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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 MARCH 31, 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.
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(Exact name of Registrant as Specified in Its Charter)
Delaware 13-3603128
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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
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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 No X
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of May 8, 1998 was
15,054,967
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ICON CMT CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of March 31, 1998 (unaudited)
and December 31, 1997..............................................3
Condensed Statement of Operations for the Three Months
ended March 31, 1998 and March 31, 1997 (unaudited)................4
Condensed Statement of Cash Flows for the Three Months
ended March 31, 1998 and March 31, 1997 (unaudited)................5
Notes to Condensed Financial Statements (unaudited)................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........................15
Item 6. Exhibits and Reports on Form 8-K..................................15
SIGNATURES....................................................................16
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ICON CMT CORP.
CONDENSED BALANCE SHEET
(In thousands, except per share amounts)
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ........................... $29,145 $ 1,011
Accounts receivable, net of allowance of $356
and $450, respectively ........................... 7,310 9,276
Unbilled costs and accrued revenue .................. 1,194 981
Inventories ......................................... 103 104
Prepaid expenses and other current assets ........... 2,183 2,329
------- -------
Total current assets .......................... 39,935 13,701
Fixed assets, net ................................... 8,247 6,525
Other noncurrent assets ............................. 303 208
------- -------
Total assets ............................... $48,485 $20,434
======= =======
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable .............................. $ 7,756 $ 8,941
Accrued expenses .............................. 3,687 4,096
Short term borrowings ......................... -- 1,000
Deferred revenue .............................. 655 121
------- -------
Total current liabilities ............... 12,098 14,158
------- -------
Total liabilities .................... 12,098 14,158
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Mandatorily redeemable 10% PIK Series B
Convertible Participating Preferred
Stock ($.01 par value; 415,000 shares
authorized, none issued and
outstanding at March 31, 1998,
180,240 shares issued and outstanding at
December 31, 1997)......................... -- 16,628
Mandatorily redeemable Series A Convertible
Participating Preferred Stock ($.01
par value; 450,000 shares authorized,
none issued and outstanding at
March 31, 1998, 422,607 shares
issued and outstanding at
December 31, 1997)......................... -- 10,601
Stockholders' equity:
Preferred stock ($.01 par value;
1,000,000 shares authorized)................... -- --
Common stock ($.001 par value: 50,000,000
shares authorized, 15,025,285 and
6,545,454 shares issued and outstanding).... 15 7
Additional paid-in-capital..................... 61,725 498
Accretion of mandatorily redeemable
preferred stock................................ -- (388)
Accumulated deficit............................ (25,353) (21,070)
-------- --------
Total stockholders' equity (deficit)..... 36,387 (20,953)
-------- --------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity... $ 48,485 $ 20,434
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The accompanying notes are an integral part of these financial statements
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ICON CMT CORP.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
--------------------
1998 1997
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(In thousands, except
per share amounts)
Revenues, net:
Services
Professional ..................................... $ 5,833 $ 3,207
Communications ................................... 2,813 938
Media ............................................ 14 77
-------- --------
Total services revenues ....................... 8,660 4,222
-------- --------
Products ......................................... 9,056 4,795
-------- --------
Total revenues, net ........................... 17,716 9,017
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Cost of revenues:
Services ............................................ 6,241 3,137
Products ............................................ 7,986 3,813
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Total costs of revenues ....................... 14,227 6,950
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Gross profit ........................................... 3,489 2,067
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Operating expenses:
Sales and marketing ................................. 3,639 2,095
General and administrative .......................... 3,354 2,100
Research and development ............................ 576 277
Depreciation and amortization ....................... 330 180
-------- --------
Total operating expenses ...................... 7,899 4,652
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Loss from operations ................................... (4,410) (2,585)
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Other income (expense):
Interest income ..................................... 180 13
Interest expense .................................... (53) (122)
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Total other income (expense) .................. 127 (109)
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Loss before income taxes ............................... (4,283) (2,694)
Provision for income taxes ............................. -- (256)
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Net loss ............................................... $ (4,283) $ (2,950)
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Basic loss per share and diluted loss per share ........ $ (0.41) $ (0.47)
======== ========
Weighted average shares outstanding used for basic
loss per share and diluted loss per share .......... 10,974 6,545
======== ========
The accompanying notes are an integral part of these financial statements
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ICON CMT CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
--------------------
1998 1997
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(In thousands)
Cash flows from operating activities:
Net loss ............................................. $ (4,283) $ (2,950)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization .................. 843 401
Deferred income taxes, net ..................... -- 275
Changes in assets and liabilities ................. 745 (306)
-------- --------
Net cash used in operating activities ....... (2,695) (2,580)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (2,565) (503)
-------- --------
Net cash used in investing activities ....... (2,565) (503)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of short-term notes ........... 1,772 12,035
Net repayments of short-term notes ................... (2,772) (9,043)
Net proceeds from issuance of common stock ........... 34,394 --
-------- --------
Net cash provided by financing activities ... 33,394 2,992
-------- --------
Net increase (decrease) in cash ......................... 28,134 (91)
Cash and cash equivalents at beginning of period ........ 1,011 515
-------- --------
Cash and cash equivalents at end of period .............. $ 29,145 $ 424
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The accompanying notes are an integral part of these financial statements
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ICON CMT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements for the three month
periods ended March 31, 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 month period ended March 31, 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 Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. Initial Public Offering
On February 18, 1998, Icon CMT Corp. ("Icon" or the "Company")
completed its initial public offering (the "Offering"), 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 offering expenses payable by the Company, of approximately
$34,394.
Upon completion of the Offering, common shares available for grant
under the Company's 1995 Stock Option Plan were increased from 1,636,364 to
2,181,818.
Upon the closing of the Offering, 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. 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 entitles 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 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.
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The computation of basic loss per share and diluted loss per share for
the three months ended March 31, 1998 and 1997 was as follows:
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net loss ......................................... $ (4,283) $ (2,950)
Accretion to liquidation value of Series A
Preferred and Series B Preferred Stock ........ (202) (148)
------------ ------------
Loss available to common stockholders ............ $ (4,485) $ (3,098)
============ ============
Weighted average shares outstanding used
for basic loss per share and diluted
loss per share ................................. 10,973,811 6,545,454
Basic loss per share and diluted loss per share .. $ (0.41) $ (0.47)
============ ============
At March 31, 1998, outstanding options to purchase 1,330,096 shares of
common stock, with exercise prices ranging from $6.02 to $14.27 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants at March 31, 1998 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 computation of diluted loss per share.
4. Discontinued Product Line
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $14 and $77 from the selling of
advertising space on its new media properties for the three months ended March
31, 1998 and 1997, respectively. The cost of revenues associated with media
services for the three months ended March 31, 1998 and 1997 was $548 and $463,
respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
Condensed 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. 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, enhanced by the
Company's proprietary technologies; 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.
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 are generally provided based on
one-year or multi-year service agreements, 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 (which incorporate professional, communications and
media services) have increased historically as a percentage of total revenue.
For the three months ended March 31, 1998 and 1997 services revenues consisted
of 49% and 47% of total net revenues, respectively. 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
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from selling advertisement space on its three new-media properties, WordJ,
ChargedJ and SportsFan Online. The Company has experienced operating losses in
connection with the ongoing operation of its media properties and, in March
1998, the Company announced that it would discontinue the ongoing operations of
Word and Charged. In April, the Company announced that Zapata Corporation
("Zapata") had purchased all of the assets of Word and Charged 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
services revenues 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. The Company expects marketing
expenses to decrease as a percentage of total net revenues due to the fact that
initial marketing expenses, such as development and preparation of collateral
materials, were incurred upon the expansion of business lines.
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 expects its research and development spending to continue to grow and to
increase modestly as a percentage of total operating expenses in future years.
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The Company's expectations of significant revenue growth are not dependent,
however, upon the success of ongoing future research and development 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. The terms of the
agreement provide for the Company to pay MFS primarily based on the average
bandwidth of the Company's traffic transmitted over MFS' communications
facilities. The Company recently extended this agreement through September 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 also believes that, as the utilization of its network increases, the
Company may elect to lease and install its own dedicated high speed connections
between nodes and may rely less on MFS' communications facilities for data
transport.
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 at least through 1998. The Company's
attainment of profitability and positive cash flow 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 serves major customers in information intensive industries,
such as financial services, telecommunications, media and travel. Revenues
attributable to Bear Stearns & Co. Inc. comprised 56% and 49% of the Company's
total net revenues for the three months ended March 31, 1998 and 1997,
respectively, and in each period 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, Inc. ("Bell Atlantic Internet Solutions") whereby Bell Atlantic
Internet Solutions 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 35% of communications services revenues in the
first quarter of 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, including Bell Atlantic Corp., receive regulatory
relief from the FCC and state utility commissions from various regulations that
affect the offering of advanced telecommunications and data services by the
Regional Bell Operating Companies and that this relationship will represent a
significant element of the Company's distribution strategy in Bell Atlantic
Internet Solutions' 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 currently plans that it will make its services available to
requesting Bell Atlantic Internet Solutions business customers in the northern
region during 1998, subject to
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certain regulatory approvals. The Company also has agreements with Totaltel,
Inc. and other resellers to resell the Company's communications services.
The Company has incurred losses since 1995 that have generated net
operating loss carry forwards of approximately $23.4 million at March 31, 1998
for federal and state income tax purposes. These carry forwards are available to
offset future taxable income and expire in 2011 through 2013 for federal income
tax purposes.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
Revenues. Total net revenues were $17.7 million for the three months
ended March 31, 1998, an $8.7 million increase over total net revenues of $9.0
million for the three months ended March 31, 1997.
Professional services revenues were $5.8 million and $3.2 million for
the three months ended March 31, 1998 and 1997, respectively, representing an
increase in 1998 of 82%. 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 $2.8 million and $0.9 million for
the three months ended March 31, 1998 and 1997, respectively, representing an
increase in 1998 of over 200%. 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 35% of communications revenues for the three months ended March 31,
1998.
Products revenues were $9.1 million and $4.8 million for the three
months ended March 31, 1998 and 1997, respectively, representing an increase of
89%. 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 $14.2 million and $7.0
million for the three months ended March 31, 1998 and 1997, respectively,
representing 80% and 77% of total net revenues, respectively.
Services cost of revenues were $6.2 million and $3.1 million for the
three months ended March 31, 1998 and 1997, respectively. This growth was
primarily attributable to the hiring of additional professional services
personnel and contractors and the continued expansion of the Company's
communications infrastructure. Such costs decreased to 72% as a percentage of
services revenues in the three months ended March 31, 1998, from 74% in the
three months ended March 31, 1997.
Products cost of revenues were $8.0 million and $3.8 million for the
three months ended March 31, 1998 and 1997, respectively, representing 88% and
80% of products revenues for the three months ended March 31, 1998 and 1997,
respectively. The decrease in margin was due primarily to a strategy to accept
selected lower-margin sales designed to promote increased services revenue in
the future.
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Selling and marketing. Selling and marketing expenses were $3.6 million
and $2.1 million for the three months ended March 31, 1998 and 1997,
respectively. The 74% increase for the three months ended March 31, 1998
reflects hiring of sales and marketing personnel and increased spending on
advertising and trade shows. Selling and marketing expenses as a percentage of
total net revenues decreased to 21% for the three months ended March 31, 1998
from 23% for the three months ended March 31, 1997.
General and administrative. General and administrative expenses were
$3.4 million and $2.1 million for the three months ended March 31, 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 19% for the three months ended March 31, 1998
from 23% for the three months ended March 31, 1997.
Research and development. Research and development expenses were $0.6
million and $0.3 million for the three months ended March 31, 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.
Liquidity and Capital Resources
The Company had an accumulated deficit of $25.4 million at March 31,
1998 and has used cash of $18.4 million in the aggregate to fund operations
during 1996, 1997 and the three-month period ended March 31, 1998. Prior to
consummation of the Offering, 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 March 31, 1998 the Company had
$29.1 million in cash and cash equivalents and working capital of $27.8 million.
Net cash used in operating activities for the three months ended March 31, 1998
and 1997 was approximately $2.7 million and $2.6 million, respectively. Net cash
used in investing activities for the three months ended March 31, 1997 and 1998,
was approximately $0.5 million and $2.6 million, respectively. For the three
months ended March 31, 1997 and 1998, cash of approximately $3.0 million and
$33.4 million, respectively, was provided by financing activities. Cash provided
by financing activities for the three months ended March 31, 1998 includes
approximately $34.4 million in net proceeds from the issuance of common stock
from the Offering.
On August 13, 1996, the Company obtained a secured line of credit with
The CIT Group/Business Credit, Inc. ("CIT") for $10.0 million which expires on
August 13, 1998. Borrowings under this line are secured by substantially all of
the assets of the Company and are limited to a specified 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 pay cash dividends, pledge any of its assets to
third parties, borrow money from third parties, lend money to 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 March 31, 1998. The Company does
not currently expect that it will be necessary to use the secured line of credit
to meet its working capital and capital expenditure requirements. 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 March 31, 1998, there was $2.4 million available
under the line.
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As of March 31, 1998, trade payables and accrued expenses to a vendor
in the amount of $5.0 million were secured by a lien on substantially all of the
Company's assets.
The Company made capital investments in its network, network operations
center and other capital assets totaling $2.6 million in the three months ended
March 31, 1998. The Company expects to make capital investments to expand and
enhance its operations totaling approximately $8.7 million in 1998. The
foregoing expectation with respect to capital investment is a forward-looking
statement that involves risks and uncertainties and the actual amount of capital
investment could vary materially as a result of a number of factors.
On February 18, 1998, the Company completed the Offering, selling 3.85
million shares of Common Stock at a price of $10.00 per share, providing gross
proceeds to the Company of $38.5 millon and net proceeds, after deducting
underwriting discounts, commissions and estimated offering expenses payable by
the Company, of approximately $34.4 million. Since the Company expects to incur
additional operating losses, the Company intends to use the net proceeds from
the Offering to meet its short term capital requirements. The Company believes
that proceeds from the Offering 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 time frame. 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 materially as a result of a number
of factors. 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. 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.
-13-
<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 (such factors are
referred to herein as "Cautionary Statements"), including but not limited to the
following: (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) the
Company's 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.
-14-
<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 March 31, 1998,
the Company incurred expenses of approximately $2.7 million for underwriting
discounts and commissions and an estimated $1.4 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 $34.4 million. From the Effective Date
through March 31, 1998, net offering proceeds of: (i) $1.8 million was paid for
the construction of plant, buildings and facilities; (ii) $1.8 million was used
for repayment of indebtedness; and (iii) $4.5 million was used for working
capital and general corporate purposes. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
period covered by this Report.
-15-
<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: May 15, 1998
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
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description Page
------- ----------- ----
27.1 Financial Data Schedule.
-17-
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