
Convertible Preferred Stock and warrants
calculated using the if-converted and treasury stock methods............ - 16,784 4,929 16,782
Weighted average common equivalent shares from stock options
and warrants calculated using the treasury stock method................. 2,140 2,859 1,821 2,736
Common equivalent shares from common shares issued and stock options granted
within twelve months of the intial public offering,
included pursuant to Staff Accounting Bulletin No. 83................... - 2,634 762 2,634
------ ------ ------ ------
Shares used to compute net income per share.................................. 33,687 30,671 32,851 30,546
====== ====== ====== ======
Net income................................................................... $2,126 $691 $5,143 $2,020
Net income per share......................................................... $0.06 $0.02 $0.16 $0.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 15,977 0
<SECURITIES> 18,256 0
<RECEIVABLES> 23,387 0
<ALLOWANCES> (643) 0
<INVENTORY> 22,744 0
<CURRENT-ASSETS> 58,829 0
<PP&E> 13,244 0
<DEPRECIATION> (5,363) 0
<TOTAL-ASSETS> 66,710 0
<CURRENT-LIABILITIES> 9,773 0
<BONDS> 0 0
0 0
0 0
<COMMON> 54,322 0
<OTHER-SE> 2,615 0
<TOTAL-LIABILITY-AND-EQUITY> 66,710 0
<SALES> 0 0
<TOTAL-REVENUES> 26,539 68,764
<CGS> 0 0
<TOTAL-COSTS> 23,404 61,036
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,485 8,432
<INCOME-TAX> 1,359 3,289
<INCOME-CONTINUING> 2,126 5,143
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,126 5,143
<EPS-PRIMARY> .06 .16
<EPS-DILUTED> 0 0
</TABLE>
