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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File No. 0-21519
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of 06-1295986
incorporation or organization) (I.R.S. Employer Identification No.)
225 High Ridge Road,
Stamford, Connecticut 06905
(Address of principal executive offices) (Zip Code)
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(203) 329-3300 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to the Form 10-K. [X]
The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant as of February 26, 1997:
Common Stock, $.01 par value -- $90,710,240.63
The number of shares outstanding of the issuer's common stock as of
February 26, 1997:
Common Stock, $.01 par value -- 8,436,941 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders to be held April 8, 1997 are incorporated by reference into Part
III of this Report.
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Item 1--Business
ITDS is a leading provider of comprehensive transactional billing and
management information solutions to providers of wireless, long distance and
satellite telecommunications services. The Company uses its robust and
flexible proprietary software technology to develop billing solutions which
address customer requirements as they evolve, regardless of the market
segment, geographic area or mix of network features and billing options. The
Company provides its services to customers under exclusive contracts with
terms typically ranging from three to four years, and bills customers
monthly, typically on a per-subscriber basis. As a result, substantially all
of the Company's revenue is recurring in nature, and increases as a
provider's subscriber base grows.
In recent years, the telecommunications services industry has experienced
rapid growth and dramatic change, ranging from the introduction of such new
technologies as cellular, PCS and satellite communications, to new features
and services, in a wide variety of combinations and at a great diversity of
prices. The Company's systems are designed to respond to the dynamic
requirements of this market for cost-effective transactional billing
solutions by drawing on the Company's core technology, which does not require
significant reconfiguration or customization to be applied across market
segments, geographic areas and customer types. The Company's software
currently supports both of the two predominant cellular telecommunications
protocols, Advanced Mobil Phone Systems ("AMPS"), an analog service
predominant in the U.S., and the Global System for Mobile Communication
("GSM"), an international digital service, as well as other emerging digital
standards.
The Company's advanced billing and management information system, ITDS
10X, forms the foundation for its integrated suite of applications that
provide not only subscriber billing and service support, but also the means
to automate subscriber activation, remittance processing, collections, data
retrieval and reporting, electronic funds transfer, credit management,
inventory management and data archiving. Its modular system architecture
permits providers to draw on those features and functions most appropriate to
their specific requirements in a fully-integrated software solution. The
Company's software and services allow its customers to address the demands of
a rapidly evolving marketplace by enabling them to develop and support
innovative rate and feature offerings without the delay and cost associated
with reconfiguring their billing and information systems; to identify and
respond to subscriber demands through analysis of billing and subscriber
databases; to reduce costs with accurate and timely receivables information;
and to manage the subscriber relationship in a comprehensive and cost-
effective manner.
Industry Background
General
The U.S. telecommunications industry currently generates approximately
$208 billion in annual revenue and has experienced rapid change and greatly
increased competition in recent years. Deregulation and rapid technological
advances are resulting in convergence of previously separate segments of the
telecommunications market. Markets that were once rigidly segmented by
service within geographical areas are converging into a single, world-wide
communications market, which includes both traditional service providers and
a variety of new participants. Each segment of these converging markets is
experiencing significant growth, increased complexity in service offerings
and greater competition.
Rapidly evolving technical changes have dramatically increased the
features and services available to subscribers. These changes have ranged
from the evolution of entirely new communications media, such as satellite
transmission, to innovative services, such as PCS, to a rapidly evolving and
growing range of services and features. For example, many cellular providers
are now offering such innovative features as group ringing, which initiates a
call on all of an individual's lines (whether business, personal or mobile)
and connects the call as soon as one line is answered, and cell site
sensitive billing, which, for example, enables carriers to apply local
wireline rates for calls to or from a cellular telephone within the vicinity
of the subscriber's home or business and apply cellular rates elsewhere.
Improved switching technology is permitting local exchange telecommunications
services providers to offer a variety of new features and services to their
subscribers such as call delivery beyond the subscriber's home area, call
waiting, voice mail and others.
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Internationally, privatization and deregulation are resulting in similar
increases in competition, the emergence of newly authorized
telecommunications providers, and the provision of additional features over a
variety of media.
Wireless Communications
The Cellular Telecommunications Industry Association ("CTIA") estimates
that the number of cellular subscribers in the United States increased from
500,000 in June 1986 to 38.2 million in June 1996. In the twelve months ended
June 1996, cellular providers generated more than $21 billion in revenue in
the United States, while in 1995, paging providers generated approximately $4
billion in revenue from approximately 34 million subscribers. In addition to
growth in the cellular telephone market, the emergence of new wireless
communications technologies and services, such as PCS and satellite-based
telephony, is expected to increase the quality and capabilities of wireless
communications, including, to varying degrees, seamless roaming, increased
service coverage, improved signal quality and greater data transmission
capacity.
Other Segments
Other segments of the telecommunications services industry are
experiencing similar change and convergence. Wireline providers, including
providers of local, long-distance, network access and related services,
provide services to approximately 155 million customers in the U.S.,
generating more than $163 billion in 1995. Deregulation has spurred the
creation of new entrants in both the local and long distance market and has
increased competitive pricing pressures among all providers. Regional Bell
Operating Companies (RBOCs) and long-distance providers compete with
providers of wireless services through the purchase of cellular companies and
PCS licenses, while wireline providers are pursuing opportunities in the
cable market. At the same time, utility companies are leveraging their
existing electrical and fiber optic infrastructures to provide
telecommunications services to their customers. In addition, on-line service
providers, including companies such as Prodigy, America Online and
CompuServe, have generated a large and rapidly growing market for the
provision of a range of services including electronic mail, news, and other
information, as well as home shopping and access to the Internet.
Traditional Transactional Billing
Transactional billing is the process of matching specific calling events
with a subscriber database. Historically, this was primarily a billing
process, used in order to generate invoices for wireless, long- distance and
local service by individual and business users. In light of the competitive
and price pressures faced by service providers, and the proliferation of
service features and pricing options within the telecommunications services
industry, the billing function is continuing to evolve from primarily a
service support function to a marketing and revenue enhancement device used
to differentiate the increasingly fungible services offered by providers.
Transactional billing is becoming an increasingly significant interface with
the subscriber, and is therefore a critical element of attracting,
communicating with, and retaining customers.
Many telecommunications services providers in the U.S. have traditionally
used transactional billing systems developed internally or through
cooperative joint ventures for operation on a provider's mainframe computer.
These "legacy" systems typically are difficult to maintain and modify, and
often do not meet the multiple and evolving needs of a service provider. In
legacy systems, introduction of changes in parameters such as price and
service often requires significant reconfiguration or reprogramming. These
traditional means of billing and monitoring service have proven inadequate to
respond to the evolving and dynamic requirements of the telecommunications
services marketplace. The enormous growth in the number of subscribers, and
the proliferation and range of services offered, require highly capable,
flexible and scalable support systems, which can adequately support the size
and nature of customer offerings on a cost effective basis.
Other service providers have elected to out-source billing and management
information-related functions because of the significant level of
technological expertise and capital resources required to implement systems
successfully. In addition, many emerging telecommunications services
providers lack any transactional billing infrastructure at all. One of the
primary challenges that these newer service
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providers face is to bring new services to market quickly. They typically
focus their capital resources on developing networking and switching
technology and on creating marketable services rather than on creating
billing systems. These providers typically seek to outsource the billing
functions because efficient flexible billing solutions are often too costly
and time consuming to develop internally.
The ITDS Solution
The Company's solution is based upon an integrated software system that
not only provides reliable and accurate transactional billing and management
information support, but also includes the means to automate subscriber
activation, remittance processing, collections, data retrieval and reporting,
electronic funds transfer, credit management, automation of inventory
management, and data archiving on a fully-integrated basis, running in either
single or multiple telecommunications services markets, including cellular,
paging, long distance and satellite. In comparison with traditional
solutions, the Company's software and services:
(bullet) permit providers to develop, validate, implement and support rate
changes without the corresponding requirement to develop or
change support systems, reducing the time to introduce new
marketing or sales strategies;
(bullet) permit providers to introduce new features or combinations of
features, either directly or with others, on a timely basis;
(bullet) assure that providers have immediate access to multiple databases
on a fully-integrated basis, to improve marketing and sales
planning;
(bullet) deliver accurate, timely and useful billing information to
customers, regardless of mix or change in level of service and
rates, to facilitate customer attraction and retention; and
(bullet) improve providers' cash flows and reduce bad debt by detecting
fraud and delivering accurate and timely receivable and
collection information across systems and service offerings.
The ITDS Strategy
The Company's goal is to become a leading provider of integrated
transactional billing and management information products and services to the
converging telecommunications services industry in the United States and
internationally. Key elements of its strategy include:
(bullet) Expand Sales to Wireless Services Providers. To date, the Company
has built a significant customer base among smaller and mid-sized
wireless providers. The Company intends to build upon this base
by adding additional wireless services providers, including
providers of PCS and satellite services, as well as larger
telecommunications services providers.
(bullet) Leverage Technology Features to Address Requirements of Related
Market Segments. The Company believes it is well positioned to
leverage its technology base by offering transactional billing
and management information solutions to providers in such other
telecommunications services market segments as wireline and data
transmission, Internet and other enhanced services. Expansion
into these additional sources of potential revenue will not
require commensurate investment in software development because
the Company's existing core technology already meets the more
challenging and demanding requirements of the wireless segment of
the market.
(bullet) Expand International Operations. In February 1997, the Company,
through its subsidiary ITDS LTDA, a Brazilian limitada, agreed to
provide billing services to MCOMCAST, S.A., a Brazilian limitada
owned by COMCAST International Holdings, Inc. and MCOM Wireless,
S.A. ITDS LTDA will establish a service bureau operation in Sao
Paulo, Brazil from which it will provide billing services and
support. The Company intends to pursue additional international
opportunities by leveraging relationships with domestic customers
that may be expanding overseas, by seeking strategic
international partners, and by selling directly abroad.
(bullet) Leverage Employee Experience. The Company intends to leverage its
employees' expertise in providing support and services to its
customers to retain its existing customers and expand its
customer base.
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(bullet) Expand Direct Sales and Develop Strategic Relationships. The
Company has recently begun to expand its sales force and is
seeking to create additional strategic distribution and marketing
alliances and to enter new markets, through relationships with
hardware vendors and equipment providers.
Recent Developments
Since the Company's initial public offering in October 1996, the Company
has relocated and consolidated its corporate headquarters; introduced the
next release of the ITDS 10X system; hired additional employees, increasing
its sales and marketing team and adding a key member of management; increased
sales and marketing efforts to larger service providers; and expanded its
subscriber base. In November 1996, the Company relocated its corporate
headquarters and consolidated each of its Connecticut offices into 48,222
square feet of office space in Stamford, Connecticut. The new facility's
state-of-the-art data center has enhanced the Company's technical development
and support and training capabilities, enabling the Company to provide more
complex services and meet the needs of a larger customer base. Beginning in
October 1996, the Company has provided its new customers with, and converted
certain of its existing customers to, its new version 4.0 of the ITDS 10X
system. Version 4.0 includes more flexible, table-driven rating capabilities
and other improved functionality. Between the Company's initial public
offering and February 15, 1997, the number of Company employees has increased
from 175 to 188. In November 1996, Joseph Juliano joined the Company as
Executive Vice President of Strategic Product Management. Mr. Juliano, who
has over 13 years of experience in the wireless transactional billing
industry, is responsible for the direction and development of products and
services, assisting the Company's sales and marketing efforts and providing
the Company's customers with expert advice in the rapidly changing wireless
industries. Since the initial public offering, the Company has entered the
PCS market and added several customers, including Cellular Properties, Inc.,
PCS One, Inc. and MCOMCAST, S.A. and has renewed its existing contracts with
Dobson Cellular Systems and Columbia River Cellular L.P.
Products and Services
Core System
The Company provides its customers with integrated transactional billing
and management information solutions through the installation of its software
systems and the provision of billing services. The Company's software is
installed at a customer site to interface directly with the customer's
systems and generate relevant subscriber billing and other data, as well as
to support a wide range of transactional billing and subscriber management
functions. The Company processes the billing information through the use of
its software, eliminating the need for customers to maintain their own
"back-office" data processing operation. Customers contract for the use of
the Company's software and the provision of the Company's services on a
long-term exclusive basis, generally between three and four years, and are
billed monthly on a per-subscriber basis.
The Company's suite of ITDS integrated applications allows customers the
flexibility of rapidly changing their billing services to implement, for
example, immediate rate plan changes for access, toll usage or toll discounts
without the need for programming. Drawing on its client/server architecture, the
system can be integrated with a customer's other communication and data systems
to provide customers with the ability to generate up-to-date subscriber analysis
and reports. The ITDS 10X system does not require any customer dedicated
circuits, and customers can maintain the system along with rate tables and
subscriber databases on their local network, while utilizing the system to
interface with external databases and systems as appropriate. To further assure
its operational flexibility and usefulness, the system supports key industry
standards such as the CIBER standard for the wireless clearinghouse for AMPS,
CDMA and TDMA wireless systems in the U.S. and the TAP standard for
international clearinghouse for GSM cellular systems. The Company also
interfaces with major U.S. credit bureaus, the Federal Reserve system and
various U.S. banks for electronic funds transfer and credit card transactions.
The ITDS 10X system includes a complete library of billing and financial reports
for production as part of the month-end billing process. These reports provide
customers with critical transactional billing data and can be modified or
configured by customers to respond most appropriately to their specific
information requirements.
The ITDS 10X system performs each of the following transactional billing,
subscriber management and information functions, while updating the relevant
customer database on a real-time basis:
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On-Line Subscriber Care and Management Support--Provides end-to-end
support for all subscriber interface requirements:
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Subscriber Order Entry Credit Bureau Interface
Integrated Point of Sale Transactional Credit Card Billing
Phone Number Assignment Rate & Feature Assignment
Switch Provisioning Interface Equipment Inventory Assignment & Tracking
Lead Generation & Tracking Multiple Account Receivable Options
Automatic Clearinghouse for Bank
Draft Payments Automatic Call Credit Adjustments
Multi-tiered Security Systems On-Line What-if Plan Selection
Automatic Notes and Reminders Multiple Search Keys at Account or Phone Level
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Message Processing and Rating--Includes the collection of raw call detail
records from the customer's switch network, and the editing, formatting,
rating and guiding of all traffic events necessary to produce subscriber
invoices, traffic reports and other call related information:
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Data Collection from all Switch Types Polling or Receipt of Near Real Time Records
Roamer In/Out Collect Processing Up to 999 Rate Plans per Market
Error Management & Reporting Rating, Re-rating and "Pseudo Roaming" Support
Discounts by Amount or Percentage Variable Time Periods for Air and/or Toll
Selective or Global Exceptions Unlimited Toll Plans On-line
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Billing & Invoicing--Application of rated messages to invoices, summary
files and reports:
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Multiple Bill Cycles by Market FIFO Overdue Payment Application
Balance Forward Billing Invoice Format Options
Multiple Level Invoices Global, Group or Individual Messages
Full Lockbox Support Federal Reserve Bank Interface
Currency Conversion Language Options
International Addressing Print Fulfillment Options
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Although customers can perform their own on-site cycle-end rating and bill
processing by licensing the Company's batch billing software, most customers
elect to contract with the Company to perform those functions for them at the
Company's data center. Customers transmit call detail records from their
switching network or network provider directly to the Company's data center.
In addition, the Company can extract necessary data from the customer's file
server. The Company formats, guides, rates, and taxes the call records in
accordance with the appropriate subscriber parameters and produces print
image data output and various reports. The Company's bill verification
personnel provide an additional level of assurance that subscriber invoices
and management reports are accurate and timely. The Company then arranges
with third-party vendors for the printing and distribution of subscriber
invoices on a monthly basis.
In addition to the foregoing general features, the ITDS system
incorporates a modular system architecture which can support a number of
complementary applications to meet a customer's specific requirements,
including:
(bullet) ITDS SwitchLink: ITDS SwitchLink is a direct multi-switch
interface between ITDS 10X and all types of telecommunication
switches, including cellular, wireline, paging and voice mail
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platforms. SwitchLink manages line and feature activation or
deactivation in connection with ITDS 10X service order activity.
(bullet) ITDS CreditLink: ITDS CreditLink interfaces with several
U.S.-based credit bureaus to provide on- line credit analysis of
potential subscribers.
(bullet) ITDS Collections Module: The ITDS Collections module provides
support for dedicated collections personnel.
(bullet) ITDS PayScan: ITDS PayScan is an automated lockbox remittance
processing system that uses an easily installed scanning device
to create edited, balanced batches that may be transferred to
ITDS 10X payment files.
(bullet) ITDS InventoryScan: ITDS InventoryScan is a complete inventory
management system which allows easy bar code scanning and on-line
inventory record maintenance from the physical receipt of
equipment to entry into the ITDS inventory subsystem.
(bullet) ITDS Report Writer: The ITDS Report Writer allows real-time data
from different sources within the system to be used to create
customized ad hoc subscriber reports.
New Products and Enhancements
The Company continues to refine its existing software and to introduce new
enhancements to meet evolving customer requirements. Enhancements currently
under development include incorporation into the ITDS 10X system of a Windows
95-compatible user interface and an Oracle relational database management
system; debit/threshold billing; and provision for the ITDS 10X system to
operate with UNIX- based file servers, in order to address the needs of
larger customers on a scalable and interoperable basis.
Point of Sale System
In addition to the ITDS 10X system and related products, the Company
offers a point of sale package (the "ITDS Point of Sale System"), a highly
capable sales tool designed to incorporate the entire sales process into a
quick and convenient on-line function. The system can be used in-store or as
a mobile unit, so that customers can market wireless products and services
outside of traditional store settings. The system enables sales clerks to
quickly process initial service applications, on-line credit checks,
inventory updates, assignment of telephone numbers, rate plan selection,
invoicing and payments. Upon credit verification, the system immediately
creates an entry in the customer's subscriber database and can activate
telephone service at the switch. In addition, because complete access to the
entire ITDS 10X database is available, walk up inquiries and account payments
from existing subscribers can be handled immediately.
The ITDS Point of Sale System is made available to users as a complete
package. An intelligent workstation, color monitor, hand held inventory
scanner, and full size cash drawer are installed as an integrated part of the
ITDS 10X database. All information, including categorized sales figures and
updated inventory stock levels, entered into the ITDS Point of Sale System is
available for immediate reporting and analysis.
Customer Support
The Company provides support from the time a customer converts to the
Company's software and continuing through the on-going provision of
transactional billing services. The Company assigns to each new customer a
dedicated conversion team that specializes in facilitating the transition
onto the ITDS 10X system by applying an implementation methodology which
includes study of the customer's needs, definition of relevant conversion
requirements, and on-site installation and training. This is followed up by
systematic analysis of the implementation process, live conversion and
follow-up training as required to meet the customer's requirements.
Thereafter, the Company assigns a support team including a customer
service representative and a programmer/analyst for on-going support of the
customer's requirements, including implementation
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of additional functionality if requested by the customer. In addition, the
Company provides a fully-staffed customer service department and 24-hour, 7
day a week access to customer service representatives.
The Company's service and support activities are supplemented by the
provision of on-going training classes to customers, free of charge, to
assist customers in utilizing the system capabilities more effectively.
Typically, the Company schedules two to three such classes a month addressing
different aspects of the transactional billing and management information
service process.
In January 1997, the Company's customer service and support department
consisted of 33 persons, with an additional 13 dedicated quality assurance
employees.
Sales and Marketing
The Company's strategy has been to establish and maintain long-term
customer relationships. As customers' subscriber bases grow and as customers
add systems features to their existing ITDS 10X systems, the Company
generates increased revenue. The Company's customer support programs enable
it to understand customer needs and offer strategic solutions from its suite
of integrated products and features. In addition, the flexible and scalable
architecture of the ITDS 10X core technology enables the Company to maintain
customer relationships as customers enter into additional telecommunications
markets.
The Company's customers include Aliant Communications Co., COMSAT Mobile
Communications, Dobson Cellular Systems, France Caraibes Mobiles (formerly,
France Telecom FCR), HighwayMaster Corporation, MCOMCAST, S.A., Point
Communications Company, Sygnet Communications and TRICOM, SA. For the year
ended December 31, 1996, revenue from Aliant Communications Co. (formerly,
The Lincoln Telephone and Telegraph Company) and its affiliated companies
represented approximately 19.1% (reflects the acquisition of Nebraska
Cellular by Aliant in 1996) of the Company's total revenue, and revenue from
Horizon Cellular Group represented approximately 12.5% of the Company's total
revenue. The Company has long-term contracts with all of its significant
customers, however, there can be no assurance that any such customer will
renew its contract with the Company at the end of the contract term or may
not seek to terminate its contract on the basis of alleged contractual
defaults or other grounds. Loss of all or a significant part of the business
of any of the Company's substantial customers would have a material adverse
effect on the Company's business, financial condition and results of
operations. Since October 1996, Horizon Cellular Group has divested certain
of its remaining cellular markets, the majority of which were acquired by
existing customers of the Company. Because the majority of these markets were
acquired by the Company's existing customers, the Company does not expect
that the significant reduction in revenue from Horizon Cellular Group
expected in 1997 will have a material adverse effect on the business,
financial condition or results of operations of the Company.
Although historically, the Company has achieved substantial growth with a
core marketing team of senior executives, the Company has recently begun to
expand its sales and marketing group as part of its overall strategy to add
additional wireless providers as customers and to expand the sales of its
systems in other segments of the telecommunications markets. The Company has
begun to develop strategic alliances with hardware and telecommunication
equipment product vendors, in order to expand into new markets. For example,
the Company works with Hewlett-Packard to develop software systems compatible
with Hewlett-Packard hardware. The Company also serves as a reseller of
Hewlett-Packard equipment configured for the Company's software system. In
addition, the Company has begun to seek strategic international partners that
will enable the Company to gain access to distribution systems and
complementary product offerings and to facilitate the Company's international
growth. The Company intends to continue to focus on the development of such
alliances as international deregulation and technological changes increase
demand for viable, flexible and interoperable transactional billing and
management information systems. The Company's marketing efforts also include
providing marketing newsletters to its customers, advertising and
participating in industry trade shows, seminar lectures, and industry
standards meetings.
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System Development
The Company's research and development efforts are focused on enhancing
existing products and services as well as developing products, features and
services that can be integrated into the Company's core ITDS 10X technology.
The Company's product development team reviews product and service
development proposals and establishes internal guidelines for efficient
development. The Company's research and development team also works closely
with customers to perform customization of products to meet specific needs.
In addition to internal development, the Company works with its strategic
partners Hewlett-Packard and Oracle to develop products compatible with their
product offerings. Currently, the Company has a number of new enhancements
under development to meet evolving customer requirements, including
incorporation into the ITDS 10X system of a Windows 95 compatible user
interface and an Oracle relational database management system;
debit/threshold billing; and provision for the ITDS 10X system to operate
with Unix based file servers.
The Company actively participates in industry standards associations to
assure that its development efforts are in compliance with standards as they
evolve and to assure that the Company's software can be used on a fully open
and interoperable basis. For example, the Company works closely with a
variety of standards committees and working groups of CIBERNET, the standards
body of the Cellular Telephone Industry Association ("CTIA"). The Company
participates in the CIBERNET Advisory Committee, which evaluates proposed
changes to standards for wireless industry data exchange; the CIBERNET Net
Settlement Working Group, which evaluates proposed changes to the subscriber
net settlement process; and the CIBERNET Data Message Handler Working Group,
which focuses on billing aspects of the TIA IS-124 standard. In addition, the
Company participates in CTIA's International Forum for AMPS Standard, and the
Bellcore Ordering and Billing Forum.
In the years ended December 31, 1994, 1995 and 1996, the Company incurred
cash expenditures of $1,043,989, $1,662,457 and $2,974,132 respectively, on
systems development, of which $288,602, $479,316 and $858,827, respectively,
were capitalized as software development costs in each of such years. In
January 1997, the Company employed 86 people in product and systems
programming and development.
Competition
The market for billing and management information systems for the
telecommunications service industry is highly competitive and the Company
expects that the high level of growth within the telecommunications service
industry will encourage new entrants, both domestically and internationally,
in the future. The Company competes with both independent providers of
transactional systems and services and with internal billing departments of
telecommunications services providers. The Company believes its most
significant competitors in the wireless telecommunications segment are Alltel
Information Systems, Inc., Cincinnati Bell Information Systems, Inc.
("CBIS"), Computer Sciences Corp. and Electronic Data Systems, Inc. In the
future, the Company may compete in both the wireless and wireline markets
with additional companies who currently compete in market segments other than
wireless. In addition, the Company competes with several international
providers of billing and management information systems and, as the Company
continues to expand into international markets, it will compete with
additional providers abroad.
The Company believes that principal competitive factors include the
ability to provide timely products, features and services that are responsive
to evolving customer needs in an industry characterized by rapidly changing
technologies and ongoing deregulation. The Company must provide statement
accuracy, meet billing cycle deadlines, offer competitive pricing and
maintain high product and service quality. The Company believes that its
fully integrated architecture enables it to compete favorably in the
telecommunications services industry by offering its customers a high degree
of flexibility to quickly modify their billing and management systems as
their needs and the needs of their subscribers change.
In addition, the Company believes that its ability to compete successfully
will depend in part on a number of factors outside its control, including the
development by others of software that is competitive with the Company's
products and services, the price at which others offer comparable products
and
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services, the extent of competitors' responsiveness to customer needs and the
ability of the Company's competitors to hire, retain and motivate key
personnel. Many of the Company's current and potential future competitors
have significantly greater financial, technical and marketing resources,
generate higher revenue and have greater name recognition than does the
Company. In addition, many of the Company's competitors have established
commercial relationships or joint ventures with major cellular and other
telecommunications services providers.
Proprietary Rights and Licenses
The Company relies in part on trademark, copyright and trade secret laws
to protect its proprietary rights. The Company distributes its products under
service and software license agreements which typically grant customers
non-exclusive licenses, subject to terms and conditions prohibiting
unauthorized reproduction, transfer or use. The Company believes that because
of the rapid pace of technological change in the telecommunications and
software industries, the technological expertise of its personnel, the
complexity of its system architecture and the frequency and timeliness of
product and service offerings are more significant than the legal protections
of its products. In addition, the Company enters into non-disclosure
agreements with each employee and consultant and each third-party to whom the
Company provides proprietary information. Access to the Company's core source
code is greatly restricted.
The Company licenses from third parties technology that is important to
certain functionalities of its products. The Company is not aware of any
patent infringement or any violation of other proprietary rights claimed by
any third party relating to the Company or the Company's products.
Employees
In February 1997, the Company had a total of 188 employees, of whom 33
were engaged in customer service, 86 were engaged in systems programming and
development, 13 in quality assurance, 29 in new customer conversions, 5 in
sales and marketing and 22 in administration and training. None of the
Company's employees are represented by labor unions. The Company believes
that its employee relations are good.
Item 2--Properties
The Company subleases a 48,222 square foot facility in Stamford,
Connecticut for its corporate headquarters, systems and programming, client
service, operations, quality assurance, documentation and training, and
administration. The Company maintains satellite offices in College Station,
Texas, Champaign, Illinois, and Orlando, Florida for individuals engaged in
product management and sales.
Item 3--Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4--Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of all
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
------------------ ---------------------------------------------------------------------
<S> <C> <C>
Charles L. Bakes 66 President, Chief Executive Officer and Director
Mark D. Spitzer 47 Executive Vice President, Chief Financial Officer, Treasurer and
Director
Lewis D. Bakes 39 Executive Vice President, Chief Operating Officer, Secretary and
Director
Barry K. Lewis 41 Senior Vice President of Customer Services
Joseph A. Juliano 47 Executive Vice President of Strategic Product Management
</TABLE>
Charles L. Bakes co-founded the Company in 1990 and has served as the
Company's President and a director since that time. In 1983, Mr. C. Bakes
co-founded the Clinton Financial Group, Inc., a broker/dealer specializing in
the marketing of private placement equity investments, where he served as a
Vice President until 1990.
9
<PAGE>
Mark D. Spitzer co-founded the Company in 1990 and has served as Executive
Vice President, Chief Financial Officer and a director since that time. In
1983, Mr. Spitzer co-founded the Clinton Financial Group, Inc. along with Mr.
C. Bakes and served as its President until joining the Company. From 1983 to
1990, Mr. Spitzer also served as a principal of The Clinton Companies, an
investor and developer of commercial and residential properties.
Lewis D. Bakes co-founded the Company in 1990 and has served as Executive
Vice President, Chief Operating Officer and a director since that time. Mr.
L. Bakes served as an attorney at the law firm of Kleban & Samor P.C. from
1984 until 1987, and served as General Counsel to The Clinton Companies from
1987 to 1990.
Barry K. Lewis joined the Company in 1994, serving initially as the
Company's Vice President of the Wireless Division and later as the Senior
Vice President of Customer Services. From 1983 until he joined the Company,
Mr. Lewis worked for Auxton Computer Enterprise and CBIS, wireless software
billing vendors, ultimately serving as CBIS' Director of the Wireless
Division.
Joseph A. Juliano joined the Company in November 1996 and has served as
Executive Vice President of Strategic Product Management since that time. Mr.
Juliano has been involved with the wireless industry since 1983. He served as
Industry Consultant-Wireless Strategies at GTE TSI, a service provider for
wireless carriers, from December 1995 to October 1996 and as Director
Industry Matters for SNET Cellular from 1983 until 1995. In recent years, Mr.
Juliano has been a participant in a number of industry advisory boards,
including the CIBERNET Advisory Committee, CIBERNET DMH Working Group, CTIA
Roamer Committee, CTIA Fraud Task Force (including as Chairperson of the
Fraud Technology Working Group), and CTIA Authentication Working Group. In
addition, Mr. Juliano is a Certified Management Accountant.
Charles L. Bakes is the father of Lewis D. Bakes.
PART II
Item 5--Market for Registrant's Common Stock and Related Stockholder Matters
Price Range of Common Stock
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "ITDS" since the Initial Public Offering on October 24, 1996.
The following table sets forth the high and low sale prices of the Common
Stock on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1996:
Fourth Quarter (from October 24, 1996) $24-1/2 $15
Fiscal Year Ending December 31, 1997:
First Quarter (through February 26, 1997) $24 $20-1/2
</TABLE>
On February 26, 1997, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $22.875 per share. As of February
26, 1997, there were approximately 94 holders of record of the Common Stock.
Dividend Policy
In 1995 and 1996, the Company paid cash dividends to the holders of Class
A Preferred Stock in the aggregate amounts of $33,750 and $36,000,
respectively, and in 1994, it paid cash dividends of $46,080 to the holders
of Class C Convertible Preferred Stock. The Company currently intends to
retain earnings, if any, to support the development of its business and does
not anticipate paying cash dividends for the foreseeable future. Payment of
future dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
10
<PAGE>
earnings, financial condition, operating results and current and anticipated
cash needs as well as such economic conditions as the Board of Directors may
deem relevant.
Recent Sales of Unregistered Securities
Set forth in chronological order below is information regarding the number
of shares of Common Stock and Preferred Stock issued by the Registrant since
January 1, 1994. Also included is the consideration, if any, received by the
Registrant for such shares, and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration
was claimed. No sale of securities involved the use of an underwriter and no
commissions were paid in connection with the sales of any securities. The
following descriptions give effect to the Recapitalization.
On September 27, 1996 as part of the Company's recapitalization, (i) all
of the Company's Series A Preferred Stock was converted into an aggregate of
524,808 shares of Common Sock and promissory notes in the aggregate amount of
$450,000 and (ii) all of the Company's Series B Preferred Stock was converted
into an aggregate of 328,004 shares of Common Stock and promissory notes in
the aggregate amount of $375,000.
Upon the consummation of the Company's initial public offering of Common
Stock in October 1996, 129 shares of Class C Convertible Preferred Stock held
by Connecticut Innovations Incorporated converted into an aggregate of
103,200 shares of Common Stock.
On January 1, 1997, the Company loaned to Mr. Juliano, an executive
officer of the Company, a promissory note in the principal amount of $54,000
due and payable on November 2, 1998, at an interest rate of 8.5%, secured by
a pledge of 24,000 shares of Common Stock held by Mr. Juliano.
The shares of capital stock and securities issued in the above
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act or Regulation D or Rule
701 promulgated under the Securities Act, relative to sales by an issuer not
involving a public offering.
11
<PAGE>
Item 6--Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial information with respect to the Company's
statements of operations for the years ended December 31, 1993, 1994, 1995
and 1996 and with respect to the Company's balance sheets as of December 31,
1993, 1994, 1995 and 1996 have been derived from the Company's Financial
Statements, which have been audited by Ernst & Young LLP, independent
auditors, and, except for the statements of operations for the year ended
December 31, 1993 and the balance sheets as of December 31, 1993 and 1994,
appear elsewhere in this Prospectus. The selected financial information with
respect to the Company's statements of operations for the year ended December
31, 1992 and with respect to the Company's balance sheet as of December 31,
1992 has been derived from the Company's unaudited financial statements. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue $1,646 $3,146 $6,324 $10,821 $16,689
Costs and expenses:
Operating expenses 568 834 1,647 2,788 4,283
General, administrative and selling expenses 1,218 1,575 2,410 4,601 6,523
Depreciation and amortization 114 242 406 641 1,054
Systems development and programming costs 6 298 755 1,183 2,115
-------- -------- -------- --------- ----------
Total cost and expenses 1,906 2,949 5,218 9,213 13,975
-------- -------- -------- --------- ----------
Operating income (loss) (260) 197 1,106 1,608 2,714
Other income 5 50 29 49 316
Interest expense (210) (329) (390) (453) (416)
-------- -------- -------- --------- ----------
Income (loss) before income tax expense and
extraordinary item (465) (82) 745 1,204 2,614
Income tax expense -- -- 37 378 1,112
-------- -------- -------- --------- ----------
Income (loss) before extraordinary item (465) (82) 708 826 1,502
Extraordinary loss (net of $158 tax benefit) -- -- -- (224) --
-------- -------- -------- --------- ----------
Net income (loss) $ (465) $ (82) $ 708 $ 602 $ 1,502
======== ======== ======== ========= ==========
Per common share data (1):
Pro forma income before extraordinary item $ .13 $ .23
Extraordinary loss (.03) --
--------- ----------
Pro forma net income $ .10 $ .23
========= ==========
Shares used in computing pro forma income per
common share 6,194 6,593
========= ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalent and
short-term investments $ 308 $ 457 $ 512 $1,468 $ 4,487
Securities available for sale at
estimated market value -- -- -- -- 25,023
Working capital 243 164 157 1,210 31,639
Current assets 671 971 1,457 3,117 33,942
Current liabilities 429 807 1,300 1,907 2,303
Total assets 1,193 1,917 2,651 5,434 38,398
Total long-term debt and
capital lease obligations 1,055 1,501 1,353 2,437 878
Redeemable Preferred Stock--Class C -- -- -- 640 --
Total stockholders' equity (deficit) (310) (503) (186) 379 34,717
</TABLE>
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
13
<PAGE>
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading provider of comprehensive transactional billing
and management information solutions to providers of wireless, long distance
and satellite telecommunications services. The Company uses its robust and
flexible proprietary software technology to develop transactional billing and
management information solutions for its customers under exclusive contracts
with terms typically ranging from three to four years.
The Company derives revenue (i) primarily from service contracts, whereby
a customer contracts with the Company to install, operate and maintain its
transactional billing system and (ii) to a lesser extent, from the
development of new software and enhancement of existing installed systems
together with the provision of related customer maintenance and training,
which is largely billed on a time and materials basis. Service revenue
related to the operation of customers billing systems accounted for 93.5%,
97.4% and 96.6% of total revenue for 1994, 1995 and 1996, respectively.
Services are generally billed monthly and service revenue is recognized in
the period in which the services are provided.
License fees comprise the remainder of the Company's revenue and are
largely recognized upon execution of the licensing agreement and delivery of
the software to the customer, provided that the Company has no significant
related obligations or collection uncertainties remaining. Where there are
significant obligations related to the development and enhancement of the
software, license fees are recorded over the expected installation period or
the term of the respective contract. As a result, the amount of revenue
realized by the Company from license fees in a particular period depends
largely on the number of product installations during that period, and the
extent to which any significant obligations are outstanding.
Driven by the requirements of the telecommunications services market, the
Company's revenue has grown rapidly in recent years, increasing from
approximately $6.3 million in 1994 to $10.8 million and $16.7 million in 1995
and 1996, respectively.
Operating expenses are comprised primarily of the salaries and benefits of
technical service representatives, operations personnel and quality assurance
representatives and costs to produce and distribute invoices for customers.
General, administrative and selling expenses consist mainly of the
salaries and benefits of management and administrative personnel and general
office administration expenses (rent and occupancy, telephone and other
office supply costs) of the Company.
Systems development and programming costs are comprised of the salaries
and benefits of the employees involved in internal software development.
Prior to 1993, Company software was under development and all related costs
were expensed. In 1993, the Company began to capitalize certain software
development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86. Amounts capitalized are amortized over five years.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward- looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forwarding-looking statements. These factors include, without limitation,
those set forth below under the caption "Certain Factors That May Affect
Future Results."
14
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue for the years ended December 31,
1994, 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1994 1995 1996
-------- -----------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 26.0 25.8 25.7
General, administrative and selling expenses 38.1 42.5 39.1
Depreciation and amortization 6.4 5.9 6.3
Systems development and programming costs 12.0 10.9 12.6
-------- -----------------
Total costs and expenses 82.5 85.1 83.7
-------- -----------------
Operating income 17.5 14.9 16.3
Other income 0.5 0.4 1.9
Interest expense (6.2) (4.2) (2.5)
-------- -----------------
Income before income tax expense and extraordinary
item 11.8 11.1 15.7
Income tax expense 0.6 3.5 6.7
-------- -----------------
Income before extraordinary item 11.2 7.6 9.0
Extraordinary loss -- (2.0) --
-------- -----------------
Net income 11.2% 5.6% 9.0%
======== =================
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue
Revenue increased 54.2% from $10,820,815 in 1995 to $16,689,401 in 1996,
due primarily to the addition of new customers and the continued growth of
recurring revenue from existing customers.
Operating expenses
Operating expenses increased 53.7% from $2,787,687 in 1995 to $4,283,364
in 1996, due primarily to the addition of new personnel required to support
the growth of the Company's business. As a percentage of revenue, such
expenses decreased slightly from 25.8% in 1995 to 25.7% in 1996.
General, administrative and selling expenses
General, administrative and selling expenses increased 41.8% from
$4,601,242 in 1995 to $6,522,900 in 1996. This increase was primarily due to
one time charges of $1,206,548, related to compensation paid to two newly
hired employees ($909,548), a lawsuit settlement ($97,000) and a payment to
Connecticut Innovations, Incorporated ("CII") ($200,000) (See Note 3 of the
Notes to the Financial Statements). Other changes from 1995 to 1996 relate to
increased employee compensation benefits of $606,535, additional rent expense
of $260,815 and other administrative expenses resulting from the growth of
the Company. These expenses were partially offset by decreases in salaries
and bonuses paid to senior management of approximately $413,086. As a
percentage of revenue, general, administrative and selling expenses decreased
from 42.5% in 1995 to 39.1% in 1996.
Depreciation and amortization
Depreciation and amortization increased 64.4% from $640,917 in 1995 to
$1,053,472 in 1996 primarily due to the purchase of computer equipment and
the increased spending on the enhancement of the Company's ITDS 10X system to
support Unix based file servers and further development of its integrated
billing and management information system. Depreciation and amortization
expenses increased as a percentage of revenue from 5.9% in 1995 to 6.3% in
1996.
Systems development and programming costs
Systems development and programming costs increased 78.8% from $1,183,141
in 1995 to $2,115,305 in 1996, primarily due to increased programming support
required by the Company's
15
<PAGE>
customers. As a percentage of revenue, system development and programming
costs increased from 10.9% in 1995 to 12.6% in 1996. In addition, the Company
capitalized $479,316 and $858,827 in software development costs, in 1995 and
1996, respectively.
Interest expense
Interest expense decreased 8.1% from $452,925 in 1995 to $416,148 in 1996,
as a result of lower overall debt balances in 1996 as compared to 1995. This
was partially offset by an increase in capitalized lease obligations in 1996.
Income tax expense
The Company's effective tax rate increased from 31.5% in 1995 to 42.5% in
1996 due primarily to debt consolidation expense benefits in 1995 which did
not recur in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue
Revenue increased 71.1% from $6,324,041 in 1994, to $10,820,815 in 1995,
due primarily to the addition of new customers and the continued growth of
recurring revenue from existing customers.
Operating expenses
Operating expenses increased 69.3% from $1,646,852 in 1994, to $2,787,687
in 1995, due primarily to the addition of new personnel required to support
the growth of the Company's business. As a percentage of revenue, such
expenses decreased slightly from 26.0% in 1994, to 25.8% in 1995.
General, administrative and selling expenses
General, administrative and selling expenses increased 91.0% from
$2,409,683 in 1994, to $4,601,242 in 1995. As a percentage of revenue,
general, administrative and selling expenses increased from 38.1% in 1994 to
42.5% in 1995. This increase was due primarily to increases in executive
officers salaries, bonuses and other benefits of $1,263,600, general office
expenses of $368,300, employee compensation and benefits, including
employment agency fees and relocation costs, of $324,600, advertising
expenses of $65,000 and other administrative expenses as a result of the
growth of the Company.
Depreciation and amortization
Depreciation and amortization increased 57.9% from $405,873 in 1994, to
$640,917 in 1995 primarily due to the purchase of computer equipment and the
increased spending on the enhancement of the Company's ITDS 10X system to
support Unix based file servers and further development of its integrated
billing and management information system. Depreciation and amortization
expenses decreased as a percentage of revenue from 6.4% in 1994 to 5.9% in
1995 primarily due to the growth in revenue.
Systems development and programming costs
Systems development and programming costs increased 56.6% from $755,387 in
1994, to $1,183,141 in 1995, primarily due to increased programming support
required by a larger customer base. As a percentage of revenue, system
development and programming costs decreased from 12.0% in 1994, to 10.9% in
1995 primarily due to the growth in revenue. In addition, the Company
capitalized $288,602 and $479,316 in software development costs in 1994 and
1995, respectively.
Interest expense
Interest expense increased 16.2% from $389,793 in 1994, to $452,925 in
1995, primarily due to the increase in capital leases for computer equipment
required by the Company.
Income tax expense
The Company's effective tax rate was 31.5% in 1995 and 4.9% in 1994. The
increase in the rate was primarily due to the fact that in 1994 the Company
fully utilized its net operating loss carryforward credits for which
valuation allowances had previously been recorded.
16
<PAGE>
Extraordinary loss
On June 30, 1995, the Company refinanced existing debt with CII and
recorded an extraordinary loss of $223,696, net of $158,038 in tax benefits.
Such extraordinary loss was due to negotiated acceleration of payments in
connection with the early termination of the debt agreement.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through its
initial public offering in October 1996, private placements of debt and
equity securities, cash generated from operations and equipment financing.
As of December 31, 1996, the Company had $4,138,575 of cash and cash
equivalents, $25,023,454 in securities available for sale (United States
Treasury Notes), $3,232,967 (including $1,396,412 for services provided prior
to December 31, 1996 which were not billable at that time) in net trade
accounts receivable, and $31,639,397 of working capital.
In the twelve months ended December 31, 1996, the Company generated
$1,445,792 in net cash from operating activities and $29,345,172 in net cash
from financing activities including the sale of shares of Common Stock in the
Company's Initial Public Offering in October 1996 for $32,502,706 in net
proceeds. The cash generated from operations and the net proceeds from the
Initial Public Offering enabled the Company to fund its operations, apply
$858,827 to product development costs, purchase $25,413,553 of investments,
and make $2,173,496 in principal payments on long-term debt and capital lease
obligations.
The Company maintains a bank line of credit with First Union Bank of
Connecticut providing for borrowings of up to $250,000. To date, the Company
has made no borrowings under this line of credit. In addition, the Company
has a letter of credit with First Union in the amount of $362,000 as security
for the Company's lease of its headquarters. The line of credit and the
letter of credit are secured by substantially all of the assets of the
Company. The line of credit expires in August 1997 and bears interest at the
bank's prime lending rate and the letter of credit is renewable annually and
is subject to an annual fee of 1%.
The Company believes that its existing capital resources as well as the
letter of credit and credit facility described in Note 8 to the Financial
Statements are adequate to meet its cash requirements for the foreseeable
future. There can be no assurance, however, that changes in the Company's
plans or other events affecting the Company's operations will not result in
accelerated or unexpected expenditures.
The Company may seek additional funding through public or private
financing. During 1997, the Company anticipates selling 500,000 shares of its
Common Stock in a follow-on public offering. There can be no assurance,
however, that additional financing will be available from any of these
sources or will be available on terms acceptable to the Company.
To date, inflation has not had a significant impact on the Company's
operations.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made
in this Annual Report on Form 10-K and presented elsewhere by management from
time to time.
Rapidly Changing Telecommunications Market
Over the last decade, the market for telecommunications services has been
characterized by rapid technological developments, evolving industry
standards, dramatic changes in the regulatory environment and frequent new
product introductions. The Company's success will depend upon its ability to
enhance its existing products and services, and to introduce new products and
services which will respond to these market requirements as they evolve. To
date, substantially all of the Company's revenues are attributable to
wireless customers. While the Company believes that systems and services
which it offers to address the needs of the wireless market will also permit
it to attract customers in other
17
<PAGE>
segments of the telecommunications services industry, there can be no
assurance that it will be able to do so. In addition, technologies, services
or standards may be developed which could require significant changes in the
Company's business model, development of new products, or provision of
additional services, at substantial cost to the Company. Such developments
may also result in the introduction of additional competitors into the
marketplace.
Management of Growth
The Company has experienced rapid growth and intends to continue to
aggressively expand its operations. The Company's total revenues have
increased from $3.1 million in 1993 to $16.7 million in 1996. The growth in
the size and complexity of its business, as well as its customer base, has
placed and is expected to continue to place significant demands on the
Company's administrative, operational and financial personnel and systems.
Additional expansion by the Company may further strain the Company's
management, financial and other resources. The Company's future operating
results will depend on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its
operational, financial control and reporting functions.
The number of the Company's employees has increased from 26 as of January
1993 to 188 as of February 1997. The Company anticipates that continued
growth will require it to recruit and hire a substantial number of new
development, managerial, finance, sales and marketing support personnel.
There can be no assurance that the Company will be successful in hiring or
retaining any of the foregoing personnel. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability
to improve operational systems and to expand, train, motivate and manage its
workforce.
New Products and Rapid Technological Change
The market for the Company's products and services is characterized by
rapid technological change. The Company believes that its future success
depends in part upon its ability to enhance its current products and services
and develop new products and services that address the increasingly complex
needs of its customers. In addition, the introduction of new products or
services by third parties could render the Company's existing products and
services obsolete or unmarketable. The Company's ability to anticipate
changes in technology and successfully develop and introduce new or enhanced
products incorporating such technology on a timely basis will be significant
factors in its ability to remain competitive.
Dependence on Cellular Telephone Industry
Although the Company's products have been designed to adapt to a variety
of current and future technologies, a significant majority of its revenues to
date have been generated by sales of its systems and services to service
providers in the cellular telephone industry. A decrease in the number of
cellular service subscribers served by the Company's customers could result
in lower revenues for the Company. Although the cellular market has
experienced substantial growth in the number of subscribers in the past,
there can be no assurance that such growth will be sustained.
Reliance On Significant Customers
For the year ended December 31, 1996, revenue from Aliant Communications
Co. (formerly, The Lincoln Telephone and Telegraph Company) and its
affiliated companies represented approximately 19.1% (reflects the
acquisition of Nebraska Cellular by Aliant in 1996) of the Company's total
revenue, and revenue from Horizon Cellular Group represented approximately
12.5% of the Company's total revenue. The Company has long-term contracts
with all of its significant customers, however there can be no assurance that
any such customer will renew its contract with the Company at the end of the
contract term or may not seek to terminate its contract on the basis of
alleged contractual defaults or other grounds. Loss of all or a significant
part of the business of any of the Company's substantial customers would have
a material adverse effect on the Company's business, financial condition and
results of operations. Additionally, the acquisition by a third party of one
of the Company's substantial customers could result in the loss of that
customer and have a material adverse effect on the business, financial
condition and results of operations of the Company. Since October 1996,
Horizon Cellular Group
18
<PAGE>
has divested certain of its remaining cellular markets, the majority of which
were acquired by existing customers of the Company. Because the majority of
these markets were acquired by the Company's existing customers, the Company
does not expect that the significant reduction in revenue from Horizon
Cellular Group expected in 1997 will have a material adverse effect on the
business, financial condition or results of operations of the Company.
Expansion of Sales Activities
In order to achieve significant long-term growth in revenues and its
overall strategic goals, the Company intends to attract a number of larger
telecommunications services providers as customers. In order to do so, and to
expand its business generally, the Company believes that it must expand the
sales and marketing organization. There can be no assurance that the Company
will be able to achieve anticipated expansion of its business, attract larger
telecommunications services providers as customers or build an efficient and
effective sales and marketing organization.
Dependence on Key Personnel
The Company's performance depends substantially on the performance of its
executive officers and key employees. The Company's long-term success will
depend upon its ability to recruit, retain and motivate highly skilled
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or retain
highly skilled personnel in the future.
Competition
The market for billing and management information systems for the
telecommunications services industry is highly competitive and the Company
expects that the high level of growth within the telecommunications services
industry will encourage new entrants, both domestically and internationally,
in the future. The Company competes with independent providers of
transactional systems and services, with the billing services of management
consulting companies and with internal billing departments of
telecommunications services providers. The Company anticipates continued
growth in competition in the telecommunications services industry and
consequently the entrance of new competitors into its market in the future.
In addition, merger or consolidation of telecommunications services providers
could result in the loss to the Company of customers or sales opportunities
to competitors.
Dependence on Proprietary Technology
The Company's success is dependent in part upon its proprietary software
technology. The Company relies on trademark, copyright and trade secret laws,
employee and third-party non-disclosure agreements and other methods to
protect its proprietary rights. There can be no assurance that its agreements
with employees, consultants and others who participate in the development of
its software will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors.
Furthermore, there can be no assurance that the Company's efforts to protect
its rights through trademark and copyright laws will prevent the development
and design by others of products or technology similar to or competitive with
those developed by the Company.
19
<PAGE>
Item 8--Financial Statements and Supplementary Data
International Telecommunication Data Systems, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Independent Auditors 21
Financial Statements
Balance Sheets as of December 31, 1995 and 1996 22
Statements of Income for the years ended December 31, 1994, 1995 and 1996 24
Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 1994, 1995 and 1996 25
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 26
Notes to Financial Statements 27
</TABLE>
20
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
International Telecommunication Data Systems, Inc.
We have audited the accompanying balance sheets of International
Telecommunication Data Systems, Inc. as of December 31, 1996 and 1995, and
the related statements of income, stockholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International
Telecommunication Data Systems, Inc. at December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernest & Young LLP
Stamford, Connecticut
February 11, 1997
21
<PAGE>
International Telecommunication Data Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,172,692 $ 4,138,575
Accounts receivable, net of allowance for doubtful accounts
of $52,370 in 1996 1,348,787 3,232,967
Securities available for sale, at estimated market value
(Note 2) -- 25,023,454
Prepaid expenses and other current assets 575,011 1,503,209
Deferred income taxes 20,256 44,000
------------- -------------
Total current assets 3,116,746 33,942,205
Property and equipment:
Computers, including leased property under capital leases of
$1,275,366 and $1,863,103, respectively 1,642,697 2,986,056
Furniture and fixtures, including leased property under
capital leases of $33,119 in 1995 and 1996 90,015 446,535
Trade booth 37,809 98,854
Equipment, including leased property under capital leases of
$20,882 and $53,508, respectively 29,933 152,996
Leasehold improvements 27,026 589,479
------------- -------------
1,827,480 4,273,920
Less: accumulated depreciation and amortization 709,911 1,328,228
------------- -------------
1,117,569 2,945,692
Other assets:
Product development costs--at cost, net of accumulated
amortization of $286,110 and $586,215, respectively 785,005 1,343,727
Other 185,563 165,913
Deferred income taxes 228,823 --
------------- -------------
1,199,391 1,509,640
------------- -------------
Total assets $5,433,706 $38,397,537
============= =============
</TABLE>
See accompanying notes.
22
<PAGE>
International Telecommunication Data Systems, Inc.
Balance Sheets--Continued
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
------------- --------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 256,001 $ 685,739
Accrued expenses 386,137 765,713
Accrued compensation 693,386 272,059
Current portion of accrued rent liability 26,401 41,059
Current maturities of notes payable 77,198 --
Current maturities of long-term debt (Note 3) 69,240 --
Current maturities of capital lease obligations (Note 7) 398,261 538,238
------------- --------------
Total current liabilities 1,906,624 2,302,808
Accrued rent liability 53,293 70,639
Long-term debt (Note 3) 1,742,033 --
Capital lease obligations (Note 7) 695,028 878,432
Deferred income taxes -- 407,000
Other 17,694 21,240
Commitments and contingencies (Note 8) -- --
Redeemable Preferred Stock--Class C $4,961 par value,
cumulative, nonvoting 250 shares authorized, 129 shares
outstanding 640,000 --
Stockholders' equity (Note 4)
Preferred Stock--Class A (net of issuance costs) $25,000 par
value, noncumulative, nonvoting 50 shares authorized, 18
shares outstanding 400,400 --
Preferred Stock--Class B (net of issuance costs) $250 par
value, noncumulative, nonvoting 2,000 shares authorized,
1,500 shares outstanding 327,600 --
Preferred Stock, $.01 par value, 2,000,000 shares
authorized, none issued -- --
Common Stock, $.01 par value; 40,000,000 shares authorized,
5,124,800 and 8,436,504 shares issued, 4,875,200 and
8,436,504 shares outstanding 51,248 84,365
Additional paid-in capital -- 43,472,324
Retained deficit (184) (8,802,298)
Treasury stock, 249,600 shares (400,030) --
Unrealized loss on securities available for sale -- (36,973)
------------- --------------
Total stockholders' equity 379,034 34,717,418
------------- --------------
Total liabilities and stockholders' equity $5,433,706 $38,397,537
============= ==============
</TABLE>
See accompanying notes.
23
<PAGE>
International Telecommunication Data Systems, Inc.
Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
Revenue $6,324,041 $10,820,815 $16,689,401
Costs and expenses:
Operating expenses 1,646,852 2,787,687 4,283,364
General, administrative and selling expenses 2,409,683 4,601,242 6,522,900
Depreciation and amortization 405,873 640,917 1,053,472
Systems development and programming costs 755,387 1,183,141 2,115,305
------------- -------------- --------------
Total costs and expenses 5,217,795 9,212,987 13,975,041
------------- -------------- --------------
Operating income 1,106,246 1,607,828 2,714,360
Other income 28,413 49,477 315,914
Interest expense (389,793) (452,925) (416,148)
------------- -------------- --------------
Income before income tax expense and extraordinary
item 744,866 1,204,380 2,614,126
Income tax expense 36,666 378,786 1,111,788
------------- -------------- --------------
Income before extraordinary item 708,200 825,594 1,502,338
Extraordinary loss (net of $158,038 tax benefit) -- (223,696) --
------------- -------------- --------------
Net income $ 708,200 $ 601,898 $ 1,502,338
============= ============== ==============
Pro forma income per common share:
Income before extraordinary item $ .13 $ .23
Extraordinary loss (.03) --
-------------- --------------
Pro forma net income $ .10 $ .23
============== ==============
Shares used in computing pro forma income per common
share 6,194,171 6,593,206
============== ==============
</TABLE>
See accompanying notes.
24
<PAGE>
International Telecommunication Data Systems, Inc.
Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------
Class A Class B Common Stock
---------------------- ----------------------
Number Number Number $.01
of Shares $25,000 of Shares $250 of Shares Par
Outstanding Par Value Outstanding Par Value Outstanding Value
------------ --------- ------------ --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18 $ 400,400 1,500 $ 327,600 5,091,200 $50,912
Issuance of Common Stock 33,600 336
Net income
Preferred Stock dividends
declared
Purchase of treasury stock (249,600)
------------ --------- ------------ --------- ------------ -------
Balance at December 31, 1994 18 400,400 1,500 327,600 4,875,200 51,248
Issuance of Preferred Stock
Net income
Preferred Stock dividends
declared
------------ --------- ------------ --------- ------------ -------
Balance at December 31, 1995 18 400,400 1,500 327,600 4,875,200 51,248
Net income
Preferred Stock dividends
declared
Retirement of treasury stock (2,496)
Recapitalization of
Class A & B Preferred Stock (18) (400,400) (1,500) (327,600) 852,812 8,528
Compensation paid in Common
Stock 70,768 708
Conversion of Class C
convertible Preferred Stock 103,200 1,032
Exercise of warrants 334,524 3,345
Sale of Common Stock, net of
expenses 2,200,000 22,000
Net unrealized loss on
securities available for sale
------------ --------- ------------ --------- ------------ -------
Balance at December 31, 1996 -- $ -- -- $ -- 8,412,504 $84,365
============ ========= ============ ========= ============ =======
</TABLE>
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Additional Treasury Retained Securities
Paid-in Stock at Earnings Available
Capital Cost (Deficit) for Sale Total
------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 20,183 $ -- $ (1,301,800) $ -- $ (502,705)
Issuance of Common Stock 30,429 30,765
Net income 708,200 708,200
Preferred Stock dividends
declared (22,500) (22,500)
Purchase of treasury stock (400,030) (400,030)
------------ --------- ------------ --------- ------------
Balance at December 31, 1994 28,112 (400,030) (593,600) -- (186,270)
Issuance of Preferred Stock
Net income 601,898 601,898
Preferred Stock dividends
declared (28,112) (8,482) (36,594)
------------ --------- ------------ --------- ------------
Balance at December 31, 1995 -- (400,030) (184) -- 379,034
Net income 1,502,338 1,502,338
Preferred Stock dividends
declared (79,236) (79,236)
Retirement of treasury stock (397,534) 400,030 --
Recapitalization of
Class A & B Preferred Stock 10,119,688 (10,225,216) (825,000)
Compensation paid in Common
Stock 633,841 634,549
Conversion of Class C
convertible Preferred Stock 638,968 640,000
Exercise of warrants 819,614 822,959
Sale of Common Stock, net of
expenses 31,657,747 31,679,747
Net unrealized loss on
securities available for sale (36,973) (36,973)
------------ --------- ------------ --------- ------------
Balance at December 31, 1996 $43,472,324 $ -- $ (8,802,298) $(36,973) $34,717,418
============ ========= ============ ========= ============
</TABLE>
See accompanying notes.
25
<PAGE>
International Telecommunication Data Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1994 1995 1996
------------ ------------- ---------------
<S> <C> <C> <C>
Operating activities
Income before extraordinary loss $ 708,200 $ 825,594 $ 1,502,338
Adjustments to reconcile income before extraordinary
loss to net cash provided by operating activities:
Depreciation and amortization 405,873 640,917 1,053,472
Compensation paid in Common Stock 30,135 -- 634,549
Deferred interest expense 342,032 -- --
Loss (gain) on disposal of equipment 14,705 (245) 10,009
Deferred income taxes -- (93,960) 612,079
Change in operating assets and liabilities:
Accounts receivable (429,785) (457,609) (1,884,180)
Prepaid expenses and other current assets 8,300 (236,378) (875,072)
Accounts payable and accrued expenses 93,574 781,049 390,831
Other assets and liabilities, net (13,310) (157,414) 1,766
------------ ------------- ---------------
Net cash provided by operating activities 1,159,724 1,301,954 1,445,792
Investing activities
Capital expenditures (144,624) (17,358) (1,852,701)
Proceeds from sale of equipment -- 13,500 --
Purchase of securities available for sale -- -- (25,060,427)
Purchase of investments held to maturity (200,000) (245,069) (353,126)
Proceeds from maturities of investments 200,000 99,286 300,000
Product development costs (288,602) (479,316) (858,827)
------------ ------------- ---------------
Net cash used for investing activities (433,226) (628,957) (27,825,081)
Financing activities
Principal payments on long-term debt (292,668) (276,507) (1,811,273)
Payment to retire Preferred Stock -- -- (825,000)
Principal payments on notes payable (18,672) (76,001) (76,958)
Principal payments on capital lease obligations (98,590) (166,297) (362,223)
Proceeds from sale of Common Stock 630 -- 32,502,706
Proceeds from sale of Preferred Stock -- 640,000 --
Dividends paid (22,500) (33,750) (82,080)
Purchase of treasury stock (240,000) -- --
------------ ------------- ---------------
Net cash provided by (used for) financing activities (671,800) 87,445 29,345,172
Net increase in cash and cash equivalents 54,698 760,442 2,965,883
Cash and cash equivalents at beginning of year 357,552 412,250 1,172,692
------------ ------------- ---------------
Cash and cash equivalents at end of year $ 412,250 $1,172,692 $ 4,138,575
============ ============= ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 335,731 $ 447,241 $ 434,092
Cash paid during the year for taxes $ 481,700 $ 419,700 $ 819,897
</TABLE>
Supplemental disclosure of noncash financing activities:
Capital lease obligations totaling $234,512, $960,059 and $685,604 in the
years ended December 31, 1994, 1995 and 1996, respectively, were incurred for
the acquisition of new equipment. In 1994, notes payable totaling $175,000 with
a present value of $160,030 were issued when the Company repurchased Common
Stock.
See accompanying notes.
26
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements
1. Business and Significant Accounting Policies
Description of Business
The Company provides comprehensive transactional billing and management
information solutions to providers of wireless, long distance and satellite
telecommunications services. These solutions are built upon a flexible
proprietary software technology to address customer requirements as they
evolve, regardless of market segment, geographic area or mix of network
features or billing options. The Company typically provides its services to
customers under exclusive contracts with terms ranging from three to four
years, and bills customers monthly, typically on a per subscriber basis. As a
result, substantially all of the Company's revenue is recurring in nature,
and increases as a customer's subscriber base grows.
Basis of Presentation
Property and equipment are carried at cost, less accumulated depreciation
computed using the straight-line method over the estimated useful lives of
the assets.
The Company acquired certain software, which is carried at cost, less
accumulated amortization computed using the straight-line method based on an
estimated life of five years.
The Company capitalizes software development costs incurred in the
development of software used in its product and service line only after
establishing commercial and technical viability and ceases when the product
is available for general release. The capitalized costs include salaries and
related payroll costs incurred in the development activities. Software
development costs are carried at cost less accumulated amortization computed
using the greater of the amount resulting from applying the ratio that
current gross revenue for the product bears to total and anticipated future
gross revenue for the product to capitalized costs or the straight-line
method over the remaining estimated useful life of the product; generally,
such deferred costs are amortized over five years. During the years ended
December 31, 1994, 1995 and 1996, $90,682, $166,292 and $300,105,
respectively, of capitalized software development costs were amortized.
Revenues and costs associated with the recurring process of providing
billing and other service/ software solutions are recognized at the time
services are performed. License fees and related costs are recognized upon
execution of the licensing agreement and delivery of the software to the
customer, provided that the Company has no significant related obligations or
collection uncertainties remaining. Where there are significant obligations
related to the development and enhancement of the software, license fees are
recorded over the expected installation period or the term of the respective
contract. As of December 31, 1996, accounts receivable includes $118,000
relating to a license agreement that is being recorded over the expected
installation period that cannot be billed until the installation is
completed, which is expected to occur during July 1997. In addition, accounts
receivable at December 31, 1995 and 1996, include $439,433 and $1,278,412,
respectively, for services rendered prior to December 31 which were billed in
January of the following year when the billing cycles were complete.
In 1995, the FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Statement, which has been adopted in 1996,
requires companies to investigate potential impairments of long-lived assets
on an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. The
adoption of Statement No. 121 has not had a material effect on the Company's
financial position or results of operations.
Pro forma net income per share of Common Stock, is calculated using the
weighted average number of shares of common stock outstanding and common
stock equivalents, if dilutive, after giving effect to
27
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
1. Business and Significant Accounting Policies (Continued)
the retirement of the Company's Class A and B Preferred Stock, the issuance
of 852,812 post-split shares of Common Stock to the holders of the Class A
and B Preferred Stock, the conversion of the Series C Preferred Stock and the
800-for-1 stock split referred to in Note 4. Common and common equivalent
shares issued during the twelve month period prior to the initial public
offering ("IPO") at prices below the IPO price are included in the
calculations, using the treasury stock method, as if they were outstanding
for all periods presented. There was no dilutive impact from stock options
during the periods.
Fully diluted EPS did not differ significantly from primary EPS for any
period presented.
Supplemental earnings per share, assuming, at the beginning of the respective
periods, the exercise of the warrants, the redemption and conversion of all
outstanding preferred stock, and the sale of common stock, the proceeds of
which were used for debt retirement, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1995 1996
--------------
<S> <C> <C>
Income before extraordinary item $ .17 $.24
Extraordinary item (.04) --
----- ----
Net income $ .13 $.24
===== ====
</TABLE>
Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications were made to conform prior years' data to the
current presentation.
Major Customers
The Company markets its services through a core team of senior executives
and is in the process of developing a direct sales force.
Three customers accounted for approximately 32.0%, 34.8% and 39.7% of the
Company's total revenues in 1994, 1995 and 1996, respectively. The president
and chief executive officer of one of these customers is a director of the
Company. Revenues from this customer, whose cellular territories are being
sold, many of which to existing ITDS customers, accounted for approximately
9.4%, 15.2%, and 12.5% of the Company's total revenues in 1994, 1995 and
1996, respectively. Credit losses have not been significant.
2. Investments
Prepaid expenses and other current assets includes short-term investments
of $295,069 and $348,195 as of December 31, 1995 and 1996, respectively.
These investments are recorded at cost plus accrued interest (approximates
market), which consist of United States Treasury Bills, maturing on or before
April 3, 1997. These short-term investments are classified as held to
maturity as the Company has the ability and intent to hold the investments to
maturity. The income from these investments is included in other income.
28
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
2. Investments (Continued)
Securities available for sale consist of United States Treasury Notes with
a 6% coupon rate maturing on August 15, 1999. These securities are recorded
at fair value, with the unrealized gains and losses, net of tax, reported in
a separate component of shareholders' equity. The net unrealized loss as of
December 31, 1996 was $36,973. The premium of approximately $64,000 paid for
these investments is being amortized into income on the straight-line basis
based on the maturity date. Amortization of the premium and accrued interest
are included in other income.
3. Debt
At December 31, 1994, the Company had an aggregate of $1,316,575 payable
to Connecticut Innovations Incorporated ("CII") under certain debt agreements
dated August 16, 1991 and July 21, 1992 with face amounts of $600,000 and
$350,000, respectively. These loans required payment of principal and
interest which were calculated based on revenues for the period multiplied by
a specified percentage rate. These loans were structured such that they would
be considered paid in full based upon the aggregate payments (principal and
interest) at specified dates. Based on the estimated payments, the imputed
interest rate approximated 25% at December 31, 1994. On June 30, 1995, the
Company consolidated these loans with CII into one loan with a principal
amount of $1,485,000 at a 14.5% interest rate.
The Company also had a loan payable to CII, originally issued in 1993 for
$350,000 at a 10% interest rate, which was refinanced in December 1994 with a
$389,472, 10% interest bearing note. This note included principal plus
accrued interest on the original loan. The new note was payable in equal
monthly installments over 60 months and had a balance of $326,273 at December
31, 1995.
In addition, pursuant to the August 16, 1991 debt agreement, as amended,
between the Company and CII, the Company was obligated to make a one-time
payment to CII of $200,000 upon (i) the closing of an initial public
offering, (ii) the sale of the Company through merger, sale of assets or
otherwise or (iii) the exclusive or semi-exclusive licensing agreement for
the sale of any product of the Company. This one-time payment was charged to
1996 operations.
With the net proceeds from the IPO, the Company retired substantially all
long-term debt and a portion of its capital lease obligations.
In 1994, the Company issued notes payable of $175,000 with no stated
interest. Interest of 9% has been imputed on these notes. Certain of these
notes are guaranteed by certain officers and stockholders of the Company. The
notes were paid in full in 1996.
4. Capital Stock
The Company completed its IPO in October 1996. The Company sold 2 million
shares at an initial public offering price of $16 per share, resulting in
proceeds to the Company of approximately $28.7 million, after deducting
expenses. In addition, on November 18, 1996 the Company received
approximately $3.0 million, net of expenses, upon the exercise of the
underwriters' over-allotment option to purchase 200,000 shares of Common
Stock.
In connection with the IPO, the Company's Certificate of Incorporation was
amended to authorize the issuance of up to 40,000,000 shares of Common Stock,
$.01 par value per share and the issuance of up to 2,000,000 shares of
Preferred Stock, $.01 par value per share. Pursuant to a recapitalization the
Company was reincorporated in the State of Delaware and an 800-for-1 split of
its Common Stock was effected.
A portion of the proceeds from the Company's IPO were used to retire
substantially all of the Company's outstanding debt. In addition, the
Company's Class A and B Preferred Stock was retired and
29
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
4. Capital Stock (Continued)
the holders of such shares were issued an aggregate of 852,812 post-split
shares of the Company's Common Stock and were paid an aggregate amount of
$825,000. The distribution of the 852,812 shares of the Company's Common
Stock, valued at $12 per share, for an aggregate of $10.2 million, resulted
in a one-time, noncash charge to retained earnings and a corresponding
increase to additional paid- in-capital. Further, immediately prior to the
IPO, CII exercised outstanding warrants to purchase 334,524 post-split shares
of the Company's Common Stock at an aggregate purchase price of $822,959. In
addition, upon the closing of the IPO all of the outstanding shares of Series
C Preferred Stock of the Company (all of which were held by CII) converted
into an aggregate of 103,200 post-split shares of Common Stock. The Company
retired all shares held in treasury immediately prior to its IPO.
Each share of Class A Preferred Stock was entitled to a noncumulative
dividend equal to 10% of the Class A par value, and a priority return on its
par value, plus .5% of any proceeds generated from a liquidating
distribution, or .5% of the then outstanding common stock (exclusive of
shares issuable upon exercise of certain warrants) immediately prior to a
public offering.
Each 100 shares of Class B Preferred Stock was entitled to a noncumulative
dividend equal to 10% of the Class B par value, and a priority return on its
par value, plus .375% of any proceeds generated from a liquidating
distribution, or .375% of the then outstanding common stock (exclusive of
shares issuable upon exercise of certain warrants) immediately prior to a
public offering. The Class B shares were subordinate to the shares of Class A
Preferred Stock with respect to dividends, capital transactions and
liquidating distributions.
The Class C Preferred Stock was junior to the Class A and B Preferred Stock
with regard to liquidation and dividend preference, was entitled to an 8%
cumulative dividend and was convertible into ITDS Common Stock at any time at
the option of the holder on a 800-for-one basis. The stock could have been
put to the Company upon the occurrence of certain events at a price to have
been determined at the put date as defined in the agreement. In addition, the
holders of the Class C Preferred Stock could have demanded registration of
the stock in certain circumstances.
5. Stock Option Plan
The Company's 1996 Stock Incentive Plan authorizes the grant of options to
employees, directors and consultants of the Company for up to 1,000,000
shares of the Company's Common Stock. Generally, options granted have 10 year
terms and vest and become fully exercisable at the end of 4 years of
continued employment. In addition, a total of 200,000 common shares have been
authorized for issuance under the Company's 1996 Employee Stock Purchase
Plan.
A summary of the Company's activity in the stock option plans and related
information for the year ended December 31 follows:
<TABLE>
<CAPTION>
Weighted-
Average
Options Exercise Price
--------- ---------------
<S> <C> <C>
Outstanding--December 31, 1995 -- --
Granted 393,700 $ 13.94
Exercised -- --
Forfeited 1,500 14.00
---------
Outstanding--December 31, 1996 392,200 13.94
=========
Exercisable at December 31, 1996 16,062 18.36
=========
Weighted-average fair value of options granted during the
year $ 7.29
</TABLE>
30
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
5. Stock Option Plan (Continued)
Exercise prices for options outstanding as of December 31, 1996 ranged
from $12 to $21. The weighted average remaining contractual life of those
options is 9.75 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions for 1996: risk-free interest rates of 5%; no dividend yield; a
volatility factor of the expected market price of the Company's Common Stock
of 0.71; and a weighted-average expected life of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the year ended December 31 follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Pro forma net income $1,189,597
==========
Pro forma earnings per share $ .18
==========
</TABLE>
These pro forma effects may not be representative of the effects on future
years because of the prospective application required by Statement No. 123,
and the fact that options vest over several years and new grants may be made
each year.
Under the employee stock purchase plan, shares of the Company's Common
Stock may be purchased at six-month intervals at 85% of the lower of the fair
market value on the first or the last business day of each six-month period.
Employees may purchase shares having a value not exceeding 10% of their gross
compensation, up to $25,000 of the fair market value of such Common Stock,
during an offering period.
6. Deferred Compensation
The Company had a deferred compensation plan for certain nonshareholder
key employees. The deferred compensation is based upon the award of
performance units, the value of which is related to the financial performance
of the Company. The performance units vest incrementally over a ten year
period from the date of grant or vest 100% upon a public offering. At
December 31, 1995, unvested
31
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
6. Deferred Compensation (Continued)
performance units with an aggregate value of $51,150 were outstanding. These
were paid in full as a result of the IPO of the Company's Common Stock.
In accordance with the terms of an employment agreement, as amended on
September 30, 1996, an employee received a payment of $275,000 in 1996 and,
as a result of the public offering of the Company's Common Stock, the right
to purchase 18,333 shares of the Company's Common Stock for $.01 per share.
In addition, during 1996 an employee was given the right to purchase 28,435
shares of the Company's Common Stock for $.01 per share. During 1996, these
employees acquired the shares and the difference between the exercise price
and the fair value on the date of grant was charged to compensation expense.
In connection with an employment agreement entered into during 1996, an
employee was awarded 24,000 shares of the Company's Common Stock with a fair
value of $336,000 when awarded. The shares become vested 25% on April 1,
1997, and an additional 25% becomes vested on October 31 of each of 1998,
1999 and 2000, provided that vesting will accelerate upon the sale of the
Company. The fair value of the shares on the date of award is being amortized
over the vesting period.
7. Capitalized Lease Obligations
The Company leases computer equipment and office furniture under capital
leases expiring in various years through 2000. The assets and liabilities
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. Depreciation of assets
under capital leases is included in depreciation expense.
Maturities of capital lease obligations are as follows as of December 31,
1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 684,864
1998 496,628
1999 260,527
2000 169,326
------------
Total lease obligations 1,611,345
Less: amount representing interest 194,675
------------
Present value of minimum lease payments $1,416,670
============
</TABLE>
8. Commitments and Contingencies
On June 11, 1996, the Company entered into a noncancelable lease expiring
on August 31, 2000 for 48,222 square feet of office space in Stamford,
Connecticut. In connection therewith, the Company obtained a letter of credit
in the initial amount of $362,000 as security for the lease. The letter of
credit is renewable annually and is subject to an annual fee of 1%. Minimum
future rental payments due under such lease are $723,330 per year. In
addition, the Company obtained a $250,000 credit facility. The credit
facility expires on August 31, 1997 and bears interest at the bank's prime
lending rate. The letter of credit and credit facility is secured by
substantially all of the assets of the Company.
The Company also leases Connecticut office facilities, which have been
sublet, under a noncancelable operating lease expiring in April 1999. The
Company recognizes rental expense on a straight line basis over the term of
the lease.
Rent expense was $221,225, $330,914 and $591,729 for the years ended
December 31, 1994, 1995 and 1996, respectively.
32
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
8. Commitments and Contingencies (Continued)
Minimum future rental payments due under such leases as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 922,958
1998 922,958
1999 773,237
2000 482,220
------------
3,101,373
Less: sublease income (423,453)
------------
$2,677,920
============
</TABLE>
The Company is also obligated to pay utilities and property taxes above
the landlords' base year costs.
The Company has entered into employment contracts with various officers
and other employees. The contracts expire in one to four years and require
the Company to pay base compensation of $435,200 during 1997 plus ordinary
bonuses and other benefits.
The Company maintains an employee savings plan that qualifies as a cash or
deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the plan, participating employees may defer up to 15% of their
pre-tax compensation, but not more than $9,500 per calendar year. The Company
does not contribute to the plan.
The Company is not party to any material legal proceedings.
9. Extraordinary Item
As described in Note 3, on June 30, 1995 the Company refinanced existing
debt with CII. In doing so, the Company recorded an extraordinary loss of
$223,696 which is net of a $158,038 tax benefit. Such extraordinary loss was
due to a negotiated acceleration of payments due to early termination of the
debt agreement.
10. Income Taxes
Significant components of income tax expense (benefit) before
extraordinary item are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1994 1995 1996
-------------------- ------------
<S> <C> <C> <C>
Current:
Federal $28,828 $344,360 $ 334,029
State 7,838 128,386 118,333
------- -------- ----------
36,666 472,746 452,362
------- -------- ----------
Deferred:
Federal -- (62,640) 484,036
State -- (31,320) 175,390
------- --------- ----------
-- (93,960) 659,426
------- --------- ----------
Total tax expense $36,666 $378,786 $1,111,788
======= ========= ==========
</TABLE>
33
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
10. Income Taxes (Continued)
A reconciliation of the applicable federal statutory rate to the Company's
effective tax (benefit) rate from income before income tax expense and
extraordinary item follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 0.7 5.3 7.4
Debt consolidation expenses -- (10.1) --
Net operating loss carryforwards (41.9) -- --
Alternative minimum tax 2.5 -- --
Nondeductible interest expense 6.4 -- --
Other, net 3.2 2.3 1.1
-------- -------- --------
4.9% 31.5% 42.5%
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1995 1996
----------- -------------
<S> <C> <C>
Deferred tax liabilities:
Software development costs $443,709 $ 798,862
Capitalized leases 173,026 382,521
----------- -------------
Total deferred tax liabilities 616,735 1,181,383
----------- -------------
Deferred tax assets:
Deferred charges 33,013 46,092
Depreciation and amortization 323,010 719,748
Accrued compensation 26,408 26,937
Reserve for doubtful accounts -- 21,521
Interest 483,383 4,085
Total deferred tax assets 865,814 818,383
----------- -------------
Net deferred tax asset (liability) $249,079 $ (363,000)
=========== =============
</TABLE>
11. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31, 1996 (in thousands, except
per-share data):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
3/31/96 6/30/96 9/30/96 12/31/96
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenue $3,934 $3,931 $4,139 $4,685
Operating income (loss) 1,054 877 (273) 1,056
Net income (loss) 549 445 (240) 748
Pro forma net income (loss) per
share .09 .07 (.04) .10
</TABLE>
34
<PAGE>
International Telecommunication Data Systems, Inc.
Notes to Financial Statements--(Continued)
<TABLE>
<CAPTION>
11. Quarterly Results of Operations (Unaudited) (Continued)
Three Months Ended
-------------------------------------------
3/31/95 6/30/95 9/30/95 12/31/95
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenue $2,179 $2,707 $2,958 $2,977
Operating income 336 558 400 314
Income before extraordinary item 150 317 231 128
Net income 150 93 231 128
Pro forma income before
extraordinary item per share .02 .05 .04 .02
Pro forma net income per share .02 .02 .04 .02
</TABLE>
The sum of the quarters' net income per share may not equal the full year
per-share amounts due to rounding differences resulting from changes in the
number of common shares outstanding.
During the third quarter of 1996, the Company incurred a one-time charge
for compensation related to two newly hired employees of $909,548 or $.09 per
share. The fourth quarter of 1996 includes a one- time charge associated with
the IPO of $200,000 or $.01 per share.
12. Subsequent Events
During 1997, the Company anticipates selling up to 500,000 shares of its
Common Stock in a follow- on public offering.
35
<PAGE>
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10--Directors and Officers of the Registrant
The response to this item is contained in part under the caption
"Executive Officers of the Company" in Part I of this Annual Report on Form
10-K and in part in the Company's proxy statement for the annual meeting of
stockholders to be held on April 8, 1997 (the "1997 Proxy Statement") in the
section entitled "Election of Directors," which section is incorporated
herein by reference.
In addition, in January 1997, David L. Wells resigned as Executive Vice
President, Chief Information Officer and Director of the Company.
Item 11--Executive Compensation
The response to this item is contained in the 1997 Proxy Statement in the
section entitled "Election of Directors--Director Compensation" and
"--Compensation of Executive Officers" which sections are incorporated herein
by reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
The response to this item is contained in the 1997 Proxy Statement in the
section entitled "Security Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by reference.
Item 13--Certain Relationships and Related Transactions
The response to this item is contained in the 1997 Proxy Statement in the
section entitled "Election of Directors--Certain Transactions," which section
is incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report on Form 10-K:
1. The following documents are included as part of this Annual Report on
Form 10-K:
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1996
Statements of Income for the years ended December 31, 1994, 1995 and
1996
Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 1994, 1995 and 1996
Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996
Notes to the Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Financial Statements or Notes
thereto.
36
<PAGE>
3. Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as
follows:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER
<S> <C>
*3.1 Certificate of Incorporation of the Registrant, as amended.
*3.2 By-Laws of the Registrant.
*10.1 Form of 1996 Equity Incentive Plan.
*10.2 1996 Employee Stock Purchase Plan.
*10.3 Employment Agreement between the Registrant and Barry K. Lewis.
*10.4 Stock Purchase Agreement dated December 11, 1995, as amended, between the Registrant and Connecticut
Innovations, Incorporated relating to Class C Convertible Preferred Stock.
*10.5 Form of Lease between the Company and 969 Associates, dated December 1990.
*10.6 Sublease dated June 11, 1996 between the Registrant and Learning International, relating to 225 High
Ridge Road, Stamford, Connecticut.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-11045), as amended, originally filed with the
Securities and Exchange Commission on August 29, 1996.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the Company's
fiscal year ended December 31, 1996.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERNATIONAL TELECOMMUNICATION
DATA SYSTEMS, INC.
/s/ Charles L. Bakes
----------------------------
Charles L. Bakes
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------------------------- ----------------------------------- -----------------------
<S> <C> <C>
/s/ Charles L. Bakes President, Chief Executive February 27, 1997
----------------------- Officer and Director
Charles L. Bakes (Principal Executive Officer)
/s/ Mark D. Spitzer Chief Financial Officer February 27, 1997
----------------------- (Principal Financial and
Mark D. Spitzer Accounting Officer)
and Director
/s/ Lewis D. Bakes Director February 27, 1997
-----------------------
Lewis D. Bakes
/s/ Stuart L. Bell Director February 27, 1997
-----------------------
Stuart L. Bell
/s/ Michael E. Kalogris Director February 27, 1997
-----------------------
Michael E. Kalogris
</TABLE>
38
EXHIBIT 21
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
- ------------------------------ ------------------------------------
<S> <C>
MDS, Inc. Delaware
ITDS Holding Company LLC Delaware
ITDS LTDA Brazil
</TABLE>
Exhibit 23
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-21287) pertaining to the 1996 Stock Incentive Plan of
International Telecommunication Data Systems, Inc. and (Form S-8 No.
333-21283) pertaining to the 1996 Employee Stock Purchase Plan of
International Telecommunication Data Systems, Inc. of our report dated
February 11, 1997, with respect to the financial statements of International
Telecommunication Data Systems, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEETS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000867889
<NAME> INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,138,575
<SECURITIES> 25,023,454
<RECEIVABLES> 3,232,967
<ALLOWANCES> 52,370
<INVENTORY> 0
<CURRENT-ASSETS> 33,942,205
<PP&E> 4,273,920
<DEPRECIATION> 1,328,228
<TOTAL-ASSETS> 38,397,537
<CURRENT-LIABILITIES> 2,302,808
<BONDS> 0
0
0
<COMMON> 84,365
<OTHER-SE> 34,633,053
<TOTAL-LIABILITY-AND-EQUITY> 38,397,537
<SALES> 16,689,401
<TOTAL-REVENUES> 16,689,401
<CGS> 0
<TOTAL-COSTS> 4,283,364
<OTHER-EXPENSES> 9,691,677
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416,148
<INCOME-PRETAX> 2,614,126
<INCOME-TAX> 1,111,788
<INCOME-CONTINUING> 1,502,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502,338
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
