U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ___ to ___
COMMISSION FILE NUMBER 33-97876
ILLUMINET HOLDINGS, INC.
(f/k/a USTN HOLDINGS, INC.)
(Exact name of small business issuer as specified in its charter)
Delaware 36-4042177
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
4501 Intelco Loop, Lacey, 98503
Washington
(Address of principal (Zip code)
executive office)
(360) 493-6000
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes X No
At June 30, 1997, 5,266,890 shares of common stock, $0.01 per share par value,
and 2,632 shares of Series A convertible preferred stock, $0.01 per share par
value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes
No X
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ILLUMINET HOLDINGS, INC.
INDEX TO 10-QSB FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1997
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Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Illuminet Holdings, Inc. Consolidated Balance Sheet - June 30, 1997 2
Illuminet Holdings, Inc. Consolidated Statements of Income -
Six Months and Three Months ended June 30, 1997 and 1996 4
Illuminet Holdings, Inc. Consolidated Statements of Cash Flows -
Six Months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements - June 30, 1997 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS 8
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 15
ITEM 2: CHANGES IN SECURITIES 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
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1
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PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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ILLUMINET HOLDINGS, INC.
Consolidated Balance Sheet
June 30, 1997
<S> <C>
ASSETS 1997
------ ----
Current assets:
Cash and cash equivalents $11,756,314
Accounts receivable, less allowance
for doubtful accounts of $594,000 25,170,973
Prepaid expenses and other405,846
----------
Total current assets 37,333,133
----------
Property and equipment:
Land 911,765
Building and leasehold improvements 6,912,736
Equipment and furniture 2,674,438
Network assets 25,010,299
Capitalized network costs 8,215,385
Computer hardware and software 16,486,442
----------
60,211,065
Less: Accumulated depreciation and amortization 29,603,237
----------
Total property and equipment 30,607,828
----------
Computer software product costs, less
accumulated amortization of $942,000 1,916,234
Other assets, net of accumulated
amortization of $93,000 2,733,071
----------
Total assets $72,590,266
==========
</TABLE>
See accompanying notes to consolidated financial statements
2
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<TABLE>
<CAPTION>
ILLUMINET HOLDINGS, INC.
Consolidated Balance Sheet, Continued
June 30, 1997
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997
- --------------------------------- ----
Current liabilities:
Trade accounts payable $ 2,477,711
Accrued expenses 1,738,808
Due to customers 21,191,453
Current portion of long-term debt 2,236,820
----------
Total current liabilities 27,644,792
----------
Long-term debt, less current portion 19,949,289
----------
Shareholders' equity:
Illuminet Holdings, Inc. Series A Convertible Preferred
Stock, par value $.01 per share, authorized 4,416
shares, issued and outstanding 2,632 26
Illuminet Holdings, Inc. Preferred Stock, par value $.01
per share, authorized 95,584 shares, none issued
or outstanding -
Illuminet Holdings, Inc. Common Stock, par value $.01
per share, authorized 12,000,000 shares, issued and
outstanding 5,266,890 52,669
Additional paid-in capital 10,757,346
Retained earnings 14,186,144
----------
Total shareholders' equity 24,996,185
----------
Total liabilities and shareholders' equity
$72,590,266
==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
ILLUMINET HOLDINGS, INC.
Consolidated Statements of Income
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------ -----------------
(Unaudited) (Unaudited)
Revenues $12,813,200 $10,396,663 $24,385,091 $16,363,574
---------- ---------- ---------- ----------
Expenses:
Operating 2,989,027 2,320,150 5,914,020 4,633,223
Selling, general
and administrative 2,364,443 2,417,983 4,706,901 3,971,678
Depreciation and
amortization 1,562,176 1,590,814 3,094,741 2,697,380
Network operating
expenses 3,624,605 2,854,462 6,785,826 3,854,509
Corporate realignment - - - 350,067
---------- ---------- ---------- ----------
Total expenses 10,540,251 9,183,409 20,501,488 15,506,857
---------- ---------- ---------- ----------
Operating income 2,272,949 1,213,254 3,883,603 856,717
Interest income 129,916 120,767 260,937 209,857
Interest expense (407,131) (378,007) (760,830) (558,077)
---------- ---------- ---------- ----------
Income before income
taxes 1,995,734 956,014 3,383,710 508,497
Income tax expense 39,914 - 67,674 -
---------- ---------- ---------- ----------
Net income $ 1,955,820 $ 956,014 $ 3,316,036 $ 508,497
========== ========== ========== ==========
Weighted average
common shares 5,270,694 5,161,152 5,273,942 4,688,226
========== ========== ========== ==========
Primary earnings per
common share $ 0.37 $ 0.19 $ 0.63 $ 0.11
========== ========== ========== ==========
Fully diluted earnings
per common share $ 0.33 $ 0.17 $ 0.56 $ 0.11
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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ILLUMINET HOLDINGS, INC.
Consolidated Statements of Cash Flows
Six Months ended June 30,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $85,689,800 $71,316,169
Interest received 252,200 231,568
Cash paid to customers, suppliers
and employees (81,166,086) (65,244,075)
Income taxes paid (167,921) -
Income tax refund - 173,795
Interest paid (910,350) (599,291)
----------- ---------
Net cash provided by operating activities 3,697,643 5,878,166
----------- ---------
Cash flows from investing activities:
Cash acquired in acquisition of Independent
Telecommunications Network, Inc. - 613,086
Investment in Authentix, Inc. - (400,000)
Capital expenditures (3,417,692) (1,607,734)
----------- ---------
Net cash used by investing activities (3,417,692) (1,394,648)
----------- ---------
Cash flows from financing activities:
Principal payments on notes payable (901,985) (566,981)
Payments to dissenting stockholders (136,159) (1,197,919)
----------- ---------
Net cash used by financing activities (1,038,144) (1,764,900)
----------- ---------
Net increase(decrease)in cash and cash equivalents (758,193) 2,718,618
Cash and cash equivalents at:
Beginning of year 12,514,507 6,992,206
----------- ---------
End of period $11,756,314$ 9,710,824
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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ILLUMINET HOLDINGS, INC.
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements of Illuminet Holdings, Inc.(formerly USTN
Holdings, Inc.), and its wholly-owned subsidiary Illuminet, Inc.,(collectively
referred to as "ILLUMINET") presented in this Form 10-QSB are unaudited and
reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of ILLUMINET's
financial position, results of its operations and its cash flows for each period
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. ILLUMINET believes that the
disclosures made are adequate to make the information presented not misleading.
The results of the interim periods are not necessarily indicative of future
results. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in
ILLUMINET's latest annual report on FORM 10-KSB.
(2) EARNINGS PER COMMON SHARE
Earnings per share is computed using the weighted average number of common
shares and dilutive common share equivalents outstanding during each period.
Other potentially dilutive securities include Illuminet Holdings, Inc. Series A
Preferred Stock and convertible redeemable subordinated debentures, which if
dilutive, are included in the calculation of fully diluted earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which is required to be adopted on December 31, 1997.
At that time, ILLUMINET will be required to change the method currently used to
compute earnings per share and to restate all prior periods. The impact of
Statement 128 on the calculation of primary and fully diluted earnings per share
for the six month and three month periods ended June 30, 1997 and 1996 is not
expected to be material.
(3) ACQUISITION
ILLUMINET was incorporated for the purpose of effecting the merger of U.S.
Intelco Holdings, Inc. ("U.S. Intelco") and Independent Telecommunications
Network, Inc. ("ITN") that was consummated effective February 23, 1996
("Merger"). The Merger was accounted for as a purchase business combination
in accordance with generally accepted accounting principles with U.S. Intelco
designated as the acquiring company. The results of ITN's operations are
included in the consolidated financial statements prospectively from the date
of the Merger.
6
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Assuming that the acquisition of ITN had taken place on January 1, 1996,
unaudited pro forma results of operations from continuing operations for the six
months ended June 30, 1996 would have been as follows:
Revenues $20,172,801
==========
Net income $ 422,017
==========
Income per common share $ 0.08
==========
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
BASIS OF PRESENTATION
Illuminet Holdings, Inc. (formerly USTN Holdings, Inc.), and its wholly-owned
subsidiary Illuminet, Inc., (collectively referred to as "ILLUMINET") were
incorporated in the State of Delaware on August 2, 1995, to effect the merger
of U.S. Intelco Holdings, Inc. ("U.S. Intelco") and Independent
Telecommunications Network, Inc. ("ITN"). In accordance with terms of the
merger, U.S. Intelco and ITN merged with and into USTN Services, Inc. ("USTN
Services") on February 23, 1996 (the "Merger"). USTN Services subsequently
changed its name to Illuminet, Inc. The Merger was accounted for as a
purchase business combination with U.S. Intelco designated as the acquiring
company. The results of ITN's operations are included in the consolidated
financial statements prospectively from the date of the Merger. The pro forma
information presented in this Management's Discussion and Analysis or Plan of
Operations reflects the combined activities of U.S. Intelco and ITN as if the
Merger had occurred effective January 1, 1996.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
REVENUES. The following table summarizes ILLUMINET's services and the effect
of the Merger on ILLUMINET revenues:
1997 1996
---- ----
Billing-and-collection services $ 3,629,367 $ 4,222,444
Data base services 4,150,504 3,530,194
Network usage measurement 1,696,705 -
Other services 86,387 542,821
---------- ----------
9,562,963 8,295,459
---------- ----------
Services acquired by Merger:
- ---------------------------
Intelligent network services 12,482,475 10,391,661
Wireless services 2,339,653 1,485,681
---------- ----------
14,822,128 11,877,342
---------- ----------
Pro forma revenue 24,385,091 20,172,801
Financial statement reporting adjustment
for operations prior to the Merger - (3,809,227)
---------- ----------
Revenues per statements of income $24,385,091 $16,363,574
========== ==========
Billing-and-collection services revenues for 1997 decreased primarily as a
result of a $653,984, or 19%, decrease in clearinghouse product line revenues.
This decrease reflects a fourth quarter 1996 price decrease offset by a 10%
increase in messages processed from 31.0 million in 1996 to 35.8 million in
1997, due to the addition of a large customer in the second quarter of 1996.
Although clearinghouse volumes are expected to increase in 1997, revenues are
expected to remain below 1996 levels due to the price decrease described above.
8
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Data base services revenues increased, reflecting an increase in Calling Name
Delivery ("CNAM") partially offset by a reduction in Line Information Data Base
("LIDB") product line revenues. CNAM revenues increased $573,058, or 303%, in
1997, reflecting growing market acceptance of the service introduced in 1995.
CNAM queries increased 156% from 47.5 million in 1996 to 121.8 million in 1997.
LIDB revenues decreased $205,324, or 8%, in 1997, reflecting a 14% decrease in
queries processed from 80.3 million in 1996 to 69.4 million in 1997 due to
increased market penetration by competing calling card service providers.
Network usage measurement revenues derived from the sale of ILLUMINET's SS7
network traffic tracking and measurement software products AMAT7(R) and CDR7(R)
increased in 1997 due to finalization of sales during the period. Network usage
measurement product sales have long sales cycle with each individual sale
normally contributing significant revenue to the product line. No sales were
completed in the corresponding 1996 period.
Other services revenues decreased primarily due to the termination of
ILLUMINET's contract to provide voice messaging services for the State of
Washington in September, 1996. Voice messaging contributed revenues of $413,705
for the 1996 period.
Intelligent network services revenues for 1997 increased primarily as a result
of a $1,650,542, or 77%, increase in trunk signaling and related service
revenues, reflecting new customer growth. Network connectivity product line
revenues increased $549,892, or 14%, from growth in chargeable customer links.
Offsetting the revenue growth in these product lines, LIDB switch and transport
revenues decreased $495,428, or 23%, in 1997 due to lower query volumes and
reduced prices brought on by competition.
Wireless services revenue increased primarily due to a $710,216, or 51%,
increase in 1997 in cellular switch and transport revenues. The increase
reflects customer growth and increased utilization of the network with message
volumes increasing 101% from 473.0 million for the 1996 period to 951.4 million
for the comparable 1997 period.
EXPENSES. The following table summarizes ILLUMINET's expenses and the
effect of the Merger on ILLUMINET expenses:
1997 1996
---- ----
Operating $ 5,914,020 $ 4,989,024
Selling, general and administrative 4,706,901 4,809,371
Depreciation and amortization 3,094,741 3,146,329
Network operating 6,785,826 5,559,938
Corporate realignment - 700,875
---------- ----------
Pro forma expenses 20,501,488 19,205,537
Financial statement reporting adjustment
for operations prior to the Merger - (3,698,680)
---------- ----------
Expenses per statements of income $20,501,488 $15,506,857
========== ==========
ILLUMINET's primary costs are network operating expenses, which are primarily
comprised of leased network connectivity charges incurred to establish and
maintain customer connectivity to the company's Signaling System 7 ("SS7")
9
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network, followed by personnel costs, depreciation and amortization of hardware,
software and facilities assets, and software maintenance expenses.
Operating expenses increased $924,996, or 19%, for 1997 primarily to support the
growth of Illuminet's SS7 network. The increase was comprised of increased
personnel expenses related to new positions, and increased maintenance costs for
new hardware and software.
Selling, general and administrative expenses decreased $102,470, or 2%, from
1996 levels due to a reduction in personnel expenses resulting from
Merger-related position reductions. Selling, general and administrative expenses
savings were offset by increased travel expenses and new marketing material
costs related to increased sales and marketing efforts.
Depreciation and amortization expenses were comparable for 1996 and 1997 but are
expected to increase with the placing into service of new network equipment.
Network operating expenses increased $1,225,888, or 22%, for 1997 due to
increased leased network connectivity, link, and LATA access charges incurred to
support growth in customer connectivity to the SS7 network.
Corporate realignment expenses were comprised primarily of non-recurring
Merger-related severance expenses incurred in the first quarter of 1996.
INTEREST INCOME/INTEREST EXPENSE. Interest income increased by $51,080, or 24%,
from $209,857 for the 1996 period to $260,937 for the comparable 1997 period.
This increase resulted primarily from an increase in available cash balances
over the two periods resulting from the Merger.
On a pro forma basis, interest income increased by $33,675, or 15%, from
$227,262 for the 1996 period to $260,937 for the 1997 period.
Interest expense increased $202,753, or 36%, from $558,077 for the 1996 period
to $760,830 for the comparable 1997 period. The increase reflects three months
of combined interest expense resulting from the Merger and a higher aggregate
outstanding debt balance resulting from an additional loan for a total of
approximately $2.7 million obtained from Rural Telephone Finance Cooperative in
December, 1996.
On a pro forma basis, interest expense was comparable for the 1996 and 1997
periods.
INCOME TAXES. ILLUMINET has Federal income tax net operating loss carryforwards
available to offset future taxable income for Federal income tax purposes
totaling $20,964,492. These carryforwards expire in various amounts from 2006
through 2011. ILLUMINET's ability to utilize such net operating loss
carryforwards is dependent on ILLUMINET's ability to generate sufficient taxable
income from its operations. The current 1997 tax provision is comprised of
Federal alternative minimum taxes which cannot be completely offset by tax loss
carryforwards.
EARNINGS
ILLUMINET's net income increased $2,807,539 from $508,497 for the six months
ended June 30, 1996, to $3,316,036 for the comparable 1997 period. This increase
primarily reflects an increase in network usage measurement revenues, the effect
of non-recurring corporate realignment costs incurred during the 1996 period,
10
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and the impact of the post-Merger operational efficiencies that have reduced
costs as a percentage of revenues.
On a pro forma basis, ILLUMINET's net income increased $2,894,019 from
$422,017 for the six months ended June 30, 1996, to $3,316,036 for the
comparable 1997 period. primarily resulting from positive revenue trends
and the completion of the Merger in 1996.
ILLUMINET believes that it will continue to have positive earnings in the future
through new product and customer diversification and expansion into related
telecommunications markets. ILLUMINET anticipates that increased expenditures in
the development of services and products will continue over the next several
years. While it is anticipated that the existing primary services and products
will continue to be profitable, overall profitability in the immediate future
could be negatively impacted by delays in obtaining new product revenues coupled
with related increases in new product start-up costs. A general downward
pressure on price caused by increased competition may also negatively impact
profitability.
Three Months Ended June 30, 1997 and 1996
REVENUES. The following table summarizes revenues for ILLUMINET's
services:
1997 1996
---- ----
Billing-and-collection services $ 1,868,070 $ 2,126,894
Data base services 2,121,875 1,854,883
Network usage measurement 912,296 -
Other services 15,471 291,560
---------- ----------
4,917,712 4,273,337
---------- ----------
Services acquired by Merger:
- ---------------------------
Intelligent network services 6,757,269 5,182,796
Wireless services 1,138,219 940,530
---------- ----------
7,895,488 6,123,326
--------- ----------
Revenues per statements of income $12,813,200 $10,396,663
========== ==========
Billing-and-collection services revenues for 1997 decreased primarily as a
result of a $327,041, or 18%, decrease in clearinghouse product line revenues.
This decrease reflects a fourth quarter 1996 price decrease offset by a 10%
increase in messages processed from 16.6 million in 1996 to 18.2 million in
1997, due to the addition of a large customer in the second quarter of 1996.
Although clearinghouse volumes are expected to increase in 1997, revenues are
expected to remain below 1996 levels due to the price decrease described above.
Data base services revenues increased, reflecting an increase in CNAM revenues
partially offset by a reduction in LIDB product line revenues. CNAM revenues
increased $281,321, or 244%, in 1997, reflecting growing market acceptance of
the service introduced in 1995. CNAM queries increased 152% from 27.2 million in
1996 to 68.6 million in 1997. LIDB revenues decreased $142,387, or 11%, in 1997,
reflecting a 14% decrease in queries processed from 41.1 million in 1996 to 35.2
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million in 1997 due to increased market penetration by competing calling card
service providers.
Network usage measurement revenues derived from the sale of ILLUMINET's SS7
network traffic tracking and measurement software products AMAT7(R) and CDR7(R)
increased in 1997 due to finalization of sales during the period. Network usage
measurement product sales have long sales cycle with each individual sale
normally contributing significant revenue to the product line. No sales were
completed in the corresponding 1996 period.
Other services revenues decreased primarily due to the termination of
ILLUMINET's contract to provide voice messaging services for the State of
Washington in September, 1996. Voice messaging contributed revenues of $223,406
for the 1996 period.
Intelligent network services revenues for 1997 increased primarily as a result
of a $1,022,403, or 92%, increase in trunk signaling and related service
revenues, reflecting new customer growth. Network connectivity product line
revenues increased $414,052, or 21%, from growth in chargeable customer links.
Offsetting the revenue growth in these product lines, LIDB switch and transport
revenues decreased $269,552, or 24%, in is due to lower query volumes and
reduced prices brought on by competition.
Wireless services revenue increased primarily due to a $114,065, or 13%,
increase in 1997 in cellular switch and transport revenues. The increase
reflects customer growth and increased utilization of the network with message
volumes increasing 87% from 288.4 million for the 1996 period to 540.0 million
for the comparable 1997 period.
EXPENSES. Operating expenses increased $542,049, or 22%, for 1997
primarily to support the growth of Illuminet's SS7 network. The increase
was comprised of increased personnel expenses related to new positions, and
increased maintenance costs for new hardware and software.
Selling, general and administrative expenses were comparable for the 1996 and
1997 periods. Reductions in personnel expenses resulting from Merger- related
position reductions were offset by increased travel expenses and new marketing
material costs related to increased sales and marketing efforts.
Depreciation and amortization expenses were comparable for 1996 and 1997 but are
expected to increase with the placing into service of new network equipment.
Network operating expenses increased $838,453, or 30%, for 1997 due to increased
leased network connectivity, link, and LATA access charges incurred to support
growth in customer connectivity to the SS7 network.
INTEREST INCOME/INTEREST EXPENSE. Interest income increased by $9,149, or 8%,
from $120,767 for the three months ended June 30, 1996, to $129,916 for the
comparable 1997 period. This increase resulted primarily from an increase in
available cash balances over the two periods resulting from the Merger.
Interest expense increased $29,124, or 8%, from $378,007 for the three months
ended June 30, 1996 to $407,131 for the 1997 period. The increase reflects a
higher aggregate outstanding debt balance resulting from an additional loan for
a total of approximately $2.7 million obtained from Rural Telephone Finance
Cooperative in December, 1996.
12
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EARNINGS
ILLUMINET's net income increased $999,806 from $956,014 for the three months
ended June 30, 1996, to $1,955,820 for the comparable 1997 period. This increase
primarily reflects an increase in network usage measurement revenues, and the
impact of the post-Merger operational efficiencies that have reduced costs as a
percentage of revenues.
ILLUMINET's net income increased $791,290 from $1,164,530 to $1,955,820 for the
three months ended June 30, 1996 and 1997, respectively, primarily resulting
from positive revenue trends and by the completion of the Merger in 1996.
FORWARD LOOKING INFORMATION
ILLUMINET is including the following cautionary statement to make applicable and
take advantage of the new "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statement made by or on
behalf of, ILLUMINET. The factors identified in this cautionary statement are
important factors (but not necessarily all of the important factors) that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, ILLUMINET.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, ILLUMINET
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, ILLUMINET, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished
Taking into account the foregoing, the following are identified as important
factors that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, ILLUMINET:
a) Future operating results will be affected by the costs of continuing to
develop and expand ILLUMINET's business which may be higher than ILLUMINET's
expectations, and ILLUMINET may be required to raise additional capital or to
borrow funds to complete such activities. There can be no assurance that
additional funding will be available if such funding requirements exceed
existing financing arrangements.
b) ILLUMINET's advanced data base, billing and collection, and network services
are offered directly by other companies or groups of companies, many of which
are significantly larger and better financed than ILLUMINET. Future operating
results will be affected by ILLUMINET's ability to adjust to competitive
pressures impacting ILLUMINET's market acceptance or prices.
c) Many of ILLUMINET's customers are regulated directly by the Federal
Communications Commission or other state public utility commissions. Changes in
regulations, or in interpretation of existing regulations, may affect
ILLUMINET's current or planned product and service offerings.
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d) ILLUMINET's SS7 network traffic tracking and measurement software products
were developed under ILLUMINET's patents in the United States and Canada. Future
operating results are subject to unforeseen events such as the cost, or failure,
to defend the validity of such patents.
LIQUIDITY AND CAPITAL RESOURCES
ILLUMINET relies on a combination of cash generated from operations, debt and
equity to fund service development and expansion activities. Currently,
ILLUMINET's operating activities are generating positive cash flows. However, as
ILLUMINET broadens its services and products to those requiring larger
investments coupled with longer periods before subsequent revenues are
generated, ILLUMINET believes there may be increased pressure on cash generated
from operations. ILLUMINET anticipates continued high levels of investment in
the development of new services and products over the next several years as
ILLUMINET processes increased volumes relating to its network, data base, and
billing-and-collection services, and broadens its product base to keep pace with
changing markets and customer needs.
ILLUMINET's working capital (current assets minus current liabilities) was
$9,688,341 as of June 30, 1997. ILLUMINET's cash and cash equivalent balances
included $7,713,000 required as working capital to service ILLUMINET's
clearinghouse customers. Such funds are received and disbursed on a monthly
basis. The increase in working capital of $5,383,378 from $4,304,963 at June 30,
1996, reflects the increase in cash balances from operating activities,
increased accounts receivable, and reductions in liabilities assumed in the
Merger. These positive changes were offset by increased payables related to
ILLUMINET's growing clearinghouse program, and the increased current portion of
long-term debt. ILLUMINET believes that its existing cash balances, funds
generated from its operations and borrowings available under its existing credit
agreements will be sufficient to meet existing capital expenditure and working
capital needs for the immediate future.
ILLUMINET's expenditures for property and equipment were $3,417,692 for the six
months ended June 30, 1997. Expenditures for property and equipment were
primarily for network equipment.
At June 30, 1997, ILLUMINET had a secured line of credit expiring August, 2001,
with RTFC that permits ILLUMINET to borrow up to $7,300,000, not to exceed 80%
of accounts receivable. There were no borrowings against the line of credit at
June 30, 1997. Additionally at June 30, 1997, ILLUMINET had $5,188,007 of unused
loan facilities established or committed with RTFC, maturing in the years 2000
and 2001.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the
Annual Meeting of Stockholders of USTN Holdings, Inc. ("USTN"),
held on April 30, 1997, the following numbers of votes were
cast for the matters indicated:
1. Proposal to amend USTN's Certificate of Incorporation to change the name
of USTN to Illuminet Holdings, Inc.:
Broker
For Against Abstain Non-Vote
--------- ------- ------- --------
3,961,371 0 72,053 1,472,563
2. Election of two Class I Directors of USTN to a three-year term expiring
at the 2000 Annual Meeting:
Broker
Nominee For Against Abstain Non-Vote
-------------------- --- ------- ------- --------
Kenneth L. Lein 4,023,124 724 9,576 1,472,563
G.I. Ross 4,023,848 0 9,576 1,472,563
The following individuals continued as USTN directors after the Annual
Meeting:
Richard A. Lumpkin
Gregory J. Wilkinson
Theodore D. Berns
Eugene L. Cole
Aubrey E. Judy
James S. Quarforth
James W. Strand
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601
OF REGULATION S-B
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months
ended June 30, 1997.
15
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ILLUMINET HOLDINGS, INC.
Date: August 8, 1997 By: /s/ Daniel E. Weiss
---------------------------
Daniel E. Weiss, Vice President -
Finance and Treasurer
(Principal Accounting Officer)
16
<PAGE>
EXHIBIT 11
ILLUMINET HOLDINGS, INC.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------- -------------------------
<S> <C> <C> <C> <C>
Primary:
Average common shares
outstanding 5,270,694 5,161,152 5,273,942 4,688,226
========= ========= ========= =========
Net income $1,955,820 $ 956,014 $3,316,036 $ 508,497
========= ======== ========= =========
Per share amount $ 0.37 $ 0.19 $ 0.63 $ 0.11
========= ======== ========= =========
Fully diluted:
Primary average common
shares outstanding 5,270,694 5,161,152 5,273,942 4,688,226
Assumed conversion of
ILLUMINET 7.5%
Debentures 907,923 946,853 911,393 -
Assumed conversion of
ILLUMINET Series A
Preferred Stock 224,036 22,770 224,175 -
--------- --------- --------- ---------
6,402,653 6,130,775 6,409,509 4,688,226
========= ========= ========= =========
Net income $1,955,820 $ 956,014 $3,316,036 $ 508,497
Add ILLUMINET 7.5%
Debenture interest,
net of federal
income tax effect 129,598 68,177 260,473 -
--------- --------- --------- ---------
Totals $2,085,418 $1,024,191 $3,576,509 $ 508,497
========= ========= ========= =========
Per share amount $ 0.33 $ 0.17 $ 0.56 $ 0.11
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
<LEGEND>
EXHIBIT 27
ILLUMINET HOLDINGS, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ILLUMINET HOLDINGS, INC. AS OF
JUNE 30, 1997, AND FOR THE THREE MONTHS THEN ENDED, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002119
<NAME> Illuminet Holdings, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 11,756,314
<SECURITIES> 0
<RECEIVABLES> 25,764,973
<ALLOWANCES> (594,000)
<INVENTORY> 0
<CURRENT-ASSETS> 37,333,133
<PP&E> 60,211,065
<DEPRECIATION> 29,603,237
<TOTAL-ASSETS> 72,590,266
<CURRENT-LIABILITIES> 27,644,792
<BONDS> 29,949,289
0
26
<COMMON> 52,669
<OTHER-SE> 24,943,490
<TOTAL-LIABILITY-AND-EQUITY> 72,590,266
<SALES> 0
<TOTAL-REVENUES> 24,385,091
<CGS> 0
<TOTAL-COSTS> 20,501,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (150,000)
<INTEREST-EXPENSE> 760,830
<INCOME-PRETAX> 3,383,710
<INCOME-TAX> 67,674
<INCOME-CONTINUING> 3,316,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,316,036
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.56
</TABLE>
