SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _________________
Commission file no. 0-23477
ICON CMT CORP.
--------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 13-3603128
- ---------------------------------- -----------------------------------
(State or Other Jurisdiction of
Incorporation or Organization) (IRS Employer Identification No.)
1200 Harbor Boulevard, Weehawken, New Jersey 07087
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number Including Area Code: (201) 601-2000
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required by Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of August 10, 1998 was
15,884,378
- --------------------------------------------------------------------------------
<PAGE>
ICON CMT CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1998
(unaudited) and December 31, 1997............................3
Condensed Consolidated Statement of Operations for the Three
and Six Months ended June 30, 1998 and June 30, 1997
(unaudited)..................................................4
Condensed Consolidated Statement of Cash Flows for the Six
Months ended June 30, 1998 and June 30, 1997 (unaudited)....5
Notes to Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................17
Item 6. Exhibits and Reports on Form 8-K............................17
SIGNATURES....................................................................18
-2-
<PAGE>
PART 1
FINANCIAL INFORMATION
Financial Statements
ICON CMT CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- --------------
(Unaudited)
Assets
<S>
<C> <C>
Current Assets:
Cash and cash equivalents $ 18,387 $ 1,409
Accounts receivable, net of allowance of
$526 and $455, respectively 9,862 10,237
Unbilled costs and accrued revenue 1,987 1,119
Inventories 365 104
Prepaid expenses and other current assets 2,220 2,381
----------------- --------------
Total current assets 32,821 15,250
Fixed assets, net 11,983 6,675
Other noncurrent assets 108 232
----------------- --------------
Total assets $ 44,912 $ 22,157
================= ==============
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,612 $ 9,124
Accrued expenses 3,406 4,540
Deferred revenue 1,229 658
Note payable - 1,000
----------------- --------------
Total current liabilities 14,247 15,322
133 2
----------------- --------------
Total liabilities 14,380 15,324
----------------- --------------
Mandatorily Redeemable 10% PIK Series B Convertible
Participating Preferred Stock ($.01 par value; 415,000 shares
authorized, none issued and outstanding at June 30, 1998,
180,240 shares issued and outstanding at December 31, 1997) - 16,628
Mandatorily Redeemable Series A Convertible Participating
Preferred Stock ($.01 par value; 450,000 shares authorized,
none issued and outstanding at June 30,1998, 422,607 shares
issued and outstanding at December 31, 1997) - 10,601
Stockholder's equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized) - -
Common stock ($.001 par value; 50,000,000 shares authorized,
15,856,655 and 7,273,780 shares issued and outstanding, respectively) 16 8
Additional paid-in-capital 62,493 533
Accretion of mandatorily redeemable preferred stock - (388)
Accumulated deficit (31,977) (20,549)
----------------- --------------
Total stockholders' equity (deficit) 30,532 (20,396)
----------------- --------------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity $ 44,912 $ 22,157
================= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
ICON CMT CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------------
1998 1997 1998 1997
---------- ---------- ------------- ------------
<S>
Revenues, net <C> <C> <C> <C>
Services:
Professional $ 8,231 $ 5,502 $ 15,747 $ 9,840
Communications 3,250 1,233 6,063 2,171
Media - - 14 77
---------- ---------- ------------- ------------
Total services revenues 11,481 6,735 21,824 12,088
---------- ---------- ------------- ------------
Products 7,470 4,885 16,526 9,680
---------- ---------- ------------- ------------
Total revenues, net 18,951 11,620 38,350 21,768
---------- ---------- ------------- ------------
Cost of revenues:
Services 7,925 4,331 15,151 8,091
Products 6,349 4,092 14,335 7,905
---------- ---------- ------------- ------------
Total costs of revenues 14,274 8,423 29,486 15,996
---------- ---------- ------------- ------------
Gross profit 4,677 3,197 8,864 5,772
---------- ---------- ------------- ------------
Operating expenses:
Sales and marketing 4,586 2,182 8,598 4,537
General and administrative 4,814 3,091 8,757 5,413
Research and development 591 282 1,167 559
Depreciation and amortization 457 224 797 413
Special merger related charges 1,094 - 1,094 -
---------- ---------- ------------- ------------
Total operating expenses 11,542 5,779 20,413 10,922
---------- ---------- ------------- ------------
Loss from operations (6,865) (2,582) (11,549) (5,150)
---------- ---------- ------------- ------------
Other income (expense):
Interest income 305 22 487 39
Interest expense (6) (191) (58) (319)
Other, net (125) - (125) -
---------- ---------- ------------- ------------
Total other income (expense) 174 (169) 304 (280)
---------- ---------- ------------- ------------
Loss before income taxes (6,691) (2,751) (11,245) (5,430)
Provision for income taxes - - - 256
---------- ---------- ------------- ------------
Net loss $ (6,691) $ (2,751) $ (11,245) $ (5,686)
========== ========== ============= ============
Basic and diluted loss per share $ (0.42) $ (0.41) $ (0.83) $ (0.84)
========== ========== ============= ============
Weighted average shares outstanding used for
basic and diluted loss per share 15,804 7,273 13,764 7,273
========== ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ICON CMT CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------
1998 1997
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,245) $ (5,686)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,971 947
Deferred taxes, net - 284
Non-cash interest expense - 20
Changes in assets and liabilities, net (678) (2,854)
--------------- ------------
Net cash used in operating activities (9,952) (7,289)
--------------- ------------
Cash flows from investing activities:
Capital expenditures (7,120) (1,209)
Other, net 125 -
--------------- ------------
Net cash used in investing activities (6,995) (1,209)
--------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 34,337 -
Net proceeds from exercise of stock options 790 -
Borrowings of short-term notes 1,772 3,565
Repayments of short-term notes (2,772) (5,186)
Net proceeds from issuance of preferred stock - 10,671
Other (202) (113)
--------------- ------------
Net cash provided by financing activities 33,925 8,937
--------------- ------------
Net increase in cash 16,978 439
Cash and cash equivalents at beginning of period 1,409 722
--------------- ------------
Cash and cash equivalents at end of period $ 18,387 $ 1,161
=============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
ICON CMT CORP.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Basis of Presentation
The accompanying unaudited financial statements for the three and six
month periods ended June 30, 1998 and 1997 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Annual Report on Form 10-K of
Icon CMT Corp. ("Icon" or the "Company") for the year ended December 31, 1997.
2. Initial Public Offering
On February 18, 1998, the Company completed its initial public offering
(the "IPO"), selling 3,850,000 shares of common stock at a price of $10.00 per
share, providing gross proceeds to the Company of $38,500 and net proceeds,
after deducting underwriting discounts, commissions and estimated offering
expenses payable by the Company, of approximately $34,337.
Upon the closing of the IPO, all outstanding shares of the Company's
Series A and Series B Preferred Stock converted into an aggregate of 4,629,831
shares of common stock.
3. Acquisition of Frontier Media Group, Inc.
On May 27, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Frontier Media Group, Inc. ("Frontier"), in exchange
for 728,325 shares of the Company's common stock. For accounting purposes, the
acquisition has been accounted for using the pooling of interests method and
prior periods have been restated to include the results of Frontier on a
comparable basis. In connection with the acquisition of Frontier, the Company
incurred $1,094 of transaction and other costs associated with the business
combination.
4. Loss Per Common Share
Effective December 31, 1997, the Company adopted Financial Accounting
Standard No. 128, "Earnings per Share" ("FAS 128") which requires presentation
of basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (i.e., options, warrants, convertible securities or
contingent stock arrangements). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
-6-
<PAGE>
shares outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation of
Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings.
The computation of basic and diluted loss per share for the three and six
months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------------
1998 1997 1998 1997
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Loss $ (6,691) $ (2,751) $ (11,245) $ (5,686)
Accrued didvidends on Series A
Preferred and Series B Preferred Stock - (240) (202) (388)
----------- ----------- ------------- ------------
Loss Available to common stockholders $ (6,691) $ (2,991) $ (11,447) $ (6,074)
=========== =========== ============= ============
Weighted average shares outstanding used
for basic and diluted loss per share 15,804 7,273 13,764 7,273
Basic and diluted loss per share $ (0.42) $ (0.41) $ (0.83) $ (0.84)
========== ========== ============= ============
</TABLE>
At June 30, 1998, outstanding options to purchase 1,502,323 shares of
common stock, with exercise prices ranging from $6.02 to $18.50 have been
excluded from the computations of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 948,891 shares of common stock,
with exercise prices ranging from $0.01 to $6.02, were also antidilutive and
excluded from the computations of diluted loss per share at June 30, 1998.
5. Discontinued Product Line
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $14 and $77 from selling of
advertising space on its media properties for the six months ended June 30, 1998
and 1997, respectively. The cost of revenues associated with media services for
the three months ended June 30, 1997 and the six months ended June 30, 1998 and
1997 was $591, $548 and $1,054, respectively.
-7-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the Financial
Statements included elsewhere in this Report. This discussion contains
forward-looking statements based on current expectations that involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth at the end of this Item.
Overview
Integration Consortium, Inc. ("ICI"), the Company's predecessor, was
incorporated in New York in February 1991. Icon CMT Corp. ("Icon" or the
"Company") was incorporated in Delaware in February 1995, and ICI was merged
with and into Icon in December 1995. ICI was primarily engaged in the design,
marketing, installation and on-going support of high-end network-based
information management systems. ICI also focused on developing, customizing and
integrating both third-party and proprietary software applications.
In 1995, recognizing the emergence of internet protocol ("IP") as a data
transmission standard, the Company's management redefined the Company's strategy
to provide end-to-end solutions that enable corporate customers to implement
their Internet, intranet and extranet strategies. The Company's revenues are
primarily derived from the following services and products: (i) a range of
professional services, including custom application and website development and
design, systems integration and maintenance and support services; (ii)
communications services including high-quality Internet access and related
services, such as web/server hosting and management; and (iii) product resales,
including hardware and software sold as an integral part of systems design and
integration and as a means to sell integrated communications and professional
services and establish customer relationships.
On May 27, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Frontier Media Group, Inc. ("Frontier"), in exchange
for 728,325 shares of the Company's common stock. For accounting purposes, the
acquisition has been accounted for using the pooling of interests method and
prior periods have been restated to include the results of Frontier on a
comparable basis. In connection with the acquisition of Frontier, the Company
incurred $1,094 of transaction and other costs associated with the business
combination.
Statement of Operations
The Company provides professional services to its customers to facilitate
the delivery of their information and applications over Icon's communications
infrastructure, including development, design and integration services and
maintenance and support services. Revenues from development, design and systems
integration contracts are recognized on a percentage-of-completion basis.
Maintenance and support services are typically provided in accordance with
annual agreements that are renewable at the discretion of the customer and
subject to change annually. Maintenance and support revenues are recognized
ratably over the term of the respective agreement.
Revenues from communications services are generated by providing Internet
access and other related communications services, such as web/server hosting and
management. Communications services
-8-
<PAGE>
are generally provided based on service agreements ranging from one to five
years, which are renewable at the discretion of the customer. Communications
services revenues are recognized ratably over the term of the respective service
agreement.
As a result of the Company's implementation of its end-to-end solutions
strategy, services revenues have increased on an annual basis as a percentage of
total revenue. For the three and six months ended June 30, 1998 services
revenues consisted of 61% and 57% of total net revenues, respectively, compared
with 58% and 56% for the same periods in the prior year. The increase in
services revenues as a percentage of total net revenues is expected to continue
to increase in the future. Historically, the Company generated limited media
revenues from selling advertisement space on its three new-media properties,
Word(R), Charged(TM) and SportsFan Online. The Company had experienced
operating losses in connection with the ongoing operation of its media
properties and, in March 1998, the Company discontinued the ongoing operations
of Word and Charged. In April 1998, Zapata Corporation ("Zapata") purchased all
of the assets of Word and Charged from the Company in exchange for Zapata's
commitment to purchase no less than $2 million in communications and
professional services over the next four years. Also, during the first quarter,
Icon terminated its agreement with SportsFan Radio Network, and instead began
providing consulting services and communications services to SportsFan Radio
Network in connection with the ongoing operation of SportsFan Online.
Historically the Company has experienced relatively stable gross margins
on product sales. Over the same periods, gross margins on services have
fluctuated as cost of revenues, particularly on communications services, have
increased in advance of revenue growth for such services. The Company
anticipates that in the future services will provide greater opportunities for
increased gross margins.
The Company generates products revenues through the reselling of computer
and networking hardware and software, including network servers, routers,
firewall software, and database management software. Products revenues are
recognized upon shipment.
Professional services cost of revenues consists of the labor and overhead
costs for the personnel performing the service including the cost of project
management, quality control and project review. Cost of communications services
revenues consists primarily of the cost to maintain and operate the Company's
communications infrastructure and customers' hosted web servers, access charges
from Local Exchange Carriers and network and related communications facilities
costs, depreciation of network equipment and rental expenses for equipment
pursuant to operating leases. The Company expects its costs of its services to
continue to increase in dollar amount, while declining as a percentage of
services revenue as the Company expands its customer base and more fully
utilizes its communications infrastructure. Cost of revenues for products
consists primarily of the Company's acquisition cost of computer and networking
hardware and software that is purchased from the manufacturers' distributors.
Selling and marketing expenses consist primarily of personnel expenses,
including salary, benefits, commissions, overhead costs and the cost of
marketing programs, such as advertising, trade shows and public relations. The
Company expects selling and marketing expenses to continue to increase in dollar
amount in future years as the Company's business grows and as it increases its
presence at trade shows, increases the size of its sales force and develops
additional materials to reach a larger audience, but to decrease over time as a
percentage of total net revenues.
-9-
<PAGE>
General and administrative expenses consist primarily of personnel expense
and professional fees, as well as rent and operating costs of the Company's
facilities. The Company expects general and administrative expenses to increase
in dollar amount, reflecting the continued growth of its operations and the
costs associated with being a publicly held entity, but to decrease in future
years as a percentage of total net revenues.
Research and development expenses consist primarily of personnel and
related costs associated with the development of the Company's technologies. The
Company's expectations of significant revenue growth are not dependent upon the
success of ongoing future research and development activities. In July 1998, the
Company reorganized its research and development group by reallocating
development personnel from the research and development group to support the
Company's professional services and communications services groups. In light of
this, the Company expects to continue to reduce its expenditures in connection
with the ongoing development of proprietary technologies, although it expects to
continue to use its products and/or expertise developed to date to augment its
other service offerings and to continue its related research activities.
Other
In order to provide nationwide communications services including Internet
access, the Company entered into a three-year agreement in June 1995 with MFS
Datanet, Inc. ("MFS") to access MFS' nationwide communications facilities and
related communications products and services. MFS was subsequently acquired by
Worldcom, Inc. ("Worldcom"). The terms of the agreement provide for the Company
to pay MFS/Worldcom primarily based on the average bandwidth of the Company's
traffic transmitted over MFS/Worldcom's communications facilities. The Company
has extended the term of the agreement through September of 1999. The Company
believes that the usage-based pricing plan established in the agreement has
allowed, and will continue to allow, the Company to grow communications services
revenues without incurring the full fixed costs typically associated with
building a nationwide network and Internet access. The Company has experienced
delays in the provisioning of its Internet access installation service orders by
MFS/Worldcom. As a result, the Company has begun purchasing communications
infrastructure facilities from additional suppliers and is reviewing Request For
Proposal responses in order to identify alternative suppliers to address its
expanding bandwidth and facilities requirements.
The Company, which had been profitable prior to 1995, has incurred net
losses and negative cash flow from operations since transitioning its strategy
to provide end-to-end Internet solutions and expects to continue to operate at a
loss and experience negative cash flow from operations at least through 1999.
The Company's attainment of profitability and positive cash flow from operations
is dependent upon its ability to substantially grow its revenue base and achieve
related operating efficiencies.
The Company will continue to focus on growing its professional services
and communications services businesses, which could require it to significantly
increase its expenses for personnel and marketing.
The Company has historically served major customers in information
intensive industries, such as financial services, telecommunications, media and
travel and, with the acquisition of Frontier, serves many companies in the
pharmaceutical industry. Revenues attributable to Bear Stearns & Co. Inc.
comprised 37% and 44%, respectively, of the Company's total net revenues for the
three and six months ended June 30, 1998 compared to 43% for the same periods in
the prior year, and in each year represented a significant component of services
and products revenues. No other customers represented over 10% of the Company's
total net revenues in the same time periods. Management expects revenue
concentration to decline as the Company grows its services revenues.
Historically, the Company has marketed and sold its services and products
through its direct sales force and through indirect channels. In May 1996, the
Company entered into an arrangement with Bell Atlantic Internet Solutions
whereby Bell Atlantic Internet Solutions, Inc. ("Bell Atlantic Internet
Solutions")
-10-
<PAGE>
agreed to provide billing services in connection with the offering of the
Company's communications services to requesting Bell Atlantic Internet Solutions
customers for both dedicated and switched access, including residential
customers. Revenues from customers acquired through Bell Atlantic Internet
Solutions represented 39% and 37%, respectively, of communications services
revenues for the three and six months ended June 30, 1998. The Company believes
that revenues from this arrangement will continue to grow at least until such
time that Bell Atlantic Internet Solutions or its affiliates receives regulatory
relief from the FCC from various regulations that affect the development of
advanced telecommunications services by the RBOCs and that this relationship
will represent a significant element of the Company's distribution strategy in
Bell Atlantic's southern region. In October 1997, the Company extended its
arrangement by entering into an updated Global Service Provider agreement with
Bell Atlantic Internet Solutions to continue to make its services available in
the traditional Bell Atlantic southern region for switched and dedicated
services and to expand the Company's reach with respect to dedicated services
into the Bell Atlantic northern region (previously NYNEX) through October 1999.
The Company's agreement with Bell Atlantic Internet Solutions contemplates a
service offering to requesting Bell Atlantic Internet Solutions customers in the
Bell Atlantic northern region, subject to Bell Atlantic Internet Soultions'
receipt of certain regulatory approvals. To date, Bell Atlantic Internet
Solutions, has not received such approvals. In July 1998, Bell Atlantic, an
affiliate of Bell Atlantic Internet Solutions, announced that it would acquire
GTE Corp. The transaction is subject to regulatory approval. The Company cannot
predict what effect, if any, the proposed transaction will have with respect to
the Company's existing business with Bell Atlantic Internet Solutions. The
Company also has agreements with Fiberlink Communications Corp., TotalTel, Inc.
and other resellers to resell the Company's communications services.
The Company has incurred losses in 1995, 1996, 1997 and the first half of
1998 that have generated net operating loss carry forwards of approximately
$29.7 million at June 30, 1998 for federal and state income tax purposes. These
carry forwards are available to offset future taxable income and expire in 2011
through 2018 for federal income tax purposes.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
Revenues. Total net revenues were $19.0 million for the three months ended
June 30, 1998, a $7.4 million, or 63%, increase over total net revenues of $11.6
million for the three months ended June 30, 1997.
Professional services revenues were $8.2 million and $5.5 million for the
three months ended June 30, 1998 and 1997, respectively, representing an
increase in 1998 of 50%. This increase was attributable to the growing demand
for professional services in its existing customer base and the acquisition of
several new customers, a high renewal rate of existing maintenance contracts, an
increased number of systems engineers available to perform these services and a
higher average billing rate per systems engineer.
Communications services revenues were $3.3 million and $1.2 million for
the three months ended June 30, 1998 and 1997, respectively, representing an
increase in 1998 of over 164%. This increase is primarily attributable to the
acquisition of new customers and the arrangement with Bell Atlantic Internet
Solutions under which the Company began providing service in the third quarter
of 1996. Revenues derived from the Bell Atlantic Internet Solutions arrangement
comprised 39% of communications revenues for the three months ended June 30,
1998. The Company's backlog for communications services pending has been
increasing significantly. The Company has begun purchasing communications
infrastructure facilities from
-11-
<PAGE>
additional suppliers and is reviewing Request For Proposal responses in order to
identify alternative suppliers to address its expanding bandwidth and facilities
requirements.
Products revenues were $7.5 million and $4.9 million for the three months
ended June 30, 1998 and 1997, respectively, representing an increase of 53%.
This increase was not as great as the increase in services revenues due
primarily to the transition of the Company's focus from its historical role as a
value-added reseller to providing IP network related services.
Cost of revenues. Total cost of revenues were $14.3 million and $8.4
million for the three months ended June 30, 1998 and 1997, respectively,
representing 75% and 72% of total net revenues, respectively.
Services cost of revenues were approximately $7.9 million and $4.3 million
for the three months ended June 30, 1998 and 1997, respectively. This growth is
primarily attributable to the hiring of additional professional services
personnel and contractors and the continued expansion of the Company's
communications infrastructure. Such costs increased to 69% as a percentage of
services revenues in the three months ended June 30, 1998 from 64% in the three
months ended June 30, 1997.
Products cost of revenues were $6.4 million and $4.1 million for the three
months ended June 30, 1998 and 1997, respectively, representing 85% and 84% of
products revenues for the three months ended June 30, 1998 and 1997,
respectively.
Selling and marketing. Selling and marketing expenses were $4.6 million
and $2.2 million for the three months ended June 30, 1998 and 1997,
respectively. The 110% increase in the three months ended June 30, 1998 reflects
hiring of additional sales and marketing personnel and increased spending on
advertising and trade shows. Selling and marketing expenses as a percentage of
total net revenues increased to 24% in the three months ended June 30, 1998 from
19% in the three months ended June 30, 1997.
General and administrative. General and administrative expenses were $4.8
million and $3.1 million for the three months ended June 30, 1998 and 1997,
respectively. This higher level of expenses reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business, as well as rent and operating costs of
the Company's facilities. General and administrative expenses as a percentage of
total net revenues decreased to 25% during the three months ended June 30, 1998
from 27% in the three months ended June 30, 1997.
Research and development. Research and development expenses were $0.6
million and $0.3 million for the three months ended June 30, 1998 and 1997,
respectively. This higher level of expense reflects an overall increase in the
number of personnel required to develop new technologies that enhance the
performance and reliability of the Company's network. In July 1998, the Company
reorganized its research and development group by reallocating development
personnel from the research and development group to support the Company's
professional services and communications services groups. In light of this, the
Company, expects to reduce its expenditures in connection with the ongoing
development of proprietary technologies, although it expects to continue to use
its products and/or expertise developed to date to augment its other service
offerings and to continue its related research activities.
-12-
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Total net revenues were $38.4 million for the six months ended
June 30, 1998, a $16.6 million, or 76%, increase over total net revenues of
$21.8 million for the six months ended June 30, 1997.
Professional services revenues were $15.7 million and $9.8 million for the
six months ended June 30, 1998 and 1997, respectively, representing an increase
in 1998 of 60%. This increase was attributable to the growing demand for
professional services in its existing customer base and the acquisition of
several new customers, a high renewal rate of existing maintenance contracts, an
increased number of systems engineers available to perform these services and a
higher average billing rate per
systems engineer.
Communications services revenues were $6.1 million and $2.1 million for
the six months ended June 30, 1998 and 1997, respectively, representing an
increase in 1998 of over 179%. This increase was primarily attributable to the
acquisition of new customers and the arrangement with Bell Atlantic Internet
Solutions under which the Company began providing service in the third quarter
of 1996. Revenues derived from the Bell Atlantic Internet Solutions arrangement
comprised 37% of communications revenues for the six months ended June 30, 1998.
The Company's backlog for communications services pending has been increasing
significantly. The Company has begun purchasing communications infrastructure
facilities from additional suppliers and is reviewing Request For Proposal
responses in order to identify alternative suppliers to address its expanding
bandwidth and facilities requirements.
Products revenues were $16.5 million and $9.7 million for the six months
ended June 30, 1998 and 1997, respectively, representing an increase of 71%.
Cost of revenues. Total cost of revenues were $29.5 million and $16.0
million for the six months ended June 30, 1998 and 1997, respectively,
representing 77% and 73% of total net revenues, respectively.
Services cost of revenues were approximately $15.2 million and $8.1
million for the six months ended June 30, 1998 and 1997, respectively. Such
costs increased to 69% as a percentage of services revenues in the six months
ended June 30, 1998 from 67% in the six months ended June 30, 1997, due to the
continued expansion of the Company's communications infrastructure.
Products cost of revenues were $14.3 million and $7.9 million for the
three months ended June 30, 1998 and 1997, respectively, representing 87% and
82% of products revenues for the six months ended June 30, 1998 and 1997,
respectively. The decrease in margin was due primarily to selected sales
designed to promote increased services revenue in the future.
Selling and marketing. Selling and marketing expenses were $8.6 million
and $4.5 million for the six months ended June 30, 1998 and 1997, respectively.
The 90% increase in the six months ended June 30, 1998 reflects hiring of
additional sales and marketing personnel and increased spending on advertising
and trade shows. Selling and marketing expenses as a percentage of total net
revenues increased to 22% in the six months ended June 30, 1998 from 21% in the
six ended June 30, 1997.
General and administrative. General and administrative expenses were $8.8
million and $5.4 million for the six months ended June 30, 1998 and 1997,
respectively. This higher level of expenses reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business, as well as rent and operating costs of
the Company's facilities. General and
-13-
<PAGE>
administrative expenses as a percentage of total net revenues decreased to 23%
during the six months ended June 30, 1998 from 25% in the six months ended June
30, 1997.
Research and development. Research and development expenses were $1.2
million and $0.6 million for the six months ended June 30, 1998 and 1997,
respectively. This higher level of expense reflects an overall increase in the
number of personnel required to develop new technologies that enhance the
performance and reliability of the Company's network. In July 1998, the Company
reorganized its research and development group by reallocating development
personnel from the research and development group to support the Company's
professional services and communications services groups. In light of this, the
Company expects to reduce its expenditures in connection with the ongoing
development of proprietary technologies, although it expects to continue to use
its products and/or expertise developed to date to augment its other service
offerings and to continue its related research activities.
Liquidity and Capital Resources
The Company had an accumulated deficit of $32.0 million at June 30, 1998
and has used cash of $23.6 million in the aggregate to fund operations during
1996, 1997 and the six month period ended June 30, 1998. Prior to consummation
of the Company's initial public offering (the "IPO") on February 18, 1998, the
Company had satisfied its cash requirements primarily through the sale of
preferred stock and borrowings under credit agreements. The Company's principal
uses of cash are to fund operations, working capital requirements and capital
expenditures. At June 30, 1998 the Company had $18.4 million in cash and cash
equivalents and working capital of $18.6 million. Net cash used in operating
activities for the six months ended June 30, 1998 and 1997 was approximately
$10.0 million and $7.3 million, respectively. Net cash used in investing
activities for the six months ended June 30, 1998 and 1997 was approximately
$7.0 million and $1.2 million, respectively. For the six months ended June 30,
1998 and 1997, cash of approximately $33.9 million and $8.9 million,
respectively, was provided by financing activities. Cash provided by financing
activities for the six months ended June 30, 1998 includes approximately $34.3
million in net proceeds from the issuance of common stock from the Company's
IPO.
The Company maintains a secured line of credit with The CIT Group/Business
Credit, Inc. ("CIT") for $10.0 million, which automatically renewed on August
13, 1998 and expires on August 13, 1999. Borrowings under this line are secured
by substantially all of the assets of the Company and are limited to a specific
percentage of qualifying accounts receivable less outstanding obligations of the
Company owed to CIT, including outstanding letters of credit. Under this secured
line of credit, the Company may not, among other things, pay cash dividends,
pledge any of its assets to third parties, borrow money from third parties or
merge or consolidate with third parties without CIT's prior written consent.
Borrowings under this line amounted to $1.0 million at December 31, 1997. There
were no borrowings under the line of credit at June 30, 1998. The Company does
not currently expect that it will be necessary to use this secured line of
credit to meet its working capital and capital expenditure requirements through
the end of 1998. Interest expense amounted to $0.1 and $0.3 million for the six
months ended June 30, 1998 and 1997, respectively. Interest is payable monthly
at an annual rate equal to the prime rate plus one percent. Following a change
in the prime rate, the rate adjusts on the first of the month following any
change. As of June 30, 1998, there was approximately $3.4 million available
under the line.
As of June 30, 1998, trade payables and accrued expenses to a vendor in
the amount of $4.3 million were secured by a lien on substantially all of the
Company's assets.
The Company has made capital investments in its network, network operating
centers and other capital assets totaling $7.1 million in the six months ended
June 30, 1998. The Company expects to make additional capital investments to
expand and enhance its operations approximating $5 million in the remainder of
1998. The foregoing expectation with respect to capital investment is a
forward-looking statement that involves
-14-
<PAGE>
risks and uncertainties and the actual amount of capital investment could vary
materially as a result of a number of factors.
In the IPO, 3.85 million shares of Common Stock were sold at a price of
$10.00 per share, providing gross proceeds to the Company of $38.5 million and
net proceeds, after deducting underwriting discounts, commissions and estimated
offering expenses payable by the Company, of approximately $34.3 million. Since
the Company expects to incur additional operating losses, the Company intends to
use the net proceeds from the IPO to meet its short-term capital requirements.
The Company believes that proceeds from the IPO will be sufficient to meet its
anticipated cash needs for working capital and for the acquisition of capital
equipment through the end of 1998. However, there can be no assurance that the
Company will not require additional financing within this timeframe. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The Company may
be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional financing, if needed, will be available on terms attractive to
the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require the Company to relinquish its rights to certain of its
technologies.
Recently Issued Accounting Standards
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), which establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. FAS 131 is effective for fiscal years beginning after December 31,
1997. The adoption of the provisions of FAS 131 is not expected to have a
material impact on the Company's existing disclosures.
Year 2000
As reasonably necessary and appropriate, the Company is in the process of
modifying or replacing software components that it uses so that such software
will properly recognize dates beyond December 31, 1999 ("Year 2000 Compliance").
The cost for such modifications and replacements is not expected to be material.
The Company has initiated formal communications with its significant vendors and
customers to determine the extent that Year 2000 Compliance issues of such
parties may affect the Company, and is interviewing outside consultants with
respect to possible assistance in connection with the Company's internal review
of its Year 2000 compliance status. There can be no guarantee that the systems
of such other companies will be timely converted, or that their conversion will
be compatible with information included in the Company's systems, without a
material adverse effect on the Company's business, financial condition or
results of operations.
-15-
<PAGE>
Disclosure Regarding Forward-Looking Information
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend," "estimate" and similar
expressions. Those statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectation of the
Company or its directors or officers with respect to, among other things, trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected, expressed or implied in the
forward-looking statements as a result of various factors, including but not
limited to the following ("Cautionary Statements"): (i) the Company's limited
operating history and history of negative cash flow and operating losses, (ii)
potential fluctuations in the Company's quarterly operating results, (iii) the
Company's concentration of revenues, (iv) challenges facing the Company as it
experiences rapid growth and (v) its dependence on a limited number of
suppliers. The accompanying information contained in this report, including the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," identifies important factors that could
cause such differences. Such forward-looking statements speak only as of the
date of this report, and the Company cautions potential investors not to place
undue reliance on such statements. The Company undertakes no obligation to
update or revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
-16-
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 12, 1998 (the "Effective Date"), the Securities and Exchange
Commission declared effective the Company's Registration Statement on Form S-1
(File No. 333-38339). From the Effective Date through June 30, 1998, the Company
incurred expenses of approximately $2.7 million for underwriting discounts and
commissions and $1.5 million for other expenses. Such payments were direct or
indirect payments to persons other than directors, officers or persons owning
10% or more of the Company's common stock. The net offering proceeds to the
Company were $34.3 million. From the Effective Date through June 30, 1998, net
offering proceeds of: (i) $6.3 million was paid for construction of plant,
buildings and facilities; (ii) $1.8 million was used for repayment of
indebtedness; and (iii) $11.6 million was used for working capital and general
corporate purposes. Such payments, except for compensation pursuant to their
employment by the Company, were direct or indirect payments to persons other
than directors, officers or persons owning 10% or more of the Company's Common
Stock.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated May 27, 1998 (date of earliest event
reported) was filed by the Company on June 11, 1998.
-17-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 1998
ICON CMT CORP.
By: /s/ Scott A. Baxter
-------------------------------------------
Scott A. Baxter, President, Chief
Executive Officer and Chairman of the Board
By: /s/ Kenneth J. Hall
------------------------------------------
Kenneth J. Hall, Senior Vice President,
Chief Financial Officer and Treasurer
-18-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
-------- -------------
27.1 Financial Data Schedule
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037330
<NAME> ICON CMT CORP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,387
<SECURITIES> 0
<RECEIVABLES> 10,388
<ALLOWANCES> 526
<INVENTORY> 365
<CURRENT-ASSETS> 32,821
<PP&E> 13,954
<DEPRECIATION> 1,971
<TOTAL-ASSETS> 44,912
<CURRENT-LIABILITIES> 14,247
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 30,516
<TOTAL-LIABILITY-AND-EQUITY> 44,912
<SALES> 38,350
<TOTAL-REVENUES> 38,850
<CGS> 29,486
<TOTAL-COSTS> 29,486
<OTHER-EXPENSES> 20,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> (11,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,245)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
