<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
COMMISSION FILE NUMBER 0-27555
ILLUMINET HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 36-4042177
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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4501 Intelco Loop, Lacey, Washington 98503
(Address of principal executive office) (Zip code)
(360) 493-6000
(Registrant's telephone number, including area code)
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 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 the past 90 days. Yes [X] No [ ]
At November 1, 2000, 31,989,197 shares of Common Stock, $0.01 par value per
share were outstanding.
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ILLUMINET HOLDINGS, INC.
FORM 10-Q
INDEX
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PAGE
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........................... 1
Consolidated Statements of Income for the three months and nine months ended
September 30, 2000 and 1999........................................................................ 2
Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 1999...................................................................................... 3
Notes to Consolidated Financial Statements - September 30, 2000...................................... 4
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................. 6
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.................................12
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings..........................................................................13
ITEM 2: Changes in Securities and Use of Proceeds..................................................13
ITEM 3: Defaults Upon Senior Securities............................................................13
ITEM 4: Submission of Matters to a Vote of Security Holders........................................13
ITEM 5: Other Information..........................................................................13
ITEM 6: Exhibits and Reports on Form 8-K...........................................................13
SIGNATURES..............................................................................................14
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PART I
FINANCIAL INFORMATION
ITEM 1: Financial Statements
ILLUMINET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 28,550 $ 24,223
Available-for-sale securities ................................................ 83,207 79,738
Accounts receivable, less allowance for doubtful accounts
of $2,197 ($1,944 in 1999) ................................................ 39,409 35,942
Deferred income taxes ........................................................ 1,683 1,783
Prepaid expenses and other ................................................... 2,906 2,039
--------- ---------
Total current assets ................................................. 155,755 143,725
Property and equipment, net .................................................... 59,151 51,095
Computer software product costs, less accumulated
amortization of $2,766 ($2,345 in 1999) ...................................... 93 513
Other assets ................................................................... 1,574 1,797
--------- ---------
Total assets ......................................................... $ 216,573 $ 197,130
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses .................................. $ 15,365 $ 13,644
Due to customers ............................................................. 16,610 16,133
Income taxes payable ......................................................... 1,313 1,988
Current portion of obligations under capital leases .......................... 2,667 2,653
Current portion of long-term debt ............................................ 802 1,430
--------- ---------
Total current liabilities ............................................ 36,757 35,848
--------- ---------
Deferred income taxes .......................................................... 4,966 5,116
Obligations under capital leases, less current portion ......................... 3,094 5,101
Long-term debt, less current portion ........................................... 6,263 11,478
Convertible Redeemable Preferred Stock ......................................... -- 4,071
Stockholders' equity:
Preferred Stock, par value $.01 per share, authorized 100,000 shares, 4,416
shares designated as Series A, none outstanding and 7,000 shares designated
as Series B, none outstanding ............................................. -- --
Common Stock, par value $.01 per share, authorized
150,000,000 shares, issued and outstanding 31,943,203
(4,485,000 in 1999) ....................................................... 319 57
Class A Common Stock, par value $.01 per share, authorized
7,200,000 shares, none outstanding (6,344,134 in 1999) .................... -- 63
Common Stock Warrants ........................................................ -- 1,521
Additional paid-in capital ................................................... 114,956 105,560
Deferred stock-based compensation ............................................ (3,031) (3,885)
Retained earnings ............................................................ 53,249 32,200
--------- ---------
Total stockholders' equity ........................................... 165,493 135,516
--------- ---------
Total liabilities and stockholders' equity ........................... $ 216,573 $ 197,130
========= =========
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1
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ILLUMINET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Network services ...................... $ 37,059 $ 29,027 $ 104,293 $ 77,775
Clearinghouse services ................ 1,470 1,540 4,234 4,592
Network usage software applications ... 3,064 271 3,852 773
------------ ------------ ------------ ------------
Total revenues ................ 41,593 30,838 112,379 83,140
Expenses:
Carrier costs ......................... 6,798 7,845 20,123 22,305
Operating ............................. 10,713 8,832 29,489 24,810
Selling, general and administrative ... 5,716 4,443 15,666 12,141
Depreciation and amortization ......... 4,057 3,530 11,505 9,433
Merger costs .......................... -- -- 3,353 --
------------ ------------ ------------ ------------
Total expenses ................ 27,284 24,650 80,136 68,689
------------ ------------ ------------ ------------
Operating income ........................ 14,309 6,188 32,243 14,451
Interest income ......................... 1,882 293 5,553 721
Interest expense ........................ (259) (634) (1,015) (1,650)
------------ ------------ ------------ ------------
Income before income taxes .............. 15,932 5,847 36,781 13,522
Income tax provision .................... 5,986 2,225 15,305 5,113
------------ ------------ ------------ ------------
Net income .............................. $ 9,946 $ 3,622 $ 21,476 $ 8,409
============ ============ ============ ============
Earnings per share -- basic ............. $ 0.31 $ 0.15 $ 0.67 $ 0.34
============ ============ ============ ============
Earnings per share -- diluted ........... $ 0.30 $ 0.13 $ 0.63 $ 0.29
============ ============ ============ ============
Weighted-average common shares -- basic . 31,873,701 22,726,139 31,394,289 22,720,843
============ ============ ============ ============
Weighted-average common shares -- diluted 33,677,898 28,414,306 33,543,619 28,066,764
============ ============ ============ ============
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2
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ILLUMINET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income ...................................................................... $ 21,476 $ 8,409
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 11,505 9,433
Stock-based compensation expense ................................................ 848 387
Deferred income taxes ........................................................... (50) 2,180
Change in:
Accounts receivable .......................................................... (3,467) (4,748)
Trade accounts payable and accrued expenses .................................. 1,721 2,654
Due to customers ............................................................. 477 (1,723)
Other ........................................................................ 574 (531)
-------- --------
Net cash provided by operating activities ....................................... 33,084 16,061
-------- --------
Investing activities:
Purchase of investments ......................................................... (3,469) --
Capital purchases ............................................................... (19,141) (9,739)
-------- --------
Net cash used in investing activities ........................................ (22,610) (9,739)
-------- --------
Financing activities:
Proceeds from issuance of notes payable ......................................... 4,103 9,111
Proceeds from issuance of Common Stock .......................................... 1,689 98
Principal payments on notes payable and capital leases .......................... (11,939) (11,030)
-------- --------
Net cash used in financing activities ........................................ (6,147) (1,821)
-------- --------
Net increase in cash and cash equivalents ......................................... 4,327 4,501
Cash and cash equivalents at:
Beginning of period ............................................................. 24,223 13,589
-------- --------
End of period ................................................................... $ 28,550 $ 18,090
======== ========
Supplemental cash flow disclosure:
Income taxes paid ............................................................... $ 13,798 $ 3,272
======== ========
Interest paid ................................................................... $ 1,069 $ 1,118
======== ========
Capital acquisitions financed through capital leases ............................ $ -- $ 2,530
======== ========
Dividends and accretion on Convertible Redeemable Preferred Stock ............... $ 404 $ 621
======== ========
</TABLE>
3
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ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Illuminet Holdings, Inc. and its wholly-owned subsidiaries Illuminet,
Inc. and National Telemanagement Corporation (collectively referred to as "the
Company") are engaged in the business of developing, managing and marketing a
Signaling System 7 ("SS7") network and related products and services based on
SS7 technology to the entire telecommunications marketplace. SS7 is a
telecommunications industry-standard system of protocols and procedures that is
used to control telephone communications and provide routing information in
association with vertical calling features, such as calling card validation,
advanced intelligent network services, local number portability, wireless
services, toll-free number database access, and caller identification.
Additionally, the Company provides advanced database services, prepaid wireless
account management and unregistered wireless roaming services,
billing-and-collection services, calling card services, and network usage
software applications to a range of telephone companies as well as interexchange
carriers, operator service providers and other telecommunications companies and
providers of telecommunications services.
The Company has its corporate headquarters and a portion of its
operations located in Lacey, Washington; a network control center and related
operations located in Overland Park, Kansas; a prepaid wireless account
management services center in Dallas, Texas; and additional SS7 Signal Transfer
Points located in Rock Hill, South Carolina; Mattoon, Illinois; Las Vegas,
Nevada; Akron, Pennsylvania, and Waynesboro, Virginia.
Illuminet Holdings, Inc. (formerly USTN Holdings, Inc. through May 1997)
and Illuminet, Inc. (formerly USTN Services, Inc. through May 1997) were
incorporated in the State of Delaware on August 2, 1995.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company as of September 30,
2000 and for the three months and nine months ended September 30, 2000 and 1999
presented in this Form 10-Q are unaudited, and in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the Company's financial position, results
of its operations and its cash flows for each period presented. All significant
intercompany balances and transactions have been eliminated in consolidation.
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. The Company 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 and notes thereto should be read in
conjunction with the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 14, 2000.
On June 30, 2000, pursuant to a Merger Agreement dated June 12, 2000
among Illuminet Holdings, Inc., Illuminet Telemanagement, Inc., a wholly-owned
subsidiary of the Company, and National Telemanagement Corporation ("NTC"),
Illuminet Telemanagement, Inc. merged with and into NTC. NTC, which has its
entire operations in Dallas, Texas, develops, markets, and provides a variety of
telecommunications services including prepaid wireless account management and
unregistered wireless roaming services to the wireless telephone industry. These
services are provided to telecommunications carriers throughout North America
and the Caribbean.
In connection with the merger, the Company issued 1,888,944 shares of
common stock in exchange for all outstanding preferred stock and common stock of
NTC and assumed all outstanding options of NTC, resulting in the issuance of
options to purchase up to 80,297 shares of the Company's common stock. This
transaction has been accounted for as a pooling-of-interests. These consolidated
financial statements have been prepared to reflect the restatement of all
periods presented to include the accounts of NTC. The historical results of the
pooled entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity.
4
<PAGE> 7
EARNINGS PER SHARE
The computation of earnings per share-basic is based on net income
available to common shareholders and the weighted-average number of outstanding
common shares, including Class A Common Stock. The computation of earnings per
share-diluted includes the dilutive effect, if any, of outstanding Series A
Preferred Stock, Convertible Redeemable Preferred Stock, and convertible
debentures calculated using the as if converted method, and Common Stock
options, Class A Common Stock options and Common Stock Warrants calculated using
the treasury stock method. Effective with Illuminet's initial public offering on
October 7, 1999, all shares of outstanding Series A Preferred Stock
automatically converted into common stock and all common stock outstanding
immediately prior to the initial public offering was renamed to Class A Common
Stock. Each share of Class A Common Stock automatically converted into four
shares of Common Stock on April 5, 2000. All share and per share amounts have
been restated to reflect the conversion of the Class A Common Stock into Common
Stock at the beginning of each period presented.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of earnings per
share-basic and diluted (in thousands, except share and per share amounts):
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
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Numerator:
Net income .................................... $ 9,946 $ 3,622 $ 21,476 $ 8,409
Accretion of redemption value and
cumulative dividends of Convertible
Redeemable Preferred Stock ................. -- (207) (404) (621)
------------ ------------ ------------ ------------
Numerator for earnings per share-basic --
Income available to common stockholders ....... 9,946 3,415 21,072 7,788
Effect of dilutive securities -- Debenture
interest, net of tax ....................... -- 179 -- 291
------------ ------------ ------------ ------------
Numerator for earnings per share-diluted
-- net income after assumed conversions .... $ 9,946 $ 3,594 $ 21,072 $ 8,079
============ ============ ============ ============
Denominator:
Denominator for earnings per share-basic --
weighted-average shares ..................... 31,873,701 22,726,139 31,394,289 22,720,843
Weighted-average effect of dilutive securities:
Stock options .............................. 1,804,197 1,408,015 1,874,274 1,039,681
Stock warrants ............................. -- 414,096 275,056 414,096
Debentures ................................. -- 3,046,180 -- 3,072,268
Series A Stock ............................. -- 819,876 -- 819,876
------------ ------------ ------------ ------------
Dilutive potential common shares ........... 1,804,197 5,688,167 2,149,330 5,345,921
------------ ------------ ------------ ------------
Denominator for earnings per share-diluted
- adjusted weighted-average shares and
assumed conversions ......................... 33,677,898 28,414,306 33,543,619 28,066,764
============ ============ ============ ============
Earnings per share-- basic ...................... $ 0.31 $ 0.15 $ 0.67 $ 0.34
============ ============ ============ ============
Earnings per share-- diluted .................... $ 0.30 $ 0.13 $ 0.63 $ 0.29
============ ============ ============ ============
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5
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and the results of our operations together with our consolidated
financial statements and the notes to those financial statements included
elsewhere in this 10-Q. The following discussion reflects the retroactive
restatement of our accounts to reflect our transaction with National
Telemanagement Corporation, which was accounted for as a pooling-of-interests.
Except where noted, this restatement did not materially affect our historical
financial condition and results of operations as it relates to our management's
discussion and analysis. This discussion contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below under
"Forward Looking Statements". We disclaim any obligation to update information
contained in any forward-looking statement.
OVERVIEW
We operate the largest unaffiliated SS7 network in the United States and
are a leading provider of complementary intelligent network and SS7 services to
telecommunications carriers. Connection to our network gives carriers access to
the system of signaling networks of nearly the entire U.S. public-switched
telecommunications infrastructure through a single source.
SS7 is the industry standard used by almost every switched telephone
network operator in the United States and Canada to identify available network
routes and designate the circuits to be used for each individual telephone call.
SS7 networks also provide access to intelligent network services, such as caller
identification, calling card validation and other specialized database access
functions, all of which are performed in the seconds it takes to complete a
call. SS7 networks are specialized packet-switched data networks that provide
these control functions and services in parallel with separate voice networks.
Our SS7 network is composed of specialized SS7 switches, sophisticated
computers and databases strategically located across the country. These elements
interconnect our customers and all of the largest U.S. telecommunications
carriers through leased lines. Our SS7 network serves more than 700 network
services customers, including incumbent local exchange carriers, competitive
local exchange carriers, long distance companies, wireless telecommunications
providers and Internet service providers.
PRODUCTS AND SERVICES
Our products and services can be grouped into three general categories:
- network services, which includes (1) SS7 connectivity, switching
and the transport of messages used to route calls and query
databases, (2) intelligent network services, such as database
access, including local number portability and support for roaming
between carriers, and (3) prepaid wireless account management and
unregistered wireless roaming services;
- clearinghouse services that facilitate payments among
telecommunications carriers; and
- network usage software applications.
Our SS7 network connectivity, switching and transport services provide
telecommunications carriers access to the signaling networks of nearly the
entire U.S. public-switched telecommunications infrastructure through a single
source. Once connected, customers use our SS7 network to route and complete
voice and data transmissions and access related and complementary services and
applications available from us or from third-party vendors. Once a customer is
connected to our SS7 network, we continue to provide support services to
maintain and upgrade its connection on a 24 hours a day, seven day a week basis.
Intelligent network services encompass a number of database query
functions, including caller identification, toll-free calling, calling card
validation, local number portability and seamless wireless roaming. Each of
these services uses our SS7 network to access databases, some maintained by us
and others maintained by third parties.
Prepaid wireless account management and unregistered wireless roaming
services include providing a prepaid wireless billing service that charges and
replenishes the customer's personal prepaid account and services that provide
access to roaming for unregistered users which allows such users to debit their
personal prepaid account while roaming or use an alternative payment method such
as a credit card for calls without live operator intervention.
6
<PAGE> 9
Our clearinghouse services include serving as a distribution and
collection point for billing information and payment collection for services
provided by one carrier to customers billed by another. For example, we receive
a monthly report from a long distance carrier detailing the long distance calls
made by the customers of another carrier. We prepare statements to each billing
carrier of its customers' usage, which the billing carrier then uses to bill its
customers. The billing carrier remits the payments received from its customers
to us. We aggregate these payments and remit them to the long distance carrier,
net of our servicing fee.
Network usage software applications are commercial applications derived
primarily from software we developed to create billing data for the use of our
SS7 network and services. This software is licensed to carriers and allows them
to create billing data to bill another carrier for use of their signaling
network or their underlying public-switched telecommunications network.
REVENUES
Our revenues primarily come from the sale of network services, including
SS7 connectivity, switching and transport, the provision of intelligent network
services, and the provision of prepaid wireless account management and
unregistered roaming services. To a much lesser extent, we derive revenues from
our clearinghouse services and network usage software applications.
Customers generally are charged for connections to our SS7 network on a
monthly "per link" basis. If we provision the network facilities that provide
their connections to our network, they pay us for establishing the initial
connections that link them to our network and pay a separate monthly fee to
maintain those links. We generally price these connectivity links on a cost-plus
basis based on our facility lease costs. In addition, customers are charged for
network switching (the transmission of signaling traffic throughout the network)
based on the number of switches to which they signal.
Our intelligent network services are delivered through our SS7 network
and a substantial majority of our customers purchase both SS7 network
connections and intelligent network services. Our intelligent network services
fall into two general categories: database administration and database query
services. In addition to paying monthly fees for SS7 connectivity, our customers
pay a per-use or per-query fee for database services. For example, we price
local number portability service order administration on a per-ported number
basis, and obtain volume-based revenue for accessing the local number
portability database on a per-query basis.
Our prepaid wireless account management services revenues are based on
either a per minute basis, where we make a percentage of every minute paid for
and used, or on a percentage of monthly access fees regardless of usage. The
unregistered wireless roaming service revenue is based on the number of
completed calls times a rate per call plus a per minute rate for call duration,
net of carrier charges.
Clearinghouse services are provided on a per message billed basis. Our
revenues vary based on the number of messages provided to us by
telecommunications companies and other message providers for aggregation and
distribution by us to the carrier who will bill to and collect from its
customers. Clearinghouse services are relatively mature, are showing a decline
in the number of messages processed, and are experiencing competitive pricing
pressures.
Revenues from network usage software applications are derived from
licenses of our software products and continuing software maintenance fees.
These products have a long sales cycle, with each individual license normally
contributing significant revenue to the product line. Therefore, these revenues
may change significantly from period to period. However, new sales opportunities
for these products in their current form are limited, as many of the customers
in the top tier market, consisting primarily of regional Bell operating
companies, have already licensed our product.
7
<PAGE> 10
The table below indicates the portion of our revenues attributable to
network services, clearinghouse services and network usage software applications
for the three months ended September 30, 2000 and 1999 and the first nine months
of 2000 and 1999, together with the percentage change in revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ---------------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- --------- -------- --------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Network services ..... $ 37,059 $ 29,027 28% $ 104,293 $ 77,775 34%
Clearinghouse services 1,470 1,540 (5) 4,234 4,592 (8)
Network usage software
applications ....... 3,064 271 1,031 3,852 773 398
--------- --------- --------- ---------
$ 41,593 $ 30,838 35% $ 112,379 $ 83,140 35%
========= ========= ========= =========
</TABLE>
EXPENSES
Our costs and expenses, which we do not attribute directly to individual
product lines, consist generally of the following:
- Carrier costs, which include recurring payments to
telecommunications carriers for leased lines and signal transfer
point ports. These lines and ports provide connections (1) between
our customers and our network, (2) among our own network locations
and (3) between our network and nearly all other SS7 networks in
the United States. Cost of links and ports to our customers is
variable, relating directly to the number of links and ports we
provide to our customers. Cost of links and ports among our own
network locations and to other SS7 networks is primarily fixed. We
generally lease lines and ports under tariffs with volume
discounts;
- Operating expenses, which include the cost of providing network
services, clearinghouse services and network usage software
applications. Such costs primarily include personnel costs and
hardware and software maintenance costs to monitor and maintain
our network 24 hours a day, seven days a week, maintain and
operate our databases, process our clearinghouse messages, and
develop and maintain our network usage software applications;
- Selling, general and administrative, which consist primarily of
executive, sales and marketing and administrative personnel and
professional services expense;
- Depreciation and amortization, which relate primarily to our
installed network equipment, our computer hardware and software,
our corporate facilities and our network usage software
applications; and
- Merger costs reflect the direct expenses associated with the NTC
transaction.
The table below indicates our expenses for the three months ended
September 30, 2000 and 1999 and the first nine months of 2000 and 1999, together
with the percentage change in expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- --------- -------- --------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Carrier costs ..................... $ 6,798 $ 7,845 (13)% $ 20,123 $ 22,305 (10)%
Operating ......................... 10,713 8,832 21 29,489 24,810 19
Selling, general and
administrative ................. 5,716 4,443 29 15,666 12,141 29
Depreciation and
amortization ................... 4,057 3,530 15 11,505 9,433 22
Merger costs ...................... -- -- -- 3,353 -- 100
-------- -------- -------- --------
$ 27,284 $ 24,650 11% $ 80,136 $ 68,689 17%
======== ======== ======== ========
</TABLE>
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RESULTS OF OPERATIONS
The table below indicates the results of our operations expressed as a
percentage of total revenues. The historical results are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Network services ............................... 89% 94% 93% 94%
Clearinghouse services ......................... 4 5 4 5
Network usage software applications ............ 7 1 3 1
---- ---- ---- ----
Total revenues .............................. 100 100 100 100
Expenses:
Carrier costs .................................. 16 25 18 27
Operating ...................................... 26 29 26 30
Selling, general and administrative ............ 14 14 14 15
Depreciation and amortization .................. 10 12 10 11
Merger costs ................................... -- -- 3 --
---- ---- ---- ----
Total expenses .............................. 66 80 71 83
---- ---- ---- ----
Operating income ................................. 34 20 29 17
Interest income .................................. 5 1 5 1
Interest expense ................................. (1) (2) (1) (2)
---- ---- ---- ----
Income before income taxes ....................... 38 19 33 16
Income tax provision ............................. 14 7 14 6
---- ---- ---- ----
Net income ....................................... 24% 12% 19% 10%
==== ==== ==== ====
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES
Network services. Network services revenues, comprised of revenues from
network connectivity, which includes message switching and transport,
intelligent network services, and prepaid wireless and unregistered user
services, increased by $8.1 million, or 28%, to $37.1 million for the three
months ended September 30, 2000 from $29.0 million for the same period in 1999,
and by $26.5 million, or 34%, to $104.3 million for the nine months ended
September 30, 2000 from $77.8 million for the same period in 1999. These
increases were due to increased customer connections and signaling across our
network, substantial growth in queries processed in our caller identification or
calling name delivery and toll-free databases, increased market penetration by
our calling name delivery customers, growth in the amount of toll-free numbers,
the continued rollout of local number portability, and increases in the
subscriber base for prepaid wireless account management services and
unregistered wireless roaming services.
Network connectivity revenues increased by $1.6 million, or 12%, to $15.0
million for the three months ended September 30, 2000 from $13.4 million for the
same period in 1999, and by $7.8 million, or 22%, to $43.8 million for the nine
months ended September 30, 2000 from $36.0 million for the same period in 1999.
Intelligent network services revenues increased by $5.4 million, or 46%, to
$17.0 million for the three months ended September 30, 2000 from $11.6 million
for the same period in 1999, and by $14.2 million, or 46%, to $44.7 million for
the nine months ended September 30, 2000 from $30.5 million for the same period
in 1999. These changes reflect the overall growth in our customer base and
higher caller information services volume as we obtained access to additional
caller information maintained in third-party databases. The remainder of these
increases was due to continued growth in local number portability volume, offset
by competitive pricing pressures for local number database access. Prepaid
wireless account management services and unregistered wireless roaming services
increased by $1.1 million, or 26%, to $5.1 million for the three months ended
September 30, 2000 from $4.0 million for the same period in 1999, and by $4.5
million, or 41%, to $15.8 million for the nine months ended September 30, 2000
from $11.3 million for the same period in 1999, reflecting increases in carrier
customers, geographic market coverage, and subscriber base.
Clearinghouse services. Clearinghouse services revenues decreased 5% to
slightly less than $1.5 million for the three months ended September 30, 2000
from slightly more than $1.5 million for the same period in 1999, and by $0.4
million, or 8%, to $4.2 million for the nine months ended September 30, 2000
from $4.6 million for the same period in 1999. The decrease was caused by a
continued decline in the number of messages processed and competitive pricing
pressures. Although the clearinghouse industry continues to experience some
residual negative impact from interexchange carriers switching the preferred
carrier information on a customer's
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account without the customer's knowledge or approval, and unexpected charges
being billed on a customer's account, we do not expect this to have a material
impact on our revenues in the future. In 2000, clearinghouse services revenues
for the three months ended September 30, 2000 were slightly higher than either
of the three month periods ended March 31, 2000 or June 30, 2000.
Network usage software applications. Network usage software applications
revenues increased by $2.8 million, to $3.1 million for the three months ended
September 30, 2000 from $0.3 million for the same period in 1999, and by $3.1
million, or 398%, to $3.9 million for the nine months ended September 30, 2000
from $0.8 million for the same period in 1999. The increase was due to the
recognition of $2.8 million of licensing revenue during the three months ended
September 30, 2000. New sales opportunities for these products in their current
form are limited, as many of the customers in the top tier market, consisting
primarily of regional Bell operating companies, have already licensed our
product. Therefore, revenues may vary significantly from period to period,
depending on the mix of license and maintenance fees in any given period.
EXPENSES
Carrier costs. Carrier costs decreased by $1.0 million, or 13%, to $6.8
million for the three months ended September 30, 2000 from $7.8 million for the
same period in 1999, and by $2.2 million, or 10%, to $20.1 million for the nine
months ended September 30, 2000 from $22.3 million for the same period in 1999.
Carrier costs decreased as a percentage of revenue as our network capacity has
been leveraged to support increasing revenues, and our network growth has
allowed for the realization of volume discounts.
Operating. Operating expenses increased by $1.9 million, or 21%, to $10.7
million for the three months ended September 30, 2000 from $8.8 million for the
same period in 1999, and by $4.7 million, or 19%, to $29.5 million for the nine
months ended September 30, 2000 from $24.8 million for the same period in 1999.
These increases resulted mainly from higher personnel expenses related to an
expansion of our customer support, operations and engineering functions and
increased maintenance costs for new network and systems hardware and software.
During the three and nine months ended September 30, 1999, we recorded reserves
of $0.8 million and $1.8 million, respectively, for a loss on a clearinghouse
services contract. This issue was resolved in February 2000 with no additional
expense incurred.
Selling, general and administrative. Selling, general and administrative
expenses increased by $1.3 million, or 29%, to $5.7 million for the three months
ended September 30, 2000 from $4.4 million for the same period in 1999, and by
$3.6 million, or 29%, to $15.7 million for the nine months ended September 30,
2000 from $12.1 million for the same period in 1999. These increases were
primarily due to increased incentive compensation expenses and costs associated
with being a public company, including annual report publication and increased
professional services expenses.
Depreciation and amortization. Depreciation and amortization expenses
increased by $0.6 million, or 15%, to $4.1 million for the three months ended
September 30, 2000 from $3.5 million for the same period in 1999, and by $2.1
million, or 22%, to $11.5 million for the nine months ended September 30, 2000
from $9.4 million for the same period in 1999. These increases reflect the
significant investment made in the last two years for network monitoring and
data collection hardware and software, database applications, and signal
transfer point switches.
Merger costs. Merger costs of $3.4 million for the nine months ended
September 30, 2000 reflect the direct expenses associated with the NTC
transaction.
Interest income. Interest income increased by $1.6 million, to $1.9
million for the three months ended September 30, 2000 from $0.3 million for the
same period in 1999, and by $4.9 million, to $5.6 million for the nine months
ended September 30, 2000 from $0.7 million for the same period in 1999. The
increase reflects increased interest income generated by the investment of $78.3
million of net proceeds from our mid-October 1999 initial public offering and
earnings from higher cash balances generated from operations beginning in
mid-1999.
Interest expense. Interest expense decreased by $0.3 million, or 59%, to
$0.3 million for the three months ended September 30, 2000 from $0.6 million for
the same period in 1999, and by $0.7 million, or 38%, to $1.0 million for the
nine months ended September 30, 2000 from $1.7 million for the same period in
1999. These changes reflect reduced interest expense from the conversion of the
redeemable subordinated debentures in October 1999 and retirement of the NTC
debt on June 30, 2000, partially offset by increased interest expense from
capital leases completed in mid-1999.
Income taxes. Income tax expense increased by $3.8 million, or 169%, to
$6.0 million, an effective tax rate of 38%, for the three months ended September
30, 2000 from $2.2 million, an effective tax rate of 38%, for the same period in
1999, and by $10.2 million, or 199%, to $15.3 million, an effective tax rate of
42%, for the nine months ended September 30, 2000 from $5.1 million, an
effective
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tax rate of 38%, for the same period in 1999. These increases were driven by our
increase in income and the effects of the NTC acquisition costs, which are not
tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
We rely on a combination of cash generated from operations, commercial
borrowings, vendor financing and the issuance of debt and equity securities to
fund our operations and capital needs. Currently, our operating activities
generate positive cash flows. We anticipate continued high levels of investment
in our infrastructure over the next several years to manage increased network
volumes, to enhance customer support systems and to continue to improve network
and service reliability. Additionally, we anticipate continued investments in
the development and acquisition of new services and products related to our
network, database and clearinghouse services in order to address changing
markets and customer needs.
Our working capital (current assets in excess of current liabilities) was
$119.0 million at September 30, 2000. Our cash and cash equivalent balances
included $9.4 million required as working capital to service our clearinghouse
services customers. Clearinghouse funds are received and disbursed on a monthly
basis. The growth in working capital of $11.1 million, or 10%, from $107.9
million at December 31, 1999, reflects increased cash related to operating
receipts and available-for-sale securities attributable to interest earnings.
Our property and equipment acquisitions were $19.1 million for the first
nine months of 2000. Expenditures for property and equipment are primarily for
network equipment to expand capacity and enhance reliability, including network
monitoring equipment and local number portability service-related assets. We
currently anticipate total capital expenditures of approximately $25.0 million
for 2000. These investments will support new product introductions such as
mediation services where we have chosen a platform, are in the process of
developing the offering, and expect to launch service in the fourth quarter of
2000.
On June 22, 2000, we entered into an agreement with Bank of America to
provide a $10 million unsecured line of credit and $15 million unsecured capital
expenditure facility. The line of credit has a three year term, with a one year
extension available at the end of the second year. The capital expenditure
facility has a five year term. No draws were taken on the unsecured line and
$0.8 million was outstanding on the capital expenditure facility at September
30, 2000. The Rural Telephone Finance Cooperative will continue to provide the
mortgage financing for our headquarters facility, secured by a first trust deed
on our building and land located in Lacey, Washington. Long-term secured notes
payable to the Cooperative were $6.3 million at September 30, 2000, with various
maturity dates including $0.7 million due September 2001, with the remainder due
in September 2010 and March 2015.
We believe that our existing cash balances, funds generated from our
operations, borrowings available under our existing credit agreements and
proceeds from our initial public offering will be sufficient to meet our
anticipated capital expenditure and working capital needs for the foreseeable
future. However, acquisitions of complementary businesses or technologies may
require significant capital beyond our current expectations, which would require
us to issue additional equity securities and/or incur additional long-term debt.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. We have appointed a team to
implement SFAS 133 for the Company. We will adopt SFAS 133 and the
corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as
amended by SFAS 138, is not expected to have a material impact on Illuminet's
consolidated results of operations, financial position or cash flows. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin Number 101 ("SAB 101"), "Revenue Recognition in Financial Statements".
This summarized certain areas of the staff's views in applying generally
accepted accounting principles as it applies to revenue recognition. We believe
that our revenue recognition principles comply with SAB 101. We will continue to
evaluate interpretations of SAB 101.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations", based on our management's beliefs and assumptions
and on information currently available to our management. Forward-looking
statements include the information concerning our possible or expected future
results of operations, business strategies, financing plans, competitive
position, potential growth opportunities and the effects of competition.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terms such as the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
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Forward-looking statements involve risks, uncertainties and assumptions.
You should understand that there are certain important factors that could cause
actual results to differ materially from those anticipated by the
forward-looking statements, including but not limited to the following:
- Our ability to provide reliable services;
- The impact of any network outages;
- The ability of third party communications infrastructure suppliers
to maintain operational integrity of our connections and to
continue to provide and expand service to us;
- Our ability to effectively and cost efficiently acquire and
integrate complimentary businesses and technologies;
- Continued acceptance of our SS7 network and the telecommunications
market's continuing use of SS7 technology;
- Our ability to attract and retain employees with requisite skills
to execute our growth plans; and
- Intense competition in the market for SS7 services and pricing
pressures caused by competition and industry consolidation.
For additional discussion of the principal factors that may cause actual
results to be different, please refer to our Form 10-Q for the quarter ended
June 30, 2000, which was filed with the SEC on August 14, 2000. You should not
put undue reliance on any forward-looking statements. We will not update
forward-looking statements.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
Our market risks relate primarily to changes in interest rates. We are
exposed to this risk in two specific ways. First, we have debt outstanding. Our
secured notes payable to RTFC, which were $6.3 million at September 30, 2000 and
$7.5 million at December 31, 1999, have a variable interest rate, which exposed
our earnings and cash flows to changes in interest rates. The rate of these
secured notes is based on the lender's cost of funds. We also have a $10.0
million unsecured line of credit and a $15.0 million unsecured capital
expenditure facility with Bank of America with a variable interest rate based on
LIBOR. At September 30, 2000, $0.8 million was outstanding on the unsecured
capital expenditure facility. If market interest rates were to increase
immediately and uniformly by 10% from levels at September 30, 2000, our net
income and cash flows would decrease by an immaterial amount.
The second component of interest rate risk involves the short-term
investment of excess cash. Such risk affects fair values, earnings and cash
flows. Excess cash is primarily invested in overnight repurchase agreements
backed by U.S. government securities. These are considered to be cash
equivalents and are shown that way on our balance sheet. We had securities
available-for-sale of $83.2 million at September 30, 2000 and $79.7 million at
December 31, 1999, which represent the investment of our initial public offering
net proceeds. Available-for-sale securities are primarily comprised of
commercial paper, and provided earnings of $1.0 million in 1999, or
approximately $4.0 million on an annualized basis.
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PART II
OTHER INFORMATION
ITEM 1: Legal Proceedings
We are a party to various legal proceedings arising in the ordinary
course of business. We do not believe that those claims, individually or
combined, will have a material adverse effect on our business, financial
condition or operating results.
ITEM 2: Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) Illuminet's registration statement (File No. 333-85779) under the
Securities Act of 1933, as amended, for its initial public offering
became effective on October 7, 1999.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
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-K
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 14, 2000, we filed a Report on Form 8-K to announce the completion
of our transaction with National Telemanagement Corporation.
On September 12, 2000, we filed a Report on Form 8-K to announce the
termination of our secondary stock offering.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLUMINET HOLDINGS, INC.
Date: November 13, 2000 By: /s/ Daniel E. Weiss
--------------------------------------------
Daniel E. Weiss,
Chief Financial Officer, Secretary
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
15