<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1994 Commission File Number 0-14972
IDB COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 93-0933098
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
10525 WEST WASHINGTON BOULEVARD, CULVER CITY, CALIFORNIA 90232
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (213) 870-9000
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 ___
Number of shares of common stock outstanding as of August 16, 1994:
74,208,777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet................................................................. 3
Consolidated Statement of Operations....................................................... 4
Consolidated Statement of Cash Flows....................................................... 5
Notes to Consolidated Financial Statements................................................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 11
PART II. OTHER INFORMATION.......................................................................... 15
SIGNATURE............................................................................................... 17
</TABLE>
2
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
---------------- ----------------
<S> <C> <C>
(UNAUDITED,
SEE NOTE 1)
Current assets:
Cash and cash equivalents................................................... $ 54,612,000 $ 14,471,000
Short-term investments...................................................... 12,672,000 11,155,000
Accounts receivable, less allowance for doubtful accounts of $5,751,000 in
1993 and $10,846,000 in 1994............................................... 108,445,000 122,189,000
Unbilled revenues........................................................... 13,900,000 13,311,000
Prepaid expenses and other current assets................................... 23,139,000 31,218,000
---------------- ----------------
Total current assets...................................................... 212,768,000 192,344,000
---------------- ----------------
Property and equipment:
Land........................................................................ 2,489,000 2,489,000
Buildings and improvements.................................................. 6,567,000 6,428,000
Equipment................................................................... 270,410,000 274,035,000
Construction in progress.................................................... 39,850,000 25,578,000
---------------- ----------------
Total property and equipment.............................................. 319,316,000 308,530,000
Less accumulated depreciation and amortization............................ 49,251,000 58,457,000
---------------- ----------------
Net property and equipment................................................ 270,065,000 250,073,000
Investment in and advances to joint venture................................... -- 25,642,000
Intangible assets, net........................................................ 215,583,000 216,844,000
Other assets.................................................................. 23,773,000 39,680,000
---------------- ----------------
Total assets.............................................................. $ 722,189,000 $ 724,583,000
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... $ 55,095,000 $ 45,852,000
Other accrued liabilities................................................... 119,805,000 144,687,000
---------------- ----------------
Total current liabilities................................................. 174,900,000 190,539,000
Long-term liabilities......................................................... 38,369,000 40,744,000
Convertible subordinated debt................................................. 195,500,000 195,500,000
---------------- ----------------
Total liabilities......................................................... 408,769,000 426,783,000
---------------- ----------------
Commitments and contingencies
Minority interest............................................................. 23,285,000 --
---------------- ----------------
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized; 34,000 shares issued and none
outstanding in 1993 and 1994............................................... -- --
Common stock, $.01 par value, 200,000,000 shares authorized; shares issued
and outstanding, 71,713,076 in 1993 and 74,180,771 in 1994................. 717,000 742,000
Additional paid-in capital.................................................. 272,744,000 296,221,000
Retained earnings........................................................... 16,674,000 837,000
---------------- ----------------
Total shareholders' equity................................................ 290,135,000 297,800,000
---------------- ----------------
Total liabilities and shareholders' equity................................ $ 722,189,000 $ 724,583,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IDB COMMUNICATIONS GROUP, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, SEE NOTE 1)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- ----------------------------------
1993 1994 1993 1994
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Transmission services..................... $ 67,044,000 $ 123,348,000 $ 127,803,000 $ 233,916,000
Systems integration and other income...... 5,657,000 9,245,000 11,589,000 13,164,000
Fees earned from TRT...................... 3,200,000 -- 5,000,000 --
-------------- ---------------- ---------------- ----------------
Total revenues.......................... 75,901,000 132,593,000 144,392,000 247,080,000
-------------- ---------------- ---------------- ----------------
Costs and expenses
Cost of sales............................. 51,347,000 119,089,000 97,171,000 201,899,000
Selling, general and administrative....... 8,258,000 24,729,000 15,939,000 41,659,000
Depreciation.............................. 4,616,000 6,122,000 9,156,000 10,916,000
Amortization.............................. 1,168,000 1,503,000 2,227,000 2,878,000
-------------- ---------------- ---------------- ----------------
Total costs and expenses................ 65,389,000 151,443,000 124,493,000 257,352,000
-------------- ---------------- ---------------- ----------------
Operating income (loss)..................... 10,512,000 (18,850,000) 19,899,000 (10,272,000)
Interest expense............................ (1,944,000) (3,214,000) (3,968,000) (5,181,000)
Interest income............................. 511,000 719,000 646,000 1,999,000
-------------- ---------------- ---------------- ----------------
Income (loss) before minority interest,
equity in joint venture and income taxes... 9,079,000 (21,345,000) 16,577,000 (13,454,000)
Equity in loss of joint venture............. -- (1,586,000) -- (2,383,000)
Minority interest........................... (72,000) -- (102,000) --
-------------- ---------------- ---------------- ----------------
Income (loss) before income taxes........... 9,007,000 (22,931,000) 16,475,000 (15,837,000)
Income tax provision (benefit).............. 3,648,000 (2,944,000) 6,673,000 --
-------------- ---------------- ---------------- ----------------
Net income (loss) before preferred stock
dividend................................... 5,359,000 (19,987,000) 9,802,000 (15,837,000)
Preferred stock dividend.................... 340,000 -- 718,000 --
-------------- ---------------- ---------------- ----------------
Net income (loss) available to common
shareholders............................... $ 5,019,000 $ (19,987,000) $ 9,084,000 $ (15,837,000)
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
Earnings (loss) per share:
Primary................................... $.09 $(.27) $.17 $(.21)
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
Fully diluted............................. $.09 $(.27) $.17 $(.21)
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
Weighted average common shares outstanding:
Primary................................... 53,928,000 74,120,000 52,117,000 73,676,000
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
Fully diluted............................. 60,244,000 74,120,000 58,440,000 73,676,000
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, SEE NOTE 1)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE
30,
--------------------------------
1993 1994
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents at beginning of period............................... $ 1,319,000 $ 50,415,000
--------------- ---------------
Cash flows from operating activities:
Net income (loss) before preferred stock dividend............................ 9,802,000 (15,837,000)
--------------- ---------------
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation expense......................................................... 9,156,000 10,916,000
Amortization expense......................................................... 1,912,000 2,580,000
Amortization of loan fees and discounts...................................... 315,000 298,000
Provision for doubtful accounts receivable................................... 660,000 5,277,000
Deferred income taxes........................................................ 5,349,000 (6,572,000)
Equity in loss of joint venture.............................................. -- 2,383,000
Minority interest............................................................ 102,000 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.......................................................... (22,429,000) (40,895,000)
Unbilled revenues............................................................ 5,805,000 249,000
Prepaid expenses and other current assets.................................... (1,677,000) (9,785,000)
Accounts payable and accrued expenses........................................ (6,508,000) 3,781,000
Other liabilities............................................................ 2,428,000 25,553,000
--------------- ---------------
Total adjustments.......................................................... (4,887,000) (6,215,000)
--------------- ---------------
Net cash provided by (used for) operating activities....................... 4,915,000 (22,052,000)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................... 51,994,000 23,502,000
Borrowings of senior debt.................................................... 10,500,000 --
Repayments of senior debt.................................................... (30,654,000) --
Repayments of senior subordinated debt....................................... (3,000,000) --
Increase in advances from minority shareholder of subsidiary................. 2,254,000 --
Preferred stock dividend payment............................................. (378,000) --
--------------- ---------------
Net cash provided by financing activities.................................. 30,716,000 23,502,000
--------------- ---------------
Cash flows from investing activities:
Additions to property and equipment.......................................... (20,173,000) (25,100,000)
Investments in and advances to joint venture................................. -- (4,813,000)
Increase in intangible and other assets...................................... (5,763,000) (8,998,000)
Sale of short term investments............................................... -- 1,517,000
--------------- ---------------
Net cash used for investing activities..................................... (25,936,000) (37,394,000)
--------------- ---------------
Increase (decrease) in cash and cash equivalents............................. 9,695,000 (35,944,000)
--------------- ---------------
Cash and cash equivalents at end of period................................. $ 11,014,000 $ 14,471,000
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 1994 and the
consolidated statements of operations for the three and six month periods ended
June 30, 1993 and 1994 and the consolidated statement of cash flows for the six
months ended June 30, 1993 and 1994 are unaudited, but in the opinion of
management include all adjustments, all of which are of a normal and recurring
nature except as discussed below and in Notes 2 and 7, necessary for a fair
presentation of the financial position and the results of operations for the
periods presented.
The accompanying financial statements are restated to reflect certain
adjustments to the consolidated financial statements for the three months ended
June 30, 1994 included in the Company's report on Form 10-Q originally filed on
August 21, 1994. The adjustments include $8.3 million increase to transmission
services revenues and $6.3 million increase to cost of sales related to the
accounting for international long distance traffic (see Note 2) and the
provision of a valuation reserve of $6,572,000 against net operating loss tax
benefit recorded in the quarter ended June 30, 1994. The effects of these
adjustments on the accompanying consolidated income statement for the three
months ended June 30, 1994 as compared to the consolidated income statement
included in the Company's original Form 10-Q are as follows:
<TABLE>
<CAPTION>
INCREASE FORM
ORIGINAL (DECREASE) 10-Q/A
FORM 10-Q ADJUSTMENTS (NO. 1)
---------------- ------------- ----------------
<S> <C> <C> <C>
For the three months ended June 30, 1994:
Transmission services revenue................................ $ 115,048,000 $ 8,300,000 $ 123,348,000
Total revenues............................................... 124,293,000 8,300,000 132,593,000
Cost of Sales................................................ 112,789,000 6,300,000 119,089,000
Total costs and expenses..................................... 145,143,000 6,300,000 151,443,000
Operating income............................................. (20,850,000) 2,000,000 (18,850,000)
Income (loss) before income taxes............................ (24,931,000) 2,000,000 (22,931,000)
Income tax provision (benefit)............................... (10,346,000) (830,000) (2,944,000)
(6,572,000)
Net income (loss) available to common
shareholders................................................ (14,585,000) (5,402,000) (19,987,000)
Earnings per share:
Primary and fully diluted.................................. (.20) (.07) (.27)
</TABLE>
The statements for the six month period ended June 30, 1994 remain unchanged
because a corresponding restatement was made in the three month period ended
March 31, 1994.
COMMON STOCK SPLIT. All common stock share amounts and earnings (loss) per
share have been adjusted to reflect the 3.15-to-one common stock split in the
form of a common stock dividend paid on February 4, 1994.
TRANSMISSION SERVICES REVENUES. The Company retroactively reclassified
payments to foreign telephone companies to complete calls made from the United
States by the Company's customers.
6
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
These payments, which previously were classified as direct reductions of
transmission services revenue, are now classified as cost of sales. Operating
income (loss), net income (loss) available to common shareholders and the
balance sheet are not affected.
<TABLE>
<CAPTION>
NEW PRESENTATION
--------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ----------------------------
1993 1994 1993 1994
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Total revenues..................... $75,901,000 $ 132,593,000 $ 144,392,000 $ 247,080,000
Cost of sales...................... 51,347,000 119,089,000 97,171,000 201,899,000
Total costs and expenses........... 65,389,000 151,443,000 124,493,000 257,352,000
</TABLE>
<TABLE>
<CAPTION>
OLD PRESENTATION
--------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ----------------------------
1993 1994 1993 1994
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Total revenues..................... $71,335,000 $ 98,593,000 $ 135,756,000 $ 188,598,000
Cost of sales...................... 46,781,000 85,089,000 88,535,000 143,407,000
Total costs and expenses........... 60,823,000 117,443,000 115,857,000 178,326,000
</TABLE>
This change was made to conform with industry reporting practices. All
applicable 1993 financial information presented in the accompanying financial
statements has been restated to conform to the 1994 presentation.
IDB MOBILE. In the second quarter of 1994, the Company deconsolidated the
results of operations of IDB Mobile Communications, Inc. ("IDB Mobile"), a 50%
owned joint venture with a Canadian company. The Company has included IDB
Mobile's results of operations for the six months ended June 30, 1994 using the
equity method of accounting. (See Note 3.)
SIGNIFICANT AND NON-RECURRING ITEMS. Results of operations for the three
months ended June 30, 1994 include certain items which the Company believes are
of a significant or a non-recurring nature and have the effect of reducing
pretax income for the three month period by approximately $18,350,000. Those
items considered to be non-recurring are approximately $8,850,000. (See Note 7.)
INTANGIBLE ASSETS. Intangible assets reflect the valuation of operating
agreements and other intangible assets, including goodwill and deferred income
tax assets arising from the acquisition of World Communications, Inc. and TRT
Communications, Inc. ("TRT"). (See Note 5.) The Company will complete its final
determination of the purchase price allocation related to TRT by September 30,
1994.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's classifications.
NOTE 2 -- ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
The Company enters into operating agreements with telecommunication carriers
in foreign countries under which international long distance traffic is both
delivered and received. Under these agreements, the foreign carriers are
obligated to adhere to the policy of the Federal Communications Commission (FCC)
whereby traffic from the foreign country is routed to international carriers, of
which IDB is one, in the same proportion as traffic carried into the foreign
country. Mutually exchanged traffic between IDB and foreign carriers is settled
in cash through a formal settlement policy
7
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC (CONTINUED)
that generally extends over a six-month period at an agreed upon tariff rate.
Although IDB can estimate the amount of inbound traffic it will receive under
the FCC's proportional share policy, it generally must wait up to six months
before it actually carries the inbound traffic.
The Company utilizes the net settlement concept that is inherent in the
operating agreements as the basis for its accounting policy for international
long distance traffic. Under this approach, the margin on outbound and inbound
calls (recognizing that the proportionate return of the actual inbound call is
received generally on six month lag), are normalized to reflect the implicit
overall earning rate concept of the contract. Accordingly, a portion of the
outbound call fee due the foreign carrier is deferred and accounted for as a
cost attributable to the revenue associated with the inbound call. All costs
deferred are expensed six months later and offset against the revenues
recognized upon receipt of the return traffic. The amount of cost deferral at
June 30, 1994 was $8,100,000.
NOTE 3 -- IDB MOBILE
In the second quarter of 1994, the Company deconsolidated the results of
operations of IDB Mobile. IDB Mobile's results of operations for the six month
period ended June 30, 1994 have been included in the accompanying consolidated
financial statements using the equity method of accounting. The Company is
currently evaluating its options with respect to its investment in IDB Mobile,
including the possible sale of its 50% equity interest, because the Company no
longer views IDB Mobile as part of its long-term strategy. As a result, the
Company has significantly reduced its involvement in the management of IDB
Mobile while, at the same time, its venture partner has substantially increased
its participation in the operations of the venture. Therefore, the Company
believes that it no longer exercises effective operating control over IDB Mobile
which previously provided the basis for the consolidation of IDB Mobile's
operating results.
Summary financial information for IDB Mobile is as follows:
OPERATING RESULTS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1993 1994 1993 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue....................... $11,556,000 $10,642,000 $21,007,000 $20,644,000
Net loss...................... $ 494,000 $ 3,171,000 $ 1,032,000 $ 4,767,000
</TABLE>
FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
-------------- --------------
<S> <C> <C>
Assets................................................................. $ 62,039,000 $ 63,330,000
Liabilities............................................................ $ 56,407,000 $ 62,464,000
</TABLE>
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Cash paid for:
Interest expense............................................... $4,849,000 $4,882,000
Income taxes................................................... $1,325,000 $1,588,000
</TABLE>
In January 1993, the Company issued 4,095,000 shares of Common Stock in
exchange for 100% of issued and outstanding common stock of Niles Canyon Earth
Station, Inc. and a binding agreement to acquire all of the capital stock of
TRT. (See Note 5.)
8
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- ACQUISITION
In 1993, the Company entered into an Exchange Agreement (the "Exchange
Agreement") with Pacific Telecom, Inc. ("PTI"), and two of its subsidiaries,
International Communications Holdings, Inc. ("ICHI") and PTI Harbor Bay, Inc.
("Harbor Bay"), to acquire all of the outstanding capital stock of TRT, a
subsidiary of ICHI, and Niles Canyon Earth Station, Inc. ("Niles Canyon"), a
subsidiary of Harbor Bay. Pursuant to the first phase of the Exchange Agreement,
effective January 22, 1993, the Company issued to ICHI and Harbor Bay a total of
4,095,000 shares of Common Stock and acquired all of the outstanding common
stock of Niles Canyon. On September 23, 1993, the Company completed the second
phase of the Exchange Agreement, and issued and paid to ICHI and Harbor Bay a
total of 10,080,000 shares of Common Stock and $1,000,000 in cash in exchange
for all of the outstanding stock of TRT.
As part of the Exchange Agreement, the Company agreed to assist in
operations of, and provide certain support services to, TRT and ICHI for
aggregate monthly fees of approximately $1,000,000 per month through the
completion of the second phase of the acquisition. The Company earned
approximately $5,000,000 in such fees in the six month period ended June 30,
1993.
The following unaudited pro forma results of continuing operations assume
TRT was acquired as of January 1, 1993 after giving effect to certain
adjustments including the elimination of intercompany revenues and expenses
among the Company and TRT and certain historical operating and selling, general
and administrative expenses representing duplicate costs to be eliminated upon
the integration of TRT.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1993 JUNE 30, 1993
---------------- ----------------
<S> <C> <C>
Revenue............................................................. $ 112,991,000 $ 223,690,000
Net income before preferred stock dividend.......................... 3,151,000 8,040,000
Net income available to common shareholders......................... 2,811,000 7,322,000
Primary earnings per share.......................................... $ 0.05 $ 0.12
Fully diluted earnings per share.................................... $ 0.05 $ 0.12
</TABLE>
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the transaction taken place
at January 1, 1993 or of future results of operations.
NOTE 6 -- SUBSEQUENT EVENT
On August 1, 1994, the Company and LDDS Communications, Inc. ("LDDS")
entered into a definitive agreement providing for the acquisition of the Company
by LDDS. The acquisition is structured as a merger of a newly-formed,
wholly-owned subsidiary of LDDS into the Company. The Company will be the
surviving entity upon consummation of the merger and will be a wholly-owned
subsidiary of LDDS. Under the terms of the agreement, the Company's stockholders
will receive in the merger a minimum of .450867 LDDS share for each Company
share if LDDS shares are valued at $22 or more, or a maximum of .520231 LDDS
share for each Company share if LDDS shares are valued at $16 or less. The
exchange ratio decreases by .001445 LDDS share for every $.125 increase in LDDS
share value between $16 and $22. The transaction will be a tax-free exchange
accounted for on a pooling-of-interests basis. Completion of the merger is
subject to, among other things, customary closing conditions, approval of the
stockholders of the Company and LDDS and certain regulatory approvals. No
assurances can be given that the merger will be completed or, if completed, will
be completed on the terms described herein.
9
<PAGE>
IDB COMMUNICATIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- SIGNIFICANT AND NON-RECURRING ITEMS
Results of operations for the three months ended June 30, 1994 include
certain charges and credits that the Company believes are significant or of a
non-recurring nature. The combined effect of these adjustments reduced pretax
income by approximately $18,350,000 as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------
(IN 000'S)
------------------------------------------------
EQUITY IN LOSS
COST OF OF
REVENUE SALES SG&A JOINT VENTURE
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Significant Items:
Additions to sales credit reserves and
allowance for doubtful accounts........... $ (6,000) $ -- $ 3,500 $ --
Non-recurring Items:
Acquisition related expenses............... -- -- 2,000 --
Broadcast facility reserves................ -- 2,300 -- --
Accounting and legal expenses.............. -- -- 1,500 --
Other...................................... -- -- 2,400 (650)
</TABLE>
NOTE 8 -- CONTINGENCIES
The Company and certain of its current and former directors and officers are
defendants in shareholder class action lawsuits. The class action complaints
allege, among other things, violations of federal securities laws for
disseminating allegedly false and misleading statements concerning the Company's
earnings and accounting practices. The class action complaints seek damages
suffered by the class, the cost of the suits including attorney fees, punitive
damages and injunctive relief.
Shareholder derivative actions have also been filed alleging that certain of
the Company's officers and directors breached their fiduciary duties to the
Company by trading on inside information, accepting bonuses based on false and
inflated Company financial results and exposing the Company to liability under
the securities laws. These actions seek restitution to the Company, injunctive
relief, costs and attorneys' fees.
The Securities and Exchange Commission has initiated an investigation
concerning certain matters, including the Company's financial position, books
and records and internal controls and trading in the Company's securities. The
Company is cooperating with the investigation.
The Company is unable at this time to predict the outcome of any of the
foregoing matters. However, if determined adversely to the Company, the impact
of such matters on the financial position and results of operations of the
Company could be material.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
table shows the percentage relationship to total revenues of certain items
included in the Statement of Operations. The Company principally derives
revenues from international public switched long distance telephone and
international private line services, radio and television transmission services
and mobile communications (in 1993) and systems integration services provided on
the Company's domestic and international communications network.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1993 1994 1993 1994
------ ------- ------ -------
<S> <C> <C> <C> <C>
Total revenues.......................................... 100.0% 100.0% 100.0% 100.0%
------ ------- ------ -------
Costs and expenses:
Cost of sales......................................... 67.6 89.8 67.3 81.7
Selling, general and administrative................... 10.9 18.7 11.0 16.8
Depreciation.......................................... 6.1 4.6 6.3 4.4
Amortization.......................................... 1.5 1.1 1.6 1.2
------ ------- ------ -------
Total cost and expenses................................. 86.1 114.2 86.2 104.1
------ ------- ------ -------
Operating income (loss)................................. 13.9 (14.2) 13.8 (4.1)
Interest, net........................................... 1.9 1.9 2.3 1.3
------ ------- ------ -------
Income (loss) before minority interest and income
taxes.................................................. 12.0 (16.1) 11.5 (5.4)
Equity in loss of joint venture......................... -- (1.2) -- (1.0)
Minority interest....................................... (0.1) -- (0.1) --
------ ------- ------ -------
Income (loss) before income taxes....................... 11.9 (17.3) 11.4 (6.4)
Income tax provision (benefit).......................... 4.8 (2.2) 4.6 --
------ ------- ------ -------
Income (loss) before preferred stock dividend........... 7.1 (15.1) 6.8 (6.4)
Preferred stock dividend................................ 0.5 -- 0.5 --
------ ------- ------ -------
Net income (loss) available to common shareholders...... 6.6% (15.1)% 6.3% (6.4)%
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
RESULTS OF OPERATIONS
Operating results for the second quarter of 1994 resulted in revenues of
$132,593,000 and a net loss of $19,987,000 versus revenues of $75,901,000 and
net income of $5,019,000 for the same period in 1993. For the six months ended
June 30, 1994, revenues and net loss were $247,080,000 and $15,837,000,
respectively, as compared to revenues of $144,392,000 and net income of
$9,084,000 for the same period in 1993. Operating results in the second quarter
of 1994 were significantly affected by certain non-recurring charges described
below. (See Note 7 to the Consolidated Financial Statements.) The Company
retroactively reclassified payments to foreign telephone companies to complete
calls made from the United States by the Company's customers. These payments,
which previously were classified as direct reductions of transmission services
revenue, are now classified as cost of sales. Operating income (loss), net
income (loss) available to common shareholders and the balance sheet are not
affected. This change was made to conform with industry reporting practices. All
applicable 1993 financial information presented in the consolidated financial
statements has been restated to conform to the 1994 presentation.
In the second quarter of 1994, the Company also deconsolidated its results
of operations with IDB Mobile, and has reflected those results of operations for
IDB Mobile for the six months ended June 30,
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<PAGE>
1994 under the equity method of accounting. For the same period in 1993, IDB
Mobile's results of operations are consolidated with Company's results of
operations. (See Note 3 to the Consolidated Financial Statements.)
REVENUES. Revenues comprised the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ----------------------------------
1993 1994 1993 1994
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
IDB WorldCom................................ $ 36,698,000 $ 102,166,000 $ 71,246,000 $ 193,858,000
IDB Broadcast............................... 20,856,000 21,182,000 39,022,000 40,058,000
IDB Mobile.................................. 9,490,000 -- 17,535,000 --
-------------- ---------------- ---------------- ----------------
Transmission services revenues............ 67,044,000 123,348,000 127,803,000 233,916,000
Systems integration......................... 2,925,000 5,187,000 7,073,000 8,660,000
Management fee.............................. 3,200,000 -- 5,000,000 --
Other....................................... 2,732,000 4,058,000 4,516,000 4,504,000
-------------- ---------------- ---------------- ----------------
Total revenues............................ $ 75,901,000 $ 132,593,000 $ 144,392,000 $ 247,080,000
-------------- ---------------- ---------------- ----------------
-------------- ---------------- ---------------- ----------------
</TABLE>
Revenues for IDB WorldCom, the Company's division which provides
international switched voice and private line services, grew by $65,468,000 and
$122,612,000 for the three and six month periods ended June 30, 1994,
respectively, as compared to same periods in 1993. The growth resulted
principally from the acquisition of TRT as of September 30, 1993 and the
Company's continued rapid growth in the international switched voice business,
which represents approximately 63% of IDB WorldCom transmission revenues for the
six months ended June 30, 1994. Since the TRT acquisition at September 30, 1993,
the Company has experienced average monthly growth of approximately 7% in
international telephone minutes.
The growth in international minutes has principally been fueled by the
Company's efforts, since its acquisition of TRT, to provide its international
telephone services to other long distance carriers who do not have the direct
operating agreements the Company has obtained. The Company currently derives
approximately 85% of its international telephone revenues from such carrier
customers, as compared to approximately 75% in late 1993. The remaining 15% are
derived from commercial accounts.
In the three months ended June 30, 1994, the Company recorded an increase of
approximately $6,000,000 in its sales credit reserve to reflect a revision in
the estimate of potential sales credits due to customers. This charge has been
deducted from IDB WorldCom revenues for the second quarter of 1994.
Broadcast revenues for the three months and six months ended June 30, 1994
did not vary significantly from the corresponding periods in 1993. IDB Mobile
revenues were consolidated in 1993 and are being reflected under the equity
method of accounting in 1994.
For the three months and six months ended June 30, 1993, the Company
recorded $3,200,000 and $5,000,000 respectively, for fees earned in connection
with agreements to provide management assistance to TRT prior to its acquisition
by the Company. No such fees were recorded in 1994.
COST OF SALES. Cost of sales as a percentage of revenues increased to 89.8%
and 81.7% for the three and six month periods ended June 30, 1994, respectively,
compared to 67.6% and 67.3% for the same periods in 1993. The increase is
principally due to the Company's changing revenue mix. International telephone
services which comprised approximately 50% of total revenues for the six months
ended June 30, 1994 compared to 15% of total revenues for the same period in
1993 carry a higher cost of sales than other transmission services provided by
the Company. Additionally, in the second quarter of 1994, average revenue per
minute for outbound traffic decreased as a result of an increase in carrier
revenue as a proportion of total international telephone revenue. Carrier rates
are approximately 20-25% lower than rates charged to commercial customers. Thus,
the changing mix has
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<PAGE>
resulted in a lower average revenue per minute trend. In addition, the Company
decreased rates to carrier customers resulting in continued market share gains
but lower margins because termination costs per minute remained relatively
stable during the first six months of 1994.
The Company has implemented a number of steps to improve margins. IDB
WorldCom has hired a number of additional commercial sales management personnel
to focus on obtaining new commercial accounts to increase margins. The Company
has also begun to revise its least cost routing network scheme for delivery of
off-net traffic to take advantage of lower rates offered by various carriers. In
addition, the Company is in the process of increasing its facilities to several
countries with whom it has operating agreements but where, because of the rapid
minute growth it has experienced, the Company is currently unable to deliver all
of its outbound traffic over existing facilities. As a result, the Company
currently must use other carriers at a higher cost to deliver this overflow
traffic. These steps, designed to reduce the termination costs per minute, are
expected to begin to take effect in the third and fourth quarter of 1994. In
addition, the Company recorded a $2,300,000 charge for unfavorable broadcast
transponder leases.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $24,729,000 and $41,659,000 for the three and six
month period ended June 30 , 1994, respectively, from $8,258,000 and $15,939,000
for the same periods in 1993 primarily as a result of the acquisition of TRT.
Additionally, in the second quarter of 1994, the Company incurred significant
one time expenses of approximately $2,000,000 due to the aborted acquisition of
Peoples Telephone, Inc., the LDDS transaction (see Notes 6 and 7 to the
Consolidated Financial Statements) and other transactions no longer in progress
as of June 30, 1994, and approximately $1,500,000 in accounting and legal
expenses incurred in connection with the resignation of its prior auditors in
May 1994 and ensuing litigation. The Company also recorded approximately
$3,500,000 of additional allowance for uncollectible accounts receivable.
DEPRECIATION. Depreciation expense increased $1,506,000 and $1,760,000 for
the three and six month periods ended June 30, 1994, respectively, from the same
periods in 1993 principally as a result of the acquisition of TRT.
AMORTIZATION. Amortization expense for the three and six month periods
ended June 30, 1994 increased by $335,000 and $651,000, respectively, from the
same periods in 1993 principally due to the acquisition of TRT.
INTEREST, NET. Interest, net for the three months ended June 30, 1994
increased by $1,062,000 principally due to additional interest expense recorded
in connection with liabilities assumed in connection with the acquisition of
TRT, partially offset by the Company's ability to invest excess cash in interest
earning investments. Interest, net for the six months ended June 30, 1994
decreased by $140,000 compared to the same period in 1993 principally as the
result of significantly higher excess cash balances which the Company invested
in interest bearing investments, offset by interest expense incurred in
connection with liabilities assumed in connection with the acquisition of TRT.
INFLATION
Since its inception, the Company's results of operations have not been
significantly affected by inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed growth through borrowings, cash generated from
operations and sales of shares of its Common Stock and 5% Convertible
Subordinated Notes due 2003 (the "Subordinated Notes").
The Subordinated Notes issued in August 1993 are convertible at any time
prior to maturity, unless previously redeemed, into Common Stock of the Company
at a conversion price of $18.15 per share, as adjusted to reflect the
3.15-to-one Common Stock split in the form of a 215% Common Stock
13
<PAGE>
dividend paid on February 1994 and subject to further adjustment in certain
events. The Subordinated Notes bear interest at a rate of 5% per annum and
interest is payable on February 15 and August 15 of each year. The Subordinated
Notes are redeemable at any time after August 15, 1996, in whole or in part, at
the option of the Company, at declining redemption prices plus accrued interest.
The Subordinated Notes are unsecured and subordinated to all existing and future
senior indebtedness of the Company and are effectively subordinated to all
indebtedness and other liabilities of subsidiaries of the Company. The
Subordinated Notes contain no limitation on the incurrence of additional
indebtedness by the Company and its subsidiaries.
In November 1993, Bank of America National Trust and Savings Association
agreed to make a $15,000,000 line of credit available to the Company (the "Line
of Credit"). Advances made pursuant to the Line of Credit bear interest at a
floating rate based, at the option of the Company, on a domestic index or an
offshore index. All advances and letters of credit made under the Line of Credit
mature on October 31, 1995 and the Line of Credit expires on such date. The
Company may at any time terminate the Line of Credit by payment of all
outstanding advances and other obligations under the Line of Credit and cash
collateralization of all letters of credit existing at that time. As of June 30,
1994, there were no amounts outstanding under the Line of Credit.
During the six month period ended June 30, 1994, the Company's capital
expenditures, including improvements, replacements and additions of
communications equipment and facilities, were approximately $25,100,000. The
Company historically has invested significantly to build its communications
network.
Net cash used by operating activities in the six months ended June 30, 1994
was $22,052,000 compared to net cash provided by operating activities of
$4,915,000 in the same period in 1993 principally due to increases in accounts
receivable as a result of the acquisition of TRT and the rapid growth of
international telephone long distance revenue. Cash provided by financing
activities in the six month period ended June 30, 1994 was $23,502,000 compared
to $30,716,000 in the same period in 1993, reflecting the issuance of common
shares in both periods. Net cash used in investing activities in the six month
period ended June 30, 1994 was $37,394,000 compared to $25,936,000 in the same
period in 1993. The increase related principally to an increase of $5,000,000 in
capital spending and $8,000,000 of costs deferred in connection with the
Company's accounting policy for international long distance revenues.
The Company's capital commitments, as of August 3, 1994, consisted primarily
of outstanding purchase orders (some of which are cancelable at the Company's
option) to acquire approximately $24,700,000 of equipment, including long term
commitments on undersea fiber optic cables of $11,850,000, which will be
financed by cash from operations and bank borrowings. It is anticipated that the
Company's 1994 expenditures will exceed that amount. The Company expects that
cash flow from operations, its current holdings of cash and marketable
securities and its borrowing capabilities under the Line of Credit will satisfy
its projected working capital and capital expenditure requirements through
fiscal 1994. Thereafter, the Company may seek additional debt or equity
financing from time to time to supplement cash generated from operations and
finance future growth opportunities.
The Company is a defendant in certain shareholder lawsuits. (See Note 8 to
the Consolidated Financial Statements.) If these matters are determined
adversely to the Company, the impact of these lawsuits and the costs associated
therewith could have a material adverse effect on the liquidity of the Company.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
IN RE IDB COMMUNICATIONS GROUP, INC. SECURITIES LITIGATION, Case No.
CV-94-3618-RG (C.D. Cal.)
Between June 1, 1994 and June 6, 1994, 22 shareholder class action lawsuits
were filed in the U.S. District Court for the Central District of California
against the Company and certain of its current and former directors and
officers. On June 7, 1994, a shareholder derivative lawsuit was filed against
certain officers and directors of the Company, including Messrs. Sudikoff and
Cheramy. The Company is a nominal defendant in this derivative lawsuit.
On July 17, 1994, the District Court ordered these class action and
derivative lawsuits consolidated. Under the court's order, the plaintiffs must
file a consolidated amended complaint no later than September 15, 1994, unless
otherwise agreed by the parties. A consolidated amended complaint has not yet
been filed. Defendants will have 60 days from the filing of the consolidated
amended complaint to respond.
The class action complaints allege violations of the federal securities laws
for disseminating allegedly false and misleading statements concerning the
Company's earnings and accounting practices. These claims are asserted under one
or more of the following provisions of the federal securities laws: Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11, 12(2)
and 15 of the Securities Act of 1933. In addition, one of the class action
complaints also alleges claims under the California Corporations Code, and the
derivative lawsuit pleads claims for breach of fiduciary duty and gross
negligence.
The class action complaints each seek damages suffered by the class and the
costs of the suit, including attorneys' fees. In addition, certain of the class
action complaints also seek punitive damages and injunctive relief. The
derivative action seeks recovery of all damages suffered by the Company, with
interest thereon, as well as the derivative plaintiff's costs and attorneys'
fees. The Company is also a party to indemnification agreements with certain of
the other defendants, including the Company's officers and directors, certain
selling shareholders and certain underwriters. The Company's officers and
directors are not covered by any applicable liability insurance.
STEELE V. SUDIKOFF, ET. AL., Civ. Action No. 13595 (Del. Chancery Court).
A second shareholder derivative action was filed in Delaware Chancery court
on or about July 1, 1994, alleging that certain of the Company's officers and
directors breached their fiduciary duties to the Company by trading on inside
information, accepting bonuses based on false and inflated Company financial
results and exposing the Company to liability under the securities laws.
Plaintiff seeks restitution to the Company, injunctive relief, costs and
attorneys' fees.
SEC INVESTIGATION
The Securities and Exchange Commission ("SEC") has initiated an
investigation concerning certain matters, including the Company's financial
position, books and records and internal controls and trading in the Company's
securities. The Company is cooperating with the SEC's investigation.
------------------------
The Company is unable at this time to predict the outcome of any of the
foregoing matters. However, if determined adversely to the Company, the impact
of such matters on the financial condition and results of operations of the
Company could be material.
ITEM 2. CHANGES IN SECURITIES.
This item is inapplicable.
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
This item is inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
This item is inapplicable.
ITEM 5. OTHER INFORMATION.
This item is inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)EXHIBITS
None.
(b) The Registrant filed the following Current Reports on Form 8-K in the
second quarter of 1994:
<TABLE>
<CAPTION>
FILE DATE EVENT DATE REPORTING ON:
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
April 22, 1994 April 20, 1994 Item 5 event
May 31, 1994 May 23, 1994 Item 4 event
June 14, 1994 May 23, 1994 Item 5 event
June 27, 1994 June 24, 1994 Item 4 event
</TABLE>
16
<PAGE>
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 thereunto duly authorized in the City of Culver City, State of
California, on November 21, 1994.
IDB COMMUNICATIONS GROUP, INC.
By: /s/ RUDY WANN
-----------------------------------
Rudy Wann
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
17
