Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
(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, 2000
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 1-8962
INTEGRATED INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0624332
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1560 West Fountainhead Parkway
Tempe, Arizona 85282 (480) 817-8000
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
Securities registered pursuant to Section 12(g) of the Act:
================================================================================
Name Of Each Exchange On
Title Of Each Class Which Registered
- --------------------------------------------------------------------------------
Common Stock, Nasdaq National Market
$0.001 Par Value
Aggregate Market Value
Of Shares Held By
Title Of Each Class Shares Outstanding As Non-Affiliates As Of
Of Voting Stock Of March 16, 2001 March 16, 2001
- --------------------------------------------------------------------------------
Common Stock, $0.001 Par Value 20,326,022 $6,857,434(a)
(a) Computed by reference to the closing price on the composite tape on March
16, 2001, as reported by the Wall Street Journal.
================================================================================
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 any amendment to this Form 10-K. [_]
================================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its Annual
Meeting of Shareholders to be held on May 24, 2001 are incorporated by reference
into Part III hereof.
================================================================================
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business..................................................................................... 2
Item 2. Properties................................................................................... 20
Item 3. Legal Proceedings............................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 20
Supplemental Item.
Executive Officers of the Registrant......................................................... 20
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters..................... 22
Item 6. Selected Consolidated Financial Data......................................................... 22
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations....... 24
Item 7A Quantitative and Qualitative Disclosures about Market Risk................................... 30
Item 8. Financial Statements and Supplementary Data.................................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 51
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 51
Item 11. Executive Compensation....................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 51
Item 13. Certain Relationships and Related Transactions............................................... 51
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K....................................... 52
SIGNATURES................................................................................................. 53
1
PART I
ITEM 1. BUSINESS
Overview
Integrated Information Systems is an innovative technology and business
consultancy providing extensive experience and insight to create a sustainable
competitive edge for our clients. For companies who seek measurable results from
business and technology investments, we offer cost-sensitive, productive,
profit-minded solutions across the entire service continuum with single provider
accountability.
Since our inception in 1988, we have focused on leveraging core
competencies to define, design, build, integrate, and manage complex information
systems and optimize applications to solve business problems. By partnering with
us, our clients are able to rapidly and cost-effectively deploy solutions,
without increasing the size of their internal IT organizations or investing in
extensive capital infrastructures. Our fully integrated services--strategy,
integration and operations--provide the framework in which technology solutions
can be conceptualized and integrated to provide clients stability with their
current systems and the agility to adopt superior processes and technologies in
the future.
Our Approach and Positioning
After 12 years of operations in the IT professional services market, IIS
became publicly traded through a successful initial public offering in March of
2000. In the process, we were evaluated by the equity markets against a number
of new entrant firms, which in most cases had comparably short track records and
limited technical integration competencies. Many of these new firms helped
companies seeking to quickly gain a web presence with transactional capabilities
for alternative sales channels and additional revenue generation streams. Many
of these eService firms, however, were focused on start-up Internet-based
companies and failed to recognize the full potential of interactive worldwide
connectivity.
With more than a decade of experience, we have been able to recognize the
broader capabilities of the Internet. Our primary focus has been on the
comprehensive utilization of Web technologies for systems automation within and
between businesses to reduce client costs through improved efficiencies and
productivity, with a reduced focus on revenue generation through websites. While
we have helped many clients gain a Web presence, most of our consulting hours
have been devoted to integrating emerging Web technologies with our clients'
traditional business systems. We believe that this is part of a natural
evolution of our market positioning and reflects our consistent emphasis on
improving our clients' operating results through the use of the latest advances
in technology. For over a decade, we have been integrating new technologies and
custom applications with existing technologies, applications, and back-end
systems for our clients. Then and now, we believe our experience in the full
spectrum of services and the depth of our operational capabilities
differentiates our service offerings from those of most other firms in the
IT professional services industry.
Although IIS and our competitors experienced lower growth rates in the IT
professional services market in 1999 and 2000, the IT professional services
market is projected to grow at a robust 19% CAGR from 2000 through 2004, or over
$500 billion to $1.1 trillion, according to Gartner Dataquest. We believe that
this predicted technology services market growth will continue to be primarily
driven by:
. the ongoing evolution of technology and business models;
2
. increased focus on leveraging Web technology to improve
productivity and efficiencies; and
. increases in the outsourcing of non-core IT operations.
With the influx of new, powerful Web-based products, companies have greatly
increased their reliance on the Internet to conduct basic business operations.
The performance and reliability of these systems has become critical to many
companies. At the same time, many companies are now being overwhelmed by the
capital and operating expenses associated with the internal hosting and
maintenance of Web-based operations. Businesses are increasingly outsourcing
these non-core operations to application/managed service providers.
We recognized the opportunity and invested in application outsourcing
services, a fast growing segment within the IT professional services market.
Gartner Dataquest estimates that outsourcing and management services will
increase from a 53% share of the worldwide IT professional services market in
2000 to 57% in 2004, or from about $270 billion to $630 billion. This market
phenomenon reinforces the foresight of our investment and commitment to the
application outsourcing market. We are well positioned, staffed, and equipped to
take advantage of the overall growth of the entire IT professional services
market through systems integration and application outsourcing services.
Most application/managed service providers have focused their energies on
services geared toward fast Website infrastructure implementation that is
characteristic of dot-com startups. Having no historical base of experience or
operations in the broader IT services market, many of these providers do not
have the required business and technical expertise necessary to competently
expand their service offerings. These providers are not presently positioned to
provide the bottom-line value mid-market and Fortune 1000 companies demand of
application outsourcers as they adopt Web technologies to produce operational
efficiencies. Our full-service offering includes all of the critical elements of
back-office integration, supply chain optimization, and partner integration most
application/managed service providers fail to provide. Moreover, many providers
in this market co-locate the physical infrastructure at facilities they neither
own nor control. We operate and provide our services from within our own state-
of the-art controlled environment.
As businesses increasingly outsource individual applications or entire
Internet operations to application/managed service providers, this service gap
is becoming increasingly apparent. Many providers that host and manage
applications do not have the expertise to provide critical application
enhancements--looking into and understanding the inner workings of the code--
including bug fixes, added functions/features, and integration with other
applications. Our industry and integration expertise enables us to fill this
service gap by leveraging our consultants to continually enhance and evolve our
clients' IT systems to help them address their key business problems. We create
ongoing value for our clients through our demonstrated ability to provide
application enhancements with measurable business results.
We believe that the ability to engage a truly integrated, end-to-end
service provider, offering single-provider accountability, is necessary under
today's business conditions. We give our clients one reliable point of contact
who is responsible for the client relationship and client satisfaction. We also
believe that the inclusion of application outsourcing as an integral part of our
service offering helps reduce our market risk associated with the traditional
seasonality of IT professional services. We have made significant application
outsourcing investments to establish recurring revenue streams through long-term
hosting contracts. These long-term application outsourcing relationships benefit
the client, who is able to defer costs of application management over extended
periods of time. We believe that a shift in the systems integration market will
result in more consulting and integration services in the deployment
3
of long-term outsourcing contracts. This trend should facilitate the cross-
selling of our services to existing clients.
Strategy, integration, and operations--these are the three vital service
elements that companies need as they undertake new technology initiatives
requiring significant investments. Through our fully integrated services, we
help clients position themselves strategically in their markets, then develop
and integrate solutions and continually evolve clients' business models through
application outsourcing to meet changing market requirements.
We recognize that large consulting firms such as IBM, EDS and CSC typically
provide a similar service offering, but primarily to Fortune 100 enterprises.
Because of their extensive cost structures, these large providers have not been
able to successfully target the mid market. We maintain the flexibility,
innovation, delivery capacity, and favorable cost structure to competitively
provide end-to-end services to mid-market and Fortune 1000 companies. We believe
that our business model is unique. We target and fill this market niche by
delivering a more complete, consistent, and economical service model for mid-
market and Fortune 1000 clients.
Our Services
Our integrated, single-source service delivery model enables us to
conceptualize, design, build, integrate, manage, and grow our clients'
applications and businesses through the seamless delivery of services relating
to our clients' need for strategy, integration, and operations. We help our
clients mitigate risk by providing stability with their current systems and the
agility to adopt superior processes and technologies in the future.
We are accountable to our clients and are totally dedicated to quality and
reliability. We share our clients' focus and dedication to realizing all the
benefits that technological innovations can produce to bottom-line results
through reduced costs, improved productivity, increased revenue and enhanced
competitive position.
Our clients trust the IIS solution team to operate as an extension of their
business. We combine our business strategy capabilities and business process
knowledge with our clients' insights to mutually develop sound, practical,
technology-based business and action plans. We believe that we are one of the
few IT services firms offering end-to-end services, providing the capabilities
necessary to rapidly transform businesses to a digital environment. We deliver
services through our project managers, who bring strategic and business process
expertise, and our solution architects, who have extensive application and
network integration expertise. We believe that one of our competitive advantages
is our ability to internally provide application outsourcing in our wholly-owned
and operated facility. We believe that this internal capability helps our
clients further integrate and enhance their applications as their businesses
evolve.
The fundamental elements of our integrated service offering include our:
. business strategy services;
. application and network integration services; and
. application outsourcing services.
4
Business Strategy Services
We help our clients visualize and translate strategic direction into
solutions that effectively leverage technologies to enhance their operational
and market performance. Our innovative strategic process, IIS NextDimension(SM),
turns ideas into executable plans in accelerated time frames. We consider both
the strategic and technical aspects of the business at every step, positioning
our clients to thrive in today's rapidly evolving business environment.
IIS NextDimension(SM): The IIS NextDimension(SM) collaborative work group
joins a client's customers and partners as part of an innovative process,
focusing on each party's needs and objectives. This requires early,
collaborative involvement and ownership of the initiative. IIS NextDimension(SM)
provides a unique opportunity for all stakeholders to align disparate
expectations and reach consensus on compelling business needs. The resulting
business plan sets the stage for action.
We analyze clients' existing technology infrastructures, evaluate both pre-
engineered and custom solutions, and deliver realistic recommendations and
options. The resulting action plan articulates specific business objectives and
success metrics and establishes a phased project plan encompassing scope,
schedule, and cost.
Customer Expectations Alignment: We view strategy as an ongoing process,
not a point-in-time event. Through the IIS NextDimension(SM) framework, we
pursue the continual alignment of expectations among various stakeholders. We
believe that this alignment is essential to a client's effective strategy
conception and integration of people, processes, and technologies. To do so, we
regularly meet with clients at predetermined checkpoints, review specific client
deliverables, and ensure that our solution teams are continually aligned with
our clients' expectations.
Application & Network Integration Services
For over a decade, we have solved business-critical issues by building
sound infrastructures and custom applications which require complex integration
with multiple entities, systems, and technologies. Through effective
integration, we provide bottom-line benefits for our clients through substantial
productivity gains and improved efficiencies.
Application Development & Integration: Information architecture and
practical interface design are the critical elements of successful integration
within and between businesses. We focus on ease of use in our application
interface designs to ensure people can naturally and effectively operate
technology in today's business world.
Our solution architects comprehensively design systems that carefully
consider all aspects of custom application development, including both legacy
system integration and enterprise application integration. To further benefit
our clients, we utilize available process and technology pre-engineering,
whether existing in client systems, existing in our experience, or available
through a vendor offering. Once our clients' internal systems are adequately
connected, we integrate the clients' systems and processes with their suppliers,
partners, and customers to enhance their automated trade capabilities. We
traverse different languages, applications, protocols and interactive channels,
such as wireless and voice technologies, to successfully integrate throughout a
client's value chain.
Network Design & Integration: During application development, we conduct a
thorough analysis of our client's organization, architecture, operations, and
facilities. We strive to ensure that a client's network and
5
systems are secure and tuned for optimal network performance and increased
availability with the capacity needed for future scalability.
Application Outsourcing Services
Our application outsourcing services provide a comprehensive solution for
deploying, managing, and enhancing all aspects of a company's interactively-
connected business. Clients who outsource their application operations to us
utilize the best technologies, reduce capital expenditures, accelerate their
time to market, and consequently benefit from an enhanced ability to focus on
their core businesses.
Application Infrastructure: Our secure, state-of-the-art data center
provides a complete infrastructure to ensure system performance. While paying
only for capacity demanded, our clients realize economies of scale benefits
through utilizing our fully scaled, production-ready hardware, storage, network
resources, and skilled engineers.
Application Management: We greatly simplify our clients' application
operations by being the single point of contact accountable for meeting all
service level requirements. Through our network operations center our
experienced engineers continuously and proactively monitor our clients'
applications and networks. Our customer care center operates around the clock
to immediately respond to any application emergency.
Application Enhancements: Our clients gain timely access to our skilled
application development and integration experts to meet any ongoing application
support and enhancement requirement, such as bug fixes or new features and
functions. Because we leverage application development and integration skills
across multiple client projects, we are able to provide significant cost
advantages to these clients. Our monitoring technology permits us to measure and
assess a client's operational and transactional data in order to gain customer
and market insights. The results of this analysis enable us to assist clients in
taking market-driven action to attract and retain the most profitable customers,
increase market share, and pursue new market opportunities.
Clients
We target companies in industries in which there are compelling reasons to
take advantage of technological innovations to produce improved operating
results through reduced costs, improved productivity and efficiency, increased
revenue, and improved competitive position.
We maintain a diversified client portfolio of mid-market and Fortune 1000
companies across a carefully balanced set of target market segments. By
targeting specific companies in select markets, we have been able to leverage
our industry experience across key market segments, giving our strategy and
technical consultants in-depth knowledge and understanding to translate client
strategies into functional and operational solutions. We align with clients in
the following vertical markets:
. education;
. financial services;
. government;
. health care;
. manufacturing;
. media and entertainment;
. retail and distribution;
6
. travel and hospitality; and
. utility and telecommunications.
Companies such as Partners HealthCare, EMC, Lycos, MD Helicopters, New West
Energy, and NCS Pearson have entrusted us to bring new technology perspectives
to help solve their complex business issues.
Sales and Marketing
Although we have traditionally been able to generate the vast majority of
our revenues from the repeat business of satisfied clients, a significant
portion of recent growth has arisen from the acquisition of new clients in new
geographic areas. Each of our domestic offices sells services through multiple
channels, including industry-focused senior professionals focusing on business
generation, consultants, strategic alliances, Centers of Excellence, and
customer referrals. We utilize a team selling approach, whereby our senior
professionals collaborate with our strategic, technical and operational
consultants to obtain business development support.
To maintain our client focus, we are internally organized around target
industries with market teams consisting of both consultants and dedicated senior
professionals who focus on business generation. These teams are responsible for
selling and delivering both consulting and application outsourcing services as
well as their clients' satisfaction. We also have a direct sales force for our
application outsourcing services. Many of our senior business generation
professionals have been grown organically through our technical ranks. This
alignment with our target industries assures that we are setting appropriate
client expectations from the very first sales contact all the way through our
service delivery. We believe that the in-depth industry knowledge and technical
expertise of our senior business generation professionals and consultants
results in higher quality services and generates additional client engagements.
We also work closely with strategic vendor alliances to provide added value
to our clients. These alliances are selected for both their product or service
market leadership and cultural fit with our organization. We deploy business
development resources to these select alliances for aggressive joint selling. In
addition to their excellent product offerings, our alliances are a valuable
source of leads and may provide funding for joint marketing events and
specialized programs.
Another part of our sales and marketing effort is our corporate planning
and communications group. The corporate planning and communications group has
overall responsibility for the company-wide strategic plan, development and
communication of our brand, public relations, analyst relations, investor
relations and Website communications. Marketing managers then communicate a
common message to potential clients with industry-specific insight on key
business and technology issues. Instead of mass media approaches to the market,
we primarily use one-to-one marketing techniques. Our Centers of Excellence are
instrumental in these cost-effective, personalized marketing activities which
include executive client briefings, joint-marketing events with strategic
alliances, on-site educational events for clients' senior management, public
speaking at seminars and trade shows, white papers and technology research
briefs. We have historically been able to establish a number of new client
relationships based on referrals from our loyal client base.
Through our founding and a decade of growth in the Southwest, we have
established a strong regional brand image base and are also now driving that
brand into the seven major U.S. geographical markets in which we have invested
in operations. We believe that having a sales and marketing focus in
7
each region will help us develop strong local market presence and brand name
recognition in each of these major markets.
Research and Development
Our research and development team is dedicated to the continual improvement
and expansion of the service offerings that we provide to our clients. We strive
to create excellence for our clients by focusing on client satisfaction,
technical competence, and service quality.
Service Excellence: We continually strive for service excellence.
Performance data for our services are identified through client satisfaction
surveys, lessons-learned workshops and service quality blueprinting. Each of
these research methods helps us create process improvements that enable us to
work more efficiently with our clients to ensure successful engagements for both
our clients and IIS.
Customer Advisory Board: Our customer advisory board is comprised of an
influential client group that regularly meets to ensure that the solutions that
we deliver are approached from a client-driven perspective. They also offer us
valuable insight into industry trends, technology needs, and service delivery
standards. Our customer advisory board is a key component of our strategic
planning process and delivery modeling which enables us to better meet rapidly
evolving needs in the marketplace.
Centers of Excellence: We provide our clients with the most current
enabling technologies through our unique "Centers of Excellence" (CoE) program.
Our CoEs are the nucleus of our learning culture, continuously advancing and
expanding our knowledge network. In their mission of "experts creating experts,"
CoE leaders and members identify trends in technology, quickly develop expertise
in those areas, and ride the next wave of technology innovation. CoEs provide
resources and a community environment in which consultants can research, learn,
apply, and teach the latest technologies. Our CoEs currently provide technology
expertise in the following areas:
. mobile solutions;
. web enabled legacy systems;
. business-to-business solutions;
. supply chain integration;
. electronic customer relationship management; and
. learning solutions.
Culture and People
At the heart of our success and long-term vision are our exceptionally
talented people drawn from many diverse backgrounds. We foster a learning
culture with an entrepreneurial spirit that enables our gifted people to thrive.
While remaining totally accountable for client satisfaction, each consultant is
also rewarded for learning, mentoring, training, and teamwork.
To date, we have built our business entirely through hiring and training
new employees without mergers or acquisitions. We believe that our organic
growth model is essential to our ability to attract and retain the brightest and
best people, and in turn provides superior quality services to our clients.
As of December 31, 2000, we had 497 full-time employees, of whom 82% are
billable consultants, 6% are sales and marketing and 12% are administrative. In
December 2000, we reduced our workforce by 110 employees to adjust to changing
market conditions. Our focus on expenses in all areas
8
will expedite our return to profitability. We plan to continue to hire
individuals with the right skills mix to meet our clients' ongoing needs.
We believe that our relationship with our employees is good. We believe
that we maintain high employee retention rates as compared to industry averages
by providing a unique corporate culture, paying competitive salaries, and
granting stock options and other awards, including continuing education
benefits. None of our employees is currently represented by a labor union.
Competition
We have traditionally competed within the broad IT professional services
sector. Within this sector, we compete with Internet service providers,
consulting arms of national accounting firms, professional service groups of
technology providers, IT strategy consulting firms, networking service systems
integrators, and our clients' internal IT departments. With our expanded
application outsourcing service offering, we also compete directly with managed
service providers.
The markets in which we compete are intensely competitive due to constant
changes in technology and client needs. We expect competition to both continue
and intensify as the IT services sector continues to evolve, resulting in rapid
changes in core business models for all competitors in these spaces. This may
cause some of our competitors who may be experiencing financial difficulty to
reduce pricing substantially on engagements.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with their clients, greater brand or name
recognition, and significantly greater financial, technical and marketing
resources. As a professional services company, we do not own any proprietary
technologies that preclude or inhibit competitors from entering our industry. In
addition, our industry typically has low barriers to entry. The costs to develop
and provide information technology consulting services are relatively low, so we
also expect to continue to face additional competition from new industry
entrants. However, with the recent closure of some competitors in the industry,
new entry is probably less likely in the short run. A more probable market
phenomenon would be consolidation of existing competitors.
We believe that the principal competitive factors in our market include:
. integrated, full-service offering with single provider
accountability;
. technical and business expertise;
. cost certainty;
. service and deliverable quality;
. development and deployment speed;
. solution reliability and measurable results; and
. attraction and retention of qualified consultants.
We believe that we are the only fully integrated, end-to-end IT solutions
provider offering a full continuum of IT professional services, including
business strategy services, application and network integration services, and
wholly-owned and operated application outsourcing services. We believe that this
enhances our ability to compete favorably in all of these principal competitive
factor areas. We also believe our industry tenure and reputation for flexibly
evolving with changes in the marketplace over the last 12 years prepares and
positions us to quickly adapt and respond to future changes in the marketplace.
The market for IT professional services is, however, continually evolving and we
cannot be certain that we will compete successfully in the future.
9
Intellectual Property Rights
We have developed proprietary methodologies, tools, processes, and software
in connection with delivering our services. We rely on a combination of trade
secret, nondisclosure and other contractual agreements, and copyright and
trademark laws, to protect our proprietary rights. Existing trade secret and
copyright laws afford us only limited protection. We typically enter into
confidentiality and non-disclosure agreements with our employees and generally
require that our clients enter into similar agreements. These agreements are
intended to limit access to and distribution of our proprietary information. In
addition, we have entered into non-competition agreements with certain of our
key employees. There can be no assurance that the steps we have taken in this
regard will be adequate to deter misappropriation of our proprietary information
or that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights.
A portion of our business involves the development of software applications
for specific client engagements. We generally retain ownership of client-
specific software, although our clients often retain co-ownership and limited
rights to use the applications, processes, and intellectual property developed
in connection with client engagements. We sometimes enter into agreements with
our clients which provide for sole ownership by our clients of our developments
with no or limited rights retained by us to utilize these developments in other
client engagements.
Factors that May Affect Future Results and Our Stock Price
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. Forward-looking statements give our current expectations
or forecasts of future events. Words such as "expect," "may," "anticipate,"
"intend," "would," "will," "plan," "believe," "estimate," "should," and similar
expressions identify forward-looking statements. Forward-looking statements in
this Form 10-K include express or implied statements concerning our future
revenues, expenditures, capital or other funding requirements, the adequacy of
our current cash and working capital balances to fund our present and planned
operations and financing needs, expansion of and demand for our service
offerings, and the growth of our business and operations, as well as future
economic and other conditions both generally and in our specific geographic and
product and services markets. These statements are based on our estimates,
projections, beliefs, and assumptions, and are not guarantees of future
performance. From time to time, we also may provide oral or written forward-
looking statements in other materials we release to the public.
We caution that the following important factors, among others, could cause
our actual results to differ materially from those expressed in forward-looking
statements made by or on behalf of us in filings with the Securities and
Exchange Commission, press releases, communications with investors, and oral
statements. Any of these factors, among others, could also negatively impact our
operating results and financial condition and cause the trading price of our
common stock to decline or fluctuate significantly. We undertake no obligation
to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult
any further disclosures we make in our reports filed with the Securities and
Exchange Commission and in future public statements and press releases.
10
WE HAVE EXPERIENCED OPERATING LOSSES AND MAY INCUR OPERATING LOSSES IN FUTURE
PERIODS, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
We had a net loss of approximately $25.4 million for the year ended
December 31, 2000 and a net loss of approximately $1.4 million for the year
ended December 31, 1999. We expect to continue to incur losses in 2001. If we do
not achieve revenue growth, we could experience operating losses greater than
already anticipated or for periods after 2001. These losses or any fluctuation
in our operating results could cause the market value of our common stock to
decline.
IF OUR COMMON STOCK PRICE REMAINS BELOW $1.00 IN 2001, WE MAY BE DELISTED FROM
NASDAQ, REDUCING THE LIQUIDITY AND VALUE OF OUR COMMON STOCK.
At various times since December 2000, our common stock has traded for less
than $1.00 per share on the Nasdaq National Market. If a security listed on
Nasdaq trades for less than $1.00 for thirty consecutive days, Nasdaq begins a
process pursuant to which the issuer's securities may be delisted from the
Nasdaq. Any delisting of our common stock on Nasdaq would adversely affect the
liquidity of our common stock and further depress the common stock price.
WE RELY ON A SMALL NUMBER OF CLIENTS FOR MOST OF OUR REVENUES AND OUR REVENUES
WILL DECLINE SIGNIFICANTLY IF WE CANNOT RETAIN OR REPLACE, OR IF WE EXPERIENCE
COLLECTION PROBLEMS FROM, THESE CLIENTS.
We derive, and expect to continue to derive, a significant portion of our
revenues from a limited number of clients. Our largest client, American Express,
first engaged us in the fourth quarter of 1998. American Express accounted for
24% and 35% of our revenues during 2000 and 1999, respectively.
PartsAmerica.com, Inc., our second largest client, accounted for 10% of our
revenues in 2000.
Virtually all of our client contracts may be canceled by the client
following limited notice and without economic penalty; however, the client is
responsible for fees earned through the date of contract termination unless a
valid offset exists. The revenues derived from specific clients are likely to
vary from period to period, and a major client in one year may not use our
services in a subsequent year. The loss of a large client or project in any
period could result in a decline in our revenues and profitability from period
to period, and cause significant and sudden declines or fluctuations in the
market value of our common stock. In addition, because a large portion of our
receivables relate to a limited number of clients and large projects, write-offs
attributable to one or a few of these clients or projects could exceed our
allowance for doubtful accounts and significantly harm our operating results.
In 2000, we experienced bad debt expense of $11.8 million with clients. Of
the $11.8 million in bad debt expense incurred in 2000, approximately $7.4
million is attributable to development stage and dot-com clients that have not
been able to pay as a result of the slow-down in funding for start up ventures
in 2000. The remaining $4.4 million in bad debt expense is attributable to
disputes with clients. We are currently in arbitration with these clients to
resolve these disputes.
THE MARKET FOR OUR SERVICES MAY NOT GROW AS ANTICIPATED AND HURT OUR ABILITY TO
BECOME PROFITABLE.
While the IT services market in which we compete with our consulting and
application outsourcing services steadily grew in 2000, this growth was lower
than anticipated. In anticipation of a continued increase in demand for
consulting and application outsourcing services, we have made substantial
infrastructure investment to support these demands. If demand for either of
these types of services does not grow as anticipated in the future, or if we do
not capture sufficient market share for these services, we may not be able to
achieve profitability.
11
THE VALUATION MODEL FOR COMPANIES SUCH AS OURS HAS CHANGED AND OUR INABILITY TO
ACHIEVE PROFITABILITY WOULD MATERIALLY ADVERSELY AFFECT OUR STOCK PRICE.
When our stock became publicly traded in 2000, companies in our sector were
valued generally upon revenue growth, with little regard for profitability. Over
the past few periods, companies in our sector have been increasingly measured
based on cash flows and profits. If we are unable to achieve profitability and
positive cash flow, our stock price will continue to suffer and could further
decline, and the liquidity for our stock could deteriorate further as well.
IF WE ARE UNABLE TO ATTRACT AND RETAIN PROFESSIONAL STAFF, WE WILL BE UNABLE TO
PROVIDE OUR SERVICES EFFECTIVELY AND CONSEQUENTLY MAY BE UNABLE TO INCREASE OR
MAINTAIN CURRENT REVENUE LEVELS OR ACHIEVE OR MAINTAIN PROFITABILITY, WHICH
WOULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
We derive substantially all of our revenue from the billings of our
professional services personnel on projects. If we fail to attract and retain
professionals, we may not be able to successfully compete for new projects,
timely finish existing projects, or generally carry out our business plan. The
continuing evolution of new technology requires integrated solutions implemented
by professionals qualified in leading and emerging technologies. There is
competition for professionals with the skills required to provide these
solutions. We may lose prospective qualified employees to clients or
competitors. We may not attract a sufficient number of highly skilled
professionals, or retain, train, and motivate the professionals that we do
attract. Failure to do so could impair our ability to adequately manage and
complete our existing projects or obtain new projects. In addition, declines in
the trading price of our common stock could materially and adversely affect
employee morale and retention and other aspects of our business.
OUR RESULTS OF OPERATIONS MAY VARY FROM QUARTER TO QUARTER IN FUTURE PERIODS
AND, AS A RESULT, WE MAY NOT MEET THE EXPECTATIONS OF OUR INVESTORS AND
ANALYSTS, WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE.
Our revenues and results of operations have fluctuated significantly in the
past and could fluctuate significantly in the future. We incurred net losses of
$2.3 million, $3.2 million, $3.7 million and $16.2 million in the first, second,
third, and fourth quarters of 2000, respectively. In 1999, our quarterly net
earnings ranged from a loss of $2.2 million in the fourth quarter to earnings of
$559,000 in the second quarter. You should not rely on period-to-period
comparisons of operations as an indication of future performance.
Our results may fluctuate due to the factors described in this Form 10-K,
as well as:
. the loss of or failure to replace any significant clients;
. variation in demand for our services;
. higher than expected bad debt write-offs;
. changes in the mix of services that we offer; and
. increases in our operating expenses.
A substantial portion of our operating expense is related to personnel
costs and overhead, which cannot be adjusted quickly and is therefore relatively
fixed in the short term. Our operating expenses are based, in significant part,
on our expectations of future revenues. If actual revenues are below our
expectations, we may not achieve our anticipated operating results. Moreover, it
is possible that in some future periods our results of operations may be below
the expectations of analysts and investors. In this event, the market price of
our common stock is likely to decline.
12
IF WE FAIL TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES THAT CHARACTERIZE
OUR INDUSTRY, OUR COMPETITIVENESS WOULD SUFFER, CAUSING US TO LOSE PROJECTS OR
CLIENTS AND CONSEQUENTLY REDUCING OUR REVENUES AND THE PRICE OF OUR COMMON
STOCK.
Our market and the enabling technologies used by our clients are
characterized by rapid, frequent, and significant technological changes. If we
fail to respond in a timely or cost-effective way to these technological
developments, we may not be able to meet the demands of our clients, which would
affect our ability to generate revenues and achieve profitability. We have
derived, and expect to continue to derive, a large portion of our revenues from
creating solutions that are based upon today's leading and developing
technologies and which are capable of adapting to future technologies. Our
historical results of operations may not reflect our new service offerings and
may not give you an accurate indication of our ability to adapt to these future
technologies.
OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD
DAMAGE OUR REPUTATION AND HARM OUR ABILITY TO COMPETE FOR NEW BUSINESS OR RETAIN
OUR EXISTING CLIENTS, WHICH MAY LIMIT OUR ABILITY TO GENERATE REVENUES AND
ACHIEVE OR MAINTAIN PROFITABILITY.
Many of our engagements involve the delivery of information technology
services that are critical to our clients' businesses. Any defects or errors in
these services or failure to meet clients' specifications or expectations could
result in:
. delayed or lost revenues due to adverse client reaction;
. requirements to provide additional services to a client at no or a
limited charge;
. refunds of fees for failure to meet obligations;
. negative publicity about us and our services; and
. claims for substantial damages against us.
In addition, we sometimes implement critical functions for high profile
clients or for projects that have high visibility and widespread usage in the
marketplace. If these functions experience difficulties, whether or not as a
result of errors in our services, our name could be associated with these
difficulties and our reputation could be damaged, which would harm our business.
WE MAY LOSE MONEY ON FIXED-PRICE CONTRACTS BECAUSE WE MAY FAIL TO ACCURATELY
ESTIMATE AT THE BEGINNING OF PROJECTS THE TIME AND RESOURCES REQUIRED TO FULFILL
OUR OBLIGATIONS UNDER OUR CONTRACTS; THE ADDITIONAL EXPENDITURES THAT WE MUST
MAKE TO FULFILL THESE CONTRACT OBLIGATIONS MAY CAUSE OUR PROFITABILITY TO
DECLINE OR PREVENT US FROM ACHIEVING PROFITABILITY AND COULD REDUCE THE PRICE OF
OUR COMMON STOCK.
Although we provide consulting services primarily on a time and materials
compensation basis, approximately 11% of our consulting revenue was derived from
fixed-price, fixed-time engagements in 1999, and approximately 5% of revenues
were derived from fixed-price, fixed-time engagements in 2000. The percentage of
our revenues derived from fixed-price, fixed time engagements may increase in
the future, as influenced by changes in demand and market conditions. Our
failure to accurately estimate the resources required for a fixed-price, fixed-
time engagement or our failure to complete our contractual obligations in a
manner consistent with our projections or contractual commitments could harm our
overall profitability and our business. From time to time, we have been required
to commit unanticipated additional resources to complete some fixed-price,
fixed-time engagements, resulting in losses on these engagements. We believe
that we may experience similar situations in the future. In addition, we may
negotiate a fixed price for some projects before the design specifications are
finalized, resulting in a fixed price that is too low and causing a decline in
our operating results.
13
OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS AND OUR CLIENTS' ABILITY TO
TERMINATE CONTRACTS WITH LITTLE OR NO NOTICE REDUCES THE PREDICTABILITY OF OUR
REVENUES AND INCREASES THE POTENTIAL VOLATILITY OF OUR STOCK PRICE.
Our clients generally retain us on an engagement-by-engagement basis,
rather than under long-term contracts. In addition, our current clients can
generally reduce the scope of or cancel their use of our services without
penalty and with little or no notice. As a result, our revenues are difficult to
predict. Because we incur costs based on our expectations of future revenues,
our failure to predict our revenues accurately may cause our expenses to exceed
our revenues, which could cause us to incur increased operating losses. Although
we try to design and build complete integrated information systems for our
clients, we are sometimes retained to design and build discrete segments of the
overall system on an engagement-by-engagement basis. Since the projects of our
large clients can involve multiple engagements or stages, there is a risk that a
client may choose not to retain us for additional stages of a project or that
the client will cancel or delay additional planned projects. These cancellations
or delays could result from factors related or unrelated to our work product or
the progress of the project, including changing client objectives or strategies,
as well as general business or financial considerations of the client. If a
client defers, modifies, or cancels an engagement or chooses not to retain us
for additional phases of a project, we may not be able to rapidly re-deploy our
employees to other engagements and may suffer underutilization of employees and
the resulting harm to our operating results. Our operating expenses are
relatively fixed and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of engagements in progress.
Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty and have begun to cancel or delay spending on
business and IT consulting initiatives. The financial difficulties of many dot-
com companies may reduce the urgency of larger companies' IT initiatives. If
current or potential clients cancel or delay their IT initiatives, our business
and results of operations could be materially adversely affected.
WE MAY NOT BE SUCCESSFUL IN RETAINING OUR CURRENT TECHNOLOGY ALLIANCES OR
ENTERING INTO NEW ALLIANCES, WHICH COULD HAMPER OUR ABILITY TO MARKET OR DELIVER
SOLUTIONS NEEDED OR DESIRED BY OUR CLIENTS AND LIMIT OUR ABILITY TO INCREASE OR
SUSTAIN OUR REVENUES AND ACHIEVE OR MAINTAIN PROFITABILITY.
We rely on vendor alliances for client referral and marketing
opportunities, access to advanced technology and training as well as other
important benefits. These relationships are non-exclusive and the vendors are
free to enter into similar or more favorable relationships with our competitors.
Whether written or oral, many of the agreements underlying our relationships are
general in nature, do not legally bind the parties to transact business with
each other or to provide specific client referrals, cross-marketing
opportunities, or other intended benefits to each other, have indefinite terms,
and may be ended at the will of either party. We may not be able to maintain our
existing strategic relationships and may fail to enter into new relationships.
If we are unable to maintain these relationships, the benefits that we derive
from these relationships, including the receipt of important sales leads, cross-
marketing opportunities, access to emerging technology training and
certifications, and other benefits, may be lost. Consequently, we may not be
able to offer desired solutions to clients, which would result in a loss of
revenues and our inability to effectively compete for clients seeking emerging
or leading technologies offered by these vendors.
IF WE ARE UNABLE TO SUCCESSFULLY OPERATE OUR REGIONAL OFFICES, WE MAY INCUR
INCREASED OPERATING EXPENSES WITHOUT CORRESPONDING INCREASED REVENUES, WHICH MAY
LIMIT OUR ABILITY TO ACHIEVE OR MAINTAIN PROFITABILITY AND CAUSE THE PRICE OF
OUR COMMON STOCK TO DECLINE.
A key component of our business strategy is to increase revenues delivered
from our offices in
14
Atlanta, Boston, Denver, Las Vegas, Los Angeles, and Irvine, as well as our
solutions development center in India. We may not be able to operate our
regional offices profitably or successfully expand these offices. If we do not
implement this strategy successfully, we may incur increased operating expenses
without increased revenues, which would harm our operating results and our stock
price.
IF OUR EFFORTS TO DEVELOP BRAND AWARENESS ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE
TO INCREASE OUR REVENUES SUFFICIENTLY TO OFFSET THE MARKETING COSTS THAT WE WILL
INCUR IN THESE EFFORTS.
Because the information technology professional service industry recently
experienced a decline in demand, an element of our business strategy is to
develop and maintain widespread awareness of our brand name in our target
markets. If our marketing efforts are not successful, we may not experience
increases in revenues.
Because we operate in a highly competitive and rapidly changing industry,
competitors could cause us to lose business opportunities or professional
personnel and limit our ability to increase or sustain revenue levels.
The business areas in which we compete are intensely competitive and
subject to rapid change. Consequently, we expect competition to continue and to
intensify. Competitors could hire professionals or win new client engagements
that we are competing for. If this occurs, our ability to generate increased
revenues may be limited and we may not achieve profitability. Our competitors
fall into several categories and include a range of entities providing both
general management and information technology consulting services and internet
services. Many of our competitors have longer operating histories, larger client
bases, and greater brand or name recognition, as well as greater financial,
technical, marketing, and public relations resources. Our competitors may be
able to respond more quickly to technological developments and changes in
clients' needs. Further, as a result of the low barriers to entry, we may face
additional competition from new entrants into our markets. We do not own any
technologies that preclude or inhibit competitors from entering the general
business areas in which we compete. Existing or future competitors may
independently develop and patent or copyright technologies that are superior or
substantially similar to our technologies, which may place us at a competitive
disadvantage.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND, AS A RESULT,
WE COULD LOSE COMPETITIVE ADVANTAGES WHICH DIFFERENTIATE OUR SOLUTIONS AND OUR
ABILITY TO ATTRACT AND RETAIN CLIENTS.
Our success is dependent, in part, upon our intellectual property rights.
We rely upon a combination of trade secret, confidentiality and nondisclosure
agreements, and other contractual arrangements, as well as copyright and
trademark laws to protect our proprietary rights. We have no patents or pending
patent applications. We enter into confidentiality agreements with our
employees, we generally require that our consultants and clients enter into
these agreements, and we attempt to limit access to and distribution of our
proprietary information. Nevertheless, we may be unable to deter
misappropriation of our proprietary information or to detect unauthorized use
and take appropriate steps to enforce our intellectual property rights or
proprietary information.
We attempt to retain significant ownership or rights to use our internally
developed software applications which we can market and adapt through further
customization for other client projects. Under some of our client contracts, all
of our project developments are the property of the client and we have no or
limited rights to reuse or provide these developments in other client projects.
To the extent that we are unable to negotiate contracts which permit us to reuse
code and methodologies, or to the extent that we have conflicts with our clients
regarding our ability to do so, we may be unable to provide services to some of
our clients within price and timeframes acceptable to these clients.
15
Although we believe that our services, trade or service names, and products
do not infringe upon the intellectual property rights of others, claims could be
asserted against us in the future. If asserted, we may be unable to successfully
defend these claims, which could cause us to cease providing some services or
products and limit any competitive advantage we derive from our trademarks or
names.
If any of these events occur, our ability to differentiate ourselves and
compete effectively could be limited and we may lose revenue opportunities.
WE OCCASIONALLY AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS,
WHICH MAY LIMIT OUR ABILITY TO GENERATE FUTURE REVENUES AND INHIBIT OUR BUSINESS
STRATEGY.
In order to secure particularly large engagements or engagements with
industry leading clients, we have agreed on limited occasions not to perform
services, or not to utilize some of our intellectual property rights developed
for clients, for competitors of those clients for limited periods of time
ranging from one to three years. In our agreement with American Express, our
largest client, we have agreed not to perform services for competitors of
American Express for one year after each project completion date and not to
assign consultants who have worked on American Express projects to other
clients' competitive projects for nine months after completing work for American
Express. These non-compete provisions reduce the number of our prospective
clients and our potential sources of revenue. These agreements also may limit
our ability to execute a part of our business strategy of leveraging our
business expertise in discreet industry segments by attracting multiple clients
competing in those industries. In addition, these agreements increase the
significance of our client selection process because some of our clients compete
in markets where only a limited number of companies gain meaningful market
share. If we agree not to perform services or to utilize intellectual property
rights for a particular client's competitors or competitive projects, we are
unlikely to receive significant future revenues in that particular market.
OUR LONG SALES CYCLES MAKE OUR REVENUES DIFFICULT TO PREDICT, WHICH COULD CAUSE
OUR REVENUES OR PROFITABILITY TO BE BELOW ANALYST OR INVESTOR EXPECTATIONS,
CAUSING OUR STOCK PRICE TO FLUCTUATE AND DECLINE SIGNIFICANTLY.
The timing of our revenues is difficult to predict because of the length
and variance of the time required to complete a sale. Our sales cycle typically
ranges in length from three months to nine months and is sometimes longer. Prior
to retaining us for a project, our clients often undertake an extensive review
of their systems, needs, and budgets and may require approval at various levels
within their organization. The length or unpredictability of our sales cycle
could cause our revenues or profitability to be below the expectations of
analysts or investors and our stock price to fluctuate significantly.
IF WE ARE UNABLE TO SUCCESSFULLY POSITION AND SELL OUR APPLICATION OUTSOURCING
SERVICES, WE MAY BE UNABLE TO RECOVER OUR INVESTMENT IN PROVIDING THESE
SERVICES, REDUCING OUR PROFITABILITY AND THE PRICE OF OUR COMMON STOCK.
Our ability to increase revenues and profitability depends in part on the
adoption and acceptance of third-party application hosting services by our
clients. We have only recently begun to offer third-party application
outsourcing services. We have expended significant resources and expect to
continue to invest to increase our data center capacity to accommodate our
hosting services. If we do not generate sufficient revenues from these services,
our operating results and stock price could be negatively affected.
SOME OF OUR CLIENTS ARE EMERGING COMPANIES THAT HAVE LITTLE OR NO OPERATING
HISTORY AND MAY LACK THE RESOURCES TO PAY OUR FEES, WHICH COULD CAUSE US TO
INCUR LOSSES ON THESE ACCOUNTS.
16
We derive a portion of our revenues from small emerging companies that have
limited operating histories and resources to pay our fees. We have recently
increased our allowance for doubtful accounts receivable due to changing market
conditions affecting capital availability to such clients. In addition, we
provide services to select start-up companies in exchange for equity in those
clients. These companies often have little or no earnings or cash flow and their
business is generally at greater risk of failing than more established,
traditional businesses. As a result, these clients may be unable to pay for our
services in a timely manner, or at all. This would reduce our cash flow, making
it difficult to carry on our business without additional funds, and could lead
to the inefficient allocation of our professional and other resources. In
addition, if the investments we make in these companies decline in value, we may
be required to recognize losses on our investments.
Of the $11.8 million in bad debt expense incurred in 2000, approximately
$7.4 million is attributable to development stage and dot-com clients that have
not been able to pay as a result of the slow-down in funding for start up
ventures in 2000. The remaining $4.4 million in bad debt expense is
attributable to disputes with clients. We are currently in arbitration with
these clients to resolve these disputes.
THE LOSS OF MR. JAMES G. GARVEY, JR., OUR FOUNDER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MAY HARM OUR ABILITY TO OBTAIN AND RETAIN CLIENT ENGAGEMENTS, MAINTAIN
A COHESIVE CULTURE, OR COMPETE EFFECTIVELY.
Our success will depend in large part upon the continued services of James
G. Garvey, Jr., our President, Chief Executive Officer, and founder. We have an
employment contract with Mr. Garvey. Mr. Garvey is precluded under his agreement
from competing against us for one year should he leave us. The loss of services
of Mr. Garvey could harm us and cause a loss of investor confidence in our
business, which could cause the trading price of our stock to decline. In
addition, if Mr. Garvey resigns to join a competitor or to form a competing
company, the loss of Mr. Garvey and any resulting loss of existing or potential
clients to any competitor could harm our business. If we lose Mr. Garvey, we may
be unable to prevent the unauthorized disclosure or use by other companies of
our technical knowledge, practices, or procedures. In addition, due to the
substantial number of shares of our common stock owned by Mr. Garvey, the loss
of Mr. Garvey's services could cause investor or analyst concern that Mr. Garvey
may sell a large portion of his shares, which could cause a rapid and
substantial decline in the trading price of our common stock.
WE MAY NEED ADDITIONAL CAPITAL WHICH, IF NOT AVAILABLE TO US, MAY ALTER OUR
BUSINESS PLAN OR LIMIT OUR ABILITY TO ACHIEVE GROWTH IN REVENUES AND WHICH, IF
AVAILABLE AND RAISED, WOULD DILUTE YOUR OWNERSHIP INTEREST IN US.
We incurred negative cash flows from operations in 2000, and continue to do
so in 2001. Although we believe that we have sufficient cash to sustain negative
cash flows from operations for the balance of the year, thereafter we may need
to raise additional funds through public or private equity or debt financings in
order to:
. support capital expenditures;
. take advantage of acquisition or expansion opportunities;
. develop new services;
. address working capital needs; or
. address unanticipated contingencies.
Our inability to obtain financing on terms acceptable to us, or at all, may
limit our ability to increase revenues or to achieve profitability. Our stock
price, like the stock price of many competitors in
17
our industry, has been depressed in recent periods, which could limit our
ability to obtain any needed financing on favorable or acceptable terms. In
addition, if we are able to raise additional capital through the sale of equity
securities, your investment in us would be diluted, which could cause our stock
price to further decline.
THE VOLUME OF TRADING OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY,
ADVERSELY AFFECTING OUR STOCK PRICE.
The stock prices of many technology companies, such as ours, have declined
significantly in recent periods. If investor interest in these stocks continues
to decline generally or does not increase, the price of our common stock could
continue to decline suddenly and significantly.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET COULD ADVERSELY AFFECT THEIR MARKET PRICE, NEGATIVELY IMPACTING YOUR
INVESTMENT.
There are a substantial number of shares currently available for sale in
the public market, and additional shares will be available for sale as
exemptions from registration afforded by Rules 144 of the Securities Act of 1933
become available. The sales of a substantial number of shares of our common
stock in the public market could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. Some holders of shares of our common stock who held our
preferred stock outstanding immediately prior to our initial public offering and
one of our warrant holders have registration rights relating to a total of
4,638,170 shares of our common stock, which currently enable them to require us
to register their shares for sale under the Securities Act.
THE HOLDINGS OF MR. GARVEY MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF
DIRECTOR ELECTIONS AND OTHER MATTERS SUBJECT TO A STOCKHOLDER VOTE, INCLUDING A
SALE OF OUR COMPANY ON TERMS THAT MAY BE ATTRACTIVE TO YOU.
James G. Garvey, Jr., a director, executive officer, and our founder,
currently owns approximately 52% of our outstanding common stock. Mr. Garvey's
stock ownership and management positions enable him to exert considerable
influence over us, including in the election of directors and the approval of
other actions submitted to our stockholders. In addition, without the consent of
Mr. Garvey, we may be prevented from entering into transactions that could be
viewed as beneficial to other stockholders, including a sale of Integrated
Information Systems. This could prevent you from selling your stock to a
potential acquirer at prices that exceed the market price of our stock, or could
cause the market price of our common stock to decline.
OUR CHARTER DOCUMENTS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE
US, WHICH COULD LIMIT YOUR ABILITY TO SELL YOUR STOCK TO AN ACQUIRER AT A
PREMIUM PRICE OR COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our certificate of incorporation and by-laws may make it difficult for a
third party to acquire control of us, even if a change in control would be
beneficial to stockholders. Our certificate of incorporation authorizes our
board of directors to issue up to 5,000,000 shares of "blank check" preferred
stock. Without stockholder approval, the board of directors has the authority to
attach special rights, including voting and dividend rights, to this preferred
stock. With these rights, preferred stockholders could make it more difficult
for a third party to acquire our company.
Our by-laws do not permit any person other than at least three members of
our board of directors, our President, the Chairman of the Board, or holders of
at least a majority of our stock to call special
18
meetings of the stockholders. In addition, a stockholder's proposal for an
annual meeting must be received within a specified period in order to be placed
on the agenda. Because stockholders have limited power to call meetings and are
subject to timing requirements in submitting stockholder proposals for
consideration at meetings, any third-party takeover or other matter that
stockholders wish to vote on that is not supported by the board of directors
could be subject to significant delays and difficulties.
If a third party finds it more difficult to acquire us because of these
provisions, you may not be able to sell your stock at a premium price that may
have been offered by the acquirer, and the trading price of our stock may be
lower than it otherwise would be if these provisions were not in effect.
OUR CURRENT STOCK REPURCHASE PLAN MAY ADVERSELY AFFECT THE TRADING VOLUME AND
LIQUIDITY OF OUR COMMON STOCK AND COULD CAUSE OUR STOCK PRICE TO DECLINE.
In December 2000, our board authorized a stock repurchase plan which
authorizes us to purchase up to $2 million of our common stock on the open
market in compliance with applicable SEC regulations. If we continue to
repurchase our common stock under this plan, the number of shares of our common
stock outstanding will decrease. This decrease could reduce the trading volume
of our common stock, adversely impacting the liquidity and value of our common
stock.
19
ITEM 2. PROPERTIES
Our headquarters and principal facilities are located in various leased
facilities in Tempe, Arizona consisting of approximately 148,000 square feet.
The leases for these facilities expire on various dates between September 2002
and December 2009. We have also entered into a lease for approximately 71,000
additional square feet of space in a building in Tempe, which is currently under
construction. When construction on that building is completed, a portion of our
Tempe staff will occupy that building and 114,000 square feet of existing space
will be vacated and subleased to third parties. In addition, we have signed
leases on various terms for regional office space in Atlanta, Boston, Denver,
Las Vegas, Los Angeles, Irvine and Bangalore, India.
ITEM 3. LEGAL PROCEEDINGS
We have initiated three arbitration claims and one lawsuit pursuant to
service agreements against four clients to collect unpaid invoices totaling
$4,400,000. These claims are in the early stages and the results cannot be
predicted with certainty. We may receive counterclaims from these clients as
part of these proceedings. We do not, however, anticipate that any counterclaims
would have a material adverse effect on our business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not applicable.
SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and positions of all of our
current executive officers.
Name Age Position
---- --- --------
James G. Garvey, Jr. 36 President, Chief Executive Officer, and
Chairman of the Board of Directors
David A. Wirthlin 40 Chief Financial Officer and Treasurer
Jeffrey Frankel 47 Corporate Counsel and Secretary
James G. Garvey, Jr. founded Integrated Information Systems, Inc. in 1989
and has served as our President, Chief Executive Officer, and Chairman of the
Board since inception. Mr. Garvey graduated Cum Laude with a degree in
Industrial Engineering from Arizona State University and has completed graduate
studies at Arizona State University in computer integrated manufacturing,
software development, and database design.
David A. Wirthlin has served as our Chief Financial Officer and Treasurer
since September 1997. From April 1994 to September 1997, Mr. Wirthlin was the
Chief Financial Officer of SkyMall, Inc. (Nasdaq: SKYM), a catalog and in-flight
retailer. Prior to SkyMall, he was employed for seven years with Arthur
Andersen, where he most recently held the position of Consulting Manager. Mr.
Wirthlin is a Certified Public Accountant. Mr. Wirthlin received an M.B.A. from
the University of Chicago Graduate
20
School of Business and a B.A. in Accounting from the University of Utah, where
he graduated Magna Cum Laude.
Jeffrey Frankel has served as our Corporate Counsel and Secretary since
June 1999. Prior to joining us, for thirteen years he held various positions at
MicroAge, Inc., a global information technology reseller and integrator,
including Assistant Corporate Counsel and Vice President and Corporate Counsel.
In addition to his legal responsibilities, from 1993 to 1997 he was Vice
President and Managing Director of MIS Global, MicroAge's international
division. Mr. Frankel received his M.B.A. from Keller Graduate School of
Business in Phoenix, his J.D. from St. Louis University School of Law, and a
B.A. in Political Science from Colby College in Waterville, Maine.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "IISX." The common stock commenced public trading on March 17, 2000 in
connection with our initial public offering. As a result, high and low market
price information is not available for periods prior to the first quarter of
fiscal 2000. The following table sets forth the high and low closing sale prices
of our common stock, as reported by the Nasdaq National Market, for the periods
indicated:
Market Price
------------
High Low
------ -----
Fiscal Year 2000
First Quarter.............................................................................. $25.88 $20.75
Second Quarter............................................................................. $19.13 $ 4.88
Third Quarter.............................................................................. $ 9.13 $ 4.63
Fourth Quarter............................................................................. $ 4.88 $ 0.63
Fiscal Year 2001 First Quarter (through March 16, 2001)................................... $ 1.66 $ 0.63
As of March 16, 2001, there were approximately 181 holders of record of our
common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K. The selected
financial data in this section is not intended to replace the consolidated
financial statements. The balance sheet data as of December 31, 2000 and 1999
and statement of operations data for each of the three years ended December 31,
2000 have been derived from our audited consolidated financial statements and
the notes thereto included elsewhere in this Annual Report on Form 10-K, which
have been audited by KPMG LLP, independent certified public accountants. The
balance sheet data as of December 31, 1998, 1997 and 1996 and statement of
operations data for the years ended 1997 and 1996 are derived from our
historical consolidated financial statements not included in this Annual Report
on Form 10-K.
Prior to August 24, 1998, we elected to be taxed as an S corporation under
the Internal Revenue Code. As an S corporation, we were not subject to income
taxes. Pro forma net earnings (loss) reflect the income taxes that would have
been recorded had we been subject to income taxes as a C corporation for all
periods assuming an effective tax rate of 40%. Provision for income taxes and
net loss for the years ended December 31, 2000 and 1999 are actual, as we were a
C corporation for these entire periods.
22
Years Ended December 31,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(in thousands, except per share data)
Statements of Operations Data:
Revenues.................................................................. $ 54,290 $21,205 $ 7,616 $ 5,385 $ 2,456
Cost of revenues.......................................................... 34,542 11,347 4,256 3,346 1,343
-------- ------- ------- ------- -------
Gross profit........................................................... 19,748 9,858 3,360 2,039 1,113
-------- ------- ------- ------- -------
Operating expenses:
Selling and marketing.................................................. 8,278 2,918 1,276 510 216
General and administrative............................................. 39,279 8,110 3,067 1,334 658
-------- ------- ------- ------- -------
Total operating expenses............................................... 47,557 11,028 4,343 1,844 874
-------- ------- ------- ------- -------
Income (loss) from operations............................................. (27,809) (1,170) (983) 195 239
Interest income (expense), net............................................ 2,381 (237) (212) (144) (40)
Provision (benefit) for income taxes...................................... -- (18) 18 -- --
-------- ------- ------- ------- -------
Net earnings (loss) before preferred dividends......................... (25,428) (1,389) (1,213) 51 199
Cumulative dividend on preferred stock.................................... -- (246) -- -- --
-------- ------- ------- ------- -------
Net earnings (loss) attributable to common
stockholders............................................................ $(25,428) $(1,635) $(1,213) $ 51 $ 199
======== ======= ======= ======= =======
Pro forma income tax expense.............................................. n/a n/a -- 32 80
------- ------- -------
Pro forma net earnings (loss)............................................. n/a n/a $(1,213) $ 19 $ 119
======= ======= =======
Basic and diluted earnings (loss) per common share........................ $ (1.32) $ (.15) $ (.12) $ .01 $ .02
======== ======= ======= ======= =======
Weighted average common shares outstanding:
Basic................................................................... 19,302 10,828 10,273 10,000 10,000
======== ======= ======= ======= =======
Diluted................................................................. 19,302 10,828 10,273 10,145 10,000
======== ======= ======= ======= =======
Balance Sheet Data:
Cash and cash equivalents................................................. $ 46,541 $ 863 $ 392 $ 90 $ 3
Working capital (deficit)................................................. 45,540 662 16 320 (1)
Total assets.............................................................. 81,324 12,118 3,495 2,062 653
Long-term debt and capital lease obligations, less
current installments.................................................... 3,909 1,825 1,032 985 143
Convertible preferred stock............................................... -- 4,882 -- -- --
Total stockholders' equity (deficiency)................................... $ 66,150 $ (704) $ (56) $ 180 $ 78
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes and other financial information appearing
elsewhere in this Annual Report.
Overview
Since our inception in 1989, we have been a leader in applying emerging
technologies by building and operating integrated information systems that allow
our clients to transform themselves into a digital business model. Our success
in assisting clients has been accompanied by significant growth in revenue,
personnel, and infrastructure over our twelve-year history.
We derive our revenues primarily from the delivery of professional
services. We offer our services to clients under time and materials contracts or
under fixed fee contracts. For time and material projects, we recognize revenues
based on the number of hours worked by consultants at a rate per hour agreed
upon with our clients. We recognize revenues from fixed-price contracts on a
percentage-of-completion method based on project hours worked. The percentage of
our revenues from fixed fee contracts was approximately 5% in 2000 and 11% in
1999. We provide our application outsourcing services at a minimum monthly fee
and charge extra fees for services that exceed agreed-upon parameters. Revenues
from these services are recognized as services are provided.
Our cost of revenues consists primarily of employee compensation and
benefits and depreciation of hosting facility property and equipment. Sales and
marketing expenses consist primarily of compensation and benefits, and the costs
of marketing programs. General and administrative expenses consist primarily of
compensation and benefits for our executive management and our finance,
administration, information technology, and human resources personnel. General
and administrative expenses also include research and development expense,
depreciation, bad debt expense and operating expenses such as rent, insurance,
telephones, office supplies, travel, outside professional services, training,
and facilities costs.
We have historically derived and believe that we will continue to derive a
significant portion of our revenues from a limited number of clients who may
change from year to year. Any cancellation, deferral, or significant reduction
in work performed for our principal clients could harm our business and cause
our operating results to fluctuate significantly from period to period. As a
result of our investments, infrastructure buildup and increase in operating
expenses in 1999 and 2000, we incurred a net loss in 2000 and anticipate
incurring a net loss in 2001. Further, our quarterly revenue, cost of revenues,
and operating results have varied in the past due to fluctuations in the
utilization of project personnel and are likely to vary significantly in the
future. Therefore, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful and should not be relied upon as
indications of future performance.
In the fourth quarter of 2000, in response to a significant softening
demand across our industry sector, we initiated an organizational restructuring
to more effectively address these changing market conditions. This restructuring
included a reduction in workforce of 110 employees, or 19% of the overall
employee base, for which we incurred a charge of $1 million. This reduction
included 42% of the SG&A headcount, 21% of application management service
workforce, and 11% of billable consultants. The
24
restructuring also included a client-focused organizational realignment.
Also in the fourth quarter of 2000, we took a charge associated with the
write-off of $8.5 million in accounts receivable. The collectablity of these
receivables had become impaired as a result of a general tightening in the
credit and capital markets for many of our clients, including certain dot-com
companies, adversely affecting funding opportunities for these clients.
Results of Operations
The following table sets forth selected financial data for the periods
indicated expressed as a percentage of revenues:
Years Ended December 31,
------------------------------------
2000 1999 1998
------ ----- ------
Revenues...................................... 100.0% 100.0% 100.0%
Cost of revenues.............................. 63.6 53.5 55.9
------ ----- ------
Gross profit.................................. 36.4 46.5 44.1
Operating expenses:
Selling and marketing....................... 15.2 13.8 16.8
General and administrative.................. 72.4 38.2 40.3
------ ----- ------
Total operating expenses................. 87.6 52.0 57.1
------ ----- ------
Loss from operations.......................... (51.2) (5.5) (13.0)
------ ----- ------
Interest income (expense), net................ 4.4 (1.1) (2.8)
Loss before income tax expense................ (46.8) (6.6) (15.8)
Income tax expense(1)......................... -- -- --
------ ----- ------
Net loss (1).................................. (46.8)% (6.6)% (15.8)%
====== ===== ======
__________
(1) Provision for income tax expense and net earnings for the year ended
December 31, 1998 are pro forma as we were an S corporation for this
period.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues increased 156% to $54.3 million in 2000 from $21.2
million in 1999. The increase in revenues reflects increases in the size and
number of client engagements involving more complex internet applications,
increases in the average rate per hour charged for services and an increase in
revenues from our largest customer. New engagements contributed approximately
$16 million of the increase in revenues for the year. Our 29% increase in
average hourly rates accounted for approximately $9 million of the increase.
Revenues from our largest customer were $13.2 million in 2000, compared to $7.5
million in 1999.
Cost of Revenues. Cost of revenues increased 205% to $34.5 million in 2000
from $11.3 million in 1999. This increase was due primarily to an increase in
project personnel from 252 at December 31, 1999 to 376 at December 31, 2000.
Approximately $5.0 million of this increase was attributable to cost of revenues
from application outsourcing services, including the cost of personnel and
depreciation. As a percentage of revenues, cost of revenues increased to 64% in
2000 from 54% in 1999, primarily due to the addition of cost of revenues from
application outsourcing services in 2000.
Selling and Marketing Expenses. Selling and marketing expenses increased
186% to $8.3 million in 2000 from $2.9 million in 1999. Of this increase,
approximately $3.8 million was attributable to the addition of personnel in the
sales and marketing departments in 2000. In addition, approximately $1.6 of
25
the increase in selling and marketing expenses in 2000 was due to increased
advertising and promotional expenses. As a percentage of revenues, selling and
marketing expenses increased to 15% in 2000 from 14% in 1999.
General and Administrative Expenses. General and administrative expenses
increased 385% to $39.3 million in 2000 from $8.1 million in 1999. Of the
increase, approximately $11.8 million was due to additional bad debt expense,
approximately $6 million was due to additional depreciation expense,
approximately $3 million was due to additional rent expense, and approximately
$3 million was attributable to additional compensation and benefits. The balance
of the increase was related to increases in other expenses such as training,
insurance, travel, telecommunications and office administration expenses. As a
percentage of revenues, general and administrative costs increased to 72% in
2000 from 38% in 1999.
Of the $11.8 million in bad debt expense incurred in 2000, approximately
$7.4 million is attributable to development stage and dot-com clients that have
not been able to pay as a result of the slow-down in funding for start up
ventures in 2000. The remaining $4.4 million in bad debt expense is attributable
to disputes with clients. We are currently in arbitration with these clients to
resolve these disputes.
Interest Income, Net. Interest income, net of interest expenses increased
to $2.4 million in 2000 compared to net interest expense of $237,000 in 1999.
The increase in 2000 was due primarily to interest income earned on the invested
portion of proceeds from both our preferred stock financing in January 2000 and
our initial public offering in March and April 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Revenues increased 178% to $21.2 million in 1999 from $7.6
million in 1998. The increase in revenues reflects increases in the average rate
per hour charged for services, increases in the size and number of typical
client engagements reflecting engagements involving more complex Internet
applications, and a significant increase in revenues from American Express. Our
30% increase in average hourly rates accounted for approximately $2.0 million of
the increase. This increase in our average hourly rates is primarily
attributable to an increased demand for our services and the more complex nature
of our Internet applications services. The number of new client engagements
contributed approximately $3.9 million for the year. Revenues from American
Express were $7.5 million in 1999, compared to $251,000 in 1998.
Cost of Revenues. Cost of revenues increased 167% to $11.3 million in 1999
from $4.3 million in 1998. This increase was due primarily to an increase in
project personnel from 89 at December 31, 1998 to 252 at December 31, 1999. As a
percentage of revenues, cost of revenues decreased from 56% in 1998 to 54% in
1999, primarily due to the increases in pricing.
Selling and Marketing Expenses. Selling and marketing expenses increased
129% to $2.9 million in 1999 from $1.3 million in 1998. An increase of
approximately $870,000 was due primarily to the addition of personnel in the
sales and marketing departments in 1999. Additionally, the increase was due to
increased advertising and promotional expenses of approximately $745,000 in
1999. As a percentage of revenues, selling and marketing expenses decreased to
14% in 1999 from 17% in 1998. The percentage decrease is due to the significant
growth in revenues in 1999, which included substantial additional business from
existing clients.
General and Administrative Expenses. General and administrative expenses
increased 164% to
26
$8.1 million in 1999 from $3.1 million in 1998. Of the increase, $1.2 million
was attributable to compensation paid to administrative personnel added in 1999.
The balance was related to increases in recruiting and training expenses as well
as additional insurance, depreciation, and rent expense. Because of our revenue
growth, as a percentage of revenues, general and administrative costs decreased
to 38% in 1999 from 40% in 1998.
Interest Expense. Interest expenses are related to borrowings under our
credit facility and capital leases. Interest expense increased to $237,000 in
1999 from $212,000 in 1998.
Pro Forma Income Tax Expense. The 1999 income tax benefit results primarily
from the conversion of accrual to cash-based tax accounting, while the 1998
income tax expense results primarily from nondeductible permanent differences.
Quarterly Results of Operations
The following table sets forth a summary of our unaudited quarterly
operating results for each of the eight quarters ended December 31, 2000, and
the percentage of our revenues represented by each item in the respective
quarters. This data has been derived from our unaudited interim financial
statements which, in our opinion, have been prepared on substantially the same
basis as the audited consolidated financial statements contained elsewhere in
this Annual Report on Form 10-K and include all normal recurring adjustments
necessary for a fair presentation of the financial information for the periods
presented. These unaudited quarterly results should be read in conjunction with
our audited consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K. The operating results in any
quarter are not necessarily indicative of the results that may be expected for a
full year or in any future period.
Quarters Ended
------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- -------- -------- --------
(in thousands)
Statement of Operations Data:
Revenues..................................... $ 11,119 $17,336 $15,381 $10,454 $ 6,507 $6,395 $5,050 $3,253
Cost of revenues............................. 9,883 10,362 8,782 5,515 4,100 3,349 2,250 1,648
-------- ------- ------- ------- ------- ------ ------ ------
Gross profit................................. 1,236 6,974 6,599 4,939 2,407 3,046 2,800 1,605
Operating expenses:
Selling and marketing..................... 1,495 1,828 2,722 2,233 1,501 586 472 359
General and administrative................ 16,664 9,571 7,912 5,132 3,443 2,345 1,414 908
-------- ------- ------- ------- ------- ------ ------ ------
Total operating expenses............... 18,159 11,399 10,634 7,365 4,944 2,931 1,886 1,267
-------- ------- ------- ------- ------- ------ ------ ------
Income (loss) from operations................ (16,923) (4,425) (4,035) (2,426) (2,537) 115 914 338
Interest income (expense), net............... 666 738 818 159 (65) (64) (49) (59)
Earnings (loss) before income tax
expense (benefit)......................... (16,257) (3,687) (3,217) (2,267) (2,602) 51 865 279
Income tax expense (benefit)................. -- -- -- -- (441) 18 306 99
-------- ------- ------- ------- ------- ------ ------ ------
Net earnings (loss).......................... $(16,257) $(3,687) $(3,217) $(2,267) $(2,161) $ 33 $ 559 $ 180
======== ======= ======= ======= ======= ====== ====== ======
As a Percentage of Revenues:
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 88.9 59.8 57.1 52.8 63.0 52.4 44.6 50.7
-------- ------- ------- ------- ------- ------ ------ ------
Gross profit................................. 11.1 40.2 42.9 47.2 37.0 47.6 55.4 49.3
Operating expenses:
Selling and marketing..................... 13.4 10.5 17.7 21.4 23.1 9.2 9.3 11.0
General and administrative................ 149.9 55.2 51.4 49.1 52.9 36.7 28.0 27.9
-------- ------- ------- ------- ------- ------ ------ ------
Total operating expenses............... 163.3 65.7 69.1 70.5 76.0 45.9 37.3 38.9
-------- ------- ------- ------- ------- ------ ------ ------
Income (loss) from operations................ (152.2) (25.5) (26.2) (23.2) (39.0) 1.7 18.1 10.4
Interest income (expense), net............... 6.0 4.3 5.3 1.5 (1.0) (1.0) (1.0) (1.8)
Earnings (loss) before income tax
expense (benefit)......................... (146.2) (21.2) (20.9) (21.7) (40.0) 0.7 17.1 8.6
Income tax expense (benefit)................. -- -- -- -- (6.8) 0.3 6.1 3.0
-------- ------- ------- ------- ------- ------ ------ ------
Net earnings (loss).......................... (146.2)% (21.2)% (20.9)% (21.7)% (33.2)% 0.4% 11.0% 5.6%
======== ======= ======= ======= ======= ====== ====== ======
27
Liquidity and Capital Resources
Since inception, we have funded our operations and investments in property
and equipment through cash generated from operations, capital lease financing
arrangements, bank borrowings, and equity financings. In January 2000, we raised
$20.2 million, before expenses of $800,000, through a private placement of
Series C preferred stock to institutional and other accredited investors. In
March and April 2000, we raised an additional $67.5 million (net of underwriting
discounts and other offering expenses) through our initial public offering of
4,945,000 shares of our common stock.
At December 31, 2000, we had approximately $46.5 million in cash and cash
equivalents and $45.5 million in working capital.
Net cash used in operating activities for the years ended December 31,
2000, 1999, and 1998 was $19.9 million, $2.3 million, and $1.3 million,
respectively. Cash used in operating activities in each of these periods was the
result of net losses, adjusted for non-cash items primarily related to
depreciation and amortization, increases in accounts receivable and prepaid
expenses and other current assets, partially offset by increases in accounts
payable and accrued expenses related to our growth.
Net cash used in investing activities for the years ended December 31,
2000, 1999, and 1998 was $16.9 million, $2.3 million, and $64,000, respectively.
Cash used in investing activities in each period consisted primarily of
purchases of computer equipment, furniture and leasehold improvements to support
growth in our infrastructure. During 2000 we invested approximately $7 million,
net of leased furniture and equipment, in our application outsourcing services
data center. We also invested in geographical expansion during 2000. We
anticipate capital expenditures of approximately $8 million in 2001.
Net cash provided by financing activities for the years ended December 31,
2000, 1999, and 1998 was $82.5 million, $5.1 million, and $1.6 million,
respectively. In 2000, cash provided by financing activities was from the sale
of our preferred stock in a private placement and our common stock in our
initial public offering. In 1999, cash provided by financing activities was from
the sale of our preferred and common stock, and borrowings under our credit
facility. In 1998, cash provided by financing activities was from the sale of
our common stock and borrowings under our credit facility.
Non-cash investing and financing activities for the years ended December
31, 2000, 1999, and 1998 consisted of new capital lease obligations for property
and equipment of $9.3 million, $1.9 million, and $464,000, respectively.
As of December 31, 2000, we had a $2.0 million line of credit and a master
lease agreement to finance up to $3.0 million of computer equipment, both with
Imperial Bank. These facilities are secured by accounts receivable, inventory,
equipment, furniture, and intellectual property. The line of credit and the term
loan bear interest at a rate of prime plus 1% (9.5% at December 31, 2000). The
master lease agreement has an implied interest rate of approximately 10.5%. As
of December 31, 2000, we had no borrowings outstanding under the line of credit
but a balance of $2.2 million outstanding under the master lease agreement. The
line of credit requires compliance with certain financial and other covenants.
As of December 31, 2000, we were in compliance with these covenants. The line of
credit is subject to renewal on September 30, 2001. The master lease agreement
expires on various dates through June 2002. As of December 31, 2000 the line of
credit was supporting letters of credit totaling $1.0 million.
We believe that current cash balances and amounts available under our
credit facilities will be sufficient to meet our working capital and capital
expenditure requirements for the next 12 months. We
28
may need additional financing to fund our cash requirements beyond 12 months. In
this regard, we expect to continue to invest in our business in an effort to
grow revenues. Such additional financing, if needed, may not be available on
terms acceptable to us, if at all.
Recently Issued Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instructions and Hedging Activities." In June 2000 the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instructions and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for
all fiscal quarters of all fiscal years beginning after June 30, 2000. We
adopted these standards on January 1, 2001 and believe that such adoption will
not have a significant effect on our financial statements.
In March 2000 the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (an interpretation of APB 25). This interpretation clarifies the
application of APB No. 25 by clarifying the definition of an employee, the
determination of non-compensatory plans and the effect of modifications to stock
options. This interpretation was effective July 1, 2000 and did not have a
material effect on our consolidated financial statements.
Forward-Looking Statements
The above discussion contains forward-looking statements based on current
expectations, and we assume no obligation to update these statements. Because
actual results may differ materially from expectations, we caution readers not
to place undue reliance on these statements. These statements are based on our
estimates, projections, beliefs, and assumptions, and are not guarantees of
future performance. A number of factors could cause future results to differ
materially from historical results, or from results or outcomes currently
expected or sought by us. These factors include: a reduced demand for Internet
services; the loss of one or more of our significant clients; an inability to
increase our market share; difficulties in maintaining our technology alliances;
and a continued downturn in economic conditions.
These factors and the other matters discussed above under the heading
"Factors that May Affect Future Results and Our Stock Price" in Item 1 of this
Report may cause future results to differ materially from historical results, or
from results or outcomes we currently expect or seek.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in 2001. We invest our cash in money market
funds, which are subject to minimal credit and market risk. We believe that the
market risks associated with these financial instruments are immaterial.
All of our revenues are realized currently in U.S. dollars and are from
customers primarily in the United States. Therefore, we do not believe that we
currently have any significant direct foreign currency exchange rate risk.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................... 32
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999......................................... 33
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998........... 34
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 2000,
1999 and 1998.................................................................................... 35
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998........... 36
Notes to Consolidated Financial Statements............................................................. 37
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Integrated Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Information Systems, Inc. and subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the each of the years in the three-year period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Information Systems, Inc. and subsidiary as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the each of the years
in the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Phoenix, Arizona
January 31, 2001
32
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
--------------------------
2000 1999
-------- -------
Assets
Current assets:
Cash and cash equivalents........................................................ $ 46,541 $ 863
Accounts receivable, net......................................................... 6,572 3,982
Income tax receivable............................................................ 111 539
Unbilled revenues on contracts................................................... 472 685
Prepaid expenses and other current assets........................................ 3,109 708
-------- -------
Total current assets........................................................... 56,805 6,777
Property and equipment, net....................................................... 23,647 4,323
Other assets...................................................................... 872 1,018
-------- -------
$ 81,324 $12,118
======== =======
Liabilities, Convertible Preferred Stock and
Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses............................................ $ 6,494 $ 3,703
Line of credit................................................................... -- 1,015
Current installments of long-term debt........................................... -- 222
Current installments of capital lease obligations................................ 4,322 779
Deferred revenues on contracts................................................... 449 396
-------- -------
Total current liabilities...................................................... 11,265 6,115
Long-term debt, less current installments......................................... -- 663
Capital lease obligations, less current installments.............................. 3,909 1,162
-------- -------
Total liabilities.............................................................. 15,174 7,940
Series A Convertible Preferred Stock, $.001 par value;
5,000,000 shares authorized; zero and 1,666,666 shares issued and outstanding at
December 31, 2000 and 1999, respectively........................................ -- 2,882
Series B Convertible Preferred Stock, $.001 par value; 5,000,000 shares
authorized; zero and 751,879 shares issued and outstanding at December 31, 2000
and 1999, respectively........................................................... -- 2,000
Series C Convertible Preferred Stock, $.001 par value;
5,000,000 shares authorized; zero shares issued and outstanding at December 31,
2000 and 1999................................................................... -- --
Commitments and contingencies
(notes 6, 8, 9, 13 and 16)....................................................
Stockholders' equity (deficiency):
Common stock, $.001 par value; authorized 100,000,000
shares; issued and outstanding 20,683,922 and 10,913,025 shares at December
31, 2000 and 1999, respectively............................................... 21 11
Additional paid-in capital....................................................... 93,613 1,298
Accumulated deficit.............................................................. (27,441) (2,013)
Accumulated other comprehensive loss............................................. (43) --
-------- -------
Total stockholders' equity (deficiency)........................................ 66,150 (704)
-------- -------
$ 81,324 $12,118
======== =======
See accompanying notes to consolidated financial statements.
33
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------------------
2000 1999 1998
-------- ------- -------
Revenues.............................................................. $ 54,290 $21,205 $ 7,616
Cost of revenues...................................................... 34,542 11,347 4,256
-------- ------- -------
Gross profit................................................. 19,748 9,858 3,360
-------- ------- -------
Operating expenses:
Selling and marketing............................................... 8,278 2,918 1,276
General and administrative.......................................... 39,279 8,110 3,067
-------- ------- -------
Total operating expenses.................................... 47,557 11,028 4,343
-------- ------- -------
Loss from operations.................................................. (27,809) (1,170) (983)
Interest income....................................................... 3,197 -- --
Interest expense...................................................... (816) (237) (212)
-------- ------- -------
Loss before income taxes.............................................. (25,428) (1,407) (1,195)
Provision (benefit) for income taxes.................................. -- (18) 18
-------- ------- -------
Net loss before preferred dividends......................... (25,428) (1,389) (1,213)
Cumulative dividend on preferred stock................................ -- (246) --
-------- ------- -------
Net loss attributable to common stockholders.......................... $(25,428) $(1,635) $(1,213)
======== ======= =======
Loss per share:
Basic and diluted................................................... $ (1.32) $ (.15) $ (.12)
======== ======= =======
Weighted average common shares outstanding............................ 19,302 10,828 10,273
======== ======= =======
See accompanying notes to consolidated financial statements.
34
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands, except share amounts)
Accumulated Total
Additional other stockholders'
Common Stock paid-in Accumulated Comprehensive equity
------------------
Shares Amount capital deficit loss (deficiency)
---------- ------ ----------- ------------ ------------- --------------
Balances, December 31, 1997........................ 10,000,000 $10 $ 51 $ 119 $ -- $ 180
Issuance of common stock, net..................... 523,500 1 976 -- -- 977
Exercise of stock options......................... 500 -- -- -- -- --
Reclass of accumulated deficit at date of --
Subchapter S termination......................... -- -- (470) 470 -- --
Net loss.......................................... -- -- -- (1,213) -- (1,213)
---------- --- ------- -------- -------- --------
Balances, December 31, 1998........................ 10,524,000 11 557 (624) -- (56)
Issuance of common stock, net..................... 373,750 -- 711 -- -- 711
Exercise of stock options......................... 4,475 -- 5 -- -- 5
Compensation expense.............................. 10,800 -- 22 -- -- 22
Issuance of warrants.............................. -- -- 3 -- -- 3
Net loss.......................................... -- -- -- (1,389) -- (1,389)
---------- --- ------- -------- -------- --------
Balances, December 31, 1999........................ 10,913,025 11 1,298 (2,013) -- (704)
Issuance of common stock upon conversion of
preferred stock.................................. 4,538,170 5 24,288 -- -- 24,293
Issuance of common stock pursuant to IPO, net of
costs of $6,659,000.............................. 4,945,000 5 67,511 -- -- 67,516
Issuance of common stock under Employee Stock
Purchase Plan.................................... 155,102 -- 246 -- -- 246
Exercise of stock options......................... 115,625 -- 236 -- -- 236
Exercise of warrants.............................. 17,000 -- 34 -- -- 34
Currency translation adjustments.................. -- -- -- -- (43) (43)
Net loss.......................................... -- -- -- (25,428) -- (25,428)
---------- --- ------- -------- -------- --------
Total comprehensive loss...................... -- -- -- -- -- (25,471)
---------- --- ------- -------- -------- --------
Balances, December 31, 2000........................ 20,683,922 $21 $93,613 $(27,441) $ (43) $ 66,150
========== === ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
35
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------------
2000 1999 1998
-------- ------- -------
Cash flows from operating activities:
Net loss.......................................................... $(25,428) $(1,389) $(1,213)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................................. 6,895 749 365
Increase in allowance for doubtful accounts.................... 6,081 598 65
Deferred tax liability......................................... -- (18) 18
Non-cash compensation expense.................................. -- 25 --
Increase (decrease) in cash resulting from changes in:
Accounts receivable.......................................... (8,671) (3,187) (702)
Income tax receivable........................................ 428 (539) --
Unbilled revenues on contracts............................... 213 (90) (324)
Prepaid expenses and other current assets.................... (2,401) (571) (38)
Other assets................................................. 146 (904) 31
Accounts payable and accrued expenses........................ 2,791 2,638 620
Deferred revenues on contracts............................... 53 368 (75)
-------- ------- -------
Net cash used in operating activities..................... (19,893) (2,320) (1,253)
-------- ------- -------
Cash flows from investing activities:
Capital expenditures.............................................. (16,885) (2,327) (64)
-------- ------- -------
Net cash used in investing activities..................... (16,885) (2,327) (64)
-------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit.................... (1,015) 15 940
Borrowings under long-term debt................................... -- 1,152 --
Repayments of long-term debt...................................... (885) (893) (124)
Repayments of capital lease obligations........................... (3,044) (754) (174)
Issuance of redeemable convertible preferred stock................ 19,411 4,882 --
Proceeds of initial public offering, net of expenses.............. 67,516 -- --
Issuance of common stock and exercise of stock options............ 516 716 977
-------- ------- -------
Net cash provided by financing activities................. 82,499 5,118 1,619
-------- ------- -------
Effect of exchange rate on cash..................................... (43) -- --
Increase in cash and cash equivalents............................... 45,678 471 302
Cash and cash equivalents, at beginning of year..................... 863 392 90
-------- ------- -------
Cash and cash equivalents, at end of year........................... $ 46,541 $ 863 $ 392
======== ======= =======
Acquisition of property and equipment and assumption of capital
lease obligations.................................................. $ 9,334 $ 1,881 $ 464
======== ======= =======
See accompanying notes to consolidated financial statements.
36
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Business
Integrated Information Systems, Inc. ("IIS" or the "Company") was
incorporated in the State of Arizona on January 9, 1989. On January 7, 2000, IIS
reincorporated into the State of Delaware by merging IIS, an Arizona corporation
(Arizona IIS), into IIS, a Delaware corporation (Delaware IIS), a wholly owned
subsidiary of Arizona IIS, with Delaware IIS surviving the merger. Each share of
Arizona IIS common stock was exchanged for one share of Delaware IIS common
stock, and each share of Arizona IIS preferred stock was exchanged for one share
of Delaware IIS preferred stock. All shares of stock are subject to the same
terms, conditions, and restrictions, if any, as existed immediately prior to the
merger and all rights, liabilities and obligations of Arizona IIS were assumed
by Delaware IIS. IIS provides information technology related professional
services to businesses seeking to utilize technology to strengthen relationships
with customers, business partners, and other constituents.
(2) Summary of Significant Accounting Policies
(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 amounts 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 include the accounts of Integrated
Information Systems, Inc. and its wholly owned subsidiary, Emeric Systems
Private Limited ("IIS" or the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets, which range from three to
seven years. Assets acquired under capital lease obligations and leasehold
improvements are amortized over the lesser of the estimated useful lives of the
assets or the lease terms.
(e) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable.
37
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
(f) Revenue Recognition
Revenues for time-and-material contracts are recognized as the services are
rendered. Revenues pursuant to fixed fee contracts are generally recognized as
services are rendered on the percentage-of-completion method of accounting
(based on the ratio of labor hours incurred to total estimated labor hours).
Revenues from maintenance or post-contract support agreements are recognized as
earned over the terms of the agreements. Revenues from recurring services such
as application outsourcing operations are recognized as services are provided
each month.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such losses
are determined. Unbilled revenues on contracts are comprised of earnings on
certain contracts in excess of contractual billings on such contracts. Billings
in excess of earnings are classified as deferred revenues on contracts.
(g) Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable. The Company maintains allowances
for potential credit losses, and such losses have been within management's
expectations. The Company's customers operate in many industry segments and are
headquartered primarily in the Unites States of America.
(h) Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
"disclosure only" alternative treatment under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS
123 requires the use of fair value option valuation models that were not
developed for use in valuing employee stock options. Under SFAS No. 123,
deferred compensation is recorded for the excess of the fair value of the stock,
on the date of the option grant, over the exercise price of the option. The
deferred compensation is amortized over the vesting period of the option.
In March 2000 the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (an interpretation of APB 25). This interpretation clarifies the
application of APB No. 25 by clarifying the definition of an employee, the
determination of non-compensatory plans and the effect of modifications to stock
options. This interpretation was effective July 1, 2000, and did not have a
material effect on the Company's consolidated financial statements.
38
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(i) Research and Development Costs
Research and development expenditures are charged to operations as
incurred. Expenditures for the years ended December 31, 2000, 1999, and 1998
were $77,000, $49,000, and $229,000, respectively and are included in general
and administrative expenses.
(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$2,722,000, $1,172,000, and $400,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
(k) Income Taxes
Through August 23, 1998, the stockholders of the Company elected to utilize
the provisions of subchapter S of the Internal Revenue Code. In lieu of
corporate income taxes, the shareholders of a subchapter S corporation are taxed
on their portion of the Company's taxable income. Accordingly, no provision or
liability for Federal or State corporate income taxes is reflected through
August 23, 1998.
On August 24, 1998, the Company terminated its election to be taxed as a
subchapter S corporation for Federal and State income tax reporting purposes and
began utilizing the method of accounting for income taxes prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Pursuant to SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
(l) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involved uncertainties and matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates. Since the fair value is estimated as
of December 31, 2000, the amounts that will actually be realized, or paid at
settlement or maturity of the instruments, could be significantly different.
The carrying amounts of accounts receivable, accounts payable and accrued
expenses are assumed to be the fair values because of the liquidity or short-
term maturity of these instruments. The fair values of the line of credit and
long-term debt approximate the terms in the marketplace at which they could be
replaced. Therefore the fair value approximates the carrying value of these
instruments.
39
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(m) Recently Issued Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instructions and Hedging Activities." In June 2000 the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instructions and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for
all fiscal quarters of all fiscal years beginning after June 30, 2000. The
Company adopted these standards on January 1, 2001, and believes that such
adoption will not have a significant effect on the Company's consolidated
financial statements.
(3) Accounts Receivable
Accounts receivable consist of the following (amounts in thousands):
December 31,
-----------------------
2000 1999
------- ------
Trade accounts receivable........................................... $13,366 $4,695
Less allowance for doubtful accounts................................ (6,794) (713)
------- ------
$ 6,572 $3,982
======= ======
(4) Unbilled and Deferred Revenues on Contracts
Unbilled revenues on contracts are comprised of costs, plus earnings on
certain contracts, based on the percentage-of-completion method, in excess of
contractual billings on such contracts. These amounts are billed after year-end
and are expected to be collected within 90 days. Billings in excess of costs
plus earnings are classified as deferred revenues.
Information with respect to contracts in progress at December 31, 2000 and
1999 follows (amounts in thousands):
Years Ended
December 31,
-------------------
2000 1999
------- ------
Costs incurred on uncompleted contracts and estimated fees.................. $17,907 $9,537
Less: Billings on uncompleted contracts..................................... 17,884 9,248
------- ------
$ 23 $ 289
======= ======
Classified on the balance sheet as follows:
Unbilled revenues on contracts............................................ $ 472 $ 685
Deferred revenues on contracts............................................ 449 396
------- ------
$ 23 $ 289
======= ======
40
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Property and Equipment
A summary of property and equipment at December 31, 2000 and 1999, follows
(amounts in thousands):
December 31,
-------------------
2000 1999
------- ------
Computer equipment....................................................... $13,294 $1,419
Computer and telephone equipment under capital leases.................... 12,005 2,671
Furniture and fixtures................................................... 3,031 1,010
Office equipment......................................................... 538 182
Leasehold improvements................................................... 3,103 475
------- ------
31,971 5,757
Less accumulated depreciation and amortization........................... 8,324 1,434
------- ------
Property and equipment, net.............................................. $23,647 $4,323
======= ======
(6) Line of Credit
At December 31, 2000, the Company had a line of credit with a bank
available to $2,000,000. The interest rate on the amounts borrowed under the
line of credit is prime (9.5% as of December 31, 2000) plus 1%, payable monthly.
The line is secured by accounts receivable, inventory, equipment, furniture and
intellectual property. The line of credit requires compliance with certain
financial and other covenants. As of December 31, 2000, the Company was in
compliance with these covenants. The line of credit is subject to renewal on
September 30, 2001. At December 31, 2000, this line of credit was supporting
letters of credit to vendors totaling $1,000,000. No borrowings were outstanding
against this line of credit at December 31, 2000. At December 31, 1999,
$1,015,000 was outstanding under the line of credit.
(7) Long-Term Debt
At December 31, 1999, the Company had an unpaid balance of $885,000 on a
$2,100,000 term loan bearing interest at prime plus 1%. This term loan was paid
in full in April 2000.
(8) Capital Lease Obligations
The Company is obligated under various capital leases primarily for
computer and telephone equipment that expire at various dates through 2005.
These leases meet the various criteria of capital leases and are, therefore,
classified as capital lease obligations.
41
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capital lease obligations reflect the present value of future rental
payments, discounted at the interest rate implicit in each of the leases. A
schedule of the future minimum lease payments required under the capital leases
after December 31, 2000 follows (amounts in thousands):
2001..................................................................... $4,748
2002..................................................................... 3,206
2003..................................................................... 569
2004..................................................................... 442
2005..................................................................... 100
------
Total minimum capital lease payments..................................... 9,065
Less amounts representing interest (3.0% to 33.6%)....................... 834
------
Capital lease obligations................................................ 8,231
Less current installments of capital lease obligations................... 4,322
------
Capital lease obligations, less current installments..................... $3,909
======
The leased furniture and equipment has been included in property and
equipment at a total cost of $12,005,000 and $2,671,000 at December 31, 2000 and
1999, respectively. Accumulated depreciation related to this furniture and
equipment was $5,831,000 and $915,000 at December 31, 2000 and 1999,
respectively.
(9) Operating Lease Commitments
The Company has entered into various non-cancelable operating lease
agreements for office space, automobiles, and office equipment. The terms of
these agreements range from 3 to 10 years and all of the leases require monthly
payments. The Company is generally responsible for all executory costs including
maintenance, insurance, utilities and taxes. Total rent expense was $3,616,000,
$748,000, and $447,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
A summary of the future minimum lease payments under operating leases after
December 31, 2000 follows (amounts in thousands):
2001......................................... $ 6,465
2002......................................... 6,518
2003......................................... 5,714
2004......................................... 5,091
2005......................................... 4,125
Thereafter................................... 12,534
-------
$40,447
=======
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future rent expense will be greater than rent expense shown for
2001.
42
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) Income Taxes
The provision for income taxes is as follows (amounts in thousands):
Years Ended
December 31,
-----------------------------------
2000 1999 1998
------- ----- -----
Deferred expense (benefit):
Federal................................................... $ -- $ (18) $ 14
State..................................................... -- -- 4
------- ----- -----
-- (18) 18
------- ----- -----
Total income taxes................................ $ -- $ (18) $ 18
======= ===== =====
The provision for income taxes differs from the amount computed by applying
the statutory federal corporate income tax rate of 34% to income before income
taxes. The sources and tax effects of the differences are as follows (amounts in
thousands):
Years Ended
December 31,
----------------------------------
2000 1999 1998
------- ----- -----
Computed expected income tax benefit............................. $(8,646) $(478) $(412)
Nondeductible permanent differences.............................. 78 23 8
State income tax benefit, net of federal benefit................. (1,715) (132) (3)
Nontaxable S corporation loss.................................... -- -- 422
Difference in rates due to conversion from S corporation to
C corporation status........................................... -- (94) --
Inability to utilize net operating loss carryforwards............ 10,283 664 --
Other............................................................ -- (1) 3
------- ----- -----
$ -- $ (18) $ 18
======= ===== =====
43
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(amounts in thousands):
December 31,
-----------------------
2000 1999
------- -----
Deferred tax assets:
Bad debts........................................................................... $ 2,938 $ 295
Debt issuance costs................................................................. 17 10
Accrued vacation and other.......................................................... 211 70
Property, plant and equipment, principally due to differences in depreciation....... 597 --
Controlled foreign corporation income............................................... -- 24
Charitable contribution carryforward................................................ 20 --
Net operating loss carryforward..................................................... 7,214 468
------- -----
Gross deferred tax assets.......................................................... 10,997 867
Less valuation allowance............................................................ 10,947 664
------- -----
Net deferred tax assets............................................................ 50 203
------- -----
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in depreciation....... -- (85)
Prepaid expenses.................................................................... (48) (93)
Other deferred liabilities.......................................................... (2) (25)
------- -----
Gross deferred tax liabilities..................................................... (50) (203)
------- -----
Net deferred tax liabilities....................................................... $ -- $ --
======= =====
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $18,149,000 for U.S. Federal and State income tax purposes that
expire in years 2018 through 2020. Due to the frequency of equity transactions
within the Company, it is possible that the use of the net operating loss
carryforward may be limited in accordance with Section 382 of the Internal
Revenue Code. A determination as to this limitation will be made at a future
date as the net operating losses are utilized.
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $10,947,000 and $664,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 2000 and 1999 was an
increase of $10,283,000 and $664,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which those
temporarily differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical losses and projections for future taxable income/losses over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will not realize the benefits of these
deductible differences.
44
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) Convertible Preferred Stock
Series A 10% Convertible Preferred Stock ("Series A Stock") is $.001 par value
and has a liquidation value of $1.80 per share, the price paid for the stock.
The holder of Series A Stock is entitled to an annual cumulative dividend of 10%
of the liquidation value. Cumulative dividends at December 31, 1999 total
$214,521. The Series A Stock is convertible into common stock at the option of
the holder at a conversion price of $1.80 per share (currently a one-for-one
basis). The holder of the Series A Stock is entitled to one vote for each share
of common stock into which it may convert. On April 15, 1999, the Company
received approximately $2,882,000, net of issuance costs of $118,000, from the
sale of 1,666,666 shares of Series A Stock. The agreement also provides for the
holder of the Series A Stock to invest, at its option, an additional $2,000,000
by purchasing Series B Stock. All shares of Series A Convertible Preferred Stock
were converted to Common Stock concurrent with the Company's Initial Public
Offering in March 2000.
Series B 10% Convertible Preferred Stock ("Series B Stock") is $.001 par value
and has a liquidation value of $2.66 per share. The Series B Stock is entitled
to an annual cumulative dividend of 10% on the liquidation value. Cumulative
dividends at December 31, 1999 total $31,233. Each share of Series B Stock is
generally convertible into common stock at a conversion price of $2.66 per share
(currently a one-for-one basis). In November 1999, the Series A holder exercised
its option to purchase Series B Stock and the Company received $2,000,000 from
the sale of 751,879 shares of Series B Stock. The other terms and redemption
feature of the Series B Stock are substantially the same as the Series A Stock.
All shares of Series B Convertible Preferred Stock were converted to Common
Stock concurrent with the Company's Initial Public Offering in March 2000.
In January 2000, the Company received $19,411,000, net of issuance costs of
$789,000, from the sale of 2,119,625 shares of Series C Convertible Preferred
Stock. The terms and redemption features of the Series C Preferred Stock operate
in substantially the same manner as the Series A and Series B stock, except that
the conversion and liquidation price of the Series C Preferred Stock is $9.53
per share, the same as the purchase price per share for the shares of Series C
Preferred Stock. All shares of Series C Convertible Preferred Stock were
converted to Common Stock concurrent with the Company's Initial Public Offering
in March 2000.
(12) Common Stock
During 1999, the Company issued 10,800 shares of Common Stock valued at $2.00
a share to a consultant as compensation for services which was charged to
operations.
During 1999, the Company sold 373,750 shares of Common Stock through a private
placement at a price of $2.00 per share for cash proceeds of $711,000, net of
expenses.
In March 2000, the Company sold 4,945,000 shares of Common Stock through an
Initial Public Offering at a price of $15.00 per share for cash proceeds of
$67,516,000, net of underwriters' discount and issuance costs of $6,659,000.
In December 2000, the Company's board of directors authorized a stock
repurchase program providing for the purchase of shares of its Common Stock,
with an aggregate purchase price of up to $2,000,000.
45
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) Employee Benefit Plans
(a) Retirement Plan
The Company established a qualified 401(k) salary deferral plan (defined
contribution plan) in July 1996. The plan covers substantially all full-time
employees who have completed ninety days of service. Subject to limits imposed
by Internal Revenue Service regulations and other options retained by the
Company affecting participant contributions, participants may voluntarily
contribute between 2% and 15% of their annual wages not to exceed limits
established by the Tax Reform Act of 1986. The Company is required to match 25%
of the first 4% of participants' contributions. Participants are immediately
vested in the amount of their contributions. Participants vest over a six-year
period with respect to employer contributions. The Company's 401(k) salary
deferral plan expense was $240,000, $73,000, and $30,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
(b) Incentive Stock Option Plan and Warrants
The Company adopted an Incentive Stock Option Plan in January 1997 (the
"Plan") pursuant to the Internal Revenue Code. Common stock reserved for grants
to key employees of the Company under the Plan total 4,500,000 shares at
December 31, 2000 and 1999. Options become exercisable over varying periods up
to five years and expire at the earlier of termination of employment or ten
years after the date of grant. The options under the Plan have been granted at
the fair market value of the Company's stock at the date of grant as determined
by the Company's board of directors. Per the Plan, options may be granted within
a period of ten years from the adoption date of the Plan.
There were 1,887,130, 2,214,957 and 957,000 shares available for grant under
the Plan as of December 31, 2000, 1999 and 1998, respectively. The per share
weighted average fair value of stock options granted under the Plan for the
periods ended December 31, 2000, 1999 and 1998, was $7.06, $0.43 and $0.33,
respectively, based on the date of grant using the minimum value method for 1999
and 1998 and the Black-Scholes Method for 2000 with the following weighted
average assumptions:
December 31,
------------
2000 1999 1998
---- ---- ----
Expected life (years).............. 3.50 3.60 3.75
Risk-free interest rate............ 5.00% 5.00% 5.00%
Dividend yield..................... 0.00% 0.00% 0.00%
Volatility......................... 150% -- --
46
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information stock option activity for the
years ending December 31, 1998, 1999 and 2000:
Options Outstanding
----------------------
Weighted
Average
Exercise Exercisable
Shares Price Shares
---------- ---------- -----------
Outstanding, December 31, 1997 740,000 $1.01 --
Granted.................................... 440,500 2.00 --
Exercised.................................. (500) .50 --
Canceled................................... (137,000) 1.13 --
--------- ----- -------
Outstanding, December 31, 1998 1,043,000 1.42 83,750
Granted.................................... 1,401,543 2.67 --
Exercised.................................. (4,475) 1.08 --
Canceled................................... (155,025) 2.09 --
--------- ----- -------
Outstanding, December 31, 1999 2,285,043 2.15 281,643
Granted.................................... 1,257,850 8.28 --
Exercised.................................. (115,625) 2.04 --
Canceled................................... (814,398) 5.64 --
--------- ----- -------
Outstanding, December 31, 2000 2,612,870 $4.01 564,109
========= ===== =======
The following table summarizes information about the stock options
outstanding at December 31, 2000:
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life (years) Price Exercisable Price
--------------------------------------------- ----------- ------------ -------- ----------- --------
$0.50 -- $0.87............................... 345,900 6.36 $ 0.50 148,275 $0.50
$0.88 -- $1.99............................... 44,750 9.92 0.88 -- --
$2.00 -- $3.19............................... 1,040,975 7.72 2.00 349,383 2.00
$3.20 -- $4.99............................... 279,495 8.83 3.70 58,473 3.61
$5.00 -- $6.80............................... 67,450 9.74 5.00 1,250 5.00
$6.81 -- $7.62............................... 499,500 9.59 6.81 -- --
$7.63 -- $9.52............................... 82,100 9.47 7.63 -- --
$9.53 -- $12.24.............................. 165,100 9.01 9.53 6,728 9.53
$12.25 -- $14.99............................. 37,100 9.28 12.25 -- --
$15.00....................................... 50,500 9.21 15.00 -- --
--------- ---- ------ ------- -----
$0.50-$15.00................................. 2,612,870 8.29 $ 4.01 564,109 $1.87
========= ==== ====== ======= =====
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
47
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Net loss
As reported............ $(25,428) $(1,389) $(1,213)
Pro forma.............. (25,577) (1,470) (1,264)
During April 1999, the Company issued 17,000 warrants to purchase shares of
common stock at an exercise price of $2.00 per share in connection with a
private placement memorandum. These warrants were exercised in April 2000.
(c) Employee Stock Purchase Plan
The Company established an Employee Stock Purchase Plan (the "Purchase
Plan") in March 2000, under which 400,000 shares of Common Stock have been
reserved for issuance. Eligible employees may purchase a limited number of
shares of the Company's Common Stock at 85% of the market value at certain plan-
defined dates. In 2000, 155,102 shares were issued under the Purchase Plan for
net proceeds of $246,000. At December 31, 2000, 244,898 shares were available
for issuance under the purchase plan.
(14) Net Loss Per Share
The following table sets forth the computation of basic and diluted net
earnings (loss) per share (in thousands, except per share amounts):
Years Ended December 31,
---------------------------------------
2000 1999 1998
-------- ------- -------
Net loss $(25,428) $(1,389) $(1,213)
Preferred stock dividends................................. -- (246) --
-------- ------- -------
Net loss attributable to common
stockholders............................................ (25,428) (1,635) (1,213)
Effect of dilutive securities:
Preferred stock dividend................................ -- 246 --
-------- ------- -------
Net loss attributable to common stockholders
after assumed conversion................................ $(25,428) $(1,389) $(1,213)
======== ======= =======
Weighted average outstanding common shares................ 19,302 10,828 10,273
Effect of dilutive securities:
Stock options and warrants.............................. 1,382 656 283
Convertible preferred stock............................. -- 1,743 --
Antidilutive effect of securities....................... (1,382) (2,399) (283)
-------- ------- -------
Weighted average and common equivalent shares
outstanding............................................. 19,302 10,828 10,273
======== ======= =======
Loss per share:
Basic and diluted....................................... $ (1.32) $ (.15) $ (.12)
======== ======= =======
48
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(15) Significant Customers
Two customers accounted for 24% and 10% of total revenue for the year ended
December 31, 2000. One customer accounted for 35% of total revenue for the year
ended December 31, 1999. Three customers accounted for 16%, 14% and 10% of the
total revenue for the year ended December 31, 1998. Two customers accounted for
25% and 10% of the total accounts receivable balance at December 31, 2000. One
customer accounted for 27% of the total accounts receivable balance at December
31, 1999.
(16) Contingencies
The Company is involved in litigation and claims arising in the normal course
of operations. In the opinion of management, based on consultation with legal
counsel, losses, if any, from this litigation are immaterial; therefore, no
provision has been made in the accompanying consolidated financial statements
for losses, if any, that might result from the ultimate outcome of these
matters.
(17) Supplemental Financial Information
A summary of additions and deductions related to the allowance for doubtful
accounts for the years ended December 31, 1998, 1999 and 2000 follows (in
thousands):
Balances at Charged to
beginning costs and Balance at
of year expenses Deductions end of year
----------- ---------- ---------- -----------
Allowance for doubtful accounts:
1998.............................. $ 50 78 (13) $ 115
1999.............................. $ 115 766 (168) $ 713
2000.............................. $ 713 11,825 (5,744) $6,794
49
INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(19) Quarterly Financial Data (Unaudited)
A summary of the quarterly data for the years ended December 31, 2000 and
1999 follows (in thousands, except per share amounts):
Quarters Ended
--------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- -------- -------- --------
Revenues................................... $ 11,119 $17,336 $15,381 $10,454 $ 6,507 $6,395 $5,050 $3,253
Gross profit............................... 1,236 6,974 6,599 4,939 2,407 3,046 2,800 1,605
Operating expenses......................... 18,159 11,399 10,634 7,365 4,944 2,931 1,886 1,267
Income (loss) from operations.............. (16,923) (4,425) (4,035) (2,426) (2,537) 115 914 338
Net earnings (loss)........................ $(16,257) $(3,687) $(3,217) $(2,267) $(2,161) $ 33 $ 559 $ 180
Earnings (loss) per share:
Basic................................... $ (.79) $ (.18) $ (.16) $ (.14) $ (.22) $ -- $ .05 $ .02
Diluted................................. $ (.79) $ (.18) $ (.16) $ (.14) $ (.22) $ -- $ .04 $ .02
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
The response to this Item regarding our directors and compliance with
Section 16(a) of the Exchange Act by our officers and directors will be
contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders
under the captions "Election of Directors" and Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein. The response to this
Item regarding our executive officers is contained in the Supplemental Item---
"Executive Officers of the Registrant" found in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the captions "How are directors
compensated?" and "Executive Compensation" and is incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to the Item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item will be contained in the Proxy Statement for the 2001
Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1)(2) Financial Statements
See the Index to Consolidated Financial Statements and Financial Statement
Schedule in Part II, Item 8.
14(a)(3) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed on
the Exhibit Index immediately preceding the exhibits. The Company has identified
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.
14(b) Reports on Form 8-K
None.
52
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.
INTEGRATED INFORMATION SYSTEMS
Date: April 2, 2001 /s/ James G. Garvey, Jr.
-----------------------
James G. Garvey, Jr.
Chairman of the Board of Directors,
President, and Chief Executive Officer
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 and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James G. Garvey, Jr Chairman of the Board of April 2, 2001
- ----------------------- Directors, President, Chief
James G. Garvey, Jr. Executive Officer
/s/ David A. Wirthlin Director, Chief Financial April 2, 2001
- --------------------- Officer, and Principal
David A. Wirthlin Accounting Officer
/s/ John Blair Director April 2, 2001
- --------------
John Blair
/s/ R. Nicholas Loops Director April 2, 2001
- ---------------------
R. Nicholas Loope
/s/ Lawrence Trachtenberg Director April 2, 2001
- -------------------------
Lawrence Trachtenberg
/s/ Stephen Brown Director April 2, 2001
- -----------------
Stephen Brown
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.3 of the Company's Quarterly Report on Form
10-Q (File No. 333-94861) for the period ending June 30, 2000).
3.2 Amended and Restated By-Laws.
4.1 Warrant granted to Imperial Bank dated December 18, 1997
(incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
4.2 Warrant dated April 14, 1999 (incorporated by reference to Exhibit
4.2 of the Company's Registration Statement on Form S-1 (File No.
333-94861) dated January 18, 2000).
4.3 Amended and Restated Registration Agreement dated January 13, 2000
(incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.1 Integrated Information Systems, Inc. 1997 Long Term Incentive Plan,
as amended (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.2 Amended and Restated Integrated Information Systems, Inc. 2000
Employee Stock Purchase Plan.
10.3 Employment Agreement between the Company and James G. Garvey, Jr.
(incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.4 Employment Agreement between the Company and David Wirthlin
(incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.6 Employment Agreement between the Company and Jeffrey Frankel
(incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.7 Master Agreement for Consulting Services between the Company and
American Express Travel Related Services Company dated April 30,
1997 (incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.8(a) Credit Facilities Agreement between the Company and Imperial Bank
amended and restated as of April 30, 1999 (incorporated by reference
to Exhibit 10.8(a) of the Company's Registration Statement on Form
S-1 (File No. 333-94861) dated January 18, 2000).
10.8(b) Restated Facility Promissory Note dated April 30, 1999 (incorporated
by reference to Exhibit 10.8(b) of the Company's Registration
Statement on Form S-1 (File No. 333-94861) dated January 18, 2000).
10.8(c) Restated Security Agreement dated April 30, 1999 (incorporated by
reference to Exhibit 10.8(c) of the Company's Registration Statement
on Form S-1 (File No. 333-94861) dated January 18, 2000).
10.8(d) Restated Security Agreement and Mortgage for Trademarks and
Copyrights dated April 30, 1999 (incorporated by reference to
Exhibit 10.8(d) of the Company's Registration Statement on Form S-1
(File No. 333-94861) dated January 18, 2000).
10.8(e) First Modification of Credit Facilities Agreement between the
Company and Imperial Bank dated as of June 30, 1999 (incorporated by
reference to Exhibit 10.8(e) of the Company's Registration Statement
on Form S-1 (File No. 333-94861) dated January 18, 2000).
10.8(f) Term Loan Note dated June 30, 1999 (incorporated by reference to
Exhibit 10.8(f) of the Company's Registration Statement on Form S-1
(File No. 333-94861) dated January 18, 2000).
10.8(g) Second Modification of Credit Facilities Agreement between the
Company and Imperial Bank dated as of December 20, 1999
(incorporated by reference to Exhibit 10.8(g) of the Company's
Registration Statement on Form S-1 (File No. 333-94861) dated
January 18, 2000).
10.9 Lease Agreement between the Company and AmberJack Ltd. dated
December 8, 1998 (incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.10 Lease Agreement between the Company and AmberJack Ltd. dated
September 7, 1999 (incorporated by reference to Exhibit 10.10 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.11 Lease Agreement between the Company and AmberJack Ltd. dated
September 7, 1999(incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.12 Assignment and Assumption of Lease Agreement between the Company and
Universal Pensions, Inc. dated September 8, 1999 (incorporated by
reference to Exhibit 10.12 of the Company's Registration Statement
on Form S-1 (File No. 333-94861) dated January 18, 2000).
10.13 Lease Agreement between the Company and Amberjack Ltd. dated April
25, 1997 (incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.14 Sublease Agreement between the Company and Bank of America, FSB
d/b/a BankAmerica Housing Services, dated May 10, 1998 (incorporated
by reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-1 (File No. 333-94861) dated January 18, 2000).
10.15 Lease Agreement between the Company and Information Technology Park
Limited dated August 2, 1999 (incorporated by reference to Exhibit
10.15 of the Company's Registration Statement on Form S-1 (File No.
333-94861) dated January 18, 2000).
10.16 Lease Agreement between the Company and 3930 Building Partnership
dated November 30, 1999 (incorporated by reference to Exhibit 10.16
of the Company's Registration Statement on Form S-1 (File No. 333-
94861) dated January 18, 2000).
10.17 Equipment Acquisition Agreement between the Company and BancBoston
Leasing Inc. dated June 1, 1998 (incorporated by reference to
Exhibit 10.17 of the Company's Registration Statement on Form S-1
(File No. 333-94861) dated January 18, 2000).
10.18 Master Lease Finance Agreement between the Company and BancBoston
Leasing Inc. dated February 20, 1998 (incorporated by reference to
Exhibit 10.18 of the Company's registration Statement on Form S-1
(File No. 333-94861) dated January 18, 2000).
10.19 Master Lease Finance Agreement between the Company and Imperial Bank
dated April 8, 1999 (incorporated by reference to Exhibit 10.19 of
the Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.20 Form of Indemnity Agreement between the Company and its directors and
executive officers (incorporated by reference to Exhibit 10.20 of the
Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.21 Lease Agreement between the Company and MCW Brickyard Commercial, LLC
dated October 5, 1999 (incorporated by reference to Exhibit 10.21 of
the Company's Registration Statement on Form S-1 (File No. 333-94861)
dated January 18, 2000).
10.22 Master Consulting Services Agreement between the Company and
realink.com, Corporation dated September 14, 1999 (incorporated by
reference to Exhibit 10.22 of the Company's Registration Statement on
Form S-1 (File No. 333-94861) dated January 18, 2000).
10.23 Lease Agreement between the Company and Riggs & Co. dated February 8,
2000 (incorporated by reference to Exhibit 10.23 of the Company's
Registration Statement on Form S-1/A (File No. 333-94861) dated March
14, 2000).
10.24 Lease Agreement between the Company and Water Garden Company L.L.C.
(incorporated by reference to the Company's Quarterly Report on Form
10-Q (File No. 333-94861) for the period ending March 31, 2000).
10.25 Lease Agreement between the Company and Deerfield Holdings, L.P.
dated March 12, 2000 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q (File No. 333-94861) for the period
ending March 31, 2000).
10.26 Lease Agreement between the Company and MONY/BDP I, L.L.C. dated May
26, 2000 (incorporated by reference to the Company's Quarterly Report
on Form 10-Q (File No. 333-94861) for the period ending June 30,
2000).
10.27 Lease Agreement between the Company and PAC Court Associates, L.P.
dated May 16, 2000 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q (File No. 333-94861) for the period
ending June 30, 2000).
21 List of Subsidiaries
23.1 Consent of KPMG LLP