<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 5, 2000
--------------------------------
ILLUMINET HOLDINGS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-27555 36-4042177
--------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
4501 Intelco Loop, S.E., Lacey, Washington 98503
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 493-6000
------------------------------
Not applicable
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Attached are consolidated financial statements and financial statement
schedule of the Company for the years ended December 31, 1997, 1998 and 1999,
which have been retroactively restated to reflect the transaction completed June
30, 2000 with National Telemanagement Corporation, which was accounted for as a
pooling of interests.
<PAGE> 3
ILLUMINET HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF ILLUMINET HOLDINGS,
INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-3
Report of Barry Morgan & Company, P.C., Independent
Auditors.................................................. F-4
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-5
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
Report of Ernst & Young LLP, Independent Auditors on
Financial Statement Schedule F-27
Schedule II-Valuation and Qualifying Accounts............... F-28
</TABLE>
F-1
<PAGE> 4
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Illuminet Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Illuminet
Holdings, Inc. (Illuminet) (formed as a result of the merger of Illuminet and
National Telemanagement Corporation (NTC)) as of December 31, 1998 and 1999, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits. We did
not audit the financial statements of NTC, whose statements reflect total assets
constituting 9% for 1998 and 7% for 1999 of the related consolidated financial
statement totals and which reflect net income constituting approximately .2%, 2%
and 5% of the related consolidated financial statement totals for each of the
three years in the period ended December 31, 1999, respectively. Those
statements were audited by other auditors, whose reports have been furnished to
us, and in our opinion, insofar as it relates to data included for NTC, is based
solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Illuminet as of
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Seattle, Washington ERNST & YOUNG LLP
June 30, 2000
F-2
<PAGE> 5
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors
National Telemanagement Corporation and Subsidiary
In our opinion, the consolidated balance sheets as of December 31, 1999 and
1998 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1999
of National Telemanagement Corporation and Subsidiary (not presented separately
herein) present fairly, in all material respects, the financial position,
results of operations and cash flows of National Telemanagement Corporation and
Subsidiary at December 31, 1999 and 1998 and for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted provisions of Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities, in 1998.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 17, 2000
F-3
<PAGE> 6
REPORT OF BARRY MORGAN & COMPANY, P.C., INDEPENDENT AUDITORS
The Board of Directors
National Telemanagement Corporation
We have audited the consolidated statement of operations, stockholders'
equity and cash flows of National Telemanagement Corporation and Subsidiary for
the year ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for the opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of National Telemanagement
Corporation and Subsidiary and its cash flows for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
BARRY MORGAN & COMPANY, P.C.
Dallas, Texas
March 12, 1998
F-4
<PAGE> 7
ILLUMINET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $13,589 $ 24,223
Available-for-sale securities............................. -- 79,738
Accounts receivable, less allowance for doubtful accounts
of $2,253 ($1,339 in 1998)............................. 30,650 35,942
Deferred income taxes..................................... 2,369 1,783
Prepaid expenses and other................................ 1,384 2,039
------- --------
Total current assets................................... 47,992 143,725
Property and equipment, net................................. 46,783 51,095
Computer software product costs, less accumulated
amortization of $2,345 ($1,784 in 1998)................... 1,075 513
Other assets................................................ 2,621 1,797
------- --------
Total assets........................................... $98,471 $197,130
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses............... $ 9,700 $ 13,644
Due to customers.......................................... 16,622 16,133
Line of credit............................................ 1,655 --
Income taxes payable...................................... 1,209 1,988
Current portion of obligations under capital leases....... 2,390 2,653
Current portion of long-term debt......................... 3,458 1,430
------- --------
Total current liabilities.............................. 35,034 35,848
------- --------
Deferred income taxes....................................... 3,740 5,116
Obligations under capital leases, less current portion...... 5,475 5,101
Long-term debt, less current portion........................ 16,044 11,478
Convertible Redeemable Preferred Stock...................... 3,243 4,071
Stockholders' equity:
Preferred Stock, par value $.01 per share, authorized
100,000 shares, 4,416 shares designated as Series A,
none outstanding (2,408 in 1998) 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, 5,737,699
(1,252,699 in 1998).................................... 12 57
Class A Common Stock, par value $.01 per share, authorized
7,200,000 shares, issued and outstanding, 6,344,134
(5,365,605 in 1998).................................... 54 63
Common Stock Warrants..................................... 1,521 1,521
Additional paid-in capital................................ 14,345 105,560
Deferred stock-based compensation......................... (394) (3,885)
Retained earnings......................................... 19,397 32,200
------- --------
Total stockholders' equity............................. 34,935 135,516
------- --------
Total liabilities and stockholders' equity............. $98,471 $197,130
======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 8
ILLUMINET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Network services.............................. $ 52,829 $ 70,577 $ 109,317
Clearinghouse services........................ 6,723 6,232 5,851
Network usage software applications........... 3,468 5,406 1,532
----------- ----------- -----------
Total revenues............................. 63,020 82,215 116,700
Expenses:
Carrier costs................................. 17,893 25,506 28,004
Operating..................................... 18,857 23,288 36,623
Selling, general, and administrative.......... 10,382 12,882 16,656
Depreciation and amortization................. 7,622 10,131 13,610
----------- ----------- -----------
Total expenses............................. 54,754 71,807 94,893
----------- ----------- -----------
Operating income................................ 8,266 10,408 21,807
Interest and other income, net.................. 501 767 2,020
Interest expense................................ (1,770) (1,966) (2,060)
----------- ----------- -----------
Income before income taxes...................... 6,997 9,209 21,767
Income tax (benefit) provision.................. (676) 3,826 8,132
----------- ----------- -----------
Net income...................................... $ 7,673 $ 5,383 $ 13,635
=========== =========== ===========
Earnings per share -- basic..................... $ 0.33 $ 0.22 $ 0.52
=========== =========== ===========
Earnings per share -- diluted................... $ 0.30 $ 0.19 $ 0.45
=========== =========== ===========
Weighted-average common shares -- basic......... 23,073,310 23,027,833 24,630,095
=========== =========== ===========
Weighted-average common shares -- diluted....... 27,477,934 27,798,781 29,246,941
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 9
ILLUMINET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A SERIES A
COMMON STOCK TREASURY STOCK COMMON STOCK PREFERRED STOCK COMMON
------------------- ------------------ ------------------- --------------- STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
---------- ------ -------- ------- ---------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 2,045,508 $ 20 (137,621) $ (206) 5,262,354 $53 2,637 $ -- $ --
Conversion of Series A Preferred
Stock.......................... -- -- -- -- 15,832 -- (186) -- --
Conversion of convertible
redeemable subordinated
debentures..................... -- -- -- -- 66,194 -- -- -- --
Class A Common Stock issued under
former stock incentive plan.... -- -- -- -- 14,240 -- -- -- --
Class A Common Stock
repurchases.................... -- -- -- -- (11,539) -- -- -- --
Treasury Stock repurchases....... -- -- (46,253) (172) -- -- -- -- --
Deferred stock-based
compensation................... -- -- -- -- -- -- -- -- --
Stock-based compensation
expense........................ -- -- -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- -- -- --
---------- ---- -------- ------- ---------- --- ------ ----- -------
Balance at December 31, 1997...... 2,045,508 20 (183,874) (378) 5,347,081 53 2,451 -- --
Conversion of Series A Preferred
Stock.......................... -- -- -- -- 3,660 (43) -- --
Conversion of convertible
redeemable subordinated
debentures..................... -- -- -- -- 14,764 1 -- -- --
Deferred stock-based
compensation................... -- -- -- -- -- -- -- -- --
Stock-based compensation
expense........................ -- -- -- -- -- -- -- -- --
Stock options exercised.......... -- -- -- -- 100 -- -- -- --
Issuance of Common Stock
Warrants....................... -- -- -- -- -- -- -- -- 1,521
Purchase of Treasury Stock....... -- -- (608,935) (2,297) -- -- -- -- --
Retirement of Treasury Stock..... (792,809) (8) 792,809 2,675 -- -- -- -- --
Dividends and accretion of
Convertible Redeemable
Preferred Stock................ -- -- -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- -- -- --
---------- ---- -------- ------- ---------- --- ------ ----- -------
Balance at December 31, 1998...... 1,252,699 12 -- -- 5,365,605 54 2,408 -- 1,521
Conversion of Series A Preferred
Stock.......................... -- -- -- -- 204,941 2 (2,408) -- --
Conversion of convertible
redeemable subordinated
debentures..................... -- -- -- -- 760,838 7 -- -- --
Deferred stock-based
compensation................... -- -- -- -- -- -- -- -- --
Stock-based compensation
expense........................ -- -- -- -- -- -- -- -- --
Stock options exercised.......... -- -- -- -- 12,750 -- -- -- --
Issuance of Common Stock......... 4,485,000 45 -- -- -- -- -- -- --
Dividends and accretion of
Convertible Redeemable
Preferred Stock................ -- -- -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- -- -- --
---------- ---- -------- ------- ---------- --- ------ ----- -------
Balance at December 31, 1999...... 5,737,699 $ 57 -- $ -- 6,344,134 $63 -- $ -- $ 1,521
========== ==== ======== ======= ========== === ====== ===== =======
<CAPTION>
ADDITIONAL DEFERRED TOTAL
PAID-IN STOCK-BASED RETAINED STOCKHOLDERS'
CAPITAL COMPENSATION EARNINGS EQUITY
---------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........ $ 12,331 $ -- $ 9,551 $ 21,749
Conversion of Series A Preferred
Stock.......................... -- -- -- --
Conversion of convertible
redeemable subordinated
debentures..................... 735 -- -- 735
Class A Common Stock issued under
former stock incentive plan.... 41 -- -- 41
Class A Common Stock
repurchases.................... -- -- (136) (136)
Treasury Stock repurchases....... -- -- -- (172)
Deferred stock-based
compensation................... 509 (509) -- --
Stock-based compensation
expense........................ -- 169 -- 169
Net income....................... -- -- 7,673 7,673
-------- ------- ------- --------
Balance at December 31, 1997...... 13,616 (340) 17,088 30,059
Conversion of Series A Preferred
Stock.......................... -- -- -- --
Conversion of convertible
redeemable subordinated
debentures..................... 164 -- -- 165
Deferred stock-based
compensation................... 561 (561) -- --
Stock-based compensation
expense........................ -- 507 -- 507
Stock options exercised.......... 1 -- -- 1
Issuance of Common Stock
Warrants....................... -- -- -- 1,521
Purchase of Treasury Stock....... -- -- -- (2,297)
Retirement of Treasury Stock..... 3 -- (2,670) --
Dividends and accretion of
Convertible Redeemable
Preferred Stock................ -- -- (404) (404)
Net income....................... -- -- 5,383 5,383
-------- ------- ------- --------
Balance at December 31, 1998...... 14,345 (394) 19,397 34,935
Conversion of Series A Preferred
Stock.......................... -- -- (2) --
Conversion of convertible
redeemable subordinated
debentures..................... 8,347 -- (2) 8,352
Deferred stock-based
compensation................... 4,185 (4,185) -- --
Stock-based compensation
expense........................ -- 694 -- 694
Stock options exercised.......... 394 -- -- 394
Issuance of Common Stock......... 78,289 -- -- 78,334
Dividends and accretion of
Convertible Redeemable
Preferred Stock................ -- -- (828) (828)
Net income....................... -- -- 13,635 13,635
-------- ------- ------- --------
Balance at December 31, 1999...... $105,560 $(3,885) $32,200 $135,516
======== ======= ======= ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 10
ILLUMINET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 7,673 $ 5,383 $ 13,635
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 7,622 10,131 13,610
Impairment on investment.................................. -- -- 1,461
Stock-based compensation expense.......................... 169 507 694
Deferred income taxes..................................... (869) 2,137 1,962
Change in:
Accounts receivable..................................... (2,880) (3,500) (5,225)
Trade accounts payable.................................. 2,749 (1,488) 3,909
Due to customers........................................ (2,306) (309) (489)
Income taxes payable.................................... 2 1,145 779
Other................................................... (383) 896 (1,297)
-------- -------- --------
Net cash provided by operating activities............. 11,777 14,902 29,039
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of investments.................................... -- -- (79,738)
Capital purchases........................................... (11,715) (11,950) (14,816)
-------- -------- --------
Net cash used in investing activities....................... (11,715) (11,950) (94,554)
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of borrowings on line of credit................... (221) (420) (1,655)
Purchase of Treasury Stock.................................. (172) (2,297) --
Class A Common Stock repurchases............................ (136) -- (4)
Proceeds from issuance of Convertible Redeemable Preferred
Stock and Common Stock Warrants........................... -- 4,361 --
Proceeds from issuance of notes payable and long-term
debt...................................................... 17,820 1,768 8,951
Proceeds from issuance of Class A Common Stock.............. -- 1 394
Proceeds from issuance of Common Stock...................... -- -- 78,334
Principal payments on notes payable, long-term debt and
capital leases............................................ (18,563) (4,188) (9,871)
-------- -------- --------
Net cash (used in) provided by financing activities......... (1,272) (775) 76,149
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (1,210) 2,177 10,634
Cash and cash equivalents at beginning of period............ 12,622 11,412 13,589
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 11,412 $ 13,589 $ 24,223
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid........................................... $ 226 $ 342 $ 5,153
======== ======== ========
Interest paid............................................... $ 2,633 $ 2,460 $ 2,177
======== ======== ========
Capital acquisitions financed through capital leases........ $ 924 $ 7,728 $ 2,530
======== ======== ========
Debentures and Series A Convertible Preferred Stock
converted into Class A Common Stock....................... $ 735 $ 165 $ 8,356
======== ======== ========
Dividends and accretion on Convertible Redeemable Preferred
Stock..................................................... $ -- $ 404 $ 828
======== ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 11
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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, Illuminet provides advanced database 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.
Illuminet has its corporate headquarters and a portion of its operations
located in Lacey, Washington; a portion of its operations located in Dallas,
Texas; a network control center and related operations located in Overland Park,
Kansas; 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 FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Illuminet Holdings, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
These consolidated financial statements have been prepared to reflect the
restatement of all periods presented to include the accounts of National
Telemanagement Corporation. 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments of operating cash,
defined as funds generated from ongoing business operations, with original
maturities of three months or less at purchase to be cash equivalents. Cash
equivalents consist of money market funds and commercial paper that are stated
at cost, which approximates fair value. At December 31, 1998 and 1999, such
investments included $11.3 million, and $20.3 million, respectively, invested in
a money market fund consisting of direct obligations of the U.S. Treasury and
repurchase agreements collateralized by such obligations of the U.S. Treasury.
At December 31, 1998, direct commercial paper investments totaled $2.0 million.
At December 31, 1999, investments in a fund collateralized by commercial paper
investments totaled $3.1 million.
F-9
<PAGE> 12
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
The Company considers the investment of the proceeds and related interest
earnings from its initial public offering to be available-for-sale securities.
Investments classified as available-for-sale securities are reported at fair
value with unrealized gains and losses excluded from earnings and recorded net
of deferred taxes directly to stockholders' equity as accumulated other
comprehensive income. At December 31, 1999, such investments included, at market
value, $69.7 million invested in commercial paper with an average of 59 days to
maturity and $10.0 million invested in demand notes. There were not any gross
unrealized holding gains or losses at December 31, 1998 and 1999.
ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK
One of the Company's services involves providing a clearinghouse function
for toll collected by telephone companies on behalf of other telecommunications
service providers. At December 31, 1998 and 1999, accounts receivable included
$11.5 million and $9.0 million, respectively, of such toll amounts due from
telephone companies. Related amounts due to customers included $12.4 million and
$11.8 million, respectively, for amounts owed to such service providers.
Accounts receivable from these companies are uncollateralized; however,
uncollected amounts may be offset against amounts otherwise due to service
providers.
Concentration of credit risk with respect to trade receivables is limited
due to the diversity of the customer base and geographic dispersion, and is
evidenced by a history of minimal customer account write-offs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives for property and equipment are as follows:
<TABLE>
<S> <C>
Corporate headquarters building........................... 31.5 years
Network assets............................................ 5 to 10 years
Office equipment and systems.............................. 5 to 20 years
Furniture and fixtures.................................... 5 to 15 years
Computer equipment and software........................... 3 to 5 years
Leasehold improvements.................................... 5 years
</TABLE>
When depreciable assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the respective accounts, and
any gains or losses on disposition are recognized in income.
Property and equipment and liabilities under capital leases are recorded at
the lower of the fair value of the asset or the present value of the minimum
lease payments. Interest rates on capitalized leases are imputed based on the
lower of Illuminet's incremental borrowing rate at the inception of each lease
or the lessor's implicit rate of return. Depreciation on the leased assets is
included in depreciation expense, and is provided using the straight-line method
over the estimated useful lives of the assets.
F-10
<PAGE> 13
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE
Computer software product costs represent capitalized costs incurred for
development of software products after the technological feasibility of the
product is established. Costs incurred prior to that date are expensed. The
annual amortization, which was $0.6 million for each of the years ended December
31, 1997, 1998, and 1999, is determined on a product-by-product basis as the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product. Amortization starts when the product is available
for general release to customers.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist of intangible assets and certain capital assets.
An impairment is considered to have occurred when the carrying value of the
asset is considered not to be recoverable. The carrying value of these assets is
regularly reviewed to verify that they are valued properly. When there are
adverse changes in facts and circumstances that suggest that the value has been
impaired, an assessment is made of future cash flows and the carrying value of
the related assets will be reduced appropriately to their fair value based on
current market values. When market values are not available, the fair value will
be determined based on other valuation techniques such as estimated future cash
flows.
REVENUE RECOGNITION
The Company recognizes revenue as the related services are performed.
Network services revenues are comprised of network connectivity revenues and
intelligent network service revenues. Network connectivity revenues are derived
from establishing and maintaining connection to the Company's SS7 network and
trunk signaling services. Revenues from network connectivity consist primarily
of monthly recurring fees, and trunk signaling services revenues are charged
monthly based on the number of switches to which a customer signals. The initial
connection fee and related costs are deferred and recognized over the term of
the arrangement. Intelligent network services, which include calling card
validation, local number portability, wireless services, toll-free database
access, and caller identification are derived primarily from database
administration and database query services and are charged on a per-use or
per-query basis. Prepaid wireless account management services and unregistered
wireless roaming services are based on the net revenue retained by the Company
and recognized in the period in which such calls are processed by the Company on
a per-minute or per-call basis.
Clearinghouse services revenues are derived primarily from serving as a
distribution and collection point for billing information and payment collection
for services provided by one carrier to customers billed by another.
Clearinghouse revenues are earned based on the number of messages processed.
Network usage software applications revenues are comprised of sales of
software and software maintenance services. Revenues on sales of software are
recognized when an arrangement exists, the price is fixed and determinable, the
related amounts are collectible, and the software has been delivered and all
customer acceptance requirements, if any, have been met. Revenues on software
maintenance are recognized on a monthly basis over the term of the maintenance
arrangement.
In 1999, the Company earned approximately 12% of its revenues from AT&T and
its affiliates with no single affiliate contributing more than 7% of total
revenue.
F-11
<PAGE> 14
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to apply the disclosure-only provisions of the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123").
Accordingly, Illuminet accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation expense for
stock options is measured as the excess, if any, of the fair value of Common
Stock and Class A Common Stock at the measurement date over the stock option
exercise price. Statement 123 requires companies that continue to follow APB 25
to provide pro forma disclosure of the impact of applying the fair value method
of Statement 123 (refer to Note 8).
INCOME TAXES
The Company provides for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance against deferred tax assets is
recorded if, based on the weight of available evidence, it is more likely than
not that some of or all of the deferred tax assets will not be realized.
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 existing common stock available to common shareholders of
Illuminet 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.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT INFORMATION
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information"
("Statement 131"), effective for financial statements for fiscal years beginning
after December 15, 1997. Statement 131 establishes standards for
F-12
<PAGE> 15
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
the reporting by public business enterprises of financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to stockholders. Illuminet primarily
provides services to companies in the telecommunications industry that are
located throughout the United States and considers all of its operations as one
segment because expenses support multiple products and services. Revenues are
reported separately for network services, clearinghouse services and network
usage software applications. No segment information is provided to the chief
operating decision maker for expenses, operating income, total assets,
depreciation, or capital purchases.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes standards for the recognition, measurement, and reporting of
derivatives and hedging activities and is effective for Illuminet's year ending
December 31, 2000. Illuminet anticipates that the adoption of this new
accounting standard will not have a material impact on Illuminet's consolidated
financial statements, but continues to evaluate that impact.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This summarized certain areas of the staff's views in applying
generally accepted accounting principles as it applies to revenue recognition.
Illuminet believes that its revenue recognition principles comply with SAB 101,
but will continue to evaluate interpretations of SAB 101.
2. MERGER WITH NATIONAL TELEMANAGEMENT CORPORATION
On June 30, 2000, pursuant to a Merger Agreement dated June 12, 2000 among
Illuminet Holdings, Inc. and National Telemanagement Corporation ("NTC"),
Illuminet Holdings, Inc. acquired all of the outstanding capital of NTC.
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 in connection with the acquisition of NTC, resulting in the issuance of
options to purchase up to 80,297 shares of common stock. Prior to the merger,
all NTC common stock purchase warrants were exercised. This transaction has been
accounted for as a pooling-of-interests.
F-13
<PAGE> 16
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER WITH NATIONAL TELEMANAGEMENT CORPORATION (CONTINUED)
Revenue, net income and total assets for separate and combined companies
are as follows (in thousands):
<TABLE>
<CAPTION>
NATIONAL
ILLUMINET TELEMANAGEMENT
HOLDINGS, INC. CORPORATION COMBINED
-------------- -------------- --------
<S> <C> <C> <C>
Year ended December 31, 1997
Revenue.............................. $ 54,308 $ 8,712 $ 63,020
Net income........................... 7,657 16 7,673
Year ended December 31, 1998
Revenue.............................. 71,912 10,303 82,215
Net income........................... 5,293 90 5,383
Year ended December 31, 1999
Revenue.............................. 100,594 16,106 116,700
Net income........................... 13,005 630 13,635
Total assets
December 31, 1998.................... 89,450 9,021 98,471
December 31, 1999.................... 183,657 13,473 197,130
</TABLE>
3. DISCONTINUED LINE OF BUSINESS
In 1998, the Company made the decision to begin the process of selling one
of its business lines. Because of the immateriality of the impact, this business
line is not presented as discontinued operations, but is included in Interest
and other income, net in the accompanying statements of income. Revenues for
this business line were $7.5 million, $4.0 million, and $0.4 million for the
years ended December 31, 1997, 1998, and 1999, respectively. On March 1, 1999,
the Company entered into an agreement to sell a substantial portion of the
assets related to the business line. The net loss of these operations was
$81,000 in 1997, $66,000 in 1998, and a net gain of $12,000 in 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Land....................................................... $ 912 $ 912
Building and leasehold improvements........................ 7,233 7,660
Equipment and furniture.................................... 3,688 4,380
Network assets............................................. 55,751 68,171
Computer hardware and software............................. 21,272 25,081
------- --------
88,856 106,204
Less: accumulated depreciation............................. 42,073 55,109
------- --------
Property and equipment, net................................ $46,783 $ 51,095
======= ========
</TABLE>
5. LEASES
In 1998 and 1999, the Company entered into various capital lease
obligations expiring in 2002 and 2003 for network assets. The majority of the
capital lease agreements allow Illuminet to purchase, for a
F-14
<PAGE> 17
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
nominal value, the assets at the end of the lease term. Property and equipment
held under capital leases follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Network assets.............................................. $9,367 $11,275
Less: accumulated amortization.............................. 1,569 3,296
------ -------
Total property and equipment held under capital leases...... $7,798 $ 7,979
====== =======
</TABLE>
The Company has entered into non-cancelable operating leases for its
various facilities, other than its Lacey headquarters site. The most significant
lease covers its Overland Park facility. The Company entered into a five-year
lease, beginning August 1998 for a new Overland Park facility that was
constructed to suit the Company's specifications. Effective January 1, 1999, the
lease was amended to a seven-year term with an option at five years to extend
the term for an additional five years. Prior to August 1998, the Company was
located in a different Overland Park facility under a lease that expired in
August 1998. During 1997, 1998 and 1999, rent expense was $0.6 million, $0.7
million and $0.8 million, respectively.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments for the years ending
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................................ $3,206 $ 891
2001........................................................ 3,027 837
2002........................................................ 2,105 578
2003........................................................ 402 440
2004........................................................ -- 440
Thereafter.................................................. -- 440
------ ------
Total minimum lease payments................................ 8,740 $3,626
======
Less: amount representing interest (at 8.12%)............... 986
------
Present value of net minimum lease payments................. 7,754
Less: current portion of obligations under capital leases... 2,653
------
Obligations under capital leases, less current portion...... $5,101
======
</TABLE>
6. LINE OF CREDIT
In 1998, the Company had a $10 million line of credit which bore interest
at prime plus 2% and was collateralized by certain accounts receivable. At
December 31, 1998, the Company had outstanding debt of $1.7 million under this
line. In June 1999, the Company paid all outstanding principal and accrued
interest amounts and terminated the line of credit.
F-15
<PAGE> 18
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Various secured notes payable to Rural Telephone Finance
Cooperative ("RTFC") with variable interest rates, (6.15%
at December 31, 1998 and 7.00% at December 31, 1999)
payable in quarterly installments, including interest,
each maturing at various dates ranging from August 2000 to
March 2015................................................ $10,591 $ 7,458
Convertible redeemable subordinated debentures
("Debentures") converted and repaid in 1999............... 7,474 --
Debentures, deferred interest payable....................... 989 --
Secured notes payable bearing interest at 15%............... 448 --
Borrowings under $10 million credit agreement............... -- 5,450
------- -------
19,502 12,908
Less: current portion....................................... 3,458 1,430
------- -------
Total long-term debt........................................ $16,044 $11,478
======= =======
</TABLE>
In connection with a call for redemption, the Company converted, on October
4, 1999, almost all outstanding Debentures with approximately $8.4 million in
principal and accrued interest and issued 760,838 shares of Class A Common Stock
to debentureholders who elected to convert. A remaining amount of $0.1 million
was paid for redemption of the principal and accrued interest that was not
converted to Class A Common Stock.
Additional borrowings available under the various note agreements with RTFC
aggregated $3.8 million at December 31, 1998 and 1999. All of the RTFC notes
have variable interest rates that are based on RTFC's short-term funding costs.
In accordance with the terms of the loan agreements, the Company purchased
lender-issued, non-interest-bearing subordinated capital certificates based on a
percentage of the gross loan amount. Such certificates are amortized against the
loan principal balance over the terms of the respective loans. Certificates
purchased, net of amortization, totaled $1.1 million and $1.0 million at
December 31, 1998 and 1999, respectively, are carried at cost, and are included
in prepaid expenses and in other long-term assets. The loan agreements contain
certain covenants, the most restrictive of which requires the Company to
maintain certain cash flow-to-debt service ratios.
All RTFC loans are currently secured by a first-priority lien in the case
of the dissolution of the Company on substantially all of the Company's assets,
revenues and property, excluding cash collected and held on behalf of others in
the normal course of providing the Company's services. Cash and cash equivalents
not subject to the lien were $3.3 million and $4.9 million at December 31, 1998,
and 1999, respectively.
The Company entered into a secured line of credit agreement with RTFC that
permits the Company to borrow up to $7.3 million, not to exceed 80% of eligible
accounts receivable, for a term of five years. The line of credit bears interest
at the lesser of the prime rate plus 1.5% or RTFC's monthly borrowing rate
(7.70% at December 31, 1999), and contains certain covenants, the most
restrictive of which requires the Company to maintain a zero balance in the line
of credit for at least five consecutive business days every 360 days after the
initial advance. There were no borrowings outstanding against the line of credit
at December 31, 1998 and 1999.
F-16
<PAGE> 19
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
The terms of the secured loan facilities restrict the ability to declare
and pay dividends without the consent of RTFC, unless the Company meets minimum
net worth and cash margin tests.
The Company had entered into certain secured notes payable agreements at an
interest rate of 15%. These notes were collateralized by specific pieces of
equipment and their related revenue, and had terms of three years. The
outstanding balance on the notes at December 31, 1998 was $0.8 million. In June
1999, the Company extinguished this debt.
In June 1999, the Company entered into a $10 million credit agreement with
Frost National Bank. This facility is comprised of a $4 million working capital
line and a $6 million capital expenditure line. Borrowings bear interest at
variable interest rates based on LIBOR or the prime rate ranging from 7.7% to
9.5% at December 31, 1999. The agreement requires quarterly interest-only
payments beginning July 1, 1999. As of May 31, 2000, the amount outstanding
under the capital expenditure note was converted to a term loan with quarterly
payments based on a 36-month amortization rate. The final maturity date for all
amounts is June 30, 2001. The credit facility is collateralized by certain
assets of the Company and is guaranteed by NTC's chief executive officer. In
conjunction with this debt, the Company must maintain certain affirmative,
negative and financial covenants. The loan was paid in full in June 2000.
The carrying value of the Company's long-term debt approximates fair value.
Maturities of the long-term debt for the years ending December 31 are
scheduled as follows (in thousands):
<TABLE>
<S> <C>
2000................................................... $ 1,430
2001................................................... 6,125
2002................................................... 372
2003................................................... 408
2004................................................... 448
2005 - 2009............................................ 2,983
2010 - 2014............................................ 1,142
-------
$12,908
=======
</TABLE>
On June 22, 2000, the Company entered into an agreement with Bank of
America to provide a line of credit and capital expenditure loan facilities. The
line of credit is a $10.0 million, unsecured loan with a three year term, with a
one year extension available at the end of the second year. The capital
expenditure facility is a $15.0 million, unsecured loan with a five year term.
The loans bear interest at the lesser of the bank's prime lending rate or LIBOR
plus 1.375% to 1.75%, depending on Illuminet's trailing twelve month earnings
before interest, taxes, depreciation and amortization ("EBITDA"), and contain
certain covenants.
In connection with the line of credit agreement with Bank of America, the
available borrowings under a line of credit and notes agreements with RTFC were
cancelled and the liens held on the Company's assets under the RTFC note
agreements were released. The borrowings outstanding under the RTFC note
agreements will be secured by a first trust deed on the Company's building and
land located in Lacey, Washington.
F-17
<PAGE> 20
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 157,300,000 shares of capital
stock consisting of (i) 150,000,000 shares of Common Stock, par value $.01 per
share, (ii) 7,200,000 shares of Class A Common Stock, par value $.01 per share,
and (iii) 100,000 shares of Illuminet Holdings, Inc. Preferred Stock, par value
$.01 per share.
INITIAL PUBLIC OFFERING
On October 14, 1999, the Company completed an initial public offering of
4,485,000 shares of its Common Stock and received approximately $78.3 million in
cash, net of underwriter discounts, commissions and other offering costs.
CLASS A COMMON STOCK
Immediately prior to the initial public offering, all existing common stock
of the Company was renamed to Class A Common Stock. Each share of Class A Common
Stock was automatically converted into four shares of Common Stock on April 5,
2000. If the Class A Common Stock were converted at December 31, 1999, an
additional 25,376,536 shares of Common Stock would have been outstanding. Other
than the conversion feature, terms of Class A Common Stock are identical to
those of the Common Stock on an as if converted basis.
SERIES A PREFERRED STOCK
As approved by stockholders on June 21, 1999, all outstanding Series A
Preferred Stock of the Company automatically converted into an aggregate total
of 204,941 shares of Class A Common Stock at the time of the initial public
offering.
SERIES B PARTICIPATING CUMULATIVE PREFERENCE STOCK
Series B Participating Cumulative Preference Stock ("Series B Stock") is
entitled to one vote per each one one-thousandth (" 1/1000") share, and votes
together as a class with Common Stock on matters on which holders of Common
Stock are generally entitled to vote. Although the Series B Stock ranks superior
to Common Stock, upon liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, other than requiring payment of accrued and
unpaid dividends before the payout to holders of Common Stock, the only
liquidation right of the Series B Stock is that each 1/1000 of a share of Series
B Stock is entitled to receive an amount equivalent to the amount to be
distributed per whole share of Common Stock. Series B Stock has similar rights
and preferences to dividends. Series B Stock was authorized in connection with
the establishment of the Company's Shareholder Rights Plan. No such shares were
outstanding at December 31, 1999.
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND COMMON STOCK WARRANTS
In June 1998, the Company sold 450,000 shares of Convertible Redeemable
Preferred Stock for $4.5 million plus 414,096 Common Stock Warrants for $1,000.
The Convertible Redeemable Preferred Stock has various rights and preferences,
including cumulative dividend rights of $1.20 per share accrued annually,
payable upon redemption of the Preferred Stock. Each warrant entitles the holder
to one share of Common Stock of the Company at an exercise price of $0.006 per
warrant.
F-18
<PAGE> 21
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The estimated fair value of the warrants of $1.5 million was based on the
application of the Black-Scholes option pricing model which incorporates current
stock price, expected stock price volatility, expected interest rates, and the
expected holding period of the warrants.
In connection with the merger discussed in Note 1, each warrant was
exercised prior to the completion of the merger and the related Common Stock of
NTC was exchanged for Common Stock of Illuminet. In addition, each share of
Convertible Redeemable Preferred Stock was exchanged for Common Stock of
Illuminet based on the liquidation value of the Convertible Redeemable Preferred
Stock, including cumulative unpaid dividends and a prepayment premium.
DIVIDENDS
Payments of dividends are restricted under the Company's long-term debt
arrangements with approval of RTFC required unless the Company's ratio of equity
to total assets exceeds 40%. No dividends have been declared to date.
SHAREHOLDER RIGHTS PLAN
On November 19, 1998, the Company's Board of Directors adopted a
Shareholder Rights Plan and declared a dividend, issued on November 20, 1998, of
one right for each outstanding share of Common Stock ("Right"). Each Right
represents the right to purchase shares of our Series B Stock. The Rights become
exercisable if a person or group acquires more than 20% of the outstanding
shares of Common Stock or makes a tender offer for more than 20% of the
outstanding shares of Common Stock. Upon the occurrence of such an event, each
Right entitles the holder (other than the acquiror) to purchase for $150 the
economic equivalent of shares of Common Stock, or in certain circumstances,
stock of the acquiring entity, worth twice as much. The Rights expire on
December 20, 2008 unless earlier redeemed by the Company, and are redeemable
prior to becoming exercisable at $0.01 per Right.
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company established the 1997 Equity Incentive Plan under which 13% of
outstanding shares of Common Stock are reserved from time to time for issuance
pursuant to non-qualified and incentive stock options and stock appreciation
rights that may be granted. Only non-qualified stock options have been granted
under the plan. Employee non-qualified stock options, primarily granted to key
employees, are generally exercisable ratably over three to four years and expire
ten years from the date of grant except that options expire 60 days after
termination of employment. Outside Director non-qualified stock options are
generally exercisable on grant, or within twelve months of grant, and expire ten
years from the date of grant. Prior to the initial public offering, the Board of
Directors determined the estimated fair value of Class A Common Stock as the
stock was not publicly traded and a readily ascertainable market value was not
available.
On December 15, 1998, NTC provided option holders the opportunity to have
their five-year term, $10.86 exercise price options exchanged for new options
equal to two-thirds of the exchanged options, with an exercise price equal to
the then estimated fair value of $3.80 and a term of ten years. Holders of
117,858 options elected to participate in the exchange.
F-19
<PAGE> 22
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED)
Additional information regarding options granted and outstanding is
summarized as follows. This information includes the effect of Class A Common
Stock options on an as if converted basis:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding January 1, 1997................................. 111,487 $10.86
Granted at exercise price less than fair value of Common
Stock on grant date.................................... 926,016 2.20
---------
Outstanding December 31, 1997 (287,820 exercisable at $2.43
weighted-average exercise price).......................... 1,037,503 3.13
Granted at exercise price less than fair value of Common
Stock on grant date.................................... 1,170,044 2.34
Granted at exercise price equal to fair value of Common
Stock on grant date.................................... 595,043 5.54
Exchanged................................................. (117,858) 10.86
Reissued.................................................. 78,572 3.77
Exercised................................................. (400) 2.20
Forfeited................................................. (94,927) 5.62
---------
Outstanding December 31, 1998 (1,243,475 exercisable at
$2.41 weighted-average exercise price).................... 2,667,977 2.90
Granted at exercise price less than fair value of Common
Stock on grant date.................................... 701,190 7.47
Granted at exercise price equal to fair value of Common
Stock on grant date.................................... 91,901 16.70
Exercised................................................. (51,000) 2.20
Forfeited................................................. (2,548) 3.77
---------
Outstanding December 31, 1999 (1,785,646 exercisable at
$2.72 weighted-average exercise price).................... 3,407,520 $ 4.23
=========
</TABLE>
Outstanding and exercisable stock options by price range as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.20 - $ 3.80 2,095,092 7.95 $ 2.35 1,550,501 $ 2.34
4.18 - 4.55 551,260 8.15 4.24 204,760 4.30
8.00 - 13.05 698,045 8.92 8.49 30,062 10.86
19.00 - 48.44 63,123 9.77 19.07 323 33.38
--------- ---------
$ 2.20 - $48.44 3,407,520 8.22 $ 4.23 1,785,646 $ 2.72
========= ==== ====== ========= ======
</TABLE>
F-20
<PAGE> 23
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED)
STOCK COMPENSATION
For the years ended December 31, 1997, 1998 and 1999, deferred stock-based
compensation for the stock options granted was $0.5 million, $0.6 million and
$4.2 million, respectively, and $0.2 million, $0.5 million and $0.7 million,
respectively, was recognized as stock-based compensation expense. Deferred
stock-based compensation is amortized under the multiple option method.
EMPLOYEE STOCK PURCHASE PLAN
Effective October 7, 1999, the Company adopted an Employee Stock Purchase
Plan ("ESPP") for which the last purchase date is October 6, 2001. Eligible
employees may contribute up to 15% of cash compensation toward the semi-annual
purchase of Common Stock. Under the terms of the plan, 700,000 shares of
authorized Common Stock were reserved for purchase at 85% of the fair market
value price at the beginning of the six-month offering period at which an
eligible employee enrolled, or the end of each six-month offering period,
whichever is lower. In no case, can the fair market value price at the beginning
of any six-month offering period be less than $16.15. Through December 31, 1999,
no stock was purchased under this plan, and eligible employees have contributed
$0.2 million toward the first purchase on April 6, 2000.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement
and includes the effect of Class A Common Stock options on an as if converted
basis. The weighted-average grant date fair value of these options was estimated
at the date of grant using the Minimum Value Option Pricing Model for all
options granted before the initial public offering and the Black-Scholes Option
Pricing Model for all options granted after the initial public offering with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
JANUARY 1, OCTOBER 7,
YEAR ENDED DECEMBER 31, 1999 TO 1999 TO
----------------------- OCTOBER 6, DECEMBER 31,
1997 1998 1999 1999
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Risk-free interest rate................... 5.1 - 5.9% 5.1 - 5.4% 5.7 - 6.4% 6.1 - 6.4%
Dividend yield............................ 0% 0% 0% 0%
Expected volatility....................... 0% 0% 0% 70%
Estimated option life in years............ 8.5 - 10.0 8.5 - 10.0 9.1 - 10.0 7.0 - 10.0
Weighted-average grant date value for
options granted at exercise price less
than fair value of Common Stock on grant
date.................................... $1.40 $2.04 $9.10 --
Weighted-average grant date value for
options granted at exercise price equal
to fair value of Common Stock on grant
date.................................... -- $1.54 $5.40 $13.63
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period; accordingly,
the pro forma impact of stock options granted may not be indicative of the pro
forma impact in future years. Pro forma information for the years ended
F-21
<PAGE> 24
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED)
December 31 are summarized as follows (in thousands, except per share amounts)
and includes the effect of Class A Common Stock options on an as if converted
basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Net income -- as reported........................... $7,673 $5,383 $13,635
Net income -- pro forma............................. $7,496 $4,877 $12,617
Earnings per share -- diluted -- as reported........ $ 0.30 $ 0.19 $ 0.45
Earnings per share -- diluted -- pro forma.......... $ 0.29 $ 0.18 $ 0.41
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has qualified profit sharing/401(k) trust retirement plans
covering all employees subject to certain eligibility requirements. The Company
provides matching contributions to the plans' trusts on a portion of employee
contributions to the plans, and also may, at the discretion of the Board of
Directors, provide a discretionary contribution. For 1997, 1998 and 1999,
contribution expense was approximately $1.2 million, $1.1 million, and $2.0
million, respectively.
11. INCOME TAXES
Components of the income tax provision (benefit) are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $ 193 $1,501 $6,079
State.............................................. -- 188 91
Deferred:
Federal............................................ (821) 2,015 2,092
State.............................................. (48) 122 (130)
----- ------ ------
Total income tax provision (benefit)................. $(676) $3,826 $8,132
===== ====== ======
</TABLE>
The reconciliations of the income tax provision (benefit) calculated using
the U.S. federal statutory rates to the recorded income tax provision (benefit)
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate.................. $ 2,378 $3,131 $7,689
State income taxes, net of federal tax benefit...... -- 205 (26)
Utilization of net operating loss carryforward...... (2,373) (10) --
Alternative minimum tax............................. 193 -- --
Additional (reversal of) valuation allowance........ (869) -- 565
Other............................................... (5) 500 (96)
------- ------ ------
Income tax provision (benefit)...................... $ (676) $3,826 $8,132
======= ====== ======
</TABLE>
F-22
<PAGE> 25
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The Company provides for deferred taxes based on the differences between
the bases of assets and liabilities for financial reporting purposes and income
tax purposes, calculated using enacted tax rates that will be in effect when the
differences are expected to reverse. At December 31, 1998 and 1999, such
differences primarily related to the use of accelerated depreciation and
amortization for tax purposes, accruals for certain expenses that are not
currently deductible for tax purposes until paid, the tax basis of certain
investments that have been written off for financial statement purposes and
software development costs that were capitalized for financial statement
purposes. Differences at December 31, 1998 also included net operating loss
carryforwards and tax credit carryforwards that were fully utilized in 1999.
During the year ended December 31, 1997, the valuation allowance decreased
$3.1 million primarily through utilization of net operating loss carryforwards
and the reversal of substantially all of the previously recorded deferred tax
valuation allowance due to improved anticipated operating results. At December
31, 1998, the Company had a valuation allowance related to tax benefits
associated with capital losses recorded for financial statement purposes but not
yet realized for tax purposes, and tax credit carryforwards of $1.4 million.
During 1999, the Company recorded an additional valuation allowance related to
the write down of a preferred stock equity investment based on a change in the
investee's business strategy and direction and fully utilized all federal net
operating loss carryforwards and tax credit carryforwards.
The components of the deferred tax assets are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 1,454 $ 251
Tax credit carryforwards.................................. 1,368 --
Allowance for doubtful accounts........................... 490 889
Contract loss provision................................... 151 760
Deferred stock-based compensation......................... 413 656
Loss on impairment........................................ -- 555
Other nondeductible accruals.............................. 1,064 827
Valuation allowance....................................... (180) (745)
------- -------
Net deferred tax assets..................................... 4,760 3,193
Deferred tax liabilities:
Excess tax over book depreciation and amortization........ (6,117) (6,512)
Other..................................................... (14) (14)
------- -------
Total deferred tax liabilities.............................. (6,131) (6,526)
------- -------
Deferred tax liabilities, net............................... $(1,371) $(3,333)
======= =======
</TABLE>
F-23
<PAGE> 26
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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) and includes the
effect of Class A Common Stock on an as if converted basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income........................................ $ 7,673 $ 5,383 $ 13,635
Accretion of redemption value and cumulative
dividends of Convertible Redeemable Preferred
Stock.......................................... -- (404) (828)
----------- ----------- -----------
Income available to common stockholders(A)........ 7,673 4,979 12,807
Effect of dilutive securities -- debenture
interest, net of tax........................... 498 427 291
----------- ----------- -----------
Numerator for earnings per share -- diluted -- net
income after assumed conversions(B)............ $ 8,171 $ 5,406 $ 13,098
=========== =========== ===========
Denominator:
Denominator for earnings per
share -- basic -- weighted-average common
shares(C)...................................... 23,073,310 23,027,833 24,630,095
Weighted-average effect of dilutive securities:
Stock options.................................. -- 549,308 1,258,042
Stock warrants................................. -- 207,048 414,096
Debentures..................................... 3,528,292 3,187,456 2,331,484
Series A Stock................................. 876,332 827,136 613,224
Convertible Redeemable Preferred Stock......... -- -- --
----------- ----------- -----------
Dilutive potential common shares.................. 4,404,624 4,770,948 4,616,846
----------- ----------- -----------
Denominator for earnings per
share -- diluted -- adjusted weighted-average
shares and assumed conversions(D)................. 27,477,934 27,798,781 29,246,941
=========== =========== ===========
Earnings per share -- basic(A)/(C).................. $ 0.33 $ 0.22 $ 0.52
=========== =========== ===========
Earnings per share -- diluted(B)/(D)................ $ 0.30 $ 0.19 $ 0.45
=========== =========== ===========
</TABLE>
See Notes 7, 8, and 9 for additional information regarding the Debentures,
Series A Stock, Convertible Redeemable Preferred Stock, stock warrants and stock
options.
Stock options to purchase 70,802 and 1,072 weighted-average shares of
Common Stock were outstanding during 1997 and 1998, respectively, and
Convertible Redeemable Preferred Stock convertible into approximately 100,000
shares of Common Stock at December 31, 1999, but were not included in the
computation of diluted earnings per share because of their anti-dilutive effect.
INCOME AVAILABLE TO COMMON STOCKHOLDERS
In addition to dividends, the Company must accrete the Convertible
Redeemable Preferred Stock from its recorded value at issuance to its redemption
value. The accretion is being recognized over the
F-24
<PAGE> 27
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE (CONTINUED)
period from the date of issuance to the redemption date based on the effective
interest method. Related amounts include (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Accretion of redemption value............................. $-- $134 $288
Cumulative dividends...................................... -- 270 540
--- ---- ----
$-- $404 $828
=== ==== ====
</TABLE>
13. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the ordinary
course of business. Management does not believe that those claims, individually
or combined, will have a material adverse effect on our business, financial
condition or operating results.
14. RELATED PARTY TRANSACTIONS
The Company is party to a contract with the subsidiary of one of its
corporate stockholders that supplies the Company with transmission facilities in
the form of private leased lines. Such lines are leased from the corporate
stockholder at rates comparable to third-party service providers. Payments
pursuant to this contract totaled $1.6 million, $1.7 million, and $2.1 million
for the years ended December 31, 1997, 1998, and 1999, respectively.
Included in accounts receivable at December 31, 1998 is $0.2 million (none
in 1999), due for services and reimbursable expenses from a customer in which
the Company has a preferred stock equity investment currently representing 13%
of the voting rights of the customer. Revenues earned from the customer were
$0.5 million, $0.8 million, and $0.4 million for the years ended December 31,
1997, 1998, and 1999, respectively. Included in 1999 operating expenses is a
$1.5 million impairment loss of the full amount of a 1995 investment in this
start-up company that was previously recorded at cost. The recognition of this
loss was coincident with significant liquidity concerns of the investee, and the
investee's decision to discontinue its historical primary operations and related
uncertainties resulting from a change in the investee's business strategy and
direction.
NTC had retained legal counsel who also served as a member of the former
board of directors of NTC during part of 1998 and 1999. The attorney was an
officer of NTC and served as general counsel for all matters affecting NTC.
Legal fees incurred by NTC during 1998 and 1999 for the attorney were $40,000
and $47,000, respectively.
In addition, NTC utilized employee recruiting services from a recruiting
firm owned by a member of the former board of directors of NTC. Finder's fees
incurred during 1998 and 1999 for the recruiting firm were $23,000 and $49,000,
respectively, with outstanding balances of $26,000 and $0 at December 31, 1998
and 1999, respectively.
15. QUARTERLY RESULTS (UNAUDITED)
The following quarterly financial data has been prepared from the Company's
supplemental financial records without audit, and in the opinion of management,
reflect all adjustments (consisting of only normal and recurring accruals)
necessary to present fairly the Company's results of operations for
F-25
<PAGE> 28
ILLUMINET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
those periods when considered in conjunction with the audited supplemental
consolidated financial statements and the notes to those financial statements.
Earnings per share-basic and earnings-per share diluted include the effect of
Class A Common Stock on an as if converted basis. Quarterly information may not
total the annual amounts in some instances because of rounding.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
----------- ----------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................... $ 17,035 $ 18,951 $ 21,301 $ 24,928
Operating income................. 1,813 2,545 2,767 3,283
Income before income taxes....... 1,576 2,205 2,388 3,040
Net income....................... $ 905 $ 1,312 $ 1,442 $ 1,724
Earnings per share -- basic...... $ 0.04 $ 0.06 $ 0.05 $ 0.07
Earnings per share -- diluted.... $ 0.04 $ 0.05 $ 0.04 $ 0.06
Weighted-average common shares --
basic.......................... 23,238,670 23,215,570 22,851,736 22,804,146
Weighted-average common shares --
diluted........................ 27,487,558 27,824,826 27,786,795 27,691,401
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- ----------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................... $ 25,085 $ 27,217 $ 30,838 $ 33,560
Operating income................. 4,148 4,115 6,188 7,356
Income before income taxes....... 3,942 3,733 5,847 8,245
Net income....................... $ 2,450 $ 2,337 $ 3,622 $ 5,226
Earnings per share -- basic...... $ 0.10 $ 0.09 $ 0.15 $ 0.17
Earnings per share -- diluted.... $ 0.08 $ 0.08 $ 0.13 $ 0.15
Weighted-average common shares --
basic.......................... 22,716,671 22,719,619 22,726,139 30,295,595
Weighted-average common shares --
diluted........................ 27,841,831 27,935,313 28,414,306 32,789,900
</TABLE>
F-26
<PAGE> 29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Illuminet
Holdings, Inc. as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
June 30, 2000 (included elsewhere in this Current Report). Our audits also
included the financial statement schedule. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Seattle, Washington ERNST & YOUNG LLP
June 30, 2000
F-27
<PAGE> 30
ILLUMINET HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------------------------ ---------- -------------------------------------- ------------ --------------
Illuminet Holdings, Inc. Additions
------------------------ --------------------------------------
Balance at Charged to
Beginning Charged to Other Accounts - Deductions - Balance at
Description of period Costs and Expenses Describe Describe (1) End of Period
----------- --------- ------------------ ---------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Allowance for doubtful
accounts .................. $ 1,339 $ 2,297 $ -- $ (1,383) $ 2,253
Year Ended December 31, 1998
Allowance for doubtful
accounts .................. $ 1,755 $ 1,051 $ -- $ (1,467) $ 1,339
Year Ended December 31, 1997
Allowance for doubtful
accounts .................. $ 1,598 $ 787 $ -- $ (630) $ 1,755
</TABLE>
(1) Write offs of accounts receivable balances against the provision.
F-28
<PAGE> 31
ITEM 7. EXHIBITS.
(c) EXHIBITS. The following exhibits are filed herewith:
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers, LLP, Independent Accountants.
23.3 Consent of Barry Morgan & Company, P.C., Independent Auditors.
<PAGE> 32
SIGNATURE
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 hereunto duly authorized.
Date: October 5, 2000
ILLUMINET HOLDINGS, INC.
By: /s/ Daniel E. Weiss
-----------------------------------------
Daniel E. Weiss, Vice President - Finance
and Chief Financial Officer
