As filed with the Securities and Exchange Commission on May 11, 1998
Registration No. 333-51669
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
International Telecommunication Data Systems, Inc.
(Exact Name Of Registrant As Specified In Its Charter)
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<S> <C>
Delaware 06-1295986
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
225 High Ridge Road, Stamford, Connecticut 06905 (203) 329-3300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Peter P. Bassermann
President and Chief Executive Officer
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
225 High Ridge Road
Stamford, Connecticut 06905 (203) 329-3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
JOHN A. BURGESS, ESQ. BARBARA L. BECKER, ESQ.
JOHN H. CHORY, ESQ. Chadbourne & Parke LLP
Hale and Dorr LLP 30 Rockefeller Plaza
60 State Street New York, NY 10112
Boston, Massachusetts 02109 (212) 408-5100
(617) 526-6000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date hereof.
If the only securities being registered on this form are being offered
pursuant to dividend or reinvestment plans, check the following box. [ ]
If the only securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum Proposed Maximum
Amount to be Offering Price Aggregate Amount of
Title of Shares to be Registered Registered(1) per Share(2) Offering Price(1)(2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share
Previously filed ..................... 4,945,000 shares $ 29.50 $145,877,500 $ 43,033.86(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Additional shares to be registered
pursuant to this Amendment ......... 60,950 shares $ 26.78 $ 1,632,317 $ 481.53
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Total ................................. 5,005,950 shares $ 43,515.39
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</TABLE>
(1) Includes 652,950 shares which the Underwriters have options to purchase
from the Company and the Selling Stockholders to cover over-allotments, if
any. See "Underwriting".
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933
based upon prices on the Nasdaq National Market on April 29, 1998 and May
7, 1998.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
Subject to Completion, dated May 11, 1998
PROSPECTUS
4,353,000 Shares
[ITDS Logo]
Common Stock
------------
Of the 4,353,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of International Telecommunication Data Systems, Inc. ("ITDS"
or the "Company") offered, 3,750,000 are being offered by the Company and
603,000 are being offered by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol ITDS. On May 8, 1998, the last reported sale price of the Common Stock
on the Nasdaq National Market was $26.50 per share. See "Price Range of Common
Stock."
------------
See "Risk Factors" beginning on page 7 for a discussion of factors that should
be considered by prospective purchasers of the Common Stock offered hereby.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
==================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ......... $ $ $ $
- ----------------------------------------------------------------------------------
Total (3) ......... $ $ $ $
==================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $600,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted the Underwriters
30-day options to purchase up to an aggregate of 652,950 additional shares
of Common Stock on the same terms and conditions as set forth above solely
to cover over-allotments, if any. If such options are exercised in full,
the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered severally
by the Underwriters subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
delivery of certificates for the shares will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.
------------
LEHMAN BROTHERS BT ALEX. BROWN
COWEN & COMPANY JEFFERIES & COMPANY, INC.
, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration under the securities laws of any such State.
<PAGE>
[Inside cover contains Company's logo and picture of a globe.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS.
IN ADDITION, IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND
SELLING GROUP MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103
OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information in the ITDS Consolidated Financial Statements, the Intelicom
Financial Statements, the Unaudited Pro Forma Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. Except as otherwise noted
herein, all information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment options and reflects a three-for-two split of the
Company's Common Stock, effected in the form of a stock dividend on March 9,
1998. Information provided on a "Pro Forma Basis" assumes that the Intelicom
Acquisition (as defined below) occurred on January 1, 1997 unless otherwise
indicated.
The Company
ITDS is a leading provider of comprehensive billing, customer care and
management information solutions to providers of wireless and satellite
telecommunications services. The Company currently supports over 5 million
subscribers in more than 200 wireless markets. The Company uses its proprietary
software technology to develop solutions which address billing and customer
care requirements as they evolve, regardless of a service provider's market
segment, geographic area or mix of network features and billing options. The
Company currently serves leading national and regional wireless
telecommunications companies in the United States, including Aliant
Communications Co. ("Aliant"), Dobson Cellular Systems ("Dobson"), Nextel
Communications, Inc. ("Nextel"), Omnipoint Corporation ("Omnipoint"),
Southwestern Bell, Sygnet Wireless, Inc. ("Sygnet"), Western Wireless Corp.
("Western Wireless") and WorldCom, Inc. ("WorldCom"). Typically, the Company
provides its services under contracts with terms ranging from two to five
years, and bills customers monthly, on a per-subscriber basis. As a result,
substantially all of the Company's revenue is derived from bill processing
services, which are recurring in nature. This revenue generally increases as
the number of subscribers served by the Company grows. For the year ended
December 31, 1997, on a Pro Forma Basis, recurring revenues accounted for
approximately 90% of total revenues.
On January 2, 1998, ITDS acquired a subsidiary ("Intelicom") of Computer
Sciences Corporation ("CSC") (the "Intelicom Acquisition"). Intelicom provides
complete billing and customer care solutions for the wireless communication
industry, including cellular, personal communication services ("PCS"), paging
and enhanced specialized mobile radio ("ESMR"). Revenue for Intelicom for the
year ended December 31, 1997 was approximately $57.0 million, or approximately
71% of the Company's 1997 revenues on a Pro Forma Basis. Primarily as a result
of the Intelicom Acquisition, the number of subscribers supported by the
Company increased from approximately 735,000 in January 1997 to approximately
4.6 million in January 1998. The Company believes there are potentially strong
synergies between the acquired platforms and applications and the ITDS
platforms and applications existing at the time of the Intelicom Acquisition.
The Company intends to reconfigure and combine certain of its platforms to
reduce the number of total platforms offered and to migrate desirable
applications across its platform offerings.
In recent years, the telecommunications services industry has experienced
rapid growth and dramatic change. The number of wireless subscribers in the
United States has increased from 500,000 in June 1986 to 55.3 million in
December 1997, according to the Cellular Telecommunications Industry
Association ("CTIA"). Deregulation and the introduction of technologies such as
cellular, PCS and satellite communications have spurred the introduction of new
entrants and increased competitive pressures across the telecommunications
services market. Markets that were once rigidly segmented by service within
defined geographic areas are converging into a single telecommunications
market, which includes both traditional service providers and a variety of new
participants. Because of these competitive pressures and the proliferation of
service features and pricing options within the telecommunications services
industry, the billing function has evolved from primarily a service support
function to a marketing and revenue enhancement device used to differentiate
the increasingly fungible services offered by providers. Service providers need
billing, customer care and management information solutions which (i) enable
them to differentiate their services quickly and efficiently in an increasingly
competitive market; (ii) respond quickly, efficiently and accurately to
market-driven demands; (iii) integrate seamlessly with their corporate
management information services; (iv) provide a basis for the efficient
development and deployment of solutions to address common industry issues; and
(v) offer flexibility and reliability as critical components of subscriber
relations, communication and retention.
Driven by the requirements of the telecommunications services market and
the Intelicom Acquisition, the Company's revenues have increased rapidly in
recent years from approximately $6.3 million in 1994 to $23.4 million and $80.4
million in fiscal 1997 and 1997 on a Pro Forma Basis, respectively.
3
<PAGE>
The Company's core systems form the foundation for an integrated suite of
applications that provide subscriber billing, customer care and service
support. In addition, the Company's systems enable the service provider to
automate subscriber activation, remittance processing, collections, data
retrieval and reporting, fraud management, electronic funds transfer, credit
management, inventory management and data archiving. The Company's software and
services allow its customers to develop and support innovative rate and feature
offerings without the delay and cost associated with reconfiguring their
billing and information system; 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.
The Company's solutions are implemented for its customers by dedicated
teams with expertise in meeting the transactional billing and customer care
requirements of telecommunications services providers. The Company's software
is installed at a customer site to interface directly with the customer's
systems and generate relevant billing and other data, as well as to support a
wide range of transactional billing, customer care and subscriber management
functions. The Company processes billing information generated through the use
of its software systems, eliminating the need for customers to maintain their
own data processing operations.
To further its position as a leading provider of billing and customer care
services to telecommunications service providers worldwide, the Company intends
to (i) leverage the expanded customer base achieved through the Intelicom
Acquisition, (ii) meet the specific needs of each of its customers by offering
and supporting applications and platforms that offer functionality tailored to
such customers' specific needs, (iii) offer complete transactional billing
solutions to providers in non-wireless segments of the telecommunications
services market, such as satellite, data transmission, Internet and other
enhanced services, (iv) achieve greater economic efficiencies by combining
certain of the operations of its facilities, (v) expand internationally and
establish a service bureau operation in Brazil, and (vi) pursue strategic
acquisitions. The Company intends to meet these objectives by drawing on the
expertise of its personnel and by focusing on the further development of its
technology base. The Company believes that these efforts, coupled with the
capabilities of its existing software and the introduction of new applications,
will permit significant continued growth in its target marketplaces.
The Company was incorporated as a Connecticut corporation in June 1990 and
was reincorporated in Delaware in September 1996. The Company's principal
executive office is located at 225 High Ridge Road, Stamford, Connecticut
06905, and its telephone number is (203) 329-3300.
ITDS is a service mark of the Company. All other service marks, trademarks
or trade names referred to in this Prospectus are the property of their
respective owners.
Risk Factors
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors."
The Offering
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<S> <C>
Common Stock offered by the Company ........................ 3,750,000 shares
Common Stock offered by the Selling Stockholders ........... 603,000 shares
Common Stock to be outstanding after this offering ......... 17,176,459 shares (1)
Use of proceeds by the Company ............................. For repayment of indebtedness and for working capital
and other general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol .............................. ITDS
</TABLE>
- --------
(1) Based on the number of shares outstanding as of March 31, 1998. Excludes
2,418,466 shares of Common Stock issuable upon the exercise of outstanding
options as of March 31, 1998, and an additional 127,146 shares, 282,465
shares, 79,388 shares and 1,125,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Incentive Plan, 1996 Employee
Stock Purchase Plan, 1997 Stock Incentive Plan and 1998 Stock Incentive
Plan, respectively.
4
<PAGE>
Recent Developments
On April 28, 1998, the Company reported that revenue for the first quarter
of 1998 rose to $26.0 million from $5.3 million in the first quarter of 1997.
The Company's results include the results of Intelicom from the date of
acquisition, which effectively tripled the Company's revenues for the period.
The Company reported a loss for the first quarter of $13.5 million or a
loss of $1.01 per basic share compared to net income of $1.1 million or $.08
per basic share in the first quarter of 1997. The basic weighted average number
of shares of Common Stock outstanding for the first quarter of 1998 and 1997
were 13,406,387 and 12,655,040, respectively. Excluding the non-recurring,
in-process R&D and indirect costs associated with the Intelicom Acquisition,
earnings for the first quarter of 1998 were $2.0 million or $.14 per pro forma
diluted share, compared to $1.1 million or $.08 per diluted share in the first
quarter of 1997. The diluted weighted average number of shares of Common Stock
outstanding for the first quarters of 1998 (pro forma) and 1997 were 14,451,809
and 12,855,537, respectively.
5
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1996 1997 1997 Pro Forma (1)
---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue ...................................... $10,821 $ 16,689 $ 23,429 $ 80,404
Operating income ............................. 1,608 2,714 6,545 13,333
Income before extraordinary item (2) ......... 826 1,502 4,801 5,160
Per common share data--basic (3):
Income before extraordinary item ............ .09 .15 .38 .39
Extraordinary loss .......................... (.03) -- -- --
------- -------- -------- --------
Net income .................................. $ .06 $ .15 $ .38 $ .39
======= ======== ======== ========
Shares used in computing basic income per
common share ................................ 9,291 9,890 12,728 13,335
======= ======== ======== ========
Per common share--diluted (3):
Income before extraordinary item ............ $ .09 $ .15 $ .36 $ .37
Extraordinary loss .......................... (.03) -- -- --
------- -------- -------- --------
Net income ................................... $ .06 $ .15 $ .36 $ .37
======= ======== ======== ========
Shares used in computing diluted income per
common share ................................ 9,291 10,109 13,193 13,800
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------------------------
Pro Forma
Actual Pro Forma (4) as Adjusted (5)
---------- --------------- ----------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short term
investments ......................... $28,967 $ 23,140 $ 47,195
Current assets ....................... 34,936 33,737 57,792
Total assets ......................... 44,452 123,409 146,464
Current liabilities .................. 2,364 16,801 16,801
Total long-term debt and capital lease
obligations ......................... 74 70,074 74
Total stockholders' equity ........... 40,318 34,838 127,894
</TABLE>
- --------
(1) Pro forma to reflect the Intelicom Acquisition, as if it occurred on
January 1, 1997. See "Unaudited Pro Forma Consolidated Financial
Statements."
(2) In 1995, the Company experienced an extraordinary loss of $223,696 (net of
a $158,038 tax benefit) in connection with the refinancing of long-term
debt.
(3) Computed on the basis described in Note 3 of the Notes to the ITDS
Consolidated Financial Statements.
(4) Pro forma to reflect the Intelicom Acquisition as if it occurred on
December 31, 1997. See "Unaudited Pro Forma Consolidated Financial
Statements."
(5) Pro forma to reflect the Intelicom Acquisition as if it occurred on
December 31, 1997, and as adjusted to give effect to the sale by the
Company of 3,750,000 shares of Common Stock offered hereby at an assumed
offering price of $26.50 per share (after deducting the underwriting
discount and commission and estimated offering expenses), the application
of the net proceeds therefrom, and the estimated cost ($1 million) of
retiring the debt assumed in connection with the Intelicom Acquisition.
See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the Common Stock
offered by this Prospectus. Except for the historical information contained
herein, the discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties. The cautionary statements made
in this Prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed here.
Important factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere herein.
Management of Growth
The Company has historically experienced rapid growth and expects to
experience considerable growth in the foreseeable future. The Company's total
revenues have increased from $3.1 million in fiscal 1993 to $23.4 million and
$80.4 million for fiscal 1997 and fiscal 1997 on a Pro Forma Basis,
respectively. As a result of the Intelicom Acquisition in early January 1998,
the Company substantially increased the size of its operations, as well as the
number of subscribers it serves. 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. There
can be no assurance that the Company's systems, procedures, controls and
existing facilities will be adequate to support expansion of its operations.
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 the operational, financial control and reporting
functions of the Company. If the Company is unable to manage expansion of its
operations, the quality of the Company's services, its ability to retain key
personnel and its business, financial condition and results of operations could
be materially adversely affected.
From January 1993 to March 1998, the number of the Company's employees
increased from 26 to 560 and the number of the Company's full-time consultants
increased from zero to 117. A substantial portion of the Company's current
employees and consultants joined the Company in January 1998, in conjunction
with the Intelicom Acquisition. 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.
Integration of Intelicom; Payment of Contingent Purchase Price
In January 1998, the Company completed the Intelicom Acquisition and
substantially increased the size of the Company's operations. For fiscal year
1997 on a Pro Forma Basis, revenue generated from the Intelicom business
represented approximately 70% of the Company's revenues, and Intelicom
employees and consultants represented 61.3% of the Company's employees and
consultants. The future success of the Company will depend in part upon whether
the integration of the two companies' businesses is achieved in an efficient
and effective manner; there can be no assurance that this will occur. The
integration of the finance and administrative operations and the product
offerings and platforms, and the coordination of the respective sales,
marketing and research and development efforts of ITDS and Intelicom will
require significant financial resources and attention from management. There
can be no assurance that such integration and coordination will be successful
or accomplished in a timely manner or that the anticipated economic,
operational and other benefits of the Intelicom Acquisition will be achieved.
The difficulties of such integration may be increased by the necessity of
coordinating the activities of ITDS facilities in Stamford, Connecticut with
Intelicom's facilities in Champaign, Illinois, each of which has a distinct
culture. The integration of Intelicom has required, and will continue to
require, the dedication of management resources which may temporarily divert
attention from the daily operations of the combined company.
In addition, in connection with the Intelicom Acquisition and subject to
the satisfaction of certain performance criteria, the Company may be required
to pay to CSC up to $6.0 million in cash on January 1, 1999.
Reliance On Significant Customers
The Company's largest two customers, Nextel and Western Wireless,
represented 25.7% and 10.3%, respectively, of the Company's 1997 revenues on a
Pro Forma Basis and 29.3% and 12.7%, respectively, of the Company's revenues
7
<PAGE>
for the first three months of 1998. It is likely that Nextel and Western
Wireless will each continue to represent over 10 percent of the Company's
revenues in the future. The Company has long-term contracts, ranging from two
to five years, with all of its significant customers. However, as a result of
the Intelicom Acquisition, the Company's relationships with its largest
customers have only been in place since January 1998. In addition, certain of
such customers have from time to time expressed concern regarding service
performed by Intelicom prior to the Intelicom Acquisition. The Company has
worked and continues to work with such customers to address these concerns.
There can be no assurance that the Company's customers will renew their
contracts with the Company at the end of the contract term or may not seek to
terminate their contracts on the basis of alleged contractual defaults or other
grounds. Certain of the Company's contracts do not require customers to make
any minimum purchases. Loss of all or a significant part of the business of any
of the Company's significant 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
significant 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. The Company is currently engaged in discussions with
Frontier Cellular, a cellular telephone service provider with which the Company
has an agreement for the development and delivery of a billing and customer
care system. The purpose of these discussions is to review and renegotiate the
terms of the development and delivery schedule for such system, including the
proposed functionality, cost of development and delivery schedule for such
system. There can be no assurance that any such proposed functionality, cost or
schedule will be mutually agreeable to the Company and Frontier Cellular, that
the Company's system will be adopted by Frontier Cellular or that Frontier
Cellular will be a customer of the Company in the future. See "Business--Sales
and Marketing."
Dependence on Key Personnel; New Management
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. In addition, several members of the Company's
senior management team have only recently joined the Company. For example,
Peter P. Bassermann, the Company's President, joined the Company in September
1997, Paul K. Kothari joined the Company in late 1997 and began serving as the
Company's Chief Financial Officer in February 1998, and Susan L. Yezzi joined
the Company in late 1997 and assumed the role of the Company's Executive Vice
President of Operations--Champaign in February 1998. Although each of Mr.
Bassermann, Mr. Kothari, Ms. Yezzi, Lewis D. Bakes, Joseph A. Juliano, Barry K.
Lewis, Peter L. Masanotti and Kevin Piltz has executed an employment contract
with the Company, there can be no assurance that they will serve their full
employment terms. Mark D. Spitzer resigned as Chief Financial Officer in
September 1997 and was replaced by Alan K. Greene, who served as Chief
Financial Officer from September 1997 to February 1998. See "Business--Legal
Proceedings." Although the Company believes that the extensive industry
experience of new members of management is essential to the Company's growth
and outweighs short employment history with the Company, there can be no
assurance that the assimilation of the new officers into their managerial roles
with the Company will be successful.
Fluctuations in Quarterly Performance
The Company's revenues and operating results may fluctuate from quarter to
quarter due to a number of factors, including the timing, size and nature of
the Company's contracts; the integration into the Company's consolidated
financial results of Intelicom and the lack of actual historical financial
results as a combined entity; long sales cycles typically associated with large
customers, which require the Company to make a substantial investment in the
conversion process prior to the generation of revenue; the hiring of additional
staff; seasonal variations in cellular telephone subscriptions; the timing of
the introduction and the market acceptance of new products or product
enhancements by the Company or its competitors; changes in the Company's
operating expenses; and fluctuations in economic and financial market
conditions. Fluctuations in quarterly operating results may result in
volatility in the price of the Common Stock. See "1997 Pro Forma Financial
Condition and Results of Operations."
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.
8
<PAGE>
To date, substantially all of the Company's revenues are attributable to
wireless customers. While the Company believes that its current systems and
services will also permit it to attract customers in other 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. Furthermore, if
the overall market for telecommunications services fails to evolve and converge
in the manner contemplated by the Company or grows more slowly than
anticipated, or if the Company's products and services fail in any respect to
achieve market acceptance, there could be a material adverse effect on the
Company's business, financial condition and results of operations. The
telecommunications industry is also characterized by significant and rapid
changes in strategic alignment. Merger or consolidation of one or more
telecommunications services providers could result in the loss to the Company
of customers or sales opportunities.
Demand for New Product Development
The Company believes that its future success depends in part upon its
ability to enhance its current solutions 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 solutions 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. There can be no
assurance that the Company will complete the development of new or enhanced
products or services on a timely or successful basis or successfully manage
transitions from one product release to the next, that the Company will not
encounter difficulties or delays in the introduction of new or enhanced
products, or that defects will not be found in such new or enhanced products
after installation, resulting in a loss of, or delay in, market acceptance. In
particular, the Company is currently developing a series of enhancements to its
existing software system, including incorporation of a Windows 95 compatible
user interface, incorporation of an Oracle relational database management
system, and support of Unix based file servers. The Company believes that these
enhancements will permit the Company to compete effectively as technology
evolves and facilitate its ability to address the requirements of larger
telecommunications services providers. If the Company is unable to introduce
these new enhancements on a timely basis, or such enhancements result in the
introduction of "bugs" or other performance impairments in the Company's
systems, the Company's business, financial condition and results of operations
could be materially adversely affected, and its ability to expand its sales
activities could be significantly limited. See "Business--New Products."
Competition
The market for billing, customer care 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 internal billing departments of
telecommunications services providers and with the billing services of
management consulting companies. 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.
Many of the Company's current and potential future competitors have
significant financial, technical and marketing resources and have greater name
recognition than 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. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of products than the Company. See "Business--Competition."
Dependence on Cellular Telephone Industry
Although the Company's products have been designed to adapt to a variety
of current and future technologies, substantially all of the Company's revenues
to date have been generated by sales of its solutions 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
9
<PAGE>
growth in the number of subscribers in the past, there can be no assurance that
such growth will be sustained. In addition, industry reports have indicated
that the average monthly bill per subscriber has decreased in recent years.
Such decreases could result in increased price competition among billing
service providers. Furthermore, any adverse development in the cellular
telephone industry could have a material adverse effect on the business,
financial condition and results of operations of the Company. See
"Business--Customers."
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. The computer technology industry is characterized by frequent and
substantial intellectual property litigation. 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.
The Company's success will depend in part on its continued ability to
obtain and use licensed technology that is important to certain functionalities
of its products. The inability to continue to procure or use such technology
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Proprietary Rights and
Licenses."
Government Regulation
Currently, the Company's business is not subject to direct government
regulation; however, the Company's existing and potential customers are subject
to extensive regulation. Changes in regulation which adversely affect the
Company's existing and potential customers could have a material adverse effect
on the business, financial condition and results of operations of the Company.
See "Business--Industry Background."
Limited Public Market; Possible Volatility of Stock Price
The Common Stock has traded on the Nasdaq National Market since October
1996 and has a limited public market history. There can be no assurance that
future market prices for the shares will equal or exceed the price to public
set forth on the cover page of this Prospectus. The price at which the Common
Stock will trade could be subject to wide fluctuations in response to quarterly
fluctuations in operating results; announcements of technological innovations
or new products by the Company or its competitors; changes in financial
estimates by securities analysts; fluctuations in economic and financial market
conditions, or other events or factors. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market price of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "--Fluctuations in
Quarterly Performance."
Risks Related to Possible Acquisitions
The Company's strategy includes pursuing additional acquisitions that will
complement its business. See "Business--The ITDS Strategy." There can be no
assurance that the Company will be able to identify, acquire on commercially
reasonable terms or at all, or profitably manage additional businesses or
successfully integrate acquired businesses into the Company without substantial
expenses, delays or other operational or financial difficulties. Furthermore,
acquisitions may involve a number of special risks, including, but not limited
to: (i) diversion of management's attention, (ii) possible failure to retain
acquired key personnel, (iii) unanticipated events or circumstances, (iv) risks
of entering markets in which the Company has no or limited prior experience,
(v)
10
<PAGE>
financial integration or (vi) legal liabilities. Customer satisfaction or
performance problems at a single acquired business could have a material
adverse effect on the reputation of the Company as a whole. In addition, there
can be no assurance that acquired businesses will achieve anticipated financial
performance. While the Company from time to time considers acquisition
opportunities, it has no existing agreements, understandings or commitments to
effect any material acquisition. The failure of the Company to manage its
acquisition strategy successfully could have a material adverse effect on the
Company's business, operation results and financial condition. See
"--Integration of Intelicom; Payment of Contingent Purchase Price."
Certain Anti-Takeover Effect Provisions Affecting Stockholders
The Company's certificate of incorporation (the "Certificate of
Incorporation") and by-laws (the "By-laws") provide that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing, and require reasonable advance notice by a stockholder of a
proposal or director nomination which such stockholder desires to present at
any annual or special meeting of stockholders. Special meetings of stockholders
may be called only by the Chairman of the Board, the Chief Executive Officer
or, if none, the President of the Company or by the Board of Directors. The
Certificate of Incorporation and By-laws provide for a classified Board of
Directors, and members of the Board of Directors may be removed only for cause
upon the affirmative vote of holders of at least two-thirds of the shares of
capital stock of the Company entitled to vote. The Board of Directors has the
authority, without further action by the stockholders, to fix the rights and
preferences of, and issue shares of, the Company's authorized Preferred Stock.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of any holders of Preferred Stock that may be
issued in the future. The Company has no present plans to issue any shares of
the Company's Preferred Stock. In addition, the Company is subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such stockholder became an "Interested Stockholder" unless
the business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. These provisions, and the provisions of the Certificate of
Incorporation and By-laws, may have the effect of deterring hostile takeovers
or delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may
deem to be in their best interests.
Shares Eligible for Future Sale
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. Upon completion of this offering, the Company will have
approximately 17,176,459 outstanding shares of Common Stock (based on the
number of shares outstanding on March 31, 1998), of which approximately
1,088,714 shares will be held by affiliates (as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act")) of the
Company and 606,673 shares are held by CSC (the "CSC Shares"). The shares held
by affiliates may only be resold in the public market in accordance with the
provisions of Rule 144. The CSC Shares will become eligible for resale in the
public market in accordance with the provisions of Rule 144 on January 2, 1999.
However, the Company has agreed to use its best efforts to cause a registration
statement covering the CSC Shares to be declared effective by the Securities
and Exchange Commission (the "Commission") on or before July 1, 1998. Pursuant
to such registration rights, (i) beginning July 1, 1998, CSC may sell up to 50%
of the CSC Shares; (ii) beginning January 1, 1999, CSC may sell up to the sum
of (x) 50% of the CSC Shares and (y) the maximum number of CSC Shares that CSC
would otherwise be entitled to sell under Rule 144 of the Securities Act and
(iii) beginning July 2, 1999, CSC may sell any remaining CSC Shares.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,750,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$26.50 per share are estimated to be $94,054,688, after deducting the
underwriting discount and commission and estimated offering expenses payable by
the Company. The Company will not receive any proceeds from the sale of shares
of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds from this offering to repay
$70 million outstanding under the Company's current term loan under the Amended
and Restated Credit Agreement dated as of March 18, 1998, among ITDS,
Intelicom, the lenders party thereto, First Union National Bank as
Administrative Agent and Lehman Commercial Paper, Inc. as Arranger (the "Credit
Agreement"), which amount was borrowed to finance a portion of the purchase
price in the Intelicom Acquisition. The Credit Agreement contains normal
covenants which include meeting certain financial ratios and it requires
payments of interest only at the rate of LIBOR plus up to two and one quarter
percent through March 30, 2000, at which time periodic principal payments will
become due. Principal payments of $1.25 million, $4.375 million, $5.625 million
and $6.25 million, respectively, will become due on a quarterly basis,
beginning March 30, 2000, 2001, 2002 and 2003, respectively. See
"Underwriting."
In addition, the Company may seek acquisitions of businesses, products and
technologies that are complementary to those of the Company, and a portion of
the remaining net proceeds, if any, may be used for such acquisitions. While
the Company engages from time to time in discussions with respect to potential
acquisitions, the Company has no plans, commitments or agreements with respect
to any such acquisitions as of the date of this Prospectus, and there can be no
assurances that any such acquisitions will be made. Pending such uses, the
Company intends to invest the net proceeds from this offering not used to repay
indebtedness in short-term, investment grade, interest-bearing instruments.
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 sales prices of the Common Stock on
the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
----------- -----------
Fiscal Year Ended December 1996:
- --------------------------------
<S> <C> <C>
Fourth Quarter (from October 24, 1996) ......... $ 16.33 $ 10.00
Fiscal Year Ended December 1997:
- --------------------------------
First Quarter .................................. $ 16.00 $ 10.67
Second Quarter ................................. $ 16.58 $ 6.92
Third Quarter .................................. $ 20.17 $ 15.17
Fourth Quarter ................................. $ 21.33 $ 14.33
Fiscal Year Ending December 1998:
- ---------------------------------
First Quarter .................................. $ 29.00 $ 20.83
Second Quarter (through May 8, 1998) ........... $ 34.25 $ 25.00
</TABLE>
On May 8, 1998, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $26.50 per share. As of May 8, 1998,
there were approximately 82 holders of record of the Common Stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on
December 31, 1997, on a Pro Forma Basis, and Pro Forma as adjusted to reflect
the sale of 3,750,000 shares of Common Stock offered hereby by the Company at
an assumed offering price of $26.50 per share and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the ITDS Consolidated Financial Statements, the Unaudited Pro Forma Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of December 31, 1997
(in thousands)
-----------------------------------------------
Pro Forma
Actual Pro Forma (1) as Adjusted(2)
----------- --------------- ---------------
<S> <C> <C> <C>
Term loan ........................................ -- $ 70,000 --
Long-term capital lease obligations .............. $ 74 74 $ 74
Stockholders' equity:
Common Stock, $.01 par value; 40,000,000 shares
authorized, 12,786,740 shares issued and
outstanding, actual; 13,393,413 shares issued and
outstanding, pro forma; and 17,176,459 shares
issued and outstanding pro forma, as adjusted (3) 128 134 172
Additional paid-in capital ....................... 44,447 54,441 148,459
Retained deficit ................................. (4,026) (19,506) (20,506)
Unearned compensation ............................ (231) (231) (231)
-------- --------- ---------
Total stockholders' equity ..................... 40,318 34,838 127,894
-------- --------- ---------
Total capitalization ......................... $ 40,392 $ 104,912 $ 127,968
======== ========= =========
</TABLE>
- --------
(1) Pro forma to reflect the Intelicom Acquisition as if it had occurred on
December 31, 1997.
(2) Pro forma to reflect the Intelicom Acquisition and as adjusted to give
effect to the sale by the Company of 3,750,000 shares of Common Stock
offered hereby (after deducting the underwriting discount and commission
and estimated offering expenses), the application of the net proceeds
therefrom, and the estimated cost ($1 million) of retiring the debt
assumed in connection with the Intelicom Acquisition.
(3) Excludes 2,489,099 shares of Common Stock issuable upon the exercise of
outstanding options as of December 31, 1997, and an additional 290,922
shares, 1,412,400 shares and 1,076,699 shares of Common Stock reserved for
issuance pursuant to the Company's 1996 Stock Incentive Plan, 1996
Employee Stock Purchase Plan and 1997 Stock Incentive Plan.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial information has been derived from the
ITDS Consolidated Financial Statements, which have been audited by Ernst &
Young LLP, independent auditors, and, except for the statements of operations
for the years ended December 31, 1993 and 1994 and the balance sheets as of
December 31, 1993, 1994, 1995 and 1996, appear elsewhere in this Prospectus,
and the unaudited Pro Forma Financial Statements. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference and the ITDS Consolidated Financial Statements, the Unaudited Pro
Forma Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997
1993 1994 1995 1996 1997 Pro Forma(1)
--------- --------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue .................................. $3,146 $6,324 $10,821 $16,689 $23,429 $ 80,404
Costs and expenses:
Operating expenses ...................... 834 1,647 2,788 4,283 5,617 25,764
General, administrative and selling
expenses .............................. 1,575 2,410 4,601 6,523 6,760 22,175
Depreciation and amortization ........... 242 406 641 1,054 1,596 9,571
Systems development and
programming costs ..................... 298 755 1,183 2,115 2,911 9,561
------ ------ ------- ------- ------- --------
Total cost and expenses .................. 2,949 5,218 9,213 13,975 16,884 67,071
------ ------ ------- ------- ------- --------
Operating income ......................... 197 1,106 1,608 2,714 6,545 13,333
Other income ............................. 50 29 49 316 1,702 1,382
Interest expense ......................... (329) (390) (453) (416) (120) (5,970)
------ ------ ------- ------- ------- --------
Income (loss) before income tax
expense and extraordinary item .......... (82) 745 1,204 2,614 8,127 8,745
Income tax expense ....................... -- 37 378 1,112 3,326 3,585
------ ------ ------- ------- ------- --------
Income (loss) before extraordinary
item (2) ................................ (82) 708 826 1,502 4,801 5,160
Extraordinary loss (net of $158 tax
benefit) ................................ -- -- (224) -- -- --
------ ------ ------- ------- ------- --------
Net income (loss) ........................ $ (82) $ 708 $ 602 $ 1,502 $ 4,801 $ 5,160
====== ====== ======= ======= ======= ========
Per common share data--Basic (3):
Income before extraordinary item ......... $ .09 $ .15 $ .38 $ .39
Extraordinary loss ....................... ( .03) -- -- --
------- ------- ------- --------
Net income ............................... $ .06 $ .15 $ .38 $ .39
------- ------- ------- --------
Shares used in determining basic
income per common share ................. 9,291 9,890 12,728 13,335
======= ======= ======= ========
Per common share date--Diluted (3):
Income before extraordinary item ......... $ .09 $ .15 $ .36 $ .37
Extraordinary loss ....................... ( .03) -- -- --
------- ------- ------- --------
Net income ............................... $ .06 $ .15 $ .36 $ .37
------- ------- ------- --------
Shares used in determining diluted
income per common share ................. 9,291 10,109 13,193 13,800
======= ======= ======= ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997
(in thousands)
-----------------------------------------------
Pro Forma
Actual Pro Forma (4) as Adjusted (5)
---------- --------------- ----------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short term
investments ......................... $28,967 $ 23,140 $ 47,195
Current assets ....................... 34,936 33,737 57,792
Total assets ......................... 44,452 123,409 146,464
Current liabilities .................. 2,364 16,801 16,801
Total long-term debt and capital lease
obligations ......................... 74 70,074 74
Total stockholders' equity ........... 40,318 34,838 127,894
</TABLE>
- --------
(1) Pro forma to reflect the Intelicom Acquisition, as if it occurred on
January 1, 1997. See "Unaudited Pro Forma Consolidated Financial
Statements."
(2) In 1995, the Company experienced an extraordinary loss of $223,696 (net of
a $158,038 tax benefit) in connection with the refinancing of long-term
debt.
(3) Computed on the basis described in Note 3 of the Notes to the ITDS
Consolidated Financial Statements.
(4) Pro forma to reflect the Intelicom Acquisition as if it occurred on
December 31, 1997. See "Unaudited Pro Forma Consolidated Financial
Statements."
(5) Pro forma to reflect the Intelicom Acquisition as if it occurred on
December 31, 1997, and as adjusted to give effect to the sale by the
Company of 3,750,000 shares of Common Stock offered hereby at an assumed
offering price of $26.50 per share (after deducting the underwriting
discount and commission and estimated offering expenses), the application
of the net proceeds therefrom, and the estimated cost ($1 million) of
retiring the debt assumed in connection with the Intelicom Acquisition.
See "Use of Proceeds" and "Capitalization."
Recent Developments
On April 28, 1998, the Company reported that revenue for the first quarter
of 1998 rose to $26.0 million from $5.3 million in the first quarter of 1997.
The Company's results include the results of Intelicom from the date of
acquisition, which effectively tripled the Company's revenues for the period.
The Company reported a loss for the first quarter of $13.5 million or a
loss of $1.01 per basic share compared to net income of $1.1 million or $.08
per basic share in the first quarter of 1997. The basic weighted average number
of shares of Common Stock outstanding for the first quarter of 1998 and 1997
were 13,406,387 and 12,655,040, respectively. Excluding the non-recurring,
in-process R&D and indirect costs associated with the Intelicom Acquisition,
earnings for the first quarter of 1998 were $2.0 million or $.14 per pro forma
diluted share, compared to $1.1 million or $.08 per diluted share in the first
quarter of 1997. The diluted weighted average number of shares of Common Stock
outstanding for the first quarters of 1998 (pro forma) and 1997 were 14,451,809
and 12,855,537, respectively.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
reflect the Intelicom Acquisition and combine the historical consolidated
financial statements of ITDS and Intelicom for the periods indicated using the
purchase method of accounting.
The unaudited pro forma consolidated balance sheet reflects the
adjustments as if the Intelicom Acquisition had occurred on December 31, 1997.
The unaudited pro forma consolidated statement of income has been prepared
assuming the Intelicom Acquisition had occurred on January 1, 1997. These pro
forma statements should be read in conjunction with "Capitalization," "1997 Pro
Forma Financial Condition and Results of Operations" and the historical
financial statements and related notes of ITDS and Intelicom. The historical
financial statements of Intelicom have been adjusted to conform with the
Company's December 31 year-end for purposes of the pro forma financial
statements.
The pro forma consolidated financial statements have been prepared using
the following assumptions:
[bullet] ITDS acquired the outstanding capital stock of Intelicom for $75.8
million in cash (which amount is net of working capital of $14.2
million retained by CSC), subject to adjustment based on the level
of receivables, payables and employment related items at the closing
date, and 606,673 shares of Common Stock of ITDS (then valued at $10
million) on January 2, 1998. Additionally, ITDS will be required to
pay CSC up to $6 million on January 1, 1999 if certain performance
criteria have been met on that date. The amount paid, if any, will
be recorded as goodwill when the final amount is known. ITDS also
incurred direct costs of approximately $2 million. These costs
consist primarily of legal, accounting and financial advisory fees.
[bullet] ITDS borrowed $70 million, on a long-term basis, to finance a
portion of the cash component of the Intelicom Acquisition and
incurred direct financing fees of approximately $1.5 million. See
"1997 Pro Forma Financial Condition and Results of Operations."
[bullet] It was assumed that ITDS incurred approximately $5 million, before
income tax benefit, in indirect transaction and combination costs.
These costs consist primarily of employment and personnel related
costs, the majority of which were expensed in the first quarter of
1998. The purchase price has been allocated to the assets and
liabilities of Intelicom based on their fair values at the date of
acquisition. The purchase price in excess of the fair value of the
net assets acquired was assumed to be approximately $51.6 million
and will be amortized over 15 years. In addition, purchased research
and development costs of approximately $20.8 million, before income
tax benefit, were expensed in the first quarter of 1998. The $5
million and the $20.8 million discussed above have been excluded
from the pro forma statement of income for the year ended December
31, 1997 and are included in the adjustments to the pro forma
balance sheet as of December 31, 1997.
Pro forma adjustments to the consolidated statement of income reflecting
anticipated cost savings and other synergies, if any, resulting from the
integration of ITDS and Intelicom are, under most circumstances, not permitted
and, accordingly, have not been reflected in the pro forma financial
statements. However, an adjustment to reverse a credit granted by Intelicom to
a major customer ($4.7 million) for obligations relating to services provided
prior to the acquisition by ITDS was recorded as this item is non-recurring and
directly related to the transaction.
The pro forma financial results are not intended to be a projection of
future results and are not necessarily indicative of the results which would
have occurred if the business combination had been in effect on the dates
presented.
16
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
ITDS Intelicom Adjustments Pro Forma
---------- ----------------- -------------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 28,967 $ -- $ (5,827) (1) $ 23,140
Accounts receivable, net ............... 5,008 18,310 (1) (13,885) (1) 9,433
Prepaid expenses ....................... 741 203 (1) -- 944
Deferred income taxes .................. 220 -- -- 220
-------- --------- ----------- --------
Total Current assets ................. 34,936 18,513 (19,712) 33,737
Computers .............................. 4,844 3,879 -- 8,723
Furniture and fixtures ................. 446 2,008 -- 2,454
Equipment .............................. 373 -- -- 373
Leasehold improvements ................. 590 736 -- 1,326
-------- --------- ----------- --------
6,253 6,623 -- 12,876
Accumulated depreciation ............... (2,319) (3,648) -- (5,967)
-------- --------- ----------- --------
Property and equipment, net .......... 3,934 2,975 (1) -- (1) 6,909
Product development costs .............. 3,698 13,530 2,270 (1) 19,498
Goodwill, net .......................... -- 12,743 38,818 (1) 51,561
Purchased software, net ................ -- 535 (535) (1) --
Deferred income taxes .................. -- -- 8,320 (2) 8,320
Other .................................. 1,884 -- 1,500 (3) 3,384
-------- --------- ----------- --------
Total assets ....................... $ 44,452 $ 48,296 $ 30,661 $123,409
======== ========= =========== ========
</TABLE>
17
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
ITDS Intelicom Adjustments Pro Forma
----------- ----------- ------------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND EQUITY
Accounts payable and accrued expenses .............. $ 2,086 $ 5,548 $ 3,000 (4)
1,500 (3)
3,293 (1) $ 15,427
Customer advances .................................. -- 1,096 -- 1,096
Current maturities of capital lease obligations 278 -- -- 278
-------- ------- ----------- ---------
Current liabilities .............................. 2,364 6,644 7,793 16,801
Capital lease obligations .......................... 73 -- -- 73
Deferred income taxes .............................. 1,667 7,416 (7,416) (1) 1,667
Long term debt ..................................... -- -- 70,000 (1) 70,000
Other .............................................. 30 -- -- 30
Common stock ....................................... 128 -- 6 (1) 134
Additional paid-in capital ......................... 44,447 -- 9,994 (1) 54,441
Retained deficit ................................... (4,026) -- (20,800) (1)
(3,000) (4)
8,320 (2) (19,506)
Unearned compensation .............................. (231) -- -- (231)
Shareholders' net investment ....................... -- 34,236 (34,236) (1) --
-------- ------- ----------- ---------
Stockholders' equity ............................. 40,318 34,236 (39,716) 34,838
-------- ------- ----------- ---------
Total liabilities and stockholders' equity ......... $ 44,452 $48,296 $ 30,661 $ 123,409
======== ======= =========== =========
</TABLE>
- --------
(1) To record assets acquired and liabilities assumed at their estimated fair
values consisting of the following (in thousands):
<TABLE>
<S> <C>
Product development costs ........... $ 15,800
In-process R & D .................... 20,800
Accounts receivable, net ............ 4,425
Pre-paid expenses ................... 203
Property and equipment, net ......... 2,975
Goodwill ............................ 51,561
Liabilities ......................... (7,937)
--------
$ 87,827
========
</TABLE>
The purchase price was satisfied as follows (in thousands):
<TABLE>
<S> <C>
Cash ............................. $ 5,827
Debt ............................. 70,000
Issuance of common stock ......... 10,000
Other liabilities ................ 2,000
-------
$87,827
=======
</TABLE>
(2) To record deferred tax asset related to the $20.8 million of purchased
research and development costs which were expensed for financial statement
purposes and will be amortized over a 15 year period for tax purposes.
(3) To capitalize direct financing costs associated with the Company's $70
million loan under the Credit Agreement.
(4) To record the indirect costs related to the Intelicom Acquisition of
approximately $5 million, less the applicable income tax benefit.
18
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
ITDS Intelicom Adjustments Pro Forma
---------- ----------- ------------------- ----------
<S> <C> <C> <C> <C>
Revenue ................................. $23,429 $52,269 $ 4,706 (1) $ 80,404
Costs and expenses:
Operating expenses ..................... 5,617 20,147 -- 25,764
General, administrative and selling
expenses .............................. 6,760 15,415 -- 22,175
Depreciation and amortization .......... 1,596 10,693 6,597 (2)
(9,315) (3) 9,571
Systems development and programming
costs ................................. 2,911 6,650 -- 9,561
------- ------- ---------- --------
Total costs and expenses ................ 16,884 52,905 (2,718) 67,071
------- ------- ---------- --------
Operating income (loss) ................. 6,545 (636) 7,424 13,333
Other income (loss) ..................... 1,702 -- (320) (4) 1,382
Interest expense ........................ (120) -- (5,850) (5) (5,970)
------- ------- ---------- --------
Income (loss) before income tax
expense ................................ 8,127 (636) 1,254 8,745
Income tax expense (benefit) ............ 3,326 (75) 334 (6) 3,585
------- ------- ---------- --------
Net income (loss) ....................... $ 4,801 $ (561) $ 920 $ 5,160
======= ======= ========== ========
Average shares outstanding:
Basic .................................. 12,728 -- 607 13,335
Diluted ................................ 13,193 -- 607 13,800
Earnings per share:
Basic .................................. $ .38 -- -- $ .39
Diluted ................................ $ .36 -- -- $ .37
</TABLE>
- --------
(1) To reverse credits given to an Intelicom customer for obligations relating
to services provided prior to the Intelicom Acquisition.
(2) To record amortization expense related to the $51.6 million of goodwill
over 15 years and the $15.8 million of software development costs over 5
years.
(3) To reverse amortization expense recorded by Intelicom prior to the
Intelicom Acquisition.
(4) To reflect reduced earnings on investments (assumed to be at a rate of 5.5%
per year after expenses) related to the cash component of the purchase
price.
(5) To record interest expense (assumed to be at a rate of 8% per year) and the
amortization of financing costs over the six-year term of the Company's
$70 million loan under the Credit Agreement.
(6) To adjust the income tax expense on a Pro Forma Basis to an effective tax
rate of 41%.
19
<PAGE>
1997 PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ITDS is a leading provider of comprehensive billing, customer care and
management information solutions to providers of wireless and satellite
telecommunications services. The Company currently supports over 5 million
subscribers in more than 200 wireless markets. In January 1998, ITDS completed
the Intelicom Acquisition. Intelicom provides complete billing and customer
care solutions for the wireless communication industry, including cellular,
PCS, paging and ESMR. The Intelicom Acquisition positions the Company as a
provider of billing service to wireless carriers and resellers in 29 of the top
30 markets in the United States. Revenue for Intelicom for the year ended
December 31, 1997 was approximately $57.0 million, or approximately 71% of the
Company's revenues for 1997 on a Pro Forma Basis.
The Company derives substantially all of its revenue (i) primarily from
service contracts, which are generally billed monthly, under which a customer
contracts with the Company to operate and maintain such customer's
transactional billing system; (ii) to a lesser extent, from the development of
new software, the enhancement of existing installed systems and the provision
of related customer maintenance and training, which are largely billed on a
time and materials basis. Service revenue is recognized in the period in which
the services are provided and revenue from the development of software is
recognized at the time the services are performed. On a Pro Forma Basis,
service revenue relating to the operation of customers' billing systems
accounted for approximately 90% of total revenue in 1997.
Operating expenses are comprised primarily of the salaries and benefits of
technical service representatives, operations personnel, quality assurance
representatives and consultants 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.
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 capitalizing such
costs 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. Amortization is computed by using the greater of the amount that
results from applying the ratio of current revenue for the product over total
revenue for the product or the straight-line method over the remaining useful
life of the product. Generally, such deferred costs are amortized over five
years.
Results of Operations on a Pro Forma Basis
On a Pro Forma Basis, revenue was approximately $80.4 million for fiscal
1997, reflecting revenue for ITDS (not including Intelicom) of approximately
$23.4 million, and revenue for Intelicom of approximately $57.0 million,
including an adjustment of $4.7 million. Revenue for Intelicom increased from
approximately $31.2 million for the fiscal year ended March 29, 1996 to
approximately $42.2 million for the fiscal year ended March 28, 1997.
On a Pro Forma Basis, operating costs and expenses were approximately
$35.3 million for 1997, reflecting operating costs and expenses for ITDS (not
including Intelicom) of approximately $8.5 million and operating costs and
expenses for Intelicom of approximately $26.8 million. Also included in
operating costs and expenses on a Pro Forma Basis were system development and
programming costs of $9.5 million (including $2.9 million for ITDS (not
including Intelicom) and $6.6 million for Intelicom), which were comprised
primarily of employee salaries and benefits and consultant fees related to
internal software development.
General, administrative and selling expenses on a Pro Forma Basis were
approximately $22.2 million for 1997, reflecting general, administrative and
selling expenses for ITDS (not including Intelicom) of approximately $6.8
million and general, administrative and selling expenses for Intelicom of
approximately $15.4 million.
Operating income on a Pro Forma Basis was approximately $13.3 million for
1997, reflecting operating income for ITDS (not including Intelicom) of
approximately $6.5 million and operating income for Intelicom of approximately
$6.8 million. The Intelicom operating income reflects pro forma adjustments of
(i) $4.7 million to reverse credits given to an Intelicom customer for
obligations relative to services provided prior to the Intelicom Acquisition,
(ii) $6.6 million to record an amortization expense related to goodwill and
software development costs recorded as part of the Intelicom Acquisition and
(iii) $9.3 million to reverse historical amortizations recorded by Intelicom.
20
<PAGE>
Interest expense on a Pro Forma Basis was approximately $6.0 million for
1997, reflecting interest expense for ITDS (not including Intelicom) of
$100,000 and a pro forma adjustment of $5.9 million to reflect interest expense
(assuming an interest rate of 8%) and the amortization of financing costs for
the Company's $70 million term loan under the Credit Agreement.
Net income on a Pro Forma Basis was approximately $5.2 million for 1997
reflecting net income of $4.8 million for ITDS (not including Intelicom) and
net income of $400,000 for Intelicom, including net adjustments of $920,000. On
a Pro Forma Basis, 1997 basic and diluted earnings per share were $.39 and
$.37, respectively. The actual 1997 basic and diluted earnings per share for
ITDS (not including Intelicom) were $.38 and $.36, respectively. The pro forma
net income and per share amounts reflect the adjustments described above.
The Intelicom Acquisition is expected to more than triple the Company's
revenue in 1998 compared to ITDS' actual revenue in 1997. However, management
expects 1998 margins as a percentage of revenue to decline when compared to
actual 1997 margins, due to the historically lower margins of Intelicom and an
expected increase in the Company's overall development and customer service
costs. Management anticipates cost savings in 1998, resulting primarily from
the elimination of CSC's overhead allocation. These lower margins are expected
to improve during 1999 as the efficiencies of the Intelicom Acquisition are
realized.
Liquidity
As of December 31, 1997, on an actual and pro forma basis as if the
Intelicom Acquisition occurred on December 31, 1997, respectively, ITDS had
cash and cash equivalents of $29.0 million and $23.1 million, trade accounts
and receivables of $5.0 million and $9.4 million, and working capital of $32.6
million and $16.9 million.
On January 2, 1998, ITDS acquired Intelicom for 606,673 shares of Common
Stock of the Company and $75.8 million in cash, plus a future contingent
payment of up to $6 million. A portion of the cash purchase price for Intelicom
was obtained by ITDS under the Credit Agreement which provides for a $70
million term loan and a $30 million line of credit. See "Use of Proceeds" and
"Underwriting." The Credit Agreement contains normal covenants which include
meeting certain financial ratios and it requires payments of interest only, at
a rate of LIBOR plus up to two and one quarter percent, through March 30, 2000,
at which time periodic principal payments will become due. Principal payments
of $1.25 million, $4.375 million, $5.625 million and $6.25 million will become
due quarterly beginning March 30, 2000, 2001, 2002 and 2003, respectively. In
addition, the Company has entered into a hedging agreement with a third party,
pursuant to which the Company currently pays a fixed interest rate of 8% with
respect to $35 million of the amount outstanding under the Credit Agreement.
The Company plans to use the proceeds of this offering to pay off all amounts
under the Credit Agreement. See "Use of Proceeds."
The Company believes that its existing capital resources as well as funds
available under the Credit Agreement 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.
In addition to the proceeds to the Company from this offering, the Company
may seek additional funding through public or private financing. 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.
Year 2000
The Company is preparing all of its products and internal computer systems
to be Year 2000 compliant. A compliance task force has been established, and is
currently identifying and developing conversion strategies for the Company's
systems. The Company expects to replace some of its systems and to upgrade
others. The Company currently estimates the compliance effort, including
planning, implementation and testing, to cost approximately $2 million to $3
million, and expects that a substantial portion of this expenditure will occur
in 1998. Although the Company does not expect the cost to have a material
adverse effect on its business or future results of operations, there can be no
assurance that the Company will not be required to incur significant
unanticipated costs in relation to its compliance obligations. The Company
currently estimates that compliance will be achieved in early 1999, however,
there can be no assurance that the Company will be able to complete the
conversion in a timely manner or that third party software suppliers will be
able to timely provide Year 2000 compliant products for the Company to install.
21
<PAGE>
BUSINESS
ITDS is a leading provider of comprehensive billing, customer care and
management information solutions to providers of wireless and satellite
telecommunications services. The Company currently supports over 5 million
subscribers in more than 200 wireless markets. The Company uses its proprietary
software technology to develop solutions which address billing and customer
care requirements as they evolve, regardless of a service provider's market
segment, geographic area or mix of network features and billing options. The
Company currently serves leading national and regional wireless
telecommunications companies in the United States, including Aliant, Dobson,
Nextel, Omnipoint, Southwestern Bell, Sygnet, Western Wireless and WorldCom.
Typically, the Company provides its services under contracts with terms ranging
from two to five years, and bills customers monthly, on a per-subscriber basis.
As a result, substantially all of the Company's revenue is derived from bill
processing services, which are recurring in nature, and such revenue generally
increases as the number of subscribers served by the Company grows.
In January 1998, the Company completed the Intelicom Acquisition.
Intelicom provides complete billing and customer care solutions for the
wireless communication industry, including cellular, PCS, paging and ESMR.
Revenue for Intelicom for the year ended December 31, 1997 was approximately
$57.0 million, or approximately 71% of the Company's 1997 revenues on a Pro
Forma Basis. Primarily as a result of the Intelicom Acquisition, the number of
subscribers supported by the Company increased from 735,000 in January 1997 to
approximately 4.6 million in January 1998. Intelicom's data center is located
in Champaign, Illinois. The Company believes there are strong synergies between
the acquired platforms and applications and the ITDS platforms and applications
existing at the time of the Intelicom Acquisition. The Company intends to
reconfigure and combine certain of its platforms to reduce the number of total
platforms offered and to migrate desirable applications across its platform
offering.
In recent years, the telecommunications services industry has experienced
rapid growth and dramatic change, ranging from the introduction of such
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 billing and customer care solutions by drawing
on the Company's core technology and significant human resources. The Company's
systems support customers with subscriber bases ranging from under 100,000 to
in excess of 1 million. The Company's software currently supports leading
wireless telecommunications protocols, including Advanced Mobil Phone Systems
("AMPS"), Global System for Mobile Communication ("GSM"), Time Division
Multiple Access ("TDMA") and Code Division Multiple Access ("CDMA").
The Company's advanced billing, customer care and management information
systems form the foundation for a 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, fraud management, electronic funds transfer, credit management,
inventory management and data archiving. The systems architecture permits
service providers to package functions and features, such as short messaging
service ("SMS"), dispatch and pre-paid calling, to meet a customer's specific
requirements. 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
In 1996, the U.S. telecommunications services industry generated
approximately $222 billion in 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.
22
<PAGE>
At the same time, 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 vertical services, such as short messaging
services, voice mail and paging. 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
telephone within the vicinity of the subscriber's home or business and apply
cellular rates elsewhere. In addition, 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.
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
CTIA estimates that the number of wireless subscribers in the United
States increased from 500,000 in June 1986 to 55.3 million in December 1997. In
the twelve months ended December 1997, wireless providers generated more than
$27 billion in revenue in the United States. 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.
While the number of cellular service subscribers in the United States has
grown substantially in recent years, the average revenue per user has declined
and is expected to decrease further. The CTIA has reported that revenue per
subscriber declined over 55% from December 1987 to December 1997. Cellular
service providers are experiencing increased price competition in the wireless
telecommunications industry as providers of PCS and other services enter the
geographic markets previously served only by cellular carriers, requiring the
cellular service providers to differentiate their services and adopt innovative
rate tariffs.
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,
provided services to approximately 171 million customers in the U.S.,
generating more than $196 billion in revenue in 1996. Deregulation has spurred
the creation of new entrants in both the local and long distance market,
created an environment for mergers and consolidation 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,
wireline providers are pursuing opportunities in the cable market and wireless
providers are examining wireless local loop and the traditional long distance
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 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. The Company believes that recurring
billing is a carrier's most significant interface with the subscriber, and is
therefore a critical element of attracting, communicating with, and retaining
subscribers.
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. Such systems often
cannot be integrated with other information sources within a provider's
organization, or databases outside an organization. Introduction of changes in
parameters such as price and service often requires significant reconfiguration
or reprogramming. These traditional means of billing and
23
<PAGE>
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, the decreasing revenue per
subscriber 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 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
managing 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, manage and staff internally.
As a result, service providers need billing, customer care and management
solutions which:
[bullet] enable them to differentiate their services in a highly competitive
and fungible market through the development, implementation and
support of a broad range of rate structures, services and features;
[bullet] respond quickly, efficiently and accurately to market-driven
demands, such as frequent changes in rate structures and innovative
marketing programs;
[bullet] integrate seamlessly with their corporate management information
services, so that providers can use the data generated for
operational and other strategic purposes as an integral part of
their marketing and sales plans;
[bullet] provide a basis for the efficient development and deployment of
solutions to address common industry issues such as authentication
management and local number portability; and
[bullet] offer reliability and accuracy as critical components of subscriber
relations, communication and retention.
The ITDS Solutions
The Company's solutions are based upon software systems that provide
reliable and accurate billing, customer care and management information
support, and enable the service provider to automate subscriber activation,
remittance processing, collections, data retrieval and reporting, fraud
management, electronic funds transfer, credit management, automation of
inventory management, and data archiving, running in either single or multiple
telecommunications services markets, including wireless, ESMR, paging 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 Company's range of solutions enables the Company to deliver some or
all of the functionality described above to wireless service providers serving
different sized subscriber bases, employing different technologies and serving
different industry segments.
24
<PAGE>
The ITDS Strategy
The Company's objective is to further its position as a leading provider
of billing and customer care services to telecommunications service providers
worldwide. Key elements of the Company's strategy include:
[bullet] Leverage Its Expanded Customer Base. Historically, the Company's
customer base had been limited to smaller and mid-sized wireless
providers. The Intelicom Acquisition in January 1998 enabled the
Company to penetrate the market of larger service providers and
substantially expanded the Company's subscriber base. The Company
believes that the new customers that it acquired as a result of the
Intelicom Acquisition will enable it to further penetrate the market
for larger telecommunications service providers. The Company's
expanded customer base enhances the Company's presence as a provider
of billing and customer care services to large wireless service
providers and demonstrates the Company's technological capabilities
in servicing additional customers with large subscriber bases. In
addition, the Company anticipates further growth of its subscriber
base as customers expand into new markets and acquire businesses in
new market segments.
[bullet] Efficiently Support Customer Needs. The Company intends to continue
to meet the specific needs of each of its existing customers by
using its broad technology base and its knowledge and experience in
the telecommunications industry to offer and support solutions and
platforms that offer functionality tailored to such customers'
specific needs. In addition, the Company intends to leverage its
technological expertise by making certain modules and
functionalities that are currently offered on some of its platforms
more broadly available across its platform offerings. By drawing on
the strengths of its overall product line, the Company expects to
offer its customers greater flexibility on its larger systems and
increased capacity and scalability on its smaller systems.
[bullet] Leverage Technology Features to Penetrate Related Market Segments.
The Company believes it is well positioned to leverage its
technology base by offering billing, customer care and management
information solutions to providers in non-wireless
telecommunications services market segments including satellite,
data transmission, Internet and other enhanced services. Expansion
into these additional sources of potential revenue are not expected
to 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, while enabling the Company to offer features and
functions to meet provider requirements.
[bullet] Achieve Greater Economic Potential of Combined Operations. The
Company currently sustains separate operations, including research
and development and customer support, in its Stamford, Connecticut
and Champaign, Illinois facilities. The Company believes that it has
significant opportunity to achieve greater economic efficiencies by
combining certain of its facilities' operations. The Company intends
to devote significant management and financial resources to
streamlining and combining operations in order to achieve future
cost reductions and improved product and services margins.
[bullet] Expand International Operations. The Company believes that the
flexibility of its system will permit it to address the billing,
customer care and management information solutions requirements of
international telecommunications services providers without the need
for significant reconfiguration. For example, the Company's systems
currently support the provision of cellular services based on GSM
technology, which has been widely adopted outside the United States,
as well as other emerging digital services. The Company, through its
subsidiary ITDS LTDA, a Brazilian limitada, provides billing
services to MCOMCAST, S.A., a Brazilian limitada owned by COMCAST
International Holdings, Inc. and MCOM Wireless, S.A. In 1997, the
Company established a presence in South America by opening an office
in Sao Paulo, Brazil and by the end of 1998, it expects to establish
a service bureau operation there from which it will be able to
provide billing services and support to Brazil.
[bullet] Continue to Pursue Strategic Acquisitions. As part of the Company's
expansion strategy, the Company completed the Intelicom Acquisition
in January 1998. The Company will continue to examine the
possibility of acquiring complementary organizations. The Company's
approach to acquisitions is to target firms that provide customers
with subscribers in new markets and product offerings and features
that complement or extend those of the Company.
25
<PAGE>
Products and Services
Core Systems
The Company provides its customers with billing, customer care and
management information solutions through the use of its software systems and
the provision of billing and customer care 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 uses its software to process the billing information, eliminating the
need for customers to maintain their own data processing operations.
As a result of the Intelicom Acquisition, the Company acquired additional
software platforms used to perform billing and customer care functions. The
Company believes there are strong synergies between the acquired platforms and
applications and the ITDS platforms and applications existing at the time of
the Intelicom Acquisition. The Company intends to reconfigure and combine
certain of its platforms to reduce the number of total platforms offered and to
migrate desirable applications across its platform offerings. The Company
believes this strategy will improve the capabilities of its billing and
customer care services; reduce operating costs, both internally and for its
customers; and reduce subscriber impact in the event its customers change
platforms.
The Company's suite of applications allows customers the flexibility of
changing their billing and customer care services to implement, for example,
rate plan changes for access, toll usage or toll discounts. Drawing on their
client/server architecture, the Company's solutions can be integrated with a
customer's communication and data systems to provide customers with the ability
to generate up-to-date subscriber analysis and reports. To further assure their
operational flexibility and usefulness, the Company's systems support leading
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's solutions perform a broad range of transactional billing and
customer care functions, including customer acquisition and provisioning,
message rating and billing, customer care and revenue assurance. The
functionality available to the Company's customers depends upon the specific
solution deployed by the customer, and includes some or all of the applications
described below.
Customer Acquisition and Provisioning
The Company's customer acquisition and provisioning applications are
designed to facilitate customers' efforts to manage sales leads, qualify
subscribers, administer inventories, assign price plans, create and update
subscriber accounts and provision the appropriate network services. Some of the
key applications include:
Point Of Sale. The Company's Point Of Sale (POS) application creates and
controls work flows for the entire sales process. These work flows make
data entry more efficient and easier for the system user, and ensure that
all of the required subscriber information is accurately recorded. Advanced
hardware and software enable sales staff to quickly process initial service
applications, perform on-line credit checks with automatic scoring, update
inventories, print service agreements and payment receipts and accept
credit card payments. Although the Company's POS application is currently
limited to use with certain of the Company's platforms, the Company expects
that future versions of the application will be available for use with the
Company's other platforms and with other vendors' billing systems.
Inventory Administration. The Company's inventory administration
applications allow customers to perform extensive inventory management of
equipment, services and subscriber data, such as account numbers, mobile
directory numbers and international mobile subscriber identification
numbers. The Company's applications enable customers to manage and control
these inventory items, not only at the time of activation, but also during
the process of ordering, receiving and verification.
Provisioning of Network Services. The Company's TSI Vision application
integrates with a variety of network elements and databases to automate the
provisioning of servicing such as voice, voice mail, dispatch and short
message service.
26
<PAGE>
Message Rating and Billing
The Company's message rating and billing applications provide its
customers robust capabilities in the following areas:
Data Collection. The Company's data collection application interfaces with
a variety of network elements to collect, forward and manage the process
flow of network calls, events and activities. This information is
distributed to a number of applications such as real-time rating, fraud
control and message rating and processing modules. The data collection
application supports real-time data collection from a network element via
electronic transmission over a direct network connection.
Message Rating. The Company's message rating applications provide its
customers with flexibility and control over their market pricing. The
authorized user can establish independent rating schedules for system usage
(airtime) and long distance (toll), enabling the Company's customers to
exercise a high degree of creativity and flexibility when developing
pricing strategy. In addition, real-time rating, which is currently
available on one of the Company's platforms, allows the Company's customers
to monitor subscriber account balances in real time. This application
allows the Company's customers to offer to their subscribers innovative
features, such as pre-paid calling. The Company's message rating
applications also support a variety of customer defined features including
flexible discounting, variable rounding of time, bundled minutes and
special phone numbers.
Message Processing. The Company's message processing applications manage a
complex set of rules and business logic to accurately calculate usage-based
pricing for customers' subscribers. These applications make the
determination of call inclusion or exclusion, length of call or event and
subscriber feature utilization, based in part upon the subscriber's price
plan, the physical location of the caller, time of day, day of week and
service utilized.
Bill Calculation and Processing. The Company's bill calculation and
processing applications ensure accuracy in the calculation of subscribers'
bills by performing a series of pre-runs, error correction and bill
verification routines. These activities are executed by both the Company
and its customers and ensure that billing information is timely and
accurate.
Customer Care
The Company's customer care applications permit a customer to apply and
execute a variety of subscriber payment options, to create service credit and
adjustments on-line, to generate notes and reminders and to execute alternate
collection strategies.
Front-End Services. The Company's front-end services applications support
the day-to-day operation of customers' billing and customer care functions
and forms the core of the Company's product and service offerings. The
applications consist of two components:
Credits and Adjustments. This application allows a customer's Customer
Service Representative ("CSR") to perform a variety of maintenance and
service functions on a subscriber's account. For example, the CSR can
issue call credits at the individual call level, groups of calls or
total amount, in order to correct erroneous bills. In addition, this
application allows a customer to control the degree of credit and
adjustment functionality given to each CSR.
Customer Maintained System Parameters. This application allows customers
to modify and update their business rules within various functions,
including rate plans, toll rates, discount schedules, cell site,
application profile and security. The application provides customers the
flexibility to address their dynamic market needs in real-time, without
the need for significant re-programming on the part of ITDS.
Payment Capabilities. The Company's payment applications provide several
methods and options for the receipt and processing of subscriber payments.
These processes, which are optional modules, can be independently deployed
by the customer and include not only traditional lockbox, but also credit
card, direct debit and bank draft.
Revenue Assurance
The Company's revenue assurance applications include system security,
general ledger interface and reporting capability, which ensure that customers'
processes are subject to the appropriate levels of control and system
auditability. The Company's applications satisfy the audit and control
requirements of the SAS 70 Accounting Standard.
27
<PAGE>
New Products
The Company continues to refine its existing software and to introduce new
applications to meet evolving customer requirements. The Company is currently
developing a new platform, based on an open systems architecture, that has a
Windows 95-compatible user interface, supports an Oracle relational database
management system and operates on a UNIX-based file server. The Company
believes that this enhanced platform will address the needs of larger customers
that require substantial functionality on a scalable and interoperable basis.
The Company expects this platform to become available during the second half of
1998.
In addition, the Company intends to maximize its technological expertise
by developing new applications for use on all of its platforms and by making
certain applications that are currently offered on some of its platforms more
broadly available across its platform offerings. By drawing on the strengths of
its overall product line, the Company expects to offer greater flexibility on
its larger systems and increased capacity and scalability on its smaller
systems. The Company is currently evaluating its products and those of third
parties to determine an implementation strategy for such applications.
In 1997, the Company announced the successful implementation of fraud
management and authentication ("A-Key") functionality into its solutions. The
feature is compliant with EDI A-Key Guidelines published by CTIA and is also
capable of utilizing other formats pursuant to a customer's specific needs. The
Company is currently enhancing the product to provide a greater range of
functionality in A-Key management and expects the enhanced version to become
available by the middle of 1998.
In anticipation of possible future enhancements, the Company continually
reviews technological innovations and changing standards and services in the
industry. See "System Development."
Customers
The ITDS solutions currently support over 5 million subscribers in over
200 wireless markets, including 29 of the top 30 domestic markets. The Company
has 54 customers, including two customers that each represent more than 10% of
the Company's total revenue. These customers include a broad range of wireless
telecommunications service providers, serving different sized subscriber bases,
employing different technologies and focusing on different industry segments.
The Company's current customers include Aliant, Dobson, Nextel, Omnipoint,
Southwestern Bell, Sygnet, Western Wireless and WorldCom.
Many of the customers acquired by the Company through the Intelicom
Acquisition in January of 1998 have substantially larger subscriber bases than
the Company's existing customers at the time of the Intelicom Acquisition. The
Company's customers, other than those acquired in the Intelicom Acquisition,
have subscriber bases of up to approximately 300,000, while the customers
obtained through the Intelicom Acquisition have subscriber bases of up to in
excess of one million. Nextel and Western Wireless each represent over ten
percent of the Company's 1997 revenues on a Pro Forma Basis and it is likely
that they will continue to represent over ten percent of the Company's revenue
in the future. The loss of any such customer could have a material adverse
effect on the operating results of the Company. See "Risk Factors--Reliance on
Significant Customers."
The following provides a brief description of certain of the Company's key
customers:
<TABLE>
<S> <C>
Aliant Aliant provides wireline and wireless services to customers in Nebraska and Iowa. Aliant's
wireless services include cellular operations and wide-area paging services. Aliant operates a
cellular telecommunications system in the Lincoln, Nebraska metropolitan area. The company
also manages the limited partnership which is the license holder for the southwestern six counties
of Iowa. As of December 31, 1997, Aliant served approximately 200,000 wireless subscribers.
Aliant has been a customer of the Company since 1992.
Dobson Dobson provides diversified telecommunications products and services in eight states across the
country. Dobson's wireless operations focus on the ownership, operation and development of
rural cellular systems primarily in portions of certain mid-western, southwestern and mid-atlantic
states. In addition, Dobson recently purchased PCS licenses in Oklahoma, Kansas and Missouri.
As of December 31, 1997, Dobson served approximately 100,000 wireless subscribers. Dobson
has been a customer of the Company since July 1994.
28
<PAGE>
Nextel Nextel provides a wide array of digital and analog wireless communications services
throughout the United States. Nextel offers a differentiated integrated package of digital
wireless communications services under the Nextel brand name, primarily to business users.
The Company provides services to Nextel's digital subscriber base. As of December 31,
1997, Nextel provided service to approximately 1,270,700 digital subscriber units in the
United States. Nextel's digital network constitutes one of the largest integrated wireless
communications systems utilizing a single transmission technology in the United States. At
December 31, 1997, Nextel's digital network was operational in areas in which
approximately 65% of the total United States population lives or works, providing coverage
in or around 75 of the top 100 metropolitan statistical areas in the United States. Nextel
became a customer of the Company in January 1998 as a result of the Intelicom Acquisition.
Previously, Nextel had been a customer of Intelicom since March 1995. Revenue from
Nextel accounted for approximately 25.7% of the Company's 1997 pro forma revenue.
Omnipoint Omnipoint is a leader in commercializing PCS. As of December 31, 1997, Omnipoint marketed
wireless communications services to over 16 million people covered by networks primarily in
the New York Major Trading Area and Philadelphia area Basic Trading Areas ("BTA") and
surrounding BTAs. Omnipoint has licenses to provide such services in areas covering a
population of approximately 96.5 million, of which approximately 60% are located in a
contiguous region of the northeast U.S. from Maine to Virginia. In addition, Omnipoint has
licenses in southeast Florida and the Midwest. As of December 31, 1997, Omnipoint had
approximately 141,000 active subscribers. In January 1998, Omnipoint became a customer of
the Company as a result of the Intelicom Acquisition. Previously, Omnipoint had been a
customer of Intelicom since July 1996.
Sygnet Sygnet owns and operates cellular telephone systems serving one large cluster with a population
of approximately 2.4 million in northeastern Ohio, western Pennsylvania and western New York.
As of December 31, 1997, Sygnet had approximately 143,000 subscribers. Sygnet has been a
customer of the Company since September 1995.
Western Western Wireless provides wireless communications services in the western United States.
Wireless Western Wireless owns an aggregate of 199 cellular and PCS licenses for a geographic area
covering a population of approximately 68.0 million. In addition, Western Wireless is a
partner in ventures owning 25 PCS licenses for a geographic area covering a population of
approximately 15.6 million. Western Wireless' combined cellular and PCS licenses, together
with licenses held by the ventures in which it is a partner, cover approximately 59% of the
land in the continental United States. As of December 31, 1997, Western Wireless served
648,600 subscribers in its consolidated cellular and PCS markets. Western Wireless became
a customer of the Company as a result of the Intelicom Acquisition. Previously, Western
Wireless had been a customer of Intelicom since February 1993. Revenue from Western
Wireless accounted for approximately 10.3% of the Company's 1997 pro forma revenue.
WorldCom WorldCom is one of the largest telecommunications companies in the United States, based
on 1996 revenues, serving local, long distance and Internet customers domestically and
internationally. The products and services provided by WorldCom include switched and
dedicated long distance and local products, dedicated and dial-up Internet access, resale
cellular services, 800 services, calling cards, domestic and international private lines,
broadband data services, debit cards, conference calling, advanced billing systems, enhanced
fax and data connections, high speed data communications, facilities management and local
access to long distance companies. The Company currently provides services to a portion
of WorldCom's wireless subscribers base. WorldCom has been a customer of the Company
since October 1997.
</TABLE>
29
<PAGE>
Customer Support and Training
The Company believes that because its solutions are critical to the
competitive success of its customers, the Company must provide a high level of
support from the time a customer converts to the Company's software and
continuing through the on-going provision of transactional billing and customer
care services. The Company assigns to each new customer a dedicated conversion
team that specializes in facilitating the transition onto the Company's
solutions 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, which may include an
account manager, a customer service team and a team of programmer/analysts for
on-going support of the customer's requirements, including implementation 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 senior management
meets with customers on a regularly scheduled basis to maintain a dialogue with
the customers and to identify, anticipate and meet evolving customer needs. The
Company also conducts focus groups to identify ways to improve system
efficiency.
The Company's service and support activities are supplemented by the
provision of on-going training classes 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 customer care
billing and management information service process.
On March 31, 1998, the Company's customer service and support department
consisted of 141 people, with an additional 17 dedicated quality assurance
employees.
Sales and Marketing
ITDS targets telecommunications and non-telecommunications companies with
a need for transaction billing and customer care solutions. The Company's
strategy has been to establish, maintain and expand long-term customer
relationships.
Service providers' subscriber bases increase both through organic growth
and through additional market acquisitions. This generally results in
increasing recurring revenue for ITDS based on contract prices and volume of
subscribers. Additionally, as customers choose to add functionality and
capabilities to the Company's billing and customer care system, the Company
receives additional revenue for the development, integration, and maintenance
of these enhancements into the system platform. In the future, the Company
expects that an increasing percentage of its total revenues will be derived
from such development projects. The Company has also developed applications,
such as A-Key fraud management and Point Of Sale system, that can stand alone,
either as part of the Company's platform or a competitors platform. The Company
believes these products are viable solutions to solving fraud and customer
acquisition issues for customers. The Company continues to explore
opportunities with new customers and expand its business with its existing
customers. In addition, the Company intends to pursue opportunities in the
international market which it finds advantageous to its distribution and
marketing strategy.
The Company has contracts with its customers with terms ranging from two
to five years. Although these contracts are generally of a long-term nature,
there can be no assurance that any 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.
Historically, the Company has achieved substantial growth with a core
marketing team of senior executives. Although the Company has recently begun to
expand its sales and marketing group as part of its overall strategy to add
customers, the Company's senior executives continue to be heavily involved in
the sales and marketing processes.
30
<PAGE>
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 current solutions. 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, which may include the
integration of third party applications into the Company's existing products.
In addition to internal development, the Company works with its strategic
partners, such as 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.
The Company intends to reconfigure and combine certain of its platforms to
reduce the number of total platforms offered and to migrate desirable
applications across its platform offerings. No assurance can be given, however,
that the Company will be able to successfully develop and implement such
functionality, or that the Company will be able to introduce such functionality
on a timely or cost-effective basis.
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
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 and CTIA's Local Number
Portability group.
On March 31, 1998, the Company employed 351 people in product and systems
development and engaged 99 independent contractors in conjunction with the
continued development of its software products, programming and development.
Competition
The market for billing, customer care 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 independent providers
of transactional systems and services, with internal billing departments of
telecommunications services providers and with the billing services of
management consulting companies. The Company believes its most significant
competitors in the wireless telecommunications segment are, within the service
bureau model, Alltel Information Systems, Inc. and Cincinnati Bell Information
Systems, Inc. and, within the licensing model, Amdocs, Ltd., LHS Group Inc. and
Saville Systems PLC. In the future, the Company may compete in both the
wireless and wireline markets with additional companies that currently compete
in market segments other than wireless. In addition, the Company competes with
several international providers of billing, customer care 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 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, customer care and management systems as their needs and the needs of
their subscribers change. See "Risk Factors--Competition."
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
31
<PAGE>
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
protection 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. See "Risk
Factors--Dependence on Proprietary Technology."
Employees
As of March 31, 1998, the Company had a total of 560 employees, of whom
132 were engaged in customer service, 351 were engaged in systems programming
and development, 17 in quality assurance, 7 in sales and marketing, 38 in
administration and 15 in documentation and training. None of the Company's
employees is represented by labor unions. The Company believes that its
employee relations are good. The Company also employs 117 full-time
consultants.
Properties
The Company subleases a 48,222 square foot facility in Stamford,
Connecticut, and a 60,000-square foot facility in Champaign, Illinois for
systems and programming, client service, operations, quality assurance,
documentation and training, and administration. The Company's headquarters are
located at the Stamford facility.
Legal Proceedings
On April 2, 1998, the Company was served with a complaint in Connecticut
Superior Court alleging that the Company had breached the terms of its
employment contract with Alan K. Greene, the Company's former Chief Financial
Officer, and breached other obligations to Mr. Greene. The Company intends to
vigorously defend itself in the action and is currently preparing a response to
the claim and file a counterclaim against Mr. Greene.
In addition, Intelicom, a wholly owned subsidiary of the Company acquired
in January 1998 from CSC, is party to litigation and has been threatened with
litigation in connection with the operation of its business prior to its
acquisition by the Company. Pursuant to the terms of the Intelicom Acquisition,
CSC and certain of its affiliates are obligated to defend and indemnify the
Company against obligations arising out of such litigation or threatened
litigation.
The Company does not believe that any liabilities relating to any of the
legal proceedings to which it is a party are likely to be, individually or in
the aggregate, material to its consolidated financial position or results of
operations.
32
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of all
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter P. Bassermann 48 President, Chief Executive Officer and Director
Paul K. Kothari 44 Chief Financial Officer
Lewis D. Bakes 40 Chairman of the Board of Directors, Executive Vice
President, Chief Operating Officer and Secretary
Peter L. Masanotti 43 Executive Vice President of Operations--Stamford,
General Counsel and Director
Joseph A. Juliano 48 Executive Vice President of Strategic Product
Management
Susan L. Yezzi 48 Executive Vice President of Operations--
Champaign
Stuart L. Bell (1)(2) 44 Director
Stephen J. Saft (1)(2) 53 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Peter P. Bassermann became President and Chief Executive Officer of the
Company in September 1997 and became a director in November 1997. From 1987
until he joined the Company, Mr. Bassermann served as President of SNET
Mobility, Inc., an affiliate of Southern New England Telecommunications
Corporation.
Paul K. Kothari became Chief Financial Officer of the Company in February
1998. From 1993 until he joined the Company, Mr. Kothari served as Vice
President of Finance for Bellcore, a software consulting and research and
development operation owned jointly by the seven Regional Bell Operating
Companies. From 1989 until 1993, Mr. Kothari served as Vice President of
Operations and Chief Financial Officer of Greenwich Associates, a marketing
research and consulting firm, specializing in financial institutions.
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. He was
elected Chairman of the Company in February 1998.
Peter L. Masanotti joined the Company in 1996 as Vice President and
General Counsel, and was appointed Executive Vice President of
Operations--Stamford and General Counsel in January 1998. Mr. Masanotti became
a director in August 1997. Prior to joining the Company, Mr. Masanotti served
as Managing Partner of the law firm Kleban & Samor, P.C., where he worked as an
attorney from 1980 until 1996.
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.
Susan L. Yezzi joined the Company in late 1997 and became Executive Vice
President of Operations--
Champaign in February 1998. Prior to joining the Company, Ms. Yezzi served as
Vice President of Customer Billing
33
<PAGE>
for Bell Atlantic Corporation since 1996. Prior to that, Ms. Yezzi worked for
NYNEX Corporation for 24 years, and served as that Company's Assistant Vice
President of Customer Billing.
Stuart L. Bell has been a director of the Company since August 1996. From
1995 to 1998, he served as Chairman of the Board of Innovative Medical
Research, Inc., a company that executes clinical trials. Mr. Bell is a director
of Harbinger Corporation, an electronic commerce company, and he is Vice
Chairman of Interval International, a vacation exchange company. From 1981 to
1995, he served as Chief Financial Officer, Treasurer and Executive Vice
President, Office of the President, of CUC International.
Stephen J. Saft has been a director of the Company since June 1997. He has
been an attorney with Kleban & Samor, P.C. since 1979.
The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term. The Board consists of two Class
I Directors (Messrs. Bell and Saft), two Class II Directors (Messrs. Bakes and
Bassermann) and one Class III Director (Mr. Masanotti). At each annual meeting
of stockholders, a class of directors is elected for a three-year term to
succeed the directors or director of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of stockholders held during the calendar years 2000, 1998
and 1999, respectively.
Each officer serves at the discretion of the Board of Directors.
34
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of April 30, 1998
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors and executive
officers, (iii) the Selling Stockholders and (iv) the directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Stock Beneficially Number of Stock Beneficially
Owned Prior to the Shares of Owned After the
Offering (2) Common Offering (2)
Name and Address (1) ----------------------- Stock Being -------------------------
of Beneficial Owner Number Percent Offered Number Percent
- -------------------------------------- ----------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Portia K. Bakes (3) .................. 729,241 5.4% 189,061 540,180 3.1%
Dresdner RCM Global Investors
LLC; RCM Limited L.P.;
RCM General Corporation (4) ......... 1,268,550 9.4% -- 1,268,550 7.4%
4 Embarcadero Center
San Francisco, CA 94111
Essex Investment Management
Company (5) ......................... 1,965,176 14.6% -- 1,965,176 11.4%
125 High Street
Boston, MA 02110
Executive Officers and Directors
Lewis D. Bakes (6) ................... 1,360,939 10.1% 360,939 1,000,000 5.8%
Peter P. Bassermann (7) .............. 28,125 * -- 28,125 *
Stuart L. Bell (8) ................... 46,875 * -- 46,875 *
Joseph A. Juliano (9) ................ 65,137 * -- 65,137 *
Paul K. Kothari ...................... -- * -- -- *
Peter L. Masanotti (10) .............. 83,077 * 13,000 70,077 *
Stephen J. Saft (11) ................. 21,000 * -- 21,000 *
Susan L. Yezzi ....................... -- * -- -- *
Additional Selling Stockholder
James V. O'Neill (12) ................ 52,866 * 40,000 12,866 *
All directors and executive officers
as a group (8 persons) (13) ......... 1,605,153 11.9% 373,939 1,231,214 7.1%
</TABLE>
- --------
* Less than 1%
(1) The address of each person for whom no address is included in the table is
225 High Ridge Road, Stamford, Connecticut 06905.
(2) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after April 30, 1998 through the exercise of any stock
option or other right. The inclusion herein of such shares, however, does
not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of such shares. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment
power (or shares such power with his or her spouse) with respect to all
shares of capital stock listed as owned by such person or entity. The
number of shares outstanding includes 13,490,007 shares of Common Stock
outstanding as of April 30, 1998, plus any shares subject to outstanding
stock options held by the person in question. Assumes no exercise of the
Underwriters' over-allotment options.
35
<PAGE>
(3) Ms. Bakes is the wife of Charles L. Bakes, the Company's former
President, Chief Executive Officer and Chairman of the Board of
Directors.
(4) Represents beneficial ownership as of December 31, 1997. According to
Schedule 13G filed with the Securities and Exchange Commission,
Dresdner RCM Global Investors LLC ("Dresdner") is an investment adviser
of which RCM Limited L.P. ("RCM Limited") is the managing agent; RCM
General Corporation ("RCM General") is the General Partner of RCM
Limited. RCM General and RCM Limited disclaim beneficial ownership of
the shares except to the extent they are deemed to have beneficial
ownership of shares beneficially owned by Dresdner.
(5) Represents beneficial ownership on or about April 30, 1998, according
to Schedule 13G/A filed with the Securities and Exchange Commission on
May 7, 1998.
(6) Consists of 1,351,849 shares beneficially owned by Mr. L. Bakes' wife
and 9,090 shares held in trust for the benefit of Mr. L. Bakes'
children, as to all of which shares Mr. L. Bakes disclaims beneficial
ownership. Mr. L. Bakes serves as the Company's Executive Vice
President, Chief Operating Officer, and Chairman of the Board of
Directors and Secretary.
(7) Represents 28,125 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998.
(8) Includes 16,875 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998.
(9) Includes 37,875 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998.
(10) Includes 42,202 shares beneficially owned by Mr. Masanotti's wife, as
to which shares Mr. Masanotti disclaims beneficial ownership. Also
includes 40,875 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998.
(11) Represents 2,250 shares beneficially owned by Mr. Saft's wife, as to
which shares Mr. Saft disclaims beneficial ownership. Includes 18,750
shares issuable pursuant to outstanding options exercisable within 60
days after April 30, 1998.
(12) Includes 6,375 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998. Since 1992, Mr.
O'Neill has been a Senior Vice President of the Company.
(13) Includes 142,500 shares issuable pursuant to outstanding options
exercisable within 60 days after April 30, 1998.
36
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part, the Company and the Selling Stockholders have
agreed to sell to each of the Underwriters named below, and each of such
Underwriters, for whom Lehman Brothers Inc., BT Alex. Brown Incorporated, Cowen
& Company and Jefferies & Company, Inc. are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ----------
<S> <C>
Lehman Brothers Inc. ................
BT Alex. Brown Incorporated .........
Cowen & Company .....................
Jefferies & Company, Inc. ...........
Total ............................... 4,353,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock are subject to certain
conditions, and that if any of the foregoing shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, then all
of the shares of Common Stock agreed to be purchased by the Underwriters
pursuant to the Underwriting Agreement must be so purchased.
The Company and the Selling Stockholders have been advised that the
Underwriters propose to offer the shares of Common Stock in part directly to
the public at the offering price set forth on the cover page of this
Prospectus, and in part to certain selected dealers (who may include the
Underwriters) at such public offering price less a selling concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain brokers and
dealers. After this offering, the public offering price, the concession to
selected dealers and the reallowance may be changed by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters
options to purchase up to an aggregate of 652,950 additional shares of Common
Stock, at the public offering price, less the aggregate underwriting discounts
and commissions shown on the cover page of this Prospectus, exercisable solely
to cover over-allotments, if any. Such options may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent that
the options are exercised, the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding table and the Company and the Selling Stockholders will be obligated,
pursuant to such over-allotment options to sell such shares of Common Stock to
the Underwriters.
The Company has agreed that, without the prior written consent of Lehman
Brothers Inc., it will not, subject to certain limited exceptions, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock, or
any securities convertible into or exchangeable or exercisable for any such
shares, for the period ending 90 days after the date of this Prospectus. All of
the executive officers and directors of the Company and the Selling
Stockholders have agreed pursuant to lock-up agreements that, without the prior
written consent of Lehman Brothers Inc., they will not, subject to certain
limited exceptions, directly or indirectly, offer, sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for any such shares for the period ending 90 days after the date
of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act and to contribute, under certain circumstances, to payments that
the Underwriters may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an
37
<PAGE>
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with this offering (i.e., if they sell more shares of Common Stock
than the number of shares set forth on the cover page of the Prospectus), the
Representatives may reduce that short position by purchasing Common Stock in
the open market. The Representatives also may elect to reduce any short
position by exercising all or part of the over-allotment options described
herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such offer is made.
Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.
The Representatives have informed the Company that they do not intend to
confirm sales of Common Stock offered hereby to any accounts over which they
exercise discretionary authority.
Lehman Brothers Inc. acted as a financial advisor to the Company in its
acquisition of Intelicom in January 1998 and received customary fees and
expenses for its services. In addition, Lehman Commercial Paper, Inc., an
affiliate of Lehman Brothers Inc., initially acted as administrative agent and
arranger and currently acts as arranger under the Company's Credit Agreement.
Lehman Commercial Paper, Inc. received a customary financing fee in connection
with the Credit Agreement, and has retained approximately $13.0 million of such
indebtedness. The Company plans to use $70 million of the net proceeds from
this offering to repay such indebtedness, including all amounts owed to Lehman
Brothers Commercial Paper, Inc. An affiliate of Lehman Brothers Inc. and
certain of its employees own in the aggregate approximately 600,000 shares of
Common Stock of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston,
Massachusetts, and for the Underwriters by Chadbourne & Parke LLP, New York,
New York.
EXPERTS
The consolidated financial statements of ITDS appearing in ITDS' Annual
Report on Form 10-K/A for the year ended December 31, 1997, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and included herein and incorporated herein by
reference. The financial statements of Intelicom appearing in ITDS' Current
Report on Form 8-K/A dated March 18, 1998 have been audited by Ernst & Young
LLP, as set forth in their report included therein and included herein and
incorporated herein by reference. The information under the caption "Selected
Financial Data" for each of the five years in the period ended December 31,
1997 included elsewhere herein, have been derived from the ITDS consolidated
financial
38
<PAGE>
statements audited by Ernst & Young LLP. Such financial statements and selected
financial data referred to above are included herein and incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its regional
offices in Chicago (Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60611), and in New York (Seven World Trade Center, New York,
New York 10007). Any interested party may obtain copies of all or any portion
of such information at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants, such as the Company, that file
electronically with the Commission. Any interested party may access such
information at Web site http:// www.sec.gov. The Company's Common Stock is
traded on the Nasdaq National Market and reports, proxy statements and other
information concerning the Company can be inspected at the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act, with respect to the shares. For the purposes
hereof, the term "Registration Statement" means the original Registration
Statement and any and all amendments thereto, including the schedules and
exhibits to such original Registration Statement or any such amendment. This
Prospectus does not contain all of the information set forth in the
Registration Statement, to which reference hereby is made. Each statement made
in this Prospectus concerning a document filed as an exhibit to the
Registration Statement is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions. Any interested person may
inspect the Registration Statement, without charge, at the public reference
facilities of the Commission as described in the previous paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, the Company's Current Report on form 8-K dated January 13,
1998, including the amendment thereto on Form 8-K/A filed with the Commission
on March 18, 1998, and the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed by the Company with the
Commission on October 10, 1996, including any amendment or reports filed for
the purpose of updating such description, are incorporated by reference into
this Prospectus. All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and to be made a
part hereof from the respective dates of filing of such documents. Any
statement in any document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
the Registration Statement and this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement or this Prospectus.
Copies of the above documents (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
documents) may be obtained without charge upon written or oral request to the
Company, Attention: Chief Financial Officer, 225 High Ridge Road, Stamford,
Connecticut 06905, telephone (203) 329-3300.
39
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Financial Statements--ITDS
Report of Independent Auditors ................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 ................... F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997 .............................................. F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 1995, 1996 and 1997 .............................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 .............................................. F-8
Notes to Consolidated Financial Statements ..................................... F-9
Financial Statements--ITDS Intelicom Services, Inc.
Report of Independent Auditors ................................................. F-19
Balance Sheets as of March 28, 1997 and January 2, 1998 ........................ F-20
Statements of Operations and Shareholders' Net Investment for the years ended
March 29, 1996 and March 28, 1997 and the thirty-nine week period ended
January 2, 1998 ............................................................... F-21
Statements of Cash Flows for the years ended March 29, 1996 and March 28, 1997
and the thirty-nine week period ended January 2, 1998 ......................... F-22
Notes to Financial Statements .................................................. F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
International Telecommunication Data Systems, Inc.
We have audited the accompanying consolidated balance sheets of International
Telecommunication Data Systems, Inc. as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of International
Telecommunication Data Systems, Inc. at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
[GRAPHIC OMITTED]
Stamford, Connecticut
February 10, 1998,
except for information describing
the three-for-two stock split in Note 1
and Note 3 as to which the
date is February 23, 1998.
See accompanying notes.
F-2
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 4,138,575 $28,967,173
Accounts receivable, net of allowance for doubtful accounts of
$52,370 and $486,422, respectively ............................ 3,232,967 5,007,581
Securities available for sale, at market value .................. 25,023,454 --
Prepaid expenses and other current assets ....................... 1,503,209 741,297
Deferred income taxes ........................................... 44,000 220,000
----------- -----------
Total current assets ....................................... 33,942,205 34,936,051
Property and equipment:
Computers, including leased property under capital leases of
$1,863,103 and $1,104,507, respectively ....................... 2,986,056 4,843,816
Furniture and fixtures, including leased property under capital
leases of $33,119 in 1996 and 1997 ............................ 446,535 446,535
Equipment, including leased property under capital leases of
$53,508 in 1996 and 1997 ...................................... 251,850 373,093
Leasehold improvements .......................................... 589,479 589,479
----------- -----------
4,273,920 6,252,923
Less: accumulated depreciation and amortization ................. 1,328,228 2,318,936
----------- -----------
2,945,692 3,933,987
Other assets:
Product development costs--at cost, net of accumulated
amortization of $586,215 and $1,104,613, respectively ......... 1,343,727 3,697,726
Other ........................................................... 165,913 1,884,688
----------- -----------
1,509,640 5,582,414
----------- -----------
Total assets ............................................... $38,397,537 $44,452,452
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS--Continued
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 685,739 $ 1,191,825
Accrued expenses .......................................... 806,772 560,861
Accrued compensation ...................................... 272,059 332,700
Current maturities of capital lease obligations ........... 538,238 278,634
------------ ------------
Total current liabilities ............................ 2,302,808 2,364,020
Capital lease obligations .................................. 878,432 73,532
Deferred income taxes ...................................... 407,000 1,667,000
Other ...................................................... 91,879 29,580
Commitments and contingencies (Note 7) .................... -- --
Stockholders' equity
Common Stock, $.01 par value; 40,000,000 shares authorized,
12,654,756 shares issued and outstanding
as of December 31, 1996, 12,786,740 shares issued
and outstanding as of December 31, 1997 ................. 126,548 127,868
Additional paid-in capital ................................ 43,790,517 44,447,507
Retained deficit .......................................... (8,826,674) (4,026,055)
Unearned compensation ..................................... (336,000) (231,000)
Unrealized loss on securities available for sale .......... (36,973) --
------------ ------------
Total stockholders' equity ................................. 34,717,418 40,318,320
------------ ------------
Total liabilities and stockholders' equity ................. $ 38,397,537 $ 44,452,452
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue ......................................................... $10,820,815 $16,689,401 $23,428,810
Costs and expenses:
Operating expenses ............................................. 2,787,687 4,283,364 5,617,245
General, administrative and selling expenses ................... 4,601,242 6,522,900 6,760,053
Depreciation and amortization .................................. 640,917 1,053,472 1,595,706
Systems development and programming costs ...................... 1,183,141 2,115,305 2,910,331
----------- ----------- -----------
Total costs and expenses ........................................ 9,212,987 13,975,041 16,883,335
----------- ----------- -----------
Operating income ................................................ 1,607,828 2,714,360 6,545,475
Other income .................................................... 49,477 315,914 1,701,881
Interest expense ................................................ (452,925) (416,148) (120,355)
----------- ----------- -----------
Income before income tax expense and extraordinary item ......... 1,204,380 2,614,126 8,127,001
Income tax expense .............................................. 378,786 1,111,788 3,326,382
----------- ----------- -----------
Income before extraordinary item ................................ 825,594 1,502,338 4,800,619
Extraordinary loss (net of $158,038 tax benefit) ................ (223,696) -- --
----------- ----------- -----------
Net income ...................................................... $ 601,898 $ 1,502,338 $ 4,800,619
=========== =========== ===========
Income per common share--basic:
Income before extraordinary item ............................... $ .09 $ .15 $ .38
Extraordinary loss ............................................. (.03) -- --
----------- ----------- -----------
Net income ...................................................... $ .06 $ .15 $ .38
=========== =========== ===========
Shares used in computing basic income per common share .......... 9,291,257 9,889,809 12,728,214
=========== =========== ===========
Income per common share--diluted:
Income before extraordinary item ............................... $ .09 $ .15 $ .36
Extraordinary loss ............................................. (.03) -- --
----------- ----------- -----------
Net income ...................................................... $ .06 $ .15 $ .36
=========== =========== ===========
Shares used in computing diluted income per
common share ................................................... 9,291,257 10,109,121 13,192,830
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
F-6
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------------------
Class A Class B Common Stock
--------------------------- --------------------------- -------------------------
Number Number Number
of Shares $25,000 of Shares $250 of Shares
Outstanding Par Value Outstanding Par Value Outstanding Par Value
------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 as previously
reported ................. 18 $ 400,400 1,500 $ 327,600 4,875,200 $ 51,248
Three-for-two stock
split effected in the
form of a 50%
stock dividend .......... 2,437,600 24,376
--------- --------
Balance at
December 31,
1994 as restated
for the three-for-
two stock split ......... 18 400,400 1,500 327,600 7,312,800 75,624
Net income ...............
Preferred stock
dividends
declared ................
Balance at
December 31, 1995 ........ 18 400,400 1,500 327,600 7,312,800 75,624
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) 1,279,218 12,792
Compensation paid in
common stock ............ 106,152 1,062
Conversion of Class C
convertible
preferred stock ......... 154,800 1,548
Exercise of warrants ..... 501,786 5,018
<CAPTION>
Unearned Net Unrealized
Additional Treasury Retained Compensation Gain (Loss)
Paid-in Stock at Earnings Restricted on Securities
Capital Cost (Deficit) Stock Awards Held for Sale Total
-------------- -------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 as previously
reported ................. $ 28,112 $ (400,030) $ (593,600) $ -- $-- $ (186,270)
Three-for-two stock
split effected in the
form of a 50%
stock dividend .......... (24,376) --
-------------- ----------
Balance at
December 31,
1994 as restated
for the three-for-
two stock split ......... 28,112 (400,030) (617,976) (186,270)
Net income ............... 601,898 601,898
Preferred stock
dividends
declared ................ (28,112) (8,482) (36,594)
------------ -------------- ----------
Balance at
December 31, 1995 ........ -- (400,030) (24,560) -- 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 ......... 10,115,424 (10,225,216) (825,000)
Compensation paid in
common stock ............ 969,487 (336,000) 634,549
Conversion of Class C
convertible
preferred stock ......... 638,452 640,000
Exercise of warrants ..... 817,941 822,959
</TABLE>
See accompanying notes.
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--Continued
F-7
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------
Class A Class B Common Stock
------------------------- ------------------------- -------------------------
Number Number Number
of Shares $25,000 of Shares $250 of Shares
Outstanding Par Value Outstanding Par Value Outstanding Par Value
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sale of common
stock, net of
expenses ................ 3,300,000 33,000
Net unrealized loss on
securities available
for sale ................
Balance at
December 31, 1996 ........ -- -- -- -- 12,654,756 126,548
Net income ...............
Secondary sale of
common stock ............ 75,000 750
Employee stock
purchase plan ........... 9,078 91
Exercise of stock
options ................. 47,906 479
Amortization of
unearned
compensation ............
Net unrealized gain
on securities
available for sale ......
Balance at
December 31, 1997 ........ -- $-- -- $-- 12,786,740 $127,868
== === == === ========== ========
<CAPTION>
Unearned Net Unrealized
Additional Treasury Retained Compensation Gain (Loss)
Paid-in Stock at Earnings Restricted on Securities
Capital Cost (Deficit) Stock Awards Held for Sale Total
-------------- ---------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common
stock, net of
expenses ................ 31,646,747 31,679,747
Net unrealized loss on
securities available
for sale ................ (36,973) (36,973)
------- ----------
Balance at
December 31, 1996 ........ 43,790,517 -- (8,826,674) (336,000) (36,973) 34,717,418
Net income ............... 4,800,619 4,800,619
Secondary sale of
common stock ............ 172,126 172,876
Employee stock
purchase plan ........... 113,113 113,204
Exercise of stock
options ................. 371,751 372,230
Amortization of
unearned
compensation ............ 105,000 105,000
Net unrealized gain
on securities
available for sale ...... 36,973 36,973
------- ----------
Balance at
December 31, 1997 ........ $44,447,507 -- $ (4,026,055) $ (231,000) -- $40,318,320
=========== == ============ ========== ======= ===========
</TABLE>
See accompanying notes.
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities
Income before extraordinary loss ............................. $ 825,594 $ 1,502,338 $ 4,800,619
Adjustments to reconcile income before extraordinary loss to
net cash provided by operating activities:
Depreciation and amortization ............................... 640,917 1,053,472 1,595,706
Amortization of unearned compensation ....................... -- -- 105,000
Compensation paid in Common Stock ........................... -- 634,549 --
Deferred income taxes ....................................... (93,960) 612,079 1,084,000
Change in operating assets and liabilities:
Accounts receivable ....................................... (457,609) (1,884,180) (1,774,614)
Prepaid expenses and other current assets ................. (236,378) (875,072) 413,717
Accounts payable and accrued expenses ..................... 781,049 390,831 320,816
Other assets and liabilities, net ......................... (157,659) 11,775 (1,788,785)
---------- ------------- -------------
Net cash provided by operating activities .................... 1,301,954 1,445,792 4,756,459
Investing activities
Capital expenditures ......................................... (17,358) (1,852,701) (2,737,598)
Proceeds from sale of equipment .............................. 13,500 -- --
Purchase of securities available for sale .................... (245,069) (25,060,427) (25,328,551)
Purchase of investments held to maturity ..................... -- (353,126) (3,062,361)
Proceeds from maturities of investments ...................... 99,286 300,000 3,410,556
Proceeds from maturities of securities available
for sale .................................................... -- -- 50,388,977
Product development costs .................................... (479,316) (858,827) (2,872,397)
---------- ------------- -------------
Net cash (used for) provided by investing activities ......... (628,957) (27,825,081) 19,798,626
Financing activities
Principal payments on long-term debt ......................... (276,507) (1,811,273) --
Payment to retire Preferred Stock ............................ -- (825,000) --
Principal payments on notes payable .......................... (76,001) (76,958) --
Principal payments on capital lease obligations .............. (166,297) (362,223) (384,558)
Proceeds from sale of Common Stock ........................... -- 32,502,706 658,071
Proceeds from sale of Preferred Stock ........................ 640,000 -- --
Dividends paid ............................................... (33,750) (82,080) --
---------- ------------- -------------
Net cash provided by financing activities .................... 87,445 29,345,172 273,513
Net increase in cash and cash equivalents .................... 760,442 2,965,883 24,828,598
Cash and cash equivalents at beginning of year ............... 412,250 1,172,692 4,138,575
---------- ------------- -------------
Cash and cash equivalents at end of year ..................... $1,172,692 $ 4,138,575 $ 28,967,173
========== ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ....................... $ 447,241 $ 434,092 $ 120,355
Cash paid during the year for taxes .......................... $ 419,700 $ 819,897 $ 2,342,081
</TABLE>
Supplemental disclosure of noncash financing activities:
Capital lease obligations totaling $960,059 and $685,604 in the years ended
December 31, 1995 and 1996, respectively, were incurred for the acquisition of
new equipment. No leases were entered into in 1997.
See accompanying notes.
F-8
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
ITDS is a leading provider of comprehensive transactional billing and
management information solutions to providers of wireless and satellite
telecommunications services. The Company uses its proprietary software
technology to develop billing solutions which address customer requirements as
they evolve, regardless of a service provider's market segment, geographic area
or mix of network features and billing options. Typically, the Company provides
its services under contracts with terms ranging from two to five years, and
bills customers monthly, 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.
Basis of Presentation
Stock Split
The Company effected a three-for-two stock split in the form of a 50%
stock dividend, to be distributed on March 9, 1998 to stockholders of record on
February 23, 1998. Accordingly, all share and per share amounts have been
adjusted to reflect this split.
Property and Equipment
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 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.
Amortization is computed by using the greater of the amount that results from
applying the ratio that current revenue for the product bears to total revenue
for the product or the straight-line method over the remaining useful life of
the product. Generally, such deferred costs are amortized over five years.
During the years ended December 31, 1995, 1996 and 1997, $166,292, $300,105 and
$518,398, respectively, of capitalized software development costs were
amortized.
Revenue Recognition
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, 1997, other assets includes approximately $865,000
for installation and related services that are being recorded over the
installation period. In addition, accounts receivable at December 31, 1996 and
1997 include $1,278,412 and $2,296,451, 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("FAS 121"). FAS 121, which was 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 FAS 121 has not
had a material effect on the Company's financial position or results of
operations.
F-9
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Consolidation
The financial statements include the accounts of ITDS and consolidated
subsidiaries after elimination of intercompany accounts and transactions.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 1995, 1996, and 1997 were $115,835, $194,097,
and $233,673, respectively.
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 year's presentation.
Major Customers
Revenues generated from two customers accounted for approximately 15.2%
and 12.7% of 1995 revenues, 19.1% and 12.5% of 1996 revenues and 18.4% and
11.7% of 1997 revenues.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("FAS 130") and SFAS 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 130 and FAS 131 are effective for
financial statements for fiscal years beginning after December 15, 1997. In
addition, in October 1997 AcSEC issued Statement of Position 97-2 "Software
Revenue Recognition" which is effective for transactions entered in fiscal
years beginning after December 15, 1997. The Company is studying the
application of the new standards to evaluate the effect on the Company's
financial statements.
2. INVESTMENTS
Prepaid expenses and other current assets includes short-term investments
of $348,195 as of December 31, 1996. These investments are recorded at cost
plus accrued interest (approximates market) and consist of United States
Treasury Bills, maturing on or before April 3, 1997. These short-term
investments are classified as held to maturity.
Securities available for sale at December 31, 1996 consisted of United
Stated Treasury Notes with a 6% coupon rate maturing on August 15, 1999. These
securities are recorded at fair value. The unrealized gains or loss, net of tax
are reported in a separate component of stockholder equity. During 1997, these
investments were disposed of and invested in cash equivalents.
Other income for the years ended December 31, 1995, 1996 and 1997 includes
$20,269, $313,132 and $1,646,630, respectively, of investment income.
F-10
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. CAPITAL STOCK
Stock Split
The Company effected a three-for-two stock split, in the form of a 50%
stock dividend, distributed on March 9, 1998 to stockholders of record on
February 23, 1998. Accordingly, all share and per share amounts have been
adjusted to reflect this split.
Public Offerings
The Company completed its Initial Public Offering ("IPO") in October 1996.
The Company sold 3 million shares at $10.67 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 300,000 shares of Common Stock from the Company in connection with
the IPO.
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.
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 the holders of such shares were
issued an aggregate of 1,279,218 shares of the Company's Common Stock and were
paid an aggregate amount of $825,000. The distribution of the 1,279,218 shares
of the Company's Common Stock, valued at $8 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, Connecticut Innovations Incorporated ("CII") exercised
outstanding warrants to purchase 501,786 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 154,800
shares of Common Stock.
During April 1997, the Company received net proceeds of $172,876 from the
sale of 75,000 shares of its Common Stock in a follow-on offering.
Earnings Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standards SFAS No. 128, "Earnings Per Share" FAS 128, which revises the
methodology of calculating earnings per share. The Company adopted FAS 128 in
the fourth quarter of 1997. All earnings per share amounts for all periods have
been presented in accordance with and where appropriate, restated to conform to
the FAS No. 128 requirements.
F-11
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. CAPITAL STOCK (Continued)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share--
earnings before extraordinary item ......................... $ 825,594 $ 1,502,338 $ 4,800,619
=========== ============ ============
Denominator:
Denominator for basic earnings per
share--weighted-average shares ............................. 9,291,257 9,889,809 12,728,214
Effect of dilutive securities:
Employee stock options ..................................... -- 219,312 464,616
----------- ------------ ------------
Denominator for diluted earnings per
share--adjusted weighted-average shares
and assumed conversions .................................... 9,291,257 10,109,121 13,192,830
=========== ============ ============
Basic income per common share before extraordinary item ....... $ .09 $ .15 $ .38
=========== ============ ============
Diluted income per common share before extraordinary item ..... $ .09 $ .15 $ .36
=========== ============ ============
</TABLE>
Income per common share for the years ended December 31, 1995 and 1996 is
calculated using the weighted average number of shares of common stock
outstanding after giving effect to the retirement of the Company's Class A and
B Preferred Stock and the conversion of the Series C Preferred Stock in
conjunction with the Company's IPO.
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>
Basic:
Income before extraordinary item ......... $ .11 $ .16
Extraordinary item ....................... (.02) --
------ -----
Net income ............................... $ .09 $ .16
====== =====
Diluted:
Income before extraordinary item ......... $ .09 $ .16
Extraordinary item ....................... (.02) --
------ -----
Net income ............................... $ .07 $ .16
====== =====
</TABLE>
F-12
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STOCK PLANS
The Company's 1996 and 1997 Stock Incentive Plans authorize the grant of
options to employees, directors and consultants for up to 1,500,000 shares and
1,125,000 shares, respectively, of the Company's Common Stock. All 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 300,000 shares of
Common Stock have been authorized for issuance under the Company's 1996
Employee Stock Purchase Plan.
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.
A summary of the Company's activity in the stock options plans, and
related information for the years ended December 31, 1995, 1996, and 1997
follows:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price
------------ -----------------
<S> <C> <C>
Outstanding at December 31, 1995 ................. -- --
Granted .......................................... 590,550 $ 9.29
Forfeited ........................................ 2,250 $ 9.33
------- -------
Outstanding at December 31, 1996 ................. 588,300 $ 9.29
Granted .......................................... 2,607,643 $ 12.33
Exercised ........................................ 47,910 $ 7.77
Cancelled ........................................ 534,750 $ 7.78
Forfeited ........................................ 124,184 $ 7.88
--------- -------
Outstanding at December 31, 1997 ................. 2,489,099 $ 12.33
========= =======
Options exercisable at December 31, 1997 ......... 111,583 $ 9.19
Options exercisable at December 31, 1996 ......... 24,093 $ 12.24
</TABLE>
In May 1997, 534,750 options previously issued were exchanged for new
options covering an equal number of shares and an exercise price equal to the
then current market price. The previously issued options were included in the
number of shares granted for 1997.
<TABLE>
<CAPTION>
Options Outstanding
- --------------------------------------------------------------------------------
Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices as of 12/31/97 Contractual Life Exercise Price
- -------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
$7.50--$10.00.......... 844,651 8.9 $ 7.75
$10.00--$12.50......... 198,750 9.4 11.50
$12.50--$15.00......... 0 0 0
$15.00--$17.50......... 1,445,698 9.9 15.48
--------- --- -------
2,489,099 9.5 $ 12.54
========= === =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $7.75 to $16 per share. The weighted average remaining contractual life of
those options is 9.5 years.
F-13
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STOCK PLANS (Continued)
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, if 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 weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate ............................................. 5.0 % 5.0 %
Dividend yield ...................................................... 0 0
Expected volatility of market price of company's
common stock ....................................................... .71 .63
Expected option life ................................................ 5 years 5 years
Weighted average fair value per share of options granted during year $ 4.86 $ 7.31
</TABLE>
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 follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Pro forma net income .......................... $ 1,189,597 $ 3,441,094
=========== ===========
Pro forma earnings per share:
Pro forma basic earnings per share ............ $ .12 $ .27
Pro forma diluted earnings per share .......... $ .12 $ .26
</TABLE>
5. DEFERRED COMPENSATION
In accordance with the terms of his employment agreement, as amended on
September 30, 1996, an employee became entitled to receive a payment of
$275,000 on or before December 31, 1996 and, as a result of the public offering
of the Company's Common Stock, the right to purchase 27,500 shares of the
Company's Common Stock for $.01 per share. In addition, during 1996 an employee
was given the right to purchase 42,652 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 36,000 shares of the
Company's Common Stock with a fair value of $336,000 when awarded. The shares
vest 25% on April 1, 1997, 25% on October 31, 1998, 25% on October 31, 1999,
and 25% on October 31, 2000. The fair value of the shares on the date of award
is being amortized as compensation expense over the vesting period.
F-14
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. CAPITALIZED LEASE OBLIGATIONS
The Company leases computer equipment and office furniture under capital
leases expiring in various years through 1999. 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,
1997:
<TABLE>
<S> <C>
1998 ............................................ $322,030
1999 ............................................ 71,935
--------
Total lease obligations ......................... 393,965
Less: amount representing interest .............. 41,799
--------
Present value of minimum lease payments ......... $352,166
========
</TABLE>
7. 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. Minimum future
rental payments due under such lease are $723,330 per year.
The Company also leases Connecticut office facilities 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 $330,914, $591,729 and $738,582 for the years ended December 31,
1995, 1996 and 1997, respectively.
Minimum future rental payments due under such leases as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 .......................... $ 929,521
1999 .......................... 773,237
2000 .......................... 482,220
----------
2,184,978
Less: sublease income ......... (266,850)
----------
$1,918,128
==========
</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 approximately $2.1 million per year plus
benefits. The contracts provide for discretionary bonuses if approved by the
Board of Directors. In addition, as of December 31, 1997, the Company has loans
to officers aggregating $264,653.
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 and $10,000 for 1996 and 1997 calendar
years. The Company does not contribute to the plan.
F-15
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. EXTRAORDINARY ITEM
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.
9. INCOME TAXES
Significant components of income tax expense (benefit) before
extraordinary item are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal .................. $ 344,360 $ 381,376 $1,667,132
State .................... 128,386 118,333 575,250
--------- ---------- ----------
472,746 499,709 2,242,382
--------- ---------- ----------
Deferred:
Federal .................. (62,640) 436,659 805,916
State .................... (31,320) 175,390 278,084
--------- ---------- ----------
(93,960) 612,079 1,084,000
--------- ---------- ----------
Total tax expense ......... $ 378,786 $1,111,788 $3,326,382
========= ========== ==========
</TABLE>
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>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate ................................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit .......... 5.3 7.4 6.9
Debt consolidation expenses .................................... (10.1) -- --
Other, net ..................................................... 2.3 1.1 --
----- ---- ----
31.5% 42.5% 40.9%
===== ==== ====
</TABLE>
F-16
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax liabilities:
Software development costs ............ $ 798,862 $1,965,598
Capitalized leases .................... 382,521 537,081
--------- ----------
Total deferred tax liabilities ......... 1,181,383 2,502,679
--------- ----------
Deferred tax assets:
Deferred charges ...................... 46,092 28,786
Depreciation and amortization ......... 719,748 819,855
Accrued compensation .................. 26,937 4,319
Reserve for doubtful accounts ......... 21,521 199,093
Interest .............................. 4,085 3,626
--------- ----------
Total deferred tax assets .............. 818,383 1,055,679
--------- ----------
Net deferred tax liability ............. $ 363,000 $1,447,000
========= ==========
</TABLE>
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31, 1997 (in thousands, except
per-share data):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue .............................. $5,270 $5,362 $6,039 $6,758
Gross profit ......................... 1,439 1,421 1,659 2,027
Net income ........................... 1,062 1,078 1,240 1,420
Basic net income per share ........... .08 .08 .10 .11
Diluted net income per share ......... .08 .08 .09 .11
</TABLE>
<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 ............................ 1,054 877 (273) 1,056
Net income (loss) ........................... 549 445 (240) 748
Basic net income (loss) per share ........... .06 .05 (.03) .07
Diluted net income (loss) per share ......... .06 .05 (.03) .07
</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 shares of Common Stock 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 $.07 per
share ($.07 per share--diluted). The fourth quarter of 1996 includes a one-time
charge associated with the IPO of $200,000 or $.02 per share ($.01 per
share--diluted).
F-17
<PAGE>
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. SUBSEQUENT EVENTS
On January 2, 1998, the Company acquired TRIS, a provider of billing and
care software and services, from Computer Sciences Corporation, in a
transaction accounted for in accordance with the purchase method of accounting,
by acquiring all of the outstanding Capital Stock of CSC Intelicom Inc. (now
known as ITDS Intelicom Services, Inc.). The purchases price consisted of
606,673 shares of Common Stock of the Company valued at $10,000,000 and
$75,826,777 in cash. A portion of the cash purchase price for TRIS was obtained
by the Company under a Credit Agreement dated January 2, 1998, with certain
lenders and Lehman Commercial Paper, Inc., as Administrative Agent and Arranger
(the "Credit Agreement"), that provides for a $70 million term loan and a $30
million line of credit.
The credit agreement contains normal covenants which include meeting
certain financial ratios, requires the Company to pay interest at LIBOR plus
two and one quarter percent and requires payments of interest only through
March 30, 2000. At which time periodic principal, payments will become due.
The purchase price in excess of the fair market value of the assets
acquired of approximately $57 million will be amortized over 15 years. In
addition, purchased research and development costs of approximately $21 million
before income tax benefit and other indirect transaction related costs of
approximately $5 million before income tax benefit will be expensed in the
first quarter of 1998. The fair value of the purchased research and development
costs was determined based on an independent valuation. The $21 million and $5
million discussed above have been excluded from the pro forma calculation for
the year ended December 31, 1997.
Pro Forma Financial Information (Unaudited)
For the year ended March 28, 1997 and the nine months ended December 31,
1997, TRIS had revenues and net income (loss) of $42.2 million and $3.0 million
and $39.8 million and $(1.9) million, respectively. Assuming the acquisition
had occurred as of January 1, 1997, pro forma revenues, net income and basic
net income per share and diluted net income per share would have been $80.4
million, $5.2 million, $.39 per share and $.37 per share, respectively.
Two customers accounted for 36% and 11% of TRIS' total revenues for the
nine months ended December 31, 1997. For the year ended March 28, 1997, these
two customers accounted for 17% and 13% of TRIS' total revenues.
Legal Proceedings
Neither ITDS nor any of its subsidiaries is currently party to any
material legal proceedings. However, ITDS Intelicom Services, Inc., a
wholly-owned subsidiary of the Company acquired in January 1998 from Computer
Sciences Corporation ("CSC"), is party to litigation and has been threatened
with litigation in connection with the operation of its business prior to its
acquisition by the Company. Pursuant to the terms of the acquisition, CSC and
certain of its affiliates are obligated to defend and indemnify the Company
against any obligations arising out of such litigation or threatened
litigation.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ITDS Intelicom Services, Inc.
We have audited the accompanying balance sheets of ITDS Intelicom Services,
Inc., formerly known as CSC Intelicom, Inc. ("Intelicom"), as of March 28, 1997
and January 2, 1998, and the related statements of operations and shareholders'
net investment and cash flows for the years ended March 29, 1996 and March 28,
1997 and for the thirty-nine week period ended January 2, 1998. These financial
statements are the responsibility of Intelicom'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 Intelicom at March 28, 1997
and January 2, 1998, and the results of its operations and its cash flows for
the years ended March 29, 1996 and March 28, 1997, and for the thirty-nine week
period ended January 2, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, a change in reporting
entity occurred on January 2, 1998. The financial statements for all periods
presented have been restated to reflect this change.
[GRAPHIC OMITTED]
Stamford, Connecticut
March 5, 1998
F-19
<PAGE>
ITDS INTELICOM SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 28, January 2,
1997 1998
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Current assets:
Trade accounts receivable, net of allowance for doubtful accounts
of $587 and $2,452, respectively................................. $ 12,036 $ 18,310
Prepaid expenses and other current assets ......................... 224 203
-------- --------
Total current assets ......................................... 12,260 18,513
Property and equipment, at cost .................................... 5,243 6,623
Accumulated depreciation ........................................... (2,654) (3,648)
-------- --------
Property and equipment, net ........................................ 2,589 2,975
Other assets:
Goodwill, net of accumulated amortization of $980 and $1,257,
respectively .................................................... 13,020 12,743
Non-compete agreements ............................................ 5 --
Purchased software, net of accumulated amortization of $388 and
$481, respectively............................................... 385 535
Internally developed software, net of accumulated amortization of
$15,690 and $22,767, respectively................................ 15,178 13,530
-------- --------
Total other assets ........................................... 28,588 26,808
-------- --------
Total assets ................................................. $ 43,437 $ 48,296
======== ========
LIABILITIES AND SHAREHOLDERS' NET INVESTMENT
Current liabilities:
Customer advances ................................................. $ 286 $ 1,096
Accounts payable .................................................. 837 5,548
-------- --------
Total current liabilities .................................... 1,123 6,644
Deferred income taxes .............................................. 6,869 7,416
Commitments and contingencies
Shareholders' net investment ....................................... 35,445 34,236
-------- --------
Total liabilities and shareholders' net investment ................. $ 43,437 $ 48,296
======== ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
ITDS INTELICOM SERVICES, INC.
STATEMENTS OF OPERATIONS AND SHAREHOLDERS' NET INVESTMENT
<TABLE>
<CAPTION>
Thirty-Nine Week
Year Ended Year Ended Period Ended
March 29, March 28, January 2,
1996 1997 1998
------------ ------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Revenues .................................................. $31,153 $42,189 $ 39,771
Costs of services ......................................... 5,359 12,584 21,277
Selling, general and administrative ....................... 11,784 15,385 12,875
Depreciation and amortization ............................. 6,579 8,996 8,444
------- ------- --------
Total costs and expenses .................................. 23,722 36,965 42,596
------- ------- --------
Income (loss) before taxes ................................ 7,431 5,224 (2,825)
Tax provision (benefit) ................................... 2,976 2,182 (972)
------- ------- --------
Net income (loss) ......................................... 4,455 3,042 (1,853)
Shareholders' net investment, beginning of period ......... 21,965 29,758 35,445
Other borrowings, net ..................................... 3,338 2,645 644
------- ------- --------
Shareholders' net investment, end of period ............... $29,758 $35,445 $ 34,236
======= ======= ========
</TABLE>
See accompanying notes.
F-21
<PAGE>
ITDS INTELICOM SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Week
Year Ended Year Ended Period Ended
March 29, March 28, January 2,
1996 1997 1998
------------ ------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss) .................................... $ 4,455 $ 3,042 $ (1,853)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: ...................
Amortization ........................................ 5,961 8,079 7,354
Depreciation ........................................ 618 917 1,090
Deferred income taxes ............................... 2,484 1,447 547
Provision for doubtful accounts ..................... 31 314 1,865
Trade accounts receivable ........................... (2,863) (3,489) (8,139)
Other--net .......................................... 14 47 26
Accounts payable and customer advances .............. (678) 194 5,521
--------- --------- --------
Net cash provided by operating activities ............ 10,022 10,551 6,411
Investing activities
Purchased software ................................... (221) (230) (246)
Capitalized software ................................. (12,223) (10,749) (5,429)
Purchases of equipment ............................... (916) (2,217) (1,380)
--------- --------- --------
Net cash used in investing activities ................ (13,360) (13,196) (7,055)
Financing activities
Other borrowings, net ................................ 3,338 2,645 644
--------- --------- --------
Net cash provided by financing activities ............ 3,338 2,645 644
--------- --------- --------
Net change in cash ................................... -- -- --
Cash at beginning of period .......................... -- -- --
--------- --------- --------
Cash at end of period ................................ $ -- $ -- $ --
========= ========= ========
</TABLE>
See accompanying notes.
F-22
<PAGE>
ITDS INTELICOM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
March 29, 1996, March 28, 1997 and January 2, 1998
(Dollars in Thousands)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Change in Reporting Entity
On January 2, 1998, International Telecommunication Data Systems, Inc.
("ITDS") acquired the stock of ITDS Intelicom Services, Inc., formerly known as
CSC Intelicom, Inc. ("Intelicom"), a company of Computer Sciences Corporation
("CSC"). Concurrent with the acquisition, Intelicom was reorganized and all
divisions other than the TRIS Division ("TRIS") were transferred to CSC in a
spin-off. ITDS acquired only the assets, liabilities and operations of TRIS. As
a result of the spin-off, the accompanying financial statements were restated
to present the financial information for TRIS as a new reporting entity.
Description of Business
TRIS (the "Company") provides comprehensive transactional billing and
management information solutions to providers of wireless, long distance and
satellite telecommunications services in North America. 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
The accompanying financial statements have been prepared from the
historical accounting records of TRIS. As noted above, TRIS was not previously
a separate legal entity and accordingly, the balance sheets and statements of
operations and shareholders' net investment reflects shareholders' net
investment which includes amounts owed to CSC, contributed capital and retained
earnings.
Due to allocations associated with certain shared functions more fully
described in Note 4, the accompanying financial statements may not be
indicative of costs that would have been incurred had TRIS been operated as an
unaffiliated entity.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation
computed using the straight-line method over the estimated useful lives of the
assets of three to five years. Leasehold improvements are amortized over the
life of the related lease.
Goodwill
The Company evaluates at least annually the recoverability of its excess
cost of business acquired over related net assets. In assessing recoverability,
the current and future profitability of the related operations are considered,
along with management's plans with respect to the operations and the projected
undiscounted cash flows. Goodwill, which relates to CSC's acquisition of TRIS
in 1992, is amortized using the straight-line method over 40 years.
Purchased Software
Purchased software is carried at cost, less accumulated amortization.
Amortization is computed using the straight-line method based on an estimated
life of five years.
Capitalized Software
The Company capitalizes software development costs as incurred for
software used in its product and service line only after establishing technical
viability. The capitalized costs include salaries and related payroll costs
incurred in the development activities. Software development costs are carried
at cost less accumulated amortization
F-23
<PAGE>
ITDS INTELICOM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 29, 1996, March 28, 1997 and January 2, 1998
(Dollars in Thousands)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
computed using the straight-line method over the remaining estimated useful
life of the product; generally, three years. The establishment of technical
viability and the ongoing assessment of recoverability of capitalized costs
require considerable judgment by management with respect to certain factors
including anticipated future gross revenues, estimated economic life, market
potential and changes in technology. Total amortization expense for capitalized
software was $5,592, $7,577 and $7,076 for the two years and thirty-nine week
period ended March 29, 1996, March 28, 1997 and January 2, 1998, respectively.
Revenue Recognition
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.
Accounts receivable at March 28, 1997 and January 2, 1998, include $3,939
and $8,834, respectively, for services rendered prior to those dates which were
billed in the month subsequent to the respective balance sheet date. The
allowance for doubtful accounts at January 2, 1998 includes $266 attributable
to unbilled accounts receivable.
Major Customers
Certain customers have individually exceeded 10% of total revenue during
the historical period, as follows:
<TABLE>
<CAPTION>
Thirty-Nine Week
Year Ended Year Ended Period Ended
March 29, 1996 March 28, 1997 January 2, 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Nextel Communications, Inc. ............. * 16.8% 38.3%
Western Wireless Corp. .................. 19.9% 21.3% 11.2%
CommNet Cellular, Inc. .................. 13.5% 10.5% 10.6%
Bell Atlantic Mobile .................... 16.3% 10.9% 10.5%
Southwestern Bell Telephone Co. ......... 11.9% * *
</TABLE>
*Denotes that sales to this customer did not exceed 10% of total revenue
for the respective period.
Income Taxes
Income taxes have been provided on a separate return basis for the two
years and 39-week period ended March 29, 1996, March 28, 1997 and January 2,
1998, respectively. Income taxes have not been provided for periods prior to
fiscal 1996. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
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.
F-24
<PAGE>
ITDS INTELICOM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 29, 1996, March 28, 1997 and January 2, 1998
(Dollars in Thousands)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 28, January 2,
1997 1998
----------- -----------
<S> <C> <C>
Computer equipment .................... $ 2,809 $ 3,879
Furniture, fixtures and other ......... 1,698 2,008
Leasehold improvements ................ 736 736
-------- --------
5,243 6,623
Less accumulated depreciation ......... (2,654) (3,648)
-------- --------
$ 2,589 $ 2,975
======== ========
</TABLE>
3. EMPLOYEE BENEFIT PLANS
Substantially all TRIS employees were eligible for the CSC contributory
defined benefit pension plan. That plan provided pay-related benefits based on
years of participation. Under CSC's funding policy, annual contributions were
made to fund the plan during the participants' time of participation.
CSC allocated pension plan expense to TRIS on the basis of payroll for
participating employees.
CSC maintained 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 the applicable statutory limit per calendar
year. TRIS through a benefit allocation from CSC, offered a contribution match
to its eligible employees.
Subsequent to the acquisition of TRIS by ITDS as described in Note 1, all
TRIS employees became eligible to participant in ITDS' employee benefit plans.
4. RELATED PARTY TRANSACTIONS
TRIS is part of the centralized cash management, treasury, disbursements
and collection functions of CSC. Accordingly, TRIS maintains no separate
banking, treasury or accounting functions. Operating expenses reflected in the
statement of operations and shareholders' net investment include both direct
costs pertaining exclusively to and incurred by TRIS, as well as an allocation
of costs associated with certain functions which were performed on a shared
basis for TRIS and other CSC divisions. These functions include insurance,
legal, accounting, human resources, income taxes and technology. Costs are
allocated to TRIS based on allocation methods related to the shared function,
principally net revenues as a percentage of consolidated net revenues.
Management believes that these cost allocation methods are reasonable and
reflect TRIS' costs of doing business.
Allocated costs included in selling, general and administrative expenses
were $3,794, $3,675 and $4,519 for the two years and 39-week period ended March
29, 1996, March 28, 1997 and January 2, 1998, respectively.
Subsequent to the acquisition of TRIS by ITDS as described in Note 1,
certain support functions will be provided by CSC on a transitional basis and
other services will be discontinued.
5. COMMITMENTS AND CONTINGENCIES
In October 1996, TRIS entered into a noncancelable lease expiring in
September 2003 for 60,400 square feet of office space in Champaign, Illinois.
Minimum future rental payments due under such lease are $665 per year, which
does not include property tax or utility experiences.
Rental expense incurred (including related property taxes) was $235, $464
and $553 for the two years and 39-week period ended March 29, 1996, March 28,
1997 and January 2, 1998, respectively.
F-25
<PAGE>
ITDS INTELICOM SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 29, 1996, March 28, 1997 and January 2, 1998
(Dollars in Thousands)
5. COMMITMENTS AND CONTINGENCIES (Continued)
In the normal course of business, the Company is party to customer and
other disputes which involve or may involve litigation. It is the opinion of
management that ultimate liability, if any, with respect to these disputes will
not be material to the Company's results of operations or financial position.
6. INCOME TAXES
Significant components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Thirty-Nine Week
Year Ended Year Ended Period Ended
March 29, 1996 March 28, 1997 January 2, 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Current:
Federal ............... $ 411 $ 614 $ (1,268)
State ................. 81 121 (251)
------ ------ --------
Total current .......... 492 735 (1,519)
Deferred:
Federal ............... 2,074 1,208 457
State ................. 410 239 90
------ ------ --------
Total deferred ......... 2,484 1,447 547
------ ------ --------
$2,976 $2,182 $ (972)
====== ====== ========
</TABLE>
A reconciliation of the applicable federal statutory rate to the Company's
effective tax rate from income (loss) before taxes is as follows:
<TABLE>
<CAPTION>
Thirty-Nine Week
Year Ended Year Ended Period Ended
March 29, 1996 March 28, 1997 January 2, 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Statutory federal income tax rate ......... 34.0% 34.0% (34.0)%
Non-deductible charges .................... 1.7 3.2 3.3
State income taxes, net ................... 4.3 4.6 ( 3.7)
---- ---- -----
40.0% 41.8% (34.4)%
==== ==== =====
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
March 28, January 2,
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Capitalized software .................. $5,773 $5,162
Unbilled revenue ...................... 1,503 3,371
------ ------
Total deferred tax liabilities ......... 7,276 8,533
Deferred tax assets:
Reserve for doubtful accounts ......... 224 936
Other ................................. 183 181
------ ------
Total deferred tax assets .............. 407 1,117
------ ------
Net deferred tax liability ............. $6,869 $7,416
====== ======
</TABLE>
F-26
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, any of the Selling
Stockholders or any of the Underwriters. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
--------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 7
Use of Proceeds ............................... 12
Price Range of Common Stock ................... 12
Capitalization ................................ 13
Selected Consolidated Financial Data .......... 14
Unaudited Pro Forma Consolidated
Financial Statements ....................... 16
1997 Pro Forma Financial Condition and
Results of Operations ...................... 20
Business ...................................... 22
Management .................................... 33
Principal and Selling Stockholders ............ 35
Underwriting .................................. 37
Legal Matters ................................. 38
Experts ....................................... 38
Available Information ......................... 39
Incorporation of Certain Documents
by Reference ............................... 39
Index to Financial Statements ................. F-1
</TABLE>
4,353,000 Shares
[ITDS Logo]
Common Stock
------------------
PROSPECTUS
, 1998
------------------
LEHMAN BROTHERS
BT ALEX. BROWN
COWEN & COMPANY
JEFFERIES & COMPANY, INC.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth an estimate (except for the SEC
registration fee and NASD filing fee) of the fees and expenses, all of which
will be borne by the Registrant, in connection with the sale and distribution
of the securities being registered, other than the underwriting discounts and
commissions.
<TABLE>
<S> <C>
SEC Registration Fee ............................. $ 43,515.39
NASD Filing Fee .................................. 15,250.98
Nasdaq National Market Listing Fee ............... 17,500.00
Transfer Agent and Registrar Fees ................ 3,500.00
Accounting Fees and Expenses ..................... 125,000.00
Legal Fees and Expenses .......................... 120,000.00
Printing, Engraving and Mailing Expenses ......... 175,000.00
Miscellaneous .................................... 100,233.63
------------
Total ........................................... $ 600,000.00
============
</TABLE>
Item 15. Indemnification of Directors and Officers
Article SEVENTH of the Registrant's Certificate of Incorporation (the
"Certificate of Incorporation") provides that no director of the Registrant
shall be personally liable for any monetary damages for any breach of fiduciary
duty as a director, except to the extent that the Delaware General Corporation
Law prohibits the elimination or limitation of liability of directors for
breach of fiduciary duty.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that a director or officer of the Registrant (a) shall be indemnified by the
Registrant against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement incurred in connection with any litigation or
other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director
or officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is
II-1
<PAGE>
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by such
law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if such
person had no reasonable cause to believe his conduct was unlawful; provided
that, in the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the corporation unless and only
to the extent that the adjudicating court determines that such indemnification
is proper under the circumstances. Under the Underwriting Agreement, the
Underwriters are obligated, under certain circumstances, to indemnify directors
and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1 hereto.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
*2 Stock Purchase Agreement, dated as of December 29, 1997 by and among the Registrant, CSC
Intelicom, Inc. and CSC Domestic Enterprises, Inc.
**3.1 Certificate of Incorporation of the Registrant, as amended.
**3.2 By-Laws of the Registrant.
**4 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant.
5 Opinion of Hale and Dorr LLP with respect to validity of securities being offered.
***21 Subsidiaries of the Registrant.
23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Ernst & Young LLP.
***24 Power of Attorney (included on the signature page of this Registration Statement).
</TABLE>
- ------------
* Incorporated by reference to the Registrant's Report on Form 8-K originally
filed with the Securities and Exchange Commission on January 13, 1998.
** 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.
*** Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required to be filed
or because the required information is given in the Consolidated Financial
Statements or Notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and By-Laws of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of
II-2
<PAGE>
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser. The undersigned
Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on this 11th day of May, 1998.
INTERNATIONAL TELECOMMUNICATION
DATA SYSTEMS, INC.
/s/ Peter P. Bassermann
---------------------------------
Peter P. Bassermann
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ Peter P. Bassermann President, Chief Executive Officer May 11, 1998
- ------------------------- and Director (Principal Executive
Peter P. Bassermann Officer
/s/ Paul K. Kothari Chief Financial Officer (Principal May 11, 1998
- ------------------------- Financial and Accounting Officer)
Paul K. Kothari
/s/ Lewis D. Bakes* Director May 11, 1998
- -------------------------
Lewis D. Bakes
/s/ Stuart L. Bell* Director May 11, 1998
- -------------------------
Stuart L. Bell
/s/ Stephen J. Saft* Director May 11, 1998
- -------------------------
Stephen J. Saft
/s/ Peter L. Masanotti* Director May 11, 1998
- -------------------------
Peter L. Masanotti
By: /s/ Peter P. Bassermann
----------------------
Peter P. Bassermann
Attorney-in-fact
</TABLE>
II-4
[__________] Shares
International Telecommunication Data Systems, Inc.
Common Stock
UNDERWRITING AGREEMENT
[________ __,] 1998
LEHMAN BROTHERS INC.
BT ALEX. BROWN INCORPORATED
COWEN & COMPANY
JEFFERIES & COMPANY
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
International Telecommunication Data Systems, Inc., a Delaware corporation
(the "Company"), proposes and certain stockholders of the Company named in
Schedule 2 hereto (the "Selling Stockholders"), propose to sell an aggregate of
[__________] shares (the "Firm Stock") of the Company's Common Stock, par value
$0.01 per share (the "Common Stock"). Of the [__________] shares of the Firm
Stock, [__________] are being sold by the Company and [__________] by the
Selling Stockholders. In addition, the Company and the Selling Stockholders
propose to grant to the underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional [__________] shares of
the Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company and the Selling
Stockholders by the Underwriters.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-3 and the amendments thereto,
with respect to the Stock have (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations (the
"Rules and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become
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<PAGE>
effective under the Securities Act. Copies of such registration
statement and the amendments thereto have been delivered by the Company to
you as the representatives (the "Representatives") of the Underwriters. As
used in this Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time; "Preliminary
Prospectus" means each prospectus included in such registration statement,
or amendments thereof, before it became effective under the Securities Act
and any prospectus filed with the Commission by the Company with the
consent of the Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration statement, as
amended at the Effective Time, including any documents incorporated by
reference therein at such time and all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations in accordance with Section 6(a) hereof and deemed to be a
part of the registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus"
means such final prospectus, as first filed with the Commission pursuant to
paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. Reference
made herein to any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Securities Act, as of the
date of such Preliminary Prospectus or the Prospectus, as the case may be,
and any reference to any amendment or supplement to any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include any
document filed under the United States Securities Exchange Act of 1934 (the
"Exchange Act") after the date of such Preliminary Prospectus or the
Prospectus, as the case may be; and any reference to any amendment to the
Registration Statement shall be deemed to include any annual report of the
Company filed with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act after the Effective Time that is incorporated by reference in
the Registration Statement. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the requirements
of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon
-2-
<PAGE>
and in conformity with written information furnished to the Company
through the Representatives by or on behalf of any Underwriter specifically
for inclusion therein.
(c) The Company has registered the Common Stock with the Commission
pursuant to Section 12 of the Exchange Act and all documents filed with the
Commission under the Exchange Act, including the documents incorporated by
reference into the Prospectus, when they were filed, conformed in all
respects to the requirements of the Exchange Act and the Rules and
Regulations thereunder and did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and any
further documents so filed and incorporated by reference in the Prospectus,
when such documents are filed with the Commission, will conform in all
material respects to the requirements of the Exchange Act and the Rules and
Regulations of the Commission thereunder and will not contain an untrue
statement of a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(d) The Company and each of its subsidiaries (as defined in Section 17)
have been duly formed and are validly existing as corporations or limited
liability companies, as the case may be, in good standing under the laws of
their respective jurisdictions of formation, are duly qualified to do
business and are in good standing as foreign corporations or limited
liability companies, as the case may be, in each jurisdiction in which
their respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, except where the failure
to so qualify would not have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations or business
of the Company and each of its subsidiaries, taken as a whole (herein, a
"Material Adverse Effect"), and have all power and authority necessary to
own or hold their respective properties and to conduct the businesses in
which they are engaged; and other than ITDS Intelicom Services, Inc., none
of the subsidiaries of the Company is a "significant subsidiary," as such
term is defined in Rule 405 of the Rules and Regulations.
(e) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus, including all shares of Common Stock distributed on March 9,
1998 to stockholders in connection with the three-for-two stock dividend
effected by the Company; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims.
(f) The shares of the Stock to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued, fully
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<PAGE>
paid and non-assessable and the Stock will conform to the description
thereof contained in the Prospectus under the section entitled "Description
of Capital Stock"; and the issuance of the Stock is not subject to
preemptive or other similar rights that have not been waived.
(g) This Agreement has been duly authorized, executed and delivered by
the Company.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any material indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of
the certificate of incorporation or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of its properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act, and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby.
(i) The Stock Purchase Agreement, dated December 29, 1997, by and among
the Company, CSC Intelicom, Inc. and CSC Domestic Enterprises, Inc. was
duly authorized, executed and delivered by the Company and the consummation
by the Company of all of the transactions contemplated thereby were duly
authorized by all necessary corporate action on the part of the Company.
(j) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or the right (other than rights
which have been waived or satisfied) to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities Act.
(k) Except as described in the Prospectus, the Company has not sold or
issued any shares of Common Stock during the six-month period preceding the
date of the Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities
-4-
<PAGE>
Act, other than shares issued pursuant to employee benefit plans,
qualified stock option or equity plans or other employee compensation plans
or pursuant to outstanding options, rights or warrants outstanding prior to
the commencement of such six-month period.
(l) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since
such date, there has not been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise
than as set forth or contemplated in the Prospectus.
(m) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement and
included in the Prospectus present fairly the financial condition and
results of operations of the Company and its subsidiaries purported to be
shown thereby, at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved.
(n) Ernst & Young LLP, who have certified certain financial statements
of the Company and ITDS Intelicom Services, Inc., respectively, whose
reports appear in the Prospectus and who have delivered the initial letter
referred to in Section 9(g) hereof, are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(o) Neither the Company nor its subsidiaries own any real property. The
Company and each of its subsidiaries have good and marketable title to all
personal property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and all real and personal
property and buildings held under lease by the Company and its subsidiaries
are held by it under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries.
(p) The Company and each of its subsidiaries is covered by insurance in
such amounts and covering such risks as is adequate for the conduct of
their respective businesses and the value of their respective properties
and as is customary for companies engaged in similar businesses in similar
industries.
-5-
<PAGE>
(q) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of their
businesses and have no reason to believe that the conduct of their
respective businesses will conflict with, and has not received any notice
of any claim of conflict with, any such rights of others.
(r) There are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, might have
a Material Adverse Effect; and to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by governmental authorities
or threatened by others.
(s) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
(t) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement.
(u) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(v) No labor disturbance by the employees of the Company exists or, to
the knowledge of the Company, is imminent which might be expected to have a
Material Adverse Effect.
(w) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
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<PAGE>
(x) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or any of its subsidiaries which has had (nor does
the Company have any knowledge of any tax deficiency which, if determined
adversely to the Company or any of its subsidiaries, might have) a Material
Adverse Effect.
(y) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities other
than securities issued pursuant to employee benefit plans, qualified stock
or equity plans or other employee compensation plans, (ii) incurred any
liability or obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of business, (iii)
entered into any transaction not in the ordinary course of business or (iv)
declared or paid any dividend on its capital stock.
(z) The Company (i) makes and keeps accurate books and records and (ii)
maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit
preparation of its financial statements and to maintain accountability for
its assets, (C) access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability for its
assets is compared with existing assets at reasonable intervals.
(aa) Neither the Company nor any of its subsidiaries (i) is in
violation of its certificate of incorporation or by-laws, (ii) is in
default in any material respect, and no event has occurred which, with
notice or lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition contained
in any material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it is bound or
to which any of its properties or assets is subject and (iii) is in
violation in any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its property or assets may be
subject or has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business.
(ab) Neither the Company nor any of its subsidiaries, nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee
from corporate funds; violated or is in violation of any provision of the
Foreign Corrupt Practices
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<PAGE>
Act of 1977; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
(ac) Neither the Company nor any of its subsidiaries is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder.
2. Each Selling Stockholder severally represents, warrants and agrees
that:
(a) The Selling Stockholder has, and immediately prior to the Delivery Date
(as defined in Section 5 hereof) the Selling Stockholder will have good and
valid title to the shares of Stock to be sold by the Selling Stockholder
hereunder on such date, free and clear of all liens, encumbrances, equities or
claims; and upon delivery of such shares and payment therefor pursuant hereto,
good and valid title to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement and power of attorney (the "Custody Agreement and Power of
Attorney" and, together with all other similar agreements executed by the
other Selling Stockholders, the "Custody Agreements and Powers of
Attorney") with the Company, as custodian (the "Custodian"), for delivery
under this Agreement, certificates in negotiable form (with signature
guaranteed by a commercial bank or trust company having an office or
correspondent in the United States or a member firm of the New York or
American Stock Exchanges) representing the shares of Stock to be sold by
the Selling Stockholder hereunder, and the Selling Stockholder has duly and
irrevocably executed and delivered a power of attorney appointing the
Custodian and one or more other persons, as attorneys-in-fact, with full
power of substitution, and with full authority (exercisable by any one or
more of them) to execute and deliver this Agreement and to take such other
action as may be necessary or desirable to carry out the provisions hereof
on behalf of the Selling Stockholder.
(c) The Selling Stockholder has full right, power and authority to
enter into this Agreement and the Custody Agreement and Power of Attorney;
the execution, delivery and performance of this Agreement and the Custody
Agreement and Power of Attorney by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any material indenture, mortgage, deed of trust, loan agreement or
other material agreement or instrument to which the Selling Stockholder, if
applicable, is a party or by which the Selling Stockholder is bound or to
which any of the property or assets of the Selling Stockholder is subject,
nor will such actions result in any violation of the provisions of the
charter or by-laws of the Selling Stockholder or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property or assets of the
Selling Stockholder; and, except for the registration of the Stock under
the Securities Act
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<PAGE>
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution of
the Stock by the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or governmental agency
or body is required for the execution, delivery and performance of this
Agreement or the Custody Agreement and Power of Attorney by the Selling
Stockholder and the consummation by the Selling Stockholder of the
transactions contemplated hereby and thereby.
(d) To the knowledge of such Selling Stockholder, the Registration
Statement and the Prospectus and any further amendments or supplements to
the Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be, do not and
will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(e) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 1 hereof
are not materially true and correct, is familiar with the Registration
Statement and the Prospectus (as amended or supplemented) and has no
knowledge of any material fact, condition or information not disclosed in
the Registration Statement, as of the effective date, or the Prospectus (or
any amendment or supplement thereto), as of the applicable filing date,
which has adversely affected or may adversely affect the business of the
Company and is not prompted to sell shares of Common Stock by any
information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
(f) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell [__________] shares of
the Firm Stock and each Selling Stockholder hereby agrees to sell the number of
shares of the Firm Stock set opposite name of such Selling Stockholder in
Schedule 2 hereto, severally and not jointly, to the several Underwriters and
each of the Underwriters, severally and not jointly, agrees to purchase the
number of shares of the Firm Stock
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<PAGE>
set opposite that Underwriter's name in Schedule l hereto. Each Underwriter
shall be obligated to purchase from the Company, and from each Selling
Stockholder, that number of shares of the Firm Stock which represents the same
proportion of the number of shares of the Firm Stock to be sold by the Company,
and by each Selling Stockholder, as the number of shares of the Firm Stock set
forth opposite the name of such Underwriter in Schedule l represents of the
total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company and the Selling Stockholders grant to the
Underwriters an option to purchase up to [__________] shares of Option Stock.
Such option is granted solely for the purpose of covering overallotments in the
sale of Firm Stock and is exercisable as provided in Section 5 hereof. Shares of
Option Stock shall be purchased severally for the account of the Underwriters in
proportion to the number of shares of Firm Stock set opposite the name of such
Underwriters in Schedule l hereto. The respective purchase obligations of each
Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no Underwriter shall be obligated to purchase Option
Stock other than in l00 share amounts. The price of both the Firm Stock and any
Option Stock shall be [______] per share.
The Company and the Selling Stockholders shall not be obligated to deliver
any of the Stock to be delivered on the First Delivery Date or the Second
Delivery Date (as hereinafter defined), as the case may be, except upon payment
for all the Stock to be purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment for the
Firm Stock shall be made at the office of Chadbourne & Parke LLP, 30 Rockefeller
Plaza, New York, New York 10112, at 10:00 A.M., New York City time, on the third
full business day following the date of this Agreement or at such other date or
place as shall be determined by agreement between the Representatives and the
Company. This date and time are sometimes referred to as the First Delivery
Date. On the First Delivery Date, the Company and the Selling Stockholders shall
deliver or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company and the Selling Stockholders of the purchase price by
wire transfer in immediately available funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Firm Stock shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Firm Stock, the Company and the Selling
Stockholders shall make the certificates representing the Firm Stock available
for inspection by the Representatives in
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<PAGE>
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of this
Agreement and may be exercised in whole or in part from time to time by written
notice being given to the Company by the Representatives. Such notice shall set
forth the aggregate number of shares of Option Stock as to which the option is
being exercised, the names in which the shares of Option Stock are to be
registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as the "Second Delivery Date" and the First Delivery
Date and the Second Delivery Date are sometimes each referred to as a "Delivery
Date."
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 5 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., New York City time, on the Second Delivery Date.
On the Second Delivery Date, the Company and the Selling Stockholders shall
deliver or cause to be delivered the certificates representing the Option Stock
to the Representatives for the account of each Underwriter against payment to or
upon the order of the Company of the purchase price by wire transfer in
immediately available funds. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each Underwriter hereunder. Upon delivery, the Option Stock
shall be registered in such names and in such denominations as the
Representatives shall request in the aforesaid written notice. For the purpose
of expediting the checking and packaging of the certificates for the Option
Stock, the Company and the Selling Stockholders shall make the certificates
representing the Option Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Representatives
and to file such Prospectus pursuant to Rule 424(b) under the Securities
Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus prior to the last delivery date
except as permitted herein; to advise the Representatives, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and
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<PAGE>
to furnish the Representatives with copies thereof; to file promptly
all reports and any definitive proxy or information statements required to
be filed by the Company with the Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the
Prospectus and for so long as the delivery of a prospectus is required in
connection with the offering or sale of the Stock; to advise the
Representatives, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to use
promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto and (ii) each Preliminary Prospectus,
the Prospectus and any amended or supplemented Prospectus; and (iii) any
document incorporated by reference in the Prospectus (excluding exhibits
thereto); and, if the delivery of a prospectus is required at any time
after the Effective Time in connection with the offering or sale of the
Stock or any other securities relating thereto and if at such time any
events shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any
other reason it shall be necessary to amend or supplement the Prospectus or
file under the Exchange Act any document incorporated by reference in the
Prospectus in order to comply with the Securities Act or the Exchange Act,
to notify the Representatives and, upon their request, to file such
document and to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as the Representatives may from
time to time reasonably request of an amended or supplemented Prospectus
which will correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment
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of the Company or the Representatives, be required by the Securities
Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus, any document
incorporated by reference in the Prospectus or any Prospectus pursuant to
Rule 424 of the Rules and Regulations, to furnish a copy thereof to the
Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least 410 days after the
end of the Company's current fiscal quarter), to make generally available
to the Company's security holders and to deliver to the Representatives an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Securities Act and the Rules
and Regulations (including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to furnish
to the Representatives copies of all materials furnished by the Company to
its shareholders and all public reports and all reports and financial
statements furnished by the Company to the principal national securities
exchange upon which the Common Stock may be listed pursuant to requirements
of or agreements with such exchange or to the Commission pursuant to the
Exchange Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
(i) For a period of 90 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than the Stock and shares
issued pursuant to employee benefit plans, qualified stock option or equity
plans or other employee compensation plans existing on the date hereof or
pursuant to currently outstanding options, warrants or rights), or sell or
grant options, rights or warrants with respect to any shares of Common
Stock or securities convertible into or exchangeable for Common Stock
(other than the grant of options pursuant to option plans existing on the
date hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, in each
case, without the prior written consent of
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Lehman Brothers Inc.; and to cause each officer and director of the
Company to furnish to the Representatives, prior to the First Delivery
Date, a letter or letters, in form and substance satisfactory to counsel
for the Underwriters pursuant to which each such person shall agree not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any
of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in the immediately preceding
clause (1) or (2) is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case, for a period of 90 days
from the date of the Prospectus, without the prior written consent of
Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of the
Stock for quotation on the Nasdaq National Market and to use its best
efforts to effect such quotation, subject only to official notice of
issuance, prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock being sold by
the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that neither the
Company nor any subsidiary shall become an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules
and regulations of the Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 90 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than the Stock) or (2) enter
into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of
such shares of Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or
other securities, in cash or otherwise, in each case, without the prior
written consent of Lehman Brothers Inc.
(b) That the Stock to be sold by the Selling Stockholder hereunder,
which is represented by the certificates held in custody for the Selling
Stockholder, is subject to the interest of the Underwriters and the other
Selling Stockholders thereunder, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable,
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and that the obligations of the Selling Stockholder hereunder shall not
be terminated by any act of the Selling Stockholder, by operation of law,
by the death or incapacity of any individual Selling Stockholder or, in the
case of a trust, by the death or incapacity of any executor or trustee or
the termination of such trust, or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First Delivery Date
a properly completed and executed United States Treasury Department Form
W-8 (if the Selling Stockholder is a non-United States person) or Form W-9
(if the Selling Stockholder is a United States person).
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus or any document
incorporated by reference therein, all as provided in this Agreement; (d) the
costs of producing and distributing this Agreement and any other related
documents in connection with the offering, purchase, sale and delivery of the
stock; (e) the costs of delivering and distributing the Custody Agreements and
Powers of Attorney; (f) the filing fees incident to securing any required review
by the National Association of Securities Dealers, Inc. of the terms of sale of
the Stock; (g) any applicable listing or other fees, including the fees for
quotation of the Common Stock on the Nasdaq National Market; (h) the fees and
expenses of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 6(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the Underwriters); (i) all fees and expenses of an independent
underwriter and (j) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Stockholders under this
Agreement; provided that, except as provided in this Section 8 and in Section
13, the Underwriters shall pay their own costs and expenses, including the costs
and expenses of their counsel, any transfer taxes on the Stock which they may
sell and the expenses of advertising any offering of the Stock made by the
Underwriters [, and the Selling Stockholders shall pay the fees and expenses of
their respective counsel, the Custodian (and any other attorney-in-fact), and
any transfer taxes payable in connection with their respective sales of stock to
the Underwriters and reimburse the Company for such Selling Stockholders' pro
rata share of the fees and expenses paid by the Company in connection with this
offering of the Common Stock.]
9. Conditions of Underwriters' Obligations. The respective obligations of
the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company and the
Selling Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder, and to each of
the following additional terms and conditions:
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(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 6(a); no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened by
the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the opinion of Chadbourne & Parke LLP,
counsel for the Underwriters, is material or omits to state a fact which,
in the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Custody Agreements
and Powers of Attorney, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and the
transactions contemplated hereby, shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Company and the
Selling Stockholders shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon
such matters.
(d) Hale and Dorr shall have furnished to the Representatives its
written opinion, as counsel to the Company, addressed to the Underwriters
and dated such Delivery Date, in form and substance reasonably satisfactory
to the Representatives, to the effect that:
(i) The Company and each of its significant subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are duly
qualified to do business and are in good standing as foreign corporations
in each of the jurisdictions in which their respective ownership or lease
of property or the conduct of their respective businesses requires such
qualification and have all power and authority necessary to own or hold
their respective properties and conduct their respective businesses.
(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the shares of Stock being delivered on such Delivery Date) have
been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
significant subsidiary of the Company have been duly and validly authorized
and issued and are fully paid and non-assessable and (except for directors
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims.
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<PAGE>
(iii) There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any shares of
the Stock pursuant to the Company's certificate of incorporation or by-laws
or, to such counsel's knowledge, any agreement or other instrument to which
the Company is a party or by which it may be bound;
(iv) All real property and buildings held under lease by the Company
and its significant subsidiaries are held by them under valid, subsisting
and enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and such subsidiaries.
(v) To such counsel's knowledge and other than as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its significant subsidiaries is the
subject which are reasonably likely to have a Material Adverse Effect; and,
to such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vi) The Registration Statement was declared effective under the
Securities Act as of the date and time specified in such opinion, the
Prospectus was filed with the Commission pursuant to the subparagraph of
Rule 424(b) of the Rules and Regulations specified in such opinion on the
date specified therein and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceeding for that purpose is pending or threatened by the
Commission;
(vii) The Registration Statement and the Prospectus and any further
amendments or supplements thereto made by the Company prior to such
Delivery Date (other than the financial statements and schedules and other
financial data contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the requirements
of the Securities Act and the Rules and Regulations; and the documents
incorporated by reference in the Prospectus and any further amendments or
supplement to any such incorporated document made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion), when
they were filed with the Commission complied as to form in all material
respects with the requirements of the Exchange Act and the Rules and
Regulations of the Commission thereunder;
(viii) To such counsel's knowledge, there are no contracts or other
documents which are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act or by the
Rules and Regulations which have not been described or filed as exhibits to
the Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
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<PAGE>
(ix) This Agreement has been duly authorized, executed and delivered by
the Company;
(x) The issue and sale of the shares of Stock being delivered on such
Delivery Date by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument listed as an exhibit to the Registration Statement,
nor will such actions result in any violation of the provisions of the
certificate of incorporation or by-laws of the Company or any of its
significant subsidiaries or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or assets; and, except for the registration of the Stock under
the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under the Exchange
Act and applicable state securities laws in connection with the purchase
and distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, by the Company and the consummation of the
transactions contemplated hereby; and
(xi) Except as described in the Prospectus, to such counsel's
knowledge, there are no contracts or agreements between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or the right
(other than rights which have been waived or satisfied) to require the
Company to include such securities in the securities registered pursuant to
the Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of
America, the laws of the Commonwealth of Massachusetts and the General
Corporation Law Statute of the State of Delaware. Such counsel shall also
have furnished to the Representatives a written statement, addressed to the
Underwriters and dated such Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that (x) such counsel
has acted as counsel to the Company on a regular basis (although the
Company is also represented by General Counsel), has acted as counsel to
the Company in connection with previous financing transactions and has
acted as counsel to the Company in connection with the preparation of the
Registration Statement, and (y) based on the procedures set forth therein,
but without independent check or verification, no facts have come to the
attention of such counsel which lead it to believe that (I) the
Registration Statement, as of the Effective Date, contained any
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<PAGE>
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, or that the Prospectus contains any untrue
statement of a material fact or omits to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading or
(II) any documents incorporated by reference in the Prospectus or any
further amendment or supplement to any such incorporated document made by
the Company prior to such Delivery Date, when they were filed with the
Commission contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
foregoing statement may be qualified by a statement to the effect that such
counsel does not (i) assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus or (ii) express any view as to the financial
statements and schedules and other financial data contained therein.
(e) Hale and Dorr shall have furnished to the Representatives its
written opinion, as special counsel to the Selling Stockholders, which
opinion shall be addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the Representatives,
to the effect that:
(i) Each Selling Stockholder has full right, power and authority to
enter into this Agreement and the Custody Agreement and Power of Attorney;
to such counsel's knowledge, no consent, approval, authorization or order
of any court or governmental agency or body is required for the execution
and delivery and performance of this Agreement and the Custody Agreement
and Power of Attorney by each Selling Stockholder, and consummation by the
Selling Stockholders of the transactions contemplated thereby, except such
as have been obtained or made and are in full force and effect and such as
may be required by the NASD or under the Exchange Act and applicable state
securities laws;
(ii) This Agreement has been duly authorized, executed and delivered by
or on behalf of each Selling Stockholder;
(iii) A Custody Agreement and Power of Attorney have been duly
authorized, executed and delivered by each Selling Stockholder and
constitute valid and binding agreements of each Selling Stockholder,
enforceable in accordance with their respective terms;
(iv) Immediately prior to the Delivery Date, each Selling Stockholder
had good and valid title to the shares of Stock to be sold by such Selling
Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to
sell, assign, transfer and deliver such shares to be sold by such Selling
Stockholder hereunder; and
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<PAGE>
(v) Good and valid title to the shares of Stock to be sold by each
Selling Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, has been transferred to each of the
several Underwriters.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United States of
America and the Delaware General Corporate Law and (ii) in rendering the
opinion in Section 9(e)(iv) above, rely upon a certificate of each Selling
Stockholder in respect of matters of fact as to ownership of and liens,
encumbrances, equities or claims on the shares of Stock sold by such
Selling Stockholder, provided that such counsel shall furnish copies
thereof to the Representatives and state that it believes that both the
Underwriters and it are justified in relying upon such certificate.
(f) The Representatives shall have received from Chadbourne & Parke
LLP, counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for the
purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the Representatives
shall have received from Ernst & Young LLP a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date hereof (or, with respect to matters involving
changes or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date hereof), the conclusions and findings of
such firm with respect to the financial information and other matters
ordinarily covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(h) With respect to the letter of Ernst & Young LLP referred to in the
preceding paragraph and delivered to the Representatives concurrently with
the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of
such accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01
of Regulation S-X of the Commission, (ii) stating, as of the date of the
bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five
days prior to the date of the bring-down letter), the conclusions and
findings of such firm with respect to the
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financial information and other matters covered by the initial letter
and (iii) confirming in all material respects the conclusions and findings
set forth in the initial letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the Company in
Section 1 are true and correct as of such Delivery Date; the Company has
complied with all its agreements contained herein; and the conditions set
forth in Sections 9(a) and 9(k) have been fulfilled; and
(ii) They have carefully examined the Registration Statement and the
Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue statement
of a material fact and did not omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and (B) since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration Statement
or the Prospectus.
(j) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the Delivery Date a certificate, dated
such Delivery Date, signed by, or on behalf of, the Selling Stockholder (or
the Custodian or one or more attorneys-in-fact) stating that the
representations, warranties and agreements of the Selling Stockholder
contained herein are true and correct as of such Delivery Date and that the
Selling Stockholder has complied with all agreements contained herein to be
performed by the Selling Stockholder at or prior to such Delivery Date.
(k) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus or
(ii) since such date there shall not have been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in clause (i) or (ii), is, in the judgment of
the Representatives, so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Stock being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
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(l) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
in the over-the-counter market, or trading in any securities of the Company
on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(m) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(n) You shall have been furnished such additional documents and
certificates as you or counsel for the Underwriters may reasonably request
relating to this Agreement and the transactions contemplated hereby.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter, its
officers and employees and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to which
that Underwriter, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (B) in any blue sky
application or other document prepared or executed by the Company (or based
upon any written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Stock under the securities laws of
any state or other jurisdiction (any such application, document
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or information being hereinafter called a "Blue Sky Application"), (ii)
the omission or alleged omission to state in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact
required to be stated therein or necessary to make the statements therein
not misleading or (iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any
manner to, the Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii)
above (provided that the Company shall not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer,
employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based
upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any such amendment or supplement, or in
any Blue Sky Application, in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein, which information consists solely of the information
specified in Section 10(f). The foregoing indemnity agreement is in
addition to any liability which the Company may otherwise have to any
Underwriter or to any officer, employee or controlling person of that
Underwriter.
(b) The Selling Stockholders, severally in proportion to the number of
shares of Stock to be sold by each of them hereunder, shall indemnify and
hold harmless each Underwriter, its officers and employees, and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Stock), to which that Underwriter, officer, employee
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
shall reimburse each Underwriter, its officers and employees and each such
controlling person for any legal or
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other expenses reasonably incurred by that Underwriter, its officers
and employees or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Selling Stockholders shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any such amendment or supplement in
reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section 10(f).
Notwithstanding the foregoing sentence, the aggregate liability of any
Selling Stockholder pursuant to the provisions of this paragraph shall be
limited to an amount equal to the aggregate purchase price, less
underwriting discounts and commissions, received by such Selling
Stockholder from the sale of such Selling Stockholder's Stock hereunder.
The foregoing indemnity agreement is in addition to any liability which the
Selling Stockholders may otherwise have to any Underwriter or any officer,
employee or controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its
directors (including any person who, with his or her consent, is named in
the Registration Statement as about to become a director of the Company),
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or
any such director, officer or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
in any amendment or supplement thereto, or (B) in any Blue Sky Application
or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person
in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses
are incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or any
such director, officer, employee or controlling person.
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(d) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 10, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under this
Section 10 except to the extent it has been materially prejudiced by such
failure and, provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 10. If any such claim
or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this Section 10
for any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that the Representatives shall have the
right to employ counsel to represent jointly the Representatives and those
other Underwriters and their respective officers, employees and controlling
persons who may be subject to liability arising out of any claim in respect
of which indemnity may be sought by the Underwriters against the Company or
any Selling Stockholder under this Section 10 if, in the reasonable
judgment of the Representatives, it is advisable for the Representatives
and those Underwriters, officers, employees and controlling persons to be
jointly represented by separate counsel because of actual differing
interests among the parties, and in that event the fees and expenses of
such separate counsel shall be paid by the Company or Selling Stockholders.
No indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless, such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the
consent of the indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to indemnify
and hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any
loss, claim, damage or liability, or any action in respect thereof,
referred to therein, then each indemnifying party shall, in lieu of
indemnifying such
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<PAGE>
indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate
to reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the
offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other with respect
to the statements or omissions which resulted in such loss, claim, damage
or liability, or action in respect thereof, as well as any other relevant
equitable considerations; provided that no Selling Stockholder shall be
required to contribute in excess of the amount of the purchase price for
the sale of Stock of such Selling Stockholder less underwriting discounts
and commissions. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Stock purchased under this
Agreement (before deducting expenses) received by the Company and the
Selling Stockholders, on the one hand, and the total underwriting discounts
and commissions received by the Underwriters with respect to the shares of
the Stock purchased under this Agreement, on the other hand, bear to the
total gross proceeds from the offering of the shares of the Stock under
this Agreement, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to
this Section 10(e) were to be determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section shall be
deemed to include, for purposes of this Section 10(e), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 10(e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Stock underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10(e)
are several in proportion to their respective underwriting obligations and
not joint.
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<PAGE>
(f) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning
over-allotments on the inside front cover page of and the concession and
reallowance figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and
the Prospectus.
11. Defaulting Underwriters. If, on either Delivery Date, any Underwriter
defaults in the performance of its obligations under this Agreement, the
remaining non-defaulting Underwriters shall be obligated to purchase the Stock
which the defaulting Underwriter agreed but failed to purchase on such Delivery
Date in the respective proportions which the number of shares of the Firm Stock
set opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining nondefaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining nondefaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 3. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholders, except that the Company will continue to be
liable for the payment of expenses to the extent set forth in Sections 8 and 13.
As used in this Agreement, the term "Underwriter" includes, for all purposes of
this Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
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<PAGE>
12. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
and the Selling Stockholders prior to delivery of and payment for the Firm Stock
if, prior to that time, any of the events described in Sections 9(k) or 9(l),
shall have occurred or if the Underwriters shall decline to purchase the Stock
for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If (a) the Company or any
Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or any Selling Stockholder(s) to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholder(s)
is not fulfilled, the Company and the Selling Stockholder(s) will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Stock, and upon demand the Company
and the Selling Stockholder(s) shall pay the full amount thereof to the
Representative(s). If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department (Fax:
212-526-6588), with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., Three World Financial Center, 10th Floor, New York, New York
10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Lewis D. Bakes (Fax: 203-321-1335) with
a copy to Hale and Dorr, 60 State Street, Boston, Massachusetts 02109,
Attention: John A. Burgess, Esq.;
(c) if to any Selling Stockholders, shall be delivered or sent by mail,
telex or facsimile transmission to such Selling Stockholder at the address
set forth on Schedule 2 hereto with a copy to Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109, Attention: John A. Burgess, Esq.;
provided, however, that any notice to an Underwriter pursuant to Section
10(d) shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take
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<PAGE>
effect at the time of receipt thereof. The Company and the Selling Stockholders
shall be entitled to act and rely upon any request, consent, notice or agreement
given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of
the Representatives, and the Company and the Underwriters shall be entitled to
act and rely upon any request, consent, notice or agreement given or made on
behalf of the Selling Stockholders by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall inure to
the benefit of and be binding upon the Underwriters, the Company, the Selling
Stockholders and their respective personal representatives and successors. This
Agreement and the terms and provisions hereof are for the sole benefit of only
those persons, except that (A) the representations, warranties, indemnities and
agreements of the Company and the Selling Stockholders contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, who control any Underwriter within the meaning of Section 15 of the
Securities Act and (B) the indemnity agreement of the Underwriters contained in
Section 10(c) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 15, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations, warranties and
agreements of the Company, the Selling Stockholders and the Underwriters
contained in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For purposes
of this Agreement, (a) "business day" means any day on which the New York Stock
Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement among the Company, the
Selling Stockholders and the Underwriters, please indicate your acceptance in
the space provided for that purpose below.
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<PAGE>
Very truly yours,
INTERNATIONAL TELECOMMUNICATION
DATA SYSTEMS, INC.
By: ________________________________________
Name:
Title:
The Selling Stockholders named in Schedule 2
to this Agreement
By: ________________________________________
Attorney-in-Fact
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<PAGE>
Accepted:
LEHMAN BROTHERS INC.
BT Alex. Brown Incorporated
Cowen & Company
Jefferies & Company
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By: __________________________
Authorized Representative
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<PAGE>
SCHEDULE 1 [To be Completed]
Number of
Underwriters Firm Shares
- ------------ -----------
Lehman Brothers Inc..................................................
BT Alex. Brown Incorporated..........................................
Cowen & Company......................................................
Jefferies & Company..................................................
TOTAL
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SCHEDULE 2 [To be Completed]
Number of Number of
Selling Stockholders Firm Shares Option Shares
- -------------------- ----------- -------------
Portia K. Bakes
Lewis D. Bakes
TOTAL
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EXHIBIT 5
HALE AND DORR LLP
60 State Street
Boston, MA 02109
May 11, 1998
International Telecommunication Data Systems, Inc.
969 High Ridge Road
Stamford, CT 06905
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-3 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, relating to the public offering of an aggregate of 5,005,950 shares of
Common Stock, $.01 par value per share (the "Shares"), of International
Telecommunication Data Systems, Inc., a Delaware corporation (the "Company").
The Shares are to be sold by the Company and the selling stockholders
pursuant to an underwriting agreement (the "Underwriting Agreement") among the
Company and Lehman Brothers Inc., BT Alex. Brown Incorporated, Cowen & Company
and Jefferies & Company, Inc., as representatives of the several underwriters
named in the Underwriting Agreement (the "Underwriters").
We have examined signed copies of the Registration Statement and all
exhibits thereto, all as filed with the Commission. We have also examined and
relied upon the original or copies of minutes of meetings of the stockholders
and Board of Directors of the Company, stock record books of the Company, a
copy of the By-Laws of the Company, as amended, and a copy of the Certificate
of Incorporation of the Company, as amended.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized for issuance and, after payment therefor and the issuance of
the certificates therefor by the Company in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name therein and in the related
Prospectus under the caption "Legal Matters."
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
/s/ HALE AND DORR LLP
HALE AND DORR LLP
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
under the caption "Selected Financial Data" and to the use of our reports dated
February 10, 1998, except for information describing the three-for-two stock
split in Note 1 and Note 3 as to which the date is February 23, 1998, related
to our audits of International Telecommunication Data Systems, Inc., and March
5, 1998 related to our audits of ITDS Intelicom Services, Inc., appearing in
and incorporated into the Registration Statement (Form S-3) and related
Prospectus of International Telecommunication Data Systems, Inc. dated May 11,
1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Stamford, Connecticut
May 8, 1998
