UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
Commission file number 0-21519
International Telecommunication Data Systems, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1295986
- ------------------------------------------------ ------------------------
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification no.)
225 High Ridge Road, Stamford, CT 06905
- ------------------------------------------------ ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 329-3300
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 1998
---------------------------- -----------------------------
Common Stock, $.01 par value 17,257,695
<PAGE>
International Telecommunication Data Systems, Inc.
and Subsidiaries
Form 10-Q
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information-
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--June 30, 1998 and December 31, 1997.............. 1
Consolidated statements of operations--three months and six months ended
June 30, 1998 and 1997...................................................... 3
Consolidated statements of cash flows--six months ended
June 30, 1998 and 1997...................................................... 4
Notes to consolidated financial statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors That May Affect Future Results....... 9
Part II. Other Information
Item 1. Legal Proceedings ...................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders .................... 13
Item 5. Other Information ...................................................... 13
Item 6. Exhibits and Reports on Form 8-K ....................................... 13
Signatures.............................................................. 14
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
International Telecommunication Data Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997(1)
--------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 31,467 $ 28,967
Accounts receivable, net of allowances for doubtful
accounts of $2,290 and $486 respectively 25,858 5,008
Prepaid expenses, and other current assets 798 741
Deferred income taxes 925 220
--------------------------
Total current assets 59,048 34,936
Property and equipment
Computers, including leased property under capital leases
of $1,150 and $1,105, respectively 8,171 4,844
Furniture and fixtures, including leased property under
capital leases of $33 in 1998 and 1997 1,679 447
Equipment, including leased property under capital
leases of $54 in 1998 and 1997 376 373
Leasehold improvements 970 589
--------------------------
11,196 6,253
Less: accumulated depreciation and amortization 3,854 2,319
--------------------------
7,342 3,934
Other assets:
Goodwill - net of accumulated amortization of $1,611
in 1998 44,456 --
Product development costs-at cost, net of accumulated
amortization of $3,073 and $1,105 at June 30, 1998 and
December 31, 1997, respectively 21,222 3,698
Deferred taxes 5,075 --
Other 1,262 1,884
--------------------------
72,015 5,582
--------------------------
Total assets $138,405 $44,452
==========================
</TABLE>
See notes to financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31
1998 1997(1)
--------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,298 $ 1,192
Accrued expenses and income taxes payable 7,736 560
Accrued compensation 2,865 333
Deferred revenue 1,191 --
Current maturities of capital lease obligations 194 279
Other 41 --
--------------------------------
Total current liabilities 15,325 2,364
Capital lease obligations 41 73
Deferred income taxes -- 1,667
Other 9 30
Stockholders' equity
Common Stock, $.01 par value; 40,000,000 shares
authorized, 17,219,426 and 12,786,740 shares
issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 172 128
Additional paid-in capital 138,813 44,447
Retained deficit (15,862) (4,026)
Unearned compensation (93) (231)
--------------------------------
Total stockholders' equity 123,030 40,318
--------------------------------
Total liabilities and stockholders' equity $138,405 $44,452
================================
</TABLE>
(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to financial statements.
2
<PAGE>
International Telecommunication Data Systems, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 27,360 $ 5,362 $ 53,366 $ 10,632
Costs and expenses:
Operating expenses 10,521 1,364 20,782 2,684
General, administrative and selling
expenses 4,936 1,542 9,961 3,084
Depreciation and amortization 2,461 388 5,108 734
Systems development and programming
costs 3,847 647 7,318 1,271
In-process R&D & indirect acquisition
costs 527 -- 25,513 --
-------------------------------------------------------
22,292 3,941 68,682 7,773
Operating income (loss) 5,068 1,421 (15,316) 2,859
Other income 204 427 429 841
Interest expense (1,144) (28) (2,649) (77)
-------------------------------------------------------
Income (loss) before income taxes and
extraordinary item 4,128 1,820 (17,536) 3,623
Income tax expense (benefit) 1,695 742 (6,464) 1,483
-------------------------------------------------------
Income (loss) before extraordinary item 2,433 1,078 (11,072) 2,140
Extraordinary loss (net of $562 tax
benefit) 826 -- 826 --
-------------------------------------------------------
Net income (loss) $ 1,607 $ 1,078 $ (11,898) $ $2,140
=======================================================
Income (loss) per common share-basic:
Income (loss) before extraordinary item $ 0.17 $ .08 $ (0.80) $ 0.17
Extraordinary loss (0.06) -- (0.06) --
-------------------------------------------------------
Net Income (loss) $ 0.11 $ .08 $ (0.86) $ $ 0.17
=======================================================
Shares used in computing basic income
(loss) per common share 14,413,910 12,894,536 13,912,934 12,894,536
Income (loss) per common share-diluted:
Income (loss) before extraordinary item $ 0 .16 $ 0.08 $ (0.80) $ 0.16
Extraordinary loss (.05) -- (0.06) --
-------------------------------------------------------
Net Income (loss) $ 0.11 $ 0.08 $ (0.86) $ 0.16
=======================================================
Shares used in computing diluted income
(loss) per common share 15,281,954 13,003,676 13,912,934 13,090,167
</TABLE>
See notes to financial statements.
3
<PAGE>
International Telecommunication Data Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
1998 1997
-------------------------
<S> <C> <C>
Operating activities
Net Income before extraordinary loss $ (11,898) $ 2,140
Adjustments to reconcile net income before extraordinary
loss to net cash provided by operating activities:
Write off of in process R&D 20,800 --
Depreciation and amortization 5,208 734
Deferred taxes (7,446) 228
Change in operating assets and liabilities:
Accounts receivable (15,141) (908)
Prepaid expenses 147 (42)
Deferred revenue 95 --
Accounts payable, accrued expenses and accrued
compensation 5,428 (681)
Unearned compensation 138 42
Other assets and liabilities, net 1,543 (239)
-------------------------
Net cash (used) provided by operating activities (1,126) 1,274
Investing activities
Capital expenditures (1,758) (1,983)
Purchase of Intelicom (73,832) --
Purchase of securities available for sale -- (2,982)
Purchase of investments -- (2)
Proceeds from maturities of investments -- 350
Proceeds from securities available for sale -- 2,295
Product development costs (3,693) (758)
-------------------------
Net cash used for investing activities (79,283) (3,080)
Financing activities
Principal payment of long term debt (70,118) (221)
Proceeds from long term debt 70,000 --
Proceeds from sale of common stock 84,510 179
Financing Fees related to acquisition (1,483) --
-------------------------
Net cash provided (used) for financing activities 82,909 (42)
-------------------------
Net Increase (decrease) in cash and cash equivalents 2,500 (1,848)
Cash and cash equivalents at beginning of period 28,967 4,139
-------------------------
Cash and cash equivalents at end of period $ 31,467 $ 2,291
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 2,554 $ 77
Cash paid during the period for taxes $ 695 $ 1,404
During 1998 the Company issued 606,673 shares of its common stock, valued at
$10 million to CSC as partial financing of the Intelicom acquisition.
</TABLE>
See notes to financial statements
4
<PAGE>
International Telecommunication Data Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the International
Telecommunication Data Systems, Inc. (the "Company" or "ITDS") Annual Report on
Form 10K/A for the year ended December 31, 1997.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
On January 2, 1998, the Company acquired a subsidiary of Computer Sciences
Corporation ("CSC"), a provider of billing and customer care software, by
acquiring all of the outstanding Capital Stock of CSC Intelicom Inc. (now known
as ITDS Intelicom Services, Inc.) ("Intelicom"). The purchase price consisted of
606,673 shares of Common Stock of the Company valued at $10 million and $75.8
million in cash plus a future contingent payout of up to $6 million. The assets
acquired and liabilities assumed were recorded at their estimated fair value on
the date of acquisition and the purchase price in excess of the fair market
value of the assets acquired of approximately $44.5 million is being amortized
over 15 years. In connection with the acquisition the Company received current
assets of $5.9 million, product development costs of $15.8 million, and other
non-current assets of $3 million and accrued liabilities of $7.9 million. In
addition, purchased research and development costs of approximately $21 million
before income tax benefit and other indirect transaction related costs of
approximately $4.5 million before income tax benefit, principally hiring, bonus
and other employment related costs associated with the Intelicom acquisition,
have been expensed in 1998. The fair value of the purchased research and
development costs was determined based on an independent valuation.
A portion of the cash purchase price for Intelicom 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"). The Company subsequently amended the Credit Agreement with an
Amended and Restated Credit Agreement dated as of March 18, 1998 (the "Amended
Credit Agreement") which provided for a $70 million term loan and a $30 million
line of credit. The Amended Credit Agreement contains normal covenants which
include meeting certain financial ratios.
During the quarter ended March 31, 1998, the Company entered into a hedging
agreement with a third party, expiring in March 2001, to limit exposure to
interest rate volatility on the Amended Credit Agreement (the "Hedge
Agreement").
On June 8,1998 as a result of the follow-on offering described in Note 2, the
Company retired the $70 million term loan and terminated the Hedge Agreement. In
connection with repaying the $70 million term loan, and canceling the Hedge
Agreement, the Company recorded an after tax extraordinary charge of $826,000.
5
<PAGE>
International Telecommunication Data Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
1. Basis of Presentation (continued)
The Company's results of operations include Intelicom from January 2, 1998, the
date of acquisition. Pro forma results for the three and six months ended June
30, 1997, as if the acquisition occurred on January 1, 1997, would have been
revenues of $18.9 million and net income of $1.2 million or $.09 per diluted
share for the quarter ended June 30, 1997 and revenues of $36.7 million and net
income of $2.9 million or $0.21 per diluted share for the six months ended June
30, 1997. The pro forma financial results are not necessarily indicative of the
results which would have occurred if the acquisition had been in effect on the
date indicated.
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 reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Public Offerings
On June 8, 1998 the Company successfully completed a follow-on offering of
3,185,000 shares of Common Stock resulting in proceeds to the Company of
approximately $ 72.1 million, after deducting expenses of $.6 million. In
addition, on June 12 1998, the Company received approximately $10.9 million net
of expenses upon the exercise of the underwriters over-allotment option to
purchase 477,750 shares of Common Stock from the Company in connection with the
June 8, 1998 offering. With the proceeds, the Company retired the $70 million
term loan obtained in connection with the January 2, 1998 Intelicom acquisition,
and the remaining funds were used as working capital. In addition to the
follow-on offering and shares issued in connection with the Intelicom
acquisition, shares were issued in connection with the exercise of stock options
during the six months ended June 30, 1998.
3. Income Tax
Income tax provisions for interim periods, other than unusual items, are based
on estimated effective annual income tax rates. The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the tax bases, projected state tax rates and financial
reporting bases of assets and liabilities.
The differences between the effective tax rate and the federal statutory rate is
primarily a result of state income taxes and the tax benefit anticipated in
connection with the nonrecurring costs associated with the Intelicom
acquisition.
6
<PAGE>
International Telecommunication Data Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("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. Earnings per share
for the quarter ended June 30, 1997 did not change as a result of the
restatement to conform with FAS 128. For the quarter ended June 30, 1997, shares
used in computing basic and diluted income (loss) per share differ by the effect
of common stock equivalents (109,140 shares). Earnings per share for the six
months ended June 30, 1997 changed as a result of the restatement to conform
with FAS 128. The shares used in computing basic and diluted income (loss) per
share for the six months ended June 30, 1997 differ by the effect of common
stock equivalents (195,631 shares).
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.
5. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
6. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive
Income ("FAS 130"). FAS 130 establishes new rules for the reporting and display
of comprehensive income and its components.
Other comprehensive income (loss) for the three and six months ended June 30,
1998 and 1997 is comprised of the following (in thousands):
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
----------------------------------------
Net income (loss) as reported $1,607 $1,078 $(11,898) $2,140
Unrealized loss on available for sale
securities -- (161) -- (5)
----------------------------------------
Other comprehensive income (loss) $1,607 $ 917 $(11,898) $2,135
========================================
As of June 30 1998, the Company had no accumulated other comprehensive income
(loss).
7
<PAGE>
International Telecommunication Data Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Officer, Director and Employee Loans
As of June 30, 1998, prepaid expenses and other current assets and other
long-term assets include approximately $.6 million of loans and advances to
certain officers, directors and employees of the Company.
8. Legal Proceedings
The Company and certain of its subsidiaries are defendants in legal proceedings
incidental to its business. Although the ultimate disposition of these
proceedings is not presently determinable, management does not expect the
outcome to have a material adverse impact on the Company's financial position or
results of operations.
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 acquisition agreement, 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.
9. Subsequent Event
On July 30, 1998, the Company filed a registration statement with the Securities
and Exchange Commission to register the 606,673 shares of Common Stock issued to
CSC in connection with the Intelicom acquisition. The Company amended the
registration statement on August 12, 1998.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition, Results of
Operations, and Certain Factors that May Affect Future Results
Overview
The Company is a leading provider of comprehensive billing, customer care and
management information solutions to providers of wireless and satellite
telecommunications services. On January 2, 1998, the Company acquired a
subsidiary ("Intelicom") of Computer Sciences Corporation ("CSC") (the
"Intelicom Acquisition"), for 606,673 shares of the Company's common stock
(valued at $10 million) and $75.8 million in cash, plus a future contingent
payment of up to $6 million. 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.
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; and (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 software development revenue is recognized at the time the services
are performed.
Operating expenses are comprised primarily of the salaries and benefits of
technical service representatives, operations personnel, quality assurance
representatives and consultants as well as 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 in addition to 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 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
Primarily as a result of the Intelicom Acquisition, the Company's revenues
increased from $5.4 million for the quarter ended June 30, 1997 to $27.4 million
for the quarter ended June 30, 1998. For the six months ended June 30, 1998,
revenue increased $42.8 million to $53.4 million from $10.6 million in the
comparable period in 1997. In addition, during the quarter ended June 30, 1998,
the Company incurred nonrecurring in process R&D and indirect costs associated
with the Intelicom Acquisition aggregating $.5 million and its total operating
costs and expenses (excluding the nonrecurring costs) increased from $3.9
million for the quarter ended June 30, 1997 to $21.8 million for the quarter
ended June 30, 1998. Operating expenses for the six month period, excluding
nonrecurring in process R&D and indirect costs associated with the Intelicom
Acquisition aggregating $25.5 million, increased from $7.8 million in 1997 to
$43.2 million in 1998. Additionally, interest expense increased from $28,000 for
the quarter ended June 30, 1997 to $1.1 million for the quarter ended June 30,
1998. For the six months ended June 30, 1998, interest expense increased to $2.6
million from $77,000 for the same period in 1997 primarily as a result of the
Company's $70 million term loan obtained in connection with the Intelicom
9
<PAGE>
Acquisition. The Company's effective tax rate increased to 41.1% for the quarter
ended June 30, 1998 from 40.8% for the quarter ended June 30, 1997. For the six
month period, the effective income tax rate decreased from 40.9% in 1997 to
36.9% in 1998 primarily due to the amount of tax benefit anticipated in
connection with the nonrecurring costs associated with the Intelicom
Acquisition.
On a pro forma basis, assuming the Intelicom Acquisition occurred on January 1,
1997, revenues for the quarter ended June 30, 1997 were $18.9 million compared
to actual revenues for the quarter ended June 30, 1998 of $27.4 million, an
increase of 45.0%. For the six month period, revenue increased 45.5% from $36.7
million on a pro forma basis in 1997 to $53.4 million on an actual basis in
1998. The increase is due primarily to the growth of recurring revenue from
existing customers. Total pro forma operating costs and expenses for the quarter
ended June 30, 1997 were $15.7 million compared to actual operating costs and
expenses for the quarter ended June 30, 1998 of $21.8 million, excluding
nonrecurring in process R&D and indirect costs associated with the Intelicom
Acquisition. Operating and other expenses for the six month period increased
46.4% from $29.5 million on a pro forma basis for 1997 to $43.2 million in 1998
excluding nonrecurring in process R&D and indirect costs associated with the
Intelicom Acquisition. This increase is due primarily to the increased service
and systems support necessary for the growing client base, provided in part by
outside contractors.
For the three month period ended June 1998 special charges were $.5 million ($.3
million after tax) in nonrecurring and indirect acquisition costs associated
with the Intelicom Acquisition. On June 8,1998 as a result of the follow-on
offering described in Note 2, the Company retired the $70 million term loan and
terminated the Hedge Agreement. In connection with repaying the $70 million term
loan and canceling the Hedge Agreement, the Company recorded an after tax
extraordinary charge of $826,000. Income before nonrecurring costs and
extraordinary item for the second quarter of 1998 was $2.7 million or $0.18 per
diluted share for the six months ended June 30, 1998. For the six months ended
June 30, 1998 special charges were $25.5 million ($15.8 million after tax) in
nonrecurring, in-process R&D and indirect acquisition costs associated with the
Intelicom Acquisition. Earnings for the six months ended June 30, 1998 before
nonrecurring and extraordinary items were $4.75 million or $0.32 per pro forma
diluted share.
Liquidity and Capital Resources
The Company has financed its operations primarily through placements of debt and
equity securities, cash generated from operations and equipment financing
leases.
As of June 30, 1998, the Company had $31.5 million in cash and cash equivalents,
$25.9 million in net trade accounts receivable and $43.7 million in working
capital.
For the six months ended June 30, 1998, the Company generated $82.9 million
from financing activities including the sale of Common Stock in June 1998 for
$83 million in net proceeds. As a result of the offering the Company retired the
$70 million term loan, obtained in connection with the Intelicom Acquisition.
The offering also enabled the Company to fund its operations, apply $3.7 million
to product development cost and make $1.8 million in capital expenditures. The
increase in accounts receivable includes the build up of Intelicom receivables
($14 million) which were retained by CSC at the time of the acquisition. Had the
receivables been included in the acquired assets, cash flow from operations
would have been a positive $12.9 million and cash flow from investing activities
would have been a negative $93.3 million for the six months ended June 30,1998.
The purchase price for Intelicom consisted of 606,673 shares of Common Stock of
the Company valued at $10 million and $75.8 million in cash plus a future
contingent payout of up to $6 million. The purchase price in excess of the fair
market value of the assets acquired of approximately $44.5 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 $4.5 million before income tax
benefit have been expensed in 1998. The fair value of the purchased research and
development costs was determined based on an independent valuation.
10
<PAGE>
A portion of the cash purchase price for Intelicom 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"). The Company subsequently amended the Credit Agreement with an
Amended and Restated Credit Agreement dated as of March 18, 1998 (the "Amended
Credit Agreement") which provided for a $70 million term loan and a $30 million
line of credit. The Amended Credit Agreement contains normal covenants which
include meeting certain financial ratios. On June 8,1998 as a result of the
follow-on offering described in Note 2, the Company retired the $70 million term
loan and terminated the Hedge Agreement. In connection with repaying the $70
million term loan and canceling the Hedge Agreement, the Company recorded an
after tax extraordinary charge of $826,000.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There can be no assurance,
however, that changes in the Company's plans or other events affecting the
Company's operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing.
There can be no assurance, however, that additional financing will be available
from any of these sources or will be available on terms acceptable to the
Company.
To date, inflation has not had a significant impact on the Company's operations.
Year 2000 Disclosure
The Company continues to prepare its software products and internal computer
systems to be Year 2000 ready. The compliance task force has completed its
overall strategy formulation, test plan development, and substantially all of
its test case development. Programming and testing are under way on all critical
path threads, including back end (billing) and front end (customer care)
applications. The Company currently estimates the readiness effort, including
planning, implementation and testing, to cost approximately $3 million, and
through June 30, 1998 the Company has incurred $.5 million. The Company expects
that a substantial portion of this expenditure will occur in the remainder of
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 readiness obligations. The Company
currently estimates that readiness will be achieved in second quarter 1999;
however, there can be no assurances that the Company will be able to complete
the conversion in a timely manner or that third party software suppliers will be
able to provide timely Year 2000 ready products for the Company to install.
Certain Factors That May Affect Future Results
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." While the Company is studying the
application of the disclosure provisions, the statement will not affect its
consolidated financial position or results of operations.
This quarterly report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, changes in the telecommunications market, the Company's
ability to successfully complete its Year 2000 efforts, the Company's ability to
retain existing customers and attract new customers, the Company's continuing
ability to develop products that are responsive to the evolving needs of its
customers, increased competition, changes in operating expenses, changes in
government regulation of the Company's clients and general economic factors.
The Company's quarterly operating results may fluctuate from quarter to quarter
depending on various factors, including the impact of significant start-up costs
associated with initiating the delivery of contracted services to new clients,
the hiring of additional staff, new product development and other
11
<PAGE>
expenses, introduction of new products by competitors, pricing pressures, the
evolving and unpredictable nature of the markets in which the Company's products
and services are sold and general economic conditions.
The market for the Company's products and services is highly competitive, and
competition is increasing as additional market opportunities arise.
Reference is made to the more detailed discussion of the risks associated with
the Company's business contained under the heading "Risk Factors" in the
Company's Registration Statement on Form S-3, as amended (Registration No.
333-60223) filed with the Securities and Exchange Commission on July 30, 1998,
as amended on August 12, 1998.
12
<PAGE>
Part II: Other Information
Item 1.
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 has filed a response to the claim
and asserted 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.
Item 4.
Submission of Matters to a Vote of Security Holders
The Registrant provided information relating to the submission of matters to a
vote of security holders for the period covered by this report in its Report on
Form 10-Q for the period ended March 31, 1998, as filed with the Commission on
May 13, 1998.
Item 5. Other Information
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under the
Exchange Act for inclusion in the Company's proxy materials for its 1999 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than November 6, 1998.
In addition, the Company's by-laws require that the Company be given advance
notice of stockholder nominations for election to the Company's Board of
Directors and of other matters which stockholders wish to present for action at
an annual meeting of stockholders (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be (i)
made in writing, (ii) delivered to or mailed and received by the Secretary of
the Company at the principal offices of the Company, and, if relating to a
nomination of directors, by first class United States mail, postage prepaid, and
(iii) received not less than 60 days nor more than 90 days prior to the 1999
Annual Meeting, provided, however, that if less than 70 days' notice or prior
public disclosure of the date of the meeting is given to stockholders, such
notice must be received by the Company not later than the close of business on
the 10th day following the date on which the notice of the date of the meeting
was mailed or such public disclosure was made, whichever occurs first. The 1999
Annual Meeting is currently expected to be held on April 13, 1999. Assuming that
this date does not change and the Company provides at least 70 days' notice of
the date of the meeting, in order to comply with the time periods set forth in
the Company's by-laws, appropriate notice would need to be provided by a
stockholder no earlier than January 13, 1999 and no later than February 12,
1999.
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits are listed in the accompanying index to exhibits immediately
following the signature page.
(b) Reports on Form 8-K
None.
13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
International Telecommunication
Data Systems, Inc.
------------------------------------
(Registrant)
By /s/ Paul K. Kothari
------------------------------------
Paul K. Kothari
(Chief Financial Officer and Duly
Authorized Officer)
Date August 13, 1998
------------------------------------
14
<PAGE>
Exhibits
The exhibits filed as part of this report on Form 10-Q are as follows:
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule, for the three month period and six month
period ended June 30, 1998.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER AND YEAR TO DATE PERIOD
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 31,467 31,467
<SECURITIES> 0 0
<RECEIVABLES> 25,858 25,858
<ALLOWANCES> 2,290 2,290
<INVENTORY> 0 0
<CURRENT-ASSETS> 59,048 59,048
<PP&E> 11,196 11,196
<DEPRECIATION> 3,854 3,854
<TOTAL-ASSETS> 138,405 138,405
<CURRENT-LIABILITIES> 15,325 15,325
<BONDS> 0 0
0 0
0 0
<COMMON> 172 172
<OTHER-SE> 122,858 122,858
<TOTAL-LIABILITY-AND-EQUITY> 138,405 138,405
<SALES> 0 0
<TOTAL-REVENUES> 27,360 53,366
<CGS> 0 0
<TOTAL-COSTS> 10,521 20,782
<OTHER-EXPENSES> 11,771 47,900
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,144 2,649
<INCOME-PRETAX> 4,128 (17,536)
<INCOME-TAX> 1,695 (6,464)
<INCOME-CONTINUING> 2,433 (11,072)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 826 826
<CHANGES> 0 0
<NET-INCOME> 1,607 (11,898)
<EPS-PRIMARY> 0.11 (0.86)
<EPS-DILUTED> 0.11 (0.86)
</TABLE>
